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HSBC Bank plc (63AS)

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Tuesday 20 February, 2018

HSBC Bank plc

Annual Financial Report (Part 2 of 3)

RNS Number : 4506F
HSBC Bank plc
20 February 2018
 




Contents
 
Page
Strategic Report
 
Highlights
Purpose and strategy
Products and services
How we do business
Key performance indicators
Economic background and outlook
Financial summary
Risk overview
Report of the Directors
 
Risk
- Our conservative risk appetite
- Top and emerging risks
- Areas of special interest
- Risk management
- Other material risks
- Key developments and risk profile
Capital
- Capital management
- Capital overview
Corporate Governance Report
- Directors
- Company Secretary
- Board of Directors
- Directors' emoluments
- Board committees
- Internal control
- Employees
- Auditor
- Conflicts of interest and indemnification of directors
- Statement on going concern
- Disclosure of information to the auditor
- Statement of Directors' Responsibilities
Financial Statements
 
Independent Auditors' Report
Financial Statements
75
Notes on the Financial Statements
84

 
Presentation of Information
This document comprises the Annual Report and Accounts 2017 for HSBC Bank plc ('the bank') and its subsidiaries (together 'the group'). 'We', 'us' and 'our' refer to HSBC Bank plc together with its subsidiaries. It contains the Strategic Report, the Report of the Directors, the Statement of Directors' Responsibilities and Financial Statements, together with the Independent Auditors' Report, as required by the UK Companies Act 2006. References to 'HSBC' or 'the Group' within this document mean HSBC Holdings plc together with its subsidiaries.
HSBC Bank plc is exempt from publishing information required by The Capital Requirements Country-by-Country Reporting Regulations 2013, as this information is published by its parent, HSBC Holdings plc. This information will be available in June 2018 on HSBC's website: www.hsbc.com.
Pillar 3 disclosures for the group are also available on www.hsbc.com, under Investor Relations.
All narrative disclosures, tables and graphs within the Strategic Report and Report of the Directors are unaudited unless otherwise stated.
Our reporting currency is £ sterling.
Unless otherwise specified, all $ symbols represent US dollars.
Cautionary Statement Regarding Forward-
Looking Statements
This Annual Report and Accounts 2017 contains certain forward-looking statements with respect to the financial condition, results of operations and business of the group.
Statements that are not historical facts, including statements about the group's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC Bank plc makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statement.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement.

HSBC Bank plc Annual Report and Accounts 2017
1


Strategic Report | Highlights

Highlights
 
Footnotes
2017

2016

For the year (£m)
 
 
 
Profit before tax (reported basis)
 
2,370

874

Profit before tax (adjusted basis)
1
3,832

4,234

Net operating income before loan impairment charges and other credit risk provisions
2
13,052

13,305

Profit/(loss) attributable to shareholders of the parent company
 
1,809

(212
)
At year-end (£m)
 
 
 
Total equity attributable to shareholders of the parent company
 
43,462

39,930

Total assets
 
818,868

816,829

Risk-weighted assets
 
233,073

245,237

Loans and advances to customers (net of impairment allowances)
 
280,402

272,760

Customer accounts
 
381,546

375,252

Capital ratios (%)
3
 
 
Common equity tier 1
 
11.8

10.2

Tier 1
 
13.8

12.3

Total capital
 
16.9

15.7

Performance, efficiency and other ratios (annualised %)
 
 
 
Return on average ordinary shareholders' equity
4
4.2

(1.2
)
Return on average risk-weighted assets
 
1.0

0.4

Adjusted return on average risk-weighted assets
 
1.6

1.7

Cost efficiency ratio (reported basis)
5
78.2

90.3

Cost efficiency ratio (adjusted basis)
5
67.5

63.9

Jaws (adjusted basis)
6
(5.8
)
0.4

Ratio of customer advances to customer accounts
 
73.5

72.7

1
Adjusted performance is computed by adjusting reported results for the effect of significant items as detailed on pages 10 to 12.
2
Net operating income before loan impairment charges and other credit risk provisions is also referred to as revenue.
3
Capital ratios as detailed on the capital section on pages 56 to 58.
4
The return on average ordinary shareholders' equity is defined as profit attributable to shareholders of the parent company divided by the average total shareholders' equity.
5
Reported cost efficiency ratio is defined as total operating expenses (reported) divided by net operating income before loan impairment charges and other credit risk provisions (reported), while adjusted cost efficiency ratio is defined as total operating expenses (adjusted) divided by net operating income before loan impairment charges and other credit risk provisions (adjusted). Net operating income before loan impairment charges and other credit risk provisions (adjusted) is also referred to as revenue (adjusted).
6
Adjusted jaws measures the difference between adjusted revenue and adjusted cost growth rates.

2
HSBC Bank plc Annual Report and Accounts 2017


Purpose and strategy
Our purpose
The purpose of HSBC Bank plc is to connect customers to opportunities, enable businesses to thrive and economies to prosper and ultimately help people to fulfil their hopes and realise their ambitions.
Geographical presence
In the group, we operate in 18 countries. Our operating entities represent the group to customers, regulators, employees and other stakeholders. Our priority markets are the UK, France and Germany.
As at 31 December 2017, the bank had 625 branches in the United Kingdom, and 13 located in the Isle of Man and the Channel Islands. The bank and its subsidiaries had further banks, branches and offices in Armenia, Belgium, Czech Republic, France, Germany, Greece, Ireland, Israel, Italy, Luxembourg, Malta, The Netherlands, Poland, Russia, South Africa, Spain and Switzerland.
On 29 June 2017, HSBC Bank plc transferred its shareholding in HSBC Bank A.S. to HSBC Middle East Holdings B.V. (89.99%) and HSBC Bank Middle East Limited (10.01%). The transfer was made as a dividend in-specie to HSBC Holdings plc.
The results of HSBC Bank A.S. for the period up to the transfer are included in the group results. To the date of transfer, HSBC Bank A.S. contributed £116m operating income (2016: £356m), and incurred £10m in loan impairment and other charges
(2016: £108m) and £86m in operating expenses (2016: £324m). HSBC Bank A.S.'s contribution to the group's profit before tax in the year up the date of its transfer was £20m (2016: £76m loss).
As a result of the transfer, the total assets excluding goodwill of the group reduced by £4,831m and the total liabilities reduced by £4,265m. Total risk-weighted assets reduced by £4,080m and the common equity tier 1 reduced by £530m.
The transfer passes through equity as a dividend in-specie that reduces reserves by £643m. This comprises HSBC Bank A.S.'s net asset value of £566m plus attributable goodwill of £77m.
There was no gain or loss recognised in the group as a result of this transfer.
HSBC worldwide
The group is part of HSBC, which has approximately 229,000 employees working around the world to provide more than 37 million customers with a broad range of banking products and services to meet their financial needs.
HSBC values
HSBC values define who we are as an organisation and what makes us distinctive.
Open
We are open to different ideas and cultures and value diverse perspectives.
Connected
We are connected to our customers, communities, regulators and each other, caring about individuals and their progress.
Dependable
We are dependable, standing firm for what is right and delivering on commitments.
Our role in society
How we do business is as important as what we do. Our responsibilities to our customers, employees and shareholders as well as to wider society go far beyond simply being profitable.
We seek to build trusting and lasting relationships with our many stakeholders to generate value in society.
 
Our strategy
The group's strategy and strategic direction is embedded in HSBC's strategy, which aims to capture value from its international network.
Our strategy is built around long-term trends and reflects our distinctive advantages.
Long-term trends
Increasing global connectivity
The international flow of goods, services and finance continues to expand, aided by the development of technology and data in personal and commercial exchanges.
Distinctive advantages
Unrivalled global presence
We enable clients to participate in global growth opportunities and offer leading product capabilities to build deeper and more enduring relationships with businesses and individuals with international needs.
Universal banking model
We serve our banking customers through our four businesses, from individual savers to large multinational corporations. This universal banking model enables us to effectively meet our clients' diverse financial needs, support a strong capital and funding base, reduce risk profile and volatility, and generate stable returns for shareholders.
Long-term strategy
Develop our international network
To facilitate international trade and capital flows and serve our clients as they grow from small enterprises into large multinationals.
Invest in wealth and retail businesses with local scale
To make the most of global social mobility, wealth creation and long-term demographic changes in our priority markets.
Our network is underpinned by our four interconnected, global businesses that share balance sheets and liquidity, in addition to strong commercial links; our businesses allow us to support clients, from retail customers to the world's largest companies.
Value of the network
HSBC's network of businesses covers the world's largest and fastest growing trade corridors and economic zones.
Services around the world
We provide products and services to meet our clients' diverse financial needs. HSBC's geographic reach and network of clients allows greater insight into the trade and capital flows across supply chains.
Business synergies
We share resources and product capabilities across our businesses and leverage these synergies when serving our customers. We are able to provide global markets products, for example, to large multinationals as well as to small businesses. We issue insurance products to individuals and corporations alike. Many of our private banking clients are business owners who we also serve as corporate clients.
Ring-fence implementation
HSBC has made steady progress in preparing for the separation of the qualifying components of the UK retail banking activities from the wholesale and investment banking activities into the UK ring-fenced bank in the second half of 2018, ahead of the 1 January 2019 deadline set under the UK Financial Services (Banking Reform) Act 2013. For further details refer to the separate section 'Structural reform' on page 16.


HSBC Bank plc Annual Report and Accounts 2017
3


Strategic Report | H ow we do business

Products and services
The group manages its products and services through its four businesses: RBWM; CMB; GB&M; GPB; and the Corporate Centre.
Retail Banking and Wealth Management
('RBWM')
Customers
RBWM serves customers worldwide through four main business areas: Retail Banking, Wealth Management, Asset Management and Insurance.
Products and services
RBWM provides services to individuals under the HSBC Premier and Advance propositions, targeted at mass affluent and emerging affluent customers who value international connectivity. For customers who have simpler everyday banking needs, RBWM offers a full range of banking products and services reflecting local requirements.
Business synergies
RBWM makes a significant contribution to the overall success of the group. Insurance and Asset Management provide services to clients across all of the global businesses; and the foreign exchange and wealth management needs of RBWM clients create opportunities for GB&M.
Areas of focus
RBWM's focus is on growing the business through relationship-led lending and wealth management, while transforming customer experience and cost base through investment in digital infrastructure.
Commercial Banking ('CMB')
Customers
CMB customers range from small enterprises focused primarily on their domestic markets through to corporates operating globally.
Products and services
We support our customers with tailored financial products and services to allow them to operate efficiently and to grow. We provide working capital, term loans, payment services and international trade facilitation. We offer expertise in mergers and acquisitions, and provide access to financial markets.
Business synergies
CMB is at the centre of creating revenue synergies within the group. For instance we provide trade finance, working capital and liquidity management solutions to GB&M clients. We also provide Capital Finance expertise and Insurance and Asset Management capabilities from across the group to benefit CMB clients.
Areas of focus
HSBC is focused on creating value from its network. The Group's priority markets cover both sides of 11 of the world's 15 largest trade corridors for goods and services forecast for 2030, and represent at least one side of the other four corridors.
The group is therefore investing heavily in digital and technology aspects of its core Global Liquidity and Cash Management ('GLCM') and Global Trade and Receivables Finance ('GTRF') propositions.
 
Global Banking and Markets ('GB&M')
Customers
GB&M supports major government, corporate and institutional clients worldwide. Our product specialists continue to deliver a comprehensive range of transaction banking, financing, advisory, capital markets and risk management services.
Products and services
GB&M's product specialists continue to deliver a comprehensive range of capital financing, advisory and transaction banking services.
Areas of focus
We have made progress on our initiatives to reduce RWAs, including managing our Markets and Capital Financing business and employing a disciplined approach to new client business.
Our focus on cost discipline will result in further simplification of the business through streamlining business lines, operations and technology.
Deepening relationships with clients in both event and transaction banking remain a priority. We are growing our business from the internationalisation of China's RMB currency and by investing in digital capabilities.
Global Private Banking ('GPB')
Customers
GPB serves high net worth individuals and families, including those with international banking needs, through 13 booking centres covering the Group's priority markets.
Products and services
Our products and services include: Investment Management, incorporating advisory, discretionary and brokerage services; Private Wealth Solutions, comprising trusts and estate planning, designed to protect wealth and preserve it for future generations; and a full range of Private Banking services.
Business synergies
GPB products are utilised within GB&M, CMB and RBWM, including asset management, research, insurance, trade finance and capital financing, to offer propositions to our clients.
Areas of focus
GPB aspires to build on HSBC's commercial banking heritage and be the leading private bank for high net worth business owners and principals.
Corporate Centre
Corporate Centre comprises Central Treasury, including Balance Sheet Management ('BSM'), certain legacy assets, interests in our associates and joint ventures, and central stewardship costs that support our businesses.

4
HSBC Bank plc Annual Report and Accounts 2017


How we do business
We conduct our business intent on supporting the sustained success of our people, customers and communities. We see investment in our capabilities, employees and processes as a source of long-term competitive advantage.
Customers
We aim to be the world's leading international bank and strive for excellence when it comes to the quality of service and experiences offered to customers.
Our customers are at the heart of everything we do and we are working to make things simpler, faster and better for them.
Our customer base ranges from individuals to major international corporate clients
Taking responsibility for the experiences we
deliver
We have clear policies, frameworks and governance in place to protect customers. These cover the way we behave, design products and services, train and incentivise employees, and interact with customers and each other.
Senior leaders have ultimate responsibility for customer service standards and monitor these through key metrics aligned to performance objectives. These include:
How customers feel about recommending us, and
The speed and quality of complaint handling.
The targets for each of these metrics are carefully set and managed to instill the right behaviours among our employees.
What customers are telling us
In 2017, our CMB and RBWM customers told us there were three main issues that we needed to focus on to improve their experience of our products and services:
1.
Accessibility
Customers across all of our channels provided feedback on length of queues in branches, call waiting and handling time in our contact centres, the length of appointments with our Relationship Managers and the complexity of logging on to our online and mobile banking services.
We introduced Universal Banker concept from listening and understanding our customers changing needs in branch. It provided a multi-channel expert who can confidently assist customers with a variety of questions while facilitating an increase in digital adoption.
The Multi Channel Appointment Booking system ensures customers can book appointments in the branch they require with a reduced wait time.
2.
Complexity
Customers are telling us our processes and procedures are too complicated which impacts the quality and length of time required to service our customers day-to-day.
We have improved our account opening process with a significant reduction in the question set, optimisation of the mobile device application and removing the requirement to return paperwork before account opening.
The mortgage journey improvements include condensing advice to one shortened meeting, instructing valuations at the point of application, increasing the use of automated valuations, reducing the amount of evidential documentation required and sending electronic offer documentation. Customers are now experiencing reduced wait times, a condensed end-to-end journey, shorter mortgage interviews and a significant reduction in the amount of information and documents requested.
 
3.
Fees and charges
Our industry can be complex, and our customers can find it difficult to understand when and why they will be charged for our services.
We refreshed the HSBC mortgage pricing structure by introducing free valuation charges to all customers, reducing the confusion around eligibility and streamlining the journey. This is part of our continuous review and improve process to ensure our journeys are simple and understandable for our customers.
We have continued to simplify our Wealth fee structure, including putting various examples within the fee disclosure document and capping fees.
A digital transformation
Our customers are becoming increasingly digitally oriented in their everyday lives. This means their expectations of us - and their behaviour towards HSBC as a brand - are changing.
Customers are now using branches less often. In the future, we will have fewer - but better - branches, with more empowered front-line employees using a greater range of technology to support all our customers' needs.
The retail transformation programme in the UK has helped to drive digital growth and meet the strategic ambition to digitise our key customer journeys and create new immersive digital experiences for our retail customers, notably being the launch of Connected Money/HSBC Beta, Mobile X and website upgrades in 2017.
We launched Mobile Trade Transaction Tracker which enables corporate clients to monitor deals and trade transactions in real-time via the HSBCnet mobile app for Documentary Credit, Collections and Guarantees. The self-service capability is expected to substantially reduce the number of calls and e-mails on status checks on transactions, leading to massive efficiencies for both our customers and the bank.
Sustainable finance
Supporting sustainable growth
Each and every one of us has a stake in developing a sustainable economic system. It is the combined responsibility of all players in society to respond to climate change, rapid technological change and continuing globalisation to secure a prosperous future.
Since its foundation in 1865, HSBC has adapted to and helped serve the needs of a changing world. It has financed economic growth, fostered international trade and overcome events such as economic crises. We recognise that governments, corporations, the financial system and civil society are all stakeholders in climate change and sustainability challenges.
Now more than ever, there is a need to develop the skills, business innovation and low-carbon solutions needed to secure long-term prosperity for all. For HSBC, these are the key elements of sustainable growth which we can influence. Our network covers the world's largest and fastest growing trade corridors and economic zones. As such, we are uniquely positioned to provide the connections needed to foster sustainable growth across borders and geographies. In 2017, we launched our sustainability strategy focusing on three main areas: sustainable finance; sustainable networks and entrepreneurship; and future skills.
We have a proud record of supporting the communities and environments in which we operate. Thousands of HSBC employees globally are involved every year by volunteering for the Group's community investment programmes. In 2017, employees in Europe volunteered more than 60,900 hours, supporting communities' activities in work time. Charitable giving by our business in Europe in 2017 totalled $19.7m (£15.3m), and in addition the Group community investment spend in Europe was $22.4m (£17.4m). Our HSBC Youth Opportunities and Junior Achievement More than Money programmes are increasing young people's levels of employability and financial capability across Europe. Our flagship environmental partnership, the HSBC Water Programme, continues to invest in projects aimed at protecting

HSBC Bank plc Annual Report and Accounts 2017
5


Strategic Report | How we do business

scarce water resources and educating communities about the importance of these resources.
HS BC publishes regular updates to stakeholders about our approach to key environmental, social and governance ('ESG') issues. In November 2017, HSBC published five Sustainable Finance Commitments, which can be found at http://www.hsbc.com/our-approach/sustainability/sustainablefinance.
We recognise its importance and seek to be a leader in managing climate change risk while developing opportunities with - and for - our customers. We welcome the recommendations which assist understanding of climate-related risks and we were a signatory to the June 2017 Taskforce on Climate-related Financial Disclosures ('TCFD') report. HSBC's 2016 Statement on Climate Change may be found on our website at http://www.hsbc.com/our-approach/measuring-our-impact. It gives background in advocacy, our approach to low / high carbon transition, managing our direct impact and partnerships.
Empowering people
Valuing diversity
Diversity
We believe that a diverse and inclusive workforce is critical to running a sustainable and successful business. Our approach aims to increase and leverage diversity of thought to drive greater innovation, better manage risks, enhance collaboration, and improve workforce agility.
Our commitment
We are committed to building an inclusive culture where people are valued, respected and supported. We create business value by actively and empathically seeking out the richness of ideas, backgrounds, styles and perspectives.
Employee networks
Our seven global employee networks play a key role in building community, highlighting opportunities and achieving our diversity and inclusion ambitions. They focus on gender, age, ethnicity, LGBT+, faith, working parents and carers, and ability. Additionally we have common interest groups sharing experiences and engaging with others both internally and externally.
Supporting our employees
We believe that if someone is worth talking to, they are worth listening to. Exchange meetings are our way of doing that: meetings with no agendas and where managers are participants rather than leaders. These meetings bring people together to listen to each other, and allow people to express themselves without interruption or rebuttal. Over 40% of European employees participated in an Exchange meeting in 2017 last quarter. 78% of European employees believe everyone has a chance to say what they think about issues that affect the team they work in.
To further strengthen our culture and promote positive behaviours, we have developed culture change plans that are regularly discussed in regional and local management forums. The plans emphasise enabling a speak-up culture, principles-based judgement and other behaviours that are key to supporting the Group's strategic objectives such as managing financial crime risk.
We include behaviour ratings in employees' performance reviews, and they are factored into variable pay awards.
 
Whistleblowing
We work hard to create an environment in which people feel able to speak up, but understand that employees may not always feel comfortable raising concerns through their regular escalation channels. There will also be some circumstances which require more discretion. We operate a global whistleblowing standard, HSBC Confidential, which allows individuals to report matters of concern confidentially. We also maintain an external email address for concerns about accounting and internal financial controls or auditing matters ([email protected]). The Group has a strict policy prohibiting retaliation against those who raise concerns. All allegations of retaliation reported are escalated to senior management.
HSBC Confidential is overseen by our Group Conduct and Values Committee and Group Audit Committee. Investigations are carried out thoroughly and independently, drawing on the expertise of a variety of teams, including Regulatory Compliance, Human Resources, Legal, Financial Crime Risk, Information Security and Internal Audit.
1,585 cases were raised during 2017 (2016: more than 1,100 cases). All cases are subject to investigation.
In 30% of the cases closed in 2017 (2016: 34%), allegations were substantiated in whole or in part, and appropriate remedial action taken.
Tax
Our approach to tax
We apply the spirit as well as the letter of the law in all territories where we operate, and have adopted the UK Code of Practice for the Taxation of Banks. As a consequence, we pay our fair share of tax in the countries in which we operate. We continue to strengthen our processes to help ensure our banking services are not associated with any arrangements known or suspected to facilitate tax evasion.
HSBC continues to apply global initiatives to improve tax transparency such as:
the US Foreign Account Tax Compliance Act ('FATCA');
the OECD Standard for Automatic Exchange of Financial Account Information (also known as the Common Reporting Standard);
the Capital Requirements Directive IV ('CRD IV') Country by Country Reporting; and
the OECD Base Erosion and Profit Shifting ('BEPS') initiative.
We do not expect the BEPS or similar initiatives adopted by national governments to adversely impact our results.

6
HSBC Bank plc Annual Report and Accounts 2017


Key Performance Indicators
The Board of Directors tracks the group's progress in implementing its strategy with a range of financial and non-financial measures or key performance indicators ('KPIs'). Progress is assessed by comparison with the group strategic priorities, operating plan targets and historical performance.
The group reviews its KPIs regularly in light of its strategic objectives and may adopt new or refined measures to better align the KPIs to HSBC's strategy and strategic priorities.
Financial KPIs
 
2017

2016

Profit before tax (reported) (£m)
2,370

874

Profit before tax (adjusted) (£m)
3,832

4,234

Jaws (adjusted) (%)
(5.8
)
0.4

Cost efficiency ratio (reported) (%)
78.2

90.3

Cost efficiency ratio (adjusted) (%)
67.5

63.9

Return on average risk-weighted assets (%)
1.0

0.4

Adjusted return on average risk-weighted assets (%)
1.6

1.7

Common equity tier 1 capital ratio (%)
11.8

10.2

Profit before tax (reported/adjusted): Reported profit before tax is the profit as reported under IFRS. Adjusted profit before tax adjusts the reported profit for the effect of significant items as detailed on pages 10 to 13.
Outcome (reported): Reported profit before tax was higher year-on-year principally in GB&M, partly offset by lower reported profit before tax mainly in RBWM and the Corporate Centre. The increase was principally driven by lower expenses in GB&M due to impairment of goodwill in 2016. This was partly offset by lower revenue in 2017 due to the one-off gain on disposal of HSBC's membership interest in Visa Europe which benefited both RBWM and CMB in 2016. The revenue decrease was also due to the transfer of HSBC Bank A.S. out of the group in June 2017. In the Corporate Centre, Balance Sheet Management ('BSM') revenue was lower due to the one off of gain from the discontinuation of a macro cash flow hedge in the prior year.
Outcome (adjusted): Adjusted profit before tax decreased driven by higher operating expenses, primarily due to higher charges from other entities in the Group in both the Corporate Centre and GB&M (partly offset by higher intercompany recoveries in revenue). Excluding this, costs were higher in the Corporate Centre due to higher technology costs and in GB&M due to higher performance costs and severance costs. In addition, operating expenses increased in CMB mainly relating to the ongoing implementation of our Global Standards programme to enhance our financial crime risk controls and capabilities and to meet our external commitments. This was partly offset by an increase in revenue, notably in GB&M in Global Banking with higher revenue in Advisory and Debt Capital Markets, and in Principal Investments due to asset disposals, as well as in Credit, Rates and Equities reflecting higher client flows and improved market share.
Adjusted jaws measures the difference between adjusted revenue and adjusted cost growth rates (excluding the effects of costs-to-achieve and other significant items as detailed on pages 10 to 13). Our target is to grow revenues faster than operating expenses on an adjusted basis. This is referred to as positive jaws.
Outcome: In 2017, we grew revenue by 3% while our operating expenses also went up, but by 9%. Jaws was therefore a negative 5.8%.
Adjusted costs increased due to the unfavourable impact of movements in foreign exchange, and higher charges from other entities in the Group in both the Corporate Centre and GB&M (partly offset by higher intercompany recoveries in revenue). Adjusted revenue was up due to higher income in GB&M in Global Banking with increases in Advisory and Debt Capital Markets, and in Principal Investments due to asset disposals, as well as in
 
Credit, Rates and Equities reflecting higher client flows and improved market share.
Cost efficiency ratio (reported/adjusted) is measured as total operating expenses divided by net operating income before loan impairment and other credit risk provisions.
Outcome (reported): In 2017, reported revenue increased by 1% while reported operating expenses decreased by 15%. The cost efficiency ratio therefore decreased by 12.1%.
Reported operating expenses decreased mainly due to impairment of goodwill in GB&M of £2.2bn in 2016 and lower settlements and provisions in connection with legal and regulatory matters in 2017. Reported revenue was up in 2017 mainly due to a gain on disposal of HSBC's interest in VocaLink Holdings Limited and higher revenue in GB&M.
Outcome (adjusted): The cost efficiency ratio (adjusted) increased from 2016 as costs increased by more than revenue.
Return on risk-weighted assets ratio (reported/adjusted) is measured as pre-tax profit divided by average risk-weighted assets.
Outcome (reported): The return on average risk-weighted assets increased by 0.6% compared with prior year due to the non-recurrence of the GB&M goodwill impairment in 2016.
Outcome (adjusted): The adjusted return on average risk-weighted assets decreased by 0.1% compared with prior year.
Common equity tier 1 ('CET1') capital ratio represents the ratio of common equity tier 1 capital to total risk-weighted assets. CET1 capital is the highest quality form of capital comprising shareholders' equity and related non-controlling interests less regulatory deductions and adjustments. The group seeks to maintain a strong capital base to support the development of its business and meet regulatory capital requirements at all times.
Outcome: The CET1 capital ratio increased during the year due principally to new CET1 capital contributed by HSBC Holdings plc.
Non-financial KPIs
We also monitor a range of non-financial KPIs focusing on customers, people, culture and values including customer service satisfaction, employee involvement and engagement, and diversity and sustainability.
For details on customer service and satisfaction please refer below; for the remaining non-financial KPIs refer to the Corporate Governance section on pages 62 to 64.
Customer service and satisfaction
For UK RBWM the principal customer metric is the Customer Recommendation Index ('CRI'), measuring customers' likelihood to recommend HSBC products and services to friends or family. This measure is tracked relative to competitors, aiming for a positive gap to market.
Scores for HSBC UK RBWM have remained broadly consistent with 2016; however improvements across competitors' scores have resulted in the brand ranking consistently in the bottom half of the competitor set. Focus for HSBC continues to be on providing great customer service and ensuring a clear demonstration of understanding our customers and their needs. A customer plan is in place to ensure development against these areas, and the launch of HSBC Beta (a mobile app to help customers track and manage spending across all of their accounts), and the continued development of our new mobile and online banking services will help support this.
First Direct continues to lead the market for customer recommendation and displays a continued high proportion of brand advocates. Excellent customer service remains a key brand strength. Ongoing enhancements to mobile and digital capabilities throughout 2018 will continue to support this, aided further by the Financial Conduct Authority ('FCA') sandbox pilot where first direct will test how it can extend customer service to areas outside of

HSBC Bank plc Annual Report and Accounts 2017
7


Strategic Report | Highlights

financial services, for example to help custo mers save on their energy bills.
M&S Bank CRI scores have remained consistent throughout 2017. For the six month period ending in October, they remain in line with the market average, placing them in joint 3rd position within their competitor set. The launch of M&S Bank mortgages will be a key development for the brand in 2018.
In 2017, France RBWM's CRI score saw the largest increase amongst the competitors. This puts HSBC in joint second place, reaching the target of top 3 within the competitive set, although very close to the followers and CRI remains a highly volatile indicator. HSBC has seen a positive trend through the course of 2017 for digital, with improvements noted for mobile and online banking. There is also an increased proportion of mentions for being flexible and giving relevant advice in the second half of 2017. HSBC continues to focus on making things easier for customers by reducing complexity of processes and improving accessibility.
HSBC UK's Commercial Banking uses Net Promoter Score (NPS) as the principal customer metric, measuring customers' likelihood to recommend their bank to other businesses, which is carried out by an independent third party (Charterhouse). In the UK, small business market (customer turning over less than £2m) we have seen a 7-point improvement when comparing to corresponding period for 2016. This is the biggest uplift across peer group, and reflects the dedicated investments being made across our channels including telephony, online, mobile and Business Specialists, where we aim to bring the best of digital and our people by integrating them through services like video conferencing and Linkscreen.
We continue to support our customers, enabling them to grow their businesses both domestically and internationally.  Commercial Banking was ranked number 1 bank in the Charterhouse Survey for supporting international needs by UK businesses.
This position is further endorsed  by the Euromoney 2018 Trade Finance survey showing HSBC as the number 1 Trade provider in the UK (for the second year running) as well as number 1 for Service across Europe. Supporting growth extends beyond just our product range, however, exemplified by the launch of our Connections Hub which brings our international network straight to our customers' desktop, allowing them to search, view and connect with other HSBC customers.
Our efforts and investments in improving customer satisfaction has led to us winning several awards from Euromoney magazine including Best Trade Finance Bank in the UK and Best Cash Manager in the UK.
Our priorities for 2018 are around simplifying customer processes across key journeys with strategic programmes underway to develop and launch enhancements to our digital platforms for Business Banking customers.
Economic background and
outlook
UK
UK real GDP rose by 0.5% in the fourth quarter of 2017 - a small improvement on 0.4% in the preceding quarter. The annual rate of growth slowed to 1.5% (from 2.0% in the same quarter of 2016). The unemployment rate stood at 4.3% in the three months to November - its lowest level since 1975. Employment as a percentage of the population aged 16-64 was 75.5% in November - a series high. Annual wage growth (excluding bonuses) stood at 2.4% in the three months to November. The annual rate of growth in the Consumer Price Index ('CPI') was 3.0% in December. Activity in the housing market weakened over the year, with price growth moderating but remaining positive. However, the Bank of England raised rates by 25bps to 0.5% in November.
 
The annual pace of UK real GDP growth is now expected to slow from 1.8% in 2017 to 1.5% in 2018. Though CPI inflation may be at or near its peak, it looks set to continue to outpace wage growth throughout 2018, with employment growth slowing. Together, these factors could weigh on consumption growth. Political uncertainty may also keep investment growth weak, while net trade is not expected to contribute to GDP growth in 2018. Although the rate of growth is lower than it has been in recent years, it is still close to what the Bank of England considers to be the new 'speed limit'. It may therefore raise the Bank Rate again in 2018.
Eurozone
The eurozone continued on a steady growth path in 2017, with GDP increasing at a 0.6% quarterly rate in the fourth quarter of the year, following 0.7% in the previous two quarters. This took full year growth to 2.5% in the eurozone last year, the fastest rate in ten years. So far we only have the data for two of the Big 4 eurozone countries: France and Spain. GDP increased by 0.6% quarter-on-quarter in France, led by strong exports growth and investment, and by 0.7% quarter-on-quarter in Spain, taking the full year growth to 3.1%, the third year in a row in excess of 3%. Domestic consumption is likely to have remained an important driver of growth in the fourth quarter, fuelled by strong job creation, but HSBC Global Research expects it to have eased a little as the recent oil price increase is reducing households' purchasing power. Investment has also been picking up recently, particularly in the business sector, also helped by important fiscal incentives, while net exports are also likely to have contributed positively to growth, thanks to the highly synchronised global cycle, and so far with limited impact from the appreciation of the euro (circa 9% in trade-weighted terms) since last spring.
The latest survey data point to a continuation of the strong growth momentum, although HSBC Global Research expects a marginal slowdown in growth in 2018 (to 2.3%) due to stalling real wage growth putting a lid on domestic consumption, against the background of rising energy prices, while the stronger euro might have a dampening effect on export growth. The European Central Bank ('ECB') Quantitative Easing ('QE') programme has been extended for 9 months from January 2018 albeit at a slightly lower pace (€30bn of asset purchases per month, compared to €60bn previously), which should continue to provide fiscal support to countries, while the ECB forward guidance on rates should help prevent a further appreciation of the euro by pushing expectations for a possible rate hike further into the future. HSBC Global research expects QE to end in October. With nominal wage growth stalling, HSBC Global Research expects inflation to continue to undershoot the ECB's inflation target, at 1.5% both in 2018 and 2019, even if the recent oil price increase has added some pressures to inflation in the short term, only partly offset by the stronger euro. The main political risk is the Italian election on
4 March, with polls pointing to a likely hung parliament. The outcome of the Catalan independence threat remains uncertain, after pro-independence parties re-gained a majority of seats in the Catalan parliament at the regional election on 21 December, while Germany is still without a government after last September's election.

8
HSBC Bank plc Annual Report and Accounts 2017


Financial summary
Summary consolidated income statement for the year ended
 
2017

2016

 
£m

£m

Net interest income
6,181

6,769

Net fee income
2,989

2,945

Net trading income
2,383

4,299

Net income/(expense) from financial instruments designated at fair value
1,122

(1,047
)
Gains less losses from financial investments
262

530

Net insurance premium income
1,809

1,567

Other operating income 
796

261

Total operating income1
15,542

15,324

Net insurance claims, benefits paid and movement in liabilities to policyholders
(2,490
)
(2,019
)
Net operating income before loan impairment and other credit risk provisions
13,052

13,305

Loan impairment charges and other credit risk provisions
(495
)
(416
)
Net operating income
12,557

12,889

Total operating expenses1
(10,208
)
(12,011
)
Operating profit
2,349

878

Share of profit/(loss) in associates and joint ventures
21

(4
)
Profit before tax
2,370

874

Tax expense
(528
)
(1,053
)
Profit/(loss) for the year
1,842

(179
)
Profit/(loss) attributable to shareholders of the parent company
1,809

(212
)
Profit attributable to non-controlling interests
33

33

1
Total operating income and expenses includes significant items as detailed on pages 10 to 12.
Reported Performance
Reported profit before tax was £2,370m, £1,496m higher than 2016.
Net interest income ('NII') decreased by £588m or 9%. This decrease was primarily in Corporate Centre, where income was lower mainly in Balance Sheet Management ('BSM') in France due to a one-off gain from a discontinuation of a macro cash flow hedge in the prior year. In RBWM, income decreased due to the transfer of our operations in Turkey to the Middle East and North Africa region ('MENA') in June 2017. NII also decreased due to spread compression on mortgages in France and lower margins on current accounts in both the UK and France. In CMB, income decreased primarily in the UK due to a reduction in the Bank of England base rate in August 2016 and in France due to margin compression on customer deposits.
Net fee income increased by £44m or 1%, primarily due to favourable movements in foreign exchange. Excluding this, net fee income decreased in RBWM mainly due to the transfer of our operations in Turkey to MENA in June 2017. In CMB, net fee income decreased primarily relating to Global Liquidity and Cash Management ('GLCM') reflecting a decline in money transmission fees due to a change in customer behaviour, switching from notes and coins to digital in the UK. This was partly offset by an increase in GB&M in Global Banking due to continued momentum in investment banking products.
Net trading income decreased by £1,916m or 45%, primarily in Corporate Centre in BSM due to adverse foreign exchange movements on assets held as economic hedges of debt designated at fair value (offset in 'Net income from financial instruments designated at fair value'). Excluding this, the decrease was mainly in GB&M in the Foreign Exchange business due to less volatility in 2017, resulting in lower client activity.
Net income from financial instruments designated at fair value increased by £2,169m, mainly in Corporate Centre in BSM due to favourable foreign exchange movements on economically hedged foreign currency debt (offset in 'Net trading income'). Excluding this, income was higher from financial assets and liabilities from investment contracts, primarily driven by improved equity market performance.
 

Gains less losses from financial investments decreased by £268m or 51%, mainly as 2016 benefitted from a gain on the disposal of our membership interest in Visa Europe of £416m. Excluding this, gains less losses from financial investments increased, mainly due to higher gains on the disposal of available-for-sale bonds in BSM, notably in the UK. In addition, there were gains on the disposal of available-for-sale equity securities.
Net insurance premium income increased by £242m or 15%, primarily due to favourable movements in foreign exchange and increased net insurance premium income in France due to improved commercial performance.
Other operating income increased by £535m, primarily in GB&M due to an increase in the recovery of research and business costs from other entities in the Group (£237m, offset in operating expenses) in 2017. Excluding this, the increase mainly reflected a strong performance in Principal Investments due to asset disposals.
Net insurance claims, benefits paid and movement in liabilities to policyholders increased by £471m or 23%. This was largely due to improved returns on contracts where the policyholder shares the investment risk, and partly offset by a reduction in premium income.
Loan impairment charges and other credit risk provisions ('LICs') increased by £79m or 19%, primarily driven by higher LICs in GB&M in 2017 reflecting charges on two large corporate exposures in the construction and retail sectors in the UK compared with net releases in 2016. This was partly offset by lower LICs in CMB due to net releases of collectively assessed impairments compared with charges in 2016, notably in the UK in the oil and gas sector. In addition, LICs were lower in France and Spain in 2017.
Total operating expenses decreased by £1,803m or 15%, driven by a number of significant items including:
an impairment of goodwill in GB&M of £2,182m in 2016;
lower settlements and provisions in connection with legal and regulatory matters, reflecting net provision releases of £540m in 2017 compared with charges in 2016 of £41m; partly offset by an increase of £111m in costs to establish the UK ring-fenced bank compared with 2016;

HSBC Bank plc Annual Report and Accounts 2017
9


Strategic Report HTMLPIPESYMBOL Highlights

an increase of £69m in costs-to-achieve, comprising specific costs relating to the achievement of the strategic actions set out at the Group's investor update; and
higher UK customer redress provisions of £82m.
Excluding these items, operating expenses increased by £700m notably in GB&M, Corporate Centre and CMB. Higher costs in GB&M were partly offset by increased intercompany recoveries in revenue (£237m) relating to research and business costs charged to other entities in the Group. Costs increased in GB&M due to higher performance related pay, pension and severance costs. In Corporate Centre, the increase reflected higher technology costs. In CMB, operating expenses increased mainly due to the ongoing implementation of our Global Standards programme to enhance our financial crime risk controls and capabilities, and to meet our external commitments.
For further details of significant items affecting revenue and costs, please refer to significant revenue/cost items by business segment on pages 10 and 11.
Tax expense totalled £528m in 2017 compared with £1,053m in 2016. The effective rate for 2017 was 22.3% compared with 120.5% in 2016. Excluding the one-off impact of a goodwill impairment, the effective rate in 2016 would have been 34.5%.  The reduction in this rate in 2017 primarily reflected the release of non-taxable regulatory provisions and favourable prior year adjustments.
Adjusted Performance
Use of non-GAAP financial measures
Our reported results are prepared in accordance with IFRSs, as detailed in the Financial Statements starting on page 75. In measuring our performance, the financial measures that we use include those derived from our reported results in order to eliminate factors that distort period-on-period comparisons. These are considered non-GAAP financial measures.
Non-GAAP financial measures are described and reconciled to the closest reported financial measure when used.
The global business segmental results on pages 10 to 15 are presented on an adjusted basis in accordance with IFRS 8 'Operating Segments' as detailed in the 'Basis of preparation'.
 
Adjusted performance
Adjusted performance is computed by adjusting reported results for the year-on-year effects of significant items that distort year-on-year comparisons.
We use 'significant items' to describe collectively the group of individual adjustments excluded from reported results when arriving at adjusted performance. These items, which are detailed below, are ones that management and investors would ordinarily identify and consider separately when assessing performance to understand better the underlying trends in the business. We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant and providing insight into how management assesses year-on-year performance.
Basis of preparation
Global businesses are our reportable segments under IFRS 8.
The global business results are assessed by the chief operating decision maker on the basis of adjusted performance that removes the effects of significant items from reported results. We therefore present these results on an adjusted basis.
Reconciliations of reported and adjusted performance are presented on pages 9 to 15.
Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to operational business lines. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs which are not allocated to global businesses are included in Corporate Centre.
Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-group elimination items are presented in the Corporate Centre.

A description of the Global businesses is provided in the Strategic Report, page 4.
Significant revenue items by business segment - (gains)/losses
(Audited)

RBWM

CMB

GB&M

GPB

Corporate Centre

Total

 
£m

£m

£m

£m

£m

£m

31 Dec 2017
 
 
 
 
 
 
Reported revenue
4,097

3,490

4,436

321

708

13,052

Significant revenue items
2

77

166

-

(65
)
180

- UK customer redress programmes
-

73

2

-

-

75

- debit valuation adjustment on derivative contracts
-

-

164

-

-

164

- fair value movement on non-qualifying hedges
-

-

-

-

(4
)
(4
)
- provisions arising from on-going review of compliance with the CCA in the UK
2

4

-

-

-

6

- gain on disposal of HSBC's interest in VocaLink Holdings Limited
-

-

-

-

(61
)
(61
)
Adjusted revenue
4,099

3,567

4,602

321

643

13,232

 
31 Dec 2016
 
 
 
 
 
 
Reported revenue
4,524

3,702

4,120

327

632

13,305

Significant revenue items
(247
)
(164
)
(19
)
(1
)
6

(425
)
- change in credit spread on long-term debt
-

-

-

-

4

4

- debit valuation adjustment on derivative contracts
-

-

(33
)
-

-

(33
)
- fair value movement on non-qualifying hedges
5

-

14

-

2

21

- provisions arising from ongoing review of compliance with the CCA in the UK
-

-

-

(1
)
-

(1
)
- gain on disposal of HSBC's membership in Visa Europe
(252
)
(164
)
-

-

-

(416
)
Adjusted revenue
4,277

3,538

4,101

326

638

12,880


10
HSBC Bank plc Annual Report and Accounts 2017


Significant cost items by business segment - (recoveries)/charges
(Audited)

RBWM

CMB

GB&M

GPB

Corporate Centre

Total

 
£m

£m

£m

£m

£m

£m

31 Dec 2017
 
 
 
 
 
 
Reported operating expenses
(3,641
)
(1,571
)
(2,885
)
(251
)
(1,860
)
(10,208
)
Significant cost items
569

20

(396
)
(1
)
1,090

1,282

- costs to achieve
69

6

147

(1
)
817

1,038

- costs to establish UK ring-fenced bank
5

1

-

-

251

257

- UK customer redress programmes
495

12

2

-

-

509

- settlements and provisions in connection with legal and regulatory matters
-

-

(551
)
-

11

(540
)
- costs associated with the UK's exit from the EU
-

1

6

-

11

18

Adjusted operating expenses
(3,072
)
(1,551
)
(3,281
)
(252
)
(770
)
(8,926
)
 
31 Dec 2016
Reported operating expenses
(3,591
)
(1,501
)
(5,328
)
(227
)
(1,364
)
(12,011
)
Significant cost items
474

52

2,407

2

850

3,785

- impairment of Global Banking & Markets goodwill
-

-

2,182

-

-

2,182

- costs to achieve
93

26

144

2

704

969

- costs to establish UK ring-fenced bank
-

-

-

-

146

146

- UK customer redress programmes
381

26

20

-

-

427

- settlements and provisions in connection with legal and regulatory matters
-

-

41

-

-

41

- Madoff-related litigation costs
-

-

20

-

-

20

- restructuring and other related costs
-

-

-

-

-

-

Adjusted operating expenses
(3,117
)
(1,449
)
(2,921
)
(225
)
(514
)
(8,226
)

Costs to Achieve ('CtA') Definition:
CtA comprise those specific costs relating to the achievement of the strategic actions set out in the Investor Update in June 2015. They comprise costs incurred between 1 July 2015 and
31 December 2017, and do not include ongoing initiatives such as Global Standards. Any costs arising within this category have been incurred as part of a significant transformation programme. CtA are included within significant items and incorporate restructuring costs that were identified as a separate significant item prior to
1 July 2015.
CtA Breakdown:
Costs which are categorised as CtA are those that:
Relate to initiatives included in the June 2015 Investor Update;
 
Are incurred between 1 July 2015 and 31 December 2017 and are not part of ongoing initiatives;
Arise from significant transformation programmes;
Reduce Run the Bank spend or Risk Weighted Assets, with reductions being clearly identifiable.
Examples of costs categorised as CtA include:
Restructuring costs - redundancy costs, write-offs relating to property disposals or where a change in systems results in an impairment of software;
Consultancy and Third Party costs - for consultants working on specified initiatives only.
Net impact on profit before tax by business segment
(Audited)

RBWM

CMB

GB&M

GPB

Corporate Centre

Total

 
£m

£m

£m

£m

£m

£m

31 Dec 2017
 
 
 
 
 
 
Reported profit/(loss) before tax
329

1,779

1,193

60

(991
)
2,370

Significant revenue items
2

77

166

-

(65
)
180

Significant cost items
569

20

(396
)
(1
)
1,090

1,282

Adjusted profit/(loss) before tax
900

1,876

963

59

34

3,832

Net impact on reported profit and loss
571

97

(230
)
(1
)
1,025

1,462

 
31 Dec 2016
Reported profit/(loss) before tax
746

1,828

(1,156
)
105

(649
)
874

Significant revenue items
(247
)
(164
)
(19
)
(1
)
6

(425
)
Significant cost items
474

52

2,407

2

850

3,785

Adjusted profit/(loss) before tax
973

1,716

1,232

106

207

4,234

Net impact on reported profit and loss
227

(112
)
2,388

1

856

3,360


HSBC Bank plc Annual Report and Accounts 2017
11


Strategic Report | Highlights

By operating segment:
Adjusted profit for the year
(Audited)

2017
 
RBWM

CMB

GB&M

GPB

Corporate Centre

Total

 
£m

£m

£m

£m

£m

£m

Net interest income
3,185

2,323

856

175

(283
)
6,256

Net fee income
963

1,138

762

117

9

2,989

Net trading income
13

40

2,368

9

113

2,543

Other income
(62
)
66

616

20

804

1,444

Net operating income before loan impairment charges and other credit risk
4,099

3,567

4,602

321

643

13,232

- external
3,840

3,784

5,142

242

224

13,232

- inter-segment
259

(217
)
(540
)
79

419

-

Loan impairment charges and other credit risk provisions
(127
)
(140
)
(358
)
(10
)
140

(495
)
Net operating income
3,972

3,427

4,244

311

783

12,737

Total operating expenses
(3,072
)
(1,551
)
(3,281
)
(252
)
(770
)
(8,926
)
- employee compensation and benefits
(973
)
(507
)
(1,014
)
(82
)
(41
)
(2,617
)
- general and administrative expenses
(2,084
)
(1,027
)
(2,262
)
(168
)
(212
)
(5,753
)
- depreciation and impairment of property, plant and equipment
(6
)
(17
)
(3
)
(1
)
(293
)
(320
)
- amortisation and impairment of intangible assets
(9
)
-

(2
)
(1
)
(224
)
(236
)
Operating profit
900

1,876

963

59

13

3,811

Share of profit in associates and joint ventures
-

-

-

-

21

21

Adjusted profit before tax
900

1,876

963

59

34

3,832

 
%

%

%

%

 
%

Adjusted cost efficiency ratio
74.9

43.5

71.3

78.5



67.5

 
 
2016
Net interest income
3,282

2,343

936

196

12

6,769

Net fee income
1,022

1,142

675

110

(4
)
2,945

Net trading income
57

10

2,547

7

1,666

4,287

Other income
(84
)
43

(57
)
13

(1,036
)
(1,121
)
Net operating income before loan impairment charges and other credit risk
4,277

3,538

4,101

326

638

12,880

- external
3,896

3,652

4,994

267

71

12,880

- inter-segment
381

(114
)
(893
)
59

567

-

Loan impairment charges and other credit risk provisions
(187
)
(373
)
52

5

87

(416
)
Net operating income
4,090

3,165

4,153

331

725

12,464

Total operating expenses
(3,117
)
(1,449
)
(2,921
)
(225
)
(514
)
(8,226
)
- employee compensation and benefits
(978
)
(496
)
(1,011
)
(86
)
(524
)
(3,095
)
- general and administrative expenses
(2,124
)
(939
)
(1,905
)
(138
)
544

(4,562
)
- depreciation and impairment of property, plant and equipment
(6
)
(14
)
(3
)
(1
)
(305
)
(329
)
- amortisation and impairment of intangible assets
(9
)
-

(2
)
-

(229
)
(240
)
Operating profit
973

1,716

1,232

106

211

4,238

Share of profit in associates and joint ventures
-

-

-

-

(4
)
(4
)
Adjusted profit before tax
973

1,716

1,232

106

207

4,234

 
%

%

%

%

 
%

Adjusted cost efficiency ratio
72.9

41.0

71.2

69.0



63.9

Adjusted Performance
Our adjusted profit before tax decreased by £402m or 10% compared with 2016. This reflected higher operating expenses and higher LICs, partly offset by higher revenue.
Adjusted revenue increased by £352m or 3%, partly due to favourable movements in foreign exchange. Excluding this, revenue was higher, mainly in GB&M due to an increase in the recovery of research and business costs from other entities in the Group (£237m, offset in operating expenses) in 2017, as well as a strong performance in Global Banking due to continued momentum in investment banking products. Revenue in Principal Investments also increased due to asset disposals. This was partly offset by lower revenue in RBWM, primarily due to the transfer of our operations in Turkey to MENA in June 2017. Revenue also decreased in RBWM due to lower margins on current accounts, mortgages and deposits in France.
Adjusted LICs were £79m or 19% higher than 2016. This primarily reflected higher LICs in GB&M in 2017 due to charges on two large corporate exposures in the construction and retail sector in the UK compared with net releases in 2016. This was partly offset by lower LICs in CMB due to net releases of collectively assessed impairments compared with charges in 2016, notably in the UK in
 
the oil and gas sector. In addition, LICs were lower in France and Spain in 2017.
Adjusted operating expenses increased by £700m or 9%, partly due to unfavourable movements in foreign exchange. Higher costs in GB&M were partly offset by increased intercompany recoveries in revenue (£237m) relating to research and business costs charged to other entities in the Group. Excluding this, operating expenses increased driven by higher performance-related pay, pension and severance costs in GB&M and higher technology costs in Corporate Centre. The increase was also due to the ongoing implementation of our Global Standards programme to enhance our financial crime risk controls and capabilities, and to meet our external commitments.
Retail Banking and Wealth Management
Adjusted profit before tax of £900m was £73m or 8% lower than 2016, primarily due to lower revenue, partly offset by lower LICs and lower operating expenses.
Revenue decreased by £178m or 4%, primarily due to the transfer of our operations in Turkey to MENA in June 2017. Excluding this, the decrease was due to lower margins on mortgages in France reflecting competitive pricing of new business despite increased volumes, and there was margin compression on current accounts in both the UK and France due to lower funding rates.

12
HSBC Bank plc Annual Report and Accounts 2017


LICs decreased by £60m or 32%, notably reflecting the transfer of our operations in Turkey to MENA in June 2017. In the UK there were higher individually assessed impairment charges on credit cards, loans and overdrafts in 2017, partly offset by a one-off debt sale in the second half of 2017.
Operating expenses decreased by £45m or 1%, primarily due to the transfer of our operations in Turkey to MENA in June 2017. Excluding this, the decrease was due to lower operations costs, lower risk costs and a lower Financial Services Compensation Scheme ('FSCS') levy. These were partly offset by higher technology costs.
Commercial Banking
Adjusted profit before tax of £1,876m was £160m or 9% higher than 2016, driven by lower loan impairment charges, partly offset by higher operating expenses.
Revenue increased by £29m or 1% due to favourable movements in foreign exchange. Excluding this, revenue decreased compared with 2016. In France, net interest income was lower due to margin compression on customer deposits; resulting from interest rate hedges being renewed at lower rates in the negative interest rate environment of the Eurozone. Net interest income also decreased due to the transfer of our operations in Turkey to MENA in June 2017. These decreases were partly offset by higher revenue in the UK, with higher net interest income despite the Bank of England base rate reduction in August 2016. This was due to balance sheet growth, primarily in term lending and growth in collaboration revenue in the UK. 
LICs decreased by £233m or 62%. The reduction in net impairment charges reflected net releases of collectively assessed impairments in 2017 compared with charges in 2016, notably in the UK in the oil and gas sector. There were also individually assessed impairment releases in the UK mainly in the Greek shipping sector. In France, LICs were lower across all sectors. In Spain, lower LICs were mainly driven by higher provisions in the construction and engineering sector in prior year.
Operating expenses increased by £102m or 7%, partly due to unfavourable movements in foreign exchange. Excluding this, operating expenses increased mainly relating to the ongoing implementation of our Global Standards programme to enhance our financial crime risk controls and capabilities, and to meet our external commitments. Costs were also higher due to an increase in staff costs reflecting strategic initiatives in the UK, the non-repeat of a VAT credit in 2016 and a lower pension credit in 2017.
Global Banking and Markets
Adjusted profit before tax of £963m was £269m or 22% lower than 2016, due to higher LICs and higher operating expenses, partly offset by higher revenue.
Revenue increased by £501m or 12%, partly due to favourable movements in foreign exchange and an increase in the recovery of research and business costs from other entities in the Group (£237m, offset in operating expenses). Excluding this, revenue increased reflecting a strong performance in Global Banking due to continued momentum in investment banking products and disposal gains in Principal Investments. Fixed Income, Currencies and Commodities ('FICC') revenue was in line with prior year. This reflected increases in Credit and Rates due to higher client flows, offset by a weaker performance in Foreign Exchange reflecting market volatility and reduced client activity. Equities revenue also increased due to market share gains in Prime Finance products.
 
LICs increased by £410m reflecting charges on two large corporate exposures in the construction and retail sectors in 2017 compared with net releases in 2016.
Operating expenses were £360m or 12% higher than 2016, partly offset by increased intercompany recoveries in revenue (£237m) relating to research and business costs charged from other entities in the Group. Excluding this, costs were higher reflecting performance-related pay, pension and severance costs.
Global Private Banking
Adjusted profit before tax of £59m was £47m or 44% lower than 2016, due to higher operating expenses, higher LICs and lower revenue.
Revenue decreased by £5m or 1%, despite favourable movements in foreign exchange. The decrease reflected lower average balances (down £550m or 10%) in 2017 following the exit from a Commercial Real Estate book in the UK.
LICs increased by £15m, notably reflecting net individually assessed impairment charges related to a single client in the UK in 2017 compared with net releases in prior year.
Operating expenses increased by £27m, partly due to unfavourable movements in foreign exchange. Excluding this, operating expenses increased driven by higher financial crime management costs and global operations costs.
Corporate Centre
Adjusted profit before tax of £34m was £173m or 84% lower than 2016. This reflected higher operating expenses and lower revenue, partly offset by lower LICs.
Revenue was broadly in line with 2016.
LICs decreased by £53m or 61%, mainly driven by significant impairment provision releases in Legacy Credit in 2017 reflecting portfolio disposals.
Operating expenses increased by £256m or 50%, partly offset by higher intercompany recoveries (£142m) in revenue relating to technology costs charged from other entities in the Group. Excluding this, the increase reflected higher technology costs including cyber-security investment.
Dividends
The consolidated reported profit for the year attributable to the shareholders of the bank was £1,809m.
Interim dividends of £415m, in lieu of a final dividend in respect of the previous financial year, and £186m in respect of 2017 were paid on the ordinary share capital during the year. A second interim dividend, in lieu of a final dividend, of £583m was declared after 31 December 2017, payable at the end of February 2018.
Further information about the results is given in the consolidated income statement on page 76.

HSBC Bank plc Annual Report and Accounts 2017
13


Strategic Report | Highlights

Review of business position
Summary consolidated balance sheet as at 31 Dec
 
2017

2016

 
£m

£m

Total assets
818,868

816,829

- cash and balances at central banks
97,601

54,278

- trading assets
145,725

125,069

- financial assets designated at fair value
9,266

8,345

- derivative assets
143,335

199,419

- loans and advances to banks
14,149

21,363

- loans and advances to customers
280,402

272,760

- reverse repurchase agreements - non-trading
45,808

31,660

- financial investments
58,000

83,135

- other
24,582

20,800

Total liabilities
774,819

776,204

- deposits by banks
29,349

23,682

- customer accounts
381,546

375,252

- repurchase agreements - non-trading
37,775

19,709

- trading liabilities
106,496

93,934

- financial liabilities designated at fair value
18,249

18,486

- derivative liabilities
140,070

190,092

- debt securities in issue
13,286

16,140

- liabilities under insurance contracts issued
21,033

19,724

- other
27,015

19,185

Total equity
44,049

40,625

- total shareholders' equity
43,462

39,930

- non-controlling interests
587

695

By operating segment:
Balance sheet information by global business
(Audited)
 


RBWM

CMB

GB&M

GPB

Corporate Centre

Total

 
£m

£m

£m

£m

£m

£m

Year ended 31 Dec 2017
 
 
 
 
 
 
Loans and advances to customers
117,933

84,947

63,379

7,372

6,771

280,402

Customer accounts
151,985

100,831

94,069

12,774

21,887

381,546

Year ended 31 Dec 2016
 
 
 
 
 
 
Loans and advances to customers
111,692

80,969

67,416

7,050

5,633

272,760

Customer accounts
148,469

97,630

89,115

14,279

25,759

375,252

There are no reconciling items between the adjusted and reported view of the balance sheet for 2017 and 2016.
The group maintained a strong and liquid balance sheet with the ratio of customer advances to customer accounts remaining broadly constant at 73.5% compared to 72.7% at 31 December 2016.
Assets
Cash and balances at central banks increased by 80% as a result of deploying surplus deposits from customers and reflecting a partial move of the liquid asset portfolio from bonds into cash.
Trading assets increased by 17% primarily due to an increase in market activity.
Derivative assets decreased by 28% largely due to shifts in major yield curves and movements in foreign exchange rates with a commensurate decrease within derivative liabilities.
Loans and advances to customers increased by 3%. The increase was due to higher levels of corporate and retail mortgage lending as well as increased overdraft balances resulting from lower levels of IFRS netting.
Reverse repurchase agreements - non-trading increased by 45% primarily due to an increase in market activity offset by higher levels of netting.
Financial investments decreased by 30% primarily due to a sale of assets within the available-for-sale portfolio.

 
Liabilities
Customer accounts increased by 2% due to growth in corporate and retail balances compounded by lower levels of IFRS netting and foreign exchange movements. This increase was partially offset by debt issued for future Minimum Requirements for own funds and Eligible Liabilities ('MREL') compliance being repaid to HSBC Holdings plc and replaced with subordinated debt, hence recognised as Subordinated Liabilities.
Repurchase agreements - non-trading increased by 92% due to increased market activity.
Trading liabilities increased by 13% broadly in line with trading assets.
Financial liabilities designated at fair value and debt securities in issue reduced by 1% and 18% respectively. The reduction is due to maturing issuances being replaced by term funding from HSBC Holdings plc in relation to the group's MREL plans.
Derivative liabilities decreased by 26% and this is in line with derivative assets as the underlying risk is broadly matched.
Equity
Total shareholders' equity increased by 9%. The increase was due to retained earnings from profit generated for the period as well as adjustments to actuarial assumptions.


14
HSBC Bank plc Annual Report and Accounts 2017


Reported performance by country
Profit before tax - by country
 
RBWM

CMB

GB&M

GPB

Corporate Centre

Total

 
£m

£m

£m

£m

£m

£m

31 Dec 2017
 
 
 
 
 
 
United Kingdom
320

1,491

704

50

(950
)
1,615

France
(8
)
158

181

4

(121
)
214

Germany
16

48

111

7

30

212

Turkey2
(9
)
8

19

-

2

20

Other
10

74

178

(1
)
48

309

Profit before tax
329

1,779

1,193

60

(991
)
2,370

 
31 Dec 2016
United Kingdom
710

1,632

514

94

(681
)
2,269

France
114

144

218

6

(31
)
451

Germany
17

50

105

5

10

187

Turkey
(106
)
(20
)
40

-

10

(76
)
Other1
11

22

(2,033
)
-

43

(1,957
)
Profit before tax
746

1,828

(1,156
)
105

(649
)
874

1
GB&M includes goodwill impairment of £2,182m.
2
On 29 June 2017, the Turkish operations transferred to HSBC Middle East Holdings B.V. and HSBC Bank Middle East Limited.
Net interest margin
Net interest margin is calculated by dividing net interest income as reported in the income statement by the average balance of interest-earning assets. Average balances are based on daily averages of the group's activities with monthly or less frequent averages used elsewhere.
 

Net interest margin of 1.36% was 20 basis points ('bps') lower than in 2016, including the effects of significant items and foreign currency translation. Excluding these factors, net interest margin decreased due to pressure on customer asset yields, including mortgages, overdrafts and term lending.
Net interest income
 
 
 
2017

2016

 
£m

£m

Interest income
9,043

9,322

Interest expense
(2,862
)
(2,553
)
Net interest income
6,181

6,769

Average interest-earning assets
453,182

434,686

 
%

%

Gross interest yield
1.84

2.04

Less: cost of funds
(0.53
)
(0.53
)
Net interest spread
1.31

1.51

Net interest margin1
1.36

1.56

1
Net interest margin is net interest income expressed as an annualised percentage of average interest-earning assets.
Summary of interest income by asset type
 
2017
2016
 
Average
balance

Interest
income

Yield1 

Average
balance

Interest
income

Yield1

 
£m

£m

%

£m

£m

%

Short-term funds and loans and advances to banks
78,133

53

0.07

60,655

116

0.19

Loans and advances to customers
266,491

7,136

2.68

250,087

7,687

3.07

Reverse repurchase agreements
44,739

186

0.42

45,233

90

0.20

Financial investments
63,462

943

1.49

78,391

975

1.24

Other interest-earning assets
357

18

5.04

320

9

2.81

Total interest-earning assets
453,182

8,336

1.84

434,686

8,877

2.04

Trading assets2 and financial assets designated at fair value
82,765

1,685

2.04

82,609

1,401

1.70

Impairment allowances
(2,328
)
-

-

(2,744
)
-

-

Non-interest-earning assets
300,521

-

-

333,169

-

-

Total assets
834,140

10,021

1.20

847,720

10,278

1.21

1
Yield calculations include negative interest on assets recognised as interest expense in the income statement.
2
Interest income arising from trading assets is included within 'Net trading income' in the income statement.

HSBC Bank plc Annual Report and Accounts 2017
15


Strategic Report HTMLPIPESYMBOL Business Review

Summary of interest expense by type of liability and equity
 
2017
2016
 
Average balance

Interest expense1

Cost

Average balance

Interest expense1

Cost

 
£m

£m

%

£m

£m

%

Deposits by banks
17,293

54

0.31

18,054

98

0.54

Financial liabilities designated at fair value - own debt issued
17,307

218

1.26

18,681

176

0.94

Customer accounts
308,944

1,279

0.41

297,913

1,456

0.49

Repurchase agreements
39,239

152

0.39

34,955

62

0.18

Debt securities in issue
21,846

377

1.73

28,822

250

0.87

Other interest-bearing liabilities
1,114

75

6.73

1,106

56

5.06

Total interest-bearing liabilities
405,743

2,155

0.53

399,531

2,098

0.53

Trading liabilities2 and financial liabilities designated at fair value (excluding own debt)
91,830

1,167

1.27

78,230

912

1.17

Non-interest bearing current accounts
49,527

-

-

39,754

-

-

Total equity and other non-interest bearing liabilities
287,040

-

-

330,205

-

-

Total equity and liabilities
834,140

3,322

0.40

847,720

3,010

0.36

1
Cost of funding calculations include negative interest on liabilities recognised as interest income in the income statement.
2
Interest expense arising from trading liabilities is included within 'Net trading income' in the income statement.

16
HSBC Bank plc Annual Report and Accounts 2017


Structural reform
Policy background
The UK Financial Services (Banking Reform) Act 2013 and associated secondary legislation and regulatory rules require UK deposit-taking banks with more than £25bn of 'core deposits' (broadly from individuals and small to medium-sized businesses) to separate their UK retail banking activities from their other wholesale and investment banking activities by 1 January 2019. The resulting UK ring-fenced bank entities need to be legally distinct, operationally separate and economically independent from the non ring-fenced bank entities.
Ring-fencing rules have been published by the Prudential Regulation Authority ('PRA') determining how ring-fenced banks will be permitted to operate. Further rules published by the FCA set out the disclosures that non ring-fenced banks are required to make to prospective customers who are individuals.
Ring-fencing implementation
HSBC's ring-fenced bank ('RFB'), named HSBC UK Bank plc ('HSBC UK'), was set up to hold the qualifying components of HSBC Bank plc's UK RBWM, CMB and GPB businesses. The UK GB&M business and current overseas subsidiaries and branches will remain in HSBC Bank plc, which will become HSBC's non ring-fenced bank ('NRFB'). The two banking entities will operate alongside each other, together with HSBC Global Services (UK) Limited ('UK ServCo'). The impact of any restructuring required as a result of the UK withdrawal from the European Union has not been included in the following disclosure and pro forma financial information.
In order to achieve this target-state, HSBC Bank plc will need to undertake a number of legal transfers. These include the transfer of customer and non-customer assets, liabilities and contractual arrangements. The majority of these transfers will be made via a court-approved ring-fencing transfer scheme ('RFTS') as provided for in Part VII, section 106 of the Financial Services and Markets Act 2000 (as amended) ('FSMA'). In addition to these transfers, certain items will be transferred via alternative arrangements.
HSBC's Structural Reform timeline, including progress to date and indicative future milestones, is as follows:
2015
HSBC UK, the legal entity which will become the RFB, was incorporated in December 2015.

2016
The Group presented the final ring-fencing project plan to the PRA and FCA.
 

An RFB banking licence application was submitted to the regulators.
A skilled person as defined by the FSMA, responsible for preparing the RFTS report was appointed.
2017
In January 2017, HSBC UK Holdings Limited was incorporated and in March 2017 HSBC UK was transferred from HSBC Holdings plc to this new intermediate holding company.
In March 2017, HSBC Bank plc's share premium totalling £20.7bn was converted to distributable reserves through a court-approved process in preparation for the transfer of businesses and related capital to HSBC UK.
In July 2017, HSBC UK was granted a restricted banking licence from its regulators prior to the satisfaction of the PRA/FCA's Threshold Conditions, and HSBC is currently working on an agreed mobilisation plan to receive an unrestricted licence in 2018.
In August 2017, HSBC UK was converted from a private company to a public limited company.
A number of legal entities connected with the future NRFB business started to be transferred to, or divisionalised into, HSBC Bank plc.
2018
In January 2018, the RFTS court process was initiated with the submission of an application to the High Court, followed by the first hearing to consider and approve the communications programme.
The final court hearing to sanction the RFTS is planned to take place in May 2018.
We plan to execute simultaneously the following three transfers on 1 July 2018 under an agreement between HSBC Holdings plc, HSBC Bank plc, HSBC UK and HSBC UK Holdings Limited:
-
HSBC Bank plc's UK RBWM and the qualifying components of CMB businesses and related items will be transferred to HSBC UK through the RFTS;
-
HSBC Bank plc's qualifying subsidiaries, notably Marks and Spencer Financial Services plc, HSBC Private Bank (UK) Limited and a number of asset finance entities, will be transferred to HSBC UK as part of the RFTS; and
-
HSBC Bank plc's excess reserves will be transferred to HSBC UK through a capital contribution.
HSBC Bank plc will be transferred to HSBC UK Holdings Limited in the second half of 2018.

HSBC Bank plc Annual Report and Accounts 2017
17


Strategic Report | Highlights

During 2017 and early 2018 there w ere also a number of other significant milestones including the establishment of HSBC UK's IT infrastructure and the successful migration of around 209,000 customer sterling accounts and 203,000 foreign currency accounts to new HSBC UK sort codes.
On 1 October 2017, 21,571 employees were transferred from HSBC Bank plc to HSBC UK. At the same time, an intra-group service agreement between these two entities, effective until 30 June 2018, enabled the deployment of these employees back to HSBC Bank plc.
We plan to officially open HSBC UK's headquarters in Birmingham on 16 May 2018. More than 90% of the roles that need to move from London to Birmingham have now been filled, and we are on track to have a fully functioning team in place by 1 July 2018.
The cost to HSBC Bank plc of ring-fencing in 2017 was £0.3bn (2016: £0.1bn). The total cost is expected to be £0.6bn over the lifetime of the restructuring.
 
HSBC UK Bank plc 2017 pro forma balance sheet
The purpose of this disclosure is to provide an estimate of the likely financial position of the RFB following legal separation, based on assets and liabilities held in HSBC Bank plc as at 31 December 2017. This pro forma information is being furnished solely for informational purposes. The unaudited pro forma financial information is based on available information and assumptions that management believes were reasonable at the date of preparation.
The disclosure below sets out pro forma consolidated financial information in respect of HSBC UK. HSBC Bank plc (excluding HSBC UK) is not presented in the disclosure due to various transfers and re-organisation activities which have not yet occurred and that will take place in the months leading to legal separation (including capital contributions). This will ensure that HSBC Bank plc and HSBC UK can operate as separate legal entities from 1 July 2018.
Consolidated balance sheet
 
 
 
 
Pro forma HSBC UK Bank plc balance sheet


 
 
2017

 
Footnotes
£bn

Assets
 
 
Liquid assets
1
59.1

Derivatives
2
0.1

Loans and advances to customers
 
162.0

Pension asset
 
6.1

Prepayments, accrued income and other assets
 
2.1

Goodwill and intangible assets
 
3.6

Total assets at 31 Dec
 
233.0

Liabilities and equity
 
 
Liabilities
 
 
Customer accounts
 
203.5

Items in the course of transmission to other banks
 
0.4

Financial liabilities designated at fair value
 
1.0

Derivatives
2
0.2

Accruals, deferred income and other liabilities
 
1.6

Provisions
 
1.1

Deferred tax liabilities
 
1.2

Subordinated liabilities
 
3.9

Total liabilities at 31 Dec
 
212.9

Total shareholder's equity at 31 Dec
3
20.1

Total liabilities and equity at 31 Dec
 
233.0

1
Liquid assets include cash and balances at central banks, items in the course of collection from other banks and financial investments.
2
HSBC UK derivative assets and liabilities relate solely to customer driven derivative transactions and hedging instruments used to manage HSBC UK's own risk.
3
Total shareholders' equity includes share capital, share premium, additional Tier 1 instruments and reserves. Reserves include accounting reserves of c.£7.6bn relating to the recognition of goodwill and the pension asset net of deferred tax which do not form part of regulatory capital. Shareholders' equity is based on information available and assumptions made at the date of preparation; as such, subsequent amounts reported may differ.
Risk Weighted Assets (RWAs) by global business1
 
At 31 Dec 2017
 
RBWM

CMB

GB&M

GPB

Corporate
 Centre

Total RWAs

 
£bn

£bn

£bn

£bn

£bn

£bn

Pro forma HSBC UK Bank plc
 
 
 
 
 
 
Credit Risk
15.1

54.1

-

1.8

1.0

72.0

Market Risk
-

-

-

-

0.1

0.1

Operational Risk
5.4

4.5

-

0.3

0.1

10.3

Total RWAs at 31 Dec 2017
20.5

58.6

-

2.1

1.2

82.4

1
Includes only third-party RWAs.

18
HSBC Bank plc Annual Report and Accounts 2017


Basis of preparation
The establishment of HSBC UK will be accounted for as a group restructuring. HSBC's accounting policy for such transactions requires that assets and liabilities are recognised by HSBC UK at their existing carrying amounts in the financial statements of HSBC Bank plc. Equity reserves relating to items such as cash flow hedging and available-for-sale fair values will not be recycled by HSBC Bank plc but will be transferred across to continue the existing accounting basis in HSBC UK, as if the RFB had always been in place.
The pro forma financial information set out above is prepared in accordance with HSBC's accounting policy on group restructuring and on the basis that the business operations are transferred to HSBC UK on 31 December 2017.
As the systems and processes to support the generation of HSBC UK's financial reporting have not yet been fully implemented, certain estimates and assumptions are necessary to generate the pro forma balances. As a result, subsequent financial information reported by HSBC UK may differ from that presented in the pro forma disclosures.
International Financial Reporting Standard 9 ('IFRS 9') 'Financial Instruments'
IFRS 9 will replace International Accounting Standard ('IAS 39') 'Financial Instruments: Recognition and Measurement' from
1 January 2018. The new standard includes requirements for classification and measurement of financial assets and liabilities, impairment of financial assets and hedge accounting. The pro forma Balance Sheet has been prepared on the basis of IAS 39, however it is not fully compliant with IFRSs.
 
Goodwill
While goodwill is an accounting concept and therefore will not form part of the legal transfer of assets and liabilities, consistent with the accounting approach for other assets and liabilities, it is necessary to take a relative proportion of the goodwill accounting value previously recognised by HSBC Bank plc. Goodwill has therefore been allocated to HSBC UK based on estimated Risk Weighted Assets.
Following an acquisition goodwill loses its original identity and is managed and monitored by cash generating units, which for HSBC Bank plc are the global businesses that have benefited from those historical acquisitions. Given that a significant percentage of the global businesses that supported the goodwill have been transferred to HSBC UK, it therefore follows that a significant portion of the goodwill is also transferred with those businesses.
Provisions
Provisions have been allocated to HSBC UK based on the underlying business line that generated an obligating event.
Pension asset
The surplus on the UK principal defined benefit plan has been recognised entirely in the pro forma balance sheet of HSBC UK.
Taxation
No current tax has been recognised on the pro forma balance sheet of HSBC UK. Deferred tax has been recognised in respect of the temporary differences arising on the underlying assets and liabilities transferred.

HSBC Bank plc Annual Report and Accounts 2017
19


Strategic Report | Highlights

Risk overview
The group continuously monitors and identifies risks. This process, which is informed by its risk factors and the results of its stress testing programme, gives rise to the classification of certain principal risks. Changes in the assessment of principal risks may result in adjustments to the group's business strategy and, potentially, its risk appetite.
Our banking risks are credit risk, operational risk, market risk, liquidity and funding risk, compliance risk and reputational risk. We also incur insurance risk.
 
In addition to these banking risks, we have identified top and emerging risks with the potential to have a material impact on our financial results or reputation and the sustainability of our long-term business model.
The exposure to our risks and risk management of these are explained in more detail in the Risk section of the Report of the Directors on pages 20 to 36.
During 2017, a number of changes to our top and emerging risks have been made, to reflect the revised assessment of their effect on the group.
Risk
 
Mitigants
Externally driven
 
UK exit from EU
p
The UK is due to leave the EU in March 2019 and negotiations are ongoing. We will continue to work with regulators, governments and our customers to manage the risks of the UK's exit from the EU (and the current period of uncertainty) as they arise, particularly across those sectors most impacted.
 
Geopolitical risk
p
We continually assess the impact of geopolitical events on our businesses and exposures across Europe and take steps to mitigate, where required, to ensure we remain within risk appetite. We have also strengthened physical security at our premises where the risk of terrorism is heightened.
 
Turning of the credit cycle
u
We continue to undertake detailed reviews of our portfolios and are also proactively accessing other customers and sectors likely to come under stress as a result of geopolitical or macroeconomic events, reducing limits where appropriate.
 
Cyber threat and unauthorised access to systems
p
We continue to strengthen our cyber control framework and implement initiatives to improve our resilience and cybersecurity capabilities, including threat detection and analysis, access control, payment system controls, data protection and backup and recovery.
 
Increasing regulatory expectations
u
We proactively engage with regulators and policy makers wherever possible to help ensure that new regulatory requirements are considered fully and can be implemented in an effective manner.
 
Regulatory focus on conduct of business
u
We continue to enhance our management of conduct in a number of areas, including the treatment of potentially vulnerable customers, market surveillance, employee training and performance.
 
Financial Crime Compliance
u
We continue to develop and enhance our Financial Crime Risk function, strengthen our governance processes and augment our risk management capabilities to further improve our financial crime detection and compliance capabilities.
 
Market illiquidity and volatility
u
We monitor risks closely and report regularly on illiquidity and concentration risks to the PRA.
Internally driven
 
People risk
u
We continue to increase our focus on resource planning and employee retention and to equip line managers with the skills to both manage change and support their employees.
 
IT systems infrastructure and resilience
u
We continue to monitor and improve service resilience across our technology infrastructure, enhancing our problem diagnosis/resolution and change execution capabilities, reducing service disruption to our customers.
 
Execution risk
u
We continue to strengthen our prioritisation and governance processes for significant strategic, regulatory and compliance projects.
 
Model risk
u
We continue to enhance our model risk governance framework by establishing an independent Second Line of Defence Model Risk Management function, and we continue to enhance our existing policy and standards in order to address evolving regulatory, external and internal requirements.
 
Data management
p
We continue to improve our insights, consistency of data aggregation, reporting and decisions through ongoing enhancement of our data governance, data quality and architecture framework.

p
Risk has heightened during 2017
u
Risk remains at the same level as 2016



On behalf of the Board
 
A P S Simoes, Director
 
20 February 2018
 
Registered number 14259
 

20
HSBC Bank plc Annual Report and Accounts 2017


Risk
 
Page
Our conservative risk appetite
Top and emerging risks
Externally driven
Internally driven
Areas of special interest
Risk management
Our risk management framework
Our material banking and insurance risks
Credit risk management
Liquidity and funding risk management
Market risk management
Operational risk management
Legal risk
Regulatory compliance risk management
Financial crime risk management
Insurance manufacturing operations risk management
Other material risks
Reputational risk management
Pension risk management
Key developments and risk profile in 2017
Key developments
Credit risk profile
Management of liquidity and funding risk profile
Market risk profile
Operational risk profile
Insurance manufacturing operations risk profile
Our conservative risk appetite
Throughout its history, HSBC has maintained an evolving conservative risk profile. It is central to our business and strategy. The following principles express the group's overarching risk appetite and fundamentally drive how the business and risks are managed:
Enterprise-wide application
Our risk appetite encapsulates consideration of financial and non-financial risks and is expressed in both quantitative and qualitative terms.
It is applied at the global business level, at the country level and to material European entities.
Financial position
Strong capital position, defined by regulatory and internal ratios.
Liquidity and funding management for each entity on a stand-alone basis.
Operating model
Returns generated in line with risk taken.
Sustainable and diversified earnings mix, delivering consistent returns for shareholders.
Business practice
Zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and/or mitigated.
No appetite for deliberately or knowingly causing detriment to consumers arising from our products and services or incurring a breach of the letter or spirit of regulatory requirements.
No appetite for inappropriate market conduct by a member of staff or by any group business.

 
Top and emerging risks
Top and emerging risks are those that may impact on the financial results, reputation or business model of the bank. If these risks were to occur, they could have a material effect on the group.
The exposure to these risks and our risk management approach are explained in more detail below.
Externally driven
Process of UK withdrawal from the European Union
Uncertainty regarding the terms of the UK's exit agreement and its future relationship (including trading) with both the EU and the rest of the world is expected to continue for the next few years at least. Market volatility will therefore persist as the UK continues its negotiations with the EU and its potential future trading partners around the world. Throughout this period, we will continually update our assessment of potential consequences for our customers, products and banking model and re-evaluate our mitigating actions accordingly.
The scale and nature of the impact on HSBC will depend on the precise terms on which HSBC and its customers will be able to conduct cross-border business following the UK's departure from the EU. Changes to the UK's current trade relationships could require changes to HSBC's banking model to ensure we continue to comply with law and regulation in meeting the needs of our customers and conducting our business. Such changes could, among other things, increase our operating costs and require us to relocate staff and businesses to other jurisdictions. In addition, any negative impact on the economy, demand for borrowing and capital flows as a result of the aforementioned uncertainty, volatility or result of UK negotiations could have a consequential negative impact on HSBC.
Mitigating actions
We have undertaken a comprehensive impact assessment to understand the range of potential implications for our customers, our products and our business. We have identified options to ensure we can continue to serve our customers across the UK and Europe, and we will continue to update these options as the negotiations with the EU develop.
We actively monitor our portfolio to identify areas of stress, supported by stress testing analyses. Vulnerable sectors will be subject to management review to determine if any adjustments to risk policy or appetite are required.
We will continue to work with regulators, governments and our clients in an effort to manage risks as they arise, particularly across the most impacted sectors.
Geopolitical risk
Our operations and portfolios are exposed to risks associated with political instability, civil unrest and military conflict which could lead to disruption to our operations, physical risk to our staff and/or physical damage to our assets. In addition rising protectionism and the increased trend of using trade and investment policies as diplomatic tools may also adversely affect global trade flows. Geopolitical risk remain heightened throughout 2017.
In the Middle East, the Islamic State's ('IS') loss of territory in both Iraq and Syria in 2017 have reduced their power and influence in the region, but attacks further afield by IS terrorists, particularly in Europe, remain likely.
In Europe, there remains an uncertain economic and political outlook. Italy, Hungary and Sweden all have elections in 2018 and the political situation in Spain remains tense following the Spanish Government's decision to take direct control of Catalonia following the independence referendum. The EU's future relationship with the UK is still yet to be determined, with negotiations on the terms of the UK's exit from the EU ongoing.

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Mitigating actions
We continually monitor the geopolitical outlook, in particular in countries where we have material exposures and/or a physical presence.
We use internal stress tests and scenario analysis as well as regulatory stress test programmes, to adjust limits and exposures to reflect our risk appetite and mitigate risks as appropriate.
We have taken steps to enhance physical security in those countries deemed to be at high risk from terrorism.
Turning of the credit cycle
While Geopolitical events in 2017 have not materially impacted our loss rates, they have created a climate of uncertainty with regards to trade and investment.
In the UK, rising inflation led to the MPC increasing the base rate by 0.25%, the first rise since July 2007, with expectations of a further increase in the first half of 2018. Combined with negative wage growth, the income squeeze that continues to be experienced within UK households has impacted consumer spending with a consequential negative effect on the retail sector.
Continental Europe enjoyed more buoyant trading conditions than seen in 2016, albeit particular areas of financial weakness (e.g. Greece and the Italian banking sector) and political vulnerability (e.g. Spain) remain.
While impairment charges increased in the second half of 2017 from historic lows, they remained well within our risk appetite for the full year and overall the wholesale portfolio remained stable.
Mitigating actions
We closely monitor economic developments in key markets and sectors and undertake scenario analysis. This enables us to take portfolio actions where necessary, including enhanced monitoring, amending our risk appetite and/or reducing limits and exposures. We continue to monitor certain high risk portfolios such as oil and gas which has been more stable in 2017.
We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions being taken to rebalance exposures and manage risk appetite where necessary.
Reviews of key portfolios are undertaken regularly to ensure that individual customer or portfolio risks are understood and our ability to manage the level of facilities offered through any downturn are appropriate. In 2017 we have undertaken specific reviews of portfolios showing vulnerability such as construction and retail.
Cyber threat and unauthorised access to systems
HSBC and other public and private organisations continue to be the targets of increasingly sophisticated cyber attacks. Ransomware and distributed denial of service attacks appear to be an increasingly dominant threat to the financial industry, which may result in disruption to our operations and customer-facing websites or loss of customer data.
Mitigating actions
We continue to strengthen and significantly invest in our ability to prevent, detect and respond to the ever-increasing and sophisticated threat of cyber attacks. Specifically, we continue to enhance our capabilities to protect against increasingly sophisticated malware, denial of service attacks and data leakage prevention, as well as enhancing our security event detection and incident response processes.
Cyber risk is a top priority of the Operations and Technology Committee ('OPTEC') of the Board and is regularly reported to ensure appropriate visibility, governance and executive support for our ongoing cybersecurity programme.
We participate in intelligence sharing with both law enforcement and industry schemes to help improve our
 
understanding of, and ability to respond to, the evolving threats faced by us and our peers.
Increasing regulatory expectations
Financial service providers continue to face stringent regulatory and supervisory requirements, particularly in the areas of capital and liquidity management, conduct of business, financial crime, internal control frameworks, the use of models and the integrity of financial services delivery. Regulatory changes including any resulting from the UK's exit from the EU may affect the activities, of the group as a whole or of some or all of its principal subsidiaries.
Mitigating actions
We are fully engaged with governments and regulators in the countries in which we operate, to help ensure that new requirements are considered properly by regulatory authorities and the financial sector and can be implemented in an effective manner.
We hold regular meetings with UK authorities to discuss strategic contingency plans covering a wide range of scenarios relating to the UK's exit from the EU.
Regulatory focus on conduct of business
Financial institutions remain under considerable scrutiny regarding conduct of business, particularly in relation to fair outcomes for customers and orderly and transparent operations in financial markets. Regulators, prosecutors, the media and the public all have heightened expectations as to the behaviour and conduct of financial institutions, and any shortcomings or failure to demonstrate adequate controls are in place to mitigate such risks could result in regulatory sanctions, fines or an increase in civil litigation.
In September 2017, HBSC Holdings and HSBC North America Holdings Inc. ('HNAH') consented to a civil money penalty order with the US Federal Reserve Board ('FRB') in connection with its investigation into HSBC's historic foreign exchange activities. Under the terms of the order, HSBC Holdings and HNAH agreed to undertake certain remedial steps and to pay a civil money penalty to the FRB. In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the Criminal Division of the US Department of Justice ('DoJ') relating to HSBC's historical foreign exchange sales and trading activities. Under the terms of the deferred prosecution agreement, HSBC agreed to undertake certain remedial steps; to provide annual reports to the DoJ and to pay a financial penalty and restitution. For further detail, see Note 30 of the Financial Statements.
Mitigating actions
We have continued to enhance our management of conduct in areas including the treatment of potentially vulnerable customers, market surveillance, employee training and performance management (see 'Regulatory compliance risk management' on page 33).
Financial crime compliance
Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. Financial crime threats continue to evolve, often in tandem with geopolitical developments. The financial crime risks related to the use of innovative fintech are not yet fully understood, while the changing sanctions regulatory landscape presents execution challenges.
Recent terrorist attacks in Europe and the US may increase law enforcement and/or regulatory focus on bank controls to combat terrorist financing and timely reporting to authorities. This focus may also lead to conflicts between data demands from law enforcement and the data protections which HSBC is required to enforce.
An independent compliance monitor ('the Monitor') was appointed in 2013 under the 2012 agreements entered into with the DoJ and the UK FCA to produce annual assessments of the effectiveness of our Anti-Money Laundering ('AML') and sanctions compliance

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programme. Additionally, the Monitor is serving as HSBC's independent consultant under the consent order of the FRB. In December 2017, the US Deferred Prosecution Agreement ('AML DPA') expired as HSBC lived up to all of its commitments. The Monitor is to continue working as an independent consultant for a period of time at the discretion of the FCA and FRB.
Mitigating actions
We continued to enhance our Financial Crime Risk function which brings together all areas of financial crime risk management at HSBC.
We are working to develop enhanced risk management capabilities through the better use of sophisticated analytical techniques.
We are working to ensure that the reforms we have put in place are both effective and sustainable over the long term. Work in this area will continue to be consistent with the strategic objective of implementing the most effective standards to combat financial crime across our operations.
Market illiquidity and volatility
Market liquidity, as defined by the ability to trade the desired volume of a financial security in a timely manner, continues to be sporadic. Liquidity remains challenging due to multiple factors: regulatory demands such as increased capital requirements constraining the overall balance sheet size of financial institutions, the implementation of the Volcker rule, which prohibits certain trading activities, and the impact of revised collateral requirements.
This is a market-wide issue, where HSBC may suffer further losses or incur lower revenue due to higher volatility.
Mitigating actions
We continually monitor our illiquid positions and concentration risks, adjusting our market risk limits where appropriate.
Internally driven
People risk
Increasingly complex and conflicting demands continue to be placed on our workforce, where the expertise is often in short supply and globally mobile. These demands arise from our regulatory reform and remediation programmes, together with those related to the delivery of our strategy.
The Senior Managers and Certification regimes and the related Rules of Conduct sets clear expectations of the accountabilities and behaviour of both senior and more junior employees.
Organisational changes to support the group's strategy, including the relocation of the HSBC UK head office to Birmingham and the implementation of regulatory reform programmes, have the potential to lead to increased staff turnover.
Following the referendum on the UK's membership of the EU and vote to leave, there are increased people risks for the UK to be assessed.
Mitigating actions
We continue to increase the level of specialist resources in key areas and to engage with our regulators as they finalise new regulations.
Risks related to organisational change are subject to close management oversight, especially in those countries where staff turnover is particularly high.
Plans to support the move of the HSBC UK head office to Birmingham are being implemented. The potential impacts resulting from the UK exit from the EU are being reviewed and action plans created.
IT systems infrastructure and resilience
HSBC continues to invest in the reliability and resilience of the group's IT systems and crucial services, which could result in reputational and regulatory damage.
 
Mitigating actions
Strategic initiatives are transforming how technology is developed, delivered and maintained, with a particular focus on providing high quality, stable and secure services. As part of this, we are concentrating on materially improving system resilience and service continuity testing. In addition we have enhanced the security of our development lifecycle and improved our testing processes and tools.
During 2017, we continued to monitor and upgrade our IT systems, simplifying our service provision and replacing older IT infrastructure and applications.
Execution risk
In order to deliver our strategic objectives and meet mandatory regulatory requirements, it is important for HSBC to maintain a strong focus on execution risk. This requires robust management of significant resource intensive and time sensitive programmes. Risks arising from the magnitude and complexity of change may include regulatory censure, reputational damage or financial losses. Current major initiatives include the implementation of the Ring Fenced Bank and managing the operational implications of updating our business model following the UK's vote to leave the EU.
Mitigating actions
Our prioritisation and governance processes for significant projects are monitored by the group's Executive Committee. Within HSBC Bank plc, the Board's Operations and Technology sub-committee ('OPTEC') has visibility of, and provides input to, regional priorities.
In 2017, we continued to manage execution risks through closely monitoring the punctual delivery of critical initiatives, internal and external dependencies, and key risks, to allow better portfolio management across the group.
Model risk
We use models for a range of purposes in managing our business, including regulatory capital calculations, stress testing, credit approvals, financial crime risk management and financial reporting. Evolving regulatory requirements have had a significant impact on our approach to model risk management, which poses execution challenges. The adoption of more sophisticated modelling approaches and technology across the industry could also lead to increased model risk.
We could incur losses, be required to hold additional capital, fail to meet regulatory standards or incur higher operating expenses due to the use of inappropriate models or poor model risk management.
Mitigating actions
We have created centralised global analytical functions and continue to enhance the capability and expertise of our modelling and independent model review teams.
We are continuing to enhance our model risk governance framework by establishing a Second Line of Defence Model Risk Management function independent from our Global Risk Analytics teams.
As we adopt new modelling technologies, we are updating our model risk management framework and governance standards to help address any new risks arising.
Data management
The group currently uses a large number of systems and applications to support key business processes and operations. As a result, we often need to reconcile multiple data sources, including customer data sources, to reduce the risk of error. HSBC, along with other organisations, also needs to meet external/internal/regulatory obligations e.g. the General Data Protection Regulation ('GDPR') which requires implementation of data privacy and protection capabilities across our customer data systems by May 2018.

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Mitigating actions
We continue to improve the data quality across a large number of group systems. Our data management and aggregation continues to strengthen and enhance the effectiveness of internal systems and processes.
We continue to make progress on improving data quality by proactively monitoring customer and transaction data and resolving any data issues. We have also implemented data controls and enhanced reconciliation in order to improve the reliability of data used by our customers and staff.
Areas of special interest
Process of UK withdrawal from the European Union
The UK is due to formally leave the EU in March 2019. Before this can happen the UK and the EU have to finalise the Article 50 Withdrawal Agreement, which will then need to be approved by their respective Parliaments. Concluding negotiations on a comprehensive trade deal within this time frame could be challenging. A period of transition is therefore possible but the scope and length of any such arrangement would need to be agreed between the UK and the EU. Uncertainty therefore continues and with it the risk of significant market volatility. Our objective in all scenarios is to continue to meet customers' needs and minimise disruption. This is likely to require adjustments to our cross-border banking model, with impacted business transferring from the UK to our existing subsidiary in France or other European subsidiaries, as appropriate.
Given the tight time frame and the complexity of the negotiations, we have put in place a robust contingency plan. It is based on a scenario whereby the UK exits the EU in March 2019, without access to the single market or customs union, and without a transitional arrangement. When negotiation positions and timelines become clearer, we will update our contingency plan.
Risks are monitored continually, with vulnerable industry sectors reviewed by management to determine if adjustments to our risk policy or appetite are required.
Construction, contracting and outsourcing sector
The construction, contracting and outsourcing sector, primarily in the UK, remained a challenging operating environment throughout the second half of 2017 and into early 2018. The medium to long term environment remains uncertain with the full impacts of the UK's vote to leave the EU yet to be quantified. HSBC's overall portfolio directly attributable to the construction-contracting sector had agreed risk exposures of $7.3bn with $3bn of drawn risk exposures. In terms of credit quality, 45% was rated 'strong/good' and 38% 'satisfactory'. Throughout the Europe region, our appetite, since the second half of 2016, is classified as Restricted. The sector remains under enhanced monitoring and heightened risk management focus.
Risk management
As a provider of banking and financial services, the group actively manages risk as a core part of its day-to-day activities. It continues to maintain a strong liquidity position and is well positioned for the evolving regulatory landscape. The group also maintained its conservative risk profile in 2017.
Our risk management framework
An established risk governance framework and ownership structure ensures oversight of, and accountability for, the effective management of risk. The group's risk management framework fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. Integral to the group's risk management framework are risk appetite, stress testing and the identification of emerging risks.
The bank's Risk Committee focuses on risk governance and provides a forward-looking view of risks and their mitigation. The
 
Risk Committee is a committee of the Board and has responsibility for oversight and advice to the Board on, inter alia, the bank's risk appetite, tolerance and strategy, systems of risk management, internal control and compliance. Additionally, members of the Risk Committee attend meetings of the Chairman's Nominations and Remuneration Committee at which the alignment of the reward structures to risk appetite is considered.
In carrying out its responsibilities, the Risk Committee is closely supported by the Chief Risk Officer, the Chief Financial Officer, the Head of Internal Audit and the Heads of Compliance, together with other business functions on risks within their respective areas of responsibility.
Three lines of defence
To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment.
The model underpins our approach to risk management by clarifying responsibility, encouraging collaboration and enabling efficient coordination of risk and control activities. The three lines are summarised below:
The first line of defence owns the risks and is responsible for identifying, recording, reporting and managing them, and ensuring that the right controls and assessments are in place to mitigate them.
The second line of defence sets the policy and guidelines for managing specific risk areas, provides advice and guidance in relation to the risk, and challenges the first line of defence on effective risk management.
The third line of defence is our Internal Audit function, which provides independent and objective assurance of the adequacy of the design and operational effectiveness of the group's risk management framework and control governance process.
Our risk culture
Risk culture refers to HSBC's norms, attitudes and behaviours related to risk awareness, risk taking and risk management.
HSBC has long recognised the importance of a strong risk culture, the fostering of which is a key responsibility of senior executives. Our risk culture is reinforced by the HSBC Values and our Global Standards programme. It is instrumental in aligning the behaviours of individuals with our attitude to assuming and managing risk, which helps to ensure that our risk profile remains in line with our risk appetite.
We use clear and consistent employee communication on risk to convey strategic messages and set the tone from senior management and the Board. We also deploy mandatory training on risk and compliance topics to embed skills and understanding in order to strengthen our risk culture and reinforce the attitude to risk in the behaviour expected of employees, as described in our risk policies.
The risk culture is reinforced by the Group's approach to remuneration. Individual awards, including those for senior executives, are based on compliance with the HSBC Values and the achievement of both financial and non-financial objectives, that are aligned to our risk appetite and global strategy.
Whistleblowing
We operate a global whistleblowing standard, HSBC Confidential, allowing staff to report matters of concern confidentially. We also maintain an external email address for concerns about accounting and internal financial controls or auditing matters ([email protected]).
For further details, see page 5 of the How we do Business section.
Risk appetite
The group's Risk Appetite Statement describes the types and levels of risk that the group is prepared to accept in executing its strategy. Quantitative and qualitative metrics are assigned to 15 key categories, including: earnings, capital and leverage, liquidity

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and funding, interest rate risk in the banking book, credit risk, traded risk, operational risk, financial crime compliance and regulatory compliance.
Measurement against the metrics:
guides underlying business activity;
informs risk-adjusted remuneration;
enables the key underlying assumptions to be monitored and, where necessary, adjusted through subsequent business planning cycles; and
promptly identifies business decisions needed to mitigate risk.
The Risk Appetite Statement is approved by the Board following advice from the Risk Committee. It is part of the annual planning process, in which global businesses, geographical regions and functions are required to articulate their individual risk appetite statements. These are aligned with the group strategy, and provide a risk profile of each global business, region or function in the context of the individual risk categories.
Stress testing
Stress testing is an important tool for banks and regulators to assess vulnerabilities in individual banks and/or the financial banking sector under hypothetical adverse scenarios. The results of stress testing are used to assess banks' resilience to a range of adverse shocks and to assess their capital adequacy.
HSBC Bank plc is subject to regulatory stress testing in several jurisdictions. These requirements are increasing in frequency and granularity. They include the programmes of the Bank of England ('BoE'), Prudential Regulation Authority ('PRA') and the European Banking Authority ('EBA'). Assessment by regulators is on both a quantitative and qualitative basis, the latter focusing on our portfolio quality, data provision, stress testing capability and capital planning processes.
 
A number of internal macroeconomic and event-driven scenarios specific to the European region were considered and reported to senior management during the course of the year. The group also conducts Reverse Stress Testing. This exercise requires a firm to assess scenarios and circumstances that would render its business model unviable, thereby identifying potential business vulnerabilities.
In 2017, the group participated in the successful completion of the annual BoE concurrent stress testing exercise. The Annual Cyclical Scenario incorporates a synchronised global downturn affecting Asia and the UK in particular. Financial markets come under severe stress with a reduction in global risk appetite and reductions in market liquidity. The UK experiences a slowdown driven by the downturn in its trading partners, fall in confidence, and a sharp sterling depreciation leading to inflationary pressure on imports. In response monetary policy tightening leads to a steep rise in market and lending interest rates in the UK while global yield curves remain flat.
In addition to the Annual Cyclical Scenario, there was an additional Exploratory Scenario, intended to assess banks' strategic response to a structurally more challenging operating environment. This scenario incorporates a slowdown in productivity growth, which is driven by weak trade and a continuing fall in cross-border banking. Interest rates remain very low and competitive pressure intensifies globally.
The BoE published the results of the 2017 Concurrent Stress Test in November 2017, confirming that these tests did not reveal any capital inadequacies for the HSBC Group.
At the European level, the EBA did not undertake a stress testing exercise in 2017.

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Our material banking and insurance risks
The material risk types associated with our banking and insurance manufacturing operations are described in the following tables.
Description of risks - banking operations
Risks
Arising from
Measurement, monitoring and management of risk
Credit risk (see page 26)
 
The risk of financial loss if a customer or counterparty fails to meet an obligation under a contract.
Credit risk arises principally from direct lending, trade finance and leasing business, but also from certain other products such as guarantees and derivatives.
Credit risk is:
measured as the amount that could be lost if a customer or counterparty fails to make repayments;
monitored within limits approved by individuals within a framework of delegated authorities; and
managed through a robust risk control framework that outlines clear and consistent policies, principles and guidance for risk managers.
Liquidity and funding risk (see page 29)
 
The risk that we do not have sufficient financial resources to meet our obligations as they fall due or that we can only do so at an excessive cost. Funding Risk is the risk that funding considered to be sustainable, and therefore used to fund assets, is not sustainable over time.
Liquidity risk arises from mismatches in the timing of cash flows. Funding risk arises when illiquid asset positions cannot be funded at the expected terms and when required.
Liquidity and funding risk is:
measured using a range of different metrics including the liquidity coverage ratio and net stable funding ratio;
monitored against the group's liquidity and funding risk framework; and
managed on a stand-alone basis with no reliance on any group entity (unless pre-committed) or central bank unless this represents routine established business-as-usual market practice.
Market risk (see page 29)
 
The risk that movements in market factors such as foreign exchange rates, interest rates, credit spreads,equity prices and commodity prices will reduce our income or the value of our portfolios.
Exposure to market risk is separated into two portfolios:
trading portfolios; and
non-trading portfolios.
Market risk exposures arising from our insurance operations are discussed on page 54.
Market risk is:
measured using sensitivities, value at risk ('VaR') and stress testing, giving a detailed picture of potential gains and losses for a range of market movements and scenarios, as well as tail risks over specified time horizons;
monitored using VaR, stress testing and other measures, including the sensitivity of net interest income and the sensitivity of structural foreign exchange; and
managed using risk limits approved by the risk management meeting ('RMM') and the RMM in various global businesses.
Operational risk (see page 32)
 
The risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems or from external events.
Operational risk arises from day-to-day operations or external events, and is relevant to every aspect of our business.
Regulatory compliance risk and financial crime compliance risk are discussed below.
Operational risk is:
measured using the risk and control assessment process, which assesses the level of risk and effectiveness of controls;
monitored using key indicators and other internal control activities; and
managed primarily by global business and functional managers that identify and assess risks, implement controls to manage them and monitor the effectiveness of these controls utilising the operational risk management framework.
Regulatory compliance risk (see page 33)
 
The risk that we fail to observe the letter and spirit of all relevant laws, codes, rules, regulations and standards of good market practice, and incur fines and penalties and suffer damage to our business as a consequence.
Regulatory compliance risk is part of operational risk, and arises from the risks associated with breaching our duty to customers and other counterparties, inappropriate market conduct and breaching other regulatory standards.
Regulatory compliance risk is:
measured by reference to identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our Regulatory Compliance teams;
monitored against our regulatory compliance risk assessments and metrics, the results of the monitoring and control activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and
managed by establishing and communicating appropriate policies and procedures, training employees in them, and monitoring activity to assure their observance. Proactive risk control and/or remediation work is undertaken where required.
Financial crime compliance risk (see page 33)
The risk that we knowingly or unknowingly help parties to commit or to further potentially illegal activity through the group.
Financial crime compliance risk is part of operational risk and arises from day-to-day banking operations.
Financial crime compliance risk is:
measured by reference to identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our Financial Crime Compliance teams;
monitored against our financial crime compliance risk appetite statement and metrics, the results of the monitoring and control activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and
managed by establishing and communicating appropriate policies and procedures, training employees in them, and monitoring activity to ensure their observance. Proactive risk control and/or remediation work is undertaken where required.

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Other material risks
Risks
Arising from
Measurement, monitoring and management of risk
Reputational risk (see page 35)
The risk of failure to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by the group itself, our employees or those with whom we are associated, that might cause stakeholders to form a negative view of the group.
Primary reputational risks arise directly from an action or inaction by HSBC, its employees or associated parties that are not the consequence of another type of risk. Secondary reputational risks are those arising indirectly and are a result of a failure to control any other risks.
Reputational risk is:
measured by reference to our reputation as indicated by our dealings with all relevant stakeholders, including media, regulators, customers and employees;
monitored through a reputational risk management framework that is integrated into the group's broader risk management framework; and
managed by every member of staff, and covered by a number of policies and guidelines. There is a clear structure of committees and individuals charged with mitigating reputational risk.
Pension risk (see page 35)
The risk of increased costs to the group from offering post-employment benefit plans to its employees.

Pension risk arises from investments delivering an inadequate return, adverse changes in interest rates or inflation, or members living longer than expected. Pension risk also includes the operational and reputational risk of sponsoring pension plans.
Pension risk is:
measured in terms of the schemes' ability to generate sufficient funds to meet the cost of their accrued benefits;
monitored through the specific risk appetite that has been developed at both Group and regional levels; and
managed locally through the group Pensions Oversight Forum and ultimately through the group's RMM.
Our insurance manufacturing subsidiaries are regulated separately from our banking operations. Risks in our insurance entities are managed using methodologies and processes that are subject to
 
Group oversight. Our insurance operations are also subject to some of the same risks as our banking operations, which are covered by the group's risk management processes.
Description of risks - insurance manufacturing operations
Risks
Arising from
Measurement, monitoring and management of risk
Financial risk (see page 52)
 
Our ability to effectively match liabilities arising under insurance contracts with the asset portfolios that back them is contingent on the management of financial risks and the extent to which these are borne by policyholders.
Exposure to financial risks arises from:
market risk affecting the fair values of financial assets or their future cash flows;
credit risk; and
liquidity risk of entities not being able to make payments to policyholders as they fall due.
Financial risk is:
measured (i) for credit risk, in terms of economic capital and the amount that could be lost if a counterparty fails to make repayments; (ii) for market risk, in terms of economic capital, internal metrics and fluctuations in key financial variables; and (iii) for liquidity, in terms of internal metrics, including stressed operational cash flow projections;
monitored through a framework of approved limits and delegated authorities; and
managed through a robust risk control framework that outlines clear and consistent policies, principles and guidance. This includes using product design and asset liability matching and bonus rates.
Insurance risk (see page 55)
 
The risk that, over time, the cost of the contract, including claims and benefits may exceed the total amount of premiums and investment income received.
The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, as well as lapse and surrender rates.
Insurance risk is:
measured in terms of life insurance liabilities and economic capital allocated to insurance underwriting risk;
monitored though a framework of approved limits and delegated authorities; and
managed through a robust risk control framework that outlines clear and consistent policies, principles and guidance. This includes using product design, underwriting, reinsurance and claims-handling procedures.

Credit risk management
(Audited)
Of the risks in which we engage, credit risk generates the largest regulatory capital requirements.
The principal objectives of our credit risk management are:
to maintain across the group a strong culture of responsible lending and a robust risk policy and control framework;
to both partner and challenge Global Businesses in defining, implementing, and continually re-evaluating our risk appetite under actual and scenario conditions; and
to ensure there is independent, expert scrutiny of credit risks, their costs and mitigation.
Within the bank, the Credit Risk function is headed by the European Chief Risk Officer who reports to the Chief Executive Officer, with a functional reporting line to the Group Chief Risk Officer. Its responsibilities are:
 
to formulate credit policy. Compliance, subject to approved dispensations, is mandatory for all operating companies which must develop local credit policies consistent with group policies that very closely reflect Group policy;
to guide operating companies on the group's appetite for credit risk exposure to specified market sectors, activities and banking products and controlling exposures to certain higher-risk sectors;
to undertake an independent review and objective assessment of risk. Credit risk assesses all credit facilities and exposures over designated limits, prior to the facilities being committed to customers or transactions being undertaken;
to monitor the performance and management of portfolios across the group;
to control exposure to sovereign entities, banks and other financial institutions, as well as debt securities which are not held solely for the purpose of trading;


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to set policy on large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography do not become excessive in relation to the group's capital base, and remain within internal and regulatory limits;
to maintain and develop the group's risk rating framework and systems through the Regional Model Oversight Committee ('RMOC'), for the wholesale businesses and the group's and HSBC UK's RBWM Model Oversight Committee ('RBWM MOC') for the retail businesses, both of which oversee risk rating system governance;
to report on retail portfolio performance, high risk portfolios, risk concentrations, large impaired accounts, impairment allowances and stress testing results and recommendations to the group's RMM, the group's Risk Committee and the Board; and
to act on behalf of the group as the primary interface, for credit-related issues, with the BoE, the PRA, local regulators, rating agencies, analysts and counterparts in major banks and non-bank financial institutions.
Concentration of credit risk exposure
(Audited)
Concentrations of credit risk arise when a number of counterparties or exposures have comparable economic characteristics, or are engaged in similar activities, or operate in the same geographical areas/industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. The group uses a number of controls and measures to minimise undue concentration of exposure in the group's portfolios across industry, country and customer groups. These include portfolio and counterparty limits, approval and review controls, and stress testing.
Wrong-way risk occurs when a counterparty's exposures are adversely correlated with its credit quality. There are two types of wrong-way risk:
general wrong-way risk occurs when the probability of counterparty default is positively correlated with general risk factors such as where the counterparty is resident and/or incorporated in a higher-risk country and seeks to sell a non-domestic currency in exchange for its home currency; and
specific wrong-way risk occurs in self-referencing transactions. These are transactions in which exposure is driven by capital or financing instruments issued by the counterparty and occurs where exposure from HSBC's perspective materially increases as the value of the counterparty's capital or financing instruments referenced in the contract decreases. It is HSBC policy that specific wrong-way risk transactions are approved on a case-by-case basis.
We use a range of procedures to monitor and control wrong-way risk, including requiring entities to obtain prior approval before undertaking wrong-way risk transactions outside pre-agreed guidelines.
Credit quality of financial instruments
(Audited)
Our credit risk rating systems and processes differentiate exposures in order to highlight those with greater risk factors and higher potential severity of loss. In the case of individually significant accounts, risk ratings are reviewed regularly and any amendments are implemented promptly. Within the group's retail business, risk is assessed and managed using a wide range of risk and pricing models to generate portfolio data.
 
Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support calculation of the minimum credit regulatory capital requirement.
Special attention is paid to problem exposures in order to accelerate remedial action. Where appropriate, operating companies use specialist units to provide customers with support to help them avoid default returning to sound trading wherever possible.
The Credit Review and Risk Identification team reviews the robustness and effectiveness of key management, monitoring and control activities.
Risk rating scales
The Customer Risk Rating ('CRR') 10-grade scale below summarises a more granular underlying 23-grade scale of obligor probability of default ('PD'). All distinct HSBC customers are rated using one of these two PD scales, depending on the degree of sophistication of the Basel II approach adopted for the exposure.
Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade, represented by the average of issuer-weighted historical default rates. This mapping between internal and external ratings is an indication only and may vary over time.
The Expected Loss ('EL') 10-grade scale for retail business summarises a more granular underlying EL scale for these customer segments; this combines obligor and facility/product risk factors in a composite measure. For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related CRR to external credit grades.
For the purpose of the following disclosure, retail loans which are past due up to 89 days and are not otherwise classified as EL 9 or EL 10, are not disclosed within the EL grade to which they relate, but are separately classified as past due but not impaired. The following tables set out the group's distribution of financial instruments by measures of credit quality.
The five credit quality classifications defined each encompasses a range of granular internal credit rating grades assigned to wholesale and retail lending businesses and the external ratings attributed by external agencies to debt securities.
For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications based upon the mapping of related CRR to external credit ratings. The mapping is reviewed on a regular basis and the most recent review resulted in sovereign BBB+ and BBB exposures previously mapped to Credit Quality band 'Good' being mapped to Credit Quality band 'Strong'. Sovereign BB+ and BB exposures previously mapped to Credit Quality band 'Satisfactory' were mapped to Credit Quality band 'Good'. This represents a change in disclosure mapping unrelated to changes in counterparty creditworthiness.

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Credit quality classification
 
Sovereign debt securities and bills
Other debt securities and bills
Wholesale lending and derivatives
Retail lending
 
External
credit rating
External
credit rating
Internal
credit rating
12-month probability of
default %
Internal
 credit rating
Expected
 loss %
Quality classification
 
 
 
 
 
 
Strong
BBB and above
A- and above
CRR1 to CRR21
0 - 0.169
EL1 to EL22
0 - 0.999
Good
BB to BBB-
BBB+ to BBB-
CRR3
0.170 - 0.740
EL3
1.000 - 4.999
Satisfactory
BB- to B and unrated
BB+ to B and unrated
CRR4 to CRR5
0.741 - 4.914
EL4 to EL5
5.000 - 19.999
Sub-standard
B- to C
B- to C
CRR6 to CRR8
4.915 - 99.999
EL6 to EL8
20.000 - 99.999
Impaired
Default
Default
CRR9 to CRR10
100
EL9 to EL10
100+ or defaulted3
1
Customer risk rating ('CRR').
2
Expected loss ('EL').
3
The EL percentage is derived through a combination of Probability of Default ('PD') and Loss Given Default ('LGD') and may exceed 100% in circumstances where the LGD is above 100% reflecting the cost of recoveries.
Quality classification definitions
'Strong': Exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. Retail accounts operate within product parameters and only exceptionally show any period of delinquency.
'Good': Exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minimal following the adoption of recovery processes.
'Satisfactory': Exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minor following the adoption of recovery processes.
'Sub-standard': Exposures require varying degrees of special attention and default risk is of greater concern. Retail portfolio segments show longer delinquency periods of generally up to 90 days past due and/or expected losses are higher due to a reduced ability to mitigate these through security realisation or other recovery processes.
'Impaired': Exposures have been assessed, individually or collectively, as impaired.
Renegotiated loans and forbearance
A range of forbearance strategies are employed to improve the management of customer relationships, maximise collection opportunities and, if possible, avoid default, foreclosure or repossession. They include extended payment terms, a reduction in interest or principal repayments, approved external debt management plans, debt consolidations, the deferral of foreclosures and other forms of loan modifications and
re-ageing.
The group's policies and practices are based on criteria which enable local management to judge whether repayment is likely to continue. These typically provide a customer with terms and conditions that are more favourable than those provided initially. Loan forbearance is only granted in situations where the customer has showed a willingness to repay their loan and is expected to be able to meet the revised obligations.
Refinance risk
Personal lending
Interest only mortgages lending incorporate bullet payments at the point of final maturity. In the UK, interest only lending is recognised as a niche product that meets a valid customer need. To reduce refinance risk, an initial on-boarding assessment of customers' affordability is made on a capital repayment basis and every customer has a credible defined repayment strategy. Additionally the customer is contacted at least once during the mortgage term to check the status of the repayment strategy. In situations where it is identified that a borrower is expected not to be able either to repay a bullet/balloon payment then the customer will either default on the repayment or it is likely that the bank may need to apply forbearance to the loan. In either circumstance this gives rise to a loss event and an impairment allowance will be considered where appropriate.
Wholesale lending
Many types of wholesale lending incorporate bullet/balloon payments at the point of final maturity; often, the intention or assumption is that the borrower will take out a new loan to settle the existing debt. Where this is true the term refinance risk refers generally to the possibility that, at the point that such a repayment is due, a borrower cannot refinance by borrowing to repay existing debt. In situations where it is identified that a borrower is expected
 
not to be able either to repay a bullet/balloon payment or to be capable of refinancing their existing debt on commercial terms then the customer will either default on the repayment or it is likely that the bank may need to refinance the loan on terms it would not normally offer in the ordinary course of business. In either circumstance this gives rise to a loss event and an impairment allowance will be considered.
Impairment assessment
(Audited)
It is the group's policy that each operating company creates allowances for impaired loans promptly and consistently.
Impairment allowances may be assessed and created either for individually significant relationships or, on a collective basis, where no evidence of impairment has been individually identified or for high-volume groups of homogeneous loans that are not considered individually significant.
When impairment losses occur, we reduce the carrying amount of loans and advances through the use of an allowance account. When impairment of available-for-sale financial assets and held-to-maturity financial investments occurs, the carrying amount of the asset is reduced directly. For further details on the accounting policy for impairment of available-for-sale debt and equity securities, see Note 1.2(e) on the Financial Statements.
Write-off of loans and advances
(Audited)
For details of our accounting policy on the write-off of loans and advances, see Note 1.2(d) on the Financial Statements.
Personal lending
Property collateral for residential mortgages is repossessed and sold on behalf of the borrower only when all normal debt recovery procedures have been unsuccessful. The carrying amounts of residential mortgages in excess of net realisable value are fully provided for, from 150 days contractually past due in the UK and 180 days contractually past due for the rest of the group. We regularly obtain new appraisals for loans and adjust carrying value to the most recent appraisal as the best estimate of the cash flows that will be received on the disposal of the collateral for these collateral dependent loans.

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Report of the Directors | Risk

U nsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due, the standard period being the end of the month in which the account becomes 180 days contractually delinquent.
In exceptional circumstances write-off periods may be extended to 360 days past due. In countries where local regulations or legislation constrain earlier write-off, or in instances where the realisation of collateral in secured lending takes longer, the period may extend beyond 360 days past due.
In retail lending, final write-off should occur within 60 months of the default at the latest.
Wholesale lending
Wholesale loans and advances are written off where normal collection procedures have been unsuccessful to the extent that there appears no realistic prospect of repayment. These procedures may include a referral of the business relationship to a debt recovery company. Debt reorganisation will be considered at all times and may involve, in exceptional circumstances and in the absence of any viable alternative, a partial write-off in exchange for a commitment to repay the remaining balance.
In the event of bankruptcy or analogous proceedings, write-off for both personal and wholesale lending may occur earlier than at the periods stated above. Collections procedures may continue after write-off.
Liquidity and funding risk management
Details of HSBC's Liquidity and Funding Risk Management Framework ('LFRF') can be found in the group's Pillar 3 document.
Liquidity and funding risk management framework
HSBC has an internal liquidity and funding risk management framework ('LFRF') which aims to allow it to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations. The Group Treasurer, who reports to the Group CFO, has responsibility for the oversight of the LFRF. Asset, Liability and Capital Management ('ALCM') teams are responsible for the application of the LFRF at a local operating entity level. This comprises of the following elements:
stand-alone management of liquidity and funding by operating entity;
operating entity classification by inherent liquidity risk ('ILR') categorisation;
minimum LCR requirement depending on ILR categorisation;
minimum NSFR requirement depending on ILR categorisation;
legal entity depositor concentration limit;
three-month and 12-month cumulative rolling term contractual maturity limits covering deposits from banks, deposits from non-bank financial institutions and securities issued;
annual individual liquidity adequacy assessment by principal operating entity;
minimum LCR requirement by currency;
intra-day liquidity;
liquidity funds transfer pricing; and
forward-looking funding assessments.
Risk governance and oversight
The elements of the LFRF are underpinned by a robust governance framework, the two major elements of which are:
Group, regional and entity level asset and liability management committees ('ALCOs'); and
Annual individual liquidity adequacy assessment process ('ILAAP') used to validate risk tolerance and set risk appetite
The Group's operating entities are predominantly defined on a country basis to reflect the local management of liquidity and funding. However, where appropriate, this definition may be expanded to cover a consolidated group of legal entities or
 
narrowed to a principal office (branch) of a wider legal entity to reflect the management under internal or regulatory definitions.
The RMM reviews and agrees annually the list of entities it directly oversees and the composition of these entities.
There were no material changes to the policies and practices for the management of liquidity and funding risk in 2017.
Market risk management
Where appropriate, we apply similar risk management policies and measurement techniques to both trading and non-trading portfolios. Our objective is to manage and control market risk exposures to optimise return on risk while maintaining a market profile consistent with our status as one of the world's largest banking and financial services organisations.
The nature of the hedging and risk mitigation strategies performed across the group corresponds to the market risk management instruments available within each operating jurisdiction. These strategies range from the use of traditional market instruments, such as interest rate swaps, to more sophisticated hedging strategies to address a combination of risk factors arising at portfolio level.
Market risk governance
(Audited)
Market risk is managed and controlled through limits approved by the RMM of the Group Management Board ('GMB') for HSBC Holdings and the global businesses. These limits are allocated across business lines and agreed with the Group's legal entities, including HSBC Bank plc.
The management of market risk is principally undertaken in Markets using risk limits allocated from the risk appetite, which is subject to the Group RMM ratification. Limits are set for portfolios, products and risk types, with market liquidity being a primary factor in determining the level of limits set.
Global Risk is responsible for setting market risk management policies and measurement techniques. Each major operating entity has an independent market risk management and control function which is responsible for measuring market risk exposures in accordance with the policies defined by Global Risk, and monitoring and reporting these exposures against the prescribed limits on a daily basis.
Each operating entity is required to assess the market risks arising on each product in its business and to transfer them to either its local Markets unit for management, to Balance Sheet management books or to separate books managed under the supervision of the local ALCO.
The aim is to ensure that all market risks are consolidated within operations which have the necessary skills, tools, management and governance to manage them professionally. In certain cases where the market risks cannot be fully transferred, the group identifies the impact of varying scenarios on valuations or on net interest income resulting from any residual risk positions.
Model risk is governed through Model Oversight Committees ('MOCs') at the regional and global Wholesale Credit and Market Risk levels. They have direct oversight and approval responsibility for all traded risk models utilised for risk measurement and management and stress testing. The MOCs prioritise the development of models, methodologies and practices used for traded risk management within the Group and ensure that they remain within our risk appetite and business plans. The Markets MOC reports into the Group MOC, which oversees all model risk types at Group level. Group MOC informs the Group RMM about material issues at least on a bi-annual basis. The RMM is the Group's 'Designated Committee' according to regulatory rules and has delegated day-to-day governance of all traded risk models to the Markets MOC.
The control of market risk in the trading and non-trading portfolios is based on a policy restricting individual operations to trading within a list of permissible instruments authorised for each site by Global Risk, enforcing new product approval procedures, and restricting trading in the more complex derivative products only to

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HSBC Bank plc Annual Report and Accounts 2017


offices with appropriate levels of product expertise and robust control systems.
Market risk measures
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures while maintaining a market profile consistent with the group's risk appetite.
We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, value at risk ('VaR'), and stress testing.
Sensitivity analysis
Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates, credit spreads and equity prices, such as the effect of a one basis point change in yield. We use sensitivity measures to monitor the market risk positions within each risk type. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining the level of limits set.
Value at risk
VaR is a technique that estimates the potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and is calculated for all trading positions regardless of how the group capitalises those exposures. Where there is not an approved internal model, the group uses the appropriate local rules to capitalise exposures.
In addition, the group calculates VaR for non-trading portfolios in order to have a complete picture of risk. The models are predominantly based on historical simulation. VaR is calculated at a 99% confidence level for a one-day holding period. Where we do not calculate VaR explicitly, we use alternative tools as summarised in the Market Risk Stress testing section.
The VaR models used by us are based predominantly on historical simulation. These models derive plausible future scenarios from past series of recorded market rates and prices, taking into account inter-relationships between different markets and rates such as interest rates and foreign exchange rates. The models also incorporate the effect of option features on the underlying exposures.
The historical simulation models used incorporate the following features:
historical market rates and prices are calculated with reference to foreign exchange rates and commodity prices, interest rates, equity prices and the associated volatilities;
potential market movements utilised for VaR are calculated with reference to data from the past two years; and
VaR measures are calculated to a 99% confidence level and use a one-day holding period.
The nature of the VaR models means that an increase in observed market volatility will most likely lead to an increase in VaR without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed in the context of its limitations. For example:
the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;
the use of a holding period assumes that all positions can be liquidated or the risks offset during that period. This may not fully reflect the market risk arising at times of severe illiquidity, when the holding period may be insufficient to liquidate or hedge all positions fully;
 
the use of a 99% confidence level, by definition does not take into account losses that might occur beyond this level of confidence; and
VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures.
Risk not in VaR framework
Other basis risks which are not completely covered in VaR, such as the Libor tenor basis, are complemented by our risk not in VaR ('RNIV') calculations, and are integrated into our capital framework.
Risk factors are reviewed on a regular basis and either incorporated directly in the VaR models, where possible, or quantified through the VaR-based RNIV approach or a stress test approach within the RNIV framework. The outcome of the VaR-based RNIV is included in the VaR calculation and back-testing; a stressed VaR RNIV is also computed for the risk factors considered in the VaR-based RNIV approach.
Stress-type RNIVs include a gap risk exposure measure to capture risk on non-recourse margin loans and a de-peg risk measure to capture risk to pegged and heavily managed currencies.
Stress testing
Stress testing is an important procedure that is integrated into our market risk management tool to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be much greater than those predicted by VaR modelling.
Stress testing is implemented at legal entity, regional and overall Group levels. A standard set of scenarios is utilised consistently across all regions within the Group. Scenarios are tailored to capture the relevant events or market movements at each level. The risk appetite around potential stress losses for the group is set and monitored against referral limits.
Market risk reverse stress tests are undertaken on the premise that there is a fixed loss. The stress testing process identifies which scenarios lead to this loss. The rationale behind the reverse stress test is to understand scenarios which are beyond normal business settings that could have contagion and systemic implications.
Stressed VaR and stress testing, together with reverse stress testing and the management of gap risk, provide management with insights regarding the 'tail risk' beyond VaR for which the group's appetite is limited.
Trading portfolios
Back-testing
We routinely validate the accuracy of our VaR models by back-testing them against both actual and hypothetical profit and loss against the corresponding VaR numbers. Hypothetical profit and loss excludes non-modelled items such as fees, commissions and revenues of intra-day transactions.
We would expect on average to see two or three profits in excess of the VaR at 1% confidence level and two or three losses in excess of VaR at the 99% confidence level over a one-year period. The actual number of profits or losses in excess of VaR over this period can therefore be used to gauge how well the models are performing.
We back-test our VaR at various levels which reflect a full legal entity scope of HSBC, including entities that do not have local permission to use VaR for regulatory purposes.
Non-trading portfolios
Non-trading VaR also includes the interest rate risk of non-trading financial instruments held by the global businesses and transferred into portfolios managed by BSM or local treasury functions. In measuring, monitoring and managing risk in our non-trading portfolios, VaR is just one of the tools used. 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.

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Report of the Directors | Risk

Non-trading VaR excludes equity risk on available-for-sale securities, structural foreign ex change risk, and interest rate risk on fixed rate securities issued by the group, the scope and management of which are described in the relevant sections below.
The group's control of market risk in the non-trading portfolios is based on transferring the assessed market risk of non-trading assets and liabilities created outside BSM or Markets, to the books managed by BSM, provided the market risk can be neutralised. The net exposure is typically managed by BSM through the use of fixed rate government bonds (liquid asset held in available-for-sale books) and interest rate swaps. The interest rate risk arising from fixed rate government bonds held within available-for-sale portfolios is reflected within the group's non-traded VaR. Interest rate swaps used by BSM are typically classified as either a fair value hedge or a cash flow hedge and included within the group's non-traded VaR. Any market risk that cannot be neutralised in the market is managed by local ALCO in segregated ALCO books.
Structural foreign exchange exposure
Structural foreign exchange exposures represent the group's net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than sterling. An entity's functional currency is that of the primary economic environment in which the entity operates.
Unrealised gains or losses due to revaluations of structured foreign exchange exposures are recognised in other comprehensive income, whereas other unrealised gains or losses arising from revaluations of foreign exchange positions are reflected in the income statement.
The group's structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that the group's consolidated capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates. This is usually achieved by ensuring that, for each subsidiary bank, the ratio of structural exposures in a given currency to risk-weighted assets denominated in that currency is broadly equal to the capital ratio of the subsidiary in question.
Interest rate risk in the banking book
Overview
Interest Rate Risk in the Banking Book ('IRRBB') is the risk of an adverse impact to earnings or capital due to changes in market interest rates. IRRBB is generated by our non-traded assets and liabilities. The Asset, Liability and Capital Management ('ALCM') function is responsible for measuring and controlling IRRBB under the supervision of the RMM who approve risk limits used in the management of interest rate risk. IRRBB is transferred to and managed by BSM, who are overseen by Wholesale Market Risk and Product Control functions.
Key risk drivers
The bank's IRRBB can be segregated into the following drivers:
Managed rate risk - the risk that the pricing of products, which are dependent upon business line decisions, do not correlate to movements in market interest rates.
Re-investment risk - risk arising due to change in rates when behaviouralised balances are reinvested as per the transfer pricing policy.
Basis Risk - the risk arising from assets and liabilities that are priced referencing different market indices creating a repricing mismatch.
Prepayment risk - the risk that the actual customer prepayment in different interest rate scenarios does not match the profile used to hedge the interest rate risk.
Duration risk - the risk that there are changes in the maturities of assets and liabilities due to changes in interest rate, which create or exacerbate a mismatch.
 
Governance and structure
ALCM monitor and control non-traded interest rate risk as well as reviewing and challenging the business prior to the release of new products and proposed behavioural assumptions used for hedging activities. ALCM are also responsible for maintaining and updating the transfer pricing framework, informing ALCO of the group's overall banking book interest rate risk exposure and managing the balance sheet in conjunction with BSM.
The internal transfer pricing framework is constructed to ensure that structural interest rate risk, arising due to differences in the re-pricing timing of assets and liabilities, is transferred to BSM and business lines are correctly allocated income and expense based on the products they write, inclusive of activities to mitigate this risk. Contractual principal repayments, payment schedules, expected prepayments, contractual rate indices used for re-pricing and interest rate reset dates are examples of elements transferred for risk management by BSM.
The internal transfer pricing framework is governed by ALCO whose responsibility it is to define each operating entity's transfer pricing curve and review and approve the transfer pricing policy, including behaviouralisation assumptions used for products where there is either no defined maturity or customer optionality exists. ALCO is responsible for monitoring and reviewing overall structural interest rate risk position. Interest rate behaviouralisation policies have to be formulated in line with the Group's behaviouralisation policies and approved at least annually by local ALCOs.
Non-traded assets and liabilities are transferred to BSM based on their re-pricing and maturity characteristics. For assets and liabilities with no defined maturity or repricing characteristics behaviouralisation is used to assess the interest rate risk profile; the maximum average duration to which a portfolio of non-maturity defined customer balances or equity can be behaviouralised is five years. The maximum percentage of any portfolio that can be behaviouralised is 90% with the residual treated as contractual, meaning overnight.
BSM manages the banking book interest rate positions transferred to it within the Markets Risk limits approved by RMM. Effective governance across BSM is supported by the dual reporting lines it has to the Chief Executive Officer of GB&M and to the Group Treasurer. BSM will only receive non-trading assets and liabilities as long as they can economically hedge the risk they receive. Hedging is generally managed through vanilla interest rate derivatives or fixed rate government bonds. Any interest rate risk which BSM cannot economically hedge is not transferred and will remain within the business line where the risk is originated.
Measurement of interest rate risk in the banking book
The following measures are used by ALCM to monitor and control interest rate risk in the banking book including:
Non-traded VaR;
Net Interest Income ('NII') sensitivity; and
Economic value of equity ('EVE').
Non-traded VaR uses the same models as those used in the trading book but for banking book balances. It will exclude the elements of risk which are not transferred to BSM as well as HSBC Holdings.
NII sensitivity reflects the group's sensitivity of earnings to changes in market interest rates. Entities forecast both one year and five year NII sensitivities across a range of interest rate scenarios based on a static balance sheet assumption. Sites include business line rate pass-on assumptions, re-investment of maturing assets and liabilities at market rates per shock scenario and prepayment risk. BSM is modelled based on no management actions i.e. the risk profile at the month end is assumed to remain constant throughout the forecast horizon.

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Net interest income sensitivity
A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected NII under varying interest rate scenarios (simulation modelling), where all other economic variables are held constant. This monitoring is undertaken by ALCO.
The group applies a combination of scenarios and assumptions relevant to the businesses as well as applying standard scenarios that are required throughout HSBC.
Projected NII sensitivity figures represent the effect of the pro forma movements in projected yield curves based on a static balance sheet size and structure assumption, other than instances where the size of the balances or repricing is deemed interest rate sensitive (non-interest bearing current account migration and fixed rate loan early prepayment) and where non-traded VaR is assumed to contractually run off. This effect, however, does not incorporate actions which would be taken by BSM or in the business units to mitigate the effect of interest rate risk. The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. Rates are not assumed to become negative in the 'down-shock' scenario unless the central bank rate is already negative and then not assumed to go further negative, which may effectively result in non-parallel shock. In addition, the net interest income sensitivity calculations take account of the effect on net interest income of anticipated differences in changes between interbank interest rates and interest rates over which the entity has discretion in terms of the timing and extent of rate changes.
Economic value of equity
EVE represents the present value of the future banking book cash flows that could be distributed to equity providers under a managed run-off scenario, i.e. the current book value of equity plus the present value of future net interest income in this scenario. This can be used to assess the economic capital required to support IRRBB. An EVE sensitivity is the extent to which the EVE value will change due to a pre-specified movements in interest rates, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivity as a percentage of capital resources.
Defined benefit pension scheme
Market risk also arises within the group's defined benefit pension schemes to the extent that the obligations of the schemes are not fully matched by assets with determinable cash flows. Refer to Pension risk section on page 35 for additional information.
Operational risk management
Details of our operational risk profile in 2017 can be found on page 52, in 'Operational risk exposures in 2017'.
Overview
The objective of our operational risk management is to manage and control operational risk in a cost-effective manner within targeted levels of operational risk consistent with our risk appetite, as defined by the GMB.
Key developments in 2017
During 2017 we implemented a new operational risk management framework ('ORMF') and Group-wide risk management system. The new ORMF provides an end-to-end view of non-financial risks, enhancing focus on the risks that matter the most and associated controls. It provides a platform to drive forward-looking risk awareness and assist management focus. It also helps the organisation understand the level of risk it is willing to accept.
We also maintained activity to continually strengthen our risk culture. In particular, we focused on the use of the three lines of defence model to reinforce individual accountability. It sets our roles and responsibilities for managing operational risk on a daily basis.
Further information on the three lines of defence model can be found in the 'Our risk management framework' section on
page 23.
 
Governance and structure
The ORMF defines minimum standards and processes, and the governance structure for the management of operational risk and internal control in our geographical regions, global businesses and global functions. The ORMF has been codified in a high-level standards manual, supplemented with detailed policies, which describes our approach to identifying, assessing, monitoring and controlling operational risk and gives guidance on mitigating action to be taken when weaknesses are identified.
We have a dedicated Global Operational Risk sub-function within our Global Risk function. It is responsible for leading the embedding of the ORMF, and assuring adherence to associated policies and processes across the first and second lines of defence. It supports the Group Chief Risk Officer and the Global Operational Risk Committee, which meets at least quarterly to discuss key risk issues and review implementation of the ORMF. The sub-function is also responsible for preparation of operational risk reporting at the group level, including reports for consideration by the RMM and the group Risk Committee.
Key risk management processes
Business managers throughout the Group are responsible for maintaining an acceptable level of internal control commensurate with the scale and nature of operations, and for identifying and assessing risks, designing controls and monitoring the effectiveness of these controls. The ORMF helps managers to fulfil these responsibilities by defining a standard risk assessment methodology and providing a tool for the systematic reporting of operational loss data.
A Group-wide risk management system is used to record the results of the operational risk management process. Operational risk and control self-assessments, along with issues and action plans, are entered and maintained by business units. Business and functional management monitor the progress of documented action plans to address shortcomings. To help ensure that operational risk losses are consistently reported and monitored at Group level, all Group companies are required to report individual losses when the net loss is expected to exceed $10,000, and to aggregate all other operational risk losses under $10,000. Losses are entered into the Group-wide risk management system and reported to governance on a monthly basis.
For further details, see the Pillar 3 Disclosures 2017 report.
Legal risk
Global businesses and functions must establish procedures required by the Global legal function and conforming to Group standards, including procedures to manage Legal Risk. Legal Risk falls within the definition of Operational Risk and includes:
contractual risk, which is the risk of a member of the HSBC Group suffering financial loss, legal or regulatory action or reputational damage because its rights and/or obligations under a contract to which it is a party are technically defective;
dispute adjudication risk, which is the risk of a member of the HSBC Group suffering financial loss or reputational damage due to an adverse dispute environment and/or the mis-management of disputes;
legislative risk, which is the risk that a Group member fails to or is unable to identify, analyse, track, impact assess or correctly interpret applicable legislation, case law or regulation, or new regulatory legislative or doctrinal interpretation of existing laws or regulations or decisions in the Courts or regulatory bodies; and
non-contractual rights risk, which is the risk that a Group member's assets are not properly owned or protected or are infringed by others, or the infringement by a Group member of another party's rights.
The group has a legal function, headed by the General Counsel for Global Businesses and Regions, which is responsible for providing and managing legal services to members of the group, thereby facilitating its business and protecting the group from Legal Risk. The function provides legal advice, including support in managing

HSBC Bank plc Annual Report and Accounts 2017
33


Report of the Directors | Risk

claims against the group's companies, as well as in respect of non-routine debt recoveries or other litigation against third parties.
The Group's operating companies must notify the relevant legal department immediately of all actual or threatened litigation, all significant contentious regulatory matters and all criminal proceedings against a Group entity, Group executive or employee. Local legal departments must provide appropriate notifications, monthly reports and semi-annual returns to their regional legal departments in relation to actual or threatened litigation, significant contentious regulatory matters and criminal proceedings. Regional legal departments are in turn required to provide appropriate notifications, monthly reports and semi-annual returns to the Group legal function in relation to actual or threatened litigation, significant contentious regulatory matters and criminal proceedings.
These notifications, monthly reports and semi-annual returns are used for reporting to various committees within the Group.
Group security risk
Security Risk, Europe, which has responsibility for physical security risk, information security risk, contingency risk and insider risk, takes functional direction from Group Security Risk. This enables management to identify and mitigate the permutations of these and other non-financial risks across the countries in which the group operates. All group companies in the region manage their risk in accordance with standards set by Security Risk, Europe, which also provides expert advice and support.
Regulatory compliance risk management
Overview
The Regulatory Compliance sub-function ('RC') provides independent, objective oversight and challenge and promotes a compliance-orientated culture, supporting the business in delivering fair outcomes for customers and maintaining the integrity of financial markets and achieving HSBC's strategic objectives.
Key developments in 2017
In 2017 RC restructured our operating model under eleven service areas to align more closely to policy obligations, the Enterprise Risk Management Framework and the Operational Risk Management Framework. The RC Operating Model sets out the key activities, operational controls and management oversight controls performed by each team across RC.
Governance and structure
The European Head of RC reports to the Global Head of RC. To align with our business line coverage matrix structure and help ensure coverage of local regulatory requirements, RC Europe is structured with country RC teams, who support and advise businesses and functions in their respective countries.
Key risk management processes
We regularly review our policies and procedures. Global policies and procedures require the prompt identification and escalation of any actual or potential regulatory breach to RC.
Reportable events of group significance are escalated to the bank's RMM. Matters relating to regulatory conduct of business are reported to the Conduct & Values Committee.
Conduct of business
In 2017, we continued to take steps to raise our standards relating to conduct, which included:
designing further global mandatory conduct training for delivery to all employees in 2017;
incorporating the assessment of expected values and behaviours as key determinants in recruitment, performance appraisal and remuneration processes;
improving our markets surveillance capability;
introducing policies and procedures to strengthen support for potentially vulnerable customers;
 
enhancing the quality and depth of conduct management information and how it is used across the group;
implementing an assessment process to check the effectiveness of our conduct initiatives across the group; and
assessing conduct standards and practices within our key third-party suppliers and distributors.
Throughout 2017, Management maintained oversight of conduct matters through the Conduct & Values Committee.
Further information on our conduct is provided in the Strategic Report on page 5 and www.hsbc.com/conduct, and for conduct-related costs relating to significant items, see page 11.
Financial crime risk management
Overview
HSBC continued its progress towards implementing an effective financial crime risk management capability across the Group. We completed the rollout of major compliance systems and shifted our focus towards embedding a sustainable approach to financial crime risk management everywhere we operate. This was underpinned by the implementation of a target operating model for the Financial Crime Risk function and by the completion of a country-by-country assessment against our financial crime risk framework.
Key developments in 2017
During 2017, HSBC continued to step up its efforts to keep financial crime out of the financial system. We completed the rollout of compliance systems to support our anti-money laundering and sanctions policies, having invested $1bn in new and upgraded IT systems since 2015. We also worked with, or invested in, a number of financial technology (fintech) firms to help us continue to innovate.
To ensure we have a clear view of our progress, we completed an assessment of each country in which we operate against the capabilities set out in our financial crime risk framework.
We implemented a new target operating model for the Financial Crime Risk function which puts in place a sustainable structure at a global, regional and country level, and across all lines of business, and continued to build the function's leadership at the most senior levels.
An engaged and well-trained workforce is crucial and in 2017 we continued to invest significantly in this area. We re-launched and refreshed our global mandatory training for all employees and introduced targeted training for relationship managers and other key roles.
Working in partnership is vital to managing financial crime risk. HSBC is a strong proponent of public-private partnerships and information-sharing initiatives. During 2017 we joined three new partnerships - in Australia, Singapore and Hong Kong - and co-sponsored a major public report into the future of financial intelligence sharing.
Key risk management processes
During 2017, HSBC introduced a strengthened financial crime risk management governance framework, mandating Financial Crime Risk Management Committees with a standardised agenda at country, region and global business line levels.
At a Group level, the Financial System Vulnerabilities Committee ('FSVC') continues to report to the Board on matters relating to financial crime, and we introduced new members with significant external expertise in this area. Throughout the year the committee, which is attended by the Group Head of Financial Crime Risk, received regular reports on actions being taken to address issues and vulnerabilities.
We strengthened our approach to affiliate risk management, implementing an effective Group-level process to assess and remediate affiliate risk, and established a strong investigations and analytical capability to enable us to proactively identify emergent risk issues.

34
HSBC Bank plc Annual Report and Accounts 2017


The Monitor
Under the agreements entered into with the US Department of Justice ('DoJ') and the UK Financial Conduct Authority ('FCA') in 2012, including the five-year deferred prosecution agreement ('AML DPA') and a Direction issued by the FCA, the Monitor (who is, for FCA purposes, a 'skilled person' under section 166 of the Financial Services and Markets Act) was appointed in July 2013 for an expected five-year period to produce annual assessments of the effectiveness of the Group's AML and sanctions compliance programme. Additionally, under the Cease and Desist Order issued by the US Federal Reserve Board ('FRB') in 2012, the Monitor also serves as an independent consultant to conduct annual assessments.
In December 2017, the AML DPA expired and the charges deferred by the AML DPA were dismissed. The Monitor will continue working in his capacity as a skilled person and independent consultant for a period of time at the FCA's and FRB's discretion.
In February 2018, the Monitor delivered his fourth annual follow-up review report based on various thematic and country reviews he had conducted during 2017. In his report, the Monitor concluded that, in 2017, HSBC made significant progress in developing a reasonably effective and sustainable AML and sanctions compliance programme and expressed confidence that HSBC can achieve its target end state within the next eighteen months if it is able to maintain the concerted effort and focus it has demonstrated in remediating and enhancing its programme over the last five years.  Nonetheless, the Monitor identified various challenges that HSBC faces in achieving this objective, noted deficiencies in HSBC's financial crime compliance controls and areas of HSBC's programme that require further work, and highlighted potential instances of financial crime and certain areas in which he believes that HSBC is not yet adequately managing financial crime risk. As described on page 133 in Note 30, the Monitor identified potential anti-money laundering and sanctions compliance issues that HSBC is reviewing further with the DoJ, FRB and/or FCA.
Throughout 2017, the Financial System Vulnerabilities Committee ('FSVC') received regular reports on HSBC's relationship with the Monitor and its compliance with the AML DPA. The FSVC received regular updates on the Monitor's review activity as part of the fourth annual review, and has received the Monitor's fourth annual review report.
Insurance manufacturing operations risk management
Details of changes in our insurance manufacturing operations risk profile in 2017 can be found on page 52 in 'Insurance manufacturing operations risk in 2017'.
There were no material changes to our policies and practices for the management of risks arising in our insurance manufacturing operations in 2017.
Governance
(Audited)
Insurance risks are managed to a defined risk appetite, which is aligned to the bank's risk appetite and risk management framework, including the three lines of defence model. For details on the governance framework, see page 23. The Group Insurance Risk Management Meeting oversees the control framework globally and is accountable to the RBWM Risk Management Meeting on risk matters relating to the insurance business.
The monitoring of the risks within the insurance operations is carried out by insurance risk teams. Specific risk functions, including Wholesale Credit & Market Risk, Operational Risk, Information Security Risk and Financial Crime Risk, support Insurance Risk teams in their respective areas of expertise.
Stress and scenario testing
(Audited)
Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and group-wide
 
regulatory stress tests, including the Bank of England stress test of the banking system, the European Insurance and Occupational Pensions Authority stress test, and individual country insurance regulatory stress tests.
These have highlighted that a key risk scenario for the insurance business is a prolonged low interest rate environment. In order to mitigate the impact of this scenario, the insurance operations are taking a number of actions including repricing some products to reflect lower interest rates, launching less capital intensive products, investing in more capital efficient assets and developing investment strategies to optimise the expected returns against the cost of economic capital.
Management and mitigation of key risk types
Market risk
All our insurance manufacturing subsidiaries have market risk mandates which specify the investment instruments in which they are permitted to invest and the maximum quantum of market risk which they may retain. They manage market risk by using, among others, some or all of the techniques listed below, depending on the nature of the contracts written:
For products with discretionary participating features ('DPF'), adjusting bonus rates to manage the liabilities to policyholders. The effect is that a significant portion of the market risk is borne by the policyholder.
Asset and liability matching where asset portfolios are structured to meet projected liability cash flows. The group manages its assets using an approach that considers asset quality, diversification, cash flows matching, liquidity, volatility and target investment return. It is not always possible to match asset and liability durations due to uncertainty over the receipt of all future premiums and the timing of claims, and also because the forecast payment dates of liabilities may exceed the duration of the longest-dated investments available. We use models to assess the effect of a range of future scenarios on the values of assets and associated liabilities, and local ALCOs employ the outcomes in determining how to best structure asset holdings to support liabilities.
Using derivatives to protect against adverse market movements or better match liability cash flows.
For new products with investment guarantees, considering the cost when determining the level of premiums or the price structure.
Periodically reviewing products identified as higher risk, which contain investment guarantees and embedded optionality features linked to savings and investment products, for active management.
Designing new products to mitigate market risk, such as changing the investment return sharing between policyholders and the shareholder.
Exiting, to the extent possible, investment portfolios whose risk is considered unacceptable.
Repricing premiums charged to policyholders.
Credit risk
Our insurance manufacturing subsidiaries are responsible for the credit risk, quality and performance of their investment portfolios. Our assessment of the creditworthiness of issuers and counterparties is based primarily upon internationally recognised credit ratings and other publicly available information.
Investment credit exposures are monitored against limits by our insurance manufacturing subsidiaries, and are aggregated and reported to the Group Insurance Credit Risk and Group Credit Risk functions. Stress testing is performed on the investment credit exposures using credit spread sensitivities and default probabilities.
We use a number of tools to manage and monitor credit risk. These include a credit report which contains a watch-list of investments with current credit concerns, primarily investments that may be at risk of future impairment or where high

HSBC Bank plc Annual Report and Accounts 2017
35


Report of the Directors | Risk

concentrations to counterparties are present in the investment portfolio. The report is circulated monthly to senior management in Group Insurance and the individual country chief risk officers to identify investments which may be at risk of future impairment.
Liquidity risk
Risk is managed by cash flow matching and maintaining sufficient cash resources, investing in high credit-quality investments with deep and liquid markets, monitoring investment concentrations and restricting them where appropriate, and establishing committed contingency borrowing facilities.
Insurance manufacturing subsidiaries are required to complete quarterly liquidity risk reports for the Group Insurance Risk function and an annual review of the liquidity risks to which it is exposed.
Insurance risk
The bank primarily uses the following techniques to manage and mitigate insurance risk:
product design, pricing and overall proposition management (for example, management of lapses by introducing surrender charges);
underwriting policy;
claims management processes; and
reinsurance which cedes risks above our acceptable thresholds to an external reinsurer thereby limiting our exposure.
Other material risks
Reputational risk management
There were no material changes to our policies and practices for the management of reputational risk in 2017.
Overview
Reputational risk relates to stakeholders' perceptions, whether fact-based or otherwise. Stakeholders' expectations change constantly and so reputational risk is dynamic and varies between geographical regions, groups and individuals. We have an unwavering commitment to operating at the high standards we set for ourselves in every jurisdiction. Any lapse in standards of integrity, compliance, customer service or operating efficiency represents a potential reputational risk.
Governance and structure
The development of policies, management and mitigation of reputational risk are coordinated through our Reputational Risk Policy Committee. This committee keeps the RMM apprised of areas and activities presenting significant reputational risk and, where appropriate, make recommendations to the RMM to mitigate such risks. Significant issues posing reputational risk are also reported to the Board where appropriate.
Key risk management processes
Our External Affairs function maintains policies and gives policy advice for the issues that might affect HSBC's reputation and standing with customers, employees, opinion formers and the public. It oversees the identification, management and control of reputational risk for all group entities in the areas of media relations and engagement with non-governmental organisations and other external stakeholders.
Our Reputational Risk and Client Selection ('RRCS') teams help ensure that issues are directed to the appropriate forums, that decisions are made and implemented effectively, and that management information is generated to aid senior management in the businesses and regions in understanding where reputational risk exists. Each global business has established a governance process that empowers our Reputational Risk Policy Committee to address reputational risk issues at the right level, escalating decisions where appropriate. The global functions manage and escalate reputational risks within established operational risk frameworks.
 
Our policies set out our risk appetite and operational procedures for all areas of reputational risk, including financial crime prevention, regulatory compliance, conduct-related concerns, environmental impacts, human rights matters and employee relations.
We have taken, and are taking, measures to address the requirements of the US DPA and enhance our AML, sanctions and other regulatory compliance frameworks. These measures should also enhance our reputational risk management in the future.
For further details, see 'Financial crime risk management' on
page 33.
Further details can be found on www.hsbc.com.
Pension risk management
There were no material changes to our policies and practices for the management of pension risk in 2017.
Governance and structure
A global pension risk framework and accompanying global policies on the management of risks related to defined benefit and defined contribution plans are in place. Pension risk is managed by a network of local and regional pension risk forums. The group's Pension Oversight Forum is responsible for the governance and oversight of pension plans sponsored by HSBC within its European operations.
Key risk management processes
In the UK, all future pension benefits are provided on a defined contribution basis. There remain future defined benefit pensions provided elsewhere in the region.
In defined contribution pension plans, the contributions that HSBC is required to make are known, while the ultimate pension benefit will vary, typically with investment returns achieved by investment choices made by the employee. While the market risk to HSBC of defined contribution plans is low, the bank is still exposed to operational and reputational risk.
In defined benefit pension plans, the level of pension benefit is known. Therefore, the level of contributions required by HSBC will vary due to a number of risks, including:
investments delivering a return below that required to provide the projected plan benefits;
the prevailing economic environment leading to corporate failures, thus triggering write-downs in asset values (both equity and debt);
a change in either interest rates or inflation, causing an increase in the value of the plan liabilities; and
plan members living longer than expected (known as longevity risk).
Pension risk is assessed using an economic capital model that takes into account potential variations in these factors. The impact of these variations on both pension assets and pension liabilities is assessed using a one-in-200 year stress test. Scenario analysis and other stress tests are also used to support pension risk management.
To fund the benefits associated with defined benefit plans, sponsoring Group companies, and in some instances employees, make regular contributions in accordance with advice from actuaries and in consultation with the plan's trustees where relevant. These contributions are normally set to ensure that there are sufficient funds to meet the cost of the accruing benefits for the future service of active members. However, higher contributions are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution rates are typically revised annually or once every three years, depending on the plan.
The defined benefit plans invest contributions in a range of investments designed to limit the risk of assets failing to meet a plan's liabilities. Any changes in expected returns from the investments may also change future contribution requirements. In pursuit of these long-term objectives, an overall target allocation

36
HSBC Bank plc Annual Report and Accounts 2017


of the defined benefit plan assets between asset classes is established. In addition, each permitted asset class has its own benchmarks, such as stock market or property valuation indices. The benchmarks are reviewed at least once every three to five years and more frequently if required by local legislation or circumstances. The process generally involves an extensive asset and liability review.
Key developments and risk profile
Key developments in 2017
In 2017, the group undertook a number of initiatives to enhance our approach to the management of risk. These included:
Implementing a new operational risk management framework ('ORMF') and system of record, as described on page 32 of the 'Operational risk management' section.
Completing the roll-out of major compliance systems, designed to support our anti-money laundering and sanctions policies. We shifted our focus towards achieving financial crime risk ('FCR') management programme sustainability through the continued implementation of the FCR function operating model, as described on page 33 of the 'Financial crime risk management' section. HSBC met its obligations under the DPA and with the Department of Justice's agreement, the DPA expired.
We continued to take steps to enhance our regulatory compliance risk management and controls, implementing a number of initiatives to raise our standards in relation to the conduct of our business, as described on page 33 of the 'Regulatory compliance risk management' section.

 
Credit risk in 2017
A summary of our current policies and practices regarding credit risk is set out on page 26.
Credit risk is the risk of financial loss if a customer or counterparty fails to meet a payment obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from off-balance sheet products such as guarantees and credit derivatives, and from the group's holdings of debt securities.
There were no material changes to our policies and practices for the management of credit risk in 2017.
Maximum exposure to credit risk
(Audited)
'Maximum exposure to credit risk' table
The following table presents our maximum exposure before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net exposure to credit risk; and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount; for financial guarantees and similar contracts granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of the committed facilities.The offset in the table relates to amounts where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. No offset has been applied to off-balance sheet collateral. In the case of derivatives the offset column also includes collateral received in cash and other financial assets.

Maximum exposure to credit risk
(Audited)
2017
2016

Maximum exposure

Offset

Exposure to credit risk (net)

Maximum exposure

Offset

Exposure to credit risk
(net)

The group
£m

£m

£m

£m

£m

£m

Trading assets: loans and advances to banks
20,590

(97
)
20,493

19,652

(113
)
19,539

Trading assets: loans and advances to customers
22,520

(222
)
22,298

21,803

(272
)
21,531

Derivatives
143,335

(139,174
)
4,161

199,419

(189,349
)
10,070

Loans and advances to banks
14,149

(202
)
13,947

21,363

(202
)
21,161

Loans and advances to customers
280,402

(19,074
)
261,328

272,760

(19,746
)
253,014

Reverse repurchase agreements - non-trading
45,808

(2,748
)
43,060

31,660

(3,866
)
27,794

Total balance sheet exposure to credit risk
728,568

(161,517
)
567,051

750,507

(213,548
)
536,959

Total off-balance sheet
155,594

-

155,594

163,406

-

163,406

- financial guarantees
13,316

-

13,316

12,895

-

12,895

- loan commitments and other credit-related commitments
142,278

-

142,278

150,511

-

150,511

At 31 Dec
884,162

(161,517
)
722,645

913,913

(213,548
)
700,365

Maximum exposure to credit risk

2017
2016

Maximum exposure

Offset

Exposure to credit risk (net)

Maximum exposure

Offset

Exposure to credit risk
(net)

The bank
£m

£m

£m

£m

£m

£m

Trading assets: loans and advances to banks
17,744

(97
)
17,647

16,902

(113
)
16,789

Trading assets: loans and advances to customers
22,254

(222
)
22,032

19,743

(272
)
19,471

Derivatives
135,236

(121,736
)
13,500

185,779

(165,490
)
20,289

Loans and advances to banks
15,160

-

15,160

16,713

-

16,713

Loans and advances to customers
220,450

(19,024
)
201,426

215,084

(19,051
)
196,033

Reverse repurchase agreements - non-trading
36,627

(342
)
36,285

23,351

(1,931
)
21,420

Total balance sheet exposure to credit risk
588,080

(141,421
)
446,659

603,782

(186,857
)
416,925

Total off-balance sheet
109,033

-

109,033

116,674

-

116,674

- financial guarantees
9,219

-

9,219

9,089

-

9,089

- loan commitments and other credit-related commitments
99,814

-

99,814

107,585

-

107,585

At 31 Dec
697,113

(141,421
)
555,692

720,456

(186,857
)
533,599


HSBC Bank plc Annual Report and Accounts 2017
37


Report of the Directors | Risk

Concentration of exposures
The geographical diversification of our lending portfolio and our broad range of global businesses and products ensured that we did not overly depend on a few markets to generate growth in 2017. This diversification also supported our strategy for growth in faster-growing markets and those with international connectivity.
Financial investments
Our holdings of available-for-sale government and government agency debt securities, corporate debt securities, asset-backed securities ('ABSs') and other securities were spread across a wide range of issuers in 2017 with 60% (2016: 61%) invested in government or government agency debt securities.
Trading assets
Trading securities remained the largest concentration within trading assets of the group at 70% (2016: 67%).
Derivatives
Derivative assets were £143bn at 31 December 2017
(2016: £199bn).
 
Items in the course of collection from other banks
Settlement risk arises in any situations where a payment in cash, securities or equities is made with the expectation of a corresponding receipt of cash, securities or equities. Daily settlement limits are established for counterparties to cover the aggregate of transactions with each counterparty on any single day.
The group substantially mitigates settlement risk on many transactions, particularly those involving securities and equities, by settling through assured payment systems, or on a delivery-versus-payment basis.
Loans and advances
The table below analyses loans and advances by industry sector to show any concentration of credit risk exposures (please also see below).
Gross loans and advances to customers by industry sector

2017
2016

Gross loans and
advances to
customers

Gross loans by
industry sector as
a % of total
gross loans to customers
Gross loans and
advances to
customers

Gross loans by
industry sector as
a % of total
gross loans to customers
The group
£m

%
£m

%
Personal
120,289

42.56
114,314

41.52
Corporate and commercial
134,513

47.59
132,556

48.15
Financial
27,842

9.85
28,447

10.33
Total gross loans and advances to customers at 31 Dec
282,644

100.00
275,317

100.00
The bank
Personal
97,248

43.80
90,103

41.59
Corporate and commercial
89,549

40.34
90,055

41.57
Financial
35,214

15.86
36,475

16.84
Total gross loans and advances to customers at 31 Dec
222,011

100.00
216,633

100.00

38
HSBC Bank plc Annual Report and Accounts 2017


Distribution of financial instruments by credit quality
(Audited)
2017
 
Neither past due nor impaired
Past due not impaired

Impaired

Total gross amount

Impairment allowances

Total

 
Strong

Good

Satisfactory

Sub-standard

 
The group
£m

£m

£m

£m

£m

£m

£m

£m

£m

Cash and balances at central banks
97,601

-

-

-

-

-

97,601

-

97,601

Items in the course of collection from
other banks
2,023

-

-

-

-

-

2,023

-

2,023

Trading assets
57,965

11,279

12,132

1,218

-

-

82,594

-

82,594

- treasury and other eligible bills
775

252

139

782

-

-

1,948

-

1,948

- debt securities
29,038

3,577

4,744

177

-

-

37,536

-

37,536

- loans and advances to banks
12,980

4,207

3,385

18

-

-

20,590

-

20,590

- loans and advances to customers
15,172

3,243

3,864

241

-

-

22,520

-

22,520

Financial assets designated at fair value
898

118

24

0

-

-

1,040

-

1,040

Derivatives
122,547

17,143

3,113

532

-

-

143,335

-

143,335

Loans and advances to customers held at amortised cost
157,147

56,744

57,092

4,871

973

5,817

282,644

(2,242
)
280,402

- personal
109,224

5,687

2,860

453

607

1,458

120,289

(437
)
119,852

- corporate and commercial
30,262

45,954

49,458

4,266

355

4,218

134,513

(1,671
)
132,842

- non-bank financial institutions
17,661

5,103

4,774

152

11

141

27,842

(134
)
27,708

Loans and advances to banks held at amortised cost
11,509

1,651

982

7

-

-

14,149

-

14,149

Reverse repurchase agreements - non-trading
36,667

4,563

4,274

304

-

-

45,808

-

45,808

Financial investments
51,478

3,271

1,132

920

-

537

57,338

-

57,338

Other assets
2,118

609

1,358

185

4

4

4,278

-

4,278

At 31 Dec
539,953

95,378

80,107

8,037

977

6,358

730,810

(2,242
)
728,568


%

%

%

%

%

%

%

 
 
Percentage of total gross amount
73.8

13.1

11.0

1.1

0.1

0.9

100.0

 
 
 
2016
Cash and balances at central banks
54,278

-

-

-

-

-

54,278

-

54,278

Items in the course of collection from
other banks
1,363

-

-

-

-

-

1,363

-

1,363

Trading assets
59,974

12,288

8,711

521

-

-

81,494

-

81,494

- treasury and other eligible bills
554

280

14

-

-

-

848

-

848

- debt securities
31,268

4,596

3,234

93

-

-

39,191

-

39,191

- loans and advances to banks
12,844

4,161

2,615

32

-

-

19,652

-

19,652

- loans and advances to customers
15,308

3,251

2,848

396

-

-

21,803

-

21,803

Financial assets designated at fair value
870

159

257

17

-

-

1,303

-

1,303

Derivatives
168,840

26,042

4,056

481

-

-

199,419

-

199,419

Loans and advances to customers held at amortised cost
153,861

50,743

57,024

5,702

1,177

6,810

275,317

(2,557
)
272,760

- personal
102,472

6,089

2,743

473

798

1,739

114,314

(658
)
113,656

- corporate and commercial
32,304

39,411

50,480

5,150

368

4,843

132,556

(1,724
)
130,832

- non-bank financial institutions

19,085

5,243

3,801

79

11

228

28,447

(175
)
28,272

Loans and advances to banks held at amortised cost
17,330

2,613

1,410

10

-

-

21,363

-

21,363

Reverse repurchase agreements - non-trading
24,993

3,404

2,665

598

-

-

31,660

-

31,660

Financial investments
75,834

3,116

1,581

1,012

-

831

82,374

-

82,374

Other assets
2,362

551

1,370

197

4

9

4,493

-

4,493

At 31 Dec
559,705

98,916

77,074

8,538

1,181

7,650

753,064

(2,557
)
750,507

 
%

%

%

%

%

%

%

 
 
Percentage of total gross amount
74.4

13.1

10.2

1.1

0.2

1.0

100.0

 
 

HSBC Bank plc Annual Report and Accounts 2017
39


Report of the Directors | Risk

Distribution of financial instruments by credit quality
 
2017
 
Neither past due nor impaired
Past due not impaired

Impaired

Total gross amount

Impairment allowances

Total

 
Strong

Good

Satisfactory

Sub-standard

 
The bank
£m

£m

£m

£m

£m

£m

£m

£m

£m

Cash and balances at central banks
81,358

-

-

-

-

-

81,358

-

81,358

Items in the course of collection from other banks
1,407

-

-

-

-

-

1,407

-

1,407

Trading assets
43,271

9,643

9,578

1,218

-

-

63,710

-

63,710

- treasury and other eligible bills
458

-

139

782

-

-

1,379

-

1,379

- debt securities
15,251

3,313

3,592

177

-

-

22,333

-

22,333

- loans and advances to banks
12,493

3,208

2,025

18

-

-

17,744

-

17,744

- loans and advances to customers
15,069

3,122

3,822

241

-

-

22,254

-

22,254

Derivatives
116,791

15,017

2,915

513

-

-

135,236

-

135,236

Loans and advances to customers held at amortised cost
133,341

38,408

41,835

3,735

488

4,204

222,011

(1,561
)
220,450

- personal
91,589

2,688

1,175

390

451

955

97,248

(307
)
96,941

- corporate and commercial
15,126

31,551

36,528

3,199

37

3,108

89,549

(1,100
)
88,449

- non-bank financial institutions
26,626

4,169

4,132

146

-

141

35,214

(154
)
35,060

Loans and advances to banks held at amortised cost
13,273

1,204

682

1

-

-

15,160

-

15,160

Reverse repurchase agreements - non-trading
30,807

2,914

2,605

301

-

-

36,627

-

36,627

Financial investments
29,607

1,034

42

291

-

1

30,975

-

30,975

Other assets
2,146

581

426

4

-

-

3,157

-

3,157

At 31 Dec
452,001

68,801

58,083

6,063

488

4,205

589,641

(1,561
)
588,080

 
%

%

%

%

%

%

%

 
 
Percentage of total gross amount
76.6

11.7

9.9

1.0

0.1

0.7

100.0

 
 
 
2016
Cash and balances at central banks
49,252

-

-

-

-

-

49,252

-

49,252

Items in the course of collection from other banks
780

-

-

-

-

-

780

-

780

Trading assets
44,775

8,278

6,897

506

-

-

60,456

-

60,456

- treasury and other eligible bills
501

-

12

-

-

-

513

-

513

- debt securities
17,866

2,500

2,839

93

-

-

23,298

-

23,298

- loans and advances to banks
12,861

2,574

1,450

17

-

-

16,902

-

16,902

- loans and advances to customers
13,547

3,204

2,596

396

-

-

19,743

-

19,743

Derivatives
159,390

22,557

3,373

459

-

-

185,779

-

185,779

Loans and advances to customers held at amortised cost
133,279

32,446

41,727

4,072

448

4,661

216,633

(1,549
)
215,084

- personal
85,726

2,194

411

404

407

961

90,103

(281
)
89,822

- corporate and commercial
18,910

25,987

38,017

3,609

41

3,491

90,055

(1,090
)
88,965

- non-bank financial institutions
28,643

4,265

3,299

59

-

209

36,475

(178
)
36,297

Loans and advances to banks held at amortised cost
13,653

1,931

1,128

1

-

-

16,713

-

16,713

Reverse repurchase agreements - non-trading
20,187

1,760

816

588

-

-

23,351

-

23,351

Financial investments
48,799

18

44

238

-

1

49,100

-

49,100

Other assets
2,255

521

466

20

-

5

3,267

-

3,267

At 31 Dec
472,370

67,511

54,451

5,884

448

4,667

605,331

(1,549
)
603,782

 
%

%

%

%

%

%

%

 
 
Percentage of total gross amount
78.0

11.1

9.0

1.0

0.1

0.8

100.0

 
 

40
HSBC Bank plc Annual Report and Accounts 2017


Past due but not impaired gross financial instruments
(Audited)
Past due but not impaired are those loans where, although customers have failed to make payments in accordance with the
 
contractual terms of their facilities, they have not met the impaired loan criteria described below.
Ageing analysis of days past due but not impaired gross financial instruments
(Audited)













Up to
29 days

30-59
days

60-89
days

90-179
days

Over
180 days

Total

The group
£m

£m

£m

£m

£m

£m

Loans and advances held at amortised cost
726

161

86

-

-

973

- personal
426

116

65

-

-

607

- corporate and commercial
291

43

21

-

-

355

- financial
9

2

-

-

-

11

Other assets
4

-

-

-

-

4

At 31 Dec 2017
730

161

86

-

-

977


Loans and advances held at amortised cost
841

225

111

-

-

1,177

- personal
547

165

86

-

-

798

- corporate and commercial
283

60

25

-

-

368

- financial
11

-

-

-

-

11

Other assets
3

1

-

-

-

4

At 31 Dec 2016
844

226

111

-

-

1,181

The bank
Loans and advances held at amortised cost
340

93

55

-

-

488

- personal
312

87

52

-

-

451

- corporate and commercial
28

6

3

-

-

37

- financial
-

-

-

-

-

-

Other assets
-

-

-

-

-

-

At 31 Dec 2017
340

93

55

-

-

488

 
Loans and advances held at amortised cost
310

85

53

-

-

448

- personal
278

79

50

-

-

407

- corporate and commercial
32

6

3

-

-

41

- financial
-

-

-

-

-

-

Other assets
-

-

-

-

-

-

At 31 Dec 2016
310

85

53

-

-

448

Impaired loans
(Audited)
Impaired loans and advances are those that meet any of the following criteria:
Wholesale loans and advances classified as CRR 9 or CRR 10. These grades are assigned when the bank considers that either the customer is unlikely to pay its credit obligations in full, without recourse to security, or when the customer is more than 90 days past due on any material credit obligation to HSBC.
Retail loans and advances classified as EL 9 or EL 10. These grades are assigned to retail loans and advances greater than 90 days past due unless they have been assessed as not individually impaired. Renegotiated loans and advances that have been subject to a change in contractual cash flows as a result of a concession which the lender would not otherwise consider, and where it is probable that without the concession the borrower would be unable to meet the contractual payment obligations in full, unless the concession is insignificant and     there are no other indicators of impairment. Renegotiated loans remain classified as impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, and there are no other indicators of impairment.
 
Impairment and credit risk mitigation
The existence of collateral has an effect when calculating impairment on individually assessed impaired loans. When we no longer expect to recover the principal and interest due on a loan in full or in accordance with the original terms and conditions, it is assessed for impairment. If exposures are secured, the current net realisable value of the collateral will be taken into account when assessing the need for an impairment allowance. No impairment allowance is recognised in cases where all amounts due are expected to be settled in full on realisation of the security.

HSBC Bank plc Annual Report and Accounts 2017
41


Report of the Directors | Risk

Impaired loans and advances to customers and banks by industry sector
(Audited)

2017
2016

Individually
assessed

Collectively
assessed

Total

Individually
assessed

Collectively
assessed

Total


£m

£m

£m

£m

£m

£m

Banks
-

-

-

-

-

-

Customers
5,365

452

5,817

6,198

612

6,810

- personal
1,061

397

1,458

1,199

540

1,739

- corporate and commercial
4,163

55

4,218

4,771

72

4,843

- financial
141

-

141

228

-

228

At 31 Dec
5,365

452

5,817

6,198

612

6,810

Renegotiated loans and forbearance
Where a loan is modified due to significant concerns about the borrower's ability to meet contractual payments when due, a range of forbearance strategies are employed in order to improve the management of customer relationships, maximise collection opportunities and, if possible, avoid default, foreclosure or repossession.
Identifying renegotiated loans
Loans are identified as renegotiated loans when we modify the contractual payment terms due to significant credit distress of the borrower. 'Forbearance' describes concessions made on the contractual terms of a loan in response to an obligor's financial difficulties. We classify and report loans on which concessions have been granted under conditions of credit distress as 'renegotiated loans' when their contractual payment terms have been modified because we have significant concerns about the borrowers' ability to meet contractual payments when due. When considering modification terms, the borrower's continued ability to repay is assessed and where they are unrelated to payment arrangements, while potential indicators of impairment, these loans are not considered as renegotiated loans.
Credit quality classification of renegotiated loans
A loan is impaired and an impairment allowance is recognised when there is objective evidence of a loss event that has an effect on the cash flows of the loan which can be reliably estimated. Granting a concession to a customer that we would not otherwise consider, as a result of their financial difficulty, is objective evidence of impairment and impairment losses are measured accordingly.
A renegotiated loan is presented as impaired when:
there has been a change in contractual cash flows as a result of a concession which the lender would otherwise not consider; and
it is probable that without the concession the borrower would be unable to meet contractual payment obligations in full.
This applies unless the concession is insignificant and there are no other indicators of impairment.
The renegotiated loan will continue to be disclosed as impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, and there are no other indicators of impairment. For loans that were assessed for impairment on a collective basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.
For retail lending the minimum period of payment performance required depends on the nature of loans in the portfolio, but is typically not less than six months. Where portfolios have more significant levels of forbearance activity the minimum repayment performance period required may be substantially more. Payment performance periods are monitored to ensure they remain appropriate to the levels of recidivism observed within the portfolio. These performance periods are in addition to a minimum of two payments which must be received within a 60-day period for the customer to initially qualify for the renegotiation. The
 
qualifying payments are required in order to demonstrate that the renegotiated terms are sustainable for the borrower.
For corporate and commercial loans, which are individually assessed for impairment and where non-monthly payments are more commonly agreed, the history of payment performance will depend on the underlying structure of payments agreed as part of the restructuring.
Renegotiated loans are classified as unimpaired where the renegotiation has resulted from significant concern about a borrower's ability to meet their contractual payment terms but the concession is not significant and the contractual cash flows are expected to be collected in full following the renegotiation.
Derecognition of renegotiated loans
(Audited)
Loans that have been identified as renegotiated retain this designation until maturity or derecognition. When determining whether a loan that is restructured should be derecognised and a new loan recognised, we consider the extent to which the changes to the original contractual terms result in the renegotiated loan, considered as a whole, being a substantially different financial instrument. Any new loans that arise following derecognition events will continue to be disclosed as renegotiated loans.
The following are examples of circumstances that individually are likely to result in this test being met and derecognition accounting being applied:
an uncollateralised loan becomes fully collateralised or vice versa;
removal or addition of debt-to-equity conversion features attached to the loan agreement that have substance;
a change in the currency in which the principal or interest is denominated, other than a conversion at a current market rate; or
a change in the obligor.
Renegotiated loans and recognition of impairment allowances
(Audited)
For retail lending, renegotiated loans are segregated from other parts of the loan portfolio for collective impairment assessment to reflect the higher rates of losses often encountered in these segments.
In the corporate and commercial sectors, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessment. A distressed restructuring is classified as an impaired loan. The individual impairment assessment takes into account the higher risk of the non-payment of future cash flows inherent in renegotiated loans.
The following table shows the group's holding of renegotiated loans and advances to customers by industry sector and credit quality classification.

42
HSBC Bank plc Annual Report and Accounts 2017


Renegotiated loans and advances to customers by industry sector

2017
2016

Residential mortgages
Other personal lending
Corporate and commercial
Non-bank financial institutions

Total
Residential mortgages
Other personal lending
Corporate and commercial
Non-bank financial institutions

Total

£m
£m
£m
£m

£m
£m
£m
£m
£m

£m
Neither past due nor impaired
252
57
1203
6

1518
328
73
1203
1

1605
Past due not impaired
33
6
42
-

81
105
44
74
-

223
Impaired
211
71
2165
136

2583
451
97
2435
155

3138
Renegotiated loans at 31 Dec
496
134
3410
142

4182
884
214
3712
156

4966
Impairment allowance on renegotiated loans





(684)





(843)
Impairment of loans and advances
(Audited)
The tables below analyse the loan impairment charges for the year and the impairment allowances recognised for impaired loans and
 
advances that are either individually assessed or collectively assessed, and collective impairment allowances on loans and advances classified as not impaired.
Loan impairment charge to the income statement by industry sector

2017

2016


£m

£m

Personal
120

189

- residential mortgages
7

(4
)
- other personal
113

193

Corporate and commercial
454

266

- manufacturing and international trade and services
227

52

- commercial real estate and other property-related
149

(12
)
- other commercial
78

226

Financial
50

24

Total loan impairment charge for the year ended 31 Dec
624

479

Individually assessed impairment allowances
529

306

- new allowances
919

708

- release of allowances no longer required
(366
)
(383
)
- recoveries of amounts previously written off
(24
)
(19
)
Collectively assessed impairment allowances
95

173

- new allowances net of allowance releases
327

351

- recoveries of amounts previously written off
(232
)
(178
)
Total loan impairment charge for the year ended 31 Dec
624

479

Movement in impairment allowances on loans and advances to customers and banks
(Audited)

2017
2016

Banks

Customers

Banks

Customers


Individually assessed

Individually assessed

Collectively assessed

Total

Individually assessed

Individually assessed

Collectively assessed

Total

The group
£m

£m

£m

£m

£m

£m

£m

£m

At 1 Jan
-

1,729

828

2,557

-

1,788

815

2,603

Amounts written off
-

(553
)
(358
)
(911
)
-

(550
)
(359
)
(909
)
Recoveries of loans and advances written off in previous years
-

24

232

256

-

19

178

197

Loan impairment charge
-

529

95

624

-

306

173

479

Exchange and other movements
-

(52
)
(232
)
(284
)
-

166

21

187

At 31 Dec
-

1,677

565

2,242

-

1,729

828

2,557

as a percentage of gross loans and advances1
-

0.59%

0.20%

0.76%

-

0.63%

0.30%

0.86%


HSBC Bank plc Annual Report and Accounts 2017
43


Report of the Directors | Risk

Movement in impairment allowances on loans and advances to customers and banks (continued)

2017
2016

Banks

Customers

Banks

Customers


Individually assessed

Individually assessed

Collectively assessed

Total

Individually assessed

Individually assessed

Collectively assessed

Total

The bank
£m

£m

£m

£m

£m

£m

£m

£m

At 1 Jan
-

1,074

475

1,549

-

1,178

497

1,675

Amounts written off
-

(345
)
(308
)
(653
)
-

(374
)
(264
)
(638
)
Recoveries of loans and advances written off in previous years
-

20

201

221

-

15

147

162

Loan impairment charge
-

347

84

431

-

158

83

241

Exchange and other movements
-

1

12

13

-

97

12

109

At 31 Dec
-

1,097

464

1,561

-

1,074

475

1,549

as a percentage of gross loans and advances1
-

0.49%

0.21%

0.66%

-

0.50%

0.22%

0.66%

1
Net of reverse repo transactions, settlement accounts and stock borrowings.
Personal lending
Total personal lending
We provide a broad range of secured and unsecured personal lending products to meet customer needs. Personal lending includes advances to customers for asset purchases such as
 
residential property where the loans are secured by the assets being acquired. We also offer loans secured on existing assets, such as first charges on residential property, and unsecured lending products such as overdrafts, credit cards and payroll loans. The following table shows the levels of personal lending products in the various portfolios in the UK and the rest of Europe.
Total personal lending


UK

Continental
Europe

Total

As a % of total gross loans


£m

£m

£m

First lien residential mortgages
88,653

4,171

92,824

31.28

- of which:








interest-only (including endowment) mortgages
24,773

14

24,787

8.35

affordability mortgages, including adjustable rate mortgages
-

303

303

0.10

Other personal lending
14,648

12,817

27,465

9.25

- personal loans and overdrafts
7,430

12,386

19,816

6.68

- credit cards
7,218

358

7,576

2.55

- second lien residential mortgages
-

73

73

0.02

- motor vehicle finance
-

-

-

-

Total gross loans at 31 Dec 2017
103,301

16,988

120,289

40.53

Impairment allowances on personal lending








First lien residential mortgages
(108
)
(86
)
(194
)


Other personal lending
(192
)
(51
)
(243
)


- personal loans and overdrafts
(110
)
(51
)
(161
)


- credit cards
(82
)
-

(82
)


- second lien residential mortgages
-

-

-



- motor vehicle finance
-

-

-



Total impairment allowances at 31 Dec 2017
(300
)
(137
)
(437
)



First lien residential mortgages
82,614

4,326

86,940

29.30

- of which:








interest-only (including endowment) mortgages
25,878

18

25,896

8.73

affordability mortgages, including adjustable rate mortgages
-

241

241

0.08

Other personal lending
14,460

12,914

27,374

9.23

- personal loans and overdrafts
7,457

11,651

19,108

6.44

- credit cards
7,003

1,182

8,185

2.76

- second lien residential mortgages
-

79

79

0.03

- motor vehicle finance
-

2

2

-

Total gross loans at 31 Dec 2016
97,074

17,240

114,314

38.53

Impairment allowances on personal lending








First lien residential mortgages
(99
)
(86
)
(185
)


Other personal lending
(187
)
(286
)
(473
)


- personal loans and overdrafts
(126
)
(134
)
(260
)


- credit cards
(61
)
(151
)
(212
)


- second lien residential mortgages
-

-

-



- motor vehicle finance
-

(1
)
(1
)


Total impairment allowances at 31 Dec 2016
(286
)
(372
)
(658
)



44
HSBC Bank plc Annual Report and Accounts 2017


Mortgage lending
We offer a wide range of mortgage products designed to meet customer needs, including capital repayment, interest-only, affordability and offset mortgages. Group credit policy prescribes the range of acceptable residential property LTV thresholds with the maximum upper limit for new loans set between 75% and 95%. Specific LTV thresholds and debt-to-income ratios are managed at regional and country levels and, although the parameters must comply with Group policy, strategy and risk appetite, they differ in the various locations in which we operate to reflect the local economic and housing market conditions, regulations, portfolio performance, pricing and other product features.
Exposure to UK interest-only mortgage loans
Interest-only mortgage products made up £24.8bn of total UK mortgage lending.
The following information is presented for the bank's HSBC branded UK interest-only mortgage loans with balances of £11.7bn; this excludes £9bn of offset mortgages in First Direct, £3bn of Private Bank mortgages, £0.8bn of endowment mortgages and £0.3bn of other products. During 2017, £123m of interest-only mortgages matured; of these, 1290 loans with balances of £42m were repaid in full, 153 loans with balances of £8m had agreed future repayment plans and 438 loans with balances of £73m were subject to ongoing individual assessments. At the end of 2017, the average LTV ratio in the portfolio was 41%, and 98% of mortgages had an LTV ratio of 75% or less.
The profile of maturing UK interest-only loans is as follows:
UK interest-only mortgage loans

£m

Matured interest-only mortgage loans1
160

Interest-only mortgage loans by maturity


- 2018
344

- 2019
385

- 2020
394

- 2021
482

- 2022-2026
2,358

- post 2026
7,561

At 31 Dec 2017
11,684

1
Includes interest-only mortgages which have reached their contractual maturity date, but were unsettled at the end of 2017.

 
Other personal lending
Other personal lending consists primarily of credit cards and personal loans, both of which are generally unsecured.
Collateral and other credit enhancements held
(Audited)
The tables below show residential mortgage lending including off-balance sheet loan commitments by level of collateral. They provide a quantification of the value of fixed charges we hold over borrowers' specific assets where we have a history of enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations, and where the collateral is cash or can be realised by sale in an established market. The LTV ratio is calculated as the gross on-balance sheet carrying amount of the loan and any off-balance sheet loan commitment at the balance sheet date divided by the value of collateral. The value of collateral is determined using professional valuations and house price indices. The collateral valuation excludes any adjustments for obtaining and selling the collateral and, in particular, loans shown as not collateralised or partly collateralised may also benefit from other forms of credit mitigants. Valuations must be updated on a regular basis and, as a minimum, at intervals of every three years. More frequent revaluations are conducted where market conditions or portfolio performance are subject to significant change or where a loan is identified and assessed as impaired.

HSBC Bank plc Annual Report and Accounts 2017
45


Report of the Directors HTMLPIPESYMBOL Risk

Residential mortgage loans including loan commitments by level of collateral
(Audited)
The group
The bank

2017

2016

2017

2016


£m

£m

£m

£m

Non-impaired loans and advances








Fully collateralised
96,173

89,997

90,421

83,885

LTV ratio:








- Less than 50%
52,940

51,100

51,015

48,876

- 51% to 60%
15,989

15,333

14,954

14,179

- 61% to 70%
12,083

11,501

10,818

10,150

- 71% to 80%
9,517

7,353

8,585

6,589

- 81% to 90%
4,698

4,036

4,218

3,587

- 91% to 100%
946

674

831

504

Partially collateralised:








greater than 100% LTV (A)
228

352

91

107

- 101% to 110%
92

122

27

29

- 111% to 120%
34

53

15

11

- greater than 120%
102

177

49

67

Collateral value on A
190

280

59

67

Impaired loans and advances








Fully collateralised
917

993

725

810

LTV ratio:








- Less than 50%
470

475

396

401

- 51% to 60%
175

182

136

155

- 61% to 70%
115

148

91

112

- 71% to 80%
86

99

56

76

- 81% to 90%
40

54

28

40

- 91% to 100%
31

35

18

26

Partially collateralised:








greater than 100% LTV (B)
64

66

19

19

- 101% to 110%
28

30

8

6

- 111% to 120%
10

10

6

7

- greater than 120%
26

26

5

6

Collateral value on B
49

54

18

18

At 31 Dec
97,382

91,408

91,256

84,821

Wholesale lending
Total wholesale lending

2017
2016



As a % of
total gross loans


As a % of
total gross loans

£m

£m

Corporate and commercial
134,513

45.32
132,556

44.68
- manufacturing
21,494

7.24
22,785

7.68
- international trade and services
47,837

16.12
45,222

15.24
- commercial real estate
18,849

6.35
17,343

5.85
- other property-related
5,908

1.99
5,797

1.95
- government
2,583

0.87
2,347

0.79
- other commercial
37,842

12.75
39,062

13.17
Financial
41,991

14.15
49,810

16.79
- non-bank financial institutions
27,842

9.38
28,447

9.59
- banks
14,149

4.77
21,363

7.20
Gross loans at 31 Dec
176,504

59.47
182,366

61.47
Impairment allowances on wholesale lending






Corporate and commercial
(1,671)


(1,723)


- manufacturing
(226)


(383)


- international trade and services
(497)


(392)


- commercial real estate
(268)


(326)


- other property-related
(256)


(137)


- government
(2)


(1)


- other commercial
(422)


(484)


Financial
(134)


(175)


- non-bank financial institutions
(134)


(175)


- banks
-


-


Impairment allowances at 31 Dec
(1,805)


(1,898)


Impairment allowances % of impaired loans
41.41%


37.43%



46
HSBC Bank plc Annual Report and Accounts 2017


Commercial real estate lending
Commercial real estate lending includes the financing of corporate, institutional and high net worth individuals who are investing primarily in income-producing assets and, to a lesser extent, in their construction and development. The business focuses mainly on traditional core asset classes such as retail, offices, light industrial and residential building projects.
Commercial real estate lending





2017

2016


£m

£m

Neither past due nor impaired
18,010

16,326

Past due but not impaired
41

34

Impaired loans
798

983

Total gross loans and advances at 31 Dec
18,849

17,343

- of which: renegotiated loans
823

906

Impairment allowances
(268
)
(326
)
Refinance risk in commercial real estate
Commercial real estate lending tends to require the repayment of a significant proportion of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a customer, being unable to repay their debt on maturity, is unable to refinance the debt at commercial rates. We monitor our commercial real estate portfolio closely, assessing those factors that may indicate potential issues with refinancing. The principal factor is the vintage of the loan, when origination reflected previous market norms which no longer apply in the current market. Examples might be higher LTV ratios and/or lower interest cover ratios. The range of refinancing sources in the local market is also an important consideration, with risk increasing when lenders are restricted to banks and when bank liquidity is limited. In addition, underlying fundamentals such as the reliability of tenants, the ability to let and the condition of the property are important, as they influence property values.
We currently see significant liquidity in overall debt markets which is leading to pressure on pricing and terms. HSBC is maintaining its quality standards and appetite for higher quality proposals.
Collateral and other credit enhancement held
(Audited)
It is the group's practice to lend on the basis of the customer's ability to meet their obligations out of their cash flow resources
 
rather than rely on the value of security offered. Depending on the customer's standing and the type of product, facilities may be provided unsecured.
For other lending a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of a default, the group may utilise the collateral as a source of repayment. Depending on its form, collateral can have a significant financial effect in mitigating exposure to credit risk.
Collateral on loans and advances
Collateral held is analysed separately for commercial real estate and for other corporate and commercial and financial (non-bank) lending. This reflects the greater correlation between collateral performance and principal repayment in the commercial real estate sector than applies to other lending. In each case, the analysis includes off-balance sheet commitments, primarily undrawn credit lines.
The collateral measured in the tables below consists of fixed first charges on real estate and charges over cash and marketable financial instruments. The values in the tables represent the expected market value on an open market basis; no adjustment has been made to the collateral for any expected costs of recovery. Cash is valued at its nominal value and marketable securities at their fair value. The LTV ratios presented are calculated by directly associating loans and advances with the collateral that individually and uniquely supports each facility. Where collateral assets are shared by multiple loans and advances, whether specifically or, more generally, by way of an all monies charge, the collateral value is prorated across the loans and advances protected by the collateral.
Other types of collateral which are commonly taken for corporate and commercial lending such as unsupported guarantees and floating charges over the assets of a customer's business are not measured in the tables below. While such mitigants have value, often providing rights in insolvency, their assignable value is not sufficiently certain and they are therefore assigned no value for disclosure purposes.
The value of commercial real estate collateral is determined by using a combination of professional and internal valuations and physical inspections. Due to the complexity of valuing collateral for commercial real estate, local valuation policies determine the frequency of review on the basis of local market conditions. Revaluations are sought with greater frequency as concerns over the performance of the collateral or the direct obligor increase.
Commercial real estate loans and advances including loan commitments by level of collateral
(Audited)



2017

2016



£m

£m

Rated CRR1 1 to 7





Not collateralised

4,526

3,158

Fully collateralised

18,850

17,625

Partially collateralised

1,208

1,104

- collateral value

940

829

Total

24,584

21,887

Rated CRR1 8 to 10





Not collateralised

44

60

Fully collateralised

439

774

LTV Ratio:





- less than 50%

112

107

- 51% to 75%

147

526

- 76% to 90%

111

87

- 90% to 100%

69

54

Partially collateralised

371

386

- collateral value

214

177

Total

854

1,220

Total at 31 Dec

25,438

23,107

1
Customer risk rating ('CRR'). See page 27 for further information.

HSBC Bank plc Annual Report and Accounts 2017
47


Report of the Directors | Risk

Other corporate, commercial and financial
(non-bank) lending
(Audited)
Other corporate, commercial and financial (non-bank) lending is detailed below, reflecting the difference in collateral held on the portfolios. For financing activities in corporate and commercial lending that are not predominantly commercial real estate-
 
oriented, collateral value is not strongly correlated to principal repayment performance. Collateral values are generally refreshed when an obligor's general credit performance deteriorates and we have to assess the likely performance of secondary sources of repayment should it prove necessary to rely on them.
The table includes off-balance sheet loan commitments by level of collateralisation.
Other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral rated
CRR 8 to 10 only
(Audited)





2017

2016


£m

£m

Not collateralised
2,546

2,669

Fully collateralised
1,343

1,346

LTV Ratio:




- less than 50%
526

548

- 51% to 75%
372

379

- 76% to 90%
202

169

- 90% to 100%
243

250

Partially collateralised
403

569

- collateral value
226

291

Total at 31 Dec
4,292

4,584

Other credit risk exposures
In addition to collateralised lending, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are described in more detail below:
some securities issued by governments, banks and other financial institutions benefit from additional credit enhancement provided by government guarantees that cover the assets;
debt securities issued by corporates are primarily unsecured;
debt securities issued by banks and financial institutions include ABSs and similar instruments which are supported by underlying pools of financial assets. Credit risk associated with ABSs is reduced through the purchase of credit default swap ('CDS') protection;
trading assets include loans and advances held with trading intent. These mainly consist of cash collateral posted to satisfy margin requirements on derivatives, settlement accounts, reverse repos and stock borrowing. There is limited credit risk on cash collateral posted since in the event of default of the counterparty these would be set off against the related liability. Reverse repos and stock borrowing are by their nature collateralised; and
the group's maximum exposure to credit risk includes financial guarantees and similar arrangements that we issue or enter into, and loan commitments that we are irrevocably committed to. Depending on the terms of the arrangement, we may have recourse to additional credit mitigation in the event that a guarantee is called upon or a loan commitment is drawn and subsequently defaults.
Derivatives
The group participates in transactions exposing it to counterparty credit risk. Counterparty credit risk is the risk of financial loss if the counterparty to a transaction defaults before completing the satisfactory settlement of the transaction, which varies in value by reference to a market factor such as interest rate, exchange rate or asset price. It arises principally from OTC derivatives and securities financing transactions ('SFTs') and is calculated in both the trading and non-trading books.
Transactions vary in value by reference to a market factor such as interest rate, exchange rate or asset price. The counterparty risk from derivative transactions is taken into account when reporting the fair value of derivative positions. The adjustment to the fair value is known as the credit value adjustment ('CVA').
 
The International Swaps and Derivatives Association ('ISDA') Master Agreement is the group's preferred agreement for documenting derivatives activity. It provides the contractual framework within which dealing activity across a full range of OTC products is conducted, and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or other pre-agreed termination events occur. It is common, and the group's preferred practice, for the parties to execute a Credit Support Annex ('CSA') in conjunction with the ISDA Master Agreement. Under a CSA, collateral is passed between the parties to mitigate the market-contingent counterparty risk inherent in the outstanding positions.
We manage the counterparty exposure arising from market risk on our OTC derivative contracts by using collateral agreements with counterparties and netting agreements. Currently, we do not actively manage our general OTC derivative counterparty exposure in the credit markets, although we may manage individual exposures in certain circumstances.
HSBC has historically placed strict policy restrictions on collateral types and as a consequence the types of collateral received and pledged are, by value, highly liquid and of a strong quality, being predominantly cash.
Where a collateral type is required to be approved outside the collateral policy (which includes collateral that includes wrong way risks), a submission to the Documentation Approval Committee ('DAC') for approval is required. The DAC requires the participation and sign-off of senior representatives from the Global Markets Chief Operating Officer, Legal and Risk.
The majority of the counterparties with whom we have a collateral agreement are European. The majority of the group's CSAs are with financial institutional clients.
Securitisation exposures and other structured products
This section contains information about our exposure to ABSs, some of which are held through consolidated structured entities ('SEs') and summarised in the table below.
Also included within this section is information on the GB&M legacy credit activities in respect of Solitaire and the securities investment conduits ('SICs'). For further information on structured entities please refer to Note 17.

48
HSBC Bank plc Annual Report and Accounts 2017


Carrying amount of consolidated holdings of ABS
 
Trading

Available
for sale

Loans and receivables

Total1

Of which held through consolidated SEs

 
£m

£m

£m

£m

£m

Mortgage-related assets:
 
 
 
 
 
- Sub-prime residential
4

679

24

707

358

- US Alt-A residential
-

778

-

778

771

- Other residential
603

134

816

1,553

56

- Commercial property
444

198

41

683

167

Leveraged finance-related assets
38

276

-

314

209

Student loan-related assets
29

1,627

-

1,656

1,597

Other assets
573

455

1

1,029

317

At 31 Dec 2017
1,691

4,147

882

6,720

3,475

 
Mortgage-related assets:
- Sub-prime residential
9

1,253

84

1,346

501

- US Alt-A residential
-

1,129

-

1,129

1,121

- Other residential
537

290

44

871

123

- Commercial property
282

927

115

1,324

574

Leveraged finance-related assets
40

1,042

16

1,098

596

Student loan-related assets
41

2,323

9

2,373

2,123

Other assets
815

491

39

1,345

328

At 31 Dec 2016
1,724

7,455

307

9,486

5,366

1
The asset-backed securities are primarily US dollar ('USD') denominated. Principal and carrying amounts are converted into sterling ('GBP') at the prevailing exchange rates at 31 December (2017: 1GBP: USD 1.351; 2016: 1GBP: USD 1.2325).
Included in the above table are securities with a carrying amount of £884m (2016: £1,587m) held through the SICs, excluding Solitaire, that are consolidated by the group. Although the group includes these assets in full on its balance sheet, significant first loss risks are borne by the third-party capital notes investors. The carrying amount of the capital notes liability at the year ended 31 December 2017 was £182m (2016: £175m).
The available-for-sale reserve movement in relation to these ABSs for the year was an increase of £25m (2016: increase of £45m). The impairment write-back attributed to the group for the year was £40m (2016: write-back of £16m).
Management of liquidity and funding risk in 2017
Liquidity coverage ratio
The Liquidity Coverage Ratio ('LCR') aims to ensure that a bank has sufficient unencumbered high-quality liquid assets ('HQLA') to meet its liquidity needs in a 30-calendar-day liquidity stress scenario. HQLA consist of cash or assets that can be converted into cash at little or no loss of value in markets.
At 31 December 2017, all the group's principal operating entities were within the LCR risk tolerance level established by the Board and applicable under the LFRF.
The following table displays the individual LCR levels for our principal operating entities on an EC LCR Delegated Regulation basis.
Operating entities' LCRs
 
At
 
31 Dec
31 Dec
 
2017
2016
 
%
%
HSBC UK liquidity group1
139
123
HSBC France
149
122
HSBC Trinkaus & Burkhardt AG
114
133
1
HSBC UK Liquidity Group comprises: HSBC Bank plc (including all overseas branches), Marks and Spencer Financial Services Limited, HSBC Trust Company (UK) Limited and Private Bank (UK) Limited. It is managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the PRA.
Net stable funding ratio
The Net Stable Funding Ratio ('NSFR') requires institutions to maintain sufficient stable funding relative to required stable funding, and reflects a bank's long-term funding profile (funding
 
with a term of more than a year). It is designed to complement the LCR.
At 31 December 2017, all the group's principal operating entities were within the NSFR risk tolerance level established by the Board and applicable under the LFRF.
The table below displays the NSFR levels for the principal operating entities on a BCBS 295 basis.
Operating entities' NSFRs
 
At
 
31 Dec
31 Dec
 
2017
2016
 
%
%
HSBC UK liquidity group
108
116
HSBC France
116
120
HSBC Trinkaus & Burkhardt AG
117
120
Depositor concentration and term funding maturity concentration
The LCR and NSFR metrics assume a stressed outflow based on a portfolio of depositors within each deposit segment. The validity of these assumptions is undermined if the underlying depositors do not represent a large enough portfolio so that a depositor concentration exists.
In addition to this, operating entities are exposed to term re-financing concentration risk if the current maturity profile results in future maturities being overly concentrated in any defined period.
At 31 December 2017, all principal operating entities were within the risk tolerance levels set for depositor concentration and term funding maturity concentration which were established by the Board and are applicable under the LFRF.
Liquid assets of the group's principal operating entities
The table below shows the unweighted liquidity value of assets categorised as liquid, which is used for the purposes of calculating the LCR metric. This reflects the stock of unencumbered liquid assets at the reporting date, using the regulatory definition of liquid assets.

HSBC Bank plc Annual Report and Accounts 2017
49


Report of the Directors | Risk

Operating entities' liquid assets
 
 
Estimated liquidity value

At Estimated liquidity value

 
at 31 Dec 2017

31 Dec 2016

 
£m

£m

HSBC UK liquidity group
 
 
Level 1
119,198

116,742

Level 2a
2,157

1,691

Level 2b
13,899

6,217

HSBC France
 
 
Level 1
16,441

16,860

Level 2a
741

650

Level 2b
2

12

HSBC Trinkaus & Burkhardt AG
 
 
Level 1
6,237

4,969

Level 2a
50

4

Level 2b
590

1,057

 
Sources of funding
Our primary sources of funding are customer current accounts and customer savings deposits payable on demand or at short notice. We issue wholesale securities (secured and unsecured) to supplement our customer deposits and change the currency mix, maturity profile or location of our liabilities.
The following 'Funding sources and uses' table provides a consolidated view of how our balance sheet is funded, and should be read in light of the LFRF, which requires operating entities to manage liquidity and funding risk on a stand-alone basis.
The table analyses our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented as a net balancing source or deployment of funds.
In 2017, the level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets, cash and balances with central banks and financial investments, as required by the LFRF.
Funding sources and uses for the group
 
2017

2016

 
 
2017

2016

 
£m

£m

 
 
£m

£m

Sources
 
 
 
Uses
 
 
Customer accounts
381,546

375,252

 
Loans and advances to customers
280,402

272,760

Deposits by banks
29,349

23,682

 
Loans and advances to banks
14,149

21,363

Repurchase agreements - non-trading
37,775

19,709

 
Reverse repurchase agreements - non-trading
45,808

31,660

Debt securities issued
13,286

16,140

 
Assets held for sale1
461

94

Liabilities of disposal groups held for sale
454

-

 
Trading assets
145,725

125,069

Subordinated liabilities
16,494

8,421

 
- reverse repos
5,987

2,583

Financial liabilities designated
 
 
 
- stock borrowing
5,189

4,588

at fair value
18,249

18,486

 
- settlement accounts
4,947

4,031

Liabilities under insurance contracts
21,033

19,724

 
- other trading assets
129,602

113,867

Trading liabilities
106,496

93,934

 
Financial investments
58,000

83,135

- repos
1,182

562

 
Cash and balances with
 
 
- stock lending
21,156

14,836

 
central banks
97,601

54,278

- settlement accounts
2,959

2,624

 
Net deployment in other balance
 
 
- other trading liabilities
81,199

75,912

 
sheet assets and liabilities1
26,585

27,614

Total equity
44,049

40,625

 
 
 
 
At 31 Dec
668,731

615,973

 
At 31 Dec
668,731

615,973

1 Net deployment in other balance sheet assets and liabilities in 2016 was £27,708m, which included a £94m of assets held for sale.
Contingent liquidity risk arising from committed lending facilities
The group provides customers with committed facilities such as standby facilities to corporate customers and committed backstop lines to conduit vehicles sponsored by the group. All of the undrawn commitments provided to conduits or external customers are accounted for in the LCR and NSFR in line with the applicable regulations. This ensures that under a stress scenario any additional outflow generated by increased utilisation of these committed facilities by either customers or the groups's sponsored conduits will not give rise to liquidity risk for the group.
 
At 31 December 2017, the CP issued by Solitaire and Mazarin was entirely held by HSBC UK liquidity group.
Since the group controls the size of the portfolio of securities held by these conduits, no contingent liquidity risk exposure arises as a result of these undrawn committed lending facilities. In relation to commitments to customers, the table below shows the level of undrawn commitments outstanding in terms of the five largest single facilities and the largest market sector.
The group's contractual exposures as at 31 December monitored under the contingent liquidity risk limit structure
 
 
2017

2016

 
 
£bn

£bn

Commitments to conduits
 
 
 
Consolidated multi-seller conduits1
 
 
 
- total lines
 
6.8

6.2

- largest individual lines
 
0.6

0.3

Consolidated securities investment conduits - total lines
 
3.4

3.8

Commitments to customers
 
 
 
- five largest2
 
2.5

3.6

- largest market sector3
 
19.0

14.8

1
These exposures relate to the Regency multi-seller conduit. This vehicle provides funding to group customers by issuing debt secured by a diversified pool of customer-originated assets.
2
These figures represent the undrawn balance for the five largest committed liquidity facilities provided to customers, other than those facilities to conduits.
3
These figures represent the undrawn balance for the total of all committed liquidity facilities provided to the largest market sector, other than those facilities to conduits.

50
HSBC Bank plc Annual Report and Accounts 2017


Asset encumbrance and collateral management
An asset is defined as encumbered if it has been pledged as collateral against an existing liability and, as a result, is no longer available to the group to secure funding, satisfy collateral needs or be sold to reduce the funding requirement. Collateral is managed on an operating entity basis consistent with the approach to managing liquidity and funding. Available collateral held in an operating entity is managed as a single consistent collateral pool
 
from which each operating entity will seek to optimise the use of the available collateral. The objective of this disclosure is to facilitate an understanding of available and unrestricted assets that could be used to support potential future funding and collateral needs. The disclosure is not designed to identify assets which would be available to meet the claims of creditors or to predict assets that would be available to creditors in the event of a resolution or bankruptcy.
Summary of assets available to support potential future funding and collateral needs (on- and off-balance sheet)
 
2017

2016

 
£m

£m

Total on-balance sheet assets at 31 Dec
818,868

816,829

Less:
 
 
- reverse repo/stock borrowing receivables and derivative assets
(200,319
)
(238,250
)
- other assets that cannot be pledged as collateral
(79,306
)
(76,431
)
Total on-balance sheet assets that can support funding and collateral needs at 31 Dec
539,243

502,148

Add: off-balance sheet assets
 
 
- fair value of collateral received in relation to reverse repo/stock borrowing/derivatives that is available to sell or repledge
173,386

112,322

Total assets that can support future funding and collateral needs
712,629

614,470

Less:
 
 
- on-balance sheet assets pledged
(88,768
)
(65,084
)
- re-pledging of off-balance sheet collateral received in relation to reverse repo/stock borrowing/derivatives
(130,430
)
(81,156
)
Assets available to support funding and collateral needs at 31 Dec
493,431

468,230

Market risk in 2017
Market risk is the risk that movements in market factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices will reduce the group's income or the value of its portfolios.
There were no material changes to our policies and practices for the management of market risk in 2017.
Exposure to market risk is separated into two portfolios.
Trading portfolios comprise positions arising from market-making and warehousing of customer-derived positions.
Non-trading portfolios including BSM comprise positions that primarily arise from the interest rate management of the group's retail and commercial banking assets and liabilities, financial investments designated as available-for-sale and held-to-maturity, and exposures arising from the group's insurance operations.
 
Trading portfolios
Value at risk of the trading portfolios
(Audited)
Trading VaR predominantly resides within Global Markets. The total VaR for trading activity showed some variation in the first quarter of the year, mostly due a low rates environment, as work was ongoing on the implementation of a compressed return model. As this was implemented around the beginning of the second quarter the VaR stabilised. The overall trading positions were constrained and VaR reached a low around mid-year. Towards the end of the year, activity picked up again, and the VaR increase can be ascribed to increased Equity risk (mainly coming from correlation and dividend Risk-Not-In-Var ('RNIV'), as well as Credit.
The daily levels of total trading VaR over the past year are set out in the graph below.
Daily VaR (trading portfolios), 99% 1 day (£m)
Trading VaR
inc RNIV
IR trading
inc RNIV
Equity Trading inc RNIV
CR Trading
FX Trading
Diversification
 
 
 

HSBC Bank plc Annual Report and Accounts 2017
51


Report of the Directors | Risk

The group's trading VaR for the year is shown in the table below.
Trading VaR, 99% 1 day
(Audited)
 
Foreign
exchange (FX) and commodity

Interest
rate (IR)

Equity (EQ)

Credit
Spread (CS)

Portfolio Diversification1

Total2

 
£m

£m

£m

£m

£m

£m

Balance at 31 Dec 2017
2.1

17.1

21.4

16.2

(20.5
)
36.3

Average
5.2

25.3

12.0

9.2

(19.1
)
32.6

Maximum
15.3

52.3

21.4

17.4

 
53.4

Minimum
0.9

17.1

7.5

3.4

 
26.2

 
Balance at 31 Dec 2016
5.2

33.2

9.6

3.9

(13.6
)
38.3

Average
5.9

30.3

14.5

7.8

(19.1
)
39.4

Maximum
12.0

44.8

20.3

16.9



55.4

Minimum
2.3

21.5

9.6

3.6



29.7

1
Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for this measure.
2
The total VaR is non-additive across risk types due to diversification effect and it includes VaR RNIV.
Back-testing
In 2017, the group experienced one back-testing exception against both hypothetical and actual loss driven by a margin loan.
There was no evidence of model failure or control error. The back-testing results exclude exemptions due from changes in fair value adjustments.
Value at Risk of the non-trading portfolios
(Audited)
Non-trading VaR of the group includes contributions from all global businesses. The gradual reduction is Interest Rate VaR is driven by a decision to de-risk the banking book in 2017. The
 
decrease in non-trading credit spread risk is attributed to the continuous decrease of legacy ABS exposures.
Non-trading VaR also includes the interest rate risk of non-trading financial instruments held by the global businesses and transferred into portfolios managed by BSM or local treasury functions. In measuring, monitoring and managing risk in our non-trading portfolios, VaR is just one of the tools used. 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. The daily levels of total non-trading VaR over the last year are set out in the graph below.
Daily VaR (non-trading portfolios), 99% 1 day (£m)
Non-trading VaR
IR non-trading
CS Trading Intent
Diversification
 
 
 
 
 
 

52
HSBC Bank plc Annual Report and Accounts 2017


The group's non-trading VaR for the year is shown in the table below.
Non-trading VaR, 99% 1 day
(Audited)
 
Interest
rate

Credit
spread

Portfolio
diversification

Total

 
£m

£m

£m

£m

Balance at 31 Dec 2017
45.8

22.1

(17.8
)
50.1

Average
64.1

29.3

(23.6
)
69.8

Maximum
92.0

53.4

 
91.2

Minimum
44.8

9.3

 
47.7

 
Balance at 31 Dec 2016
91.5

29.5

(39.6
)
81.4

Average
79.9

27.9

(29.6
)
78.2

Maximum
94.5

48.3



92.5

Minimum
67.0

17.4

 
66.1

Fixed-rate securities
The principal non-trading risk which is not included in the VaR arises out of Fixed Rate Subordinated Notes. The VaR related to these instruments was £35.5m at 31 December 2017 (2016: £29.2m); while the average and maximum during the year was £31.0m and £35.6m respectively (2016: £30.1m and £36.6m).
Equity securities held as available-for-sale
Potential new commitments are subject to risk appraisal to ensure that industry and geographical concentrations remain within acceptable levels for the portfolio. Regular reviews are performed to substantiate the valuation of the investments within the portfolio and investments held to facilitate ongoing business, such as holdings in government-sponsored enterprises and local stock exchanges.
Market risk arises on equity securities held as available-for-sale. The fair value of these securities at 31 December 2017 was £662m (2016: £761m).
The fair value of the constituents of equity securities held as available-for-sale can fluctuate considerably. For details of the impairment incurred on available-for-sale equity securities see the accounting policies in Note 1.2(e).
Structural foreign exchange exposures
The group's structural foreign currency exposure is represented by the net asset value of its foreign currency equity and subordinated debt investments in subsidiary undertakings, branches, joint ventures and associates.
For our policies and procedures for managing structural foreign exchange exposures, see page 31 of the 'Risk management' section.
Net structural foreign currency exposures

2017

2016


£m

£m

Currency of structural exposure


Euro
11,132

11,718

US dollars
515

907

Turkish lira1
-

596

South African rand
326

279

Russian rouble
225

214

Others, each less than £100m
378

366

At 31 Dec
12,576

14,080

1
On 29 June 2017, HSBC Bank plc transferred its shareholding in HSBC Bank A.S. to HSBC Middle East Holdings B.V. and HSBC Bank Middle East Limited. Please see page 3.
Operational risk in 2017
Operational risk is the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems or from external events.
Responsibility for minimising operational risk lies with HSBC's employees. They are required to manage the operational risks of the business and operational activities for which they are responsible.
 
A summary of our current policies and practices regarding the management of operational risk is set out on page 32.
Operational risk exposures in 2017
In 2017 we continued our ongoing work to strengthen those controls that manage our most material risks. Among other measures, we:
further developed controls to help ensure that we know our customers, ask the right questions, monitor transactions and escalate concerns to detect, prevent and deter financial crime risk;
implemented a number of initiatives to raise our standards in relation to the conduct of our business and other regulatory compliance-related initiatives, as described on page 33 of the 'Regulatory compliance risk management' section;
increased monitoring and enhanced detective controls to manage those fraud risks which arise from new technologies and new ways of banking;
strengthened internal security controls to prevent cyber-attacks;
improved controls and security to protect customers when using digital channels; and
enhanced our third-party risk management capability to enable the consistent risk assessment of any third-party service.
Further information on the nature of these risks is provided in 'Top and emerging risks' on page 20 and in 'Risk management' from pages 23 to 35.
Operational risk losses in 2017
Operational risk losses in 2017 are lower than in 2016, reflecting a reduction in losses incurred relating to large legacy conduct-related events. Provisions related to the civil money penalty order associated with the FRB agreed in September 2017 and the DPA with the US DoJ in January 2018, in connection with investigations into HSBC's historic foreign exchange activities, were recognised in prior periods. For further details, see Note 30 on the Financial Statements and on conduct-related costs included in significant items on page 11.
Insurance manufacturing operations risk in 2017
The majority of the risk in our insurance business derives from manufacturing activities and can be categorised as financial risk or 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 (the bank).
A summary of our current policies and practices regarding the management of insurance risk is set out on page 34.

HSBC Bank plc Annual Report and Accounts 2017
53


Report of the Directors | Risk

The group's bancassurance model
We operate a n integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship.
The insurance contracts we sell relate to the underlying needs of our banking customers, which we can identify from our point-of-sale contacts and customer knowledge. The majority of sales are of savings and investment products and term and credit life contracts.
By focusing largely on personal and SME lines of business, we are able to optimise volumes and diversify individual insurance risks.
We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the bank.
We have life insurance manufacturing subsidiaries in France, Malta and the UK. Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a handful of leading external insurance companies in order to provide insurance products to our customers through our banking network and direct channels. These arrangements are generally structured with our exclusive strategic partners and earn
 
the bank a combination of commissions, fees and a share of profits.
Insurance products are sold through all global businesses, but predominantly by RBWM, GPB and CMB through our branches and direct channels.
Measurement
(Audited)
The risk profile of our insurance manufacturing businesses is measured using an economic capital approach. Assets and liabilities are measured on a market value basis, and a capital requirement is defined to ensure that there is a less than one-in-200 chance of insolvency over a one-year time horizon, given the risks to which the businesses are exposed. The methodology for the economic capital calculation is largely aligned to the pan-European Solvency II insurance capital regulations. The economic capital coverage ratio (economic net asset value divided by the economic capital requirement) is a key risk appetite measure. The business has a current appetite to remain above 140% with a tolerance of 110%. In addition to economic capital, the regulatory solvency ratio is also a metric used to manage risk appetite on an entity basis.
The following table shows the composition of assets and liabilities by contract type. A portfolio of business in our Maltese insurance operations was reported as held for sale at 31 December 2017.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)

With DPF

Unit-linked

Other contracts1

 Shareholder
assets and liabilities

Total


£m

£m

£m

£m

£m

Financial assets
18,749

1,530

190

1,906

22,375

- financial assets designated at fair value
7,020

1,466

85

630

9,201

- derivatives
95

-

-

30

125

- financial investments - AFS2
9,918

-

104

1,188

11,210

- other financial assets3
1,716

64

1

58

1,839

Reinsurance assets
-

188

159

-

347

PVIF4
-

-

-

572

572

Other assets and investment properties
784

1

1

449

1,235

Total assets at 31 Dec 2017
19,533

1,719

350

2,927

24,529

Liabilities under investment contracts designated at fair value
-

548

-

-

548

Liabilities under insurance contracts
19,533

1,166

334

-

21,033

Deferred tax5
-

5

-

156
161

Other liabilities
-

-

-

1,561

1,561

Total liabilities at 31 Dec 2017
19,533

1,719

334

1,717

23,303

Total equity at 31 Dec 2017
-

-

-

1,226

1,226

Total liabilities and equity at 31 Dec 2017
19,533

1,719

334

2,943

24,529

Financial assets
17,663

1,997

208

1,450

21,318

- financial assets designated at fair value
5,822

1,882

106

442

8,252

- derivatives
114

-

-

38

152

- financial investments - AFS2
10,204

-

99

902

11,205

- other financial assets3
1,523

115

3

68

1,709

Reinsurance assets
-

124

169

-

293

PVIF4
-

-

-

577

577

Other assets and investment properties
692

5

2

5

704

Total assets at 31 Dec 2016
18,355

2,126

379

2,032

22,892

Liabilities under investment contracts designated at fair value
-

1,072

-

-

1,072

Liabilities under insurance contracts
18,355

1,030

339

-

19,724

Deferred tax5
-

2

-

189

191

Other liabilities
-

-

30

733

763

Total liabilities at 31 Dec 2016
18,355

2,104

369

922

21,750

Total equity at 31 Dec 2016
-

-

-

1,142

1,142

Total liabilities and equity at 31 Dec 2016
18,355

2,104

369

2,064

22,892

1
'Other contracts' includes term assurance and credit life insurance.
2
Financial investments available-for-sale ('AFS').
3
Comprise mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities.
4
Present value of in-force long-term insurance business.
5
'Deferred tax' includes the deferred tax liabilities arising on recognition of PVIF.

54
HSBC Bank plc Annual Report and Accounts 2017


Key risk types
The key risks for the insurance operations are market risks (in particular interest rate and equity) and credit risks, followed by insurance underwriting risks and operational risks. Liquidity risk, whilst significant for the bank, is minor for our insurance operations.
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting the bank's capital or profit. Market factors include interest rates, equity and growth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued. Our most significant life insurance products are investment contracts with discretionary participating features ('DPF') issued in France. These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds with a proportion allocated to other asset classes, to provide customers with the potential for enhanced returns.
 
DPF products expose the bank to the risk of variation in asset returns, which will impact our participation in the investment performance. In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by the bank. Reserves are held against the cost of such guarantees, calculated by stochastic modelling.
Where local rules require, these reserves are held as part of liabilities under insurance contracts. Any remainder is accounted for as a deduction from the present value of in-force 'PVIF' long-term insurance contracts and on the relevant product. The table below shows the total reserve held for the cost of guarantees, the range of investment returns on assets supporting these products and the implied investment return that would enable the business to meet the guarantees.
The financial guarantees offered on some portfolios exceeded the current yield on the assets that back them. The cost of guarantees on portfolios in France increased, driven principally by the impact of modelling changes.
For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains as fees earned are related to the market value of the linked assets.
Financial return guarantees
(Audited)
 
2017
2016
 
Investment returns implied by guarantee
Long-term investment returns on relevant portfolios
Cost of guarantees

Investment returns implied by guarantee
Long-term investment returns on relevant portfolios
Cost of guarantees

 
%
%
£m

%
%
£m

Capital
0.0
3.2
67

0.0
3.0
25

Nominal annual return1
2.6
3.2
80

2.6
3.0
76

Nominal annual return
4.5
3.2
44

4.5
3.0
52

At 31 Dec
 
 
191

 
 
153

1
A block of contracts in France with guaranteed nominal annual returns in the range 1.25%-3.72% are reported in line with the average guaranteed return of 2.6% (2016: 2.6%) offered to policyholders on these contracts.
Sensitivities
The following table illustrates the effects of selected interest rate and equity price scenarios on our profit for the year and the total equity of our insurance manufacturing subsidiaries.
Where appropriate, the effects of the sensitivity tests on profit after tax and equity incorporate the impact of the stress on the PVIF. The relationship between the profit and total equity and the risk factors is non-linear; therefore, the results disclosed should not be extrapolated to measure sensitivities to different
 
levels of stress. For the same reason, the impact of the stress is not symmetrical on the upside and downside. The sensitivities are stated before allowance for management actions which may mitigate the effect of changes in the market environment. The sensitivities presented allow for adverse changes in policyholder behaviour that may arise in response to changes in market rates.
Changes in sensitivity compared to 2016 were primarily driven by the impact of increasing yields in France on the projected cost of options and guarantees.
Sensitivity of the group's insurance manufacturing subsidiaries to market risk factors
(Audited)
 
2017
2016
 
Effect on profit after tax

Effect on
total equity

Effect on profit after tax

Effect on
total equity

 
£m

£m

£m

£m

+100 basis points parallel shift in yield curves
24

9

58

44

-100 basis points parallel shift in yield curves1
(44
)
(28
)
(110
)
(95
)
10% increase in equity prices
20

20

13

13

10% decrease in equity prices
(19
)
(19
)
(13
)
(13
)
1
For 2016, where a -100 basis point parallel shift in the yield curve would result in a negative interest rate, the effect on profit after tax and total equity has been calculated using a minimum rate of 0%.


HSBC Bank plc Annual Report and Accounts 2017
55


Report of the Directors | Risk

Credit risk
(Audited)
Description and exposure
Credit risk arises in two main areas for our insurance manufacturers:
risk associated with credit spread volatility and default by debt security counterparties after investing premiums to generate a return for policyholders and shareholders; and
risk of default by reinsurance counterparties and non-reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect of these items are shown in the table on page 53.
The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'satisfactory' or higher (as defined on page 27), with 100% of the exposure being neither past due nor impaired.
Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholder; therefore our exposure is primarily related to liabilities under non-linked insurance and
 
investment contracts and shareholders' funds. The credit quality of these financial assets is included in the table on page 38.
Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though solvent, either does not have sufficient financial resources available to meet its obligations when they fall due, or can secure them only at excessive cost.
The following table shows the expected undiscounted cash flows for insurance contract liabilities at 31 December 2017. The liquidity risk exposure is wholly borne by the policyholder in the case of unit-linked business and is shared with the policyholder for non-linked insurance.
The profile of the expected maturity of insurance contracts at
31 December 2017 remained comparable with 2016.
The remaining contractual maturity of investment contract liabilities is included in Note 25.
Expected maturity of insurance contract liabilities
(Audited)

Expected cash flows (undiscounted)

Within 1 year

1-5 years

5-15 years

Over 15 years

Total


£m

£m

£m

£m

£m

Unit-linked
289

323

436

440

1,488

With DPF and other contracts
1,460

6,665

6,625

5,212

19,962

At 31 Dec 2017
1,749

6,988

7,061

5,652

21,450


Unit-linked
195

277

418

370

1,260

With DPF and other contracts
1,377

6,074

5,912

5,372

18,735

At 31 Dec 2016
1,572

6,351

6,330

5,742

19,995

Insurance risk
Description and exposure
Insurance risk is the risk of loss through adverse experience, in either timing or amount, of insurance underwriting parameters (non-economic assumptions). These parameters include mortality, morbidity, longevity, lapses and unit costs.
The 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.
The table on page 53 analyses our life insurance risk exposures by type of contract.
The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2016.
Sensitivities
The table below shows the sensitivity of profit and total equity to reasonably possible changes in non-economic assumptions across all our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in mortality or morbidity depends on the type of business being written. Our largest exposure to mortality and morbidity risk exists in the UK.
 
Sensitivity to lapse rates depends on the type of contracts being written. For a portfolio of term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. We are most sensitive to a change in lapse rates in France.
Expense rate risk is the exposure to a change in the cost of administering insurance contracts. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative effect on our profits.
Sensitivity analysis
(Audited)
 
2017

2016

 
£m

£m

Effect on profit after tax and total equity at
31 Dec
 
 
10% increase in mortality and/or morbidity rates
(18
)
(13
)
10% decrease in mortality and/or morbidity rates
18

12

10% increase in lapse rates
(22
)
(18
)
10% decrease in lapse rates
25

22

10% increase in expense rates
(31
)
(32
)
10% decrease in expense rates
31

31


56
HSBC Bank plc Annual Report and Accounts 2017


Capital
Capital management
Approach and policy
(Audited)
Our objective in managing the group's capital is to maintain appropriate levels of capital to support our business strategy and meet regulatory and stress testing related requirements.
We manage group capital to ensure that we exceed current and expected future requirements, and that we respect the payment priority of our capital providers. Throughout 2017, we complied with the Prudential Regulation Authority's ('PRA') regulatory capital adequacy requirements, including those relating to stress testing.
Capital measurement
The PRA is the supervisor of the bank and lead supervisor of the group. The PRA sets capital requirements and receives information on the capital adequacy of the bank and the group.
Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their capital adequacy requirements. Since 1 January 2014, our capital at group level is calculated under CRD IV and the PRA Rulebook.
Our policy and practice in capital measurement and allocation at the group level is underpinned by the CRD IV rules. In most jurisdictions, non-bank financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.
The Basel III framework, like Basel II, is structured around three 'pillars': minimum capital requirements, supervisory review process and market discipline. Basel III also introduces a number of capital buffers, including the Capital Conservation Buffer ('CCB'), Countercyclical Capital Buffer ('CCyB'), and other systemic buffers such as the Globally/Other Systemically Important Institutions ('G-SII'/'O-SII') buffer. CRD IV legislation implemented Basel III in the EU, and in the UK, the 'PRA Rulebook' for CRR Firms transposed the various national discretions under the CRD IV legislation into UK requirements.
Regulatory capital
Our capital base is divided into three main categories, namely common equity tier 1, additional tier 1 and tier 2, depending on their characteristics.
Common equity tier 1 ('CET 1') capital is the highest quality form of capital, comprising shareholders' equity and related non-controlling interests (subject to limits). Under CRD IV various capital deductions and regulatory adjustments are made against these items; these include deductions for goodwill and intangible assets, deferred tax assets that rely on future profitability, negative amounts resulting from the calculation of expected loss amounts under internal ratings based ('IRB') approach and surplus defined benefit pension fund assets.

 
Additional tier 1 capital comprises eligible non-common equity capital instruments and any related share premium; it also includes other qualifying instruments issued by subsidiaries subject to certain limits. Holdings of additional tier 1 instruments of financial sector entities are deducted from our additional tier 1 capital.
Tier 2 capital comprises eligible capital instruments and any related share premium and other qualifying tier 2 capital instruments issued by subsidiaries, subject to limits. Holdings of tier 2 capital instruments of financial sector entities are deducted from our tier 2 capital.
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market discipline and aims to increase market transparency by requiring firms to publish, at least annually, wide-ranging information on their risks and capital, and how these are managed. Our Pillar 3 Disclosures 2017 are published on HSBC's website, www.hsbc.com, under 'Investor Relations'.
Capital overview
Key capital numbers
 
 
At 31 Dec
 
Footnotes
2017

2016

Available capital (£m)
1
 
 
Common equity tier 1 capital
 
27,409

25,098

Tier 1 capital
 
32,243

30,218

Total regulatory capital
 
39,288

38,522

Risk-weighted assets (£m)
 
 
 
Credit risk
 
164,767

168,936

Counterparty credit risk
 
24,018

28,593

Market risk
 
20,978

24,975

Operational risk
 
23,310

22,733

Total risk-weighted assets
 
233,073

245,237

Capital ratios (%)
 
 
 
Common equity tier 1
 
11.8

10.2

Total tier 1
 
13.8

12.3

Total capital
 
16.9

15.7

Leverage ratio
 
 
 
Tier 1 capital (£m)
 
31,165

28,853

Total leverage ratio exposure measure (£m)
 
787,220

733,415

Leverage ratio (%)
2
4.0

3.9

1
Capital figures are reported on a transitional basis.
2
Leverage ratio is calculated on a fully phased-in basis.


HSBC Bank plc Annual Report and Accounts 2017
57


Report of the Directors | Risk

Capital structure at 31 December
(Audited)
Own funds disclosure
 
 
 
At
 
 
 
31 Dec

31 Dec

Ref*
 
 
2017

2016

 
 
Footnotes
£m

£m

 
Common equity tier 1 ('CET1') capital: instruments and reserves
 
 
 
1
Capital instruments and the related share premium accounts
 
797

21,099

 
- ordinary shares
 
797

21,099

2
Retained earnings
1
32,601

12,638

3
Accumulated other comprehensive income (and other reserves)
1
4,341

1,758

5
Minority interests (amount allowed in consolidated CET1)
 
337

349

5a
Independently reviewed interim net profits net of any foreseeable charge or dividend
1
217

(820
)
6
Common equity tier 1 capital before regulatory adjustments
 
38,293

35,024

 
Common equity tier 1 capital: regulatory adjustments
 
 
 
7
Additional value adjustments
 
(587
)
(756
)
8
Intangible assets (net of related deferred tax liability)
 
(5,337
)
(5,145
)
10
Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)
 
(39
)
(30
)
11
Fair value reserves related to gains or losses on cash flow hedges
 
41

(84
)
12
Negative amounts resulting from the calculation of expected loss amounts
 
(864
)
(1,128
)
14
Gains or losses on liabilities at fair value resulting from changes in own credit standing
 
452

(141
)
15
Defined-benefit pension fund assets
 
(4,550
)
(2,642
)
28
Total regulatory adjustments to common equity tier 1
 
(10,884
)
(9,926
)
29
Common equity tier 1 capital
 
27,409

25,098

 
Additional tier 1 ('AT1') capital: instruments
 
 
 
30
Capital instruments and the related share premium accounts
 
3,781

3,781

31
- classified as equity under IFRSs
 
3,781

3,781

33
Amount of qualifying items and the related share premium accounts subject to phase out from AT1
 
1,083

1,389

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
 
44

56

36
Additional tier 1 capital before regulatory adjustments
 
4,908

5,226

 
Additional tier 1 capital: regulatory adjustments

 
 
 
37
Direct and indirect holdings of own AT1 instruments
 
(45
)
(49
)
41b
Residual amounts deducted from AT1 capital with regard to deduction from tier 2 ('T2') capital during the transitional period
 
(29
)
(57
)
 
- 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
 
(29
)
(57
)
43
Total regulatory adjustments to additional tier 1 capital
 
(74
)
(106
)
44
Additional tier 1 capital
 
4,834

5,120

45
Tier 1 capital (T1 = CET1 + AT1)
 
32,243

30,218

 
Tier 2 capital: instruments and provisions
 
 
 
46
Capital instruments and the related share premium accounts
 
5,977

7,058

47
Amount of qualifying items and the related share premium accounts subject to phase out from T2
 
1,194

1,310

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
 
169

196

49
- of which: instruments issued by subsidiaries subject to phase out
 
146

182

51
Tier 2 capital before regulatory adjustments
 
7,340

8,564

 
Tier 2 capital: regulatory adjustments
 
 
 
52
Direct and indirect holdings of own T2 instruments
 
(30
)
(32
)
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)
 
(265
)
(228
)
57
Total regulatory adjustments to tier 2 capital

 
(295
)
(260
)
58
Tier 2 capital
 
7,045

8,304

59
Total capital (TC = T1 + T2)
 
39,288

38,522

*
The references identify the lines prescribed in the EBA template, which are applicable and where there is a value.
1
In the comparative period, dividend paid has been reallocated from row 2 and 3 to row 5a.
CET1 capital increased during the year by £2.3bn, due to:
£1.2bn of capital generation through profits, net of dividends;
£1.2bn of capital contribution from HSBC Holdings plc; and

 
favourable foreign currency translation differences of £0.4bn.
These increases were partly offset by a reduction of £0.5bn as a result of the transfer of HSBC Bank A.S. to HSBC Middle East Holdings B.V.

58
HSBC Bank plc Annual Report and Accounts 2017


Risk-Weighted Assets ('RWAs')
RWA movement by business by key driver
 
Credit risk, counterparty credit risk and operational risk
 
 
 
RBWM

CMB

GB&M

GPB

Corporate Centre

Market risk

Total RWAs

 
£m

£m

£m

£m

£m

£m

£m

RWAs at 1 Jan 2017
25,849

81,958

81,504

3,509

27,442

24,975

245,237

RWA initiatives
(10
)
(3,930
)
(9,746
)
(135
)
(5,927
)
(1,783
)
(21,531
)
Foreign exchange movement
91

606

(2,289
)
22

(1,203
)
(2,024
)
(4,797
)
Acquisitions and disposals
(791
)
(1,611
)
(631
)
-

(585
)
(462
)
(4,080
)
Book size
368

3,799

4,327

120

216

(294
)
8,536

Book quality
298

587

86

150

442

-

1,563

Model updates
661

3,666

252

(90
)
-

-

4,489

Methodology and policy
210

373

3,287

(36
)
(744
)
566

3,656

- internal updates
210

373

2,525

(36
)
(744
)
566

2,894

- external updates - regulatory
-

-

762

-

-

-

762

Total RWA movement
827

3,490

(4,714
)
31

(7,801
)
(3,997
)
(12,164
)
RWAs at 31 Dec 2017
26,676

85,448

76,790

3,540

19,641

20,978

233,073

RWAs decreased by £12.2bn during the year, including a decrease of £4.8bn due to foreign currency translation differences. The remaining decrease of £7.4bn (excluding foreign currency translation differences) was due to RWA initiatives of £21.5bn and acquisitions and disposals of £4.1bn, less increases from book size growth of £8.5bn, model updates of £4.5bn, and methodology and policy movements of £3.7bn.
The following comments describe the principal RWA movements in 2017, excluding foreign currency translation differences.
RWA Initiatives
Continued reduction in legacy credit reduced RWAs by £5.6bn. Further savings mainly came from refined calculations of £3.1bn, exposure reductions of £2.9bn, trade actions of £2.7bn and process improvements of £3.1bn.
 
Acquisitions and disposals
The transfer of HSBC Bank A.S. to HSBC Middle East Holdings B.V. decreased the group's RWAs by £4.1bn.
Book size
Book size movements of £8.5bn principally represent lending growth, mainly in GB&M and CMB.
Leverage ratio
Our fully phased-in CRD IV leverage ratio was 4.0% at
31 December 2017, up from 3.9% at 31 December 2016. Growth in tier 1 capital was partly offset by a rise in the leverage exposure measure, primarily due to a growth in on balance sheet exposures.

HSBC Bank plc Annual Report and Accounts 2017
59


Report of the Directors | Corporate Governance

Corporate Governance Report
The statement of corporate governance practices set out on pages 59 to 64 and information incorporated by reference constitutes the Corporate Governance Report of HSBC Bank plc.
The Directors serving as at 31 December 2017 are set out below.
Directors
Jonathan Symonds, CBE
Chairman and independent non-executive Director
Chairman of the Chairman's Nominations and Remuneration Committee
Appointed to the Board: 2014
Jonathan is a former Chief Financial Officer of Novartis AG and AstraZeneca plc. He was also a partner and Managing Director of Goldman Sachs, a partner of KPMG, and a non-executive director and chair of the Audit Committee of Diageo plc. He is a fellow of the Institute of Chartered Accountants in England and Wales.
His current appointments include being Senior Independent Director, Chairman of the Group Audit Committee and member of the Nomination Committee and the Conduct & Values Committee of HSBC Holdings plc. Jonathan is also Chairman of Proteus Digital Health Inc, and a non-executive director of Genomics England Limited.
John Trueman
Deputy Chairman and independent non-executive Director
Member of the Audit Committee, the Risk Committee, the Risk Sub-Committee for Global Banking and Markets Risk Oversight and the Chairman's Nominations and Remuneration Committee
Appointed to the Board: 2004. Deputy Chairman since December 2013
John is Chairman of HSBC Private Bank (UK) Limited and HSBC Global Asset Management Limited. Former appointments include: Deputy Chairman of S.G. Warburg & Co Ltd.
Antonio Simoes
Chief Executive
Chairman of the Executive Committee
Appointed to the Board: 2012. Chief Executive since September 2015
Antonio joined HSBC in 2007 and became a Group Managing Director of HSBC Holdings plc on 1 February 2016. He is Chief Executive of Europe and a director of HSBC France. Former appointments include: Chief Executive of HSBC UK; Head of Retail Banking and Wealth Management, Europe; Chief of Staff to the Group Chief Executive; and Group Head of Strategy and Planning. Antonio was formerly the Chairman of the Practitioner Panel of the FCA, Partner of McKinsey & Company and an Associate at Goldman Sachs.
James Coyle
Independent non-executive Director
Chairman of the Risk Committee and member of the Audit Committee, the Risk Sub-Committee for Global Banking and Markets Risk Oversight and the Chairman's Nominations and Remuneration Committee
Appointed to the Board: 2015
James is Chairman of HSBC Trust Company (UK) Limited and Marks & Spencer Unit Trust Management Limited and a non-executive director of Marks and Spencer Financial Services plc and Marks and Spencer Savings and Investments Limited. He is a non-executive director and chairman of the Audit and Risk Committee of Scottish Water, a non-executive director and chairman of the Audit and Risk Committee of Honeycomb Investment Trust plc, director and chairman of the Audit and Risk Committee of Worldfirst and a member of the Financial Reporting Council's
 
Monitoring Committee. Former appointments include: Group Financial Controller for Lloyds Banking Group; Group Chief Accountant of Bank of Scotland; member of the Audit Committee of the British Bankers Association; non-executive director of the Scottish Building Society; and a non-executive director and chairman of the Audit Committee of Vocalink plc.
Dame Denise Holt
Independent non-executive Director
Member of the Risk Committee
Appointed to the Board: 2011
Denise is Chairman of Marks and Spencer Financial Services plc and Marks and Spencer Savings and Investments Limited. She is a non-executive director of Iberdrola SA and and a member of the Board of Governors at Nuffield Health. Former appointments include: a senior British Ambassador with 40 years' experience of working in government including postings in Ireland, Mexico, Brazil and Spain.
David Lister
Independent non-executive Director
Chairman of the Operations and Technology Committee and a member of the Chairman's Nominations and Remuneration Committee
Appointed to the Board: 2015
David is a non-executive director of FDM Group (Holdings) plc and CIS General Insurance Limited; and a member of the Board of Governors at Nuffield Health. Former appointments include: Group Chief Information Officer at each of National Grid, Royal Bank of Scotland, Reuters, Boots and GlaxoSmithKline plc and a non-executive director at the Department for Work and Pensions.
Dame Mary Marsh
Independent non-executive Director
Member of the Operations and Technology Committee
Appointed to the Board: 2009
Mary is non-executive Chair of Trustees of the Royal College of Paediatrics and Child Health, director of the London Symphony Orchestra,a member of the Governing Body at the London Business School and Trustee of Teach First. Former appointments include: founding director of the Clore Social Leadership Programme, a co-opted non-director member of the Corporate Sustainability Committee of HSBC Holdings plc and Chief Executive of the National Society for the Prevention of Cruelty to Children (NSPCC).
Thierry Moulonguet
Independent non-executive Director
Chairman of the Audit Committee and a member of the Risk Committee, the Operations and Technology Committee and the Chairman's Nominations and Remuneration Committee
Appointed to the Board: 2012
Thierry is a director of HSBC France, Chairman of its Audit Committee and a member of its Risk Committee. He is a director of Fimalac; Groupe Lucien Barrière; Valéo; and the Prodways Group. Former appointments include: Executive Vice-President, and Chief Financial Officer of Renault Group.
Dr Eric Strutz
Independent non-executive Director
Member of the Risk Committee, the Chairman's Nominations and Remuneration Committee and Chairman of the Risk Sub-Committee for Global Banking and Markets Risk Oversight
Appointed to the Board: 2016
Eric is a member of the Supervisory Board and Chairman of the Risk and Audit Committees of HSBC Trinkaus & Burkhardt AG, Germany. He is a member of the Board of Directors and Chairman of the Risk and Audit Committee of Partners Group Holding AG,

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HSBC Bank plc Annual Report and Accounts 2017


Switzerland. Former appointments include: Chief Financial Officer of Commerzbank AG.
Company Secretary
Nicola Black held the position of Company Secretary until 31 December 2017. Loren Wulfsohn, who joined HSBC in 2015 as Head of Shareholder Services, was appointed Company Secretary with effect from 1 January 2018.
Board of Directors
The objectives of the management structures within the bank, headed by the Board of Directors and led by the Chairman, are to deliver sustainable value to shareholders and to internal and external stakeholders. Implementation of the strategy set by the Board is delegated to the bank's Executive Committee.
The Board meets regularly and Directors receive information between meetings about the activities of committees and developments in the bank's business. All Directors have full and timely access to all relevant information and may take independent professional advice if necessary.
The names of Directors serving at the date of this report and brief biographical particulars for each of them are set out on pages 59 and 60.
All Directors, including those appointed by the Board to fill a casual vacancy, are subject to annual re-election at the bank's Annual General Meeting. Non-executive Directors have no service contracts.
Simon Leathes retired as a non-executive Director on 21 April 2017.

 
Directors' emoluments
Details of the emoluments of the Directors of the bank for 2017, disclosed in accordance with the Companies Act, are shown in Note 4 'Employee compensation and benefits'.
Board committees
The Board has established a number of committees, the membership of which comprises certain Directors and, where appropriate, senior executives. The Chairman of each non-executive Board committee reports to each meeting of the Board on the activities of the Committee since the previous Board meeting.
All of the members of the Audit Committee, Risk Committee, Chairman's Nominations and Remuneration Committee and Operations and Technology Committee are independent non-executive Directors.
As at the date of this report, the following are the principal committees:
Audit Committee
The Audit Committee is accountable to the Board and has non-executive responsibility for oversight of and advice to the Board on financial reporting related matters and internal controls over financial reporting.
The Committee meets regularly with the bank's senior financial and internal audit management and the external auditor to consider, among other matters, the bank's financial reporting, the nature and scope of audit reviews, the effectiveness of the systems of internal control relating to financial reporting, the review of the financial underpinnings of structural reform projects and the monitoring of the finance function transformation program.
The current members are: Thierry Moulonguet (Chairman); James Coyle and John Trueman.

Significant accounting judgements and related matters considered by the Audit Committee during 2017 included:
Key area
Action taken
Appropriateness of provisioning for legal proceedings and regulatory matters
The HSBC Bank plc Audit Committee ('AC') received reports from management on the recognition and amounts of provisions, as well as the existence of contingent liabilities for legal proceedings and regulatory matters. Specific matters included accounting judgements in relation to provisions and contingent liabilities arising out of investigations by regulators and competition and law enforcement authorities around the world into trading on the foreign exchange market.


Half-year and annual reporting
The AC considered key judgements in relation to half-year and annual reporting.
Loan impairment, allowances and charges
The AC considered loan impairment allowances for personal and wholesale lending. Specific attention was applied to credit risk in the UK and the implication of economic uncertainty from a credit perspective.


Valuation of financial instruments
The AC considered the key valuation metrics and judgements involved in the determination of the fair value of financial instruments.


Going Concern
In making their going concern assessment, the Directors have considered a wide range of detailed information relating to present and potential conditions, including projections for profitability, cash flows, capital requirements and capital resources.
UK customer remediation
The AC considered the provisions for redress for mis-selling of payment protection insurance ('PPI') policies in the UK and the associated redress on PPI commissions earned under certain criteria, including management's judgements regarding the effect of the time-bar for claims ending August 2019. In addition, the GAC monitored progress on the remediation of operational processes for foreign currency overdrafts, and associated customer redress.

Goodwill impairment testing
The AC noted that no impairment was identified as a result of the annual goodwill impairment test and subsequent review for any impairment indicators. Following the full impairment of GB&M goodwill in 2016, the 1 July 2017 test indicated that none of the cash-generating units are considered sensitive to reasonably possible changes to key assumptions.


Controls
The AC considered control matters including IT access controls, model governance and hedge accounting.

Expected impact of IFRS 9
The AC considered the progress of the project to implement IFRS 9 and the key judgements related to its
implementation, including the expected impacts disclosed.


Restatement of the 2016 results

The AC considered the need to restate the 2016 numbers in the 2017 Interim Report for the identification of a macro cash flow hedge not having met the hedge accounting criteria of IAS 39 during the half-year to 30 June 2016. Profit before tax was restated to reflect a gain of £134m that should have been transferred from the cash flow hedge reserve to the income statement during the half-year to 30 June 2016.

Ring-Fenced Bank ('RFB')
The AC considered the accounting in relation to the creation of the RFB and the associated judgements.

HSBC Bank plc Annual Report and Accounts 2017
61


Report of the Directors | Corporate Governance

Risk Committee
The Risk Committee is accountable to the Board and has non-executive responsibility for oversight of and advice to the Board on high-level risk related matters and risk governance.
The Committee meets regularly with the bank's senior financial, risk, internal audit and compliance management and the external auditor to consider, among other matters, risk reports and internal audit reports and the effectiveness of compliance.
The current members are: James Coyle (Chairman); Denise Holt; Thierry Moulonguet; Dr Eric Strutz; and John Trueman.
In addition to the Risk Committee there is the Risk Sub-Committee for Global Banking and Markets ('GB&M)' Risk Oversight.
The objective of the Risk Sub-Committee is to provide non-executive oversight and review of material European and United Kingdom risk matters relating to GB&M and to advise the Risk Committee as appropriate. The Sub-Committee will not act as a substitute for oversight by the Risk Committee but will supplement efforts.
Operations and Technology Committee
The Operations and Technology Committee has responsibility for independent oversight of systems, IT-oriented projects, operations and processes and information security and for reviewing the risks associated with the bank's IT infrastructure, its performance, appropriateness, resilience, recovery and resolution plans, plus the capability of the organisation and its management, and the material risks arising therefrom.
The Committee meets regularly with the bank's senior risk, operations, security and fraud risk and technology audit management to consider, among other matters, internal audit reports and reports on the risks associated with the bank's IT infrastructure and transformation projects, cybersecurity and data management.
The current members are: David Lister (Chairman); Mary Marsh; and Thierry Moulonguet.
Chairman's Nominations and Remuneration Committee
The Chairman's Nominations and Remuneration Committee has responsibility for: (i) leading the process for Board appointments and for identifying and nominating, for the approval of the Board, candidates for appointment to the Board; (ii) the endorsement of the appointment of the chairman and any director to the Board of certain subsidiaries of the bank; and (iii) reviewing the implementation and appropriateness of the Group's remuneration policy and the remuneration of the bank's senior executives.
The current members are: Jonathan Symonds (Chairman); James Coyle; David Lister; Thierry Moulonguet; John Trueman; and Eric Strutz.
Executive Committee
The Executive Committee meets regularly and operates as a general management committee under the direct authority of the Board, exercising all of the powers, authorities and discretions of the Board in so far as they concern the management and day-to-day running of the bank, in accordance with such policies and directions as the Board may from time to time determine. The bank's Chief Executive Officer, Antonio Simoes, chairs the Committee.
Regular Risk Management Meetings of the Executive Committee, chaired by the Chief Risk Officer, Europe, are held to establish, maintain and periodically review the policy and guidelines for the management of risk within the bank.
The following committees are sub-committees of the Executive Committee:
International Executive Committee;
International Risk Management Meeting;
HSBC UK Executive Committee; and
 
HSBC UK Risk Management Meeting.
The International Executive Committee is responsible for monitoring and, where appropriate, implementing and driving execution of the group's strategy as it pertains to the portion of the group's operations designated as International.
The International Risk Management Committee is responsible for the oversight and management of all risks impacting the group's operations designated as International.
The HSBC UK Executive Committee is responsible for the oversight of HSBC's UK operations.
The HSBC UK Risk Management Meeting is responsible for the oversight and management of all risks impacting HSBC's UK operations.
The oversight provided by the UK Executive Committee and the UK Risk Management Meeting acts as a proxy for the Ring Fenced Bank activities. The Board of the Ring Fenced Bank will formally constitute an Executive Committee and a Risk Management Meeting in the first half of 2018, which will assume the activities of these two group sub committees.
Dividends
Information about dividends is provided on page 13 of the Strategic Report.
Internal control
The Board is responsible for maintaining and reviewing the effectiveness of risk management and internal control systems and for determining the aggregate level and types of risks the bank is willing to take in achieving its strategic objectives.
The bank has procedures in place designed to safeguard assets against unauthorised use or disposal, maintain proper accounting records and ensure the reliability and usefulness of financial information whether used within the business or for publication.
These procedures can only provide reasonable assurance against material mis-statement, errors, losses or fraud. They are designed to provide effective internal control within the bank. The procedures have been in place throughout the year and up to 20 February 2018, the date of approval of the Annual Report and Accounts 2017.
In the case of companies acquired during the year, the risk management and internal controls in place are being reviewed against HSBC's benchmarks and integrated into HSBC's processes.
Key risk management and internal control procedures include the following:
The Group's Global Standards Manual ('GSM'). The GSM outlines the core principles within which all member of the Group must operate wherever business is conducted. The GSM overlays all other policies and procedures throughout the Group. The requirements of the GSM are mandatory, apply to and must be observed by all businesses within the Group, regardless of the nature or location of their activities.
Delegation of authority within limits set by the Board. Authority to manage the day to day running of the bank is delegated within limits set by the Board to the Chief Executive who has responsibility for overseeing the establishment and maintenance of systems of control appropriate to the business and who has the authority to delegate such duties and responsibilities as he sees fit. Appointments to the most senior positions within the group require the approval of the Board of Directors of HSBC Holdings plc.
Risk identification and monitoring. Systems and procedures are in place to identify, control and report on the material risk types facing the group.
Changes in market conditions/practices. Processes are in place to identify new risks arising from changes in market conditions/

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HSBC Bank plc Annual Report and Accounts 2017


practices or customer behaviours, which could expose the group to heightened risk of loss or reputational damage. The group employs a top and emerging risks framework at all levels of the organisation, which enables it to identify current and forward-looking risks and to take action which either prevents them materialising or limits their impact.
Responsibility for risk management. All employees are responsible for identifying and managing risk within the scope of their role as part of the three lines of defence model, which is an activity-based model to delineate management accountabilities and responsibilities for risk management and the control environment. The second line of defence sets the policy and guidelines for managing specific areas, provides advice and guidance in relation to the risk, and challenges the first line of defence (the risk owners) on effective risk management.
Strategic plans. Strategic plans are prepared for global businesses, global functions and geographical regions within the framework of the Group's overall strategy. The bank also prepares and adopts an Annual Operating Plan, which is informed by detailed analysis of risk appetite, describing the types and quantum of risk that the bank is prepared to take in executing its strategy and sets out the key business initiatives and the likely financial effects of those initiatives.
IT operations. Centralised control is exercised over all IT developments and operations. Common systems are employed for similar business processes wherever practicable.
The key risk management and internal control procedures over financial reporting include the following:
Disclosure Committee. The Disclosure Committee reviews financial reporting disclosures made by the bank for any material errors, misstatements or omissions. The integrity of disclosures is underpinned by structures and processes within the group's Finance and Risk functions that support rigorous analytical review of financial reporting and the maintenance of proper accounting records.
Financial reporting. The bank's financial reporting process for preparing the consolidated Annual Report and Accounts 2017 is controlled using documented accounting policies and reporting formats, supported by detailed instructions and guidance on reporting requirements, issued by Global Finance to the bank and all reporting entities within the group in advance of each reporting period end. The submission of financial information from each reporting entity is subject to certification by the responsible financial officer, and analytical review procedures at reporting entity and group levels.
Subsidiary certifications. Half yearly confirmations are provided to the Audit Committee and the Risk Committee from audit and risk committees of principal subsidiary companies regarding whether the financial statements have been prepared in accordance with Group policies, present fairly the state of affairs of the relevant principal subsidiary and are prepared on a going concern basis.
During the year, the Risk Committee and the Audit Committee have kept under review the effectiveness of this system of internal control and have reported regularly to the Board. In carrying out their reviews, the Audit Committee and Risk Committee receive regular business and operational risk assessments; regular reports from the heads of key risk functions, which cover all internal controls, both financial and non-financial; internal audit reports; external audit reports; prudential reviews; and regulatory reports.
The Risk Committee monitors the status of principal risks and considers whether the mitigating actions put in place are appropriate. In addition, when unexpected losses have arisen or when incidents have occurred which indicate gaps in the control framework or in adherence to Group policies, the Risk Committee and the Audit Committee review special reports, prepared at the instigation of management, which analyse the cause of the issue, the lessons learned and the actions proposed by management to address the issue.
 
Employees
Health and safety
The Group is committed to providing a healthy and safe working environment for our employees, contractors, customers and visitors on HSBC premises and where impacted by our operations. We aim to be compliant with all applicable health and safety legal requirements, and to ensure that best practice health and safety management standards are implemented and maintained across the HSBC Group.
Everyone at HSBC has a responsibility for helping to create a healthy and safe working environment. Employees are expected to take ownership of their safety and are encouraged and empowered to report any concerns.
Chief Operating Officers have overall responsibility for ensuring that the correct policies, procedures and safeguards are put into practice. This includes making sure that everyone in HSBC has access to appropriate information, instruction, training and supervision.
Putting our commitment into practice, in 2017 the Group delivered a health and safety education and information training programme to every one of our employees, and the Group implemented a range of programmes to help us understand the risks we face and improve the buildings in which we operate:
We completed fire risk assessments in over 2,000 properties worldwide, and addressed areas of concern.
We completed a health and safety inspection and remediation programme in 97% of our premises across the globe.
The application of our health and safety policies and procedures continue to be integrated throughout our supply chain, particularly in developing markets, with audit and inspection programmes demonstrating continued improvements in health and safety performance.
We developed and implemented an improved risk assurance and oversight function to ensure our health and safety management system was performing appropriately, including conducting full reviews of health and safety management in
12 countries.
Employee health and safety
 
Footnotes
2017

2016

2015
Number of workplace fatalities
1
2

1

0
Number of major injuries to employees
2
31

44

n/a
All injury rate per 100,000 employees
 
205

246

n/a
1
Customer death on branch premises; contractor involved in road traffic accident on bank business.
2
Fractures, dislocation, concussion.
n/a
Comparable data not available at global level for 2015 following change in reporting procedure for 2016.
Diversity and inclusion
HSBC is committed to a thriving organisational culture where individuals are valued, respected and supported; where different ideas, backgrounds, styles and perspectives are actively sought out to create business value; and where career advancement is based on objective criteria. We are focusing on the diversity profile of our workforce to make it more reflective of the communities in which we operate and the customers we serve.
Building a more inclusive workplace is part of everyone's role at HSBC. Our Global Diversity and Inclusion Policy is clear that all employees and workers are responsible for treating colleagues with dignity and respect, and for creating an inclusive environment free from discrimination, bullying, harassment or victimisation, irrespective of their age, colour, disability, ethnic or national origin, gender, gender expression, gender identity, marital status, pregnancy, race, religion or belief, or sexual orientation. Our employees are expected to demonstrate openness by listening and valuing different backgrounds, perspectives and cultures, and their performance in this respect is reviewed in our year-end review process.

HSBC Bank plc Annual Report and Accounts 2017
63


Report of the Directors | Corporate Governance

Diversity and inclusion is governed by our Group People Committee and carries the highest level of executive support at HSBC, and oversight of our diversity agenda and related activities resides with the Global Diversity and Inclusion sub-function.
Key achievements:
HSBC awarded Company of the Year at the European Diversity Awards.
HSBC listed as a top employer in the Times Top 50 Employers for Women, which acknowledges our UK focus on improving gender balance in senior leadership.
HSBC named in the UK Top 100 Stonewall Workplace Equality Index.
HSBC named by Business in the Community ('BITC') as one of the UK's Best Employers for Race.
In 2017, France has established its own Diversity Committee to keep driving its actions regarding diversity and inclusion. Aiming at helping women to get access to more senior roles, France continued to raise managers' awareness of diversity and unconscious bias via dedicated workshops and to support womens' development using mentoring and individual and collective coaching focusing on acquiring the tools to manage their career and progress to senior roles.  
France has also taken actions to create a more inclusive environment for disabled people, for example HOST are ensuring disabilities are accommodated through assisted technologies.
2017 was also marked by the creation of Pride in Malta, providing support to the Lesbian, Gay, Bisexual and Transgender population and their allies; the purpose of this employee resource group is to raise awareness of the challenges they face in the workplace and promote our culture of inclusion.
Germany successfully launched the women network 'HSBC.Frauen.Dialog'. The network aims to help women broaden their network within the bank and share professional insights. Typical activities include speeches by senior women, Blind date lunches, Quarterly Newsletter as well as Senior Events. Germany also continued to run Career Panels for women in HSS & GB&M to encourage exchange with senior managers and seizing career advancing opportunities. Additionally, a local Mentoring programme was launched by co-creation of HR and representatives from the Business. To date 145 senior leaders offered their guidance for junior colleagues
Diverse representation in Europe
Internally, our focus on improving gender balance in senior leadership across Europe is on going.
Female representation by management level:
All grades: 54%
Clerical grades: 71%
Junior management: 58%
Management: 40%
Senior management: 25%
Executive management: 13%
Improving youth employment
HSBC apprenticeship programmes provide access to opportunity for a wide range of new starters and existing employees.HSBC was the first major bank to launch an apprenticeship programme in 2011; since then more than 2500 employees have enrolled in the UK Of our current participants 59% are female, and this year a high-performer has progressed from the apprenticeship programme to the graduate programme.This type of progression is now being actively encouraged and facilitated by a new, more connected Emerging Talent strategy.
For 14 to 19-year-old individuals, the bank offered just over 300 work experience programmes in 2017 in the UK. We also had 239 school leaver apprentices on programme, with 50 new joiners starting on Apprenticeship Levy standards to date. The opportunities are spread across our branch network, contact
 
centres, First Direct and M&S Bank. We made 80 internship placements available to university students and 123 graduates joined the graduate programmes in our Commercial and RBWM business areas.The global graduate intake of over 500 came together for the Global Graduate Discovery induction in London.
HSBC has continued to run its successful traineeship programme with The Prince's Trust, providing training and employment opportunities for young people not in education, employment or training. This is the flagship programme representing our commitment to Movement To Work, a nationwide programme to encourage the country's largest employers to provide training or work opportunities to young people. A further 170 participants benefited from our programme this year.
Our Emerging Talent programmes received external recognition in 2017, with Global Graduate Induction receiving an award from the Institute of Student Employers and The Times naming HSBC as the Graduate Employer of Choice in the Finance sector.
Employment of people with a disability
We believe in providing equal opportunities for all employees. The employment of people with a disability is included in this commitment and recruitment, training, and career development are based on the aptitudes and abilities of the individual. Should employees become disabled during their employment with us, efforts are made to continue their employment and to provide workplace adjustments.
A number of countries have dedicated teams to ensure that barriers to work are removed for colleagues. In the UK we are a Disability Confident employer and our disability work is led by our Business Disability Steering Group and sponsored at an executive level by the COO. The group is formed of relevant business areas including recruitment, IT, corporate real estate and the employee voice is represented by the chairs of Ability, our employee resource group for disability, carers and mental health.
Learning and talent development
The development of our people is essential to the future strength of our business. We continue to develop and implement practices that build employee capability and identify, develop and deploy talented employees to ensure an appropriate supply of high calibre individuals with the right values, skills and experience for current and future senior management positions. In 2017 classroom and virtual classroom training has been delivered to over 86,000 people within the group.
In 2017, we launched HSBC University providing employees world class world class leadership and professional programmes, excellent learner experiences and an opportunity for leaders and people managers to connect and learn together and from each other. The introduction of new University Flagship programmes focus on developing management and leadership skills, complemented by tailored business learning to help employees excel in their role. New Flagship programmes launched in 2017 include Team Management Essentials, which helps employees build a high-functioning team by encouraging specific behaviours critical to effective team management; Leadership Essentials, enabling participants to better understand their own leadership strengths and then build the critical capabilities required to effectively lead; and Innovation in the Digital Age designed to help HSBC leaders hone their awareness, skills and ways of working needed to lead in the Digital Age. Over 2,700 employees across Europe attended a Flagship programme in 2017 and all courses continue to receive positive feedback.
HSBC is embracing the Apprenticeship Levy as a means of developing and up-skilling employees at all employment levels. The first learners are already enrolled and benefiting from this exciting new initiative.
Employee relations
We consult with and, where appropriate, negotiate with employee representative bodies. It is our policy to maintain well developed communications and consultation programmes with all employee

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HSBC Bank plc Annual Report and Accounts 2017


representative bodies and there have been no material disruptions to our operations from labour disputes during the past five years.
Auditor
PricewaterhouseCoopers LLP ('PwC') is external auditor to the bank. PwC has expressed its willingness to continue in office and the Board recommends that PwC be re-appointed as the bank's auditor. A resolution proposing the re-appointment of PwC as the bank's auditor and giving authority to the Audit Committee to determine its remuneration will be submitted to the forthcoming AGM.
Conflicts of interest and indemnification of
Directors
The bank's Articles of Association give the Board authority to approve Directors' conflicts and potential conflicts of interest. The Board has adopted a policy and procedures for the approval of Directors' conflicts or potential conflicts of interest. The Board's powers to authorise conflicts are operating effectively and the procedures are being followed. A review of situational conflicts which have been authorised, including the terms of authorisation, is undertaken by the Board annually.
The Articles of Association provide that Directors are entitled to be indemnified out of the assets of the company against claims from third parties in respect of certain liabilities arising in connection with the performance of their functions, in accordance with the provisions of the UK Companies Act 2006. Such indemnity
 
provisions have been in place during the financial year but have not been utilised by the Directors. All Directors have the benefit of directors' and officers' liability insurance.
Statement on going concern
The Directors consider it appropriate to prepare the financial statements on the going concern basis. In making their going concern assessment, the Directors have considered a wide range of detailed information relating to present and potential conditions, including profitability, cash flows, capital requirements and capital resources.
Further information relevant to the assessment is provided in the Strategic Report and the Report of the Directors, in particular:
A description of the group's strategic direction;
A summary of the group's financial performance and a review of performance by business;
The group's approach to capital management and its capital position; and
The top and emerging risks facing the group, as appraised by the Directors, along with details of the group's approach to mitigating those risks and it's approach to risk management in general.
In addition, the objectives, policies and processes for managing credit, liquidity and market risk are set out in the 'Report of the Directors: Risk'.


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Statement of Directors' Responsibilities in Respect of the Annual Report and Accounts 2017 and the Financial Statements


Disclosure of Information to the Auditor and Statement of Directors' Responsibilities
The Directors who held office at the date of approval of this Directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the bank's auditors are unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the company's auditors are aware of that information.
The Directors are responsible for preparing the Annual Report and Accounts 2017, comprising the consolidated financial statements of HSBC Bank plc and its subsidiaries (the 'group') and parent company financial statements for HSBC Bank plc (the 'bank') in accordance with applicable laws and regulations.
Company law requires the Directors to prepare a Strategic Report, a Report of the Directors and group and parent company ('Company') financial statements for each financial year. The Directors are required to prepare the group financial statements in accordance with IFRSs as adopted by the European Union and have elected to prepare the bank's financial statements on the same basis.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and Company and of their profit or loss for that period. In preparing each of these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether they have been prepared in accordance with IFRSs as adopted by the European Union; and
prepare the financial statements on a going concern basis unless it is not appropriate. Since the Directors are satisfied that the group has the resources to continue in business for the foreseeable future, the financial statements continue to be prepared on a going concern basis.
The Directors have responsibility for ensuring that sufficient accounting records are kept that disclose with reasonable accuracy at any time the financial position of the bank and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for safeguarding the assets of the Company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors have responsibility for the maintenance and integrity of the Annual Report and Accounts 2017 as they appear on the bank's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, the names of whom are set out in the 'Report of Directors: Governance' section on pages 59 and 60 of the Annual Report and Accounts 2017, confirm to the best of their knowledge:
in accordance with rule 4.1.12(3)(a) of the Disclosure Rules and Transparency Rules, the consolidated financial statements, which have been prepared in accordance with IFRSs as issued by the IASB and as endorsed by the European Union, have been prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the bank and the undertakings included in the consolidation taken as a whole; and
the management report represented by the Strategic Report and the Report of the Directors has been prepared in accordance with rule 4.1.12(3)(b) of the Disclosure Rules and Transparency Rules, and includes a fair review of the development and performance of the business and the position of the bank and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that the group faces.



On behalf of the Board
Loren Wulfsohn
Company Secretary
20 February 2018
Registered number 14259

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Independent auditors' report to the member of HSBC Bank plc
Report on the audit of the financial statements
Opinion
In our opinion, HSBC Bank plc's group financial statements and parent company financial statements (the 'financial statements'):
give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2017 and of the group's profit and the group's and the parent company's cash flows for the year then ended;
have been properly prepared in accordance with IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006; and
have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts (the 'Annual Report'), which comprise:
the consolidated and HSBC Bank plc balance sheets as at 31 December 2017;
the consolidated income statement and consolidated statement of comprehensive income;
the consolidated and HSBC Bank plc statements of cash flows;
the consolidated and HSBC Bank plc statements of changes in equity for the year then ended; and
the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs (UK)') and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC's Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC's Ethical Standard were not provided to the group or the parent company.
Other than those disclosed in Note 5 to the financial statements, we have provided no non-audit services to the group or the parent company in the period from 1 January 2017 to 31 December 2017.
Our audit approach
Overview
Overall group materiality: £183 million (2016: £159 million), based on 5% of adjusted profit before tax.
Overall parent company materiality: £183 million (2016: £159 million), group materiality was applied.
HSBC Bank plc is a member of the HSBC Group, the ultimate parent company of which is HSBC Holdings plc. HSBC Bank plc operates in 18 countries.
We performed audits of the complete financial information of the UK Operations of the Bank and HSBC France components.
For five further reporting units, specific audit procedures were performed over selected significant account balances.
The following areas were identified as key audit matters. These are discussed in further detail in the Appendix:
IT access management
Impairment of loans and advances
Application of hedge accounting
Litigation and regulatory enforcement actions
Valuation of financial instruments
Customer redress - Payment Protection Insurance ('PPI')
IFRS 9 Expected Credit Loss - IAS 8 disclosure
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We gained an understanding of the legal and regulatory framework applicable to the group and the industry in which it operates, and considered the risk of acts by the group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at group level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
We focused on laws and regulations that could give rise to a material misstatement in the financial statements, including but not limited to the Companies Act 2006, the Financial Conduct Authority's regulations, the Prudential Regulation Authority's regulations, UK Listing Rules, the UK tax legislation and equivalent local laws and regulations applicable to significant component teams. Our tests included

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review of the financial statement disclosures to underlying supporting documentation, review of correspondence with and reports to the regulators, review of correspondence with legal advisors, enquiries of management, enquiries of legal counsel, review of significant component auditors' work and review of internal audit reports in so far as they related to the financial statements.
There are inherent limitations in the audit procedures described above and the further removed non-compliance is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
As in all of our audits, we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. The key audit matters are discussed further in the Appendix.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the parent company, the accounting processes and controls, and the industry in which they operate.
HSBC Bank plc is structured into four divisions being Retail Banking and Wealth Management, Commercial Banking, Global Banking & Markets and Global Private Banking. The divisions operate across a number of operations, subsidiary entities and branches throughout Europe. Within the group's main consolidation and financial reporting system, the consolidated financial statements are an aggregation of the operations, subsidiary entities and branches ('reporting units'). Each reporting unit submits their financial information to the group in the form of a consolidation pack.
In establishing the overall approach to the group and parent company audit, we scoped using the balances included in the consolidation pack. We determined the type of work that needed to be performed over the reporting units by us, as the group engagement team, or auditors within PwC UK and from other PwC network firms operating under our instruction ('component auditors').
As a result of our scoping, for the parent company we determined that an audit of the complete financial information of the UK Operations of the Bank was necessary, owing to its financial significance. For group purposes, we additionally performed an audit of the complete financial information of HSBC France. We instructed component auditors, PwC UK and PwC France, to perform the audits of these components. Our interactions with component auditors included regular communication throughout the audit, including visits to France, the issuance of instructions, a review of working papers relating to the key audit matters and formal clearance meetings. The group audit engagement partner was also the partner on the audit of the UK Operations significant component.
We then considered the significance of other reporting units in relation to primary statement account balances. In doing this we also considered the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). For five further reporting units, specific audit procedures were performed over selected significant account balances. For the remainder, the risk of material misstatement was mitigated through group audit procedures including testing of entity level controls and group and parent company level analytical review procedures.
Certain group-level account balances (including goodwill) were audited by the group engagement team.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
  
Group financial statements
Parent company financial statements
Overall materiality
£183 million (2016: £159 million).
£183 million (2016: £159 million).
How we determined it
5% of adjusted profit before tax.
We applied the group materiality
Rationale for benchmark applied
Adjusted profit before tax excluding the debit valuation adjustment and non-qualifying hedges is used as a benchmark as this reflects the group's underlying performance. The debit valuation adjustment and non-qualifying hedges have been excluded as they are recurring items that form part of ongoing business performance.
Materiality was determined as the lower of group materiality or the parent company's profit before tax adjusted on the same basis as for the group financial statements. The group materiality was lower.

For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was £58m to £155m. Certain components were audited to a local statutory audit materiality that was also less than our overall group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £9 million (group audit and parent company audit) (2016: £10 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.

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Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when:
the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's and parent company's ability to continue to adopt the going concern basis of accounting for a period of at least 12 months from the date when the financial statements are authorised for issue.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group's and parent company's ability to continue as a going concern.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Report of the Directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below.
Strategic Report and Report of the Directors
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Report of the Directors for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Report of the Directors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors' Responsibilities set out on page 65, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group's and the parent company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditors' responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors' report.
Use of this report
This report, including the opinions, has been prepared for and only for the parent company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not received all the information and explanations we require for our audit; or
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
certain disclosures of directors' remuneration specified by law are not made; or
the parent company financial statements are not in agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.

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Appointment
Following the recommendation of the audit committee, we were appointed by the directors on 31 March 2015 to audit the financial statements for the year ended 31 December 2015 and subsequent financial periods. The period of total uninterrupted engagement is three years, covering the years ended 31 December 2015 to 31 December 2017.




Simon Hunt (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
20 February 2018



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Appendix: Key audit matters discussed with the Audit Committee ('AC')
The key audit matters are discussed below together with an explanation of how the audit was tailored to address these specific areas.
All key audit matters are applicable to both the group and parent company.
IT Access Management
Nature of key audit matter
Matters discussed with the Audit Committee
All banks are highly dependent on technology due to the significant number of transactions that are processed daily. The audit approach relies extensively on automated controls and therefore on the effectiveness of controls over IT systems.

It was identified that the entity's controls over individuals' access rights to operating systems, applications, and data used in the financial reporting process required improvement. Access rights are important as they ensure that changes to applications and data are authorised and made in an appropriate manner. Ensuring staff only have appropriate access, and that the access is monitored, are key controls to mitigate the potential for fraud or error as a result of a change to an application or underlying data.

The results of our work show an improvement of controls over infrastructure privileged access for systems relevant to our audit. By the end of the audit period, a number of controls had been implemented and operated effectively in the latter part of the year to address the critical operating system and database related matters previously reported. Management continue to progress the remaining issues including several relating to the management of business application access.

The status on remediation of access controls was discussed at several Audit Committee meetings during the year.

Controls were enhanced and implemented over FY17 to respond to our audit findings and to reduce the risks over privileged access to IT infrastructure such as databases and operating systems. However, given the scale and complexity of the remediation, there were still actions to be taken during the year to ensure that controls are fully embedded and operate effectively.

By the end of the audit period, management had successfully operated controls to address the critical operating system and database related matters previously reported. Management continue to progress remediation relating to the management of business application access.
 
Procedures performed to support our discussions and conclusions
Access rights were tested over applications, operating systems and databases relied upon for financial reporting. Specifically, the audit tested that:
new access requests for joiners were properly reviewed and authorised;
user access rights were removed on a timely basis when an individual left or moved role;
access rights to applications, operating systems and databases were periodically monitored for appropriateness; and
highly privileged access is restricted to appropriate personnel.
Other areas that were independently assessed included password policies, security configurations, controls over changes to applications and databases and that business users, developers and production support did not have access to change applications, the operating system or databases in the production environment.
As a consequence of deficiencies identified, a range of other procedures were performed:
where inappropriate access was identified, we understood the nature of the access and obtained additional evidence on the appropriateness of the activities performed;
additional substantive testing was performed on specific year-end reconciliations (i.e. custodian, bank account and suspense account reconciliations) and confirmations with external counterparties;
testing was performed on other compensating controls such as business performance reviews;
testing was performed over toxic combination controls; and
a list of users' access permissions was obtained and manually compared to other access lists where segregation of duties was deemed to be of higher risk.

Relevant references in the Annual Report and Accounts 2017
AC Report, page 60.
Effectiveness of internal controls, page 61.
 


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Impairment of loans and advances
 
Nature of key audit matter
Matters discussed with the Audit Committee
Impairment allowances represent management's best estimate of the losses incurred within the loan portfolios at the balance sheet date. They are calculated on a collective basis for portfolios of loans of a similar nature and on an individual basis for significant loans. The calculation of both collective and specific impairment allowances is inherently judgemental for any bank.

Collective impairment allowances are calculated using models which approximate the impact of current economic and credit conditions on large portfolios of loans. The inputs to these models are based on historical loss experience with judgement applied to determine the assumptions used to calculate impairment. Model overlays are applied where data driven parameters or calculations are not considered representative of current risks or conditions of the loan portfolios.

For specific impairments, judgement is required to determine when an impairment event has occurred and then to estimate the expected future cash flows related to that loan.

The audit was focused on impairment due to the materiality of the loan balances and associated impairment allowances and the subjective nature of the impairment calculation.

Discussions with the Audit Committee and Risk Committee focussed on the risks that changed or emerged during the year together with the key judgements on the collective allowance models and individually significant loan impairments.

A number of specific risks were discussed including:
the changing macroeconomic environment in the UK, as negotiations between the UK and European Union over the UK's withdrawal from the EU continued;
concerns about personal indebtedness particularly in the UK; and
specific sector and industry matters.

In each of the cases above, the performance of the existing credit exposure and the potential need for changes to the modelling approach were discussed.

Significant changes made to the inputs or models impacting the collective impairment allowance were discussed, noting the results of our controls and substantive testing and the impact on the audit approach. A focus was also on significant post model adjustments and the suitability of changes made to relevant models in the period.

Key judgements around significant changes to specific impairments including over the assessment of the the likelihood and timing of the cash flows expected to be received and the valuation of collateral supporting the loan were discussed.


Procedures performed to support our discussions and conclusions
The controls management has established to support their collective and specific impairment calculations were tested.
For collective impairment, this included controls over the appropriateness of models used to calculate the charge, the process of determining key assumptions and the identification of loans to be included within the calculation.
For specific impairment charges on individual loans, this included controls over the monitoring of the credit watch list, credit file review processes, approval of external collateral valuation vendors and controls over the approval of significant individual impairments.

Substantive testing procedures were also performed over the loan impairments.
For collective allowances, the appropriateness of the modelling policy and methodology used for material portfolios was independently assessed by reference to the accounting standards and market practices. Model calculations were tested through reperformance and code review. Specifically with respect to the collective impairment models for the retail portfolios, we examined the enhancements made to the models and methodology to ensure they were appropriate.
The appropriateness of management's judgements was also independently considered in respect of calculation methodologies, segmentation, economic factors and judgemental overlays, the period of historical loss rates used, loss emergence periods, cure rates for impaired loans, and the valuation of recovery assets and collateral.
For specific allowances, the appropriateness of provisioning methodologies and policies was independently assessed for a sample of loans across the portfolio selected on the basis of risk. An independent view was formed on the levels of provisions booked based on the detailed loan and counterparty information in the credit file. Calculations within a sample of discounted cash flow models were re-performed.

Relevant references in the Annual Report and Accounts 2017
Impaired loans, page 40-43.
Areas of special interest, page 23.
AC Report, page 60.
Note 1.2 (d): Impairment of loans and advances, page 87.

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Application of hedge accounting
 
Nature of key audit matter
Matters discussed with the Audit Committee
To qualify for hedge accounting, certain criteria must be met including documenting the nature and purpose of the hedge and performing regular testing over its effectiveness.

Due to the complex nature of the hedge accounting rules this is often an area of significant risk for banks.

In December 2016, management in France identified an issue with an established hedging relationship which resulted in a partial disqualification of the hedge. Due to the errors identified, the HSBC Bank plc 2017 Interim Report was restated.

In light of the complexity of the area and the prior year matter noted above, we determined this to be an area of significant audit risk.

We discussed with the Audit Committee the partial disqualification that arose in France in the prior year and the testing performed over remediated controls.

We discussed the results of our controls and substantive testing, which found no further hedges that required disqualification and no further significant control findings.

Procedures performed to support our discussions and conclusions
For significant macro cash flow hedges, documentation was examined and the relationships assessed to determine if the hedges had been appropriately designated. This included consideration of the hedge objectives and specific compliance with IFRS.
A sample of new hedging relationships was examined and the relationships assessed to determine if they had been appropriately designated. This included consideration of the hedge objectives and specific compliance with IFRS.
Management's hedge effectiveness reviews, and the measurement and recording of hedge ineffectiveness, were tested for a sample of hedge relationships.
We gained an understanding of and tested controls over the documentation and review of the hedge relationships and their initial and ongoing effectiveness. This included testing the relevant remediated or newly implemented controls identified in France.

Relevant references in the Annual Report and Accounts 2017
AC Report, page 60.
Note 12: Derivatives, page 114.
 
Litigation and regulatory enforcement actions
 
Nature of key audit matter
Matters discussed with the Audit Committee
HSBC, like other global banking institutions, is exposed to a significant number of open legal cases and regulatory investigations in a number of its markets. Given the business is geographically dispersed, the same matter could be subject to investigation in multiple jurisdictions.

Provisions have been established to account for probable legal liabilities and regulatory fines. The most significant provisions related to foreign exchange market manipulation albeit these were largely used or released in the year.

There are also a number of legal and regulatory matters for which no provision has been established, as discussed on page 132.

There is an inherent risk that legal exposures are not identified and considered for financial reporting purposes on a timely basis. Importantly, the decision to recognise a provision and the basis of measurement are judgemental.

Group Legal provided to each Audit Committee meeting an update on the status of significant legal cases.  These updates considered whether all related litigation or investigations about a specific matter had been identified.

Material matters were discussed during each meeting and the need for changes to provisions considered. We participated in these discussions, including consideration of whether any constructive obligation had arisen in individual cases.  
 

Procedures performed to support our discussions and conclusions
Controls designed to ensure the completeness and adequacy of current legal and regulatory provisions were tested. Regulatory correspondence from material markets was also read, and a sample of legal expenses were assessed.
Open legal cases were discussed with Group Legal and in certain instances we obtained and read the relevant regulatory and litigation documents in order to assess the facts and circumstances.
The range of reasonably possible outcomes was considered for material provisions to independently assess the appropriateness of the judgement made by HSBC.
The disclosures of legal exposures and provisions were assessed for completeness and accuracy.

Relevant references in the Annual Report and Accounts 2017
AC Report, page 60.
Note 23: Provisions, page 124.
Note 30: Legal proceedings and regulatory matters, page 132.

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Valuation of financial instruments
 
Nature of key audit matter
Matters discussed with the Audit Committee
The financial instruments held by HSBC range from those that are traded daily on active markets with quoted prices, to more complex and bespoke positions. The valuation of these complex financial instruments can require the use of prices or inputs which are not readily observable in the market.
Financial instruments classified as Level 3 ('L3'), per the IFRS 13 fair value hierarchy, are valued using some unobservable inputs. There is a risk that certain L3 portfolios are not valued appropriately due to the complexity of the trades and/or unobservability of some inputs.
Valuation of the following L3 portfolios was therefore classified as a significant risk for the audit: certain asset backed securities, equity linked structured notes, securitisation swaptions and certain long-dated interest rate derivatives.

We discussed with the Audit Committee the results of our controls testing. This included observations on how controls may be improved, particularly with respect to model governance.
We also discussed the results of our substantive testing which included independent revaluation of a range of financial instruments, including a sample of Level 3 positions.

Procedures performed to support our discussions and conclusions
We evaluated the design and tested the operating effectiveness of the key controls supporting the identification, measurement and oversight of the valuation of financial instruments. We examined the key controls, including the independent price verification process and governance and reporting controls. This included review of the year end IPV results by the HSBC Bank plc Valuation Committee.
Methodology and underlying assumptions of key valuation adjustments, including the Credit Valuation Adjustment, Debt Valuation Adjustment and Funding Fair Value Adjustment, were assessed, and compared with our knowledge of current industry practice. Controls over the calculation of these adjustments were also tested.
We utilised internal valuation specialists to perform independent valuations to determine if management's valuations fell within a reasonable range. The revaluation covered a range of product classes and was performed across level 1, 2 & 3 of the Group's IFRS 13