Half-year Report (3 of 3)

RNS Number : 0414I
HSBC Holdings PLC
25 August 2016
 

Risk (continued)

Trading VaR, 99% 1 day
 
 
Foreign
exchange and
commodity

 
Interest
rate

 
Equity

 
Credit
spread

 
Portfolio
diversification11

 
Total

 
 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
 
 
Half-year to 30 Jun 2016
 
10.9

 
41.8

 
18.3

 
9.0

 
(27.7
)
 
52.3

Average
 
11.0

 
40.2

 
23.2

 
17.5

 
(30.9
)
 
61.0

Maximum
 
16.9

 
49.2

 
32.4

 
28.1

 
-

 
91.5

Minimum
 
6.5

 
31.8

 
15.2

 
9.0

 
-

 
44.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Half-year to 30 Jun 2015
 
11.6

 
48.5

 
17.9

 
14.9

 
(35.8
)
 
57.1

Average
 
15.3

 
49.9

 
20.5

 
16.3

 
(38.5
)
 
63.5

Maximum
 
22.0

 
57.0

 
29.0

 
21.8

 
-

 
77.9

Minimum
 
9.3

 
40.4

 
15.2

 
9.9

 
-

 
51.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Half-year to 31 Dec 2015
 
8.0

 
34.9

 
21.4

 
13.9

 
(24.9
)
 
53.3

Average
 
14.1

 
42.2

 
18.6

 
15.0

 
(33.0
)
 
56.9

Maximum
 
25.4

 
51.9

 
23.8

 
23.3

 
-

 
67.7

Minimum
 
6.3

 
32.6

 
11.9

 
9.8

 
-

 
47.5

For footnote, see page 87.
The risk not in VaR ('RNIV') framework captures risks from exposures in the HSBC trading book which are not captured well by the VaR model. The VaR-based RNIVs are included within the metrics for each asset class and the previously reported 30 June 2015 balances were restated to reflect this. The total trading VaR did not change whereas the individual VaR components and portfolio diversification did as the VaR-based RNIVs were added to each asset class.
Backtesting
There were two backtesting exceptions against hypothetical profit and loss for the Group in 1H16: a loss exception in February, driven by Libor against overnight index spread widening on long positions; and a profit exception in June, driven by significant devaluations in sterling and the euro against the US dollar resulting from the UK's referendum on EU membership.

 
Non-trading portfolios
Value at risk of the non-trading portfolios
Non-trading VaR of the Group includes contributions from all global businesses. There is no commodity risk in the non-trading portfolios. The VaR for non-trading activity at 30 June 2016 was slightly higher than at 31 December 2015 driven by an increase in non-trading interest rate VaR component and a decrease in diversification benefit, largely offset by a decrease in non-trading credit spread VaR component.
Non-trading VaR also includes the interest rate risk of non-trading financial instruments held in portfolios managed by Balance Sheet Management ('BSM'). The management of interest rate risk in the banking book is described further in 'Non-trading interest rate risk' below, including the role of BSM.
Non-trading VaR excludes the insurance operations which are discussed further on page 84.
The Group non-trading VaR for the half-year is shown in the table below.



Non-trading VaR, 99% 1 day
 
 
Interest
rate

 
Credit
spread

 
Portfolio diversification11

 
Total

 
 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
Half-year to 30 Jun 2016
 
123.6

 
43.7

 
(29.6
)
 
137.7

Average
 
125.1

 
59.0

 
(42.6
)
 
141.5

Maximum
 
140.1

 
82.8

 
-

 
164.8

Minimum
 
100.2

 
43.7

 
-

 
123.3

 
 
 
 
 
 
 
 
 
Half-year to 30 Jun 2015
 
106.4

 
66.7

 
(45.3
)
 
127.8

Average
 
86.6

 
61.7

 
(33.6
)
 
114.7

Maximum
 
112.6

 
71.9

 
-

 
128.1

Minimum
 
70.5

 
54.3

 
-

 
91.5

 
 
 
 
 
 
 
 
 
Half-year to 31 Dec 2015
 
114.1

 
72.7

 
(54.0
)
 
132.8

Average
 
107.8

 
69.7

 
(50.1
)
 
127.4

Maximum
 
131.5

 
89.4

 
-

 
156.8

Minimum
 
89.6

 
52.1

 
-

 
103.5

For footnote, see page 87.
Non-trading VaR excludes equity risk on available-for-sale securities, structural foreign exchange risk and interest rate risk on fixed-rate securities issued by HSBC Holdings.
 
This section and the sections below describe the scope of HSBC's management of market risks in non-trading books.



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79

Interest rate risk in the banking book
Our policies regarding the management of interest rate risk in the banking book and the funds transfer pricing process are described on pages 215 and 207, respectively, of the Annual Report and Accounts 2015.
The component of the interest rate risk in the banking book outside of Balance Sheet Management or Global Markets that can be economically neutralised by fixed-rate government bonds or interest rate derivatives is transfer-priced to and managed by Balance Sheet Management. The banking book interest rate risk transferred to Balance Sheet Management is reflected in the Group's non-traded VaR measure.
The Group utilises sensitivity of net interest income to assess the overall level of interest rate risk in the banking book. This measure reflects both the structural banking book interest rate risk remaining after risk transfer to Balance Sheet Management and the banking book interest rate risk managed by Balance Sheet Management and Global Markets.
Third-party assets in Balance Sheet Management
Third-party assets in BSM increased by 12% during the first half of 2016. The movement in cash and balances at central banks, reverse repurchase agreements and financial investments were driven by Europe and America where increased commercial surplus funds were deployed into these assets.
Third-party assets in Balance Sheet Management
 
 
At
 
 
30 Jun

 
31 Dec

 
 
2016

 
2015

 
 
$m

 
$m

Cash and balances at central banks
 
96,261

 
71,116

Trading assets
 
2,159

 
639

Loans and advances
 
 
 
 
- to banks
 
40,461

 
42,059

- to customers
 
2,958

 
2,773

Reverse repurchase agreements
 
46,235

 
29,760

Financial investments
 
350,438

 
335,543

Other
 
4,095

 
4,277

 
 
 
 
 
 
 
542,607

 
486,167


Sensitivity of net interest income
The table below sets out the effect on our future net interest income ('NII') of an incremental 25 basis points parallel rise or fall in all yield curves worldwide at the beginning of each quarter during the 12 months from 1 July 2016.
 
The sensitivities shown represent the change in the base case projected NII that would be expected under the two rate scenarios assuming that all other non-interest rate risk variables remain constant, and there are no management actions. In deriving our base case net interest income projections, the repricing rate of assets and liabilities used is derived from current yield curves. The interest rate sensitivities are indicative and based on simplified scenarios.
Assuming no management response, a sequence of such rises ('up-shock scenario') would increase planned net interest income for the 12 months to 30 June 2017 by $1,373m (to 31 December 2016: $1,252m), while a sequence of such falls ('down-shock scenario') would decrease planned net interest income by $2,201m (to 31 December 2016: $2,258m).
The NII sensitivity of the Group can be split into three key components: the structural sensitivity arising from the four global businesses excluding BSM and Global Markets, the sensitivity of the funding of the trading book (Global Markets) and the sensitivity of BSM.
The structural sensitivity is positive in a rising rate environment and negative in a falling rate environment. The sensitivity of the funding of the trading book is negative in a rising rate environment and positive in a falling rate environment. The sensitivity of BSM depends on its position. Typically, assuming no management response, the sensitivity of BSM is negative in a rising rate environment and positive in a falling rate environment.
The NII sensitivity figures below also incorporate the effect of any interest rate behaviouralisation applied and the effect of any assumed repricing across products under the specific interest rate scenario. They do not incorporate the effect of any management decision to change the composition of HSBC's balance sheet.
The NII sensitivity in BSM arises from a combination of the techniques that BSM uses to mitigate the transferred interest rate risk and the methods it uses to optimise net revenues in line with its defined risk mandate. The figures in the table below do not incorporate the effect of any management decisions within BSM, but in reality it is likely that there would be some short-term adjustment in BSM positioning to offset the NII effects of the specific interest rate scenario where necessary.
The NII sensitivity arising from the funding of the trading book comprises the expense of funding trading assets, while the revenue from these trading assets is reported in net trading income. This leads to an asymmetry in the NII sensitivity figures which is cancelled out in our global business results, where we include both NII and net trading income. It is likely, therefore, that the overall effect on profit before tax of the funding of the trading book will be much less pronounced than is shown in the figures below.
The scenario sensitivities remained broadly unchanged in 1H16.



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Risk (continued)

Sensitivity of projected net interest income
 
 
US dollar
bloc

 
Rest of
Americas
bloc

 
Hong Kong dollar
bloc

 
Rest of
Asia
bloc

 
Sterling
bloc

 
Euro
bloc

 
Total

 
 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Change in Jul 2016 to Jun 2017 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
+ 25 basis points
 
496

 
57

 
615

 
2

 
82

 
121

 
1,373

- 25 basis points
 
(779
)
 
(62
)
 
(817
)
 
(79
)
 
(442
)
 
(22
)
 
(2,201
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in Jan 2016 to Dec 2016 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
+ 25 basis points
 
410

 
72

 
217

 
369

 
135

 
49

 
1,252

- 25 basis points
 
(691
)
 
(74
)
 
(645
)
 
(290
)
 
(528
)
 
(30
)
 
(2,258
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in Jul 2015 to Jun 2016 projected net interest income arising from a shift in yield curves at the beginning of each quarter of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
+ 25 basis points
 
347

 
5

 
307

 
297

 
174

 
(103
)
 
1,027

- 25 basis points
 
(470
)
 
(22
)
 
(580
)
 
(246
)
 
(565
)
 
(22
)
 
(1,905
)

Sensitivity of capital and reserves
Available-for-sale ('AFS') reserves are included as part of CET1 capital. We measure the potential downside risk to the CET1 ratio due to interest rate and credit spread risk in the AFS portfolio by the portfolio's stressed VaR, using a 99% confidence level and an assumed holding period of one quarter. At June 2016, the stressed VaR of the portfolio was $2.9bn.
We monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a monthly basis by
 
assessing the expected reduction in valuation of cash flow hedges due to parallel movements of plus or minus 100bps in all yield curves. These particular exposures form only a part of our overall interest rate exposures.
The table below describes the sensitivity of our cash flow hedge reported reserves to the stipulated movements in yield curves and the maximum and minimum month-end figures during the year. The sensitivities are indicative and based on simplified scenarios.



Sensitivity of cash flow hedging reported reserves to interest rate movements
 
 
 
 
Impact in the preceding 6 months
 
 
 
 
Maximum

 
Minimum

 
 
$m

 
$m

 
$m

At 30 Jun 2016
 
 
 
 
 
 
+ 100 basis point parallel move in all yield curves
 
(1,173
)
 
(1,235
)
 
(1,173
)
As a percentage of total shareholders' equity
 
(0.6
%)
 
(0.6
%)
 
(0.6
%)
 
 
 
 
 
 
 
- 100 basis point parallel move in all yield curves
 
1,145

 
45

 
1,224

As a percentage of total shareholders' equity
 
0.6
%
 
0.6
%
 
0.6
%
 
 
 
 
 
 
 
At 30 Jun 2015
 
 
 
 
 
 
+ 100 basis point parallel move in all yield curves
 
(1,137
)
 
(1,259
)
 
(1,137
)
As a percentage of total shareholders' equity
 
(0.6
%)
 
(0.7
%)
 
(0.6
%)
 
 
 
 
 
 
 
- 100 basis point parallel move in all yield curves
 
1,149

 
1,226

 
1,149

As a percentage of total shareholders' equity
 
0.6
%
 
0.6
%
 
0.6
%
 
 
 
 
 
 
 
At 31 Dec 2015
 
 
 
 
 
 
+ 100 basis point parallel move in all yield curves
 
(1,235
)
 
(1,259
)
 
(1,137
)
As a percentage of total shareholders' equity
 
(0.7
%)
 
(0.7
%)
 
(0.6
%)
 
 
 
 
 
 
 
- 100 basis point parallel move in all yield curves
 
1,224

 
1,232

 
1,133

As a percentage of total shareholders' equity
 
0.7
%
 
0.7
%
 
0.6
%

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Additional market risk measures applicable only to the parent company
The principal tools used in the management of market risk are VaR for foreign exchange rate risk and the projected sensitivity of HSBC Holdings' NII to future changes in yield curves and interest rate gap repricing for interest rate risk.
Foreign exchange risk
Total foreign exchange VaR arising within HSBC Holdings in the first half of 2016 was as follows:
HSBC Holdings - foreign exchange VaR
 
 
Half-year to
 
 
30 Jun

 
30 Jun

 
31 Dec

 
 
2016

 
2015

 
2015

 
 
$m

 
$m

 
$m

 
 
 
 
 
 
 
At period-end
 
56.3

 
47.1

 
45.6

Average
 
49.2

 
38.0

 
45.7

Maximum
 
58.2

 
47.1

 
46.8

Minimum
 
44.6

 
32.9

 
44.1

 
The foreign exchange risk largely arises from loans to subsidiaries of a capital nature that are not denominated in the functional currency of either the provider or the recipient and which are accounted for as financial assets. Changes in the carrying amount of these loans due to foreign exchange rate differences are taken directly to HSBC Holdings' income statement. These loans, and most of the associated foreign exchange exposures, are eliminated on consolidation.
Interest rate repricing gap table
The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VaR but is managed on a repricing gap basis. The interest rate repricing gap table below analyses the full-term structure of interest rate mismatches within HSBC Holdings' balance sheet.



Repricing gap analysis of HSBC Holdings
 
 
Total

 
Up to
1 year

 
1 to
5 years

 
5 to
10 years

 
More than
10 years

 
Non-interest
 bearing

 
 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
166,646

 
61,048

 
842

 
684

 
-

 
104,072

Total liabilities and equity
 
(166,646
)
 
(3,804
)
 
(14,601
)
 
(18,664
)
 
(16,325
)
 
(113,252
)
Off-balance sheet items attracting interest rate sensitivity
 
-

 
(38,393
)
 
13,989

 
16,123

 
8,281

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest rate risk gap at 30 Jun 2016
 
-

 
18,851

 
230

 
(1,857
)
 
(8,044
)
 
(9,180
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative interest rate risk gap
 
-

 
18,851

 
19,081

 
17,224

 
9,180

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
148,926

 
46,084

 
402

 
2,144

 
-

 
100,296

Total liabilities and equity
 
(148,926
)
 
(2,345
)
 
(6,850
)
 
(10,104
)
 
(14,507
)
 
(115,120
)
Off-balance sheet items attracting interest rate sensitivity
 
-

 
(21,248
)
 
5,351

 
9,222

 
5,763

 
912

 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest rate risk gap at 30 Jun 2015
 
-

 
22,491

 
(1,097
)
 
1,262

 
(8,744
)
 
(13,912
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative interest rate risk gap
 
-

 
22,491

 
21,394

 
22,656

 
13,912

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
150,194

 
45,888

 
388

 
1,136

 
-

 
102,782

Total liabilities and equity
 
(150,194
)
 
(2,522
)
 
(6,613
)
 
(11,495
)
 
(13,332
)
 
(116,232
)
Off-balance sheet items attracting interest rate sensitivity
 
-

 
(22,748
)
 
5,351

 
10,722

 
5,763

 
912

 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest rate risk gap at 31 Dec 2015
 
-

 
20,618

 
(874
)
 
363

 
(7,569
)
 
(12,538
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative interest rate risk gap
 
-

 
20,618

 
19,744

 
20,107

 
12,538

 
-



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82

Risk (continued)

Operational risk
Operational risk is the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people or systems, or external events.
There were no material changes to the policies and practices for the management of operational risk described in the Annual Report and Accounts 2015.
Activity to further enhance and embed our operational risk management framework ('ORMF') continued in 1H16.
Responsibility for minimising operational risk lies with HSBC's management and staff. All regional, global business, country, and functional staff are required to manage the operational risks of the business and activities for which they are responsible.
A diagrammatic representation of our ORMF is provided on page 176 of the Annual Report and Accounts 2015.
A summary of our current policies and practices regarding operational risk is provided in the Appendix to Risk on page 217 of the Annual Report and Accounts 2015 Appendix to Risk.
Operational risk profile in the first half of 2016
During 1H16, our operational risk profile continued to be driven mainly by compliance risks and we continued to see operational risk losses that relate to events from prior years (significant events are outlined in Notes 16 and 19 on the Financial Statements). A number of mitigating actions are being undertaken to prevent future conduct-related incidents.
Operational risk areas include:
•
Compliance with regulatory agreements and consent orders: Breach of the US deferred prosecution agreement ('DPA') may allow US authorities to prosecute HSBC with respect to matters covered thereunder. The work of the Monitor is discussed on page 60, and compliance risk is described below.
•
Fraud risks: Losses continue to be at acceptable levels in most markets, but the introduction of new technologies and ways of banking mean we are subject to new types of fraud attacks. We have increased monitoring and enhanced detective controls to help mitigate these risks in accordance with our risk appetite.
•
Information security risk: Like other banks, we face numerous cyber threats. These include denial of service attacks, in which hackers try to prevent our customers accessing our services online. We continue to strengthen internal security controls to prevent unauthorised access to our systems and network, and improve the controls and security to protect customers using digital channels. Strong engagement with our industry, government agencies and intelligence providers helps ensure we keep abreast of developments.
•
Third-party risk management: HSBC is implementing a multi-year strategic plan to enhance its third-party risk management capability. We have defined a framework to provide a holistic view of third-party risks which will help enable the consistent risk assessment of any third-party service. Third-party engagement will be assessed against key criteria, combined with the associated control monitoring, testing and assurance throughout the relationship lifecycle.
 
Other operational risks are also monitored and managed through the use of the ORMF and governing policies.
Compliance risk
Compliance risk arises from activities subject to rules, regulations, Group policies and other formal standards relating to anti-money laundering ('AML'), counter-terrorist and proliferation financing, sanctions compliance, anti-bribery and corruption, conduct of business and other regulations.
A summary of our current policies and practices regarding compliance risk is provided on pages 217 and 218 of the Annual Report and Accounts 2015.
AML and sanctions
In 1H16, we continued to embed the procedures required to effect the AML and sanctions policies in our day-to-day business operations globally. This supports our ongoing effort to address the US DPA requirements. These actions are in line with our strategic target to implement the highest or most effective standards globally. The work of the Monitor, who was appointed to assess the effectiveness of our AML and sanctions compliance programme, is discussed on page 60 and our progress on implementing Global Standards is detailed on page 11.
Anti-bribery and corruption
We have introduced a strategic programme to address bribery and corruption risks. We are also embedding an enhanced global suite of policies to make clear to staff that employees or other associated persons or entities must not engage in or facilitate any form of bribery, directly or indirectly.
The anti-bribery and corruption programme emphasises the importance of consistent procedures to drive 'detect, deter and protect' principles, and help ensure they are incorporated into every aspect of our activities.
Conduct of business
We continue to recognise that delivering fair outcomes for our customers and upholding financial market integrity are critical to a sustainable business model. The global businesses are refining the range of measures, appropriate to their specific customer bases and markets, used to assess the ongoing effectiveness of the management of conduct, and enable action to be taken where potential conduct issues arise. The measures include information relating to the products we sell, sales quality, customer experience and market behaviour. Oversight of the management of conduct is being embedded within country, regional and global governance structures.
We continue to take steps to raise our standards of conduct. In 1H16, these included:
•
the launch of a new global mandatory training module, Embedding Good Conduct, building on training launched in 2015, to help ensure employees have a strong understanding of conduct and how it applies to them, and understand good conduct behaviours;
•
enhanced values and behaviours-based components within employee recruitment and performance management processes;
•
continued focus on improving the identification and treatment of potentially vulnerable customers;



HSBC HOLDINGS PLC
83

•
a review to further enhance delivery of products and services through digital channels;
•
continued enhancement of, and investment in, our surveillance capabilities and the use of new technologies to strengthen our ability to detect suspicious trading activity and misconduct; and
•
development of a conduct maturity model to assess the effectiveness of improvements we are making to customer outcomes and our financial markets activities.
Whistleblowing
We actively encourage our employees to raise concerns and escalate issues so they can be dealt with effectively. In most cases, individuals will raise their concerns with line management or Global Human Resources. However, where an individual believes that their normal reporting channels are unavailable or inappropriate, it is important that they have alternative channels available to them to raise concerns confidentially without fear of personal repercussions. This is referred to as 'whistleblowing'.
We operate a global whistleblowing platform, HSBC Confidential, which can be accessed by telephone, email, web and mail. We also maintain an external email address for concerns about accounting and internal financial controls or auditing matters (accountingdisclosures@hsbc.com). Matters raised are independently investigated by appropriate subject matter teams and details of investigations and outcomes including remedial action taken are reported to the Conduct & Values Committee. Matters raised in respect of audit, accounting and internal control over financial reporting are reported to the Group Audit Committee.
Reputational risk
Reputational risk is the risk of failure to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC itself, our employees or those with whom we are associated, that might cause stakeholders to form a negative view of the Group. This may have financial or non-financial effects, resulting in a loss of confidence or have other consequences.
The Global Head of Financial Crime Compliance and the Global Head of Regulatory Compliance are the risk stewards for reputational risk. The Reputational Risk and Client Selection sub-function is responsible for: setting policies to guide the Group's management of reputational risk; devising strategies to protect against reputational risk; and advising the global businesses and global functions to help them identify, assess and mitigate such risks where possible. For further details on the reputational risk policies and practices, see page 224 of the Annual Report and Accounts 2015.
We have zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and appropriately mitigated. There must be no barriers to open discussion and the escalation of issues that could affect the Group negatively. While there is a level of risk in every aspect of business activity, appropriate consideration of potential harm to HSBC's good name must be a part of all business decisions.
 
We continue to take steps to address the requirements of the US DPA and to enhance our AML, sanctions and other regulatory compliance frameworks. These measures should also serve over time to enhance our reputational risk management. For further details on the implementation of the Global Standards, see page 11 and 'Compliance risk', see above.
Risk management of insurance operations
The majority of the risks in our insurance business derive from manufacturing activities and can be categorised as financial risk and insurance risk. Financial risks include market risk, credit risk and liquidity risk. Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (HSBC).
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 2015.
A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture are provided on page 180 of the Annual Report and Accounts 2015.
Risk management of insurance manufacturing operations in the first half of 2016
We measure the risk profile of our insurance manufacturing businesses using an economic capital approach where assets and liabilities are measured on a market value basis. On this basis, there is a minimum economic capital requirement to ensure that there is a less than one in 200 chance of insolvency, given the risks the businesses are exposed to over the next year. The methodology for the economic capital calculation is largely aligned to the new pan-European Solvency II insurance capital regulations.
The sale of our Brazilian insurance operations completed on 1 July 2016. These operations are reported as part of the disposal group held for sale at 30 June 2016 and 31 December 2015.
The risk profile of our remaining life insurance manufacturing businesses did not change materially during 1H16. The increase in policyholder liabilities during the period to $79.4bn (31 December 2015: $76.0bn) is primarily a result of new premiums collected.
Asset and liability matching
A principal tool used to manage exposures to both financial and insurance risk, in particular for life insurance contracts, is asset and liability matching. In many markets in which we operate it is neither possible nor appropriate to follow a perfect asset and liability matching strategy. For long-dated non‑linked contracts, in particular, this results in a duration mismatch between assets and liabilities. Portfolios are structured to support these projected liabilities, with limits set to control the duration mismatch.
The table on the next page shows the composition of assets and liabilities by contract type and demonstrates that there were sufficient assets to cover the liabilities to policyholders, in each case at 30 June 2016.



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Risk (continued)

Balance sheet of insurance manufacturing subsidiaries by type of contract
 
 
 
Insurance contracts
 
Investment contracts
 
 
 
 
 
 
 
With
DPF

 
Unit-
linked

 
Annuities

 
Other12

 
With
DPF13

 
Unit-
linked

 
Other

 
Other
assets and
liabilities14

 
Total

 
 
Footnotes
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial assets
 
 
33,713

 
6,560

 
1,126

 
7,758

 
22,576

 
2,196

 
3,982

 
5,111

 
83,022

- trading assets
 
 
-

 
-

 
2

 
-

 
-

 
-

 
-

 
-

 
2

- financial assets designated at fair value
 
 
4,958

 
6,434

 
310

 
576

 
6,481

 
1,982

 
1,904

 
671

 
23,316

- derivatives
 
 
107

 
-

 
-

 
5

 
147

 
1

 
38

 
65

 
363

- financial investments - HTM
 
15
24,308

 
-

 
436

 
2,936

 
-

 
-

 
1,378

 
2,881

 
31,939

- financial investments - AFS
 
15
1,867

 
-

 
325

 
4,081

 
13,984

 
-

 
22

 
1,379

 
21,658

- other financial assets
 
16
2,473

 
126

 
53

 
160

 
1,964

 
213

 
640

 
115

 
5,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance assets
 
 
419

 
313

 
-

 
1,004

 
-

 
-

 
-

 
-

 
1,736

PVIF
 
17
-

 
-

 
-

 
-

 
-

 
-

 
-

 
6,036

 
6,036

Other assets and investment properties
 
 
890

 
1

 
21

 
104

 
864

 
11

 
22

 
5,777

 
7,690

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at 30 Jun 2016
 
 
35,022

 
6,874

 
1,147

 
8,866

 
23,440

 
2,207

 
4,004

 
16,924

 
98,484

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities under investment contracts:
 
 
-

 
-

 
-

 
-

 
-

 
2,185

 
3,806

 
-

 
5,991

- designated at fair value
 
 
-

 
-

 
-

 
-

 
-

 
2,185

 
3,806

 
-

 
5,991

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities under insurance contracts
 
 
34,217

 
6,846

 
1,067

 
7,912

 
23,374

 
-

 
-

 
-

 
73,416

Deferred tax
 
18
12

 
-

 
-

 
35

 
-

 
-

 
-

 
1,128

 
1,175

Other liabilities
 
 
-

 
-

 
-

 
173

 
-

 
-

 
-

 
6,420

 
6,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
34,229

 
6,846

 
1,067

 
8,120

 
23,374

 
2,185

 
3,806

 
7,548

 
87,175

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
11,309

 
11,309

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equities and liabilities at 30 Jun 2016
 
19
34,229

 
6,846

 
1,067

 
8,120

 
23,374

 
2,185

 
3,806

 
18,857

 
98,484


HSBC HOLDINGS PLC
85

 
 
 
Insurance contracts
 
Investment contracts
 
 
 
 
 
 
 
With
DPF

 
Unit-
linked

 
Annuities

 
Other12

 
With
DPF13

 
Unit-
linked

 
Other

 
Other assets and
liabilities14

 
Total

 
 
Footnotes
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial assets
 
 
31,801

 
6,569

 
1,138

 
6,618

 
21,270

 
2,271

 
3,935

 
5,531

 
79,583

- trading assets
 
 
-

 
-

 
2

 
-

 
-

 
-

 
-

 
-

 
2

- financial assets designated at fair value
 
 
4,698

 
6,435

 
296

 
563

 
6,421

 
2,000

 
1,859

 
1,015

 
23,287

- derivatives
 
 
49

 
-

 
-

 
4

 
111

 
1

 
29

 
62

 
256

- financial investments - HTM
 
15
22,840

 
-

 
468

 
2,334

 
-

 
-

 
1,387

 
3,050

 
30,079

- financial investments - AFS
 
15
1,743

 
-

 
312

 
3,685

 
13,334

 
-

 
23

 
1,233

 
20,330

- other financial assets
 
16
2,471

 
134

 
60

 
32

 
1,854

 
270

 
637

 
171

 
5,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance assets
 
 
202

 
264

 
-

 
951

 
-

 
-

 
-

 
-

 
1,417

PVIF
 
17
-

 
-

 
-

 
-

 
-

 
-

 
-

 
5,685

 
5,685

Other assets and investment properties
 
 
838

 
1

 
11

 
105

 
888

 
6

 
23

 
4,576

 
6,448

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at 31 Dec 2015
 
 
32,841

 
6,834

 
1,149

 
7,674

 
22,608

 
2,277

 
3,958

 
15,792

 
93,133

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities under investment contracts:
 
 
-

 
-

 
-

 
-

 
-

 
2,256

 
3,771

 
-

 
6,027

- designated at fair value
 
 
-

 
-

 
-

 
-

 
-

 
2,256

 
3,771

 
-

 
6,027

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities under insurance contracts:
 
 
32,414

 
6,791

 
1,082

 
7,042

 
22,609

 
-

 
-

 
-

 
69,938

Deferred tax
 
18
11

 
-

 
11

 
3

 
-

 
-

 
-

 
1,056

 
1,081

Other liabilities
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
5,553

 
5,553

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
32,425

 
6,791

 
1,093

 
7,045

 
22,609

 
2,256

 
3,771

 
6,609

 
82,599

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
10,534

 
10,534

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity and liabilities at 31 Dec 2015
 
19
32,425

 
6,791

 
1,093

 
7,045

 
22,609

 
2,256

 
3,771

 
17,143

 
93,133

For footnotes, see page 87.
Insurance risk
A principal risk we face is that, over time, the cost of the contract, including claims and benefits, may exceed the total amount of premiums and investment income received. In
 
respect of insurance risk, the cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, and lapse and surrender rates.



HSBC HOLDINGS PLC
86

Risk (continued)

Footnotes to Risk
Credit risk
1
The amount of loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of $49bn (31 December 2015: $59bn), reflecting the full take-up of loan commitments. The take-up of such offers is generally at low levels.
2
'Other commercial loans and advances' includes advances in respect of agriculture, transport, energy utilities and ABSs reclassified to 'Loans and advances'.
3
'Loans and advances to customers' includes asset-backed securities that have been externally rated as strong (30 June 2016: $392m; 31 December 2015: $504bn), good (30 June 2016: $65m; 31 December 2015: $95m), satisfactory (30 June 2016: $99m; 31 December 2015: $107m), sub-standard (30 June 2016: $19m; 31 December 2015: $19m) and impaired (30 June 2016: $64m; 31 December 2015: $73m).
4
Corporate and commercial includes commercial real estate renegotiated loans of $1,870m (31 December 2015: $2,134m) of which $442m (31 December 2015: $477m) were neither past due nor impaired, $19m (31 December 2015: $1m) were past due but not impaired and $1,409m (31 December 2015: $1,656m) were impaired.
5
Included within 'Exchange and other movements' is $1.1bn of impairment allowances reclassified to held for sale (31 December 2015: $2.1bn).
6
The charge for impairment losses as a percentage of average gross loans and advances to customers includes Brazil, which was classified as held for sale in 1H15.
7
'Currency translation adjustment' is the effect of translating the results of subsidiaries and associates for the previous period at the average rates of exchange applicable in the current period.
Liquidity and funding
8
The HSBC UK Liquidity Group shown comprises four legal entities; HSBC Bank plc (including all overseas branches, and SPEs consolidated by HSBC Bank plc for Financial Statement purposes), 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 UK PRA.
9
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.
10
The total shown for other principal HSBC operating entities represents the combined position of all the other operating entities overseen directly by the Risk Management Meeting of the Group Management Board.
Market risk
11
When VaR is calculated at a portfolio level, natural offsets in risk can occur when compared to 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.
Risk management of insurance operations
12
'Other' includes term assurance, credit life insurance, universal life insurance and remaining non-life insurance.
13
Although investment contracts with discretionary participation features ('DPF') are financial investments, HSBC continues to account for them as insurance contracts as required by IFRS 4.
14
'Other assets and liabilities' shows shareholder assets as well as assets and liabilities classified as held for sale. The majority of the assets for insurance businesses classified as held for sale are reported as 'Other assets and investment properties' and totalled $5.3bn at 30 June 2016 (31 December 2015: $4.1bn). The majority of these assets at 30 June 2016 were debt and equity securities and PVIF. All liabilities for insurance businesses classified as held for sale are reported in 'Other liabilities' and totalled $4.8bn at 30 June 2016 (31 December 2015: $3.7bn). The majority of these liabilities at 30 June 2016 were liabilities under insurance contracts and liabilities under investment contracts.
15
Financial investments held to maturity ('HTM') and available for sale ('AFS').
16
Comprises mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities.
17
Present value of in-force long-term insurance contracts and investment contracts with DPF.
18
'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.
19
Does not include associated insurance company SABB Takaful Company or joint venture insurance company Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.

HSBC HOLDINGS PLC
87

Capital

Capital
 
 
 
Capital overview
88
Risk-weighted assets
89
Capital
90
Leverage ratio
90
Regulatory disclosures
92
 
 
Our objective in managing Group capital is to maintain appropriate levels of capital to support our business strategy and meet regulatory and stress testing related requirements.
 
 
Capital highlights
•
Our common equity tier 1 ('CET1') ratio1 of 12.1% was up from 11.9% at the end of 2015.
•
Our CET1 ratio1 strengthened as we continued to generate capital from profit and implement our RWA initiatives, creating capacity for growth.
•
Our leverage ratio remained strong at 5.1%.
 
 
We manage Group capital to ensure we exceed current regulatory requirements and respect the payment priority of our capital providers. Throughout 1H16, we complied with the UK Prudential Regulation Authority's ('PRA') regulatory capital adequacy requirements, including those relating to stress testing. We are well placed to meet our expected future capital requirements.
We continue to manage Group capital to meet a target for return on equity of more than 10%. This is modelled on a CET1 ratio (on an end point basis) in the range of 12% to 13%, which takes into account known and quantifiable end point CET1 requirements including a regulatory and management buffer of 1.0% to 2.0%. This buffer is based on our estimate of the additional CET1 we will need to hold to cover the new time-varying buffers and other factors. It will be kept under review as clarity in respect of future regulatory developments improves.
A summary of our policies and practices regarding capital management, measurement and allocation is provided on page 243 of the Annual Report and Accounts 2015.
Our CET1 capital decreased in 1H16 by $0.2bn to $130.7bn. We generated $1.5bn of capital through profits net of dividends and scrip, offset by foreign currency differences of $2.3bn.

 
Capital overview
Capital ratios
 
 
 
At
 
 
 
30 Jun
 
31 Dec

 
 
 
2016
 
2015

 
 
Footnotes
%
 
%

 
 
 
 
 
 
Transitional basis
 


 


 
1
12.1
 
11.9

Tier 1 ratio
 

14.1
 
13.9

Total capital ratio
 

17.3
 
17.2

For footnote, see page 100.
Total regulatory capital and risk-weighted assets
 
 
 
At
 
 
 
30 Jun

 
31 Dec

 
 
 
2016

 
2015

 
 
Footnotes
$m

 
$m

 
 
 
 
 
 
Transitional basis
 



 


 
1
130,670

 
130,863

Additional tier 1 capital
 

21,642

 
22,440

Tier 2 capital
 

34,481

 
36,530

 
 
 
 
 
 
Total regulatory capital
 

186,793

 
189,833

 
 
 
 
 
 
Risk-weighted assets
 

1,082,184

 
1,102,995

For footnote, see page 100.
RWAs by risk type
 
 
RWAs

 
Capital required2

 
 
$bn

 
$bn

Credit risk
 
851.3

 
68.1

Counterparty credit risk
 
73.7

 
5.9

Market risk
 
41.8

 
3.3

Operational risk
 
115.4

 
9.2

At 30 Jun 2016
 
1,082.2

 
86.5

For footnote, see page 100.
Leverage ratio
 
 
At
 
 
30 Jun

 
31 Dec

 
 
2016

 
2015

 
 
$bn

 
$bn

 
 
 
 
 
Leverage ratio exposure
 
2,788

 
2,794

Tier 1 capital (end point)
 
142

 
140

Leverage ratio
 
5.1
%
 
5.0
%
Quarterly average:
 
 
 
 
Leverage ratio exposure
 
2,819

 
 
Leverage ratio
 
5.1
%
 
 





HSBC HOLDINGS PLC
88

Capital (continued)

Risk-weighted assets
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

 
 
Footnotes
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RWAs at 1 Jan 2016
 
 
306.4

 
437.8

 
59.4

 
185.0

 
71.9

 
42.5

 
1,103.0

RWA movements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RWA initiatives
 
 
(15.8
)
 
(5.0
)
 
(1.1
)
 
(25.1
)
 
-

 
(1.3
)
 
(48.3
)
Foreign exchange movement
 
 
(13.0
)
 
(1.7
)
 
(1.0
)
 
1.8

 
4.6

 
-

 
(9.3
)
Book size
 
3
14.6

 
(1.7
)
 
0.5

 
4.2

 
0.5

 
0.6

 
18.7

Book quality
 
 
4.5

 
6.9

 
0.8

 
2.7

 
(0.1
)
 
-

 
14.8

Model updates
 
 
0.3

 
-

 
-

 
(1.3
)
 
-

 
-

 
(1.0
)
- portfolios moving onto IRB approach
 
 
(0.1
)
 
-

 
-

 
-

 
-

 
-

 
(0.1
)
- new/updated models
 
 
0.4

 
-

 
-

 
(1.3
)
 
-

 
-

 
(0.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Methodology and policy
 
 
2.4

 
1.3

 
-

 
0.1

 
0.5

 
-

 
4.3

- internal updates
 
 
2.4

 
-

 
-

 
0.1

 
0.5

 
-

 
3.0

- external updates - regulatory
 
 
-

 
1.3

 
-

 
-

 
-

 
-

 
1.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RWA movement
 
 
(7.0
)
 
(0.2
)
 
(0.8
)
 
(17.6
)
 
5.5

 
(0.7
)
 
(20.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RWAs at 30 Jun 2016
 
 
299.4

 
437.6

 
58.6

 
167.4

 
77.4

 
41.8

 
1,082.2

For footnote, see page 100.


RWA movement by global businesses by key driver
 
 
 
Credit risk, counterparty credit risk and operational risk
 
 
 
 
 
 
 
Principal
RBWM

 
US run-off
portfolio

 
Total
RBWM

 
CMB

 
GB&M

 
GPB

 
Other

 
Market
risk

 
Total RWAs

 
 
Footnotes
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RWAs at 1 Jan 2016
 
 
150.1

 
39.5

 
189.6

 
421.0

 
398.4

 
19.3

 
32.2

 
42.5

 
1,103.0

RWA movements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RWA initiatives
 
 
(0.1
)
 
(12.3
)
 
(12.4
)
 
(11.3
)
 
(23.3
)
 
-

 
-

 
(1.3
)
 
(48.3
)
Foreign exchange movement
 
 
(0.5
)
 
-

 
(0.5
)
 
(5.6
)
 
(2.7
)
 
(0.2
)
 
(0.3
)
 
-

 
(9.3
)
Book size
 
3
0.7

 
-

 
0.7

 
3.5

 
12.2

 
(0.7
)
 
2.4

 
0.6

 
18.7

Book quality
 
 
(0.9
)
 
-

 
(0.9
)
 
5.9

 
9.5

 
0.1

 
0.2

 
-

 
14.8

Model updates
 
 
(0.9
)
 
-

 
(0.9
)
 
-

 
(0.1
)
 
-

 
-

 
-

 
(1.0
)
- portfolios moving onto IRB approach
 
 
-

 
-

 
-

 
-

 
(0.1
)
 
-

 
-

 
-

 
(0.1
)
- new/updated models
 
 
(0.9
)
 
-

 
(0.9
)
 
-

 
-

 
-

 
-

 
-

 
(0.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Methodology and policy
 
 
0.5

 
-

 
0.5

 
1.3

 
1.6

 
-

 
0.9

 
-

 
4.3

- internal updates
 
 
(0.8
)
 
-

 
(0.8
)
 
1.3

 
1.6

 
-

 
0.9

 
-

 
3.0

- external updates - regulatory
 
 
1.3

 
-

 
1.3

 
-

 
-

 
-

 
-

 
-

 
1.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total RWA movement
 
 
(1.2
)
 
(12.3
)
 
(13.5
)
 
(6.2
)
 
(2.8
)
 
(0.8
)
 
3.2

 
(0.7
)
 
(20.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RWAs at 30 Jun 2016
 
 
148.9

 
27.2

 
176.1

 
414.8

 
395.6

 
18.5

 
35.4

 
41.8

 
1,082.2

For footnote, see page 100.
RWAs decreased in 1H16 by $20.8bn, of which $9.3bn was due to foreign currency translation differences. The decrease was primarily from RWA initiatives reducing RWAs by $48.3bn, partly offset by book size movements of $18.7bn, and a deterioration of credit quality and risk parameter movements that increased RWAs by $14.8bn. Comments below describe RWA movements excluding foreign currency translation differences.
RWA initiatives
The main drivers of these reductions were:
•
$19.3bn through the continued reduction in GB&M legacy credit and US run-off portfolios; and
•
$29.0bn as a result of reduced exposures, refined calculations and process improvements.
Book size
Book size movements were principally from:
 
•
higher corporate lending in GB&M and CMB in Europe, Middle East and North Africa, and North America increasing RWAs by $7.1bn; and
•
increased trade volumes and mark-to-market movements on derivatives and securities financing transactions increasing counterparty credit risk ('CCR') by $9.4bn.
Book quality
The main drivers for book quality movements were:
•
corporate and institution downgrades and changes in credit quality mix in Asia, North America and Europe, increasing RWAs by $14.6bn; and
•
the downgrade of Brazil's and Egypt's internal credit rating, increasing RWAs by $2.0bn; partly offset by
•
the upgrade of Argentina's sovereign rating, decreasing RWAs by $0.8bn.



HSBC HOLDINGS PLC
89

Capital
Source and application of total regulatory capital


Half-year to




30 Jun




2016



Footnotes
$m

Movement in total regulatory capital




Opening common equity tier 1 capital

1
130,863

Contribution to common equity tier 1 capital from profit for the period


5,388

- consolidated profits attributable to shareholders of the parent company


6,912

- removal of own credit spread net of tax


(1,094
)
- debit valuation adjustment


(103
)
- deconsolidation of insurance entities and special purpose entities


(327
)





Net dividends including foreseeable net dividends

4
(3,853
)
- update for actual dividends and scrip take-up


(413
)
- first interim dividend net of scrip take-up
 
 
(1,433
)
- second interim dividend net of planned scrip


(2,007
)





Goodwill and intangible assets


786

Ordinary shares issued


8

Foreign currency translation differences


(2,333
)
Other, including regulatory adjustments


(189
)





Closing common equity tier 1 capital

1
130,670






Opening additional tier 1 capital on a transitional basis


22,440

Movement in additional tier 1 securities


(205
)
- new issuance net of redemptions


(680
)
- grandfathering adjustments
 
 
574

- foreign currency translation and other differences


(99
)
Other, including regulatory adjustments


(593
)





Closing tier 1 capital on a transitional basis


152,312






Opening tier 2 capital on a transitional basis


36,530

Movement in tier 2 securities


(2,020
)
- new issuance net of redemptions


567

- grandfathering adjustments


(2,284
)
- foreign currency translation and other differences


(303
)
Other, including regulatory adjustments


(29
)





Closing total regulatory capital on a transitional basis


186,793

For footnotes, see page 100.

Leverage ratio
Summary reconciliation of accounting assets and leverage ratio exposures
Ref*
 
 
At
30 Jun
2016

 
 
 
$bn

 
 
 
 
1
Total assets as per published financial statements
 
2,608

 
Adjustments for:
 
 
2
- entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation
 
116

4
- derivative financial instruments
 
(236
)
5
- securities financing transactions
 
9

6
- off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures)
 
302

7
- other
 
(11
)
 
 
 
 
8
Total leverage ratio exposure
 
2,788

*
The references identify the lines prescribed in the European Banking Authority ('EBA') template which are applicable and where there is a value.

HSBC HOLDINGS PLC
90

Capital (continued)

Leverage ratio common disclosure
 
 
 
At
30 Jun
2016

Ref*
 
 
$bn

 
On-balance sheet exposures (excluding derivatives and securities financing transactions ('SFT'))
 
 
1
On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral)
 
2,161

2
(Asset amounts deducted in determining tier 1 capital)
 
(34
)
 
 
 
 
3
Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets)
 
2,127

 
 
 
 
 
Derivative exposures
 
 
4
Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin)
 
37

5
Add-on amounts for potential future exposures associated with all derivatives transactions (mark-to-market method)
 
120

6
Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to IFRSs
 
5

7
(Deductions of receivables assets for cash variation margin provided in derivatives transactions)
 
(43
)
8
(Exempted CCP leg of client-cleared trade exposures)
 
(3
)
9
Adjusted effective notional amount of written credit derivatives
 
238

10
(Adjusted effective notional offsets and add-on deductions for written credit derivatives)
 
(217
)
 
 
 
 
11
Total derivative exposures
 
137

 
 
 
 
 
Securities financing transaction exposures
 
 
12
Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions
 
291

13
(Netted amounts of cash payables and cash receivables of gross SFT assets)
 
(78
)
14
Counterparty credit risk exposure for SFT assets
 
9

 
 
 
 
16
Total securities financing transaction exposures
 
222

 
 
 
 
 
Other off-balance sheet exposures
 
 
17
Off-balance sheet exposures at gross notional amount
 
900

18
(Adjustments for conversion to credit equivalent amounts)
 
(598
)
 
 
 
 
19
Total off-balance sheet exposures
 
302

 
 
 
 
 
Capital and total exposures
 
 
 
 
 
 
20
Tier 1 capital
 
142

 
 
 
 
21
Total leverage ratio exposure
 
2,788

 
 
 
 
22
Leverage ratio
 
5.1
%
 
 
 
 
EU-23
Choice on transitional arrangements for the definition of the capital measure
 
 Fully phased in

*
The references identify the lines prescribed in the EBA template which are applicable and where there is a value.

Split of on-balance sheet exposures (excluding derivatives and SFTs)
Ref*

 
At
30 Jun
2016



 
$bn

 
 
 
 
EU-1
Total on-balance sheet exposures (excluding derivatives, SFTs, and exempted exposures) of which:
 
2,161

EU-2
Trading book exposures
 
274

EU-3
Banking book exposures, of which:
 
1,887

EU-4
- covered bonds
 
1

EU-5
- exposures treated as sovereigns
 
568

EU-6
- exposures to regional governments, multilateral development banks ('MDB'), international organisations and public sector entities ('PSE') not treated as sovereigns
 
6

EU-7
- institutions
 
105

EU-8
- secured by mortgages of immovable properties
 
283

EU-9
- retail exposures
 
108

EU-10
- corporate
 
662

EU-11
- exposures in default
 
15

EU-12
- other exposures (e.g. equity, securitisations, and other non-credit obligation assets)
 
139

*
The references identify the lines prescribed in the EBA template which are applicable and where there is a value.
Our leverage ratio calculated on both the PRA and Capital Requirements Regulation ('CRR') bases was 5.1% at 30 June 2016. On the CRR basis, the leverage ratio was up from 5.0% at 31 December 2015 because of increased capital. The PRA basis was introduced on 1 January 2016.
 
At 30 June 2016, our PRA minimum leverage ratio requirement of 3% was supplemented with an additional leverage ratio buffer of 0.2% that translates to a value of $6.1bn, and a countercyclical leverage ratio buffer which results in no capital impact. We comfortably exceeded these leverage requirements.



HSBC HOLDINGS PLC
91

The risk of excessive leverage is managed as part of HSBC's global risk appetite framework and monitored using a leverage ratio metric within our Risk Appetite Statement ('RAS'). The RAS articulates the aggregate level and types of risk that HSBC is willing to accept in its business activities in order to achieve its strategic business objectives. The RAS is monitored via the risk appetite profile report, which includes comparisons of actual performance against the risk appetite
 
and tolerance thresholds assigned to each metric, to ensure that any excessive risk is highlighted, assessed and mitigated appropriately. The risk appetite profile report is presented monthly to the Group Risk Management Meeting of the Group Management Board and the Group Risk Committee. Our approach to risk appetite is described on page 102 of the Annual Report and Accounts 2015.




Regulatory disclosures
Regulatory developments
Throughout 1H16, there was a series of documents issued by the Basel Committee on Banking Supervision which proposed significant changes to the regulatory framework. The key publications proposed changes to:
•
the framework for credit risk capital requirements under both the internal model and standardised approaches;
•
the operational risk framework;
•
the credit valuation adjustment capital framework;
•
the scope of consolidation to include entities giving rise to 'step-in risk'; and
•
the leverage ratio exposure calculation and buffers.
The final impact of these and other proposals will depend on the outcome of the consultation processes and quantitative impact studies, and any changes would need to be
 
transposed into law before coming into effect. This includes the finalised changes that relate to the market risk, counterparty risk and securitisation regimes. In the UK, the Bank of England's Financial Policy Committee ('FPC') has indicated that there will be an offset with the PRA's Pillar 2 capital framework as a result of these changes but the full scope and size of this offset is currently uncertain.
The FPC also, in July 2016, decided to keep the UK countercyclical capital buffer requirement at 0% until at least June 2017, having previously planned to raise it to 0.5% in March 2017. Furthermore, the FPC recommended that the PRA buffer requirements reduce in line with this decision. The PRA did this with immediate effect.
As part of Recovery and Resolution frameworks, the international standard for Total Loss Absorbing Capacity was finalised by the Financial Stability Board. The Bank of England expects to implement this through the EU's Minimum Requirements for own funds and Eligible Liabilities framework, which it has consulted on but has yet to finalise.



Risk-weighted assets
RWAs by geographical region
 
 
 
Europe

 
Asia

 
MENA

 
North
America

 
Latin
America

 
Total

 
 
Footnotes
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

IRB approach
 
 
181.7

 
199.7

 
19.9

 
117.4

 
15.0

 
533.7

- IRB advanced approach
 
 
162.8

 
199.7

 
10.0

 
117.4

 
15.0

 
504.9

- IRB foundation approach
 
 
18.9

 
-

 
9.9

 
-

 
-

 
28.8

Standardised approach
 
 
46.1

 
175.1

 
31.1

 
20.0

 
45.3

 
317.6

Credit risk
 
 
227.8

 
374.8

 
51.0

 
137.4

 
60.3

 
851.3

Counterparty credit risk
 
 
36.7

 
15.7

 
1.4

 
15.9

 
4.0

 
73.7

Market risk
 
5
31.8

 
24.7

 
1.1

 
7.7

 
1.2

 
41.8

Operational risk
 
 
34.9

 
47.1

 
6.2

 
14.1

 
13.1

 
115.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
331.2

 
462.3

 
59.7

 
175.1

 
78.6

 
1,082.2

For footnote, see page 100.

RWAs by global business
 
 
 
Principal
RBWM

 
US
run-off
portfolio

 
Total
RBWM

 
CMB

 
GB&M

 
GPB

 
Other

 
Total

 
 
Footnotes
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

IRB approach
 
 
57.6

 
20.8

 
78.4

 
225.3

 
210.7

 
7.8

 
11.5

 
533.7

- IRB advanced approach
 
 
57.6

 
20.8

 
78.4

 
205.5

 
202.9

 
7.7

 
10.4

 
504.9

- IRB foundation approach
 
 
-

 
-

 
-

 
19.8

 
7.8

 
0.1

 
1.1

 
28.8

Standardised approach
 
 
57.9

 
4.0

 
61.9

 
158.5

 
66.8

 
7.1

 
23.3

 
317.6

Credit risk
 
 
115.5

 
24.8

 
140.3

 
383.8

 
277.5

 
14.9

 
34.8

 
851.3

Counterparty credit risk
 
 
-

 
-

 
-

 
-

 
72.9

 
0.3

 
0.5

 
73.7

Market risk
 
5
-

 
-

 
-

 
-

 
41.5

 
-

 
0.3

 
41.8

Operational risk
 
 
33.4

 
2.4

 
35.8

 
31.0

 
45.2

 
3.3

 
0.1

 
115.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
148.9

 
27.2

 
176.1

 
414.8

 
437.1

 
18.5

 
35.7

 
1,082.2

For footnote, see page 100.

HSBC HOLDINGS PLC
92

Capital (continued)

RWA and Capital requirements for credit risk and information on risk exposures
Credit risk RWAs by exposure class
 
 
 
Exposure value

 
RWAs

 
Capital required2

 
 
Footnotes
$bn


$bn

 
$bn

IRB advanced approach
 
 
1,493.7


504.9

 
40.4

Retail:
 
 
 

 
 
 
- secured by mortgages on immovable property SME
 
 
2.9


0.6

 
-

- secured by mortgages on immovable property non-SME
 
 
261.9


47.7

 
3.8

- qualifying revolving retail
 
 
65.3


15.1

 
1.2

- other SME
 
 
10.8


5.2

 
0.4

- other non-SME
 
 
45.2


10.7

 
0.9

Total retail
 
 
386.1


79.3

 
6.3

Central governments and central banks
 
 
350.2


50.7

 
4.1

Institutions
 
 
77.1


19.0

 
1.5

Corporates
 
6
589.5


321.4

 
25.7

Securitisation positions
 
 
37.2


21.1

 
1.7

Non-credit obligation assets
 
 
53.6


13.4

 
1.1

IRB foundation approach
 
 
46.3


28.8

 
2.3

Central governments and central banks
 
 
0.1


0.1

 
-

Institutions
 
 
0.3


0.1

 
-

Corporates
 
 
45.9


28.6

 
2.3

Standardised approach
 
 
601.3


317.6

 
25.4

Central governments and central banks
 
 
223.4


19.9

 
1.6

Institutions
 
 
34.3


13.8

 
1.1

Corporates
 
 
212.8


195.9

 
15.6

Retail
 
 
43.4


31.9

 
2.6

Secured by mortgages on immovable property
 
 
43.1


15.3

 
1.2

Exposures in default
 
 
5.0


6.4

 
0.5

Regional governments or local authorities
 
 
2.6


0.8

 
0.1

Equity
 
7
6.8


12.0

 
1.0

Items associated with particularly high risk
 
 
4.5


6.8

 
0.5

Securitisation positions
 
 
0.8


0.7

 
0.1

Claims in the form of collective investment undertakings ('CIUs')
 
 
0.5


0.5

 
-

Claims on institutions and corporates with a short-term credit assessment
 
 
0.1

 
-

 
-

International organisations
 
 
2.7


-

 
-

Multilateral development banks
 
 
0.2

 
-

 
-

Other items
 
 
21.1


13.6

 
1.1

 
 
 
 

 
 
 
 
 
 
 

 
 
 
At 30 Jun 2016
 
 
2,141.3


851.3

 
68.1

For footnotes, see page 100.

Counterparty credit risk RWAs by exposure class
 
 
 
 
 
Capital

 
 
 
RWAs

 
required2

 
 
Footnotes
$bn

 
$bn

IRB advanced approach
 
 
48.1

 
3.8

Central governments and central banks
 
 
2.8

 
0.2

Institutions
 
 
18.7

 
1.5

Corporates
 
 
26.6

 
2.1

 
 
 
 
 
 
IRB foundation approach
 
 
2.0

 
0.2

Corporates
 
 
2.0

 
0.2

 
 
 
 
 
 
Standardised approach
 
 
4.7

 
0.3

Institutions
 
 
0.4

 
-

Corporates
 
 
4.3

 
0.3

 
 
 
 
 
 
CVA advanced
 
8
3.5

 
0.3

CVA standardised
 
8
13.3

 
1.1

CCP standardised
 
 
2.1

 
0.2

 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
73.7

 
5.9

For footnotes, see page 100.

HSBC HOLDINGS PLC
93

Market risk - RWAs and capital required
 
 
RWAs

 
Capital required2

 
 
$bn

 
$bn

Internal model based
 
35.8

 
2.8

VaR
 
6.9

 
0.6

Stressed VaR
 
9.6

 
0.7

Incremental risk charge
 
11.1

 
0.8

Other VaR and stressed VaR
 
8.2

 
0.7

Standardised approach
 
6.0

 
0.5

Interest rate position risk
 
2.4

 
0.2

Foreign exchange position risk
 
0.3

 
-

Equity position risk
 
1.0

 
0.1

Securitisation positions
 
2.3

 
0.2

 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
41.8

 
3.3

For footnote, see page 100.

Wholesale IRB exposure - by obligor grade9 - Central governments and central banks
 
 
CRR

PD range
 
 
Exposure
value

 
Average
exposure
value

 
Undrawn commit-ments

 
Average PD10

 
Average
 LGD10

 
RWA density10

 
RWAs

 
Mapped
external rating
 
Footnotes
 
%
 
 
$bn

 
$bn

 
$bn

 
%

 
%

 
%

 
$bn

 
 
Default risk
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimal
 
0.1

0.000 to 0.010
 
 
145.8

 
143.6

 
0.7

 
0.01

 
39.9

 
7

 
10.1

 
AAA
 
 
1.1

0.011 to 0.028
 
 
116.3

 
112.6

 
0.7

 
0.02

 
45.0

 
6

 
7.5

 
AA+ to AA
 
 
1.2

0.029 to 0.053
 
 
38.3

 
39.7

 
0.4

 
0.04

 
45.2

 
14

 
5.4

 
AA- to A+
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Low
 
2.1

0.054 to 0.095
 
 
13.1

 
11.5

 
0.1

 
0.07

 
45.0

 
28

 
3.7

 
A
 
 
2.2

0.096 to 0.169
 
 
10.4

 
11.0

 
0.2

 
0.13

 
45.0

 
30

 
3.1

 
A-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Satisfactory
 
3.1

0.170 to 0.285
 
 
4.5

 
4.2

 
-

 
0.22

 
44.5

 
38

 
1.7

 
BBB+
 
 
3.2

0.286 to 0.483
 
 
0.4

 
3.3

 
-

 
0.37

 
45.0

 
50

 
0.2

 
BBB
 
 
3.3

0.484 to 0.740
 
 
12.5

 
8.8

 
-

 
0.63

 
45.0

 
70

 
8.7

 
BBB-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair
 
4.1

0.741 to 1.022
 
 
0.1

 
0.1

 
-

 
0.87

 
45.0

 
100

 
0.1

 
BB+
 
 
4.2

1.023 to 1.407
 
 
1.0

 
1.0

 
0.1

 
1.20

 
45.0

 
90

 
0.9

 
BB
 
 
4.3

1.408 to 1.927
 
 
1.1

 
1.1

 
-

 
1.65

 
45.0

 
100

 
1.1

 
BB-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Moderate
 
5.1

1.928 to 2.620
 
 
1.8

 
3.6

 
0.9

 
2.25

 
45.0

 
111

 
2.0

 
BB-
 
 
5.2

2.621 to 3.579
 
 
3.6

 
1.6

 
-

 
3.05

 
45.0

 
117

 
4.2

 
B+
 
 
5.3

3.580 to 4.914
 
 
1.1

 
1.0

 
-

 
4.20

 
45.0

 
136

 
1.5

 
B
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
6.1

4.915 to 6.718
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
B
 
 
6.2

6.719 to 8.860
 
 
0.3

 
0.5

 
-

 
7.85

 
45.0

 
200

 
0.6

 
B-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
 
7.1

8.861 to 11.402
 
 
-

 
0.3

 
-

 
10.00

 
45.0

 
-

 
-

 
CCC+
 
 
7.2

11.403 to 15.000
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
CCC+
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Special management
 
8.1

15.001 to 22.000
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
CCC+
 
 
8.2

22.001 to 50.000
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
CCC+
 
 
8.3

50.001 to 99.999
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
CCC to C
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Default
11
9/10

100.0
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
Default
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
 
 
350.3

 
343.9

 
3.1

 
0.12

 
42.9

 
15

 
50.8

 
 
For footnotes, see page 100.


HSBC HOLDINGS PLC
94

Capital (continued)

Wholesale IRB exposure - by obligor grade9 - Institutions
 
 
CRR

PD range

 
Exposure
value

 
Average
exposure
value

 
Undrawn commit-ments

 
Average
PD10

 
Average
 LGD10

 
RWA
density10

 
RWAs

 
Mapped
external rating
 
Footnotes
 
%

 
$bn

 
$bn

 
$bn

 
%

 
%

 
%

 
$bn

 
 
Default risk
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimal
 
0.1

0.000 to 0.010

 
0.8

 
1.8

 
0.1

 
0.03

 
45.7

 
13

 
0.1

 
AAA
 
 
1.1

0.011 to 0.028

 
16.1

 
15.4

 
1.4

 
0.03

 
37.1

 
11

 
1.7

 
AA+ to AA
 
 
1.2

0.029 to 0.053

 
27.5

 
31.3

 
3.8

 
0.04

 
40.8

 
13

 
3.5

 
AA-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Low
 
2.1

0.054 to 0.095

 
10.6

 
16.0

 
4.4

 
0.07

 
40.4

 
21

 
2.2

 
A+ to A
 
 
2.2

0.096 to 0.169

 
11.7

 
10.5

 
3.6

 
0.13

 
37.3

 
26

 
3.1

 
A-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Satisfactory
 
3.1

0.170 to 0.285

 
2.0

 
2.7

 
1.5

 
0.22

 
40.9

 
40

 
0.8

 
BBB+
 
 
3.2

0.286 to 0.483

 
2.7

 
3.5

 
0.6

 
0.37

 
46.0

 
59

 
1.6

 
BBB
 
 
3.3

0.484 to 0.740

 
2.7

 
2.6

 
0.7

 
0.63

 
45.3

 
104

 
2.8

 
BBB-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair
 
4.1

0.741 to 1.022

 
2.2

 
1.2

 
0.7

 
0.87

 
43.7

 
91

 
2.0

 
BB+
 
 
4.2

1.023 to 1.407

 
0.5

 
0.5

 
0.2

 
1.20

 
45.6

 
100

 
0.5

 
BB
 
 
4.3

1.408 to 1.927

 
0.2

 
0.2

 
0.1

 
1.65

 
46.4

 
100

 
0.2

 
BB-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Moderate
 
5.1

1.928 to 2.620

 
0.1

 
0.1

 
0.2

 
2.25

 
48.5

 
100

 
0.1

 
BB-
 
 
5.2

2.621 to 3.579

 
0.1

 
0.1

 
-

 
3.05

 
45.0

 
100

 
0.1

 
B+
 
 
5.3

3.580 to 4.914

 
0.1

 
0.1

 
-

 
4.20

 
18.7

 
-

 
-

 
B
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
6.1

4.915 to 6.718

 
0.1

 
-

 
-

 
5.75

 
45.5

 
100

 
0.1

 
B-
 
 
6.2

6.719 to 8.860

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
B-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
 
7.1

8.861 to 11.402

 
-

 
-

 
-

 
10.00

 
45.4

 
-

 
0.1

 
CCC+
 
 
7.2

11.403 to 15.000

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
CCC+
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Special management
 
8.1

15.001 to 22.000

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
CCC
 
 
8.2

22.001 to 50.000

 
-

 
-

 
0.2

 
35.97

 
54.9

 
-

 
0.1

 
CCC- to CC
 
 
8.3

50.001 to 99.999

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
C
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Default
11
9/10

100.0

 
-

 
-

 
-

 
100.00

 
45.0

 
-

 
0.1

 
Default
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
 
 
77.4

 
86.0

 
17.5

 
0.20

 
40.0

 
25

 
19.1

 
 
For footnotes, see page 100.
Wholesale IRB exposure - by obligor grade9 - Corporates12
 
 
CRR

PD range

 
Exposure
value

 
Average
exposure
value

 
Undrawn commit-ments

 
Average
PD10

 
Average
 LGD10

 
RWA
density10

 
RWAs

 
Mapped
external rating
 
Footnotes 
 
%

 
$bn

 
$bn

 
$bn

 
%

 
%

 
%

 
$bn

 
 
Default risk
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimal
 
0.1

0.000 to 0.010

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
 
 
 
1.1

0.011 to 0.028

 
19.4

 
14.8

 
13.8

 
0.03

 
27.5

 
12

 
2.4

 
AAA to AA
 
 
1.2

0.029 to 0.053

 
43.2

 
49.5

 
37.2

 
0.04

 
36.8

 
14

 
6.2

 
AA-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Low
 
2.1

0.054 to 0.095

 
63.8

 
64.8

 
57.0

 
0.07

 
40.3

 
22

 
14.0

 
A+ to A
 
 
2.2

0.096 to 0.169

 
74.3

 
80.0

 
65.6

 
0.13

 
39.3

 
31

 
23.0

 
A-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Satisfactory
 
3.1

0.170 to 0.285

 
75.0

 
76.6

 
61.9

 
0.22

 
39.3

 
40

 
30.2

 
BBB+
 
 
3.2

0.286 to 0.483

 
69.5

 
72.9

 
52.7

 
0.37

 
39.4

 
51

 
35.3

 
BBB
 
 
3.3

0.484 to 0.740

 
65.6

 
69.4

 
43.9

 
0.63

 
36.3

 
60

 
39.4

 
BBB-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair
 
4.1

0.741 to 1.022

 
44.2

 
43.6

 
31.4

 
0.87

 
39.1

 
74

 
32.9

 
BB+
 
 
4.2

1.023 to 1.407

 
33.6

 
35.4

 
22.6

 
1.20

 
39.8

 
85

 
28.3

 
BB
 
 
4.3

1.408 to 1.927

 
35.0

 
32.5

 
18.4

 
1.65

 
33.7

 
84

 
29.3

 
BB-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Moderate
 
5.1

1.928 to 2.620

 
27.7

 
27.4

 
15.8

 
2.24

 
35.5

 
92

 
25.6

 
BB-
 
 
5.2

2.621 to 3.579

 
12.8

 
12.5

 
8.9

 
3.06

 
36.8

 
106

 
13.6

 
B+
 
 
5.3

3.580 to 4.914

 
10.7

 
11.4

 
8.2

 
4.14

 
38.4

 
118

 
12.6

 
B
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
6.1

4.915 to 6.718

 
7.6

 
6.8

 
6.8

 
5.73

 
37.8

 
130

 
9.9

 
B-
 
 
6.2

6.719 to 8.860

 
4.6

 
3.9

 
2.0

 
7.85

 
37.1

 
146

 
6.7

 
B-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
 
7.1

8.861 to 11.402

 
2.9

 
2.6

 
1.3

 
10.01

 
36.6

 
155

 
4.5

 
CCC+
 
 
7.2

11.403 to 15.000

 
0.8

 
1.0

 
0.5

 
13.00

 
31.8

 
150

 
1.2

 
CCC+
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Special management
 
8.1

15.001 to 22.000

 
1.8

 
1.2

 
1.2

 
19.00

 
32.6

 
178

 
3.2

 
CCC
 
 
8.2

22.001 to 50.000

 
0.5

 
0.5

 
0.1

 
35.86

 
34.9

 
200

 
1.0

 
CCC- to CC
 
 
8.3

50.001 to 99.999

 
0.3

 
0.3

 
0.1

 
75.00

 
41.4

 
133

 
0.4

 
C
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Default
11
9/10

100.0

 
7.9

 
7.4

 
1.2

 
100.00

 
44.3

 
82

 
6.5

 
Default
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
 
 
601.2

 
614.5

 
450.6

 
2.28

 
37.9

 
54

 
326.2

 
 
For footnote, see page 100.

HSBC HOLDINGS PLC
95

Retail IRB exposure - by internal PD band
 
 
PD range
 
Exposure
value

 
Average
exposure
 value

 
Undrawn commit-ments

 
Average
PD10

 
Average
 LGD10

 
RWA density10

 
RWAs

 
 
%
 
$bn

 
$bn

 
$bn

 
%

 
%

 
%

 
$bn

At 30 Jun 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Secured by mortgages on immovable property SME
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Band 1
 
0.000 to 0.483
 
0.6

 
0.6

 
-

 
0.16

 
12.7

 
-

 
-

Band 2
 
0.484 to 1.022
 
0.5

 
0.5

 
0.1

 
0.76

 
19.5

 
20

 
0.1

Band 3
 
1.023 to 4.914
 
1.2

 
1.3

 
-

 
2.29

 
19.8

 
25

 
0.3

Band 4
 
4.915 to 8.860
 
0.3

 
0.2

 
-

 
6.76

 
22.4

 
33

 
0.1

Band 5
 
8.861 to 15.000
 
0.1

 
0.1

 
-

 
11.02

 
27.8

 
-

 
-

Band 6
 
15.001 to 50.000
 
0.1

 
0.1

 
-

 
24.62

 
20.5

 
100

 
0.1

Band 7
 
50.001 to 100.000
 
0.1

 
0.2

 
-

 
100.00

 
18.7

 
-

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.9

 
3.0

 
0.1

 
5.56

 
18.6

 
21

 
0.6

Secured by mortgages on immovable property non-SME
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Band 1
 
0.000 to 0.483
 
206.9

 
210.2

 
16.2

 
0.12

 
15.4

 
8

 
15.8

Band 2
 
0.484 to 1.022
 
22.0

 
23.2

 
1.0

 
0.71

 
21.3

 
26

 
5.7

Band 3
 
1.023 to 4.914
 
20.4

 
22.4

 
0.7

 
1.94

 
25.0

 
55

 
11.3

Band 4
 
4.915 to 8.860
 
4.3

 
5.3

 
-

 
5.69

 
28.1

 
116

 
5.0

Band 5
 
8.861 to 15.000
 
1.1

 
1.2

 
0.1

 
11.82

 
26.4

 
164

 
1.8

Band 6
 
15.001 to 50.000
 
1.9

 
2.2

 
-

 
25.20

 
46.1

 
300

 
5.7

Band 7
 
50.001 to 100.000
 
5.3

 
5.7

 
-

 
98.29

 
46.2

 
45

 
2.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
261.9

 
270.2

 
18.0

 
2.63

 
17.8

 
18

 
47.7

Qualifying revolving retail exposures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Band 1
 
0.000 to 0.483
 
47.4

 
48.4

 
84.5

 
0.12

 
93.3

 
7

 
3.3

Band 2
 
0.484 to 1.022
 
6.9

 
7.0

 
6.6

 
0.71

 
92.6

 
29

 
2.0

Band 3
 
1.023 to 4.914
 
8.7

 
8.9

 
5.7

 
2.22

 
90.6

 
66

 
5.7

Band 4
 
4.915 to 8.860
 
1.2

 
1.3

 
0.5

 
6.65

 
90.1

 
142

 
1.7

Band 5
 
8.861 to 15.000
 
0.4

 
0.4

 
0.2

 
11.11

 
92.1

 
200

 
0.8

Band 6
 
15.001 to 50.000
 
0.5

 
0.5

 
0.1

 
23.32

 
91.3

 
260

 
1.3

Band 7
 
50.001 to 100.000
 
0.2

 
0.2

 
0.1

 
88.94

 
70.5

 
150

 
0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
65.3

 
66.7

 
97.7

 
1.16

 
92.7

 
23

 
15.1

Other SME
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Band 1
 
0.000 to 0.483
 
1.3

 
1.5

 
0.8

 
0.29

 
60.6

 
23

 
0.3

Band 2
 
0.484 to 1.022
 
1.9

 
2.0

 
0.8

 
0.75

 
50.6

 
37

 
0.7

Band 3
 
1.023 to 4.914
 
5.0

 
5.3

 
1.3

 
2.57

 
52.7

 
56

 
2.8

Band 4
 
4.915 to 8.860
 
1.2

 
1.2

 
0.3

 
6.62

 
49.2

 
58

 
0.7

Band 5
 
8.861 to 15.000
 
0.4

 
0.5

 
0.1

 
10.81

 
58.4

 
100

 
0.4

Band 6
 
15.001 to 50.000
 
0.3

 
0.2

 
-

 
25.47

 
60.1

 
100

 
0.3

Band 7
 
50.001 to 100.000
 
0.7

 
0.8

 
0.1

 
99.72

 
38.8

 
-

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.8

 
11.5

 
3.4

 
9.92

 
52.4

 
48

 
5.2

Other non-SME
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Band 1
 
0.000 to 0.483
 
26.4

 
26.7

 
11.3

 
0.18

 
26.4

 
11

 
2.8

Band 2
 
0.484 to 1.022
 
6.7

 
6.7

 
1.5

 
0.66

 
31.4

 
27

 
1.8

Band 3
 
1.023 to 4.914
 
9.7

 
10.1

 
1.4

 
1.92

 
30.4

 
41

 
4.0

Band 4
 
4.915 to 8.860
 
0.9

 
0.9

 
0.1

 
7.14

 
54.9

 
89

 
0.8

Band 5
 
8.861 to 15.000
 
0.5

 
0.5

 
-

 
12.00

 
63.9

 
120

 
0.6

Band 6
 
15.001 to 50.000
 
0.4

 
0.4

 
-

 
28.04

 
60.1

 
125

 
0.5

Band 7
 
50.001 to 100.000
 
0.6

 
0.6

 
-

 
96.61

 
59.9

 
33

 
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
45.2

 
45.9

 
14.3

 
2.36

 
29.6

 
24

 
10.7

Total retail
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Band 1
 
0.000 to 0.483
 
282.6

 
287.4

 
112.8

 
0.13

 
29.7

 
8

 
22.2

Band 2
 
0.484 to 1.022
 
38.0

 
39.4

 
10.0

 
0.70

 
37.4

 
27

 
10.3

Band 3
 
1.023 to 4.914
 
45.0

 
48.0

 
9.1

 
2.07

 
41.8

 
54

 
24.1

Band 4
 
4.915 to 8.860
 
7.9

 
8.9

 
0.9

 
6.18

 
43.8

 
105

 
8.3

Band 5
 
8.861 to 15.000
 
2.5

 
2.7

 
0.4

 
11.53

 
49.9

 
144

 
3.6

Band 6
 
15.001 to 50.000
 
3.2

 
3.4

 
0.1

 
25.23

 
55.4

 
247

 
7.9

Band 7
 
50.001 to 100.000
 
6.9

 
7.5

 
0.2

 
98.00

 
47.0

 
42

 
2.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
386.1

 
397.3

 
133.5

 
2.58

 
32.8

 
21

 
79.3

For footnote, see page 100.



HSBC HOLDINGS PLC
96

Capital (continued)

Regulatory balance sheet
Regulatory and accounting consolidations
The basis of consolidation for the purpose of financial accounting under IFRSs, described in Note 1 on the Financial Statements, differs from that used for regulatory purposes as described below. The following table provides a reconciliation of the financial accounting balance sheet to the regulatory scope of consolidation.
Interests in banking associates are equity accounted in the financial accounting consolidation, whereas their exposures are proportionally consolidated for regulatory purposes by including our share of assets, liabilities, profit and loss, and RWAs in accordance with the PRA's application of Capital Requirements Directive IV ('CRD IV').
 
Subsidiaries engaged in insurance activities are excluded from the regulatory consolidation by excluding assets, liabilities and post-acquisition reserves, leaving the investment of these insurance subsidiaries to be recorded at cost and deducted from CET1 (subject to thresholds).
The regulatory consolidation also excludes special purpose entities ('SPEs') where significant risk has been transferred to third parties. Exposures to these SPEs are risk-weighted as securitisation positions for regulatory purposes.
Entities in respect of which the basis of consolidation for financial accounting purposes differs from that used for regulatory purposes can be found in table 5 of our Pillar 3 Disclosures 2015 document.


Reconciliation of balance sheets - financial accounting to regulatory scope of consolidation
 
 
 
Accounting balance
sheet

 
Deconsolidation of insurance/
other entities

 
Consolidation of banking associates

 
Regulatory balance
sheet

 
 
Ref*
$m

 
$m

 
$m

 
$m

Assets
 
 
 
 
 
 
 
 
 
Cash and balances at central banks
 
 
128,272

 
(1
)
 
26,726

 
154,997

Items in the course of collection from other banks
 
 
6,584

 
-

 
27

 
6,611

Hong Kong Government certificates of indebtedness
 
 
29,011

 
-

 
-

 
29,011

Trading assets
 
 
280,295

 
(87
)
 
3,049

 
283,257

Financial assets designated at fair value
 
 
23,901

 
(23,539
)
 
-

 
362

Derivatives
 
 
369,942

 
(175
)
 
1,068

 
370,835

Loans and advances to banks
 
 
92,199

 
(2,894
)
 
15,660

 
104,965

Loans and advances to customers
 
 
887,556

 
(5,116
)
 
122,664

 
1,005,104

Of which:
 
 
 
 
 
 
 
 
 
- impairment allowances on IRB portfolios
 
h
(6,026
)
 
-

 
-

 
(6,026
)
- impairment allowances on standardised portfolios
 
 
(2,927
)
 
-

 
(2,818
)
 
(5,745
)
Reverse repurchase agreements - non-trading
 
 
187,826

 
425

 
2,621

 
190,872

Financial investments
 
 
441,399

 
(54,824
)
 
50,181

 
436,756

Assets held for sale
 
 
50,305

 
(5,291
)
 
-

 
45,014

Of which:
 
 
 
 
 
 
 
 
 
- goodwill and intangible assets
 
e
2,027

 
(268
)
 
-

 
1,759

- impairment allowances
 
 
(2,220
)
 
-

 
-

 
(2,220
)
Of which:
 
 
 
 
 
 
 
 
 
- IRB portfolios
 
h
(146
)
 
-

 
-

 
(146
)
- standardised portfolios
 
 
(2,074
)
 
-

 
-

 
(2,074
)
Capital invested in insurance and other entities
 
 
-

 
2,347

 
-

 
2,347

Current tax assets
 
 
714

 
(26
)
 
-

 
688

Prepayments, accrued income and other assets
 
 
60,569

 
(2,603
)
 
9,560

 
67,526

Of which:
 
 
 
 
 
 
 
 
 
- retirement benefit assets
 
i
5,781

 
-

 
-

 
5,781

Interests in associates and joint ventures
 
 
19,606

 
-

 
(19,014
)
 
592

Of which:
 
 
 
 
 
 
 
 
 
- positive goodwill on acquisition
 
e
574

 
-

 
(560
)
 
14

 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
 
e
24,053

 
(6,471
)
 
616

 
18,198

Deferred tax assets
 
f
5,917

 
163

 
491

 
6,571

 
 
 
 
 
 
 
 
 
 
Total assets at 30 Jun 2016
 
 
2,608,149

 
(98,092
)
 
213,649

 
2,723,706

*
The references (a) to (q) identify balance sheet components which are used in the calculation of regulatory capital on page 99.


HSBC HOLDINGS PLC
97

 
 
 
Accounting balance
sheet

 
Deconsolidation of insurance/
other entities

 
Consolidation of banking associates

 
Regulatory balance
sheet

 
 
Ref*
$m

 
$m

 
$m

 
$m

Liabilities and equity
 
 
 
 
 
 
 
 
 
Hong Kong currency notes in circulation
 
 
29,011

 
-

 
-

 
29,011

Deposits by banks
 
 
69,900

 
(44
)
 
48,095

 
117,951

Customer accounts
 
 
1,290,958

 
(43
)
 
148,867

 
1,439,782

Repurchase agreements - non-trading
 
 
98,342

 
-

 
-

 
98,342

Items in the course of transmission to other banks
 
 
7,461

 
-

 
-

 
7,461

Trading liabilities
 
 
188,698

 
700

 
36

 
189,434

Financial liabilities designated at fair value
 
 
78,882

 
(6,025
)
 
-

 
72,857

Of which:
 
 
 
 
 
 
 
 
 
- term subordinated debt included in tier 2 capital
 
n,q
22,049

 
-

 
-

 
22,049

- preferred securities included in tier 1 capital
 
m
420

 
-

 
-

 
420

Derivatives
 
 
368,414

 
277

 
1,041

 
369,732

Debt securities in issue
 
 
87,673

 
(6,560
)
 
6,294

 
87,407

Liabilities of disposal groups held for sale
 
 
43,705

 
(4,765
)
 
145

 
39,085

Current tax liabilities
 
 
1,569

 
(122
)
 
457

 
1,904

Liabilities under insurance contracts
 
 
73,416

 
(73,416
)
 
-

 
-

Accruals, deferred income and other liabilities
 
 
42,057

 
2,177

 
5,869

 
50,103

Of which:
 
 
 
 
 
 
 
 
 
- retirement benefit liabilities
 
 
3,064

 
(3
)
 
51

 
3,112

Provisions
 
 
5,797

 
(19
)
 
-

 
5,778

Of which:
 
 
 
 
 
 
 
 
 
- contingent liabilities and contractual commitments
 
 
256

 
-

 
-

 
256

Of which:
 
 
 
 
 
 
 
 
 
- credit-related provisions on IRB portfolios
 
h
227

 
-

 
-

 
227

- credit-related provisions on standardised portfolios
 
 
29

 
-

 
-

 
29

Deferred tax liabilities
 
 
2,300

 
(991
)
 
4

 
1,313

Subordinated liabilities
 
 
21,669

 
1

 
2,841

 
24,511

Of which:
 
 
 
 
 
 
 
 
 
- preferred securities included in tier 1 capital
 
k,m
1,832

 
-

 
-

 
1,832

- perpetual subordinated debt included in tier 2 capital
 
o
1,968

 
-

 
-

 
1,968

- term subordinated debt included in tier 2 capital
 
n,q
17,253

 
-

 
-

 
17,253

 
 
o
 
 
 
 
 
 
 
Total liabilities at 30 Jun 2016
 
 
2,409,852

 
(88,830
)
 
213,649

 
2,534,671

 
 
 
 
 
 
 
 
 
 
Called up share capital
 
a
9,906

 
(1,036
)
 
-

 
8,870

Share premium account
 
a,k
12,772

 
(182
)
 
-

 
12,590

Other equity instruments
 
j,k
17,110

 
2,972

 
-

 
20,082

Other reserves
 
c,g
5,759

 
1,245

 
-

 
7,004

Retained earnings
 
b,c
145,710

 
(11,275
)
 
-

 
134,435

 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
 
 
191,257

 
(8,276
)
 
-

 
182,981

Non-controlling interests
 
d,l,m,p
7,040

 
(986
)
 
-

 
6,054

Of which:
 
 
 
 
 
 
 
 
 
- non-cumulative preference shares issued by subsidiaries included in tier 1 capital
 
m
270

 
-

 
-

 
270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity at 30 Jun 2016
 
 
198,297

 
(9,262
)
 
-

 
189,035

 
 
 
 
 
 
 
 
 
 
Total liabilities and equity at 30 Jun 2016
 
 
2,608,149

 
(98,092
)
 
213,649

 
2,723,706

*
The references (a) to (q) identify balance sheet components which are used in the calculation of regulatory capital on page 99.

HSBC HOLDINGS PLC
98

Capital (continued)

Capital
Transitional own funds disclosure
Ref *

 
Ref†
At
30 Jun
2016

 
CRD IV prescribed residual amount

 
Final
CRD IV
text

 
 
 
$m

 
$m

 
$m

 
Common equity tier 1 ('CET1') capital: instruments and reserves
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1

Capital instruments and the related share premium accounts
 
21,273

 


 
21,273

 
Of which: ordinary shares
a
21,273

 


 
21,273

2

Retained earnings
b
138,347

 


 
138,347

3

Accumulated other comprehensive income (and other reserves)
c
(2,066
)
 


 
(2,066
)
5

Minority interests (amount allowed in consolidated CET1)
d
3,659

 
 
 
3,659

5a

Independently reviewed interim net profits net of any foreseeable charge or dividend
b
4,905

 
 
 
4,905

 
 
 
 
 
 
 
 
6

Common equity tier 1 capital before regulatory adjustments
 
166,118

 
 
 
166,118

 
 
 
 
 
 
 
 
 
Common equity tier 1 capital: regulatory adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7

Additional value adjustments
 
(1,507
)
 
 
 
(1,507
)
8

Intangible assets (net of related deferred tax liability)
e
(20,086
)
 
 
 
(20,086
)
10

Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)
f
(1,475
)
 
 
 
(1,475
)
11

Fair value reserves related to gains or losses on cash flow hedges
g
(408
)
 
 
 
(408
)
12

Negative amounts resulting from the calculation of expected loss amounts
h
(5,073
)
 
 
 
(5,073
)
14

Gains or losses on liabilities at fair value resulting from changes in own credit standing
 
(1,670
)
 
 
 
(1,670
)
15

Defined-benefit pension fund assets
i
(4,290
)
 
 
 
(4,290
)
16

Direct and indirect holdings of own CET1 instruments
 
(939
)
 
 
 
(939
)
 
 
 
 
 
 
 
 
28

Total regulatory adjustments to common equity tier 1
 
(35,448
)
 
-

 
(35,448
)
 
 
 
 
 
 
 
 
29

Common equity tier 1 capital
 
130,670

 
-

 
130,670

 
 
 
 
 
 
 
 
 
Additional tier 1 ('AT1') capital: instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30

Capital instruments and the related share premium accounts
 
11,259

 
-

 
11,259

31

Of which: classified as equity under IFRSs
j
11,259

 
-

 
11,259

33

Amount of qualifying items and the related share premium accounts subject to phase out from AT1
k
7,946

 
(7,946
)
 
-

34

Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties
l,m
2,579

 
(2,403
)
 
176

35

Of which: instruments issued by subsidiaries subject to phase out
m
1,665

 
(1,665
)
 
-

 
 
 
 
 
 
 
 
36

Additional tier 1 capital before regulatory adjustments
 
21,784

 
(10,349
)
 
11,435

 
 
 
 
 
 
 
 
 
Additional tier 1 capital: regulatory adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
37

Direct and indirect holdings of own AT1 instruments
 
(60
)
 


 
(60
)
41b

Residual amounts deducted from AT1 capital with regard to deduction from tier 2 ('T2') capital during the transitional period
 
(82
)
 
82

 
-

 
Of which: direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities
 
(82
)
 
82

 
-

43

Total regulatory adjustments to additional tier 1 capital
 
(142
)
 
82

 
(60
)
 
 
 
 
 
 
 
 
44

Additional tier 1 capital
 
21,642

 
(10,267
)
 
11,375

 
 
 
 
 
 
 
 
45

Tier 1 capital (T1 = CET1 + AT1)
 
152,312

 
(10,267
)
 
142,045

 
 
 
 
 
 
 
 
 
Tier 2 capital: instruments and provisions
 
 
 
 
 
 
46

Capital instruments and the related share premium accounts
n
16,840

 


 
16,840

47

Amount of qualifying items and the related share premium accounts subject to phase out from T2
o
5,695

 
(5,695
)
 
-

48

Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in CET1 or AT1) issued by subsidiaries and held by third parties
p,q
12,314

 
(12,262
)
 
52

49

Of which: instruments issued by subsidiaries subject to phase out
q
12,283

 
(12,283
)
 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
51

Tier 2 capital before regulatory adjustments
 
34,849

 
(17,957
)
 
16,892


HSBC HOLDINGS PLC
99

Ref *

 
Ref†
At
30 Jun
2016

 
CRD IV prescribed residual amount

 
Final
CRD IV
text

 
 
 
$m

 
$m

 
$m

 
Tier 2 capital: regulatory adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
52

Direct and indirect holdings of own T2 instruments
 
(40
)
 


 
(40
)
 
 
 
 
 
 
 
 
55

Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions)
 
(328
)
 
(82
)
 
(410
)
 
 
 
 
 
 
 
 
57

Total regulatory adjustments to tier 2 capital
 
(368
)
 
(82
)
 
(450
)
 
 
 
 
 
 
 
 
58

Tier 2 capital
 
34,481

 
(18,039
)
 
16,442

 
 
 
 
 
 
 
 
59

Total capital (TC = T1 + T2)
 
186,793

 
(28,306
)
 
158,487

 
 
 
 
 
 
 
 
60

Total risk-weighted assets
 
1,082,184

 
-

 
1,082,184

 
 
 
 
 
 
 
 
 
Capital ratios and buffers
 
 
 
 
 
 
61

Common equity tier 11 
 
12.1
%
 
 
 
12.1
%
62

Tier 1
 
14.1
%
 
 
 
13.1
%
63

Total capital
 
17.3
%
 
 
 
14.6
%
64

Institution specific buffer requirement
 
1.3
%
 
 
 
 
 
Of which:
 
 
 
 
 
 
65

- capital conservation buffer requirement
 
0.6
%
 
 
 
 
66

- countercyclical buffer requirement
 
0.1
%
 
 
 
 
67a

- Global Systemically Important Institution ('G-SII') or Other Systemically Important Institution ('O-SII') buffer
 
0.6
%
 
 
 
 
68

Common equity tier 1 available to meet buffers
 
6.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts below the threshold for deduction (before risk weighting)
 
 
 
 
 
 
72

Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions)
 
2,940

 
 
 
 
73

Direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions)
 
3,461

 
 
 
 
75

Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability)
 
7,605

 
 
 
 
 
 
 
 
 
 
 
 
 
Applicable caps on the inclusion of provisions in tier 2
 
 
 
 
 
 
77

Cap on inclusion of credit risk adjustments in T2 under standardised approach
 
4,030

 
 
 
 
79

Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach
 
3,404

 
 
 
 
 
 
 
 
 
 
 
 
 
Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2013 and 1 Jan 2022)
 
 
 
 
 
 
82

Current cap on AT1 instruments subject to phase out arrangements
 
10,382

 
 
 
 
83

Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)
 
201

 
 
 
 
84

Current cap on T2 instruments subject to phase out arrangements
 
17,978

 
 
 
 
85

Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)
 
5,501

 
 
 
 
*
The references identify the lines prescribed in the EBA template which are applicable and where there is a value.
†
The references (a) to (q) identify balance sheet components on page 97 which are used in the calculation of regulatory capital.
A list of the features of our capital instruments in accordance with Annex III of Commission Implementing Regulation 1423/2013 is published on our website with reference to
 
our balance sheet at 30 June 2016, along with the full terms and conditions.


Footnotes to Capital
1
Since 1 January 2015 the CRD IV transitional CET1 and end point CET1 capital ratios have been aligned for HSBC Holdings plc.
2
'Capital required' represents the Pillar 1 capital charge at 8% of RWAs.
3
Book size now includes market risk movements previously categorised as movements in risk levels.
4
This includes dividends on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity.
5
RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
6
'Corporates' includes specialised lending exposures subject to a supervisory slotting approach of $34.2bn and RWAs of $23.8bn.
7
This includes investment in insurance companies which are risk weighted at 250%.
8
The RWA impact due to the CVA capital charge is calculated based on the exposures under the IRB and standardised approaches. No additional exposures are taken into account.
9
For a definition of obligor grade refer to our Capital and Risk Management Pillar 3 disclosures 2015, where a glossary of terms can be found.
10
Average PD, average LGD and RWA density percentages represent an exposure weighted average.
11
There is a requirement to hold additional capital for unexpected losses on defaulted exposures where LGD exceeds our best estimate of EL. As a result, in some cases RWAs arise for exposures in default.
12
Excludes specialised lending exposures subject to a supervisory slotting approach of $34.2bn and RWAs of $23.8bn.


HSBC HOLDINGS PLC
100

Financial Statements (unaudited)

Financial Statements
Consolidated income statement
for the half-year to 30 June 2016


Half-year to



30 Jun


30 Jun


31 Dec




2016


2015


2015



Notes
$m


$m


$m












Interest income


23,011


24,019


23,170

Interest expense


(7,251
)

(7,575
)

(7,083
)











Net interest income


15,760


16,444


16,087







 



Fee income


8,202


9,372


8,644

Fee expense


(1,616
)

(1,647
)

(1,664
)











Net fee income


6,586


7,725


6,980












Trading income excluding net interest income


4,594


3,520


3,428

Net interest income on trading activities


730


1,053


722












Net trading income


5,324


4,573


4,150












Changes in fair value of long-term debt issued and related derivatives


270


1,324


(461
)
Net income/(expense) from other financial instruments designated at fair value


291


1,342


(673
)











Net income/(expense) from financial instruments designated at fair value


561


2,666


(1,134
)
Gains less losses from financial investments


965


1,874


194

Dividend income


64


68


55

Net insurance premium income


5,356


5,607


4,748

Other operating income


644


836


219












Total operating income


35,260


39,793


31,299












Net insurance claims and benefits paid and movement in liabilities to policyholders


(5,790
)

(6,850
)

(4,442
)











Net operating income before loan impairment charges and
other credit risk provisions


29,470


32,943


26,857












Loan impairment charges and other credit risk provisions


(2,366
)

(1,439
)

(2,282
)











Net operating income


27,104


31,504


24,575












Employee compensation and benefits


(9,354
)

(10,041
)

(9,859
)
General and administrative expenses


(7,467
)

(8,129
)

(9,533
)
Depreciation and impairment of property, plant and equipment


(605
)

(604
)

(665
)
Amortisation and impairment of intangible assets and goodwill


(1,202
)

(413
)

(524
)











Total operating expenses


(18,628
)

(19,187
)

(20,581
)











Operating profit


8,476


12,317


3,994












Share of profit in associates and joint ventures


1,238


1,311


1,245












Profit before tax


9,714


13,628


5,239












Tax expense


(2,291
)

(2,907
)

(864
)











Profit for the period


7,423


10,721


4,375












Profit attributable to shareholders of the parent company


6,912


9,618


3,904

Profit attributable to non-controlling interests


511


1,103


471















$


$


$












Basic earnings per ordinary share

3
0.32

 
0.48

 
0.17

Diluted earnings per ordinary share

3
0.32

 
0.48

 
0.17

The accompanying notes on pages 107 to 138 form an integral part of these financial statements1.
For footnote, see page 106.

HSBC HOLDINGS PLC
101

Consolidated statement of comprehensive income
for the half-year to 30 June 2016

Half-year to


30 Jun


30 Jun


31 Dec



2016


2015


2015



$m


$m


$m











Profit for the period

7,423


10,721


4,375











Other comprehensive income/(expense)









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









Available-for-sale investments

1,010


(2,445
)

(627
)
- fair value gains/(losses)

2,826


(355
)

(876
)
- fair value gains reclassified to the income statement

(1,228
)

(2,317
)

(120
)
- amounts reclassified to the income statement in respect of impairment losses

24


2


125

- income taxes

(612
)

225


244











Cash flow hedges

340


(150
)

126

- fair value (losses)/gains

(1,796
)

341


363

- fair value losses/(gains) reclassified to the income statement

2,242


(538
)

(167
)
- income taxes

(106
)

47


(70
)










Share of other comprehensive (expense)/income of associates and joint ventures

(1
)

2


(11
)
- share for the period

(1
)

2


(11
)
- reclassified to income statement on disposal

-


-


-






 
 
 
Exchange differences

(2,713
)

(3,267
)

(7,678
)
- other exchange differences

(2,619
)

(3,395
)

(7,717
)
- income tax attributable to exchange differences

(94
)

128


39











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









Remeasurement of defined benefit asset/liability

416


(1,680
)

1,781

- before income taxes

533


(2,085
)

2,215

- income taxes

(117
)

405


(434
)










Other comprehensive expense for the period, net of tax

(948
)

(7,540
)

(6,409
)










Total comprehensive income/(expense) for the period

6,475


3,181


(2,034
)










Attributable to:









- shareholders of the parent company

6,010


2,856


(2,396
)
- non-controlling interests

465


325


362











Total comprehensive income/(expense) for the period

6,475


3,181


(2,034
)
The accompanying notes on pages 107 to 138 form an integral part of these financial statements1.
For footnote, see page 106.

HSBC HOLDINGS PLC
102

Financial Statements (unaudited) (continued)

Consolidated balance sheet
at 30 June 2016
 
 
 
At
 
 
 
30 Jun

 
31 Dec

 
 
 
2016

 
2015

 
 
Notes 
$m

 
$m

Assets
 
 

 

 
 
 
 
 
 
Cash and balances at central banks
 
 
128,272

 
98,934

Items in the course of collection from other banks
 
 
6,584

 
5,768

Hong Kong Government certificates of indebtedness
 
 
29,011

 
28,410

Trading assets
 
5 
280,295

 
224,837

Financial assets designated at fair value
 
8 
23,901

 
23,852

Derivatives
 
9 
369,942

 
288,476

Loans and advances to banks
 
 
92,199

 
90,401

Loans and advances to customers
 
 
887,556

 
924,454

Reverse repurchase agreements - non-trading
 
 
187,826

 
146,255

Financial investments
 
10 
441,399

 
428,955

Assets held for sale
 
11 
50,305

 
43,900

Prepayments, accrued income and other assets
 
 
60,569

 
54,398

Current tax assets
 
 
714

 
1,221

Interests in associates and joint ventures
 
13 
19,606

 
19,139

Goodwill and intangible assets
 
 
24,053

 
24,605

Deferred tax assets
 
 
5,917

 
6,051

 
 
 
 
 
 
Total assets
 
 
2,608,149

 
2,409,656

 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Hong Kong currency notes in circulation
 
 
29,011

 
28,410

Deposits by banks
 
 
69,900

 
54,371

Customer accounts
 
 
1,290,958

 
1,289,586

Repurchase agreements - non-trading
 
 
98,342

 
80,400

Items in the course of transmission to other banks
 
 
7,461

 
5,638

Trading liabilities
 
14 
188,698

 
141,614

Financial liabilities designated at fair value
 
 
78,882

 
66,408

Derivatives
 
9 
368,414

 
281,071

Debt securities in issue
 

87,673

 
88,949

Liabilities of disposal groups held for sale
 
11 
43,705

 
36,840

Accruals, deferred income and other liabilities
 
 
42,057

 
38,116

Current tax liabilities
 
 
1,569

 
783

Liabilities under insurance contracts
 
 
73,416

 
69,938

Provisions
 
16 
5,797

 
5,552

Deferred tax liabilities
 
17 
2,300

 
1,760

Subordinated liabilities
 
 
21,669

 
22,702

 
 
 
 
 
 
Total liabilities
 
 
2,409,852

 
2,212,138

 
 
 
 
 
 
Equity
 
 
 
 
 
Called up share capital
 
 
9,906

 
9,842

Share premium account
 
 
12,772

 
12,421

Other equity instruments
 
 
17,110

 
15,112

Other reserves
 
 
5,759

 
7,109

Retained earnings
 
 
145,710

 
143,976

 
 
 
 
 
 
Total shareholders' equity
 
 
191,257

 
188,460

Non-controlling interests
 
 
7,040

 
9,058

 
 
 
 
 
 
Total equity
 
 
198,297

 
197,518

 
 
 
 
 
 
Total liabilities and equity
 
 
2,608,149

 
2,409,656

The accompanying notes on pages 107 to 138 form an integral part of these financial statements1.
For footnote, see page 106.

HSBC HOLDINGS PLC
103

Consolidated statement of cash flows
for the half-year to 30 June 2016

Half-year to


30 Jun


30 Jun


31 Dec



2016


2015


2015



$m


$m


$m











Cash flows from operating activities









Profit before tax

9,714


13,628


5,239











Adjustments for:









- net gain from investing activities

(1,034
)

(1,926
)

(9
)
- share of profit in associates and joint ventures

(1,238
)

(1,311
)

(1,245
)
- other non-cash items included in profit before tax

5,817


4,522


6,243

- change in operating assets

7,268


12,077


53,751

- change in operating liabilities

59,093


(15,544
)

(91,218
)
- elimination of exchange differences2

(3,193
)

3,951


14,357

- dividends received from associates

619


770


109

- contributions paid to defined benefit plans

(340
)

(226
)

(438
)
- tax paid

(1,668
)

(1,351
)

(2,501
)










Net cash generated from/(used in) operating activities

75,038


14,590


(15,712
)










Cash flows from investing activities









Purchase of financial investments

(233,153
)

(211,669
)

(226,707
)
Proceeds from the sale and maturity of financial investments

216,340


208,637


190,999

Purchase of property, plant and equipment

(429
)

(620
)

(732
)
Proceeds from the sale of property, plant and equipment

40


56


47

Net cash inflow from disposal of customer and loan portfolios

4,186


321


1,702

Net purchase of intangible assets

(395
)

(400
)

(554
)
Net cash inflow from disposal of subsidiaries, businesses, associates and joint ventures

16


6


2











Net cash used in investing activities

(13,395
)

(3,669
)

(35,243
)










Cash flows from financing activities









Issue of ordinary share capital

8


9


138

Net (purchases)/sales of own shares for market-making and investment purposes

(78
)

139


192

Issue of other equity instruments

1,998


2,459


1,120

Redemption of preference shares and other equity instruments

(1,825
)

(462
)

-

Subordinated loan capital issued

1,129


1,680


1,500

Subordinated loan capital repaid

(546
)

(778
)

(1,379
)
Dividends paid to ordinary shareholders of the parent company

(3,729
)

(1,834
)

(4,714
)
Dividends paid to non-controlling interests

(702
)

(386
)

(311
)
Dividends paid to holders of other equity instruments

(556
)

(428
)

(522
)
 
 
 
 
 
 
 
Net cash generated (used in)/from financing activities

(4,301
)

399


(3,976
)










Net increase/(decrease) in cash and cash equivalents

57,342


11,320


(54,931
)










Cash and cash equivalents at the beginning of the period

243,863


301,301


308,792

Exchange differences in respect of cash and cash equivalents

(1,452
)

(3,829
)

(9,998
)










Cash and cash equivalents at the end of the period

299,753


308,792


243,863

The accompanying notes on pages 107 to 138 form an integral part of these financial statements1.
For footnote, see page 106.



HSBC HOLDINGS PLC
104

Consolidated statement of changes in equity
for the half-year to 30 June 2016














Other reserves











Called up share capital


Share
premium


Other
equity
instru-ments3


Retained
earnings


Available-
for-sale
fair value
reserve4


Cash flow
hedging
reserve4


Foreign
exchange
reserve4


Merger
reserve


Total share-holders' equity


Non-
controlling
interests5


Total equity



$m


$m


$m


$m


$m


$m


$m


$m


$m


$m


$m



































At 1 Jan 2016

9,842


12,421


15,112


143,976


(189
)

34


(20,044
)

27,308


188,460


9,058


197,518

Profit for the period

-


-


-


6,912


-


-


-


-


6,912


511


7,423



































Other comprehensive income (net of tax)

-


-


-


451


1,024


341


(2,718
)

-


(902
)

(46
)

(948
)
- available-for-sale investments

-


-


-


-


1,024


-


-


-


1,024


(14
)

1,010

- cash flow hedges

-


-


-


-


-


341


-


-


341


(1
)

340

- remeasurement of defined benefit asset/liability

-


-


-


452


-


-


-


-


452


(36
)

416

- share of other comprehensive income of associates & joint ventures

-


-


-


(1
)

-


-


-


-


(1
)

-


(1
)
- exchange differences

-


-


-


-


-


-


(2,718
)

-


(2,718
)

5


(2,713
)




































































Total comprehensive income for the period

-


-


-


7,363


1,024


341


(2,718
)

-


6,010


465


6,475



































Shares issued under employee remuneration and share plans

32


383


-


(407
)

-


-


-


-


8


-


8

Shares issued in lieu of dividends and amounts arising thereon

32


(32
)

-


1,111


-


-


-


-


1,111


-


1,111

Dividends to shareholders

-


-


-


(6,674
)

-


-


-


-


(6,674
)

(702
)

(7,376
)
Capital securities issued

-


-


1,998


-


-


-


-


-


1,998


-


1,998

Cost of share-based payment arrangements

-


-


-


305


-


-


-


-


305


-


305

Other movements

-


-


-


36


3


-


-


-


39


(1,781
)

(1,742
)


































At 30 Jun 2016

9,906


12,772


17,110


145,710


838


375


(22,762
)

27,308


191,257


7,040


198,297



































At 1 Jan 2015

9,609


11,918


11,532


137,144


2,143


58


(9,265
)

27,308


190,447


9,531


199,978

Profit for the period

-


-


-


9,618


-


-


-


-


9,618


1,103


10,721



































Other comprehensive income (net of tax)

-


-


-


(1,693
)

(1,735
)

(151
)

(3,183
)

-


(6,762
)

(778
)

(7,540
)
- available-for-sale investments

-


-


-


-


(1,735
)

-


-


-


(1,735
)

(710
)

(2,445
)
- cash flow hedges

-


-


-


-


-


(151
)

-


-


(151
)

1


(150
)
- remeasurement of defined benefit asset/liability

-


-


-


(1,695
)

-


-


-


-


(1,695
)

15


(1,680
)
- share of other comprehensive income of associates & joint ventures

-


-


-


2


-


-


-


-


2


-


2

- exchange differences

-


-


-


-


-


-


(3,183
)

-


(3,183
)

(84
)

(3,267
)




































































Total comprehensive income for the period

-


-


-


7,925


(1,735
)

(151
)

(3,183
)

-


2,856


325


3,181



































Shares issued under employee remuneration and share plans

31


490


-


(512
)

-


-


-


-


9


-


9

Shares issued in lieu of dividends and amounts arising thereon

118


(118
)

-


2,242


-


-


-


-


2,242


-


2,242

Dividends to shareholders

-


-


-


(6,224
)

-


-


-


-


(6,224
)

(432
)

(6,656
)
Capital securities issued

-


-


2,459


-


-


-


-


-


2,459


-


2,459

Cost of share-based payment arrangements

-


-


-


444


-


-


-


-


444


-


444

Other movements

-


-


-


189


5


-


-


-


194


(469
)

(275
)


































At 30 Jun 2015

9,758


12,290


13,991


141,208


413


(93
)

(12,448
)

27,308


192,427


8,955


201,382



Consolidated statement of changes in equity for the half-year to 30 June 2016 (continued)









Other reserves








Called up share capital


Share
premium


Other equity instru-ments


Retained
earnings


Available- for-sale fair value
reserve4


Cash flow
hedging
reserve4


Foreign exchange reserve4


Merger
reserve


Total share-holders' equity


Non-
controlling
interests


Total equity



$m


$m


$m


$m


$m


$m


$m


$m


$m


$m


$m



































At 1 Jul 2015

9,758


12,290


13,991


141,208


413


(93
)

(12,448
)

27,308


192,427


8,955


201,382

Profit for the period

-


-


-


3,904


-


-


-


-


3,904


471


4,375



































Other comprehensive income (net of tax)

-


-


-


1,766


(597
)

127


(7,596
)

-


(6,300
)

(109
)

(6,409
)
- available-for-sale investments

-


-


-


-


(597
)

-


-


-


(597
)

(30
)

(627
)
- cash flow hedges

-


-


-


-


-


127


-


-


127


(1
)

126

- remeasurement of defined benefit asset/liability

-


-


-


1,777


-


-


-


-


1,777


4


1,781

- share of other comprehensive income of associates & joint ventures

-


-


-


(11
)

-


-


-


-


(11
)

-


(11
)
- exchange differences

-


-


-


-


-


-


(7,596
)

-


(7,596
)

(82
)

(7,678
)




































































Total comprehensive income for the period

-


-


-


5,670


(597
)

127


(7,596
)

-


(2,396
)

362


(2,034
)
Shares issued under employee remuneration and share plans

14


201


-


(77
)

-


-


-


-


138


-


138

Shares issued in lieu of dividends and amounts arising thereon

70


(70
)

-


920


-


-


-


-


920


-


920

Dividends to shareholders

-


-


-


(4,436
)

-


-


-


-


(4,436
)

(265
)

(4,701
)
Capital securities issued

-


-


1,121


-


-


-


-


-


1,121


-


1,121

Cost of share-based payment arrangements

-


-


-


313


-


-


-


-


313


-


313

Other movements

-


-


-


378


(5
)

-


-


-


373


6


379



































At 31 Dec 2015

9,842


12,421


15,112


143,976


(189
)

34


(20,044
)

27,308


188,460


9,058


197,518

The accompanying notes on pages 107 to 138 form an integral part of these financial statements1.


Footnotes to financial statements
1
The tables 'Gross loans and advances to customers by industry sector and by geographical region' (see page 62) and 'Movement in impairment allowances on loans and advances to customers and banks' (see page 67) also form an integral part of these financial statements.
2
Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.
3
During June 2016, HSBC Holdings issued $2,000m of perpetual subordinated contingent convertible capital securities, after issuance costs of $6m and tax benefits of $4m, which are classified as equity under IFRSs.
4
At 30 June 2016, our operations in Brazil were classified as held for sale (see Note 11). The cumulative amounts of other reserves attributable to these operations were as follows: available-for-sale fair value reserve debit of $33m (30 June 2015: $65m debit; 31 December 2015: $176m debit), nil cash flow hedging reserve (30 June 2015: $29m debit; 31 December 2015: $34m credit) and foreign exchange reserve debit of $1.9bn (30 June 2015: $1.7bn debit; 31 December 2015: $2.6bn debit).
5
During the period HSBC USA Inc. and HSBC Finance Corporation redeemed all outstanding preferred securities at 31 December 2015 ($1,825m). Refer to Note 34 on pages 436 and 437 of the Annual Report and Accounts 2015 for further details of all preferred securities outstanding at 31 December 2015.


Notes on the Financial Statements (unaudited)


Notes on the Financial Statements
1

Basis of preparation and significant accounting policies
107

 
13
Interests in associates and joint ventures
123

2

Dividends
108

 
14
Trading liabilities
125

3

Earnings per share
109

 
15
Maturity analysis of assets and liabilities
126

4

Segmental analysis
109

 
16
Provisions
128

5

Trading assets
110

 
17
Deferred tax
129

6

Fair values of financial instruments carried at fair value
111

 
18
Contingent liabilities, contractual commitments and
 
7

Fair values of financial instruments not carried at fair value
119

 
 
guarantees
129

8

Financial assets designated at fair value
119

 
19
Legal proceedings and regulatory matters
130

9

Derivatives
120

 
20
Goodwill impairment
137

10

Financial investments
121

 
21
Transactions with related parties
138

11

Assets held for sale and liabilities of disposal groups held for
 
 
22
Events after the balance sheet date
138

 
sale
122

 
23
Interim Report 2016 and statutory accounts
138

12

Assets charged as security for liabilities and collateral
 
 
 
 
 
 
accepted as security for assets
123

 
 
 
 
 
 
 
 
 
 
 
1
Basis of preparation and significant accounting policies
(a)    Compliance with International Financial Reporting Standards
The interim condensed consolidated financial statements of HSBC have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Conduct Authority and IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board ('IASB') and as endorsed by the EU. These financial statements should be read in conjunction with the Annual Report and Accounts 2015.
At 30 June 2016, there were no unendorsed standards effective for the half-year to 30 June 2016 affecting these financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC.
Standards applied during the half-year to 30 June 2016
There were no new standards applied during the half-year to 30 June 2016. During the period, HSBC applied a number of interpretations and amendments to standards which had an insignificant effect on these financial statements.
(b)    Use of estimates and judgements
Management believes that HSBC's critical accounting estimates and judgements are those which relate to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, deferred tax assets, provisions for liabilities and interests in associates. There was no change in the current period to the critical accounting estimates and judgements applied in 2015, which are stated on pages 64 and 353 of the Annual Report and Accounts 2015.
(c)    Composition of Group
There were no material changes in the composition of the HSBC Group in the half-year to 30 June 2016.
(d)    Future accounting developments
Information on future accounting developments and their potential effect on the financial statements of HSBC are provided on pages 347 to 352 of the Annual Report and Accounts 2015. The IFRS 9 'Financial Instruments' Programme's focus continues to be on developing the impairment models and processes which are needed for the parallel run during 2017 in accordance with the project plan and finalising implementation of the more complex requirements. Until sufficient models have been developed and tested, we will not have a reliable understanding of the potential impact on the financial statements and any consequential effects on regulatory capital requirements.
(e)    Going concern
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.
(f)    Accounting policies
The accounting policies applied by HSBC for these interim condensed consolidated financial statements are consistent with those described on pages 347 to 469 of the Annual Report and Accounts 2015, as are the methods of computation.

HSBC HOLDINGS PLC
107

2
Dividends
On 3 August 2016, the Directors declared a second interim dividend of $0.10 per ordinary share, in respect of the financial year ending 31 December 2016, a distribution of approximately $1,992m which will be payable on 28 September 2016. No liability is recognised in the financial statements in respect of this dividend.
Dividends paid to shareholders of HSBC Holdings plc
 
 
Half-year to
 
 
30 Jun 2016
 
30 Jun 2015
 
31 Dec 2015
 
 
Per
share

 
Total

 
Settled
in scrip

 
Per
share

 
Total

 
Settled
in scrip

 
Per
share

 
Total

 
Settled
in scrip

 
 
$

 
$m

 
$m

 
$

 
$m

 
$m

 
$

 
$m

 
$m

Dividends paid on ordinary shares
 


 


 


 


 


 


 


 


 


In respect of previous year:
 


 


 


 


 


 


 


 


 


- fourth interim dividend
 
0.21

 
4,137

 
408

 
0.20

 
3,845

 
2,011

 
-

 
-

 
-

In respect of current year:
 


 


 


 


 


 


 


 


 


- first interim dividend
 
0.10

 
1,981

 
703

 
0.10

 
1,951

 
231

 
-

 
-

 
-

- second interim dividend
 
-

 
-

 
-

 
-

 
-

 
-

 
0.10

 
1,956

 
160

- third interim dividend
 
-

 
-

 
-

 
-

 
-

 
-

 
0.10

 
1,958

 
760

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
0.31

 
6,118

 
1,111

 
0.30

 
5,796

 
2,242

 
0.20

 
3,914

 
920

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total dividends on preference shares classified as equity (paid quarterly)
 
31.00

 
45

 


 
31.00

 
45

 


 
31.00

 
45

 



Total coupons on capital securities classified as equity
 
 
 
 
 
 
 
 
Half-year to
 
 
 
 
 
 
 
 
30 Jun 2016

 
30 Jun 2015

 
31 Dec 2015

 
 
 
 
First
 
Per

 
Total

 
Total

 
Total

 
 
Footnotes 
 
call date
 
security

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
 
 
Perpetual subordinated capital securities
 
1 
 

 


 


 


 


- $2,200m
 

 
Apr 2013
 
$
2.032

 
89

 
89

 
90

- $3,800m
 

 
Dec 2015
 
$
2.000

 
152

 
152

 
152

 
 
 
 
 
 
 
 
 
 
 
 
 
Perpetual subordinated contingent convertible securities
 
2 
 

 


 


 


 


- $2,250m
 

 
Sep 2024
 
$
63.750

 
72

 
72

 
71

- $1,500m
 

 
Jan 2020
 
$
56.250

 
42

 
28

 
42

- €1,500m
 

 
Sep 2022
 
€
52.500

 
44

 
42

 
44

- $2,450m
 

 
Mar 2025
 
$
63.750

 
78

 
-

 
78

- €1,000m
 

 
Sep 2023
 
€
60.000

 
34

 
-

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 

 

 


 
511

 
383

 
477

1
Discretionary coupons are paid quarterly on the perpetual subordinated capital securities, in denominations of $25 per security.
2
Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities, in denominations of 1,000 per security.
On 15 July 2016, HSBC paid a further coupon on the $2,200m subordinated capital securities of $0.508 per security, representing a total distribution of $45m. On 18 July 2016, HSBC paid a further coupon on the $1,500m subordinated contingent convertible securities, representing a total distribution of $42m. No liability is recognised in the financial statements in respect of these coupon payments.
In June 2016, HSBC issued $2,000m of contingent convertible securities issued at 6.875% which are classified as equity under IFRSs. Discretionary coupons are paid semi-annually on these contingent convertible securities and none were declared in 1H16.

HSBC HOLDINGS PLC
108

Notes on the Financial Statements (unaudited) (continued)


3
Earnings per share
Profit attributable to ordinary shareholders of the parent company
 
 
Half-year to
 
 
30 Jun

 
30 Jun

 
31 Dec

 
 
2016

 
2015

 
2015

 
 
$m

 
$m

 
$m

 
 
 
 
 
 
 
Profit attributable to shareholders of the parent company
 
6,912

 
9,618

 
3,904

Dividend payable on preference shares classified as equity
 
(45
)
 
(45
)
 
(45
)
Coupon payable on capital securities classified as equity
 
(511
)
 
(383
)
 
(477
)
 
 


 
 
 
 
Profit attributable to ordinary shareholders of the parent company
 
6,356

 
9,190

 
3,382


Basic and diluted earnings per share
 
 
 
Half-year to 30 Jun 2016
 
Half-year to 30 Jun 2015
 
Half-year to 31 Dec 2015
 
 
 
Profit

 
Number
of shares

 
Amount per share

 
Profit

 
Number
of shares

 
Amount per share

 
Profit

 
Number
of shares

 
Amount per share

 
 
Footnotes 
$m

 
(millions)

 
$

 
$m

 
(millions)

 
$

 
$m

 
(millions)

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
1 
6,356

 
19,672

 
0.32

 
9,190

 
19,249

 
0.48

 
3,382

 
19,380

 
0.17

Effect of dilutive potential ordinary shares
 
 


 
68

 


 


 
68

 


 


 
137

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted
 
1 
6,356

 
19,740

 
0.32

 
9,190

 
19,317

 
0.48

 
3,382

 
19,517

 
0.17

1
Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
4
Segmental analysis
HSBC operates a matrix management structure which includes geographical regions and global businesses. HSBC considers that geographical operating segments represent the most appropriate information for users of the financial statements to best evaluate the nature and financial effects of HSBC's business activities and the economic environment in which it operates. HSBC's operating segments are Europe, Asia, Middle East and North Africa, North America, and Latin America.
 
 
 
Europe

 
Asia

 
MENA

 
North
America

 
Latin
America

 
Intra-HSBC
items

 
Total

 
 
Footnotes 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Net operating income
 
1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Half-year to 30 Jun 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating income
 
 
11,122

 
11,752

 
1,334

 
3,952

 
2,925

 
(1,615
)
 
29,470

- external
 
 
10,602

 
10,795

 
1,340

 
3,778

 
2,955

 
-

 
29,470

- inter-segment
 
 
520

 
957

 
(6
)
 
174

 
(30
)
 
(1,615
)
 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Half-year to 30 Jun 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating income
 
 
11,469

 
14,065

 
1,289

 
4,126

 
3,558

 
(1,564
)
 
32,943

- external
 
 
10,974

 
13,148

 
1,279

 
3,979

 
3,563

 
-

 
32,943

- inter-segment
 
 
495

 
917

 
10

 
147

 
(5
)
 
(1,564
)
 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Half-year to 31 Dec 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating income
 
 
9,589

 
11,238

 
1,276

 
3,531

 
3,034

 
(1,811
)
 
26,857

- external
 
 
8,804

 
10,329

 
1,280

 
3,407

 
3,037

 
-

 
26,857

- inter-segment
 
 
785

 
909

 
(4
)
 
124

 
(3
)
 
(1,811
)
 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) before tax
 
2 
 
 
 
 
 
 
 
 
 
 
 
 
 
Half-year to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 Jun 2016
 
 
1,579

 
7,155

 
985

 
50

 
(55
)
 
-

 
9,714

30 Jun 2015
 
 
2,205

 
9,400

 
901

 
690

 
432

 
-

 
13,628

31 Dec 2015
 
 
(1,562
)
 
6,363

 
636

 
(76
)
 
(122
)
 
-

 
5,239


HSBC HOLDINGS PLC
109
 
Europe

 
Asia

 
MENA

 
North
America

 
Latin
America

 
Intra-HSBC
items

 
Total


 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Balance sheet information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
1,251,513

 
946,998

 
58,802

 
438,658

 
93,067

 
(180,889
)
 
2,608,149

Total liabilities
 
1,193,445

 
866,283

 
49,171

 
399,682

 
82,160

 
(180,889
)
 
2,409,852

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
1,129,365

 
889,747

 
59,236

 
393,960

 
86,262

 
(148,914
)
 
2,409,656

Total liabilities
 
1,067,127

 
813,466

 
49,126

 
355,506

 
75,827

 
(148,914
)
 
2,212,138

1
Net operating income before loan impairment charges and other credit risk provisions.
2
During the period the Group recognised an impairment of $800m relating to the goodwill of Global Private Banking - Europe. Further details are set out in Note 20.
5
Trading assets
 
 
 
At
 
 
 
30 Jun

 
31 Dec

 
 
 
2016

 
2015

 
 
Footnotes
$m

 
$m

Treasury and other eligible bills
 
 
20,141

 
7,829

Debt securities
 
 
111,201

 
99,038

Equity securities
 
 
49,757

 
66,491

 
 
 
 
 
 
Trading securities at fair value
 
 
181,099

 
173,358

Loans and advances to banks
 
1
42,696

 
22,303

Loans and advances to customers
 
1
56,500

 
29,176

 
 
 
 
 
 
 
 
 
280,295

 
224,837

1
Loans and advances to banks and customers include settlement accounts, stock borrowing, reverse repos and other amounts.
Trading securities valued at fair value1 
 
 
 
At
 
 
 
30 Jun

 
31 Dec

 
 
 
2016

 
2015

 
 
Footnotes
$m

 
$m

 
 
 
 
 
 
US Treasury and US Government agencies
 
2
21,049

 
14,833

UK Government
 
 
11,681

 
10,177

Hong Kong Government
 
 
10,757

 
6,495

Other government
 
 
62,105

 
48,567

Asset-backed securities
 
3
2,774

 
3,135

Corporate debt and other securities
 
 
22,976

 
23,660

Equity securities
 
 
49,757

 
66,491

 
 
 
 
 


 
 
 
181,099

 
173,358

1
Included within these figures are debt securities issued by banks and other financial institutions of $14,873m (31 December 2015: $16,403m), of which $1,058m (31 December 2015: $1,034m) is guaranteed by various governments.
2
Includes securities that are supported by an explicit guarantee issued by the US Government.
3
Excludes asset-backed securities included under US Treasury and US Government agencies.


HSBC HOLDINGS PLC
110

Notes on the Financial Statements (unaudited) (continued)


6
Fair values of financial instruments carried at fair value
The accounting policies, control framework and the hierarchy used to determine fair values at 30 June 2016 are consistent with those applied for the Annual Report and Accounts 2015.
Financial instruments carried at fair value and bases of valuation
 
 
 
 
Valuation techniques
 
 
 
 
Quoted
market
price
Level 1

 
Using
observable
inputs
Level 2

 
With significant
unobservable
inputs
Level 3

 
Total

 
 
$m

 
$m

 
$m

 
$m

Recurring fair value measurements
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Trading assets
 
140,031

 
133,762

 
6,502

 
280,295

Financial assets designated at fair value
 
18,915

 
4,426

 
560

 
23,901

Derivatives
 
2,229

 
364,564

 
3,149

 
369,942

Financial investments: available for sale
 
274,115

 
118,184

 
3,945

 
396,244

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Trading liabilities
 
49,850

 
134,201

 
4,647

 
188,698

Financial liabilities designated at fair value
 
4,472

 
74,375

 
35

 
78,882

Derivatives
 
2,992

 
363,260

 
2,162

 
368,414

 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Trading assets
 
133,095

 
84,886

 
6,856

 
224,837

Financial assets designated at fair value
 
18,947

 
4,431

 
474

 
23,852

Derivatives
 
1,922

 
284,292

 
2,262

 
288,476

Financial investments: available for sale
 
262,929

 
117,197

 
4,727

 
384,853

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Trading liabilities
 
41,462

 
95,867

 
4,285

 
141,614

Financial liabilities designated at fair value
 
5,260

 
61,145

 
3

 
66,408

Derivatives
 
2,243

 
277,618

 
1,210

 
281,071


The increase in Level 2 trading assets and liabilities reflects an increase in settlement balances and cash collateral. The increase in Level 2 derivative assets and liabilities is driven by significant yield curve movements.
Transfers between Level 1 and Level 2 fair values
 
 
Assets
 
Liabilities
 
 
Available for sale

Held for trading

Designated at fair value through profit or loss

Derivatives

 
Held for trading

Designated at fair value through profit or loss

Derivatives

 
 
$m

$m

$m

$m

 
$m

$m

$m

At 30 Jun 2016
 
 
 
 
 
 
 
 
 
Transfers from Level 1 to Level 2
 
162

1,614

122

-

 
2,699

-

-

Transfers from Level 2 to Level 1
 
1,314

-

-

-

 
341

-

-

 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
 
 
 
 
 
 
 
 
Transfers from Level 1 to Level 2
 
-

67

-

56

 
1,563

857

100

Transfers from Level 2 to Level 1
 
-

487

-

2

 
515

2

-


Fair value adjustments
Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. HSBC classifies fair value adjustments as either 'risk‑related' or 'model-related'. The majority of these adjustments relate to GB&M. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.

HSBC HOLDINGS PLC
111

Global Banking and Markets fair value adjustments
 
 
At
 
 
30 Jun

 
31 Dec

 
 
2016

 
2015

 
 
$m

 
$m

Type of adjustment
 
 
 
 
Risk-related
 
1,456

 
1,402

- bid-offer
 
495

 
477

- uncertainty
 
64

 
95

- credit valuation adjustment
 
901

 
853

- debit valuation adjustment
 
(600
)
 
(465
)
- funding fair value adjustment
 
593

 
442

- other
 
3

 
-

 
 
 
 
 
Model-related
 
(196
)
 
97

- model limitation
 
(196
)
 
92

- other
 
-

 
5

 
 
 
 
 
Inception profit (Day 1 P&L reserves)1 
 
84

 
97

 
 
 
 
 
 
 
1,344

 
1,596

1
See Note 9 on the Financial Statements on page 120.
Fair value adjustments declined by $252m during 1H16. The most significant movement was a decline of $288m in respect of a model limitation adjustment relating to derivative discounting assumptions. This was driven by a tightening of the major currency spreads during the period.
A description of HSBC's risk-related and model-related adjustments is provided on pages 381 and 382 of the Annual Report and Accounts 2015.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3
 
 
Assets
 
Liabilities
 
 
Available
for sale

 
Held for trading

 
 At fair
value1

 
Deriv-atives

 
Total

 
Held for trading

 
 At fair
value1

 
Deriv-atives

 
Total

 
 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity including strategic investments
 
2,933

 
79

 
544

 
-

 
3,556

 
49

 
-

 
-

 
49

Asset-backed securities
 
782

 
719

 
-

 
-

 
1,501

 
-

 
-

 
-

 
-

Loans held for securitisation
 
-

 
30

 
-

 
-

 
30

 
-

 
-

 
-

 
-

Structured notes
 
-

 
4

 
-

 
-

 
4

 
4,596

 
-

 
-

 
4,596

Derivatives with monolines
 
-

 
-

 
-

 
223

 
223

 
-

 
-

 
-

 
-

Other derivatives
 
-

 
-

 
-

 
2,926

 
2,926

 
-

 
-

 
2,162

 
2,162

Other portfolios
 
230

 
5,670

 
16

 
-

 
5,916

 
2

 
35

 
-

 
37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
3,945

 
6,502

 
560

 
3,149

 
14,156

 
4,647

 
35

 
2,162

 
6,844

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity including strategic investments
 
3,443

 
55

 
453

 
-

 
3,951

 
35

 
-

 
-

 
35

Asset-backed securities
 
1,053

 
531

 
-

 
-

 
1,584

 
-

 
-

 
-

 
-

Loans held for securitisation
 
-

 
30

 
-

 
-

 
30

 
-

 
-

 
-

 
-

Structured notes
 
-

 
4

 
-

 
-

 
4

 
4,250

 
-

 
-

 
4,250

Derivatives with monolines
 
-

 
-

 
-

 
196

 
196

 
-

 
-

 
-

 
-

Other derivatives
 
-

 
-

 
-

 
2,066

 
2,066

 
-

 
-

 
1,210

 
1,210

Other portfolios
 
231

 
6,236

 
21

 
-

 
6,488

 
-

 
3

 
-

 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
4,727

 
6,856

 
474

 
2,262

 
14,319

 
4,285

 
3

 
1,210

 
5,498

1
Designated at fair value through profit or loss.
The basis for determining the fair value of the financial instruments in the table above is explained on page 382 of the Annual Report and Accounts 2015.

HSBC HOLDINGS PLC
112

Notes on the Financial Statements (unaudited) (continued)


Movement in Level 3 financial instruments
 
 
 
Assets
 
Liabilities
 
 
 
Available
for sale

 
Held for trading

 
Designated
at fair value
through profit
or loss

 
Derivatives

 
Held for trading

 
Designated
at fair value
through
profit
or loss

 
Derivatives

 
 
Footnotes 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

At 1 Jan 2016
 
 
4,727

 
6,856

 
474

 
2,262

 
4,285

 
3

 
1,210

Total gains/(losses) recognised in profit or loss
 
 
37

 
136

 
23

 
1,188

 
294

 
-

 
1,071

- trading income/(expense) excluding net interest income
 
 
-

 
136

 
-

 
1,188

 
294

 
-

 
1,071

- net income/(expense) from other financial instruments designated at fair value
 
 
-

 
-

 
23

 
-

 
-

 
-

 
-

- gains less losses from financial investments
 
 
(28
)
 
-

 
-

 
-

 
-

 
-

 
-

- loan impairment charges and other credit risk provisions
 
 
65

 
-

 
-

 
-

 
-

 
-

 
-

Total gains/(losses) recognised in other comprehensive income
 
1 
132

 
(309
)
 
1

 
(200
)
 
(86
)
 
-

 
(151
)
- available-for-sale investments: fair value gains
 
 
238

 
-

 
-

 
-

 
-

 
-

 
-

- cash flow hedges: fair value gains/(losses)
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

- exchange differences
 
 
(106
)
 
(309
)
 
1

 
(200
)
 
(86
)
 
-

 
(151
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
 
 
160

 
187

 
84

 
-

 
-

 
-

 
-

New issuances
 
 
-

 
-

 
-

 
-

 
1,318

 
-

 
-

Sales
 
 
(810
)
 
(1,176
)
 
(3
)
 
-

 
(16
)
 
(1
)
 
-

Settlements
 
 
(88
)
 
(24
)
 
(18
)
 
-

 
(660
)
 
-

 
(186
)
Transfers out
 
 
(572
)
 
(36
)
 
(1
)
 
(105
)
 
(504
)
 
-

 
(107
)
Transfers in
 
 
359

 
868

 
-

 
4

 
16

 
33

 
325

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
3,945

 
6,502

 
560

 
3,149

 
4,647

 
35

 
2,162

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 Jun 2016
 
 
65

 
27

 
20

 
1,090

 
212

 
-

 
65

- trading income/(expense) excluding net interest income
 
 
-

 
27

 
-

 
1,090

 
212

 
-

 
65

- net income/(expense) from other financial instruments designated at fair value
 
 
-

 
-

 
20

 
-

 
-

 
-

 
-

- loan impairment recoveries and other credit risk provisions
 
 
65

 
-

 
-

 
-

 
-

 
-

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

HSBC HOLDINGS PLC
113

 
 
 
Assets
 
Liabilities
 
 
 
Available
for sale

 
Held for trading

 
Designated
at fair value
through profit
or loss

 
Derivatives

 
Held for trading

 
Designated
at fair value
through
profit
or loss

 
Derivatives

 
 
Footnotes
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

At 1 Jan 2015
 
 
4,988

 
6,468

 
726

 
2,924

 
6,139

 
-

 
1,907

Total gains/(losses) recognised in profit or loss
 
 
(17
)
 
(14
)
 
(19
)
 
344

 
(223
)
 
(1
)
 
(467
)
- trading income/(expense) excluding net interest income
 
 
-

 
(14
)
 
-

 
344

 
(223
)
 
-

 
(467
)
- net income/(expense) from other financial instruments designated at fair value
 
 
-

 
-

 
(19
)
 
-

 
-

 
(1
)
 
-

- gains less losses from financial investments
 
 
(29
)
 
-

 
-

 
-

 
-

 
-

 
-

- loan impairment charges and other credit risk provisions
 
 
12

 
-

 
-

 
-

 
-

 
-

 
-

Total gains/(losses) recognised in other comprehensive income
 
1
72

 
(6
)
 
(9
)
 
5

 
(20
)
 
(1
)
 
1

- available-for-sale investments: fair value gains
 
 
70

 
-

 
-

 
-

 
-

 
-

 
-

- cash flow hedges: fair value gains
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

- exchange differences
 
 
2

 
(6
)
 
(9
)
 
5

 
(20
)
 
(1
)
 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
 
 
342

 
435

 
165

 
-

 
-

 
9

 
-

New issuances
 
 
-

 
-

 
-

 
-

 
863

 
-

 
-

Sales
 
 
(420
)
 
(1,134
)
 
(46
)
 
-

 
(10
)
 
(2
)
 
-

Settlements
 
 
(15
)
 
(90
)
 
(72
)
 
43

 
(681
)
 
-

 
41

Transfers out
 
 
(1,257
)
 
(31
)
 
(272
)
 
(312
)
 
(889
)
 
-

 
(52
)
Transfers in
 
 
314

 
112

 
-

 
64

 
126

 
-

 
13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2015
 
 
4,007

 
5,740

 
473

 
3,068

 
5,305

 
5

 
1,443


HSBC HOLDINGS PLC
114

Notes on the Financial Statements (unaudited) (continued)


Movement in Level 3 financial instruments (continued)
 
 
Assets
 
Liabilities
 
 
Available
for sale

 
Held for trading

 
Designated
at fair value
through
profit
or loss

 
Derivatives

 
Held for trading

 
Designated
at fair value
through
profit
or loss

 
Derivatives

 
 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 Jun 2015
 
13

 
(6
)
 
17

 
444

 
(24
)
 
(1
)
 
(459
)
- trading income/(expense) excluding net interest income
 
-

 
(6
)
 
-

 
444

 
(24
)
 
-

 
(459
)
- net income/(expense) from other financial instruments designated at fair value
 
-

 
-

 
17

 
-

 
-

 
(1
)
 
-

- loan impairment recoveries and other credit risk provisions
 
13

 
-

 
-

 
-

 
-

 
-

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 1 Jul 2015
 
4,007

 
5,740

 
473

 
3,068

 
5,305

 
5

 
1,443

Total gains/(losses) recognised in profit or loss
 
(17
)
 
123

 
49

 
(249
)
 
(350
)
 
-

 
258

- trading income/(expense) excluding net interest income
 
-

 
123

 
-

 
(249
)
 
(350
)
 
-

 
258

- net income/(expense) from other financial instruments designated at fair value
 
-

 
-

 
-

 
-

 
-

 
-

 
-

- gains less losses from financial investments
 
(240
)
 
-

 
49

 
-

 
-

 
-

 
-

- loan impairment charges and other credit risk provisions
 
223

 
-

 
-

 
-

 
-

 
-

 
-

Total gains recognised in other comprehensive income1
 
154

 
(186
)
 
(2
)
 
(131
)
 
(98
)
 
-

 
(65
)
- available-for-sale investments: fair value gains
 
323

 
-

 
-

 
-

 
-

 
-

 
-

- cash flow hedges: fair value gains
 
-

 
-

 
-

 
(4
)
 
-

 
-

 
-

- exchange differences
 
(169
)
 
(186
)
 
(2
)
 
(127
)
 
(98
)
 
-

 
(65
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
 
252

 
1,310

 
85

 
-

 
2

 
-

 
-

New issuances
 
-

 
-

 
-

 
-

 
608

 
-

 
-

Sales
 
(337
)
 
(72
)
 
(4
)
 
-

 
(56
)
 
(2
)
 
-

Settlements
 
(17
)
 
(56
)
 
(63
)
 
(81
)
 
(579
)
 
-

 
(282
)
Transfers out
 
(214
)
 
(175
)
 
(64
)
 
(703
)
 
(854
)
 
-

 
(231
)
Transfers in
 
899

 
172

 
-

 
358

 
307

 
-

 
87

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
4,727

 
6,856

 
474

 
2,262

 
4,285

 
3

 
1,210

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2015
 
222

 
(3
)
 
(5
)
 
(355
)
 
408

 
-

 
726

- trading income/(expense) excluding net interest income
 
-

 
(3
)
 
-

 
(355
)
 
408

 
-

 
726

- net income/(expense) from other financial instruments designated at fair value
 
-

 
-

 
(5
)
 
-

 
-

 
-

 
-

- loan impairment recoveries and other credit risk provisions
 
222

 
-

 
-

 
-

 
-

 
-

 
-

1
Included in 'Available-for-sale investments: fair value gains/(losses)' and 'Exchange differences' in the consolidated statement of comprehensive income.
Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period. Movements in available-for-sale assets are mainly driven by sales of private equity investments and the transfer out of Level 3 of legacy credit assets following greater price certainty. Sales in trading assets reflect sell-down of syndicated loans.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
The following table shows the sensitivity of Level 3 fair values to reasonably possible alternative assumptions:

HSBC HOLDINGS PLC
115

Sensitivity of fair values to reasonably possible alternative assumptions
 
 
 
Reflected in
profit or loss
 
Reflected in other
comprehensive income
 
 
 
Favourable
changes

 
Unfavourable
changes

 
Favourable
changes

 
Unfavourable
changes

 
 
Footnotes
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
Derivatives, trading assets and trading liabilities
 
1
229

 
(257
)
 
-

 
-

Financial assets and liabilities designated at fair value
 
 
28

 
(28
)
 
-

 
-

Financial investments: available for sale
 
 
43

 
(33
)
 
193

 
(207
)
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
300

 
(318
)
 
193

 
(207
)
 
 
 
 
 
 
 
 
 
 
Derivatives, trading assets and trading liabilities
 
1
255

 
(274
)
 
-

 
-

Financial assets and liabilities designated at fair value
 
 
41

 
(42
)
 
-

 
-

Financial investments: available for sale
 
 
33

 
(30
)
 
222

 
(217
)
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2015
 
 
329

 
(346
)
 
222

 
(217
)
 
 
 
 
 
 
 
 
 
 
Derivatives, trading assets and trading liabilities
 
1
335

 
(215
)
 
-

 
-

Financial assets and liabilities designated at fair value
 
 
24

 
(24
)
 
-

 
-

Financial investments: available for sale
 
 
35

 
(30
)
 
230

 
(243
)
 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
 
394

 
(269
)
 
230

 
(243
)
1
Derivatives, 'trading assets and trading liabilities' are presented as one category to reflect the manner in which these financial instruments are risk‑managed.
The reduction in the effect of both favourable and unfavourable changes during the period reflects funding spread widening and increased pricing certainty, in particular in private equity.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
 
 
Reflected in
profit or loss
 
Reflected in
other comprehensive income
 
 
Favourable
changes

 
Unfavourable
changes

 
Favourable
changes

 
Unfavourable
changes

 
 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
Private equity including strategic investments
 
63

 
(63
)
 
121

 
(140
)
Asset-backed securities
 
26

 
(13
)
 
54

 
(49
)
Loans held for securitisation
 
1

 
(1
)
 
-

 
-

Structured notes
 
12

 
(9
)
 
-

 
-

Derivatives with monolines
 
7

 
(7
)
 
-

 
-

Other derivatives
 
132

 
(164
)
 
-

 
-

Other portfolios
 
59

 
(61
)
 
18

 
(18
)
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
300

 
(318
)
 
193

 
(207
)
 
 
 
 
 
 
 
 
 
Private equity including strategic investments
 
79

 
(79
)
 
171

 
(171
)
Asset-backed securities
 
31

 
(9
)
 
29

 
(24
)
Loans held for securitisation
 
1

 
(1
)
 
-

 
-

Structured notes
 
19

 
(14
)
 
-

 
-

Derivatives with monolines
 
9

 
(9
)
 
-

 
-

Other derivatives
 
117

 
(198
)
 
-

 
-

Other portfolios
 
73

 
(36
)
 
22

 
(22
)
 
 
 
 
 
 
 
 
 
At 30 Jun 2015
 
329

 
(346
)
 
222

 
(217
)
 
 
 
 
 
 
 
 
 
Private equity including strategic investments
 
54

 
(53
)
 
152

 
(171
)
Asset-backed securities
 
18

 
(12
)
 
57

 
(51
)
Loans held for securitisation
 
1

 
(1
)
 
-

 
-

Structured notes
 
15

 
(11
)
 
-

 
-

Derivatives with monolines
 
11

 
(11
)
 
-

 
-

Other derivatives
 
179

 
(87
)
 
-

 
-

Other portfolios
 
116

 
(94
)
 
21

 
(21
)
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
394

 
(269
)
 
230

 
(243
)
Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, the availability and reliability of observable proxies and historical data. When the available data are not amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.

HSBC HOLDINGS PLC
116

Notes on the Financial Statements (unaudited) (continued)


Key unobservable inputs to Level 3 financial instruments and inter-relationships
The table below lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs as at 30 June 2016. The core range of inputs is the estimated range within which 90% of the inputs fall.
There has been no change to the key unobservable inputs to Level 3 financial instruments and inter-relationships therein which are detailed on page 389 of the Annual Report and Accounts 2015.
Quantitative information about significant unobservable inputs in Level 3 valuations
 
 
 
Fair value
 
 
 
 
 
 
 
 
 
 
 
Assets

 
Liabilities

 
 
 
Key unobservable
 
Full range of inputs
 
 
Core range of inputs
 
 
 
Footnotes
$m

 
$m

 
Valuation technique
 
inputs
 
Lower

 
Higher

 
Lower

 
Higher

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity including strategic investments
 
 
3,556

 
49

 
See notes3
 
See notes3
 
n/a

 
n/a

 
n/a

 
n/a

Asset-backed securities
 
 
1,501

 
-

 
 
 
 
 
 
 
 
 
 
 
 
- CLO/CDO
 
1
371

 
-

 
Market proxy
 
Prepayment rate
 
2
%
 
7
%
 
2
%
 
7
%
 
 
 
 
 
-

 
Market proxy
 
Bid quotes
 
0

 
99

 
19

 
89

- other ABSs
 
 
1,130

 
-

 
Market proxy
 
Bid quotes
 
0

 
99

 
50

 
88

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for securitisation
 
 
30

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Structured notes
 
 
4

 
4,596

 
 
 
 
 
 
 
 
 
 
 
 
- equity-linked notes
 
 
-

 
4,042

 
Model - option model
 
Equity volatility
 
12
%
 
83
%
 
18
%
 
35
%
 
 
 
 
 
 
 
Model - option model
 
Equity correlation
 
35
%
 
94
%
 
46
%
 
83
%
- fund-linked notes
 
 
-

 
14

 
Model - option model
 
Fund volatility
 
7
%
 
11
%
 
7
%
 
11
%
- FX-linked notes
 
 
-

 
149

 
Model - option model
 
FX volatility
 
4
%
 
30
%
 
7
%
 
19
%
- other
 
 
4

 
391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives with monolines
 
 
223

 
-

 
Model - discounted cash flow
 
Credit spread
 
3
%
 
3
%
 
3
%
 
3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other derivatives
 
 
2,926

 
2,162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- securitisation swaps
 
 
399

 
981

 
Model - discounted
cash flow
 
Prepayment rate
 
0.5
%
 
90
%
 
21
%
 
74
%
- long-dated swaptions
 
 
1,886

 
120

 
Model - option model
 
IR volatility
 
5
%
 
209
%
 
16
%
 
36%
- other
 
 
208

 
60

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FX derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- FX options
 
 
212

 
188

 
Model - option model
 
FX volatility
 
0.5
%
 
30
%
 
7
%
 
14
%
- other
 
 
5

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- long-dated single stock options
 
 
134

 
178

 
Model - option model
 
Equity volatility
 
10
%
 
97
%
 
18
%
 
36
%
- other
 
 
47

 
306

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- other
 
 
35

 
327

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolios
 
 
5,916

 
37

 
 
 
 
 
 
 
 
 
 
 
 
- structured certificates
 
 
4,440

 
-

 
Model - discounted
cash flow
 
Credit volatility
 
2
%
 
4
%
 
2
%
 
4
%
- EM corporate debt
 
 
472

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Market proxy
 
Bid quotes
 
99

 
127

 
110

 
126

Other
 
2
1,004

 
37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
14,156

 
6,844

 
 
 
 
 
 
 
 
 
 
 
 
1
Collateralised loan obligation/collateralised debt obligation.
2
'Other' includes a range of smaller asset holdings.
3
See notes on page 389 of the Annual Report and Accounts 2015.

HSBC HOLDINGS PLC
117

Quantitative information about significant unobservable inputs in Level 3 valuations (continued)
 
 
 
Fair value
 
 
 
 
 
 
 
 
 
 
 
Assets

 
Liabilities

 
 
 
Key unobservable
 
Full range of inputs
 
 
Core range of inputs
 
 
 
Footnotes
$m

 
$m

 
Valuation technique
 
inputs
 
Lower

 
Higher

 
Lower

 
Higher

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity including strategic investments
 
 
3,951

 
35

 
See notes3
 
See notes3
 
n/a
 
n/a
 
n/a
 
n/a
Asset-backed securities
 
 
1,584

 
-

 
 
 
 
 
 
 
 
 
 
 
 
- CLO/CDO
 
1
511

 
-

 
Market proxy
 
Prepayment rate
 
1
%
 
6
%
 
1
%
 
6
%
 
 
 
 
 
-

 
Market proxy
 
Bid quotes
 
3

 
147

 
54

 
117

- other ABSs
 
 
1,073

 
-

 
Market proxy
 
Bid quotes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for securitisation
 
 
30

 
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Structured notes
 
 
4

 
4,250

 
 
 
 
 
 
 
 
 
 
 
 
- equity-linked notes
 
 
-

 
3,719

 
Model - option model
 
Equity volatility
 
12
%
 
72
%
 
19
%
 
43
%
 
 
 
 
 
 
 
Model - option model
 
Equity correlation
 
35
%
 
93
%
 
43
%
 
79
%
- fund-linked notes
 
 
-

 
13

 
Model - option model
 
Fund volatility
 
6
%
 
8
%
 
6
%
 
8
%
- FX-linked notes
 
 
-

 
166

 
Model - option model
 
FX volatility
 
5
%
 
35
%
 
5
%
 
20
%
- other
 
 
4

 
352

 
 
 
 
 


 


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives with monolines
 
 
196

 
-

 
Model - discounted
cash flow
 
Credit spread
 
4
%
 
4
%
 
4
%
 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other derivatives
 
 
2,066

 
1,210

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- securitisation swaps
 
 
250

 
455

 
Model - discounted
cash flow
 
Prepayment rate
 
0
%
 
90
%
 
14
%
 
71
%
- long-dated swaptions
 
 
1,237

 
119

 
Model - option model
 
IR volatility
 
3
%
 
66
%
 
20
%
 
41
%
- other
 
 
176

 
65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FX derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- FX options
 
 
180

 
186

 
Model - option model
 
FX volatility
 
0.5
%
 
35
%
 
5
%
 
14
%
- other
 
 
10

 
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- long-dated single stock options
 
 
135

 
191

 
Model - option model
 
Equity volatility
 
8
%
 
104
%
 
18
%
 
44
%
- other
 
 
39

 
170

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- other
 
 
39

 
19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other portfolios
 
 
6,488

 
3

 
 
 
 
 
 
 
 
 
 
 
 
- structured certificates
 
 
4,434

 
-

 
Model - discounted
cash flow
 
Credit volatility
 
2
%
 
4
%
 
2
%
 
4
%
- EM corporate debt
 
 
210

 
-

 
Market proxy
 
Bid quotes
 
70

 
124

 
100

 
123

Other
 
2
1,844

 
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
 
14,319

 
5,498

 
 
 
 
 
 
 
 
 
 
 
 
1
Collateralised loan obligation/collateralised debt obligation.
2
'Other' includes a range of smaller asset holdings.
3
See notes on page 389 of the Annual Report and Accounts 2015.


HSBC HOLDINGS PLC
118

Notes on the Financial Statements (unaudited) (continued)


7
Fair values of financial instruments not carried at fair value
The basis for measuring the fair values of loans and advances to banks and customers, financial investments, deposits by banks, customer accounts, debt securities in issue, subordinated liabilities and non-trading repurchase and reverse repurchase agreements is explained on pages 391 and 392 of the Annual Report and Accounts 2015.
Fair values of financial instruments which are not carried at fair value on the balance sheet
 
 
At 30 Jun 2016
 
At 31 Dec 2015
 
 
Carrying
amount

 
Fair
value

 
Carrying
Amount

 
Fair
value

 
 
$m

 
$m

 
$m

 
$m

Assets



 
 
 
 
 
 
Loans and advances to banks

92,199

 
92,131

 
90,401

 
90,411

Loans and advances to customers

887,556

 
886,637

 
924,454

 
922,469

Reverse repurchase agreements - non-trading

187,826

 
187,869

 
146,255

 
146,266

Financial investments: debt securities

45,155

 
47,744

 
44,102

 
45,258





 
 
 
 
 
 
Liabilities



 
 
 
 
 
 
Deposits by banks

69,900

 
69,907

 
54,371

 
54,371

Customer accounts

1,290,958

 
1,292,378

 
1,289,586

 
1,289,789

Repurchase agreements - non-trading

98,342

 
98,344

 
80,400

 
80,400

Debt securities in issue

87,673

 
87,892

 
88,949

 
89,023

Subordinated liabilities

21,669

 
23,455

 
22,702

 
24,993

Other financial instruments not carried at fair value are typically short-term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value.
8
Financial assets designated at fair value
 
 
At
 
 
30 Jun

 
31 Dec

 
 
2016

 
2015

 
 
$m

 
$m

Treasury and other eligible bills
 
278

 
396

Debt securities
 
4,390

 
4,341

Equity securities
 
19,120

 
18,995

 
 
 
 
 
Securities designated at fair value
 
23,788

 
23,732

Loans and advances to banks and customers
 
113

 
120

 
 
 
 
 
 
 
23,901

 
23,852


Securities designated at fair value1 
 
 
 
At
 
 
 
30 Jun

 
31 Dec

 
 
 
2016

 
2015

 
 
 
$m

 
$m

 
 
 
 
 
 
US Treasury and US Government agencies
 
 
7

 
145

UK Government
 
 
95

 
103

Hong Kong Government
 
 
28

 
33

Other government
 
 
1,084

 
1,020

Asset-backed securities
 
 
36

 
25

Corporate debt and other securities
 
 
3,418

 
3,411

Equity securities
 
 
19,120

 
18,995

 
 
 
 
 
 
 
 
 
23,788

 
23,732

1
Included within these figures are debt securities issued by banks and other financial institutions of $1,680m (31 December 2015: $1,536m), of which $29m (31 December 2015: $35m) are guaranteed by various governments.


HSBC HOLDINGS PLC
119

9
Derivatives
Fair values of derivatives by product contract type held by HSBC
 
 
Assets
 
Liabilities
 
 
Trading

 
Hedging

 
Total

 
Trading

 
Hedging

 
Total

 
 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
116,357

 
614

 
116,971

 
118,450

 
2,359

 
120,809

Interest rate
 
378,397

 
2,332

 
380,729

 
366,415

 
6,885

 
373,300

Equities
 
8,569

 
-

 
8,569

 
9,726

 
-

 
9,726

Credit
 
5,359

 
-

 
5,359

 
6,049

 
-

 
6,049

Commodity and other
 
2,052

 
-

 
2,052

 
2,268

 
-

 
2,268

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross total fair values
 
510,734

 
2,946

 
513,680

 
502,908

 
9,244

 
512,152

 
 
 
 
 
 
 
 
 
 
 
 
 
Offset
 
 
 
 
 
(143,738
)
 
 
 
 
 
(143,738
)
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
 
 
 
 
369,942

 
 
 
 
 
368,414

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
95,201

 
1,140

 
96,341

 
94,843

 
755

 
95,598

Interest rate
 
277,496

 
1,658

 
279,154

 
267,609

 
3,758

 
271,367

Equities
 
8,732

 
-

 
8,732

 
10,383

 
-

 
10,383

Credit
 
6,961

 
-

 
6,961

 
6,884

 
-

 
6,884

Commodity and other
 
3,148

 
-

 
3,148

 
2,699

 
-

 
2,699

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross total fair values
 
391,538

 
2,798

 
394,336

 
382,418

 
4,513

 
386,931

 
 
 
 
 
 
 
 
 
 
 
 
 
Offset
 
 
 
 
 
(105,860
)
 
 
 
 
 
(105,860
)
 
 
 
 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
 
 
 
 
288,476

 
 
 
 
 
281,071


Derivative assets and liabilities increased during 1H16, primarily driven by an increase in the fair value of interest rate derivatives as yield curves in major currencies declined. This resulted in the increase in gross fair values and corresponding increase in the offset amount.
Trading derivatives
The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for trading purposes by product type
 
 
At
 
 
30 Jun

 
31 Dec

 
 
2016

 
2015

 
 
$m

 
$m

 
 
 
 
 
Foreign exchange
 
6,040,629

 
5,658,030

Interest rate
 
15,573,352

 
14,462,113

Equities
 
487,893

 
501,834

Credit
 
488,866

 
463,344

Commodity and other
 
67,555

 
51,683

 
 
 
 
 
 
 
22,658,295

 
21,137,004

Credit derivatives
HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. The trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products.
The notional contract amount of credit derivatives of $489bn (31 December 2015: $463bn) consisted of protection bought of $251bn (31 December 2015: $237bn) and protection sold of $238bn (31 December 2015: $226bn).

HSBC HOLDINGS PLC
120

Notes on the Financial Statements (unaudited) (continued)


Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:
Unamortised balance of derivatives valued using models with significant unobservable inputs
 
 
 
Half-year to
 
 
 
30 Jun

 
30 Jun

 
31 Dec

 
 
 
2016

 
2015

 
2015

 
 
Footnotes
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
Unamortised balance at beginning of period
 
 
97

 
114

 
117

Deferral on new transactions
 
 
67

 
118

 
78

Recognised in the income statement during the period:
 
 
(74
)
 
(115
)
 
(92
)
- amortisation
 
 
(38
)
 
(69
)
 
(52
)
- subsequent to unobservable inputs becoming observable
 
 
(2
)
 
(1
)
 
(1
)
- maturity or termination, or offsetting derivative
 
 
(34
)
 
(45
)
 
(39
)
 
 
 
 
 
 
 
 
Exchange differences
 
 
(6
)
 
-

 
(6
)
 
 
 
 
 
 
 
 
Unamortised balance at end of period
 
1
84

 
117

 
97

1
This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
The notional contract amounts of derivatives held for hedge accounting purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedging purposes by product type
 
 
At 30 Jun 2016
 
At 31 Dec 2015
 
 
Cash flow
hedges

 
Fair value
hedges

 
Cash flow
hedges

 
Fair value
hedges

 
 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
Foreign exchange
 
29,922

 
460

 
32,128

 
196

Interest rate
 
106,954

 
135,377

 
107,796

 
105,127

 
 
 
 
 
 
 
 
 
 
 
136,876

 
135,837

 
139,924

 
105,323


10
Financial investments
Carrying amounts and fair values of financial investments
 
 
At 30 Jun 2016
 
At 31 Dec 2015
 
 
Carrying
amount

 
Fair
value

 
Carrying
amount

 
Fair
value

 
 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
Treasury and other eligible bills
 
94,690

 
94,690

 
104,551

 
104,551

- available for sale
 
94,690

 
94,690

 
104,551

 
104,551


 


 
 
 
 
 
 
Debt securities
 
341,496

 
344,085

 
318,569

 
319,725

- available for sale
 
296,341

 
296,341

 
274,467

 
274,467

- held to maturity
 
45,155

 
47,744

 
44,102

 
45,258


 


 
 
 
 
 
 
Equity securities
 
5,213

 
5,213

 
5,835

 
5,835

- available for sale
 
5,213

 
5,213

 
5,835

 
5,835

 
 


 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
441,399

 
443,988

 
428,955

 
430,111


HSBC HOLDINGS PLC
121

Financial investments at amortised cost and fair value
 
 
 
Amortised
cost1

 
Fair
value2

 
 
Footnotes
$m

 
$m

 
 
 
 
 
 
US Treasury
 
 
54,177

 
56,194

US Government agencies
 
3
18,800

 
19,088

US Government sponsored entities
 
3
13,196

 
13,798

UK Government
 
 
26,174

 
27,199

Hong Kong Government
 
 
57,050

 
57,070

Other government
 
 
146,812

 
149,562

Asset-backed securities
 
4
12,095

 
11,243

Corporate debt and other securities
 
 
100,748

 
104,621

Equities
 
 
3,512

 
5,213

 
 
 
 
 
 
At 30 Jun 2016
 
 
432,564

 
443,988

 
 
 
 
 
 
US Treasury
 
 
61,585

 
61,779

US Government agencies
 
3
22,910

 
22,843

US Government sponsored entities
 
3
10,365

 
10,627

UK Government
 
 
27,250

 
27,316

Hong Kong Government
 
 
53,676

 
53,674

Other government
 
 
141,329

 
143,370

Asset-backed securities
 
4
14,239

 
13,375

Corporate debt and other securities
 
 
89,860

 
91,292

Equities
 
 
4,057

 
5,835

 
 
 
 
 
 
At 31 Dec 2015
 
 
425,271

 
430,111

1
Represents the amortised cost or cost basis of the financial investment.
2
Included within the 'Fair value' figures are debt securities issued by banks and other financial institutions of $68bn (31 December 2015: $61bn), of which $20bn (31 December 2015: $18bn) are guaranteed by various governments.
3
Includes securities that are supported by an explicit guarantee issued by the US Government.
4
Excludes asset-backed securities included under US Government agencies and sponsored entities.
Maturities of investments in debt securities at their carrying amount
 
 
1 year
or less

 
5 years or
less but over
1 year

 
10 years or
less but over
5 years

 
Over
10 years

 
Total

 
 
$m

 
$m

 
$m

 
$m

 
$m

 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
66,345

 
144,929

 
45,498

 
39,569

 
296,341

Held to maturity
 
1,726

 
10,429

 
9,381

 
23,619

 
45,155

 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
68,071

 
155,358

 
54,879

 
63,188

 
341,496

 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
61,664

 
131,023

 
42,140

 
39,640

 
274,467

Held to maturity
 
2,428

 
10,242

 
8,881

 
22,551

 
44,102

 
 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
64,092

 
141,265

 
51,021

 
62,191

 
318,569


11
Assets held for sale and liabilities of disposal groups held for sale
 
 
At
 
 
30 Jun

 
31 Dec

 
 
2016

 
2015

 
 
$m

 
$m

 
 
 
 
 
Disposal groups

48,899

 
41,715

Non-current assets held for sale

1,406

 
2,185





 
 
Total assets held for sale

50,305

 
43,900





 
 
Liabilities of disposal groups held for sale

43,705

 
36,840



HSBC HOLDINGS PLC
122

Notes on the Financial Statements (unaudited) (continued)


Disposal groups
Brazil
In 1H15, we announced the plan to sell our operations in Brazil. The resulting disposal group includes the assets and liabilities expected to be sold plus allocated goodwill of $1.3bn as set out in the table below. It is measured at its carrying amount at 30 June 2016 which is lower than its fair value less cost to sell.
The disposal group represents a foreign operation. Upon completion, the cumulative amount of associated exchange differences previously recognised in other comprehensive income will be reclassified to the income statement. At 30 June 2016, there was a cumulative loss of $1.9bn in the Group's foreign exchange reserve attributable to the Brazilian operations.
Subsequent to 30 June 2016, we completed the sale of our operations in Brazil to Banco Bradesco S.A. (1 July 2016) for cash consideration of $4.9bn. This resulted in a loss on disposal of $1.7bn which includes the reclassification of cumulative foreign exchange differences.
The major classes of assets and associated liabilities of disposal groups held for sale are as follows:
 
 
 
At 30 Jun 2016
 
 
 
Brazil

 
Other

 
Total

 
 
Footnotes
$m

 
$m

 
$m

Assets of disposal groups held for sale
 
 
 
 
 
 
 
Trading assets
 
 
157

 
-

 
157

Fair value of financial assets designated at fair value
 
 
4,056

 
-

 
4,056

Loans and advances to banks
 
 
5,332

 
-

 
5,332

Loans and advances to customers
 
 
19,203

 
582

 
19,785

Reverse repurchase agreements
 
 
3,209

 
-

 
3,209

Financial investments
 
 
6,726

 
-

 
6,726

Goodwill and intangible assets
 
 
1,819

 
54

 
1,873

Deferred tax asset
 
1
1,687

 
-

 
1,687

Prepayments, accrued income and other assets
 
 
6,073

 
1

 
6,074

 
 
 
 
 
 
 
 
Total assets
 
 
48,262

 
637

 
48,899

 
 
 
 
 
 
 
 
Liabilities of disposal groups held for sale
 
 
 
 
 
 
 
Deposits by banks
 
 
1,863

 
-

 
1,863

Customer accounts
 
 
19,357

 
1,174

 
20,531

Debt securities in issue
 
 
8,908

 
-

 
8,908

Liabilities under insurance contracts
 
 
4,347

 
-

 
4,347

Accruals, deferred income and other liabilities
 
 
8,054

 
2

 
8,056

 
 
 
 
 
 
 
 
Total liabilities
 
 
42,529

 
1,176

 
43,705

 
 
 
 
 
 
 
 
Expected date of completion
 
 
1 July 2016

 
Various

 
 
Operating segment
 
 
Latin America

 
Various

 
 
 
 
 
 
 
 
 
 
Fair value of selected financial instruments which are not carried at fair value on the balance sheet
 
 
 
 
 
 
 
Loans and advances to banks and customers
 
 
23,874

 
585

 
24,459

 
 
 
 
 
 
 
 
Customer accounts
 
 
19,056

 
1,173

 
20,229

1
The recognition of deferred tax assets relies on an assessment of the probability and sufficiency of future taxable profits and future reversals of existing taxable temporary differences. In recognising the deferred tax asset management has critically assessed all available information, including sufficiency of future taxable profits using internal and external benchmarks, and historical performance.
12
Assets charged as security for liabilities and collateral accepted as security for assets
Information on financial assets pledged as security for liabilities and collateral accepted as security for assets is disclosed on pages 401 and 402 of the Annual Report and Accounts 2015. There was no material change in the relative amounts of assets charged as security for liabilities and collateral accepted as security for assets at 30 June 2016.
13
Interests in associates and joint ventures
At 30 June 2016, the carrying amount of HSBC's interests in associates and joint ventures was $19.6bn (31 December 2015: $19.1bn).

HSBC HOLDINGS PLC
123

Principal associates of HSBC
 
 
At 30 Jun 2016
 
At 31 Dec 2015
 
 
Carrying
amount

 
Fair
value1

 
Carrying
amount

 
Fair
value1

 
 
$m

 
$m

 
$m

 
$m

Bank of Communications Co., Limited
 
15,408

 
8,872

 
15,344

 
9,940

The Saudi British Bank
 
3,177

 
3,250

 
3,021

 
3,957

 
 
 
 
 
 
 
 
 
 
 
18,585

 
12,122

 
18,365

 
13,897

1
Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).
Bank of Communications Co., Limited
Impairment testing
At 30 June 2016, the fair value of HSBC's investment in Bank of Communications Co., Limited ('BoCom') had been below the carrying amount for approximately 50 months, apart from a short period in 2013 and briefly during 1H15. As a result, we performed an impairment test on the carrying amount of the investment in BoCom. The test confirmed that there was no impairment at 30 June 2016.
 
 
At 30 Jun 2016
 
At 31 Dec 2015
 
 
VIU

 
Carrying
value

 
Fair
value

 
VIU

 
Carrying
value

 
Fair
value

 
 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
$bn

 
 
 
 
 
 
 
 
 
 
 
 
 
Bank of Communications Co., Limited
 
16.2

 
15.4

 
8.9

 
17.0

 
15.3

 
9.9

Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a value-in-use ('VIU') calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management's estimates of earnings. Cash flows beyond the short to medium term are then extrapolated in perpetuity using a long-term growth rate. An imputed capital maintenance charge ('CMC') is calculated to reflect the expected regulatory capital requirements, and is deducted from forecast cash flows. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected regulatory capital requirements. Management judgement is required in estimating the future cash flows of BoCom.
Key assumptions in VIU calculation
Long-term growth rate: the growth rate used was 5% (31 December 2015: 5%) for periods after 2019 and does not exceed forecast GDP growth in mainland China.
Long-term asset growth rate: the growth rate used was 4% (31 December 2015: 4%) for periods after 2019 and this is the rate of growth required for an assumed 5% long-term growth rate in profit.
Discount rate: the discount rate of 13% (31 December 2015: 13%) is derived from a range of values obtained by applying a capital asset pricing model ('CAPM') calculation for BoCom, using market data. Management supplements this by comparing the rates derived from the CAPM with discount rates available from external sources, and HSBC's discount rate for evaluating investments in mainland China. The discount rate used was within the range of 10.1% to 15.0% (31 December 2015: 10.1% to 14.2%) indicated by the CAPM and external sources.
Loan impairment charge as a percentage of customer advances: the ratio used ranges from 0.76% to 0.83% (31 December 2015: 0.71% to 0.78%) in the short to medium term and is based on the forecasts disclosed by external analysts. For periods after 2019, the ratio used was 0.70% (31 December 2015: 0.70%), slightly higher than the historical average.
Risk-weighted assets as a percentage of total assets: the ratio used was 67% for all forecast periods (31 December 2015: 67%). This is consistent with the forecasts disclosed by external analysts.
Cost-income ratio: the ratio used was 41% (31 December 2015: 41%) in the short to medium term. The ratio was consistent with the short- to medium-term range forecasts of 40.2% to 42.4% (31 December 2015: 40.3% to 40.7%) disclosed by external analysts.

HSBC HOLDINGS PLC
124

Notes on the Financial Statements (unaudited) (continued)


The following changes to each key assumption on its own used in the VIU calculation would be necessary to reduce headroom to nil:
 
 
Key assumption
Changes to key assumption to reduce headroom to nil
•
Long-term growth rate
Decrease by 30 basis points
•
Long-term asset growth rate
Increase by 31 basis points
•
Discount rate
Increase by 38 basis points
•
Loan impairment charge as a percentage of customer advances
Increase by 7 basis points
•
Risk-weighted assets as a percentage of total assets
Increase by 225 basis points
•
Cost-income ratio
Increase by 132 basis points
 
 
14
Trading liabilities
 
 
 
At
 
 
 
30 Jun  

 
31 Dec  

 
 
 
2016

 
2015

 
 
Footnotes
$m

 
$m

 
 
 
 
 
 
Deposits by banks
 
1
38,521

 
27,054

Customer accounts
 
1, 2
62,805

 
40,208

Other debt securities in issue
 
3
31,860

 
30,525

Other liabilities - net short positions in securities
 
 
55,512

 
43,827

 
 
 
 
 
 
 
 
 
188,698

 
141,614


1
'Deposits by banks' and 'Customer accounts' include repos, settlement accounts, stock lending and other amounts.
2
Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation, a US Government agency, up to $250,000 per depositor.
3
'Other debt securities in issue' comprises structured notes issued by HSBC for which market risks are actively managed as part of trading portfolios.
At 30 June 2016, the cumulative amount of change in fair value attributable to changes in credit risk was a gain of $346m (31 December 2015: gain of $122m).


HSBC HOLDINGS PLC
125

15
Maturity analysis of assets and liabilities
HSBC
Maturity analysis of assets and liabilities
 
 
 
Due
not more
than
1 month

 
Due over
1 month but not more than
3 months

 
Due over
3 months but not more than
6 months

 
Due over
6 months but not more than
9 months

 
Due over
9 months but not more than
1 year

 
Due over
1 year but not more than 2 years

 
Due over
2 years but not more than 5 years

 
Due over
5 years

 
Total

 
 
Footnotes
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and balances at central banks
 
 
128,272

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
128,272

Items in the course of collection from other banks
 
 
6,584

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
6,584

Hong Kong Government certificates of indebtedness
 
 
29,011

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
29,011

Trading assets
 
 
277,876

 
261

 
906

 
353

 
1

 
898

 
-

 
-

 
280,295

Financial assets designated at fair value
 
 
245

 
88

 
520

 
149

 
170

 
967

 
2,442

 
19,320

 
23,901

Derivatives
 
 
367,166

 
19

 
50

 
94

 
84

 
365

 
1,089

 
1,075

 
369,942

Loans and advances to banks
 
 
61,768

 
11,054

 
5,552

 
2,738

 
1,895

 
5,513

 
2,333

 
1,346

 
92,199

Loans and advances to customers
 
 
171,009

 
64,540

 
49,377

 
30,743

 
33,016

 
78,342

 
199,297

 
261,232

 
887,556

Reverse repurchase agreements - non-trading
 
 
140,887

 
26,874

 
10,808

 
2,617

 
4,626

 
1,515

 
499

 
-

 
187,826

Financial investments
 
 
35,975

 
51,952

 
33,529

 
22,986

 
18,247

 
52,017

 
102,502

 
124,191

 
441,399

Assets held for sale
 
1
38,398

 
1

 
10

 
7

 
10

 
87

 
8

 
-

 
38,521

Accrued income and other financial assets
 
 
12,777

 
7,488

 
1,859

 
587

 
496

 
348

 
441

 
1,724

 
25,720


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Financial assets at 30 Jun 2016
 
 
1,269,968

 
162,277

 
102,611

 
60,274

 
58,545

 
140,052

 
308,611

 
408,888

 
2,511,226


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Non-financial assets
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
96,923

 
96,923


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Total assets at 30 Jun 2016
 
 
1,269,968

 
162,277

 
102,611

 
60,274

 
58,545

 
140,052

 
308,611

 
505,811

 
2,608,149


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hong Kong currency notes in circulation
 
 
29,011

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
29,011

Deposits by banks
 
 
59,052

 
1,694

 
806

 
1,799

 
1,612

 
315

 
3,701

 
921

 
69,900

Customer accounts
 
 
1,186,803

 
50,556

 
24,047

 
10,683

 
9,009

 
5,587

 
3,689

 
584

 
1,290,958

Repurchase agreements - non-trading
 
 
89,718

 
3,938

 
3,142

 
519

 
25

 
-

 
750

 
250

 
98,342

Items in the course of transmission to other banks
 
 
7,461

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
7,461

Trading liabilities
 
 
157,132

 
1,341

 
3,092

 
1,327

 
1,056

 
5,784

 
6,583

 
12,383

 
188,698

Financial liabilities designated at fair value
 
 
119

 
483

 
1,822

 
1,722

 
1,598

 
3,664

 
24,687

 
44,787

 
78,882

Derivatives
 
 
359,525

 
284

 
312

 
297

 
172

 
1,245

 
1,931

 
4,648

 
368,414

Debt securities in issue
 
 
16,161

 
12,604

 
9,389

 
6,624

 
5,796

 
11,609

 
22,247

 
3,243

 
87,673

Liabilities of disposal groups held for sale
 
1
37,987

 
27

 
-

 
-

 
-

 
-

 
-

 
-

 
38,014

Accruals and other financial liabilities
 
 
16,256

 
6,881

 
2,064

 
1,380

 
696

 
818

 
1,542

 
609

 
30,246

Subordinated liabilities
 
 
11

 
-

 
11

 
77

 
159

 
2,394

 
4,889

 
14,128

 
21,669


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Financial liabilities at 30 Jun 2016
 
 
1,959,236

 
77,808

 
44,685

 
24,428

 
20,123

 
31,416

 
70,019

 
81,553

 
2,309,268


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Non-financial liabilities
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
100,584

 
100,584


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Total liabilities at 30 Jun 2016
 
 
1,959,236

 
77,808

 
44,685

 
24,428

 
20,123

 
31,416

 
70,019

 
182,137

 
2,409,852



Maturity analysis of assets and liabilities (continued)
 
 
 
Due
not more
than 1 month

 
Due
over 1 month but not more than 3 months

 
Due
over 3 months but not more than 6 months

 
Due
over 6 months but not more than 9 months

 
Due
over 9 months but not more than 1 year

 
Due
over 1 year
but not more than 2 years

 
Due
over 2 years
but not more than 5 years

 
Due
over 5 years

 
Total

 
 
Footnotes
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and balances at central banks
 
 
98,934

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
98,934

Items in the course of collection from other banks
 
 
5,768

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
5,768

Hong Kong Government certificates of indebtedness
 
 
28,410

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
28,410

Trading assets
 
 
224,691

 
34

 
-

 
-

 
-

 
112

 
-

 
-

 
224,837

Financial assets designated at fair value
 
 
429

 
194

 
222

 
83

 
390

 
896

 
2,603

 
19,035

 
23,852

Derivatives
 
 
285,797

 
215

 
223

 
198

 
33

 
499

 
841

 
670

 
288,476

Loans and advances to banks
 
 
57,296

 
14,530

 
4,063

 
1,964

 
2,499

 
5,134

 
3,274

 
1,641

 
90,401

Loans and advances to customers
 
 
176,862

 
69,638

 
54,730

 
33,095

 
34,774

 
81,560

 
201,253

 
272,542

 
924,454

Reverse repurchase agreements - non-trading
 
 
110,478

 
21,978

 
7,220

 
2,786

 
580

 
2,985

 
228

 
-

 
146,255

Financial investments
 
 
35,104

 
59,098

 
36,897

 
19,102

 
17,293

 
48,634

 
94,549

 
118,278

 
428,955

Assets held for sale
 
1
15,816

 
2,628

 
2,544

 
1,218

 
2,611

 
4,675

 
6,365

 
4,422

 
40,279

Accrued income and other financial assets
 
 
12,732

 
6,682

 
1,995

 
483

 
395

 
463

 
445

 
2,115

 
25,310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial assets at 31 Dec 2015
 
 
1,052,317

 
174,997

 
107,894

 
58,929

 
58,575

 
144,958

 
309,558

 
418,703

 
2,325,931

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-financial assets
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
83,725

 
83,725

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets at 31 Dec 2015
 
 
1,052,317

 
174,997

 
107,894

 
58,929

 
58,575

 
144,958

 
309,558

 
502,428

 
2,409,656

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hong Kong currency notes in circulation
 
 
28,410

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
28,410

Deposits by banks
 
 
46,693

 
2,225

 
1,049

 
325

 
116

 
712

 
3,182

 
69

 
54,371

Customer accounts
 
 
1,185,091

 
50,831

 
21,397

 
10,421

 
10,869

 
6,596

 
3,852

 
529

 
1,289,586

Repurchase agreements - non-trading
 
 
73,478

 
3,788

 
1,816

 
164

 
154

 
-

 
500

 
500

 
80,400

Items in the course of transmission to other banks
 
 
5,638

 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
5,638

Trading liabilities
 
 
111,691

 
1,471

 
1,529

 
882

 
2,184

 
4,344

 
10,105

 
9,408

 
141,614

Financial liabilities designated at fair value
 
 
2,036

 
1,822

 
2,943

 
342

 
1,900

 
4,930

 
14,316

 
38,119

 
66,408

Derivatives
 
 
276,765

 
34

 
251

 
213

 
52

 
524

 
1,063

 
2,169

 
281,071

Debt securities in issue
 
 
16,536

 
9,326

 
16,295

 
5,542

 
1,365

 
10,754

 
22,866

 
6,265

 
88,949

Liabilities of disposal groups held for sale
 
1
20,350

 
1,416

 
1,548

 
1,344

 
1,246

 
5,050

 
1,484

 
115

 
32,553

Accruals and other financial liabilities
 
 
14,802

 
7,965

 
2,467

 
659

 
421

 
925

 
1,454

 
665

 
29,358

Subordinated liabilities
 
 
-

 
401

 
-

 
-

 
34

 
650

 
4,579

 
17,038

 
22,702

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities at 31 Dec 2015
 
 
1,781,490

 
79,279

 
49,295

 
19,892

 
18,341

 
34,485

 
63,401

 
74,877

 
2,121,060

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-financial liabilities
 
 
-

 
-

 
-

 
-

 
-

 
-

 
-

 
91,078

 
91,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities at 31 Dec 2015
 
 
1,781,490

 
79,279

 
49,295

 
19,892

 
18,341

 
34,485

 
63,401

 
165,955

 
2,212,138

1
The assets and liabilities of the disposal groups classified as held for sale are disclosed in Note 11. Where an agreed or expected closing date exists, the underlying contractual maturities of the related assets and liabilities are no longer relevant to HSBC and these assets and liabilities are classified in accordance with the closing date of the disposal transaction. For all other disposal groups, the assets and liabilities are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal.



16
Provisions
 
 
Restructuring
costs

 

Contractual
commitments

 
Legal
proceedings
and regulatory
matters

 
Customer
remediation

 
Other
provisions

 
Total

 
 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

At 1 Jan 2016
 
463

 
240

 
3,174

 
1,340

 
335

 
5,552

Additional provisions/increase in provisions
 
128

 
65

 
799

 
114

 
93

 
1,199

Provisions utilised
 
(96
)
 
-

 
(180
)
 
(347
)
 
(54
)
 
(677
)
Amounts reversed
 
(66
)
 
(57
)
 
(39
)
 
(15
)
 
(42
)
 
(219
)
Unwinding of discounts
 
-

 
-

 
(2
)
 
-

 
4

 
2

Exchange differences and other movements
 
(21
)
 
8

 
33

 
(105
)
 
25

 
(60
)
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2016
 
408

 
256

 
3,785

 
987

 
361

 
5,797

 
 
 
 
 
 
 
 
 
 
 
 
 
At 1 January 2015
 
197

 
234

 
2,184

 
1,831

 
552

 
4,998

Additional provisions/increase in provisions
 
92

 
35

 
1,432

 
155

 
45

 
1,759

Provisions utilised
 
(47
)
 
(1
)
 
(145
)
 
(450
)
 
(71
)
 
(714
)
Amounts reversed
 
(13
)
 
(10
)
 
(86
)
 
(13
)
 
(50
)
 
(172
)
Unwinding of discounts
 
-

 
-

 
24

 
4

 
-

 
28

Exchange differences and other movements
 
(34
)
 
(89
)
 
(441
)
 
(173
)
 
(37
)
 
(774
)
 
 
 
 
 
 
 
 
 
 
 
 
 
At 30 Jun 2015
 
195

 
169

 
2,968

 
1,354

 
439

 
5,125

 
 
 
 
 
 
 
 
 
 
 
 
 
At 1 Jul 2015
 
195

 
169

 
2,968

 
1,354

 
439

 
5,125

Additional provisions/increase in provisions
 
338

 
85

 
721

 
610

 
93

 
1,847

Provisions utilised
 
(48
)
 
(1
)
 
(474
)
 
(406
)
 
(88
)
 
(1,017
)
Amounts reversed
 
(16
)
 
(5
)
 
(9
)
 
(157
)
 
(83
)
 
(270
)
Unwinding of discounts
 
-

 
-

 
16

 
2

 
-

 
18

Exchange differences and other movements
 
(6
)
 
(8
)
 
(48
)
 
(63
)
 
(26
)
 
(151
)
 
 
 
 
 
 
 
 
 
 
 
 
 
At 31 Dec 2015
 
463

 
240

 
3,174

 
1,340

 
335

 
5,552


Further details of 'Legal proceedings and regulatory matters' are set out in Note 19. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.
Further details of 'Customer remediation' are set out in this note. The term refers to activities (root cause analysis, customer contact, case reviews, decision making and redress calculations) carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action.
Payment Protection Insurance
At 30 June 2016, a provision of $720m (31 December 2015: $1,039m) was held relating to the estimated liability for redress in respect of the potential mis-selling of payment protection insurance ('PPI') policies in previous years. There has been no additional charge recorded in 1H16 for PPI.
Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amount to $4.6bn of which $3.9bn has been paid as at 30 June 2016.
The estimated liability for redress is calculated on the basis of the total premiums paid by the customer plus simple interest of 8% per annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for single premium and regular premium policies. Future estimated redress levels are based on historically observed redress per policy.
A total of 5.4m PPI policies have been sold by HSBC since 2000 which generated estimated gross written premiums of approximately $4.6bn and revenues of approximately $3.7bn at 1H16 average exchange rates. At 30 June 2016, the estimated total complaints expected to be received was two million, representing 36% of total policies sold. It is estimated that contact

HSBC HOLDINGS PLC
128

Notes on the Financial Statements (unaudited) (continued)


will be made with regard to 2.3m policies, representing 43% of total policies sold. This estimate includes inbound complaints as well as HSBC's proactive contact exercise on certain policies ('outbound contact').
The following table details the cumulative number of complaints received at 30 June 2016 and the number of claims expected in the future:
 
 
Footnotes
Cumulative to 30 Jun 2016

 
Future
expected

 
 
 
 
 
 
Inbound complaints (000s of policies)
 
1
1,289

 
285

Outbound contact (000s of policies)
 
 
725

 
1

Response rate to outbound contact
 
 
42
%
 
37
%
Average uphold rate per claim
 
2
75
%
 
85
%
Average redress per claim ($)
 
 
2,824

 
2,873

Complaints to the Financial Ombudsman Service ('FOS') (000s of policies)
 
 
130

 
41

Average uphold rate per FOS complaint
 
 
40
%
 
61
%
1
Excludes invalid claims where the complainant has not held a PPI policy and FOS complaints.
2
Claims include inbound and responses to outbound contact, but exclude FOS complaints.
A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $199m. Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by approximately $12m.
Brazilian labour, civil and fiscal claims
Brazilian labour, civil and fiscal litigation provisions were $495m (31 December 2015: $363m) at 30 June 2016. Of these provisions, $229m (31 December 2015: $168m) was in respect of labour and overtime litigation claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels and the facts and circumstances of each individual case. These provisions form part of the Brazilian disposal group and were classified as 'held for sale' at 30 June 2016 (see Note 11).
17
Deferred tax
Net deferred tax assets amounted to $3.6bn at 30 June 2016 (30 June 2015: $4.5bn; 31 December 2015: $4.3bn) and mainly relate to timing differences in the US.
18
Contingent liabilities, contractual commitments and guarantees


At


30 Jun  

 
31 Dec  



2016

 
2015



$m

 
$m

Guarantees and contingent liabilities



 
 
Guarantees

86,375

 
85,855

Other contingent liabilities

546

 
490





 
 


86,921

 
86,345



 
 
 
Commitments

 
 
 
Documentary credits and short-term trade-related transactions

9,518

 
10,168

Forward asset purchases and forward forward deposits placed

3,055

 
981

Undrawn formal standby facilities, credit lines and other commitments to lend

655,037

 
655,281





 
 


667,610

 
666,430

The above table discloses the nominal principal amounts of commitments, guarantees and other contingent liabilities. Contingent liabilities arising from legal proceedings, regulatory and other matters against the Group are disclosed in Note 19. Nominal principal amounts represent the amounts at risk should contracts be fully drawn upon and clients default. As a significant proportion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.
Capital commitments
In addition to the commitments disclosed above, at 30 June 2016 HSBC had $402m (31 December 2015: $468m) of capital commitments contracted but not provided for and $36m (31 December 2015: $100m) of capital commitments authorised but not contracted for.

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129

19
Legal proceedings and regulatory matters
HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 29 of the Annual Report and Accounts 2015. While the outcome of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 30 June 2016 (see Note 16). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Securities litigation
Household International, Inc. ('Household International') and certain former officers were named as defendants in a securities class action lawsuit, Jaffe v. Household International, Inc., et al., filed in the US District Court for the Northern District of Illinois (the 'Illinois District Court') in August 2002. The complaint asserted claims under the US Securities Exchange Act and alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household International's Consumer Lending operations (some of which ultimately led to a 2002 settlement with 46 states and the District of Columbia) and certain accounting practices, as evidenced by an August 2002 restatement of previously reported consolidated financial statements. A class was certified on behalf of all persons who acquired and disposed of Household International common stock between July 1999 and October 2002.
In April 2009, a jury trial was decided partly in favour of the plaintiffs.
After a court-appointed claims administrator reported that 45,921 claims generated an allowed aggregate loss of approximately $2.2bn, the Illinois District Court entered a partial final judgement against the defendants in October 2013 in the amount of approximately $2.5bn (including pre-judgement interest). The defendants appealed the partial final judgement.
In addition, there were objections regarding approximately $625m in additional claims, prior to the imposition of pre-judgement interest, which remained pending before the Illinois District Court.
In May 2015, the US Court of Appeals for the Seventh Circuit reversed the partial final judgement of the Illinois District Court and remanded the case for a new trial on loss causation.
In June 2016, HSBC reached an agreement to pay $1.575bn to settle all claims. The court granted preliminary approval of the settlement, and HSBC made payment of the agreed settlement amount into an escrow account in July 2016. Final court approval is pending.
Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff ('Madoff') was arrested in December 2008 and later pleaded guilty to running a Ponzi scheme. His firm, Bernard L. Madoff Investment Securities LLC ('Madoff Securities'), is being liquidated in the US by a trustee (the 'Trustee').
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was $8.4bn, including fictitious profits reported by Madoff. Based on information available to HSBC, we have estimated that the funds' actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time HSBC serviced the funds totalled approximately $4bn. Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities' fraud.
US/UK litigation: The Trustee has brought lawsuits against various HSBC companies in the US Bankruptcy Court and in the English High Court, seeking recovery of transfers from Madoff Securities to HSBC in an amount not yet pleaded or determined. HSBC and other parties to the action have moved to dismiss the Trustee's US actions. The deadline by which the Trustee must serve HSBC with his English action has been extended to the end of the third quarter of 2016.
Alpha Prime Fund Ltd ('Alpha Prime') and Senator Fund SPC ('Senator'), co-defendants in one of the Trustee's US actions, have each brought cross-claims against certain HSBC defendants. HSBC has moved to dismiss those cross-claims.
Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, 'Fairfield') (in liquidation since July 2009) have brought lawsuits in the US and the British Virgin Islands ('BVI') against fund shareholders, including HSBC companies that acted as nominees for clients, seeking restitution of redemption payments. Fairfield's US actions are stayed pending the outcome of the action in the BVI (see below).
In December 2014, three additional actions were filed in the US. A purported class of direct investors in Madoff Securities asserted common law claims against various HSBC companies in the United States District Court for the Southern District of New York (the 'New York District Court'). Two investors in Hermes International Fund Limited ('Hermes') also asserted common law claims against various HSBC companies in the New York District Court. HSBC has moved to dismiss both actions. In addition, SPV Optimal SUS Ltd ('SPV OSUS'), the purported assignee of the Madoff-invested company, Optimal Strategic US Equity Ltd, filed a lawsuit in New York state court against various HSBC companies and others, seeking damages on various alleged grounds, including breach of fiduciary duty and breach of trust.
BVI litigation: Beginning in October 2009, liquidators for Fairfield ('Fairfield Liquidators') commenced lawsuits against fund shareholders, including HSBC companies that acted as nominees for clients, seeking recovery of redemption payments. In

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130

Notes on the Financial Statements (unaudited) (continued)


March 2016, the BVI court denied a motion brought by certain non-HSBC defendants challenging the Fairfield Liquidators' authorisation to pursue their US claims, which those defendants have appealed.
Bermuda litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (together, 'Kingate') brought an action against HSBC Bank Bermuda Limited ('HBBM') for recovery of funds held in Kingate's accounts, fees and dividends. This action is pending, but is not expected to move forward until the resolution of the Trustee's US actions against Kingate and HBBM.
Thema Fund Limited ('Thema') and Hermes each brought three actions in 2009. The first set of actions seeks recovery of funds in frozen accounts held at HSBC Institutional Trust Services (Bermuda) Limited. The second set of actions asserts liability against HSBC Institutional Trust Services (Bermuda) Limited in relation to claims for mistake, recovery of fees and damages for breach of contract. The third set of actions seeks return of fees from HBBM and HSBC Securities Services (Bermuda) Limited. The parties have agreed to a standstill in respect of all three sets of actions.
Cayman Islands litigation: In February 2013, Primeo Fund Limited ('Primeo') (in liquidation since April 2009) brought an action against HSBC Securities Services Luxembourg ('HSSL') and The Bank of Bermuda (Cayman), alleging breach of contract and breach of fiduciary duty, and claiming damages and equitable compensation. Trial is scheduled to begin in November 2016.
Luxembourg litigation: In April 2009, Herald Fund SPC ('Herald') (in liquidation since July 2013) brought an action against HSSL before the Luxembourg District Court, seeking restitution of cash and securities Herald purportedly lost because of Madoff Securities' fraud, or money damages. The Luxembourg District Court dismissed Herald's securities restitution claim, but reserved Herald's cash restitution claim and its claim for money damages. Herald has appealed this judgement.
In March 2010, Herald (Lux) SICAV ('Herald (Lux)') (in liquidation since April 2009) brought an action against HSSL before the Luxembourg District Court seeking restitution of securities, or the cash equivalent, or money damages. Herald (Lux) has also requested the restitution of fees paid to HSSL.
Alpha Prime and Senator have each brought an action against HSSL before the Luxembourg District Court, seeking the restitution of securities, or the cash equivalent, or money damages. Both matters have been temporarily suspended at the request of Alpha Prime and Senator, respectively. In April 2015, Senator commenced an action against the Luxembourg branch of HSBC Bank plc asserting identical claims before the Luxembourg District Court.
HSSL has also been named as a defendant in various actions by shareholders in Primeo Select Fund, Herald, Herald (Lux), and Hermes. Most of these actions have been dismissed, suspended or postponed.
Ireland litigation: In November 2013, Defender Limited brought an action against HSBC Institutional Trust Services (Ireland) Limited ('HTIE') and others, alleging breach of contract and claiming damages and indemnification for fund losses. A trial date has not yet been scheduled.
In May 2016, following a hearing on two preliminary issues, HTIE was successful in obtaining an order dismissing two remaining claims by purported shareholders in Thema International Fund plc.
SPV OSUS's action against HTIE and HSBC Securities Services (Ireland) Limited alleging breach of contract and claiming damages and indemnification for fund losses was dismissed in October 2015. SPV OSUS's appeal is scheduled for hearing in January 2017.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the proceedings have been brought. Based upon the information currently available, management's estimate of possible aggregate damages that might arise as a result of all claims in the various Madoff-related proceedings is up to or exceeding $800m, excluding costs and interest. Due to uncertainties and limitations of this estimate, the ultimate damages could differ significantly from this amount.
US mortgage-related investigations
In April 2011, HSBC Bank USA N.A. ('HSBC Bank USA') entered into a consent order with the Office of the Comptroller of the Currency ('OCC'), and HSBC Finance Corporation ('HSBC Finance') and HSBC North America Holdings Inc. ('HNAH') entered into a similar consent order with the Federal Reserve Board ('FRB') (together with the OCC order, the 'Servicing Consent Orders'). The Servicing Consent Orders require prescribed actions to address certain foreclosure practice deficiencies. The Servicing Consent Orders also required an independent foreclosure review which, pursuant to amendments to the Servicing Consent Orders in February 2013, ceased and was replaced by a settlement under which HSBC and 12 other participating servicers agreed to provide cash payments and other assistance to eligible borrowers. In June 2015, the OCC issued an amended consent order citing the failure of HSBC Bank USA to be in compliance with all requirements of the OCC order. A failure to satisfy all requirements of the OCC order may result in a variety of regulatory consequences for HSBC Bank USA, including the imposition of civil money penalties.
In February 2016, HSBC Bank USA, HSBC Finance, HSBC Mortgage Services Inc. and HNAH entered into an agreement with the US Department of Justice (the 'DoJ'), the US Department of Housing and Urban Development, the Consumer Financial Protection Bureau, other federal agencies (the 'Federal Parties') and the Attorneys General of 49 states and the District of Columbia (the 'State Parties') to resolve civil claims related to past residential mortgage loan origination and servicing practices (the 'National Mortgage Settlement Agreement'). In addition, in February 2016, the FRB announced the imposition against HSBC Finance and HNAH of a $131m civil money penalty in connection with the FRB's consent order of April 2011. Pursuant to the terms of the FRB's civil money penalty order, the penalty will be satisfied through the cash payments made to the Federal Parties and the consumer relief provided under the National Mortgage Settlement Agreement.

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The Servicing Consent Orders and the National Mortgage Settlement Agreement do not completely preclude other enforcement actions by regulatory, governmental or law enforcement agencies related to foreclosure and other mortgage servicing practices, including, but not limited to, matters relating to the securitisation of mortgages for investors, which could include the imposition of civil money penalties, criminal fines or other sanctions. In addition, these practices have in the past resulted in private litigation, and may result in further private litigation.
US mortgage securitisation activity and litigation
HSBC Bank USA was a sponsor or seller of loans used to facilitate whole loan securitisations underwritten by HSBC Securities (USA) Inc. ('HSI'). From 2005 to 2007, HSBC Bank USA purchased and sold $24bn of such loans to HSI, which were subsequently securitised and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $4.9bn as at 30 June 2016. In addition, HSBC Bank USA served as trustee on behalf of various mortgage securitisation trusts.
As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to a number of foreclosed homes as trustee on behalf of various mortgage securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws relating to property upkeep and tenants' rights. While HSBC believes and continues to maintain that these obligations and any related liabilities are those of the servicer of each trust, HSBC continues to receive significant adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of 'HSBC, as trustee'.
Beginning in June 2014, a number of lawsuits were filed in state and federal court in New York and Ohio against HSBC Bank USA as trustee of over 320 mortgage securitisation trusts. These lawsuits are brought on behalf of the trusts by a putative class of investors including, among others, BlackRock and PIMCO funds. The complaints allege that the trusts have sustained losses in collateral value of approximately $38bn. The lawsuits seek unspecified damages resulting from alleged breaches of the US Trust Indenture Act, breach of fiduciary duty, negligence, breach of contract and breach of the common law duty of trust. HSBC's motions to dismiss in several of these lawsuits were, for the most part, denied.
HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (an indirect subsidiary of HSBC Finance) ('Decision One') have been named as defendants in various mortgage loan repurchase actions brought by trustees of mortgage securitisation trusts. In the aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay compensatory damages, totalling at least $1bn. One of these actions has been scheduled for trial in September 2016.
HSBC Mortgage Corporation (USA) Inc. and Decision One have also been named as defendants in two separate actions filed by Residential Funding Company LLC ('RFC'), a mortgage loan purchase counterparty, seeking unspecified damages in connection with approximately 25,000 mortgage loans.
Since 2010, various HSBC entities have received subpoenas and requests for information from the DoJ and the Massachusetts state Attorney General seeking the production of documents and information regarding HSBC's involvement in specific private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. In November 2014, HNAH, on behalf of itself and various subsidiaries including, but not limited to, HSBC Bank USA, HSI Asset Securitization Corp., HSI, HSBC Mortgage Corporation (USA), HSBC Finance and Decision One, received a subpoena from the US Attorney's Office for the District of Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act ('FIRREA'), concerning the origination, financing, purchase, securitisation and servicing of subprime and non-subprime residential mortgages. Five non-HSBC banks have previously reported settlements with the DoJ of FIRREA and other mortgage-backed securities-related matters. HSBC is cooperating with the US authorities and is continuing to produce documents and information responsive to their requests.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact of these matters, which could be significant.
HSBC expects the focus on mortgage securitisations to continue and may be subject to additional claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market.
Anti-money laundering and sanctions-related matters
In October 2010, HSBC Bank USA entered into a consent order with the OCC, and HNAH entered into a consent order with the FRB (each an 'Order' and together, the 'Orders'). These Orders required improvements to establish an effective compliance risk management programme across HSBC's US businesses, including risk management related to the Bank Secrecy Act ('BSA') and AML compliance. HSBC Bank USA is not currently in compliance with the OCC Order. Steps are being taken to address the requirements of the Orders.
In December 2012, HSBC Holdings, HNAH and HSBC Bank USA entered into agreements with US and UK government agencies regarding past inadequate compliance with the BSA, AML and sanctions laws. Among those agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with, among others, the DoJ (the 'US DPA'); and HSBC Holdings consented to a cease-and-desist order, and HSBC Holdings and HNAH consented to a civil money penalty order with the FRB. HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control ('OFAC') regarding historical transactions involving parties subject to OFAC sanctions, as well as an undertaking with the UK FCA to comply with certain forward-looking AML and sanctions-related obligations. In addition, HSBC Bank USA entered into civil money penalty orders with the Financial Crimes Enforcement Network of the US Treasury Department and the OCC.
Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling $1.9bn to US authorities and undertook various further obligations, including, among others, to continue to cooperate fully with the DoJ in any and all investigations, not to commit any crime under US federal law subsequent to the signing of the agreement, and to retain an independent

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Notes on the Financial Statements (unaudited) (continued)


compliance monitor (the 'Monitor'). In January 2016, the Monitor delivered his second annual follow-up review report. Through his country-level reviews, the Monitor identified potential anti-money laundering and sanctions compliance issues that the DoJ and HSBC are reviewing further. Additionally, as discussed elsewhere in this Note, HSBC is the subject of other ongoing investigations and reviews by the DoJ. The potential consequences of breaching the US DPA, as well as the role of the Monitor and his second annual review, are discussed on pages 113 and 116 of the Annual Report and Accounts 2015.
HSBC Bank USA also entered into two consent orders with the OCC. These required HSBC Bank USA to correct the circumstances noted in the OCC's report and to adopt an enterprise-wide compliance programme, and imposed restrictions on acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, without the OCC's prior approval.
These settlements with US and UK authorities have led to private litigation, and do not preclude further private litigation related to HSBC's compliance with applicable BSA, AML and sanctions laws or other regulatory or law enforcement actions for BSA, AML, sanctions or other matters not covered by the various agreements.
In May 2014, a shareholder derivative action was filed by a shareholder of HSBC Holdings purportedly on behalf of HSBC Holdings, HSBC Bank USA, HNAH and HSBC USA Inc. (the 'Nominal Corporate Defendants') in New York state court against certain current and former directors and officers of those HSBC companies (the 'Individual Defendants'). The complaint alleges that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the US DPA. In November 2015, the New York state court granted the Nominal Corporate Defendants' motion to dismiss. The plaintiff has appealed that decision.
In July 2014, a claim was filed in the Ontario Superior Court of Justice against HSBC Holdings and a former employee purportedly on behalf of a class of persons who purchased HSBC common shares and American Depositary Shares between July 2006 and July 2012. The complaint, which seeks monetary damages of up to CA$20bn, alleges that the defendants made statutory and common law misrepresentations in documents released by HSBC Holdings and its wholly owned subsidiary, HSBC Bank Canada, relating to HSBC's compliance with BSA, AML, sanctions and other laws.
In November 2014, a complaint was filed in the US District Court for the Eastern District of New York on behalf of representatives of US persons alleged to have been killed or injured in Iraq between April 2004 and November 2011. The complaint was filed against HSBC Holdings, HSBC Bank plc, HSBC Bank USA and HSBC Bank Middle East, as well as other non-HSBC banks and the Islamic Republic of Iran. The plaintiffs allege that defendants violated the US Anti-Terrorism Act ('US ATA') by altering or falsifying payment messages involving Iran, Iranian parties and Iranian banks for transactions processed through the US. Defendants filed a motion to dismiss in May 2015.
In November 2015, a complaint was filed in the Illinois District Court on behalf of representatives of US persons alleged to have been killed or injured in terrorist attacks on three hotels in Amman, Jordan in 2005. The complaint was filed against HSBC Holdings, HSBC Bank USA, HNAH, HSI, HSBC Finance, HSBC USA Inc. and HSBC Bank Middle East, as well as a non-HSBC bank. The plaintiffs allege that the HSBC defendants violated the US ATA by failing to enforce due diligence methods to prevent its financial services from being used to support the terrorist attacks.
In February 2016, a complaint was filed in the US District Court for the Southern District of Texas by representatives of US persons alleged to have been killed or injured in Mexico by Mexican drug cartels. The complaint was filed against HSBC Holdings, HSBC Bank USA, HSBC México SA, and Grupo Financiero HSBC. The plaintiffs allege that defendants violated the US ATA by providing financial services to individuals and entities associated with the Mexican drug cartels. In June 2016, HSBC filed a motion to transfer the case to the New York District Court, and a motion to dismiss in respect of certain of the HSBC defendants.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these lawsuits, including the timing or any possible impact on HSBC, which could be significant.
Tax-related investigations
HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain HSBC companies and employees, including those associated with HSBC Private Bank (Suisse) SA ('HSBC Swiss Private Bank') and an HSBC company in India, acted appropriately in relation to certain customers who had US tax reporting obligations. In connection with these investigations, HSBC Swiss Private Bank, with due regard for Swiss law, has produced records and other documents to the DoJ. In August 2013, the DoJ informed HSBC Swiss Private Bank that it was not eligible for the 'Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks' since a formal investigation had previously been authorised.
In addition, various tax administration, regulatory and law enforcement authorities around the world, including in Belgium, France, Argentina and India, are conducting investigations and reviews of HSBC Swiss Private Bank and other HSBC companies in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation. HSBC Swiss Private Bank has been placed under formal criminal examination by magistrates in both Belgium and France. In April 2015, HSBC Holdings was informed that it has been placed under formal criminal investigation by the French magistrates in connection with the conduct of HSBC Swiss Private Bank in 2006 and 2007 for alleged tax offences, and a €1bn bail was imposed. HSBC Holdings appealed the magistrates' decision and, in June 2015, bail was reduced to €100m. The ultimate financial impact of this matter could differ significantly, however, from the bail amount of €100m. In March 2016, HSBC was informed that the French magistrates are of the view that they have completed their investigation with respect to HSBC Swiss Private Bank and HSBC Holdings, and have referred the matter to the public prosecutor for a recommendation on any potential charges to be brought.

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In November 2014, the Argentine tax authority initiated a criminal action against various individuals, including current and former HSBC employees. The criminal action includes allegations of tax evasion, conspiracy to launder undeclared funds and an unlawful association among HSBC Swiss Private Bank, HSBC Bank Argentina, HSBC Bank USA and certain HSBC employees, which allegedly enabled numerous HSBC customers to evade their Argentine tax obligations.
In February 2015, the Indian tax authority issued a summons and request for information to an HSBC company in India. In August 2015 and November 2015, HSBC companies received notices issued by two offices of the Indian tax authority, alleging that the Indian tax authority had sufficient evidence to initiate prosecution against HSBC Swiss Private Bank and its Dubai entity for abetting tax evasion of four different Indian individuals and/or families and requesting that the HSBC companies show why such prosecution should not be initiated.
HSBC is cooperating with the relevant authorities. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these investigations and reviews, which could be significant.
In light of the media attention regarding these matters, it is possible that other tax administration, regulatory or law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings.
Mossack Fonseca & Co.
HSBC has received requests for information from various regulatory and law enforcement authorities around the world concerning persons and entities believed to be linked to Mossack Fonseca & Co., a service provider of personal investment companies. HSBC is cooperating with the relevant authorities.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the UK, the US, the EU and Switzerland, are conducting investigations and reviews related to certain past submissions made by panel banks and the processes for making submissions in connection with the setting of Libor, Euribor and other benchmark interest rates. As certain HSBC companies are members of such panels, HSBC has been the subject of regulatory demands for information and is cooperating with those investigations and reviews.
In May 2014, HSBC received a Statement of Objections from the European Commission (the 'Commission'), alleging anti-competitive practices in connection with the pricing of euro interest rate derivatives. The Statement of Objections sets out the Commission's preliminary views and does not prejudge the final outcome of its investigation. HSBC responded to the Commission's Statement of Objections in March 2015, and a hearing before the Commission took place in June 2015. A decision by the Commission is pending.
US dollar Libor: Beginning in 2011, HSBC and other panel banks have been named as defendants in a number of private lawsuits filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including US antitrust and racketeering laws, the US Commodity Exchange Act ('US CEA'), and state law. The lawsuits include individual and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the New York District Court.
The New York District Court has issued decisions dismissing certain of the claims in response to motions filed by the defendants. Those decisions resulted in the dismissal of the plaintiffs' federal and state antitrust claims, racketeering claims, and unjust enrichment claims. Dismissal of certain of these claims was appealed to the US Court of Appeals for the Second Circuit, which reversed the New York District Court's dismissal of plaintiffs' antitrust claims in May 2016.
Euroyen Tokyo interbank offered rate ('Tibor') and/or Japanese yen Libor: In April 2012 and July 2015, HSBC and other panel banks were named as defendants in putative class actions filed in the New York District Court on behalf of persons who transacted in financial instruments allegedly related to the euroyen Tibor and/or Japanese yen Libor. The complaints allege, among other things, misconduct related to euroyen Tibor, although HSBC is not a member of the Japanese Bankers Association's euroyen Tibor panel, as well as Japanese yen Libor, in violation of US antitrust laws, the US CEA, and state law. In May 2016, HSBC reached an agreement in principle with plaintiffs to resolve both of these actions, subject to court approval. The court granted preliminary approval of the settlement in June 2016, and HSBC made payment of the agreed settlement amount into an escrow account. The final settlement approval hearing is scheduled for November 2016.
Euribor: In November 2013, HSBC and other panel banks were named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in euro futures contracts and other financial instruments allegedly related to Euribor. The complaint alleges, among other things, misconduct related to Euribor in violation of US antitrust laws, the US CEA and state law. In May 2016, HSBC reached an agreement in principle with plaintiffs to resolve this action, subject to court approval.
Singapore Interbank Offered Rate ('SIBOR') and/or Singapore Swap Offer Rate ('SOR'): In July 2016, HSBC and other panel banks were named as defendants in a putative class action filed in the New York District Court on behalf of persons who transacted in products related to SIBOR and/or SOR. The complaint alleges, among other things, misconduct related to SIBOR and/or SOR in violation of US antitrust and racketeering laws, and state law. This matter is at an early stage.
US dollar International Swaps and Derivatives Association fix ('ISDAfix'): In September 2014, HSBC and other panel banks were named as defendants in a number of putative class actions consolidated in the New York District Court on behalf of

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Notes on the Financial Statements (unaudited) (continued)


persons who transacted in interest rate derivatives or purchased or sold financial instruments that were either tied to ISDAfix rates or were executed shortly before, during, or after the time of the daily ISDAfix setting window. The consolidated complaint alleges, among other things, misconduct related to these activities in violation of US antitrust laws, the US CEA and state law. HSBC's motion to dismiss the complaint was denied in March 2016.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
Foreign exchange rate investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the US, the EU, Brazil and South Korea, are conducting investigations and reviews into trading by HSBC and others on the foreign exchange markets. HSBC is cooperating with these investigations and reviews.
In May 2015, the DoJ resolved its investigations with respect to five non-HSBC financial institutions, four of whom agreed to plead guilty to criminal charges of conspiring to manipulate prices in the foreign exchange spot market, and resulting in the imposition of criminal fines in the aggregate of more than $2.5bn. Additional penalties were imposed at the same time by the FRB and other banking regulators. HSBC was not a party to these resolutions, and investigations into HSBC by the DoJ, FRB and others around the world continue.
In late 2013 and early 2014, HSBC and other banks were named as defendants in various putative class actions consolidated in the New York District Court. The consolidated complaint alleged, among other things, that the defendants conspired to manipulate the WM/Reuters foreign exchange benchmark rates. In September 2015, HSBC reached an agreement with plaintiffs to resolve the consolidated action, subject to court approval. In December 2015, the court granted preliminary approval of the settlement, and HSBC made payment of the agreed settlement amount into an escrow account. The court has not yet set a date for the final approval hearing.
In June 2015, a putative class action was filed in the New York District Court making similar allegations on behalf of Employee Retirement Income Security Act of 1974 ('ERISA') plan participants, and another complaint was filed in the US District Court for the Northern District of California in May 2015. HSBC filed a motion to transfer the California action to New York, which was granted in November 2015.
In September 2015, two additional putative class actions making similar allegations under Canadian law were issued in Canada against various HSBC companies and other financial institutions.
As at 30 June 2016, HSBC has recognised a provision in the amount of $1.2bn. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from the amount provided.
Precious metals fix-related investigations and litigation
Various regulators and competition and law enforcement authorities, including in the US and the EU, are conducting investigations and reviews relating to HSBC's precious metals operations and trading. HSBC is cooperating with these investigations and reviews. In November 2014, the Antitrust Division and Criminal Fraud Section of the DoJ issued a document request to HSBC Holdings, seeking the voluntary production of certain documents in connection with a criminal investigation that the DoJ is conducting of alleged anti-competitive and manipulative conduct in precious metals trading. In January 2016, the Antitrust Division of the DoJ informed HSBC that it was closing its investigation; however, the Criminal Fraud Section's investigation remains ongoing.
Gold: Beginning in March 2014, numerous putative class actions were filed in the New York District Court and the US District Courts for the District of New Jersey and the Northern District of California, naming HSBC and other members of The London Gold Market Fixing Limited as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. Defendants moved to dismiss the consolidated action and a hearing took place in April 2016.
In December 2015, a putative class action under Canadian law was filed in the Ontario Superior Court of Justice against various HSBC companies and other financial institutions. Plaintiffs allege that, from January 2004 to March 2014, defendants conspired to manipulate the price of gold and gold-related investment instruments in violation of the Canadian Competition Act and common law.
Silver: Beginning in July 2014, numerous putative class actions were filed in the US District Courts for the Southern and Eastern Districts of New York, naming HSBC and other members of The London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 1999 to the present, defendants conspired to manipulate the price of silver and silver derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. Defendants moved to dismiss the consolidated action and a hearing took place in April 2016.
In April 2016, two putative class actions under Canadian law were filed in the Ontario and Quebec Superior Courts of Justice against various HSBC companies and other financial institutions. Plaintiffs in both actions allege that, from January 1999 to August 2014, defendants conspired to manipulate the price of silver and silver-related investment instruments in violation of the Canadian Competition Act and common law. These actions are at an early stage.
Platinum and palladium: Between late 2014 and early 2015, numerous putative class actions were filed in the New York District Court, naming HSBC and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The

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complaints allege that, from January 2008 to the present, defendants conspired to manipulate the price of platinum group metals ('PGM') and PGM-based financial products for their collective benefit in violation of US antitrust laws and the US CEA. Defendants have moved to dismiss the action.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant.
Credit default swap litigation
Various HSBC companies, among other financial institutions, ISDA, and Markit, were named as defendants in numerous putative class actions filed in the New York District Court and the Illinois District Court. The actions alleged that the defendants, violated US antitrust laws by, among other things, conspiring to restrict access to credit default swap pricing exchanges and block new entrants into the exchange market. The actions were subsequently consolidated in the New York District Court. In September 2015, the HSBC defendants reached an agreement with plaintiffs to resolve the consolidated action, and final court approval of that settlement was granted in April 2016.
Interest rate swap litigation
In February 2016, various HSBC companies, among others, were added as defendants to a pending putative class action filed in the New York District Court. The amended complaint, along with other complaints filed in the New York District Court and the Illinois District Court, alleged that the defendants violated US antitrust laws by, among other things, conspiring to boycott and eliminate various entities and practices that would have brought exchange trading to buy‐side investors in the interest rate swaps marketplace. In June 2016, the actions were consolidated in the New York District Court. This matter is at an early stage.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Economic plans: HSBC Bank Brasil S.A.
In the mid-1980s and early 1990s, certain economic plans were introduced by the government of Brazil to reduce escalating inflation. The implementation of these plans adversely impacted savings account holders, thousands of which consequently commenced legal proceedings against financial institutions in Brazil, including HSBC Bank Brasil S.A. ('HSBC Brazil'), alleging, among other things, that savings account balances were adjusted by a different price index than that contractually agreed, which caused them a loss of income. Certain of these cases have reached the Brazilian Supreme Court. The Supreme Court has suspended all cases pending before lower courts until it delivers a final judgement on the constitutionality of the changes resulting from the economic plans. It is anticipated that the outcome of the Supreme Court's final judgement will set a precedent for all cases pending before the lower courts. Separately, the Brazilian Superior Civil Court is considering matters relating to, among other things, contractual and punitive interest rates to be applied to calculate any loss of income.
In July 2016, HSBC completed the sale of HSBC Brazil to Banco Bradesco S.A. (see Note 11).
Fédération Internationale de Football Association ('FIFA') related investigations
HSBC has received inquiries from the DoJ regarding its banking relationships with certain individuals and entities that are or may be associated with FIFA. The DoJ is investigating whether multiple financial institutions, including HSBC, permitted the processing of suspicious or otherwise improper transactions, or failed to observe applicable AML laws and regulations. HSBC is cooperating with the DoJ's investigation.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.
Hiring practices investigation
The US Securities and Exchange Commission (the 'SEC') is investigating multiple financial institutions, including HSBC, in relation to hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific. HSBC has received various requests for information and is cooperating with the SEC's investigation.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.

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Notes on the Financial Statements (unaudited) (continued)


20
Goodwill impairment
Impairment testing
As described on page 407 of the Annual Report and Accounts 2015, we test goodwill for impairment at 1 July each year and whenever there is an indication that goodwill may be impaired. At 30 June 2016, we reviewed the inputs used in our most recent impairment test in the light of current economic and market conditions, and identified indicators of impairment for two cash-generating units ('CGUs') disclosed as sensitive in the Annual Report and Accounts 2015.
The indicators related to the perceived increase in the cost of equity for UK and European banks following the UK electorate's vote to leave the European Union ('EU'), and current business performance, as well as the continued reshaping of our Global Private Banking business in Europe. As a result, impairment tests were performed for Global Private Banking - Europe and Global Banking and Markets - Europe at 30 June 2016. The key assumptions and the results of the tests are included in the disclosure below. There were no indicators of impairment in respect of our other CGUs.
The discount rates used for Global Private Banking - Europe and Global Banking and Markets - Europe include a 100bps uplift to reflect the increased risk in European markets following the UK's referendum on membership of the EU. Given the proximity of the referendum to the end of 1H16 and the subsequent market volatility, the adjustment represents management's judgement based on the latest available information, including the latest broker reports. Furthermore, the tests were based on recently updated internal forecasts, which include a preliminary assessment of the impact of the referendum result but may change. Finally, the structure of the Global Private Banking business continues to evolve and this could also impact future tests. All these factors could impact the headroom of these two CGUs in the future.
Impairment test results
 
 
 Carrying
amount1

 
Value in
use

 
Headroom/
(impairment)

 
Discount
rate

 
Nominal growth rate
beyond initial cash flow projections

Cash-generating unit
 
$bn

 
$bn

 
$bn

 
%

 
%

 
 
 
 
 
 
 
 
 
 
 
Global Private Banking - Europe
 
4.4

 
3.6

 
(0.8
)
 
9.7

 
2.8

Global Banking and Markets - Europe
 
18.9

 
22.7

 
3.8

 
10.7

 
3.8

1
Included in the carrying amounts of $4.4bn and $18.9bn is goodwill of $3.3bn and $2.6bn respectively.
As shown above, the Group's Global Private Banking - Europe goodwill balance was impaired by $752m. This is in addition to a $48m goodwill impairment charge recognised on certain Global Private Banking - Europe assets classified as held for sale. These amounts have been recognised in the income statement as an impairment loss within 'Amortisation and impairment of intangible assets and goodwill'. The previous value in use amounts for Global Banking and Markets - Europe and Global Private Banking - Europe are disclosed on page 410 of the Annual Report and Accounts 2015. Due to the impairment recognised, Global Private Banking - Europe had nil headroom at 30 June 2016 and therefore any negative movement in the current assumptions would result in the recognition of a further impairment.
Sensitivities of key assumptions in calculating VIU
At 30 June 2016, Global Banking and Markets - Europe was sensitive to reasonably possible changes in the key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the model. These include the external range of observable discount rates, historical performance against forecast, and risks attaching to the key assumptions underlying cash flow projections.
Reasonably possible changes in key assumptions
Cash-generating unit
Input
 
Key assumptions
 
Associated risks
 
Reasonably possible change
Global Private Banking - Europe
Cash flow projections
 
•
Achievement of planned strategic repositioning.
 
•
Challenges achieving strategic repositioning.
 
•
A negative change in any assumption would result in an additional impairment.
 
 
 
•
Level of assets under management.
 
•
Lower than expected growth in assets under management.
•
 
 
 
 
 
•
Return on assets.
 
 
 
 
 
 
 
•
Level of interest rates.
 
 
 
 
 
 
 
•
Cost savings from recent investment in new platforms.
 
 
 
 
 
Discount rate
 
•
Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business.
 
•
External evidence arises to suggest that the rate used is not appropriate to the business.
 
 
 
Long-term growth rates
 
•
Business growth will reflect GDP growth rates in the long term.
 
•
Growth does not match GDP, or GDP forecasts fall.
 
 
Global Banking and Markets - Europe
Cash flow projections
 
•
Level of interest rates.
 
 
 
•
Cash flow projections decrease by 20%.

HSBC HOLDINGS PLC
137

 
 
 
•
Recovery of European markets over the forecast period.
 
•
Lower than expected growth in key markets.
 
 
 
 
 
 
 
•
The impact of regulatory changes, including the ring fencing of the UK retail bank.
 
 
 
Discount rate
 
•
Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business.
 
•
External evidence arises to suggest that the rate used is not appropriate to the business.
 
•
Discount rate increases by 100 basis points.
 
Long-term growth rates
 
•
Business growth will reflect GDP growth rates in the long term.
 
•
Growth does not match GDP, or GDP forecasts fall.
 
•
Real GDP growth does not occur or is not reflected in performance.

The following table presents the change required to individual current assumptions for Global Banking and Markets - Europe to reduce headroom to nil (break even).
Changes to current assumptions to achieve nil headroom
 
 
Increase/(decrease)
 
 
Discount
 rate
 
 Cash flow

 
 Long-term
growth rate

 
 
bps
 
%

 
bps

Cash-generating unit
 
 
 
 
 
 
Global Banking and Markets - Europe
 
139
 
(16.7
)
 
(177
)

21
Transactions with related parties
There were no changes in the related party transactions described in the Annual Report and Accounts 2015 that have had a material effect on the financial position or performance of HSBC in the half-year to 30 June 2016. All related party transactions that took place in the half-year to 30 June 2016 were similar in nature to those disclosed in the Annual Report and Accounts 2015.
22
Events after the balance sheet date
On 1 July 2016, we sold our operations in Brazil, comprising HSBC Bank Brasil S.A. - Banco Múltiplo and HSBC Serviços e Participações Ltda. (collectively 'HSBC Brazil'), to Banco Bradesco S.A. for cash consideration of $4.9bn and recognised a loss on disposal of $1.7bn. HSBC Brazil was classified as held for sale at 30 June 2016 (see Note 11).
On 3 August 2016, the Board approved a share buy-back programme of up to $2.5bn.
A second interim dividend for the financial year ending 31 December 2016 was declared by the Directors on 3 August 2016, as described in Note 2.
23
Interim Report 2016 and statutory accounts
The information in this Interim Report 2016 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. This Interim Report 2016 was approved by the Board of Directors on 3 August 2016. The statutory accounts of HSBC Holdings for the year ended 31 December 2015 have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The Group's auditor, PricewaterhouseCoopers LLP ('PwC') has reported on those accounts. Its report was unqualified, did not include a reference to any matters to which PwC drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

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138

Statement of Directors' responsibilities

Statement of Directors' Responsibilities
The Directors1, who are required to prepare the financial statements on a going concern basis unless it is not appropriate, 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 EU;
•
this Interim Report 2016 includes a fair review of the information required by:
(a)
DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of: important events that have occurred during the first six months of the financial year ending 31 December 2016 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
(b)
DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being: related party transactions that have taken place in the first six months of the financial year ending 31 December 2016 and that 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 2015 that could materially affect the financial position or performance of HSBC during the first six months of the financial year ending 31 December 2016.

On behalf of the Board
Douglas Flint
Group Chairman
3 August 2016
Phillip Ameen*, Kathleen Casey*, Laura Cha*, Henri de Castries*, Lord Evans of Weardale*, Joachim Faber*, Douglas Flint, Stuart Gulliver, Sam Laidlaw*, Irene Lee*, John Lipsky*, Rachel Lomax*, Iain Mackay, Heidi Miller*, Marc Moses, David Nish*, Jonathan Symonds*, Pauline van der Meer Mohr* and Paul Walsh*.
*
Independent non-executive Director.

HSBC HOLDINGS PLC
139

Independent Review Report by PricewaterhouseCoopers LLP to HSBC Holdings plc

Independent Review Report to HSBC Holdings plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed the condensed consolidated interim financial statements, defined below, in the interim financial report of HSBC Holdings plc for the six months ended 30 June 2016. Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
This conclusion is to be read in the context of what we say in the remainder of this report.
What we have reviewed
The condensed consolidated interim financial statements, which are prepared by HSBC Holdings plc, comprise:
•
the consolidated Balance Sheet as at 30 June 2016;
•
the consolidated income statement and the consolidated statement of comprehensive income for the period then ended;
•
the consolidated statement of cash flows for the period then ended;
•
the consolidated statement of changes in equity for the period then ended; and
•
the explanatory notes to the condensed consolidated interim financial statements.
As disclosed in Note 1, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
The condensed consolidated interim financial statements included in the interim financial report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
What a review of interim financial information involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated interim financial statements.
Responsibilities for the interim financial information and the review
Our responsibilities and those of the Directors
The interim financial report, including the condensed consolidated interim financial statements, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express to the company a conclusion on the condensed consolidated interim financial statements in the interim financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Rules and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London, United Kingdom
3 August 2016

HSBC HOLDINGS PLC
140

Shareholder information

Shareholder information
 
1
Directors' interests
141
  9
Final results
146

2
Employee share plans
144
10
Corporate governance
146

3
Notifiable interests in share capital
145
11
Changes in Directors' details
146

4
Dealings in HSBC Holdings listed securities
145
12
Going concern basis
147

5
First interim dividend for 2016
145
13
Telephone and online share dealing service
147

6
Second interim dividend for 2016
145
14
Stock symbols
147

7
Proposed interim dividends for 2016
146
15
Copies of the Interim Report 2016 and shareholder enquiries
 
8
Earnings release
146
 
and communications
148

 
 
 
 
 
 
1
Directors' interests
According to the register of Directors' interests maintained by HSBC Holdings pursuant to section 352 of the Securities and Futures Ordinance of Hong Kong, at 30 June 2016 the Directors of HSBC Holdings had the following interests, all beneficial unless otherwise stated, in the shares or debentures of HSBC and its associates:
Directors' interests - shares and debentures
 
 
 
 
 
At 30 Jun 2016
 
Footnotes
 
At
1 Jan 2016

 
Beneficial
owner

 
Child
under 18
or spouse

 
Jointly
with
another
person

 
Trustee

 
Total
interests1

HSBC Holdings ordinary shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Phillip Ameen
3
 
5,000

 
5,000

 
-

 
-

 
-

 
5,000

Kathleen Casey
3
 
3,540

 
8,260

 
-

 
-

 
-

 
8,260

Laura Cha
 
 
5,200

 
5,200

 
-

 
-

 
-

 
5,200

Henri de Castries
 
 
-

 
15,491

 
-

 
-

 
-

 
15,491

Lord Evans of Weardale
 
 
7,416

 
7,416

 
-

 
-

 
-

 
7,416

Joachim Faber
 
 
45,778

 
66,605

 
-

 
-

 
-

 
66,605

Douglas Flint
 
 
401,450

 
401,796

 
-

 
-

 
-

 
401,796

Stuart Gulliver
 
 
2,861,265

 
3,056,229

 
176,885

 
-

 
-

 
3,233,114

Sam Laidlaw
 
 
38,012

 
37,795

 
-

 
-

 
1,4162

 
39,211

Irene Lee
 
 
-

 
10,000

 
-

 
-

 
-

 
10,000

John Lipsky
3
 
16,165

 
16,165

 
-

 
-

 
-

 
16,165

Rachel Lomax
 
 
18,900

 
18,900

 
-

 
-

 
-

 
18,900

Iain Mackay
 
 
223,872

 
370,489

 
-

 
-

 
-

 
370,489

Heidi Miller
3
 
3,695

 
3,815

 
-

 
-

 
-

 
3,815

Marc Moses
 
 
624,643

 
762,161

 
-

 
-

 
-

 
762,161

David Nish
 
 
-

 
-

 
50,000

 
-

 
-

 
50,000

Jonathan Symonds
 
 
21,771

 
16,886

 
4,885

 
-

 
-

 
21,771

Pauline van der Meer Mohr
 
 
-

 
7,000

 
-

 
-

 
-

 
7,000

Paul Walsh
 
 
-

 
5,000

 
-

 
-

 
-

 
5,000

1
Details of executive Directors' other interests in HSBC Holdings ordinary shares arising from the HSBC Holdings savings-related share option plans and the HSBC Share Plan 2011 are set out on the following pages. At 30 June 2016, the aggregate interests under the Securities and Futures Ordinance of Hong Kong in HSBC Holdings ordinary shares, including interests arising through employee share plans, were: Douglas Flint - 404,715; Stuart Gulliver - 6,330,295; Iain Mackay - 1,804,677; and Marc Moses - 2,489,059. Each Director's total interests represent less than 1% of the shares in issue.
2
Non-beneficial.
3
Interests in American Depositary Shares ('ADS'), which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.


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141

Savings-related share option plans and the HSBC Share Plan 2011
HSBC Holdings savings-related share option plans
 
 
 
 
 
 
 
 
 
 
HSBC Holdings ordinary shares
 
 
 
 
 
 
 
 
 
 
Held at
 
Held at
 
 
Date of
award
 
Exercise
price (£)
 
Exercisable
 
1 Jan
 
30 Jun
 
 
 
from
 
until
 
2016
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Douglas Flint
 
23 Sep 2014
 
5.1887
 
1 Nov 2019
 
1 May 2020
 
2,919
 
2,919
 
 
 
 
 
 
 
 
 
 
 
 
 
Iain Mackay
 
23 Sep 2014
 
5.1887
 
1 Nov 2017
 
1 May 2018
 
3,469
 
3,469
There are no performance criteria conditional upon which the outstanding options are exercisable and there have been no variations to the terms and conditions since the awards were made. See page 144 for more details on the HSBC Holdings savings-related share option plans. The market value per ordinary share at 30 June 2016 was £4.66. The highest and lowest market values per ordinary share during the half-year to 30 June 2016 were £5.22 and £4.16. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the relevant date. Under the Securities and Futures Ordinance of Hong Kong, the options are categorised as unlisted physically settled equity derivatives.

Awards of Restricted Shares
HSBC Share Plan 2011
Vesting of Restricted Share awards is normally subject to the Director remaining an employee on the vesting date. The awards may vest at an earlier date in certain circumstances. Under the Securities and Futures Ordinance of Hong Kong, interests in Restricted Share awards are categorised as the interests of the beneficial owner.
 
 
 
 
 
 
 
 
HSBC Holdings ordinary shares
 
 
Date of
award
 
 
 
Year in
which
awards
may vest
 
Awards held at

 
Awards made during
the period to
30 Jun 2016
 
Awards vested during
the period to
30 Jun 2016
 
Awards held at

 
 
 
Footnotes
 
 
1 Jan
2016

 
Number

 
Monetary value

 
Number

 
Monetary value

 
30 Jun
20161

 
 
 
 
 
 
 
 
 
 
 
 
£000

 
 
 
£000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stuart Gulliver
 
11 Mar 2013
 
2
 
2018
 
92,185

 
-

 
-

 
-

 
-

 
95,205

 
 
10 Mar 2014
 
3
 
2015-2017
 
66,016

 
-

 
-

 
34,340

 
153

 
33,871

 
 
2 Mar 2015
 
4
 
2016-2018
 
71,004

 
-

 
-

 
24,210

 
110

 
49,154

 
 
29 Feb 2016
 
5
 
2016
 
-

 
45,897

 
211

 
45,897

 
211

 
-

 
 
29 Feb 2016
 
6
 
2017-2019
 
-

 
68,845

 
317

 
-

 
-

 
71,099

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Iain Mackay
 
11 Mar 2013
 
2
 
2018
 
63,730

 
-

 
-

 
-

 
-

 
65,817

 
 
10 Mar 2014
 
3
 
2015-2017
 
38,671

 
-

 
-

 
20,116

 
90

 
19,841

 
 
2 Mar 2015
 
4
 
2016-2018
 
47,717

 
-

 
-

 
16,270

 
74

 
33,033

 
 
29 Feb 2016
 
5
 
2016
 
-

 
45,704

 
210

 
45,704

 
210

 
-

 
 
29 Feb 2016
 
6
 
2017-2019
 
-

 
68,556

 
315

 
-

 
-

 
70,801

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marc Moses
 
11 Mar 2013
 
2
 
2018
 
61,917

 
-

 
-

 
-

 
-

 
63,945

 
 
10 Mar 2014
 
3
 
2015-2017
 
38,668

 
-

 
-

 
20,114

 
90

 
19,839

 
 
2 Mar 2015
 
4
 
2016-2018
 
56,893

 
-

 
-

 
19,399

 
88

 
39,386

 
 
29 Feb 2016
 
5
 
2016
 
-

 
35,376

 
163

 
35,376

 
163

 
-

 
 
29 Feb 2016
 
6
 
2017-2019
 
-

 
53,065

 
244

 
-

 
-

 
54,802

1
Includes additional shares arising from scrip dividends.
2
Vesting of these awards is subject to satisfactory completion of the Deferred Prosecution Agreement with the US Department of Justice.
3
At the date of the award, 10 March 2014, the market value per share was £6.16. These deferred awards are subject to a six-month retention period upon vesting. On 10 March 2016, the second anniversary of the award, a further 33% of the award vested. On that date the market value per share was £4.46. The balance of the award will vest on the third anniversary of the award.
4
At the date of the award, 2 March 2015, the market value per share was £5.83. These deferred awards are subject to a six-month retention period upon vesting. On 14 March 2016, following the first anniversary of the award, 33% of the award vested. On that date the market value per share was £4.53. On the second anniversary of the award a further 33% of the award will vest and the balance will vest on the third anniversary of the award.
5
The non-deferred award vested immediately on 29 February 2016. The shares (net of tax) are subject to a six-month retention period. At the date of vesting, the market value per share was £4.60.
6
At the date of the award, 29 February 2016, the market value per share was £4.60. These deferred awards are subject to a six-month retention period upon vesting. On the first anniversary of the award 33% of the award will vest, a further 33% of the award will vest on the second anniversary and the balance will vest on the third anniversary of the award.


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142

Shareholder information (continued)

Conditional awards under the Group Performance Share Plan
HSBC Share Plan 2011
The Group Performance Share Plan ('GPSP') is a long-term incentive plan governed by the rules of the HSBC Share Plan 2011. Vesting of GPSP awards is normally subject to the Director remaining an employee on the vesting date. Any shares (net of tax) which the Director becomes entitled to on the vesting date are subject to a retention requirement until cessation of employment. Under the Securities and Futures Ordinance of Hong Kong, interests in awards are categorised as beneficial.
 
 
 
 
 
 
 
 
HSBC Holdings ordinary shares
 
 
Date of
award
 
 
 
Year in
which
awards
may vest
 
Awards
held at

 
Awards made during
the period to
30 Jun 2016
 
Awards vested during
the period to
30 Jun 2016
 
Awards
held at

 
 
 
Footnotes
 
 
1 Jan
2016

 
Number

 
Monetary value

 
Number

 
Monetary value

 
30 Jun
20161

 
 
 
 
 
 
 
 
 
 
 
 
£000

 
 
 
£000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stuart Gulliver
 
23 Jun 2011
 
2
 
2016
 
482,292

 
-

 
-

 
498,322

 
2,257

 
-

 
 
12 Mar 2012
 
 
 
2017
 
818,298

 
-

 
-

 
-

 
-

 
845,098

 
 
11 Mar 2013
 
 
 
2018
 
472,750

 
-

 
-

 
-

 
-

 
488,234

 
 
10 Mar 2014
 
 
 
2019
 
657,621

 
-

 
-

 
-

 
-

 
679,159

 
 
2 Mar 2015
 
 
 
2020
 
387,638

 
-

 
-

 
-

 
-

 
400,334

 
 
29 Feb 2016
 
3
 
2021
 
-

 
421,232

 
1,938

 
-

 
-

 
435,027

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Iain Mackay
 
23 Jun 2011
 
2
 
2016
 
134,836

 
-

 
-

 
139,318

 
631

 
-

 
 
12 Mar 2012
 
 
 
2017
 
152,748

 
-

 
-

 
-

 
-

 
157,751

 
 
11 Mar 2013
 
 
 
2018
 
220,617

 
-

 
-

 
-

 
-

 
227,842

 
 
10 Mar 2014
 
 
 
2019
 
385,215

 
-

 
-

 
-

 
-

 
397,831

 
 
2 Mar 2015
 
 
 
2020
 
207,632

 
-

 
-

 
-

 
-

 
214,432

 
 
29 Feb 2016
 
3
 
2021
 
-

 
235,654

 
1,084

 
-

 
-

 
243,371

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marc Moses
 
23 Jun 2011
 
2
 
2016
 
125,190

 
-

 
-

 
129,351

 
586

 
-

 
 
12 Mar 2012
 
 
 
2017
 
425,514

 
-

 
-

 
-

 
-

 
439,450

 
 
11 Mar 2013
 
 
 
2018
 
245,829

 
-

 
-

 
-

 
-

 
253,881

 
 
10 Mar 2014
 
 
 
2019
 
385,177

 
-

 
-

 
-

 
-

 
397,792

 
 
2 Mar 2015
 
 
 
2020
 
207,632

 
-

 
-

 
-

 
-

 
214,432

 
 
29 Feb 2016
 
3
 
2021
 
-

 
235,654

 
1,084

 
-

 
-

 
243,371

1
Includes additional shares arising from scrip dividends.
2
On 15 March 2016, the deferred awards granted in 2011 vested. On that date the market value per share was £4.53.
3
At the date of award, 29 February 2016, the market value per share was £4.60.
No Directors held any short position (as defined in the Securities and Futures Ordinance of Hong Kong) in the shares or debentures of HSBC Holdings and its associated corporations. Save as stated above, none of the Directors had an interest in any shares or debentures of HSBC Holdings or any associates at the beginning or at the end of the period, and none of the Directors or members of their immediate families were awarded or exercised any right to subscribe for any shares or debentures in any HSBC corporation during the period. Since 30 June 2016, the interests of each of the following Directors have increased by the number of HSBC Holdings ordinary shares shown against their name:
Increase in Directors' interests since 30 June 2016
 
 
HSBC Holdings
ordinary shares

Footnotes
Beneficial owner
 
 
 
 
 
 
 
Kathleen Casey
 
130

1, 2
Henri de Castries
 
244

2
Douglas Flint
 
108

3
Stuart Gulliver
 
48,938

4
Sam Laidlaw
 
597

2
Iain Mackay
 
22,607

4
Heidi Miller
 
60

1, 2
Marc Moses
 
27,286

4
Paul Walsh
 
79

2
1
Comprises interests in ADSs, which are categorised as equity derivatives under Part XV of the Securities and Futures Ordinance of Hong Kong. Each ADS represents five HSBC Holdings ordinary shares.
2
Additional shares arising from scrip dividends.
3
Comprises the acquisition of shares in the HSBC Holdings UK Share Incentive Plan through regular monthly contributions (30 shares) and the automatic reinvestment of dividend income on shares held in the HSBC Holdings UK Share Incentive Plan (78 shares).
4
Comprises scrip dividend on Restricted Share awards and GPSP awards granted under the HSBC Share Plan 2011.

HSBC HOLDINGS PLC
143

2
Employee share plans
Share options and discretionary awards of shares are granted under HSBC share plans to help align the interests of employees with those of shareholders. The following are particulars of outstanding options, including those held by employees working under employment contracts that are regarded as 'continuous contracts' for the purposes of the Hong Kong Employment Ordinance. The options were granted for nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services, or in excess of the individual limit for each share plan. No options were cancelled by HSBC during the period.
A summary, for each plan, of the total number of options which were granted, exercised or lapsed during the period is shown in the following tables. Particulars of options held by Directors of HSBC Holdings are set out on page 141. Further details required to be disclosed pursuant to Chapter 17 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited are available on our website at www.hsbc.com, and on the website of The Stock Exchange of Hong Kong Limited at www.hkex.com.hk. Copies may be obtained upon request from the Group Company Secretary, 8 Canada Square, London E14 5HQ.
All-employee share plans
The HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International are all-employee share plans under which eligible employees have been granted options to acquire HSBC Holdings ordinary shares. There will be no further grant of options under the HSBC Holdings Savings-Related Share Option Plan: International; the final grant was in 2012. The HSBC International Employee Share Purchase Plan was introduced in 2013 and now includes employees based in 25 jurisdictions.
For options granted under the HSBC Holdings Savings-Related Option Plan, employees make contributions of up to £500 each month over a period of three or five years which may be used within six months following the third or fifth anniversary of the commencement of the relevant savings contract, at the employee's election, to exercise the options. Alternatively, the employee may elect to have the savings, plus (where applicable) any interest or bonus, repaid in cash. In the case of redundancy, retirement including on grounds of injury or ill health, the transfer of the employing business to another party, or a change of control of the employing company, options may be exercised before completion of the relevant savings contract. In certain circumstances, the exercise period of options granted under the all-employee share plans may be extended, for example, on the death of a participant the executors may exercise the option up to six months beyond the normal exercise period.
The terms set out in the preceding paragraph also applied to options granted up to April 2012 under the HSBC Holdings Savings-Related Share Option Plan: International with the exception that contributions were capped at the equivalent of £250.
Under the HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International the option exercise price has been determined by reference to the average market value of the ordinary shares on the five business days immediately preceding the invitation date, then applying a discount of 20%. Where applicable, the US dollar, Hong Kong dollar and euro exercise prices were converted from the sterling exercise price at the applicable exchange rate on the working day preceding the relevant invitation date. The HSBC Holdings Savings-Related Share Option Plan will terminate on 23 May 2025 unless the Directors resolve to terminate the plan at an earlier date.
HSBC Holdings All-employee Share Option Plans
 
 
 
 
 
 
 
HSBC Holdings ordinary shares
Dates of award
 
Exercise price
 
Exercisable
 
 
At
1 Jan 2016

 
Granted in period

 
Exercised in period

 
Lapsed in period

 
At
30 Jun 2016

from
 
to
 
from
 
to
 
from
 
to
Footnotes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings-Related Share Option Plan
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21 Apr 2010
 
22 Sep
2015
 
(£)
4.0472
 
(£)
5.4738
 
1 Aug 2015
 
30 April 2021
 
 
71,709,819

 
-

 
951,619

 
8,930,274

 
61,827,926

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings-Related Share Option Plan: International
2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21 Apr
2010
 
24 Apr
2012
 
(£)
4.4621
 
(£)
5.4573
 
1 Aug 2014
 
31 Jan
2018
 
 
1,130,991

 
-

 
333,065

 
258,887

 
539,039

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21 Apr
2010
 
24 Apr
2012
 
($)
7.1456
 
($)
8.2094
 
1 Aug 2014
 
31 Jan
2018
 
 
665,445

 
-

 
13,569

 
415,504

 
236,372

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21 Apr
2010
 
24 Apr
2012
 
(€)
5.3532
 
(€)
6.0657
 
1 Aug 2015
 
31 Jan
2018
 
 
153,610

 
-

 
23,777

 
19,553

 
110,280

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21 Apr
2010
 
24 Apr
2012
 
(HK$)
55.4701
 
(HK$)
63.9864
 
1 Aug
2015
 
31 Jan
2018
 
 
1,114,830

 
-

 
60,141

 
505,889

 
548,800

1
The weighted average closing price of the shares immediately before the dates on which options were exercised was £4.79.
2
The weighted average closing price of the shares immediately before the dates on which options were exercised was £4.91.

HSBC HOLDINGS PLC
144

Shareholder information (continued)

3
Notifiable interests in share capital
At 30 June 2016, HSBC Holdings had received the following notification of major holdings of voting rights pursuant to the requirements of Rule 5 of the Disclosure Guidance and Transparency Rules:
•
BlackRock, Inc. gave notice on 24 May 2016 that on 23 May 2016 it had an indirect interest in HSBC Holdings ordinary shares of 1,141,129,047; qualifying financial instruments with 19,267,029 voting rights that may be acquired if the instruments are exercised or converted; and financial instruments with similar economic effect to qualifying financial instruments which refer to 7,029,186 voting rights, each representing 5.75%, 0.09% and 0.03%, respectively, of the total voting rights at that date.
At 30 June 2016, as recorded in the register maintained by HSBC Holdings pursuant to section 336 of the Securities and Futures Ordinance of Hong Kong:
•
JPMorgan Chase & Co. gave notice on 25 May 2016 that on 23 May 2016 it had the following interests in HSBC Holdings ordinary shares: a long position of 930,672,268 shares; a short position of 159,394,496 shares; and a lending pool of 536,945,956 shares, each representing 4.69%, 0.80% and 2.71%, respectively, of the ordinary shares in issue at that date. Since 30 June 2016, JPMorgan Chase & Co. gave notice on 6 July 2016 that on 1 July 2016 it had the following interests in HSBC Holdings ordinary shares: a long position of 972,489,499 shares; a short position of 224,324,049 shares; and a lending pool of 509,817,402 shares, each representing 4.90%, 1.13% and 2.57%, respectively, of the ordinary shares in issue at that date.
•
BlackRock, Inc. gave notice on 23 May 2016 that on 19 May 2016 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,285,704,498 shares and a short position of 5,613,912 representing 6.49% and 0.03%, respectively, of the ordinary shares in issue at that date.
4
Dealings in HSBC Holdings listed securities
Except for dealings as intermediaries by subsidiaries of HSBC Holdings, neither HSBC Holdings nor any of its subsidiaries purchased, sold or redeemed any of its securities listed on the Stock Exchange of Hong Kong Limited during the half-year ended 30 June 2016.
5
First interim dividend for 2016
The first interim dividend for 2016 of $0.10 per ordinary share was paid on 6 July 2016.
6
Second interim dividend for 2016
On 3 August 2016, the Directors declared a second interim dividend for 2016 of $0.10 per ordinary share. It will be payable on 28 September 2016 to holders of record on 12 August 2016 on the Principal Register in the United Kingdom, and the Hong Kong and Bermuda Overseas Branch Registers. The dividend will be payable in US dollars, sterling or Hong Kong dollars, or a combination of these currencies, at the forward exchange rates quoted by HSBC Bank plc in London at or about 11.00am on 19 September 2016. A scrip dividend will also be offered. Particulars of these arrangements will be sent to shareholders on or about 25 August 2016 and elections must be received by 14 September 2016.
The dividend will be payable on ordinary shares held through Euroclear France, the settlement and central depositary system for Euronext Paris, on 28 September 2016 to the holders of record on 12 August 2016. The dividend will be payable by Euroclear France in euros, at the forward exchange rate quoted by HSBC France on 19 September 2016, or as a scrip dividend. Particulars of these arrangements will be announced through Euronext Paris on 5 August 2016, 19 August 2016 and 19 September 2016.
The dividend will be payable on American Depositary Shares ('ADS'), each of which represents five ordinary shares, on 28 September 2016 to holders of record on 12 August 2016. The dividend of $0.50 per ADS will be payable by the depositary in US dollars or as a scrip dividend of new ADSs. Elections must be received by the depositary on or before 9 September 2016. Alternatively, the cash dividend may be invested in additional ADSs by participants in the dividend reinvestment plan operated by the depositary.
Ordinary shares will be quoted ex-dividend in London, Hong Kong, Paris and Bermuda on 11 August 2016. The ADSs will be quoted ex-dividend in New York on 10 August 2016.
Any person who has acquired ordinary shares registered on the Principal Register in the United Kingdom, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register but who has not lodged the share transfer with the Principal Registrar, the Hong Kong or Bermuda Branch Registrar should do so before 4.00pm local time on 12 August 2016 in order to receive the dividend.
Ordinary shares may not be removed from or transferred to the Principal Register in the United Kingdom, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 12 August 2016. Any person wishing to remove ordinary shares to or from each register must do so before 4.00pm local time on 11 August 2016.
Transfers of ADSs must be lodged with the depositary by 12 noon on 12 August 2016 in order to receive the dividend.

HSBC HOLDINGS PLC
145

7
Proposed interim dividends for 2016
The Board has adopted a policy of paying quarterly dividends on the ordinary shares, under which it is intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. The proposed timetables for dividends payable on the ordinary shares in respect of 2016 that have not yet been declared are as follows:
 
 
Footnotes
Third interim
dividend for 2016
 
Fourth interim
dividend for 2016
 
 

 
 
 
Announcement
 

3 Oct 2016
 
21 Feb 2017
ADSs quoted ex-dividend in New York
 

19 Oct 2016
 
22 Feb 2017
Shares quoted ex-dividend in London, Hong Kong, Paris and Bermuda
 

20 Oct 2016
 
23 Feb 2017
Record date in London, Hong Kong, New York, Paris and Bermuda
 
1
21 Oct 2016
 
24 Feb 2017
Payment date
 

6 Dec 2016
 
6 Apr 2017
1
Removals from or transfers to the Principal Register in the United Kingdom, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register will not be permitted on these dates.
8
Earnings release
An earnings release for the three-month period ending 30 September 2016 is expected to be issued on 7 November 2016.
9
Final results
The results for the year to 31 December 2016 are expected to be announced on 21 February 2017.
10
Corporate governance
Throughout the six months to 30 June 2016, HSBC Holdings has complied with the applicable code provisions of: The UK Corporate Governance Code issued by the Financial Reporting Council in September 2014; and the Hong Kong Corporate Governance Code set out in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited1. The UK Corporate Governance Code is available at www.frc.org.uk and the Hong Kong Corporate Governance Code is available at www.hkex.com.hk.
The Board has adopted a dealing code for transactions in HSBC Group securities by Directors ('Code for Dealing in HSBC Group Securities'). For the period under review, this code met the requirements of the FCA Listing Rules and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, save that The Stock Exchange of Hong Kong Limited has granted certain waivers from strict compliance with the Rules which take into account accepted practices in the UK, particularly in respect of employee share plans.
Following specific enquiry, each Director has confirmed that he or she has complied with the Code for Dealing throughout the period. All Directors have been routinely reminded of their obligations under the Code for Dealing in HSBC Group Securities.
There have been no material changes to the information disclosed in the Annual Report and Accounts 2015 in respect of the remuneration of employees, remuneration policies, bonus and share option plans and training schemes. Details of the number of employees are provided on page 28.
1
The Group Risk Committee is responsible for the oversight of internal control (other than internal controls over financial reporting) and risk management systems (Hong Kong Corporate Governance Code provision C.3.3 paragraphs (f), (g) and (h)). In the absence of the Group Risk Committee, these matters would be the responsibility of the Group Audit Committee.
11
Changes in Directors' details
Changes in Directors' details since the date of the Annual Report and Accounts 2015 which are required to be disclosed pursuant to Rule 13.51(2) and Rule 13.51B(1) of the Hong Kong Listing Rules are set out below.
David Nish, 56
Independent non-executive Director
Appointed to the Board: 1 May 2016.
Member of the Group Audit Committee since 1 May 2016.
Skills and experience: David served as Chief Executive Officer of Standard Life plc between 2010 and 2015, having joined as Group Finance Director in 2006. David led the investment in technology, the complementary acquisitions and the disposal of the group's Canadian operations. Other former appointments include Group Finance Director of Scottish Power plc and partner of Price Waterhouse. He is a qualified chartered accountant.
Current appointments include: A non-executive director of Vodafone Group plc, London Stock Exchange Group plc, UK Green Investment Bank plc and Zurich Insurance Group.

HSBC HOLDINGS PLC
146

Shareholder information (continued)

Henri de Castries
Henri de Castries will step down from his position as Chairman and CEO of AXA from 1 September 2016.
Douglas Flint
Mentor at Chairman Mentors International (CMi) since the end of May 2016.
Sam Laidlaw
Chair of the Saïd Business School's Business Advisory Council and a member of its School Board since 27 June 2016.
Rachel Lomax
Member of the Group Audit Committee until 20 April 2016.
Pauline van der Meer Mohr
Member of the Group Nomination Committee since 22 April 2016.
Paul Walsh
Member of the Group Nomination Committee since 1 May 2016.
Irene Lee
Member of the Risk Committee and Chairman of the Audit Committee for The Hongkong and Shanghai Banking Corporation Limited since 18 April 2016.
Rona Fairhead and Sir Simon Robertson retired from the Board at the conclusion of the HSBC Holdings AGM on 22 April 2016.
12
Going concern basis
As mentioned in Note 1 Basis of preparation on page 107, the financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources.
In particular, HSBC's principal activities, business and operating models, strategic direction and top and emerging risks are addressed in the 'Overview' section; a financial summary, including a review of the consolidated income statement and consolidated balance sheet, is provided in the 'Interim Management Report' section; HSBC's objectives, policies and processes for managing credit, liquidity and market risk are described in the 'Risk' section of the Annual Report and Accounts 2015; and HSBC's approach to capital management and allocation is described in the 'Capital' section of the Annual Report and Accounts 2015.
13
Telephone and online share dealing service
For shareholders on the Principal Register who are resident in the UK, with a UK postal address, and who hold an HSBC Bank plc personal current account, the HSBC InvestDirect share dealing service is available for buying and selling HSBC Holdings ordinary shares. Details are available from: HSBC InvestDirect, Forum 1, Parkway, Whiteley PO15 7PA; or UK telephone: 03456 080848, or from an overseas telephone: +44 (0) 1226 261090; or website: www.hsbc.co.uk/shares.
14
Stock symbols
HSBC Holdings plc ordinary shares trade under the following stock symbols:
London Stock Exchange    HSBA
Hong Kong Stock Exchange    5
New York Stock Exchange (ADSs)    HSBC
Euronext Paris    HSB
Bermuda Stock Exchange    HSBC.BH

HSBC HOLDINGS PLC
147

15
Copies of the Interim Report 2016 and shareholder enquiries and communications
Further copies of the Interim Report 2016 may be obtained from External Affairs, HSBC Holdings plc, 8 Canada Square, London E14 5HQ, United Kingdom; from Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong; or from Investor Relations, HSBC North America, 1421 West Shure Drive, Suite 100, Arlington Heights, Illinois 60004. The Interim Report 2016 may also be downloaded from the HSBC website, www.hsbc.com.
Shareholders may at any time choose to receive corporate communications in printed form or to receive notifications of their availability on HSBC's website. To receive future notifications of the availability of a corporate communication on HSBC's website by email, or to revoke or amend an instruction to receive such notifications by email, go to www.hsbc.com/ecomms. If you provide an email address to receive electronic communications from HSBC, we will also send notifications of your dividend entitlements by email. If you received a notification of the availability of this document on HSBC's website and would like to receive a printed copy of it or, if you would like to receive future corporate communications in printed form, please write or send an email (quoting your shareholder reference number) to the appropriate Registrar at the address given below. Printed copies will be provided without charge.
Any enquiries relating to your shareholdings on the share register, for example transfers of shares, change of name or address, lost share certificates or dividend cheques, should be sent to the Registrar at the address given below. The Registrar offers an online facility, Investor Centre, which enables shareholders to manage their shareholding electronically.
Principal Register
Hong Kong Overseas Branch Register
Bermuda Overseas Branch Register
 
 
 
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Computershare Hong Kong Investor
Services Limited
Rooms 1712-1716, 17th Floor
Hopewell Centre
183 Queen's Road East
Hong Kong
Investor Relations Team
HSBC Bank Bermuda Limited
6 Front Street
Hamilton HM 11
Bermuda
Telephone: +44 (0) 370 702 0137
Email via website:
www.investorcentre.co.uk/contactus

Investor Centre:
www.investorcentre.co.uk
Telephone: +852 2862 8555
Email:
hsbc.ecom@computershare.com.hk

Investor Centre:
www.investorcentre.com/hk
Telephone: +1 441 299 6737
Email: hbbm.shareholder.services@hsbc.bm
 
 
Investor Centre:
www.investorcentre.co.uk/bm
Any enquiries relating to ADSs should be sent to the depositary at:
The Bank of New York Mellon
Depositary Receipts
PO Box 30170
College Station, TX 77842-3170
USA
Telephone (US): +1 877 283 5786
Telephone (international): +1 201 680 6825
Email: shrrelations@bnymellon.com
Website: www.computershare.com/us/contact/pages/default.aspx
Any enquiries relating to shares held through Euroclear France, the settlement and central depositary system for NYSE Euronext Paris, should be sent to the paying agent:
HSBC France
103, avenue des Champs Elysées
75419 Paris Cedex 08
France
Telephone: +33 1 40 70 22 56
Email: ost-agence-des-titres-hsbc-reims.hbfr-do@hsbc.fr
Website: www.hsbc.fr
A Chinese translation of this and future documents may be obtained on request from the Registrar. Please also contact the Registrar if you have received a Chinese translation of this document and do not wish to receive such translations in future.
Persons whose shares are held on their behalf by another person may have been nominated to receive communications from HSBC pursuant to section 146 of the UK Companies Act 2006 ('nominated person'). The main point of contact for a nominated person remains the registered shareholder (for example your stockbroker, investment manager, custodian or other person who manages the investment on your behalf). Any changes or queries relating to a nominated person's personal details and holding (including any administration thereof) must continue to be directed to the registered shareholder and not HSBC's Registrar. The only exception is where HSBC, in exercising one of its powers under the UK Companies Act 2006, writes to nominated persons directly for a response.

HSBC HOLDINGS PLC
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Shareholder information (continued)

Cautionary statement regarding forward-looking statements
This Interim Report 2016 contains certain forward-looking statements with respect to HSBC's financial condition, results of operations and business.
Statements that are not historical facts, including statements about HSBC's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'targets', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.
Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC's Directors, officers or employees to third parties, including financial analysts.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:
•
Changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks' policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status of public or private defined benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we serve.
•
Changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities;
 
initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms.
•
Factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; our success in addressing operational, legal and regulatory, and litigation challenges, notably compliance with the US DPA; and the other risks and uncertainties we identify in 'top and emerging risks' on pages 16 and 17.

Certain defined terms
Unless the context requires otherwise, 'HSBC Holdings' means HSBC Holdings plc and 'HSBC', the 'Group', 'we', 'us' and 'our' refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. When used in the terms 'shareholders' equity' and 'total shareholders' equity', 'shareholders' means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations '$m' and '$bn' represent millions and billions (thousands of millions) of US dollars, respectively.




HSBC HOLDINGS PLC
149

Abbreviations
Abbreviation
Brief description
1H15
First half of 2015
1H16
First half of 2016
1Q15
First quarter of 2015
1Q16
First quarter of 2016
2H15
Second half of 2015
2Q15
Second quarter of 2015
2Q16
Second quarter of 2016
A
 
ABS
Asset-backed security
ADS
American Depositary Share
AFS
Available for sale
AIEA
Average interest-earning assets
AML
Anti-money laundering
ARM
Adjustable-rate mortgage
AT1
Additional tier 1
B
 
Basel Committee
Basel Committee on Banking Supervision
Basel III
Basel Committee's reforms to strengthen global capital and liquidity rules
Bps
Basis points. One basis point is equal to one hundredth of a percentage point
BoCom
Bank of Communications Co., Limited, one of China's largest banks
BRRD
Bank Recovery and Resolution Directive (EU)
BSA
Bank Secrecy Act (US)
BSM
Balance Sheet Management
BVI
British Virgin Islands
C
 
CA$
Canadian dollars
CAPM
Capital asset pricing model
CCAR
Federal Reserve Comprehensive Capital Analysis and Review
CCB
Capital conservation buffer
CCP
Central counterparty
CCR
Counterparty credit risk
CCyB
Countercyclical capital buffer
CEA
Commodity Exchange Act (US)
CET1
Common equity tier 1
CGUs
Cash-generating units
CIUs
Collective investment undertakings
CMB
Commercial Banking, a global business
CMC
Capital maintenance charge
CML
Consumer and Mortgage Lending (US)
CRD
Capital Requirements Directive
CRR
Capital Requirements Regulation
CRS
Card and Retail Services
CVA
Credit valuation adjustment
D
 
DFAST
Dodd-Frank Act Stress Testing
DoJ
Department of Justice (US)
DPA
Deferred prosecution agreement (US)
DPF
Discretionary participation feature of insurance and investment contracts
DVA
Debit value adjustment
E
 
EBA
European Banking Authority
EU
European Union
Euribor
European Interbank Offered Rate
F
 
FCA
Financial Conduct Authority (UK)

HSBC HOLDINGS PLC
150

Shareholder information (continued)

FOS
Financial Ombudsman Service
FPC
Financial Policy Committee (UK)
FRB
Federal Reserve Board (US)
FTE
Full-time equivalent staff
FuM
Funds under management
G
 
GB&M
Global Banking and Markets, a global business
GDP
Gross domestic product
GLCM
Global Liquidity and Cash Management
GPB
Global Private Banking, a global business
GPSP
Group Performance Share Plan
Group
HSBC Holdings together with its subsidiary undertakings
G-SIB
Global systemically important bank
G-SII
Global systemically important institution
GTRF
Global Trade and Receivables Finance
H
 
HK$
Hong Kong dollar
HNAH
HSBC North America Holdings Inc.
Hong Kong
Hong Kong Special Administrative Region of the People's Republic of China
HQLA
High-quality liquid assets
HSBC
HSBC Holdings together with its subsidiary undertakings
HSBC Bank
HSBC Bank plc
HSBC Bank Middle East
HSBC Bank Middle East Limited
HSBC Bank USA
HSBC Bank USA, N.A., HSBC's retail bank in the US
HSBC Colombia
HSBC Bank (Colombia) S.A.
HSBC Finance
HSBC Finance Corporation, the US consumer finance company (formerly Household International, Inc.)
HSBC France
HSBC's French banking subsidiary, formerly CCF S.A.
HSBC Holdings
HSBC Holdings plc, the parent company of HSBC
HSBC USA
The sub-group, HSBC USA Inc and HSBC Bank USA, consolidated for liquidity purposes
HSI
HSBC Securities (USA) Inc.
HSSL
HSBC Securities Services (Luxembourg)
HTIE
HSBC Institutional Trust Services (Ireland) Limited
HTM
Held to maturity
I
 
IAS
International Accounting Standards
IASB
International Accounting Standards Board
IFRSs
International Financial Reporting Standards
ILAA
Individual liquidity adequacy assessment
ILR
Inherent liquidity risk
Industrial Bank
Industrial Bank Co. Limited, a national joint-stock bank in mainland China in which Hang Seng Bank Limited has a shareholding
Investor Update
The Investor Update in June 2015
IRB
Internal ratings-based
ISDA
International Swaps and Derivatives Association
L
 
LCR
Liquidity coverage ratio
LFRF
Liquidity and funding risk management framework
LGD
Loss given default
Libor
London Interbank Offered Rate
LICs
Loan impairment charges and other credit risk provisions
LTV
Loan to value
M
 
Madoff Securities
Bernard L Madoff Investment Securities LLC
Mainland China
People's Republic of China excluding Hong Kong and Macau
MBS
US mortgage-backed security
MDB
Multilateral development banks
MENA
Middle East and North Africa
MREL
EU minimum requirements for own funds and eligible liabilities

HSBC HOLDINGS PLC
151

 
 
N
 
NII
Net interest income
NSFR
Net stable funding ratio
O
 
OCC
Office of the Comptroller of the Currency (US)
ORMF
Operational risk management framework
O-SII
Other systemically important institution
P
 
PBT
Profit before tax
PPI
Payment protection insurance product
PRA
Prudential Regulation Authority (UK)
Premier
HSBC Premier, HSBC's premium personal global banking service
PSE
Public sector entities
PVIF
Present value of in-force long-term insurance business and long-term investment contracts with DPF
PwC
PricewaterhouseCoopers LLP and its network of firms
 
 
Q
 
QIS
Quantitative impact study
R
 
RAS
Risk Appetite Statement
RBWM
Retail Banking and Wealth Management, a global business
Repo
Sale and repurchase transaction
Reverse repo
Security purchased under commitments to sell
RMB
Renminbi
RMBS
Residential mortgage-backed securities
RNIV
Risk not in VaR
RoE
Return on equity
RoRWA
Return on average risk-weighted assets
RQFII
Renminbi qualified foreign institutional investor
RTS
Regulatory technical standards
RWAs
Risk-weighted assets
S
 
ServCo group
Separately incorporated group of service companies planned in response to UK ring-fencing proposals
SFT
Securities financing transactions
SPE
Special purpose entity
T
 
T1
Tier 1
T2
Tier 2
The Hongkong and Shanghai Banking Corporation
The Hongkong and Shanghai Banking Corporation Limited, the founding member of HSBC
TLAC
Total loss absorbing capacity
U
 
UAE
United Arab Emirates
UK
United Kingdom
US
United States of America
US DPA
Five-year deferred prosecution agreement with the Department of Justice and others (US)
US run-off portfolio
Includes the run-off CML residential mortgage loan portfolio of HSBC Finance on an IFRSs management basis
V
 
VaR
Value at risk
VIU
Value in use

Glossary
Terminology used in this Interim Report is consistent with that used in our Annual Report and Accounts 2015, and Capital and Risk Management Pillar 3 disclosures 2015, where a glossary of terms can be found.


HSBC HOLDINGS PLC
152

Shareholder information (continued)

Index
A
Abbreviations 150
Accounting
future developments 107
policies 107
Adjusted jaws 15
Adjusted performance 13, 18
Adjusted results 13
Anti-bribery and corruption 83
Anti-money laundering
investigations 132
sanctions 83
Areas of special interest 60
Asia
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 47, 50, 73
cost efficiency ratios 47
customer accounts 47
impaired loans 72
impairment allowances/charges 66, 67
loans and advances 47, 62, 69, 70
net operating income 109
profit before tax 47, 50, 109
renegotiated loans 65
risk-weighted assets 46
snapshot 5
staff numbers 47
Asset-backed securities 74
Assets
by geographical region 46
by global business 35, 43
charged as security 123
held for sale 43, 63, 122
maturity analysis 126
movement in 32
risk-weighted 2
total 2, 31, 103
trading 110
Associates and joint ventures (income from) 14, 30, 123
adjusted/reported reconciliation 53, 56
Auditor's review report 140

B
Backtesting 79
Balance sheet
consolidated 31, 103
data 43
insurance manufacturing subsidiaries 85
movement 32
Balance Sheet Management 80
Bank of Communications 124
Basis of preparation 35, 46, 107
Brazil 20, 123
Brazilian labour and fiscal claims 129, 136

C
Capital
commitments 129
management 88
overview 88
ratios 88
regulatory 32, 88
source and application of regulatory capital 90
subordinated loan 33
total regulatory 88
transitional own funds disclosure 99
Cash flows
consolidated statement 104
Cautionary statement regarding forward-looking statements 149
Client assets 41
Collateral 123
Combined customer lending and deposits 32
 
Commercial Banking 38
adjusted/reported reconciliation 56
cost efficiency ratios 30
management view 37
snapshot 4
Commitments 129
Compliance risk 83
Compliance with IFRSs 107
Composition of Group (changes in) 107
Conduct of business 83
Contents 1
Contingent liabilities, contractual commitments and guarantees 129
Copies of the Interim Report 148
Corporate governance 146
Counterparty risk 93
Credit default swap regulatory investigation and litigation 136
Credit quality 63
Credit risk 61
risk-weighted assets 89
Customer accounts
by country 33
by global business 43
Customer lending and deposits (combined) 32

D
Dealings in HSBC Holdings shares 145
Deferred tax 129
Defined terms 149
Derivatives 120
by product contract type 120
credit 120
hedging instruments 121
trading 120
Directors
Board changes 7
changes in details 146
interests 141
responsibility statement 139
Disposal groups 123
Dividends 108, 145, 146

E
Earnings per share 101, 109
Earnings release 146
Equity 2, 31, 103, 105
movement in 32
return on 15
Estimates and judgements 107
Europe
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 47, 50, 73
cost efficiency ratios 47
customer accounts 47
impaired loans 72
impairment allowances/charges 66, 67
loans and advances 47, 62, 69, 70
net operating income 109
profit before tax 47, 50, 109
renegotiated loans 65
risk-weighted assets 46
snapshot 5
staff numbers 47
Events after the balance sheet date 138

F
Fair values
adjustments 111
movements 113
of derivatives 120
of financial instruments at fair value 111
of financial instruments not at fair value 119
significant unobservable assumptions 115



HSBC HOLDINGS PLC
153

valuation bases 112
Fee income (net) 21
'FIFA' related investigations 136
Final results 146
Financial assets
designated at fair value 119
Financial crime compliance 84
Financial highlights 2
Financial instruments
at fair value 111
credit quality 63
net income from 23
not at fair value 119
Financial investments 121
Financial overview 12
Financial summary 18
Footnotes 59, 87, 100, 106
Forbearance 64
Foreign currency translation differences 18
Foreign exchange rates 32
investigations and litigation 136
Funding sources 77
Funds under management 52

G
Gains less losses from financial investments 24
significant items and currency translation 24
Geographical regions 46
Global Banking and Markets 39
adjusted/reported reconciliation 56
client-facing 39
cost efficiency ratios 30
fair value adjustments 111
management view 40
risk-weighted assets 10
snapshot 4
Global businesses 35
Global Private Banking 41
adjusted/reported reconciliation 56
cost efficiency ratios 30
snapshot 4
Global Standards 11
Glossary 152
Going concern 107, 147
Goodwill impairment 137
Group Chairman's Statement 6
Group Chief Executive's Review 8
Group performance by income and expense item 20
Guangdong loans 10

H
Held for sale 43, 63, 122
Highlights 2
Hiring practices investigation 136
HSBC Finance 70
HSBC Bank USA 70
HSBC Holdings 82

I
Impairment
allowances and charges 66, 69
by geographical region 66
charges and other credit risk provisions 27
constant currency/reported profit 72
impaired loans 64, 71, 72
Income from financial instruments designated at fair value (net) 23
Income statement
consolidated 19, 101
Information security 83
Insurance
asset and liability matching 84
balance sheet by type of contract 85
claims and benefits paid and movement in liabilities to
policyholders (net) 26
net insurance premium income 24
risk 86
 
Interest-earning assets 20
Interest expense 21
Interest income (net) 20
sensitivity 80
significant items and currency translation 20
Interest rate swap litigation 136
Interim Report 2016 138

L
Latin America
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 49, 50, 73
cost efficiency ratios 49
customer accounts 49
impaired loans 72
impairment allowances/charges 66
loans and advances 49, 62, 69, 70
net operating income 109
profit before tax 49, 50, 109
renegotiated loans 65
risk-weighted assets 44
snapshot 5
staff numbers 49
Legal proceedings 130
Leverage ratio 90
Liabilities
maturity analysis 126
movement in 32
total 31, 103
trading 125
Libor investigation 134
Liquidity and funding 75
depositor concentration 76
liquid assets 76
liquidity coverage ratio 75
management 75
net stable funding ratio 76
risk management framework 75
term funding 76
Loans and advances
by country/region 62, 73
by credit quality 63
by global business 43
by industry sector 62, 71
exposure 62
held for sale 43
impaired 64, 72
personal lending 70
renegotiated 64
wholesale lending 69
Loan impairment charges and other credit risk provisions 19, 27, 66
adjusted 14
adjusted/reported reconciliation 53, 56
on held for sale 63

M
Madoff 130
Margin 20
Market risk 78
measures applicable to parent 82
Middle East and North Africa
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 48, 50, 73
cost efficiency ratios 48
customer accounts 48
impaired loans 72
impairment allowances/charges 66
loans and advances 48, 62, 69, 70
net operating income 109
profit before tax 48, 50, 109
renegotiated loans 65
risk-weighted assets 46
snapshot 5



HSBC HOLDINGS PLC
154

Shareholder information (continued)

staff numbers 48
Monitor 60
Mortgage-related investigations (US) 131
Mortgage securitisation activity (US) 132
Mossack Fonseca & Co. 134

N
NAFTA area revenues 10
Non-GAAP measures 18
Non-trading portfolios 79
North America
adjusted/reported reconciliation 53
assets 46
balance sheet data 110
by country 48, 50, 73
cost efficiency ratios 48
customer accounts 48
impaired loans 72
impairment allowances/charges 66, 67
loans and advances 48, 62, 69, 70
net operating income 109
profit before tax 48, 50, 109
renegotiated loans 65
risk-weighted assets 46
snapshot 5
staff numbers 48
Notifiable interests in share capital 145

O
Oil and gas 61
Operating expenses 28
adjusted/reported reconciliation 53, 56
by geographical region 47 to 49
by global business 36 to 42
costs-to-achieve 28
change-the-bank 28
run-the-bank 28
significant items and currency translation 29
Operating income (other) 25
significant items and currency translation 25
Operational risk 83
'Other' segment 42
adjusted/reported reconciliation 56
Outlook 7, 9

P
Payment protection insurance 128
Performance
adjusted 13, 18
highlights 2
management 34
reported 12
Personal lending 70
Precious metals litigation 135
Preferred securities 32
Profit before tax
adjusted 2, 3, 9, 13
adjusted/reported reconciliation 53, 56
attributable 19, 101
by country 50
by geographical region 46, 47 to 49
by global business 35 to 41, 42
consolidated 101
reported 2, 3, 12
Provisions 128
PVIF 25

R
Ratios
capital (total) 88
common equity tier 1 2, 88
core tier 1 ratio 88
cost efficiency 30, 47 to 49
customer advances to customer accounts 32
earnings per share 101
leverage 90
 
LICs to advances 14
return on average risk-weighted assets 3, 34
return on equity 3, 15
shareholders' equity to total assets 31
Regulatory
balance sheet 97
capital 88
developments 96
disclosures 92
policy 7
risks 60
source and application 90
stress testing 60
Related parties 138
Reported results 12
Reputational risk 84
Responsibility statement 139
Retail Banking and Wealth Management 36
adjusted/reported reconciliation 56
cost efficiency ratios 30
management view 37
Principal RBWM 37
snapshot 4
Revenue
adjusted/reported reconciliation 13, 14, 53, 56
by geographical region 46 to 49
by global business 35 to 45
items (significant) 53 to 58
Review of performance 6, 8
Risks
compliance 83
counterparty credit risk 93
credit 61, 89
data management 17
economic outlook 17
foreign exchange 82
fraud 83
geopolitical 17
information security 83
insurance operations 84
interest rate repricing gap 82
liquidity and funding 75
managing risk 16
market 78
model 17
interest rate risk in the banking book 80
operational 83
regulatory 60
reputational 84
third parties 17, 83
top and emerging 16
Risk-weighted assets 2, 3, 34, 89
adjusted/reported reconciliation 34
by geographical region 46, 92
by global business 35, 92

S
Securities litigation 130
Securitisation 74
Segmental analysis 109
Sensitivity of capital and reserves 81
Sensitivity of fair values 116
Sensitivity of net interest income 80
Share capital 32
Share capital - notifiable interests 145
Shareholder enquiries 148
Share option plans
Directors' interests 141
employee share plans 144
Significant items 18, 53
Snapshot
Global business 4
Regional 5
Spread 20
Staff numbers 28
Statement of changes in equity (consolidated) 105
Statement of comprehensive income (consolidated) 102
Stock symbols 147



HSBC HOLDINGS PLC
155

Strategic actions 10
Strategy 10
Stress testing 60

T
Targets 11, 15
Tax 19, 30, 104
US tax-related investigations 133
Telephone and online share-dealing service 147
Trading
assets 110
derivatives 120
income (net) 22
significant items and currency translation 23
liabilities 125
portfolios 78

U
UK Referendum on EU membership 7, 60

V
Value at risk 78, 79, 82

W
Whistleblowing 84
Wholesale lending 69

Y
Yield 20



HSBC HOLDINGS PLC
156


























 
This document comprises the Interim Report 2016 to shareholders and information contained herein has been filed on Form 6-K with the US Securities and Exchange Commission for HSBC Holdings plc and its subsidiary and associated undertakings.
HSBC HOLDINGS PLC
Incorporated in England with limited liability. Registered in England: number 617987

REGISTERED OFFICE AND GROUP HEAD OFFICE
8 Canada Square, London E14 5HQ, United Kingdom
Web: www.hsbc.com

© Copyright HSBC Holdings plc 2016
All rights reserved
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Holdings plc.
Published by Group Finance, HSBC Holdings plc, London
Designed by Addison Group, London (cover and 'Overview' section) and by Group Finance, HSBC Holdings plc, London (rest of the Interim Report)
Printed by Global Publishing Services, HSBC Bank plc, London; and by Global Publishing Services, The Hongkong and Shanghai Banking Corporation Limited, Hong Kong.

Photography
Cover, inside front cover to page 1, page 16: Getty Images
Group Chairman and Group Chief Executive by Charles Best


This information is provided by RNS
The company news service from the London Stock Exchange
 
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