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HSBC Bank plc (63AS)

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Tuesday 22 February, 2022

HSBC Bank plc

HSBC Bank plc 2021 Annual Report and Accounts 1/2

RNS Number : 4287C
HSBC Bank plc
22 February 2022
 

22 February 2022

 

HSBC Bank plc 2021 Annual Report and Accounts

 

In fulfilment of its obligations under sections 4.1.3 and 6.3.5(1) of the Disclosure Guidance and Transparency Rules, HSBC Bank plc (the "Company") hereby releases the unedited full text of its 2020 Annual Report and Accounts for the year ended 31 December 2021.

 

The document is now available on the Company's website:

http://www.hsbc.com/investor-relations/subsidiary-company-reporting

 

The document has also been submitted to the National Storage Mechanism (NSM) and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism

 

 

 

 

 

HSBC Bank plc

Annual Report and Accounts 2021

Registered number - 00014259  

 

 

 

 

Contents


Page

Strategic Report


Highlights

2

Key themes of 2021

3

Key financial metrics

3

About HSBC Group

4

Purpose and strategy

4

Our Global Businesses

6

How we do business

7

Key Performance Indicators

11

Economic background and outlook

13

Financial summary

14

Risk overview

20

Report of the Directors


Risk

22

-  Our approach to risk

22

-  Top and emerging risks

24

-  Areas of special interest

30

-  Our material banking and insurance risks

32

Corporate Governance Report

92

-  Directors

92

-  Company Secretary

94

-  Board of Directors

94

-  Directors' emoluments

95

-  Board committees

95

-  Dividends

97

-  Internal control

  93 

-  Employees

99

-  Auditors

100

-  Articles of association, conflicts of interest and indemnification of directors

101

-  Statement on going concern

102

-  Statement of directors' responsibilities in respect of the financial statements

103

Independent Auditors' Report

104

Financial Statements


Financial statements

  107 

Notes on the financial statements

  118 

 

Presentation of Information

This document comprises the Annual Report and Accounts 2021 for HSBC Bank plc ('the bank' or 'the company') 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', 'HSBC Group' or '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 is available on HSBC's website: www.hsbc.com.

Pillar 3 disclosures for the group are also available on www.hsbc.com, under Investors.

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 2021 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.


 

Highlights

For the year ended 31 December 2021


Reported profit/(loss) before tax (£m)

 

£1,023m

(2020: £(1,614)m)

Reported revenue (£m)

 

£6,120m

(2020: £5,900m)

Reported risk-weighted assets at period end (£bn)

£104bn

(2020: £122bn)

.

Adjusted profit/(loss) before tax (£m)

 

£1,577m

(2020: £(184)m)

Total assets at period end (£bn)

£597bn

(2020: £681bn)

Common equity tier 1 ratio at period end (%)

17.3%

(2020: 14.7%)


Key themes of 2021

HSBC Bank plc continued to support the Group through progress on our strategic aims, although challenges in the geopolitical and economic environment remain.

Financial Performance

Performance reflected an improvement in global economic conditions and the impact of lower interest rates. Revenue increased, there were releases of expected credit loss allowances, and operating expenses were lower reflecting the impact of our transformation programme. All of our global businesses generated higher profits compared with 2020. The outlook for net interest income is now more positive, although risks remain as inflation is anticipated to increase across Europe. Read more on pages 13 to 18.

Strategic Transformation

We have continued to progress in our areas of strength and develop our digital capabilities. During the year we announced the planned sale of our retail banking business in France. We have formulated our response to the requirement for an Intermediate Parent Undertaking ('IPU') in line with European Union ('EU') Capital Requirements Directive, as a result of which our subsidiary HSBC Continental Europe plans to acquire HSBC Trinkaus & Burkhardt AG ('HSBC Germany'), HSBC Malta and HSBC Private Bank Luxembourg. More information can be found on pages 4 and 5.

Climate Ambition

As demonstrated at COP26, the Group is playing a leading role in helping to mobilise the transition to a global net zero economy. Since 2020, HSBC Bank plc has supported our customers' transition to net zero and a sustainable future by providing them with $65.2bn of financing and investment; this contributes towards the Group's ambition to provide and facilitate $750bn to $1tn of sustainable financing and investment by 2030. In May 2021, a climate change resolution proposed by the Group's Board was backed by more than 99% of the Group's shareholders at its Annual General Meeting, including a commitment to publish a policy to phase out the financing of coal-fired power and thermal coal mining, by 2030 in the European Union ('EU') / Organisation for Economic Cooperation and Development ('OECD'), and 2040 in all other markets. We are also working with peers and industry bodies to take action on climate change, biodiversity and nature.


 

Key financial metrics

 

 

 

2021

  2020

For the year (£m)



Profit/(loss) before tax (reported basis)

  1,023 

  (1,614)

Profit/(loss) before tax (adjusted basis)1

  1,577 

  (184)

Net operating income before change in expected credit losses and other credit impairment charges (reported basis)2

  6,120 

  5,900 

Profit/(loss) attributable to the parent company

  1,041 

  (1,488)

At year-end (£m)



Total equity attributable to shareholders of the parent company

  23,584 

  23,666 

Total assets

  596,611 

  681,150 

Risk-weighted assets3

  104,314 

  122,392 

Loans and advances to customers (net of impairment allowances)

  91,177 

  101,491 

Customer accounts

  205,241 

  195,184 

Capital ratios (%)3



Common equity tier 1

17.3

14.7

Tier 1

21.0

18.1

Total capital

31.7

27.3

Performance, efficiency and other ratios (annualised %)



Return on average ordinary shareholders' equity4

4.3

(7.9)

Return on tangible equity (%)5

6.1

(2.7)

Cost efficiency ratio (reported basis)6

89.2

113.6

Cost efficiency ratio (adjusted basis)6

80.9

89.6

Ratio of customer advances to customer accounts

44.4

52.0

1  Adjusted performance is computed by adjusting reported results for the effect of significant items as detailed on pages 15 to 16.

2  Net operating income before change in expected credit losses and other credit impairment charges is also referred to as revenue.

3  Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. These include the regulatory transitional arrangements for IFRS 9 'Financial Instruments', which are explained further on page 73. References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK's version of such regulation and/or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law.

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  The RoTE is calculated by adjusting reported profit attributable to ordinary shareholders by excluding movements in PVIF and significant items (net of tax), divided by average tangible shareholders' equity excluding fair value of own debt, debt valuation adjustment ('DVA') and other adjustments for the period. The calculation of this measure includes the UK bank levy incurred for the first time in 2021, which was previously paid by Group. Comparative data have not been re-presented.

6  Reported cost efficiency ratio is defined as total operating expenses (reported) divided by net operating income before change in expected credit losses and other credit impairment charges (reported), while adjusted cost efficiency ratio is defined as total operating expenses (adjusted) divided by net operating income before change in expected credit losses and other credit impairment charges (adjusted).

 


 

About HSBC Group

With assets of $3.0tn and operations in 64 countries and territories at 31 December 2021, HSBC is one of the largest banking and financial services organisations in the world. Approximately 40 million customers bank with the Group and the Group employs around 220,000 full-time equivalent staff. The Group has around 187,000 shareholders in 128 countries and territories.


 

Purpose and strategy

 

HSBC's purpose and ambition

The Group's purpose is 'Opening up a world of opportunity' and the Group's ambition is to be the preferred international finance partner for the Group's clients.

HSBC values

HSBC values help define who we are as an organisation and are key to our long-term success.

We value difference

Seeking out different perspectives.

We succeed together

Collaborating across boundaries.

We take responsibility

Holding ourselves accountable and taking the long view.

We get it done

Moving at pace and making things happen.

HSBC Group strategy

The Group is implementing its strategy at pace across the four strategic pillars aligned to its purpose, values and ambition announced in February 2021.

The Group's strategy centres on four key areas: focus on our areas of strength, digitise at scale to adapt our operating model for the future; energise our organisation for growth and lead the transition to net zero.

Focus on our strengths : in each of our global businesses, the Group will focus on areas where we are strongest and have significant opportunities for growth.

Digitise at scale: the Group will focus investments in areas such as technology, to improve our customers' experience while ensuring security and resilience. These investments in technology will also help drive down costs, including through automating our middle and back offices and building solutions to free up office footprint.

Energise for growth : the Group is moving to a leaner and simpler organisation that is energised and fit for the future. The Group aim to inspire a dynamic culture and champion inclusion across the organisation, as well as help employees develop future skills.

Transition to net zero: the Group ambition is to support the transition to a net zero global economy. The Group have set out an ambitious plan to become a net zero bank, to support customers in their transition, and to unlock new climate solutions.

HSBC in Europe

Europe is an important part of the global economy, accounting for nearly 40% of global trade and one quarter of global Gross Domestic Product. In addition, Europe is the world's top exporter of services and second largest exporter of manufactured goods (UNCTAD, 2020). HSBC Bank plc facilitates trade within Europe and between Europe and other jurisdictions where the HSBC Group has a presence.

With assets of £597bn at 31 December 2021, HSBC Bank plc is one of Europe's largest banking and financial services organisations. We employ around 15,000 people across our locations. HSBC Bank plc is responsible for HSBC's European business, apart from UK retail and most UK commercial banking activity which, post ring-fencing, are managed by HSBC UK Bank plc.

HSBC Bank plc's ambition is to simplify its operating model; with a wholesale banking hub for the European Union ('EU') in Paris and a wholesale banking hub for western markets in London.

HSBC Bank plc operates in 20 markets1 through the three principal operating units detailed below.

The London hub consists of the UK non-ring fenced bank, which provides overall governance and management for the Europe region as a whole and is a global centre of excellence for wholesale banking for the Group.

HSBC Continental Europe, comprises our Paris hub and its EU branches (Belgium, Czech Republic, Greece, Ireland, Italy, Luxembourg, Netherlands, Poland, Spain and Sweden) and Switzerland. We are creating an integrated Continental European bank anchored on Paris to better serve our clients and simplify our organisation.

HSBC Germany Holdings GmbH serves the European Union's largest economy and one of the leading export nations globally. HSBC Germany's business proposition mirrors the importance of trade and global connectivity.

1  Full list of markets where HSBC Bank plc has a presence: Armenia, Belgium, Channel Islands and Isle of Man, Czech Republic, France, Germany, Greece, Ireland, Italy, Israel, Luxembourg, Malta, Netherlands, Poland, Russia, South Africa, Spain, Sweden, Switzerland and the UK.


HSBC Bank plc's strategy and progress on our 2021 commitments

We have a clear vision to be the leading international wholesale bank in Europe, complemented by a targeted wealth and personal banking business (see our global businesses on page 6).

HSBC Bank plc exists to open up a world of opportunity for our customers by connecting them to international markets. Europe is the largest trading region in the world and Asia is Europe's biggest and fastest growing external trading partner (UNCTAD, 2020).

Below we provide a progress update on our commitments and strategic initiatives for 2021, in line with the Group's strategy.

Focus on our strengths

Through our transformation programme we are building a leaner, simpler bank with a sharper strategic focus. We have an ambition to grow, leveraging our industry leading positions in transaction banking, trade, capital markets and financing. We intend to be a market leader in sustainable financing and help the Group meet its ambition for net zero in its operations and supply chain by 2030.

New regulation in the EU provides an opportunity to simplify our structure. In response to the requirement for an IPU in line with the EU Capital Requirements Directive for European Union banking entities, our subsidiary HSBC Continental Europe plans to acquire HSBC Trinkaus & Burkhardt AG ('HSBC Germany'), HSBC Malta, and HSBC Private Bank Luxembourg. HSBC Germany would then be transferred into a newly created branch of HBCE in Germany. This legal entity restructuring remains subject to regulatory approvals.

Following the announcement in June 2021 regarding the planned sale of our French retail operations, a binding Framework Agreement was signed between HSBC Continental Europe and Promontoria MMB SAS ('My Money Group'), its subsidiary Banque des Caraïbes SA (the 'Purchaser') and My Money Bank ('MMB') on 25 November 2021. This step marks the start of an implementation process expected to complete in the second half of 2023, subject to obtaining the authorization of the competent financial, government and regulatory bodies. Until such point, the business remains part of, and will be managed by HSBC Continental Europe. See Note 34 on page 174 for further financial information on the transaction.

We intend to establish a Paris branch of HSBC Private Luxembourg, from which French clients will be served. The project is due to be completed during 2022 following the conclusion of the associated social process last year. This will enable us to provide an enhanced product range to clients leveraging our high quality infrastructure in Luxembourg.

Digitise at scale

We continue to focus our investments in areas that help optimise our technology capabilities and operations, as well as enhance client experience. Our main areas of focus are Transaction Banking, comprising Global Liquidity and Cash Management ('GLCM'), Global Trade and Receivable Finance ('GTRF') and Foreign Exchange ('FX'), which are central to our strategy.

Global Liquidity and Cash Management is focused on enhancing our digital and self-serve capabilities for our clients and improving our customer experience. In 2021, we continued to advance our proposition, an example of this involved developing our Liquidity Management Dashboard to facilitate customer cash flow forecasts. Looking ahead, we will continue to develop our offering, to improve our customer experience.

Our ambition for Global Trade and Receivables Finance is to make trade safer, faster and easier. In 2021, we improved key aspects of our proposition by taking steps to: simplify and digitise the client experience, upgrade our infrastructure and connect customers to technology partners. We aim to continue to invest in the future of trade by further developing our capabilities across key areas such as real-time credit decisioning, structured trade and sustainable trade finance.

In Foreign Exchange we further enhanced our electronic trading infrastructure to provide improved risk management to our clients. Our focus is to support customers' FX and cross-border payment needs through improved pricing tools and e-trading.

Our Wealth and Private Banking business in the Channel Islands and Isle of Man has focussed on digitising documentation, with the business saving over 600,000 pieces of paper through customers migrating to e-statements and telephone PINs being distributed vis SMS messaging.

During the same period, our technology investments have helped reduce operating costs across the bank.

Energise for growth

In February 2021, we committed to continuing to energise our people, which fundamentally contributes to a more effective, agile and empowered organisation. The main areas of focus are to inspire a dynamic culture, champion inclusion and develop future skills.

Since then, we have been engaging colleagues through numerous initiatives to apply our purpose and values to the delivery of our strategy, how we work and how we serve our customers. 

Recruiting the right talent and diversifying our workforce remains important to us as is ensuring we create an environment for our colleagues to learn and grow. We are committed to increasing diverse representation in Europe, especially at senior levels. Our new pan-European Employee Resource Group 'Inclusive Europe' and the Diversity & Inclusion Council has sponsorship from our leaders and will support our actions.

We continue to energise our colleagues through initiatives that help develop their future skills and learning opportunities. During the year we promoted and engaged our employees with an expanded Future Skills curriculum that now incorporates the key strategic skills of Personal, Digital, Data and Sustainability.

 


Transition to net zero

Becoming a Net Zero Bank

In 2020, the HSBC Group set out ambitions to achieve net zero in the Group's operations and supply chain by 2030 or sooner and to align the Group's financed emissions to the Paris Agreement goal to achieve net zero by 2050 or sooner. To help achieve HSBC's ambitions, the Group passed a climate change resolution in the 2021 Annual General Meeting. The resolution included a commitment to set out the next steps in the Group's transition to net zero, including setting sector-based targets, publishing a thermal coal phase-out policy and reporting annually on progress. The resolution was backed by more than 99% of the Group's shareholders.

In 2021, the HSBC Group was one of 43 founding members of the Net Zero Banking Alliance ('NZBA'), which seeks to reinforce, accelerate, and support the implementation of decarbonisation strategies for the banking sector. The Group also launched a new climate leadership training programme for its top 250 leadership team, in which HSBC Bank plc non-executive directors and executives are included.

In 2021, travel restrictions and lower energy usage due to the Covid-19 outbreak favourably impacted HSBC Bank plc's greenhouse gas emissions figures. More detail can be found in our Environmental Social and Governance ('ESG') metrics disclosure on page 8.

Supporting our Customers

The Group's climate ambition is to support customers in their transition to net zero and a sustainable future. As part of this, the Group aims to provide and facilitate between $750bn and $1tn of sustainable finance and investment by 2030. To date, HSBC Bank plc has contributed $65.2bn to this ambition led by strong performance from debt capital markets, representing 51% of the Group's cumulative contribution towards sustainable finance and investments.

The breakdown of the Group's sustainable finance and investment progress is included in its ESG Data pack. The detailed definitions of the contributing activities for sustainable finance are available in the Group's revised Sustainable Finance Data Dictionary 2021. For the Group's ESG Data Pack, Sustainable Finance Data Dictionary and PwC Assurance Report, see www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre .

Case study: Debt Management Office

In September 2021, HSBC Bank plc acted as Joint Structuring Adviser and Joint Lead Manager on the United Kingdom Debt Management Office's £10bn 12-year inaugural Green gilt transaction with the proceeds to be used on projects to help the UK finance its Green Industrial Revolution. As Joint Structuring Adviser, we supported with establishing the UK Government's Green Financing Framework published in June 2021.

Unlocking New Climate Solutions

HSBC Group partnered with the World Resources Institute and World Wildlife Fund ("WWF") to launch the $100m Climate Solutions Partnership with the aim to accelerate support for innovative solutions tackling climate change. The programme will run for five years, as a part of this, there are two projects located in France in partnership with the French National Forestry Office and the Earthworm Foundation. Both of these local nature-based projects will contribute to net zero goals by better enabling CO2 capture, preserving biodiversity and engaging the community. HSBC also launched a Business Plan for the Planet campaign to help business transition to a sustainable model. In France, Germany and Malta we issued leadership content around carbon neutrality, ESG and Agrofood. These topics were illustrated with client case studies, content articles, videos and infographics published on our websites, media partnerships and social media. We also engaged on live sessions webinars series with HSBC experts, clients and partners to help small and medium companies transition.

 


 

Our Global Businesses

The Group manages its products and services through its three global businesses: Global Banking and Markets ('GBM'); Commercial Banking ('CMB'); Wealth and Personal Banking ('WPB'); and the Corporate Centre (comprising, certain legacy assets, central stewardship costs, and interests in our associates and joint ventures).

Business segments

Our operating model has the following material segments: WPB; CMB; a GBM business which is further split into 3 reportable segments MSS, GB and GBM Other reflecting the reorganisation of the GBM management structure during the year and a Corporate Centre. These segments are supported by Digital Business Services and 11 global functions, including Risk, Finance, Compliance, Legal, Marketing and Human Resources.

Markets & Securities Services ('MSS')

Global Banking ('GB')

GBM Other

Commercial Banking ('CMB')

Wealth and Personal Banking ('WPB')

Markets & Securities Services is a products group that services all of the Bank's clients, from those in Global Banking to Commercial Banking and Wealth and Personal Banking. We offer clients a range of services and capabilities including Trading, Financing and Securities Services across asset classes and geographies, supported by dedicated sales and research teams.

Our European teams play a key role in providing cross-asset services, bridging Emerging and Developed Markets, and collaborating with other global businesses to provide clients across the Group with bespoke products and solutions that support their growth ambitions.

We continue to invest in technology and digital transformation to enhance client experience, improve operational efficiencies and future proof the business. We have taken actions to streamline our cost base, optimise the usage of financial resources and enhance returns. Conduct is at the heart of everything we do and we are determined to have the highest conduct standards in the industry.

HSBC Global Banking delivers tailored financial solutions to corporate and institutional clients worldwide opening up opportunities through the strength of our global network and capabilities. We provide a comprehensive suite of services including corporate banking, capital markets, advisory, trade services and global liquidity and cash management.

Our European teams take a client-centric approach bringing together relationship and product expertise to deliver financial solutions customised to suit our clients' growth ambitions and financial objectives. We work closely with our business partners including MSS, WPB and CMB, to provide a range of tailored products and services that meet the needs of clients across the bank. Global Banking Europe operates as an integral part of the global business and contributes significant revenues to other regions through our European client base, supporting the Europe ambition to be the leading international wholesale bank.

GBM Other primarily comprises Principal Investments ('PI') and GBM's share of the Bank's Markets Treasury function.

The Principal Investments portfolio ('PI') is focused on delivering investments that align to the group's strategy and seeks to deliver strong returns across a diversified portfolio. Our commitment to sustainable private equity funds contributes directly to the Group's aim to provide and facilitate $750bn and $1tn of sustainable finance and investment by 2030.

We have a clear strategy to be the Leading International Corporate Bank in Europe. We help to connect our European customers to our international network of relationship managers and product specialists; supporting their growth ambitions and targets. Our products, which are designed to help our customers seize growth opportunities, range from term loans to region-wide treasury and trade solutions. Commercial Banking is at the centre of creating revenue synergies within the Group: we collaborate closely with our Global Banking and Markets colleagues to provide expertise in capital finance and advisory solutions to support our Commercial Banking clients. Our trade teams within Commercial Banking also provide import and export finance solutions to Global Banking and Markets clients. We also enable customers to gain visibility over their liquidity positions through our main hubs in France and Germany, which in turn helps clients to unlock efficiencies in their Treasury structures. As the European economy pivots to a net zero carbon economy, we are expanding our services and products to provide customers with innovative sustainable finance solutions and ensuring our relationship managers are informed to match these to our clients' net zero ambitions.

In Europe, Wealth and Personal Banking serves customers with their financial needs through Private Banking, Retail Banking, Wealth Management, Insurance and Asset Management.

Our core retail proposition offers a full suite of products including personal banking, mortgages, loans, credit cards, savings, investments and insurance. Alongside this, WPB offers various propositions in certain markets, including Jade, Premier, and Advance; as well as wealth solutions, financial planning and international services. In the Channel Islands and the Isle of Man, we serve local Islanders as well as international customers through our HSBC Expat proposition.

Our Private Banking proposition serves high net worth and ultra-high net worth clients with investable assets greater than $5m in Channel Islands and Isle of Man, France and Germany. The range of services available to private banking clients includes investment management, Private Wealth Solutions and bespoke lending such as lending against financial assets and residential mortgage financing for high-end properties.

Private Banking hosts a 'Next Generation' programme of events to support our client's next generation in building and retaining the wealth within the family. The Private bank offers this through its philanthropy advisory to our clients, which looks at business succession planning. We continue to focus on meeting the needs of our customers, the communities we serve, and our people, whilst working to build the bank of the future.

Adjusted profit/(loss) before tax

£(8)m

£589m

£99m

£490m

£323m

(2020: £20m)

(2020: £55m)

(2020: £(52)m)

(2020: £152m)

(2020: £(132)m)

 

Our global businesses are presented on an adjusted basis, which is consistent with the way in which we assess the performance of our global businesses. 


 

How we do business

We conduct our business to support the sustained success of our customers, employees and other stakeholders.

Our approach

The Group recognises that it is important to be clear about who we are and what we stand for to create long-term value for our stakeholders. This will help the Group deliver the strategy and operate our business in a way that is sustainable. Following an extensive consultation with the Group's people and customers, the Group refined our purpose and values. The Group's new purpose is 'Opening up a world of opportunity' with the ambition to be the preferred international financial partner for clients. To achieve this in a way that is sustainable, we are guided by values: we value difference; we succeed together; we take responsibility; and we get it done.

In 2021, our ability to help our stakeholders was more important than ever, as we continued to promote and encourage good conduct through our employees' behaviours and the decisions we take during these unprecedented times. The Group define conduct as delivering fair outcomes for its customers and not disrupting the orderly and transparent operation of financial markets. This is central to the Group's long-term success and ability to serve customers. We have clear policies, frameworks and governance in place to protect them. For further information on conduct, see page 81. Details on our conduct framework are available at www.hsbc.com/conduct.

Fair outcomes

Our conduct approach guides us to do the right thing and to focus on the impact we have for our customers and the financial markets in which we operate. It complements our purpose and values and - together with more formal policies and the tools we have to do our jobs - provides a clear path to achieving our purpose and delivering our strategy. For further information on conduct, see page 4. For further details on our purpose-led conduct approach framework, see www.hsbc.com/who-we-are. Our section 172 statement, detailing our Directors' responsibility to stakeholders, can be found on page 9.

Our Covid-19 actions

Having a clear purpose and strong values has never been more important, with the Covid-19 pandemic testing us all in ways we could never have anticipated. Since the world changed in 2020, we adapted to new ways of working and endeavoured to provide support to our customers during this challenging period. In the following section, we have set out further ways that we continued to support our stakeholders.

Our colleagues

We believe diversity makes us stronger and we are dedicated to building a diverse and connected workforce. In 2021, HSBC Bank plc increased representation of women in senior roles to 24.0% narrowly missing our target of 24.3%. However, as we progress beyond the Transformation and into growth mode, we are committed to stretching our gender target further and have set a target of 26.4% (2.4% higher than the 2021 actuals).

In July 2020, the Group set out HSBC's global race commitments, which included the goal of doubling the number of Black employees in senior roles over the following five years. In Europe, we continue to place a strong focus on the quality and transparency of our ethnicity data in countries where it is legally permissible. We are committed to improving our ethnic diversity and put in place important foundations in 2021 through leadership development programmes, inclusive hiring, and investing in the next generation of high-performing diverse talent.

Our Future Skills programme helps prepare our people for the changing skills required in the future workplace. We are encouraging our employees to take ownership of their development and supporting them to do so.

During our Future Skills Summer campaign our new Degreed Learning Experience Platform was formally launched to help colleagues shape their development using both internal and external learning content. As part of the campaign colleagues were encouraged to identify four skills they wanted to personally develop. By the end of 2021, 8,200 colleagues had successfully registered and accessed the platform. More than 8,500 hours of learning were completed by over 3,000 colleagues.

Our Climate ambition

We're playing a leading role in helping to mobilise the transition to a global net zero economy, not just by financing it, but by helping to shape and influence the global policy agenda. The Group has set on-balance sheet financed emissions targets for the oil and gas, and power and utilities sectors, aligned to the IEA's net zero scenario, underpinned by a clear science-based strategy. To support the Group's ambition of net zero financed emissions, unlocking transition finance for our portfolio of clients will be crucial. The Group has changed how disclosures are provided against the Task Force on Climate-Related Disclosures ('TCFD') framework by embedding the content previously provided in a stand-alone TCFD Update within the HSBC Holdings plc Annual Report and Accounts 2021. The summary TCFD disclosure can be found on page 63 of the HSBC Holdings plc Annual Report and Accounts 2021.

Engaging with our stakeholders

Engaging with our stakeholders is core to being a responsible business. To determine material topics that our stakeholders are interested in, we conduct a number of activities throughout the year, including engagements outlined in the table below.

Our stakeholders

How we engage

Material topics highlighted by the engagement

Customers

Our customers' voices are heard through our interactions with them, surveys and by listening to their complaints

Customer advocacy

Employees

Our colleagues' voices are heard through our employee Snapshot survey, Exchange meetings and our 'speak-up' channels, including our global whistleblowing platform, HSBC Confidential

Future Skills and Diversity & Inclusion

Investors

Our ordinary shares are held by our parent HSBC Holdings plc, however external parties invest in our bond issuance. We engage with these investors via our investor relations programme which enables investor queries alongside a broader programme of management meetings and market engagement

Coal financing policies

Communities

We welcome dialogue with external stakeholders, including non-governmental organisations ('NGOs') and other civil societies groups. We engage directly on specific issues and by taking part in external forums and working groups

Financial Inclusion and Community Investment

Regulators and governments

We proactively engage with regulators and governments to facilitate strong relationships via virtual and in-person meetings, responses to consultations individually and jointly via the industry bodies

 

Anti-bribery and Corruption

Suppliers

Our ethical and environmental code of conduct for suppliers of goods and services sets out how we engage with our suppliers on ethical and environmental performance

Suppliers ability to service HSBC at an appropriate cost, risk profile and ability to meet the demand by the bank

Supporting our stakeholders through Covid-19

The Covid-19 pandemic continues to create a great deal of uncertainty and disruption for the people, businesses and communities we serve around the world. It is affecting everyone in different ways, with markets at different stages of the crisis.

The outbreak continued to pose significant challenges for our customers. Our immediate priority has been to do what we can to provide them with support and flexibility; with customers doing more of their banking online, we have also deployed new technology to help enable them to engage with us in new ways.

Employee well-being remains a top priority as we transition to new ways of working and continue to navigate through the pandemic. The support we provide is driven by the feedback from our people surveys. In 2021, we launched new tools and training to support mental, physical and financial health. We are also enabling more colleagues to work flexibly and continue to follow social distancing and protection measures in line with local guidance. We firmly believe that helping our people to be healthy and happy is a key enabler of our strategy, and benefits the people and communities we serve.

Our ESG metrics and targets 

The Group has established targets, that guide how we do business, including how we operate and how we serve our customers. These include targets designed to help us to make our business - and those of our customers - more environmentally and socially sustainable. They also help us to improve employee advocacy and diversity at senior levels as well as strengthen our market conduct.

The 2021 annual incentive scorecards of the Group Chief Executive, Group Chief Financial Officer and members of the Group Executive Committee have 30% weightings for measures linked to outcomes that underpin the ESG metrics below. ESG metrics are also incorporated into the Europe Chief Executive and Executive Committee member scorecards.

Our Environmental metrics:

HSBC Holdings plc refreshed a number of metrics and targets to better align with its strategy and the vision for ESG, including its ambition to achieve zero net operational emissions by 2030. HSBC Bank plc reports emissions following the Greenhouse Gas Protocol, which incorporates the scope 2 market-based emissions methodology. We report greenhouse gas emissions resulting from the energy used in our buildings and employees' business travel. Due to the nature of our primary business, carbon dioxide is the main type of greenhouse gas applicable to our operations. While the amount is immaterial, our current reporting also incorporates methane and nitrous oxide for completeness. We do not report employee home working emissions. In 2021 we collected data on energy use and business travel for our operations in Europe in France, Germany, Malta, and Switzerland, which accounted for approximately 67% of our FTEs in HSBC Bank plc1.

At the end of 2021, HSBC Bank plc achieved a 12% reduction in greenhouse gas emissions compared to 2020. Emissions in 2021 were 0.61 tonnes CO2e per FTE.

For further information regarding our environmental footprint, please visit https://www.hsbc.com/who-we-are/our-climate-strategy/becoming-a-net-zero-bank.

Our Social metrics:

• Employee engagement w as 48% as at the end of 2021, up by by 2% compared to 20201.

• Employee gender diversity, our target was 24.3% of women in senior leadership roles by the end of 2021. The outcome for 2021 was 24.0% of women in senior leadership roles2.

Our Governance metrics:

• Sustained delivery of global conduct outcomes, with 97.8% of staff having completed conduct training in 2021. Our target for 2021 was 98%3.

1  To estimate the proportion of FTEs in HSBC Bank plc covered by the emissions data collected, we have calculated FTEs reporting into HSBC Bank plc in the relevant countries where emissions data is collected as a proportion of total FTEs in HSBC Bank plc. 

2  Performance is based on our employee Snapshot results. We transitioned to the employee engagement index in 2020. 

3  Senior leadership is classified as those at band 3 and above in the Group's global career band structure.   We narrowly missed our 2021 target, our focus on improving gender balance in senior leadership across Europe remains a priority for HSBC Bank plc's executive committee for 2022.

4  The completion rate shown relates to the 2021 financial crime training module. The 2021 regulatory conduct training has been launched in January 2022 and will run through the first quarter of 2022.

Responsible Business Culture

We have the responsibility to protect our customers, our communities and the integrity of the financial system. In this section, we outline our requirements under the Non-Financial Reporting Directive.

Environmental matters

In 2021, the Group joined the Net Zero Banking Alliance, a group of 43 international banks to establish a robust and transparent framework for monitoring progress and setting the standard for the banking industry.

In fulfilment of the Group's commitment approved by shareholders at the Group AGM in May 2021, the Group published a policy to phase out thermal coal financing in EU and OECD markets by 2030, and globally by 2040. This incorporates project finance, direct lending, or arranging or underwriting of capital markets transactions to in-scope clients, as well as the refinancing of existing finance facilities.

More information about the Group's assessment of climate risk can be found in the HSBC Holdings plc annual report, under the Task Force on Climate-related Financial Disclosures and climate strategy. HSBC has actively created opportunities for cross sectoral dialogue to advance the topic of sustainability, across key markets. In Germany, HSBC Bank plc and the International Chamber of Commerce organised a two day Pre COP event on climate action, global challenges, international climate policy and the role of business, involving international and national experts from the United Nations, European Union, governments, COP-Presidency (UK), civil society, business and academia. HSBC Armenia also organised, in partnership with the British Embassy, the first conference to promote sustainable finance, titled 'Joining for a Green Future'.

Employee matters

We want to encourage a dynamic and inclusive culture where our colleagues can expect to be treated with dignity, and respect. We are proud to be an organisation that takes action where we find behaviours that falls short of this expectation. We monitor achievement against this goal through metrics that we value. Listening to our colleagues is critical to the business we conduct and is reflected in our purpose and values, which were established through enterprise wide listening and engagement activities. We continue to seek innovative ways that encourage and provide opportunities for our people to speak up about things that are important to them. We recognise that at times people may not feel comfortable speaking up through the usual channels. HSBC Confidential is the Group's global whistleblowing channel, open to colleagues past and present as an anonymous route through which they can raise concerns confidentially at their discretion.

The development of our people is core to the success of our organisation. We continue to develop and implement practices that build employee capability and identify, develop and deploy talented employees; this ensures an appropriate supply of high calibre individuals with the right values, skills and experience for current and future senior management positions.

Since the launch of HSBC University in 2017, we have continued to add to the portfolio of world class leadership and professional development programmes for leaders and people managers including our flagship programmes, Accelerate into Leadership, Accelerating Female Leadership and Leading Business and Functions.

Communities

We have a responsibility to invest in the communities where we operate. We recognise that the world is evolving at a rapid pace and that a range of new and different skills are now needed for people to succeed. For this reason, much of our focus is on charitable partnerships that develop employability and financial capability skills. We also back climate solutions and innovation, and contribute to disaster relief efforts based on need. In 2021 in Europe, we contributed £1.7m to charitable programmes and our employees volunteered 4,200 hours to community activities during the working day.

Human rights

Our commitment to respecting human rights, principally as they apply to our employees, our suppliers and through our financial services lending, is set out in our Human Rights Statement. This statement, along with our statements under the UK's Modern Slavery Act ('MSA'), is available on  www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre .

Anti-corruption and anti-bribery

We are committed to high standards of ethical behaviour and operate a zero-tolerance approach to bribery and corruption. Our anti-bribery and corruption policy sets the framework for the Group and this is followed throughout HSBC Bank plc, to comply with anti-bribery and corruption legislation in all jurisdictions in which we operate, and gives practical effect to global initiatives, such as the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Where local legislation is in place in a jurisdiction, local policies are in place as appropriate, for example in France the Sapin II law requirements is adhered to.

The principal risks addressed by our anti-bribery and corruption policy are the risk that our employees, associated persons or customers engage in bribery or corruption, or that the Group does so through its strategic activities.

HSBC conducts business with the commitment to supporting the sustained success of our customers, people and communities.

Non-Financial Information Statement

Disclosures required pursuant to the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 can be found on the following pages:

Environmental matters (including the impact of the company's business on the environment)

Page 8

The company's employees

Pages 7 to 10 and 94 to 95

Social matters

Page 8

Respect for human rights

Page 9

Anti-corruption and anti-bribery matters

Page 9

Business model

Page 6

Principal risks

Page 19

HSBC creates value by providing products and services to meet our customers' needs. We aim to do so in a way that fits seamlessly into their lives. This helps us to build long-lasting relationships with our customers. HSBC maintains trust by striving to protect our customers' data and information, and delivering fair outcomes for them and if things go wrong, we need to address complaints in a timely manner. Operating with high standards of conduct is central to our long-term success and underpins our ability to serve our customers. Our Conduct Framework guides activities to strengthen our business and increases our understanding of how the decisions we make affect customers and other stakeholders. Details on our Conduct Framework are available at www.hsbc.com.


Section 172 statement

This section, from pages 9 to 11 forms our section 172 statement. It describes how the Directors have performed their duty to promote the success of the bank, including how they have considered and engaged with stakeholders and, in particular, how they have taken account of the matters set out in section 172(1)(a) to (f) of the Companies Act 2006 (the 'Act').

The Board considered a range of factors when making decisions and is supported in the discharge of its duties by:

a.  an induction programme and ongoing training to provide an understanding of our business and financial performance and prospects;

b.  management processes which help ensure that proposals presented to Board and committee meetings for decision include information relevant to determine the action that would most likely promote the success of the bank and involve engagement with stakeholders where relevant to support appropriate decision making; and

c.  agenda planning for Board and committee meetings to provide sufficient time for the consideration and discussion of key matters.

Stakeholder Engagement

The Board understands the importance of effective engagement with its stakeholders and is committed to open and constructive dialogue. This helps build trust and allows the Board to better understand the impact of the bank's actions on its stakeholders and respond to the challenges facing the bank. Depending on the nature of the issue in question, however, the relevance of each stakeholder group may differ and not every decision the Board makes will necessarily result in a positive outcome for all stakeholders.

The Board continued to focus its engagement with the bank's six key stakeholders, namely the bank's customers, employees, shareholders and investors, communities, suppliers, and regulators and governments. In discharging its responsibilities, the Board seeks to understand, and have regard to, the interests and priorities of these stakeholders.

For further details regarding the role of the Board and the way in which it makes decisions, including key activities during 2021, please see page 89.

The Board regularly receives reports from management on issues concerning its stakeholders, which it takes into account in its discussions and in its decision-making process as part of their duties under section 172. In addition to this, the Board seeks to understand the interests and views of the bank's stakeholders by engaging with them directly as appropriate. The ongoing impact of the Covid-19 pandemic has restricted the Board's ability to engage with stakeholders face-to-face, but examples of how the Directors engaged with stakeholders are set out below:

Customers

Customers are at the core of the bank's business model: without customers there would be no bank. The Board strives to ensure it has a broad understanding of customers, their needs and challenges, and to give full consideration to these.

During the year, the CEO and his senior management team continued to engage directly with customers, while the Board continued to monitor the bank's approach to supporting customers. The Board received regular reports from senior management on interaction with customers, which included key performance indicators measuring the impacts and challenges to customers as a result of the ongoing Covid-19 pandemic and associated Covid-19 relief payment moratoria, the impact of the free trade agreement between the EU and UK which excluded EU-wide arrangements for financial services, the bank's Europe transformation programme and associated conduct considerations. Dedicated deep dive sessions were also held, with one such session focused on HSBC Life and the Insurance business.

Employees

Employees are critical to the successful operation of the bank and its long-term future.

During the year the Board received regular updates from senior management on various metrics and feedback tools in relation to employees, including updates on Diversity and Inclusion and the Gender Pay Gap. Updates were also provided on the impact on employee wellbeing and how the bank was supporting its staff. The focus on employees by the Board was also heightened through the frequent updates provided to the Board on the bank's Europe transformation programme and how staff were being impacted by the level of change. These updates considered key areas of people risk and the future of work in a post-pandemic environment.

Shareholders and Investors

The bank is a wholly owned subsidiary of the HSBC Holdings plc and, as such, the Board took into account the implications of its decisions with regard to its ultimate shareholder, HSBC Holdings plc, and its debt security investors.

During the course of the year, the Group Chairman held a number of principal subsidiary chair conferences which were attended by the Chairman of the Board. In addition, Chairs of the Audit and Risk Committees participated in regional Audit and Risk committee forums hosted by their Group counterparts. These were attended both by the bank's Directors as well as Audit and Risk Committee Chairs of material subsidiaries. The Board also received updates from management on the bank's debt issuance programmes.

Regulators and Governments

Directors periodically meet with the bank's regulators, the Financial Conduct Authority ('FCA') and Prudential Regulatory Authority ('PRA'). It is central to the success of the bank that it has strong relationships with these stakeholders and that there is a mutual understanding on expectations and challenges given their impact on customers, the business model and the bank's strategy.

During the year, members of the Board met regularly with regulators both in the UK and Europe and engagement continued during 2021 notwithstanding the logistical challenges posed by the impact and continued national and regional lock-downs due to the Covid-19 pandemic. The Board held a dedicated deep dive session on how HSBC interacts with regulators globally and at the European level to better understand the scope of engagement at executive level with relevant regulators in the region.

Suppliers  

Suppliers are critical to supporting the infrastructure and operations of the business and have contractual relationships with the bank.

During the year, the Board received an update on the bank's performance against its statutory reporting obligations in respect of the payment of third party suppliers. This also provided an insight into the impact of its procurement processes and procedures on suppliers.

Communities and Environment

The bank has legal, regulatory and social responsibilities to the community and its environment.

During the year the Board received updates on the Group's evolving climate and sustainable finance strategy and net zero ambition. As we go into 2022, and as a sustainable finance strategy tailored for European business is further developed, the Board will receive updates on the bank's delivery against the ambition and strategy execution.

Employee Engagement

The Chief Executive Officer and senior management are actively involved in the engagement of employees through leadership calls and quarterly all employee webcasts to keep the workforce up-to-date on business developments and answer questions. In addition, the Chief Executive Officer issues a Europe-wide newsletter which updates employees on initiatives across the region. The Board receives regular updates from the Chief Executive Officer and the Head of HR on employee matters, including feedback received through Town Halls and Exchanges, as well as through regular employee surveys. One of the non-executive Directors also has a particular focus on employee matters to enhance the Board's view of people issues and to gain a better understanding of the employee perspective. Further details of the bank's engagement with employees can be found on pages 7 to 10 and 94 to 95.

Principal Decisions

Set out below are some of the principal decisions made by the Board during 2021. In each case, in taking such decisions, the Directors exercised their statutory duties, including the duty to act in the way that they consider, in good faith, would be most likely to promote the success of the bank for the benefit of its members as a whole.

Europe Transformation Programme

Following a revision of the bank's operating plan in 2020 in response to the revised Group strategy, in 2021 the Board continued to oversee and challenge management in their execution of the bank's Europe transformation programme.  The bank's continued focus on simplification of its presence in the region included a proposal being brought to the Board in May 2021 for the disposal of the group's non-core retail banking business in France. 

Prior to approval, the Board constructively challenged and engaged with senior management to consider the financial and commercial profile of the business itself, alternative proposals in respect of the retail business and the likely consequences of the disposal on the bank's key stakeholders, including customers and its shareholder and investors. In considering stakeholders, the Board also considered the consultation undertaken with relevant French works' councils, and the interests of the bank's employees, in respect of the disposal. Completion of the disposal will involve engagement with other key stakeholders, including relevant regulators.

In reaching its decision, the Board acknowledged the rationale for the transaction in the context of the strategy for the group set by its shareholder and considered the interests of its shareholder in undertaking the disposal. It concluded that the disposal would be a strong enabler in simplifying HSBC's business in Continental Europe, allowing management to accelerate the transformation of the European wholesale banking franchise. Additionally, the Board had regard to customers. In particular, the Board considered the terms negotiated as part of the transaction to help to ensure an effective transition of the business to the buyer in light of the importance of maintaining ongoing support for customers.  Furthermore, the proposed sale to an experienced investor, with a strategic focus on retail banking, was recognised as giving support to the development of the retail business over the longer term.

Having taken all of these and other factors into account, including an assessment of the financial merits and risks, and the interests of employees, the Board agreed to proceed with the proposal on the basis that it considered that it was in the best interests of the bank's members as a whole and would promote the long term success of the bank, as subsequently announced by HSBC on 18 June 2021.

Legacy Capital Consent Solicitation

A key regulatory responsibility of the bank for a number of years has been to help facilitate an industry-wide transition from the use of interbank offered rates ('Ibors'), such as the London interbank offered rate ('Libor'), to using near risk free replacement rates ('RFRs') or alternative reference rates. The bank had two externally-issued outstanding English law capital instruments (one of which was issued through a Jersey Limited Partnership vehicle) that contained provisions requiring the interest rate to be determined by reference to a GBP Libor rate.

In view of the anticipated demise of GBP Libor from the end of 2021, in July 2021, the Board considered a proposal to seek consent from the bondholders to amend the terms and conditions of such instruments, to transition them from using GBP Libor to calculate the interest rate to instead use the Sterling Overnight Index Average ('SONIA') rate, which is the RFR recognised as the preferred alternative rate for sterling markets. 

As part of its consideration, the Board took into account the impact of the project on the bank's key stakeholders, in particular its investors in such instruments, and its obligations to, and relationship with, its regulators. In this respect, the Board acknowledged the expectations of the regulators that the bank seeks to swiftly transition its portfolio of legacy GBP Libor contracts (which includes these instruments) prior to the anticipated demise date for GBP Libor. From an investor perspective, the Board was mindful of the need to adopt transition terms that were consistent with others in the market and that included the industry agreed adjustment spread to be added to the relevant SONIA rate, to compensate investors for the difference between SONIA and Libor reference rates.

Having considered these factors, the Board recognised and approved the need for the bank to seek the consent of bondholders to transition these instruments, acknowledging that this would be in the best interests of the bank's members as a whole and would promote the long term success of the bank. Tax

Our approach to tax

We are committed to applying both the letter and the spirit 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 seek to 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;

• the OECD Base Erosion and Profit Shifting ('BEPS') initiative; and

• the UK legislation on the corporate criminal offence ('CCO') of failing to prevent the facilitation of tax evasion.

We do not expect the BEPS or similar initiatives adopted by national governments to adversely impact our results.

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

 


2021

2020

Profit/(loss) before tax (reported) (£m)

  1,023 

  (1,614)

Profit/(loss) before tax (adjusted) (£m)

  1,577 

  (184)

Cost efficiency ratio (reported) (%)

89.2

113.6

Cost efficiency ratio (adjusted) (%)

80.9

  89.6 

Return on tangible equity (%)

6.1

  (2.7)

Common equity tier 1 capital ratio (%)

17.3

14.7

 


Profit/(loss) before tax (reported/adjusted): Reported profit/(loss) before tax is the profit/(loss) as reported under IFRS. Adjusted profit/(loss) before tax adjusts the reported profit/(loss) for the effect of significant items as detailed on pages 15 to 16.

Reported profit before tax in 2021 was £1,023m compared with a loss before tax of £(1,614)m in 2020. This was primarily driven by lower reported operating expenses driven by the non-recurrence of a £802m impairment of intangible assets in 2020

and lower restructuring and other related costs, including severance costs, arising from the bank's transformation programme. Expected credit losses and other credit impairment charges ('ECL') were significantly lower reflecting an improvement in the economic outlook. Revenue was higher compared with 2020, notably in our insurance manufacturing business in WPB, partly offset by higher restructuring and other related costs comprising disposal losses associated with RWA reductions which related to the commitments at our February 2020 business update.

Adjusted profit before tax was £1,577m compared with a loss before tax of £(184)m in 2020. This was driven by lower ECL and lower operating expenses as well as strong revenue performance. The increase in revenue included positive market impacts on the present value of in-force ('PVIF') insurance contracts in insurance manufacturing in WPB driven by an increase in interest rate yield curves and favourable movements in valuation adjustments in Markets and Securities Services ('MSS'). Operating expenses decreased as a result of the tight control of discretionary spend to reflect the economic outlook and the initial impact of our transformation of the bank. This was partly offset by the UK bank levy incurred in 2021, which was previously paid by the Group. In addition, there was a gain of £191m compared with a loss of £(1)m in 2020 recognised from our share of profit/(loss) from associates.

Reported cost efficiency ratio was 24.4 percentage points lower compared with 2020 driving by higher revenue and lower operating expenses. Reported revenue increased by 3.7% and reported operating expenses decreased by 18.5%, mainly driven by the factors mentioned above.

Adjusted cost efficiency ratio improved by 8.7 percentage points from 2020, reflecting higher revenue and lower costs  Revenue increased by 5.6%, mainly driven by favourable PVIF and positive valuation adjustments. Operating expenses decreased by 4.7%, mainly driven by lower costs reflecting our transformation plans partly offset by the UK bank levy and higher variable pay.

Return on tangible equity ('RoTE') is computed by adjusting reported profit attributable to ordinary shareholders by excluding movements in PVIF and significant items (net of tax), divided by average tangible shareholders' equity excluding fair value of own debt, debt valuation adjustment ('DVA') and other adjustments for the period. The adjustment to reported results and reported equity excludes amounts attributable to non-controlling interests.

We provide RoTE as a way of assessing our performance, which is closely aligned to our capital positions.

CET1 capital ratio represents the ratio of common equity tier 1 capital to total risk-weighted assets ('RWA'). 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.

The CET1 capital ratio of 17.3% in 2021 increased by 2.6 percentage points from 2020, mainly due to a reduction in RWAs.

Non-financial KPIs

We monitor a range of non-financial KPIs focusing on customers, people, culture and values including customer service satisfaction, employee engagement and diversity and sustainability.

For details on customer service and satisfaction please refer below; for the remaining non-financial KPIs, refer to the Non financial reporting section on page 8 and Corporate Governance section on pages 88 to 96. Customer service, awards and satisfaction

MSS

Our customers are at the heart of what we do and we are committed to delivering services and capabilities that meet their needs and help them fulfil their ambitions.

In 2021, we won numerous awards and consistently ranked highly with our European clients, including winning Currency Manager of the Year at the European Pension Awards, Western Europe's Best Bank for SMEs by EuroMoney, ranking number one for overall service quality in Continental Europe in the Coalition Greenwich Foreign Exchange study, and ranking number one in both the UK and Ireland as best fund and administration provider in the R&M Investor Services Survey.

These accolades, coupled with multiple milestones and achievements in sustainable finance, demonstrate our unique capabilities to support clients locally and connect them to markets and expertise in the East, as well the key role Europe plays in supporting the Group's strategic priorities.

GB

Within Global Banking Europe we remain committed to providing excellent customer experience and we continue to strive towards improving our proposition to meet client needs.

In 2021, HSBC received a number of external awards, recognising the support we've provided to our clients for example, Investment Bank of the Year for Bonds by The Banker.

Aligned with our strategy of opening up opportunities for our clients, HSBC was also recognised with an Excellence Award in International Network Breadth by the Coalition Greenwich Awards and won seven bond awards from Environmental Finance in 2021. These awards, in particular, highlight the continued strength and differentiation of our ESG capabilities globally as well as the role we play in Europe helping our clients transition to net zero.

CMB

Customer experience and satisfaction are fundamental priorities for Commercial Banking in Europe. We measure a number of metrics, track customer service levels and gather direct customer feedback to ensure our solutions and channels remain relevant and fit for our customers' needs today. In 2021, we launched Europe 1 Form, a single document addressing all of a clients' onboarding requirements to enable an account being opened. These type of initiatives help to improve our customers' journeys and experience, and ensures that we continue to achieve internal operating efficiencies. We have also pivoted towards a centralised booking model, which has enabled us to provide regional coverage to our customers and helped to support our their needs on a pan-European basis. Looking ahead, we will continue to support our customers to formulate transition plans to achieve their net-zero targets.


WPB

In WPB Europe, enhancing customer experience and improving satisfaction remains integral to our strategy. This is monitored through a number of customer satisfaction metrics covering branch, contact centre and digital channels. We recognise the importance of customer feedback and continue to enhance our insights to gain a better understanding of our clients to provide a more personalised and relevant service.

Digital continues to be a principal area of investment; enhancing customer experience, reducing processing costs and driving the sustainability agenda. In Expat we have launched a new mobile app including the deployment of soft token. This will reduce the need for over 20,000 hard tokens being sent to customers globally. Our Private Banking arm is also committed to enhancing digital offerings, including enhanced capabilities to support our advisory offering, and improved internal platforms and software to support our people in delivering excellent client service.

We recognise that enhancing customer satisfaction is an evolving process and are committed to ensure our investments and focus are prioritised to achieve this.


 

Economic background and outlook

 

UK

Continued recovery amid high inflation

The UK economy grew by 1% in the fourth quarter of 2021, bringing the level of output to 0.4% above its pre-pandemic level. While the UK only tightened restrictions modestly over the winter in response to concerns surrounding the Omicron variant of COVID-19, the pace of economic growth slowed and uncertainty remains high. Much of the expansion through 2021 was driven by household and government spending. On the other hand, business investment and exports have been subdued (10% and 18% below their pre-pandemic peaks). Headwinds related to the UK's exit from the EU might have played a role.

As the economy has rebounded, it has run into supply constraints, both in terms of global supply chain disruption, and labour shortages. The former might be constraining trade and manufacturing, while the latter has been associated with record job vacancy levels.

These supply issues, coupled with significant rises in energy prices - wholesale gas prices in particular - have led to a sharp rise in inflationary pressure. The annual CPI inflation rate stood at 5.5% in January 2022, more than double the Bank of England's 2% target. Inflation is expected to rise further in the near term, with sharp rises in regulated utility prices set for April.

Looking ahead, HSBC Research expects the UK economy to continue to normalise following the worst of the pandemic-related disruption, with GDP growing by 4% in 2022 and by 1.6% in 2023. As energy and supply-related pressures eventually ease, HSBC Research expects CPI inflation to start falling back through 2022, then fall to around the 2% mark in 2023.

UK rates could rise this year

Given inflation strength and 'tightness' in the labour market, the Bank of England ('BoE') has begun to tighten monetary policy, with a 15 basis point rise in Bank Rate in December and a 25 basis point increase in January, lifting the rate to 0.50%. HSBC Research expects another three rate increases in 2022 bringing Bank Rate up to 1.25%. The BoE has announced that, with Bank Rate now at 0.50%, it will stop reinvesting maturing government bonds held as part of its Quantitative Easing ('QE') programme.

Fiscal policy, which has been highly supportive since the onset of the pandemic, is set to achieve a narrowing in the government budget deficit over the coming years. As part of the consolidation, and in order to meet the increasing spending commitments relating to an ageing population, taxes as a share of the overall economy are set to rise, according to the government's forecasts, to levels not seen since early the 1950s.

Eurozone

Recovering from renewed Covid-19 concerns

Even before heightened concerns about the Omicron variant,  Covid-19 cases were rising sharply in several European countries. In response, several countries curtailed hospitality-sector opening hours and tightened restrictions for unvaccinated people. This has compounded ongoing headwinds from supply chain disruption, which has weighed on the manufacturing sector in particular. And economic growth slowed in the fourth quarter, from 2.2% to 0.3%, though that allowed GDP to return to its pre-pandemic peak. More recently, case numbers have been in decline and the business surveys point to a pick-up in near-term growth.

Despite the softening in overall activity at the turn of the year, the labour market has remained robust. In December 2021, the eurozone unemployment rate declined from 7.1% to 7.0%. That compares to a December 2020 peak of 8.4% and a February 2020 level of 7.3%.

As a result of sharp rises in energy prices, and supply disruption, annual eurozone consumer price inflation reached a record high of 5.1% in January 2022. Importantly though, eurozone wage cost pressures remain fairly contained, keeping a lid on underlying inflation rates.

HSBC Research expects a continued economic recovery, with eurozone GDP growing by 3.5% in 2022 and 2.3% in 2023. Meanwhile, as long as wage pressures remain in check, and assuming an easing in supply disruption, inflation is likely to fall sharply over the coming months. HSBC Research sees the headline inflation rate falling to around the 2% mark in early 2023.

Eurozone interest rates could rise this year

Although eurozone wage pressures appear to remain fairly soft, significant upside news to inflation, alongside the ongoing economic recovery, means that the European Central Bank ('ECB') has signalled the possibility of paring back monetary policy stimulus. In December the ECB announced that it will end its Pandemic Emergency Purchase Programme ('PEPP') in March 2022.

Beyond that, HSBC Research expects the ECB to end net asset purchases under its regular Asset Purchase Programme ('APP') by the end of  September 2022, paving the way for a 25 basis point rise in the Deposit Rate (from -0.50% to -0.25%) in October 2022, then another 25 basis point increase in March 2023. In mid-February, market prices pointed to a faster pace of ECB tightening, with more than 40bps of rate rises priced in for 2022. 


 



 

Financial summary

 

Use of alternative performance measures

Our reported results are prepared in accordance with International Financial Reporting Standards ('IFRSs'), as detailed in the Financial Statements starting on page 107. In measuring our performance, the financial measures that we use include those derived from our reported results in order to eliminate factors that distort year-on-year comparisons. These are considered alternative performance measures.

All alternative performance measures are described and reconciled to the closest reported financial measure when used.

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 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.

 


Summary consolidated income statement for the year ended


2021

2020


£m

£m

Net interest income

  1,754 

  1,898 

Net fee income

  1,413 

  1,400 

Net income from financial instruments measured at fair value

  3,432 

  2,314 

Gains less losses from financial investments

  60 

  95

Net insurance premium income

  1,906 

  1,559 

Other operating income

  594 

  417

Total operating income1

  9,159 

  7,683 

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

  (3,039)

  (1,783)

Net operating income before change in expected credit losses and other credit impairment charges1

  6,120 

  5,900 

Change in expected credit losses and other credit impairment charges

  174 

  (808)

Net operating income

  6,294 

  5,092 

Total operating expenses excluding impairment of goodwill and other intangible assets2

  (5,416)

  (5,903)

Impairment of goodwill and other intangible assets

  (46)

  (802)

Operating profit/(loss)

  832 

  (1,613)

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

  191 

  (1)

Profit/(loss) before tax

  1,023 

  (1,614)

Tax credit

  23 

  136

Profit/(loss) for the year

  1,046 

  (1,478)

Profit/(loss) attributable to the parent company

  1,041 

  (1,488)

Profit attributable to non-controlling interests

  5 

  10

1  Net operating income before change in expected credit losses and other credit impairment charges is also referred to as revenue.

2  Total operating income and expense include significant items as detailed on pages 14 to 16.


Reported performance

Performance in 2021 was stronger compared with 2020, which was heavily impacted by the Covid-19 pandemic.

Reported profit before tax was £1,023m, compared with a loss before tax in 2020 of £(1,614)m, an increase of £2,637m. This was mainly due to a significant reduction in operating expenses, a net release in ECL compared with charges in 2020, and stronger revenue performance.

Reported revenue was £220m higher, largely driven by favourable market impacts on the present value of in-force ('PVIF') long-term insurance contracts in insurance manufacturing in WPB. Also, 2020 revenue included a significant negative impact from valuation adjustments in MSS. This was partly offset in 2021 by higher restructuring and other related costs comprising disposal losses associated with RWA reductions, related to the commitments at our February 2020 business update. ECL were lower driven by a net release in 2021 compared with net charge in 2020 as a result of the deteriorating economic outlook during the onset of the Covid-19 outbreak. Operating expenses were lower, mainly driven by the non-recurrence of a impairment of goodwill and other intangible assets and lower transformation costs, partly offset by the UK bank levy incurred for the first time in 2021. In addition, there was also a gain compared with a loss in 2020 recognised from our share of profit/(loss) from associates.

Net interest income ('NII') decreased by £144m or 8% compared with the prior year. NII was lower mainly driven by the impact of lower interest rate environment, notably in Retail deposits in WPB and in GLCM (in Global Banking). Revenue was also lower due to a reduction in balance sheet lending as a result of the transformation programme to reduce RWAs. This was partly offset by a reduction in the funding cost of trading assets, and through initiatives to reduce the overall funding costs of the bank through retiring more expensive wholesale funding.

Net fee income increased by £13m or 1% compared with the prior year, primarily in WPB largely in Asset Management driven by favourable market conditions and in Retail due to higher fees commission driven by increased levels of customer activity compared to 2020, which was impacted by the Covid-19 pandemic.

Net income from financial instruments measured at fair value increased by £1,118m or 48% compared with the prior year. In WPB, revenue increased primarily reflecting a stronger equity market performance and higher interest rate yields in France compared with 2020 when the value of equity and unit trust assets supporting insurance contracts were heavily impacted by the Covid-19 outbreak.

This favourable movement resulted in a corresponding movement in liabilities to policyholders, reflecting the extent to which policyholders participate in the investment performance of the associated assets. The offsetting movements are recorded in net insurance claims and benefits paid and movement in liabilities to policyholders.

Revenue also increased in MSS largely driven by lower adverse credit and funding valuation adjustments compared with 2020. Excluding this, revenue was lower, as 2020 benefited from higher market volatility supporting a particularly strong performance within Global Foreign Exchange and Global Debt Markets, notably in the UK.

By contrast, revenue decreased in GBM Other, mainly driven by higher restructuring and other related costs comprising disposal losses associated with RWA reductions, related to the commitments at our February 2020 business update.

 


Gains less losses from financial investments decreased by £35m, mainly driven by lower gains on the disposal of bonds held at fair value through other comprehensive income ('FVOCI') in Markets Treasury.

Net insurance premium income increased by £347m or 22%, in WPB, from insurance manufacturing revenue in France driven by higher new business volumes.

Net insurance claims, benefits paid and movement in liabilities to policyholders increased by £1,256m or 70%, primarily in the insurance business in WPB. The increase was driven by higher returns on financial assets supporting contracts

where the policyholder is subject to part or all of the investment risks. The gains recognised on the financial assets measured at fair value through profit and loss that are held to support these insurance contract liabilities are reported in 'Net income from financial instruments designated at fair value'. This was partly offset by a increase in premium income.

Other operating income increased by £177m or 42%, mainly due to favourable market impacts, notably on PVIF, in insurance manufacturing in WPB. This reflected a stronger equity market performance and higher interest rate yields on the valuations of the liabilities under insurance contracts. This was partly offset by lower revenue in GBM Other due to lower intercompany recharge recoveries from other entities in the Group, with an offsetting decrease in operating expenses.

Changes in expected credit losses and other credit impairment charges ('ECL') were a net release of £174m in 2021, compared with a net charge of £808m in 2020. The net release in 2021 reflected an improvement in the economic outlook and a stabilisation of credit risk. This compared with the significant build-up of stage 1 and stage 2 allowances in 2020 due to the worsening economic outlook at the onset of the Covid-19 outbreak. The reduction in ECL compared with 2020 also reflected lower levels of stage 3 charges.

Total operating expenses excluding impairment of goodwill and other intangible assets decreased by £487m or 8%, mainly driven by a reduction in staff costs, lower contractor and consultancy spend, and lower discretionary spend, in line with our transformation plan. In addition, there was also lower expenses related to severance costs arising from cost efficiency measures across our global businesses and function. This reduction was partly offset by the UK bank levy incurred in 2021, which was previously paid by the Group.

Impairment of goodwill and other intangible assets was £756m lower compared with the prior year. In 2020, operating expenses included a £802m goodwill impairment which principally comprised the write-off of capitalised software. This mainly related to our businesses in the UK and France and reflected the underperformance and deterioration in the future forecasts of these businesses, substantially relating to prior periods.

Share of profit/(loss) in associates and joint ventures was a profit of £191m compared with a loss of £(1)m in 2020. The profit in 2021 included a £93m true-up of prior year valuations in the underlying investments of an associate.

Tax credit was £113m lower compared with 2020. The effective tax rate of 2.3% for 2021 included favourable non-recurring items in respect of tax rate changes, prior period adjustments and the recognition of previously unrecognised deferred tax assets in France.

The effective tax rate of 8.4% for 2020, representing a tax credit on loss before tax, was mainly due to the non-recognition of deferred tax on the loss in France for the period.


Adjusted performance

 


Significant revenue items by business segment - (gains)/losses for the year ended


MSS

GB

GBM Other

CMB

WPB

Corporate Centre

Total


£m

£m

£m

£m

£m

£m

£m

31 Dec 2021








Reported revenue

  2,043 

  1,367 

  310 

  1,096 

  1,276 

  28 

  6,120 

Significant revenue items

  12 

  -

  269 

  (1)

  (1)

  (69)

  210 

-  fair value movements on financial instruments1

  12 

  -

  (5)

  (1)

  (1)

  -

  5 

-  restructuring and other related costs2

  -

  -

  274 

  -

  -

  (69)

  205 

Adjusted revenue

  2,055 

  1,367 

  579 

  1,095 

  1,275 

  (41)

  6,330 


31 Dec 20203








Reported revenue

  1,966 

  1,381 

  437

  1,132 

  1,035 

  (51)

  5,900 

Significant revenue items

  2

  -

  187

  1

  -

  (93)

  97

-  fair value movements on financial instruments1

  2

  -

  2

  1

  -

  (2)

  3

-  restructuring and other related costs2

  -

  -

  185

  -

  -

  (91)

  94

Adjusted revenue

  1,968 

  1,381 

  624

  1,133 

  1,035 

  (144)

  5,997 

1  Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.

2  Includes losses associated with the RWA reduction commitments.

3   A change in reportable segments was made in 2021. Comparatives data have been re-presented accordingly. For further guidance, refer to
Note 9: Segmental Analysis on page 138.


 

Significant cost items by business segment - (recoveries)/charges for the year ended


MSS

GB

GBM Other

CMB

WPB

Corporate Centre

Total


£m

£m

£m

£m

£m

£m

£m

31 Dec 2021








Reported operating expenses

  (2,064)

  (918)

  (588)

  (611)

  (981)

  (300)

  (5,462)

Significant cost items

  -

  -

  103 

  (1)

  6 

  236 

  344 

-  restructuring and other related costs

  -

  -

  103 

  (1)

  6 

  236 

  344 

-  settlements and provisions in connection with legal and regulatory matters

  -

  -

  -

  -

  -

  -

  -

-  impairment of other intangible assets

  -

  -

  -

  -

  -

  -

  -

Adjusted operating expenses

  (2,064)

  (918)

  (485)

  (612)

  (975)

  (64)

  (5,118)


31 Dec 20202

Reported operating expenses

  (1,950)

  (878)

  (1,351)

  (773)

  (1,169)

  (584)

  (6,705)

Significant cost items

  1

  -

  679

  114

  41

  498

  1,333 

-  restructuring and other related costs1

  -

  -

  218

  79

  5

  377

  679

-  settlements and provisions in connection with legal and regulatory matters

  1

  -

  -

  -

  -

  8

  9

-  impairment of other intangible assets

  -

  -

  461

  35

  36

  113

  645

Adjusted operating expenses

  (1,949)

  (878)

  (672)

  (659)

  (1,128)

  (86)

  (5,372)

1  Includes the write down of software £148m.

2  A change in reportable segments was made in 2021. Comparatives data have been re-presented accordingly. For further guidance, refer to
Note 9: Segmental Analysis on page 138.


Net impact on profit/(loss) before tax by business segment


MSS

GB

GBM Other

CMB

WPB

Corporate Centre

Total


£m

£m

£m

£m

£m

£m

£m

31 Dec 2021








Reported profit/(loss) before tax

  (20)

  589 

  (273)

  492 

  318 

  (83)

  1,023 

Net impact on reported profit and loss

  12 

  -

  372 

  (2)

  5 

  167 

  554 

-  Significant revenue items

  12 

  -

  269 

  (1)

  (1)

  (69)

  210 

-  Significant cost items

  -

  -

  103 

  (1)

  6 

  236 

  344 

Adjusted profit/(loss) before tax

  (8)

  589 

  99 

  490 

  323 

  84 

  1,577 


31 Dec 20201

Reported profit/(loss) before tax

  17

  55

  (918)

  37

  (173)

  (632)

  (1,614)

Net impact on reported profit and loss

  3

  -

  866

  115

  41

  405

  1,430 

-  Significant revenue items

  2

  -

  187

  1

  -

  (93)

  97

-  Significant cost items

  1

  -

  679

  114

  41

  498

  1,333 

Adjusted profit/(loss) before tax

  20

  55

  (52)

  152

  (132)

  (227)

  (184)

1  A change in reportable segments was made in 2021. Comparatives data have been re-presented accordingly. For further guidance, refer to
Note 9: Segmental Analysis on page 138.

 


Adjusted performance

Adjusted profit before tax was £1,577m compared with a loss before tax of £(184)m in 2020, up £1,761m. This reflected lower ECL, a strong revenue performance and lower operating expenses. There was also a gain in our share of profit in associates and joint ventures compared with a loss in 2020. ECL were significantly lower mainly reflecting an improvement in the economic outlook from 2020. Adjusted revenue performance was stronger largely driven by the impact of volatile items including favourable market impacts on insurance manufacturing in WPB and favourable valuation adjustments in MSS. Adjusted operating expenses were lower as a result of our transformation plans and continued prudent management of discretionary spend. This was partly offset by the UK bank levy which incurred in 2021.

Adjusted revenue increased by £333m or 6%, partly offset by unfavourable movements in foreign exchange. Excluding this, revenue increased primarily in WPB, MSS and Corporate Centre. The increase in WPB reflected favourable market impacts on insurance manufacturing as equity markets performance remained strong compared with 2020, which was heavily impacted by the  Covid-19 pandemic. In MSS, adjusted revenue was higher driven by lower adverse credit and funding valuations and continued momentum in Equities performance, partly offset by lower revenue in Global FX driven by lower market volatility. Revenue also increased in Corporate Centre, primarily due to a fair value gain from a long-standing investment in a Germany-based company. There were also gains from disposals in Legacy Credit.

Adjusted ECL were £982m lower compared with 2020. There was a net release of £174m compared with a net charge of £808m in 2020. In 2021, there were releases of stage 1 and 2 provisions reflecting an improvement in the economic outlook and a stabilisation of credit risk, compared with a significant build-up of allowances in the first half of 2020 at the onset of the Covid-19 outbreak. There were also lower charges against specific wholesale customers during 2021 compared with 2020.

Adjusted operating expenses decreased by £254m or 5%, in part due to favourable movements in foreign exchange. Excluding this, operating expenses decreased as we reviewed and re-prioritised spend aligning with our transformation plans and to reflect the economic outlook. This resulted in a reduction in FTE, tight control of contractor and consultancy spend as well as lower discretionary spend. This decrease was partly offset by the UK bank levy booked in 2021, which was previously paid by the Group.

Share of profit/(loss) in associates and joint ventures was a profit of £191m compared with a loss of £(1)m in 2020. Profit in 2021 included a £93m true-up of prior year valuations in the underlying investments of an associate.


Markets and Securities Services

Adjusted loss before tax was £(8)m compared to a profit before tax of £20m, down £28m compared with 2020. This was driven by higher operating expenses, largely offset by higher revenue.

Revenue increased by £87m or 4%, mainly driven by lower adverse credit and funding valuations compared with 2020 and a stronger performance in Equities, notably in structured derivatives, driven by higher market volatility. This was partly offset by lower revenue in Global FX as, in 2020, there was an exceptional level of volatility and client activity driven by the onset of the Covid-19 outbreak.

Operating expenses increased by £115m or 6%, largely driven by an increase in performance-related pay reflecting higher revenue and a higher Single Resolution Fund ('SRF') levy in France and Germany. This was partly offset by a reduction in staff costs resulting from our transformation cost-saving initiatives.

Global Banking

Adjusted profit before tax was £589m, an increase of £533m compared with 2020, largely driven by lower ECL, partly offset by higher operating expenses.

Revenue decreased by £14m or 1%, mainly driven by unfavourable movements in foreign exchange. Excluding this, revenue remained broadly stable compared with 2020. This was despite a reduction in interest rates in the first half of 2020 and lower customer balances in 2021, reflecting actions taken to reduce RWAs as part of our transformation. Revenue in 2020 included mark-to-market losses which were not repeated in 2021.

ECL net credit of £139m compared to a net charge of £448m in 2020. The net credit in 2021 mainly reflected releases of stage 1 and stage 2 allowances as the economic outlook improved. This compared with the significant build-up of charges in 2020 resulting from the deterioration in the economic situation due to the Covid-19 outbreak.

Operating expenses were £40m or 5% higher compared with 2020, mainly driven by higher performance-related pay, partly offset by a reduction in staff costs resulting from our transformation cost-saving initiatives. 

Global Banking and Markets Other

Adjusted profit before tax was £99m, compared with a loss before tax of £(52)m in 2020. This was largely driven by lower operating expenses and gains from disposals in Principal Investments ('PI').

Revenue decreased by £45m or 7%, mainly driven by lower intercompany cost recoveries which resulted from a change in billing methodology of GBM costs, where recharges and recoveries were moved to other entities in the Group (with an offsetting reduction in operating expenses). This was partly offset by higher revenue in PI driven by gains following disposals of a number of funds in 2021 compared with losses in 2020.

Operating expenses decreased by £187m or 28% compared with 2020, including the move of certain GBM costs from the bank to other entities in the Group (offset by lower intercompany recoveries in revenue). In addition, there was a reduction in staff costs and performance-related pay resulting from our transformation initiatives. This was partly offset by the UK bank levy incurred in 2021.


Commercial Banking

CMB performed well in 2021 as we continued to implement our strategy to focus on serving our international customers.

Adjusted profit before tax was £490m, up by £339m compared with 2020. This was mainly driven by lower ECL and lower operating expenses, partly offset by lower revenue.

Revenue decreased by £38m or 3% compared with 2020. This was primarily in Credit and Lending due to lower customer balances reflecting actions taken to reduce RWAs as part of transformation. Revenue also decreased in GLCM driven by the lower interest rate environment despite growth in average deposit balances. This was partly offset by an increase in revenue allocated from Markets Treasury. 

ECL net credit of £7m compared with a net charge of £322m in 2020. The net credit in 2021 largely reflected releases of stage 1 and stage 2 allowances reflecting the improved economic outlook. In 2020, there was significant build-up of charges resulting from the deterioration in the economic situation driven by the Covid-19 outbreak. In addition, stage 3 charges were lower compared with 2020.

Operating expenses decreased by £47m or 7%, mainly driven by a reduction in staff costs resulting from transformation initiatives. There were also lower corporate real estate costs due to lower depreciation as certain assets have been fully written down.


Wealth and Personal Banking ('WPB')

Adjusted profit before tax of £323m, up £456m compared with 2020. This was primarily due to higher revenue, lower operating expenses and lower ECL.

Revenue increased by £241m or 19%, mainly in insurance manufacturing in France and in the UK, largely from positive market impacts, notably on PVIF, driven by favourable equity market performance and higher interest rate yields on insurance contracts. This partly offset by lower revenue in Retail in France and in the Channel Islands and Isle of Man, mainly from deposits due to the low interest rate environment, despite growth in average balances.

ECL net credit of £23m compared with a net charge of £39m in 2020. This mainly reflected an improvement in the economic outlook from 2020.

Operating expenses decreased by £152m or 23%. This was driven by the non-recurrence of an impairment of real estate assets in France in 2020. In addition, there were lower technology costs and lower corporate real estate costs due to lower depreciation as certain assets have been fully written down.


 

Corporate Centre

Adjusted profit before tax of £96m compared with a loss before tax of £227m in 2020. This was mainly driven by a profit in associates and joint ventures compared with a loss in 2020, lower operating expenses and higher revenue.

Revenue was higher by £104m, primarily driven by gains on portfolio disposals in Legacy Credit compared with losses in 2020. The increase was also driven by a fair-value gain from a long-standing investment in a Germany-based brokerage company.

ECL net charge of £2m in 2021 compared with a net release of £5m in 2020, mainly driven by losses in Legacy Credit following disposals.

Operating expenses decreased by £22m or 26%, largely driven by lower intercompany recharges from other entities in the Group, with an offsetting decrease in revenue. 

Shares of profit/(loss) in associates and joint ventures was a profit of £191m, of which £93m was due to a true-up of prior year valuations in the underlying investments of an associate. This compared with a loss of £(1)m in 2020.


 

Dividends

The consolidated reported profit for the year attributable to the shareholders of the bank was £1,041m.

No dividend in respect of 2021 was declared on the ordinary share capital during the year.

Further information about the results is given in the consolidated income statement on page 108.

 


Review of business position

 

Summary consolidated balance sheet at 31 Dec

 

 

2021

2020

 

 

£m

£m

Total assets

  596,611 

  681,150 

-  cash and balances at central banks

  108,482 

  85,092 

-  trading assets

  83,706 

  86,976 

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

  18,649 

  16,220 

-  derivatives

  141,221 

  201,210 

-  loans and advances to banks

  10,784 

  12,646 

-  loans and advances to customers

  91,177 

  101,491 

-  reverse repurchase agreements - non-trading

  54,448 

  67,577 

-  financial investments

  41,300 

  51,826 

-  other assets

  46,844 

  58,112 

Total liabilities

  572,896 

  657,301 

-  deposits by banks

  32,188 

  34,305 

-  customer accounts

  205,241 

  195,184 

-  repurchase agreements - non-trading

  27,259 

  34,903 

-  trading liabilities

  46,433 

  44,229 

-  financial liabilities designated at fair value

  33,608 

  40,792 

-  derivatives

  139,368 

  199,232 

-  debt securities in issue

  9,428 

  17,371 

-  liabilities under insurance contracts

  22,264 

  22,816 

-  other liabilities

  57,107 

  68,469 

Total equity

  23,715 

  23,849 

Total shareholders' equity

  23,584 

  23,666 

Non-controlling interests

  131 

  183

 


Total reported assets were 12.4% lower than at 31 December 2020. The group maintained a strong and liquid balance sheet with the ratio of customer advances to customer accounts decreasing to 44.4% from 52.0% as at 31 December 2020 driven by ongoing loan book optimisation efforts.

Assets

Cash and balances at central banks increased by 27.5% as a result of increased customer deposits and decreased reverse repurchase agreements and advances to customers positions.

Trading assets and financial assets designated at fair value slightly reduced due to changes in business and product mix during the year.

Derivative assets decreased by 29.8% due to a combination of market movement and trades compression and novation.

Non-trading reverse repurchase agreements decreased by 19.4% primarily due to changes in market conditions.

Financial investments decreased by 20.3% as a result of optimisation strategy.

Liabilities

Customer accounts increased by 5.2%, which is consistent with our funding strategy to grow customer deposits and increase

stable funding.

Total of trading liabilities and financial liabilities designated at fair value balances has decreased by 5.9%.

Debt securities in issue decreased by 45.7% in line with the funding strategy.

Non-trading repurchase agreements decreased by 21.9% as a result of market activities.

Derivative liabilities decreased by 30.0%. This is in line with derivative assets as the underlying risk is broadly matched.

Equity

Total shareholder's equity remained broadly unchanged as compared to 2020.


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.

 


Net interest income




2021

2020


£m

£m

Interest income

  3,149 

  4,086 

Interest expense

  (1,395)

  (2,188)

Net interest income

  1,754 

  1,898 

Average interest-earning assets

  354,324 

  369,617 


%

%

Gross interest yield1

0.51

0.74

Less: gross interest payable1

(0.01)

(0.27)

Net interest spread2

0.50

0.47

Net interest margin3

0.50

0.51

1  Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA'). Gross interest payable is the average annualised interest cost as a percentage of average interest-bearing liabilities.

2  Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing liabilities.

3  Net interest margin is net interest income expressed as an annualised percentage of AIEA.

Summary of interest income by asset type


2021

2020


Average
balance

Interest
income

Yield1

Average
balance

Interest
income

Yield1


£m

£m

%

£m

£m

%

Short term funds and loans and advances to banks

  119,025 

  (221)

(0.19)

  90,841 

  (113)

(0.12)

Loans and advances to customers

  99,151 

  1,585 

1.60

  116,518 

  2,058 

1.77

Reverse repurchase agreements - non-trading

  57,630 

  (132)

(0.23)

  68,573 

  22

0.03

Financial investments

  45,142 

  497 

1.10

  51,335 

  652

1.27

Other interest-earning assets

  33,376 

  67 

0.20

  42,350 

  118

0.28

Total interest-earning assets

  354,324 

  1,796 

0.51

  369,617 

  2,737 

0.74

1  Interest yield calculations include negative interest on assets recognised as interest expense in the income statement.


Summary of interest expense by type of liability and equity


2021

2020


Average
balance

Interest
expense

Cost1

Average balance

Interest expense

Cost1


£m

£m

%

£m

£m

%

Deposits by banks

  32,891 

  (186)

(0.57)

  28,812 

  (60)

(0.21)

Customer accounts

  150,048 

  95 

0.06

  143,807 

  321

0.22

Repurchase agreements - non-trading

  32,916 

  (192)

(0.58)

  38,829 

  (129)

(0.33)

Debt securities in issue - non-trading

  38,727 

  258 

0.67

  52,781 

  546

1.03

Other interest-bearing liabilities

  36,811 

  68 

0.18

  47,384 

  160

0.34

Total interest-bearing liabilities

  291,393 

  43 

0.01

  311,613 

  838

0.27

1  Interest payable calculations include negative interest on liabilities recognised as interest income in the income statement.

 


 

Risk overview

The group continuously identifies and monitors 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 financial and non-financial risks. Changes in the assessment of these risks may result in adjustments to the group's business strategy and, potentially, its risk appetite.

Our banking risks include credit risk, treasury risk, market risk, resilience risk, regulatory compliance risk, financial crime and fraud risk and model 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 21 to 87.

During 2021, a number of changes to our top and emerging risks have been made, to reflect the revised assessment of their effect on the group. Some risks were removed towards the end of 2021 as current concerns in these areas were considered as having been absorbed effectively into business as usual risk management practices. These risks were the UK's exit from the EU, market illiquidity and Covid-19. Covid-19 has been maintained as an Area of Special Interest reflecting the continued impact of the pandemic on our operations in 2021.

Environmental, social and governance also replaced Climate-related risks to cover the wider scope of climate, nature and human rights risks.



Externally driven

Geopolitical risk

p

We continually assess the impact of geopolitical events, including the ongoing impacts of the Covid-19 pandemic, on our businesses and exposures across the group, and take steps to mitigate them, where required and possible, to help ensure we remain within our risk appetite. The relationship between the UK and the EU may come under more severe strain in 2022 over multiple disputes, most notably the Northern Ireland Protocol and possible triggering of Article 16 that could have potential repercussions on the terms of trade between the UK and the EU. We will continue to work with regulators, governments and our customers to manage the risks created by the UK's exit from the EU as they arise, particularly across those industry sectors most impacted. In addition with tensions continuing to rise between Russia and Ukraine, we will continue to monitor the development of this situation and any potential implications for the group.

Cyber threat and unauthorised access to systems

u

We protect the group and our customers by strengthening our cyber defences, helping us to execute our business priorities safely and keep our customers' information secure. We employ a defence in depth approach to cyber security and continue to focus on controls to prevent, detect and mitigate the impacts of persistent and increasingly advanced cyber threats with a specific emphasis on vulnerability management, malware defences, protections against unauthorised access and third-party risk. We closely monitor the continued dependency on widespread remote working and online facilities.

Regulatory focus on conduct of business

u

We proactively monitor for regulatory developments to ensure they are interpreted and implemented effectively and in a timely way. We engage with regulators, policy makers and standard setters as appropriate, to help make a positive contribution to the evolving regulatory landscape. We also track closely the key themes currently driving the regulatory compliance agenda, which include: consumer protection and customer vulnerability; the impact of digital services and innovation; Ibor transition; regulatory reporting obligations; mitigating the risk of inappropriate market conduct; and environmental, social and governance ('ESG') matters, with a particular focus on climate change, diversity and inclusion considerations and enhancements to ESG disclosure and reporting obligations.

Financial crime and fraud risk

u

We continued to support our customers as the Bank's financial crime landscape evolved due to the Covid-19 pandemic and as broad geopolitical, socioeconomic and technological shifts happened across our markets. We continued to make improvements to our financial crime controls as emerging risks were identified and to invest in advanced analytics and artificial intelligence as key elements of our next generation of tools to fight financial crime.

Ibor transition

u

We remain focused on completing the system and product updates to support the transition of demising Libor benchmarks, in particular US dollar Libor. We continue to support the transition of all legacy contracts referencing demised and demising Ibor benchmarks, including from any sterling or Japanese yen contracts using 'synthetic' Libor. Throughout 2022 there will be an increasing focus on customer engagement for US dollar Libor related transition activities.

Environmental, social and governance

p

We continue to develop our approach to managing ESG risk, noting that the risk has increased owing to the pace and volume of regulatory developments globally, with the focus on formalising climate risk management, enhanced disclosures, and integration of other ESG risks such as nature-related risks and human rights. Some stakeholders are also placing more emphasis on financial institutions' actions and investment decisions in respect of ESG.

Internally driven

People risk

p

We monitor workforce capacity and capability requirements in line with our published growth strategy. We have put in place measures to support our people to work safely during the Covid-19 pandemic, and to integrate them back into the workplace as government restrictions ease. We monitor people risks that may arise due to business transformation to help sensitively manage redundancies and support impacted employees. People Risk is heightened as a result of the ongoing pandemic conditions, including long periods of working from home, and impacts from our transformation programme. This has affected our staff's resilience, wellbeing and level of engagement over time, with increased attrition seen in some areas of our business.

IT systems infrastructure and resilience

u

We continue to monitor and improve our IT systems and network resilience, both on our premises and on the Cloud to minimise service disruption and improve customer experience. To support the business strategy, we strengthened our end to end management, build and deployment controls and system monitoring capabilities. We continue to seek to reduce the complexity of our technology estate and consolidate our core banking systems onto a single strategic platform.

 



Internally driven

Execution risk

p

We monitored and managed our change execution risk, including capacity and resources to meet the increased delivery demand across both strategic transformation projects, regulatory deliverables and remediation activities throughout 2021. Our transformation programme continues to oversee all initiatives mobilised to deliver the commitments made to restructure the business and reduce costs by the end of 2022. Execution risk is heightened by the inter-dependencies between projects within our transformation programme, which are primarily centred on France and Germany. A number of these initiatives impact our colleagues and are supported by increased levels of investment in technology. We are working to strengthen our change management practices to deliver sustainable change efficiently and safely, aligned to a new Group change framework launched during the first half of 2021.

Model risk

u

We continue to strengthen our oversight of models. Our model risk policy is fully embedded, including updated controls around the monitoring and use of models. New model risk appetite measures have been rolled out which are more forward looking and will help our businesses and functions manage model risk more effectively. Redevelopment of capital models to reflect the evolving regulatory requirements are also either in progress or pending regulatory approval for implementation.

Data management

u

We protect our customers and organisation by making focused investments in capabilities that manage data risk. We focus on controls that manage data governance, usage, integrity, privacy and retention. During 2021, we refreshed our data strategy and continued to improve our approach to data risk management and reporting.

Third party risk management

u

We continually enhance our third-party risk management framework as our supply chain evolves, and to stay aligned to the latest regulatory expectations. We closely monitor for Covid-19-related impacts on the delivery of services to the group, with businesses and functions taking appropriate action where needed.

 

p

Risk has heightened during 2021

u

Risk remains at the same level as 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

On behalf of the Board


Dave Watts, Director


21 February 2022


Registered number 00014259


 


Risk



Page

Our approach to risk

22

Our risk appetite

22

Risk management

24

Key developments and risk profile

24

Top and emerging risks

24

Externally driven

25

Internally driven

28

Areas of special interest

30

Risks related to Covid-19

30

Climate-related risks

30

Our material banking and insurance risks

32

Credit risk

34

Treasury risk

73

Capital risk in 2021

77

Market risk

81

Resilience risk

84

Regulatory compliance risk

85

Financial crime risk

85

Model risk

87

Insurance manufacturing operations risk

87


Our approach to risk

 


 

Our risk appetite

We recognise the importance of a strong culture, which refers to our shared attitudes, values and standards that shape behaviours related to risk awareness, risk taking and risk management. All our people are responsible for the management of risk, with the ultimate accountability residing with the Board.

We seek to build our business for the long term by balancing social, environmental and economic considerations in the decisions we make. Our strategic priorities are underpinned by our endeavour to operate in a sustainable way. This helps us to carry out our social responsibility and manage the risk profile of the business. We are committed to managing and mitigating climate-related risks, both physical and transition, and continue to incorporate consideration of these into how we manage and oversee risks internally and with our customers.

The following principles guide the group's overarching appetite for risk and determine how our businesses and risks are managed.

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

• Ambition to generate returns in line with our risk appetite and strong risk management capability.

• Ambition to deliver sustainable earnings and appropriate 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.

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 group level and to material European entities.

Our risk management framework

An established risk governance framework and ownership structure ensures oversight of, and accountability for, the effective management of risk within the group. HSBC's Risk Management Framework ('RMF') fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. Integral to the RMF 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, amongst other things, 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 Head of Compliance, together with other business functions on risks within their respective areas of responsibility.

Responsibility for managing both financial and non-financial risk lies with our people. They are required to manage the risks of the business and operational activities for which they are responsible. We maintain oversight of our risks through our various specialist Risk Stewards, as well as the accountability held by the Chief Risk Officer. Non-financial risk includes some of the most material risks HSBC faces, such as cyber-attacks, poor customer outcomes and loss of data. Actively managing non-financial risks is crucial to serving our customers effectively and having a positive impact on society. During 2021 we continued to strengthen the control environment and our approach to the management of non-financial risks, as is broadly set out in our risk management framework. The management of non-financial risk focuses on governance and risk appetite, providing a single view of the non-financial risks that matter most, and associated controls. It incorporates a risk management system designed to enable the active management of non-financial risk. Our ongoing focus is on simplifying our approach to non-financial risk management, while driving more effective oversight and better end-to-end identification and management of non-financial risks. This is overseen by the Operational and Resilience Risk function, headed by the Group Head of Operational and Resilience Risk.

Three lines of defence

To create a robust control environment to manage risks, we use an activity-based three lines of defence model, whereby the activity a member of staff undertakes drives which line they reside within. 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 challenges the first line of defence on effective risk management, and provides advice and guidance in relation to the risk.

• The third line of defence is our Internal Audit function, which provides independent assurance that the group's risk management approach and processes are designed and operating effectively. 

Risk appetite

We formally articulate our risk appetite through our risk appetite statement ('RAS'), which is approved by the Board on the recommendation of the Risk Committee. Setting out our risk appetite ensures that planned business activities provide an appropriate balance of return for the risk we are taking, and that we agree a suitable level of risk for our strategy. In this way, risk appetite informs our financial planning process and helps senior management to allocate capital to business activities, services and products.

The RAS consists of qualitative statements and quantitative metrics, covering financial and non-financial risks. It is fundamental to the development of business line strategies, strategic and business planning and senior management balanced scorecards. Performance against the RAS is reported to the Risk Management Meeting ('RMM') so that any actual performance that falls outside the approved risk appetite is discussed and appropriate mitigating actions are determined. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture.

.


 

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.


Stress testing

Stress testing is an important tool that is used by banks, as part of their internal risk management, 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 selection of stress scenarios is based upon the output of our top and emerging risks identified and our risk appetite. The results help the Board and senior management to set our risk appetite and confirm the strength of our strategic and financial plans. Our risk appetite is set at a level that enables the group to withstand future stress impacts.

In 2021, the Group participated in the successful completion of the BoE solvency stress testing exercise. The Solvency Stress Test Scenario depicts a synchronised, global, double-dip recession in 2021, driven by a continuation and intensification of economic and financial shocks experienced in 2020 as a result of the Covid-19 pandemic. Unemployment rises sharply in the stress, with certain sectors such as hospitality, leisure, construction and transport more affected than others.

Traded risk shocks are consistent with the macro-economic scenario. The global stress causes financial market participants' perceptions of risk to increase, and their risk appetite to diminish. The traded risk shocks are lower than those included in the 2019 exercise. This is, in part, because of a smaller rise in risk premia in the stress scenario given an expectation from market participants

that markets remain functional despite the broader macroeconomic stress.

The BoE published the results of the 2021 Solvency Stress Test in December 2021, confirming that these tests did not reveal any capital inadequacies for the HSBC Group. In 2021, the Group participated also in the Climate Biennial Exploratory Scenario ('CBES') exercise of BoE.

The CBES objective was to test the resilience of the UK financial system to the physical and transition risks associated with different climate pathways. The BoE has indicated that CBES was a learning exercise for both participating banks and the BoE. CBES will not be used to set capital requirements but to understand the collective impact on the wider economy and also explore vulnerabilities of current business models to future climate policy pathways and how the Group is expected to adjust it's business models in response to these climate change impacts.


 

Key developments and risk profile

 


Key developments in 2021

We continued to actively manage the risks resulting from the Covid-19 pandemic and its impacts on our customers and operations during 2021, as well as other key risks described in this section. In addition, we enhanced our risk management in the following areas:

• We streamlined the articulation of our risk appetite framework, providing further clarity on how risk appetite interacts with strategic planning and recovery planning processes.

• We continued to simplify our approach to non-financial risk management, with the implementation of more effective oversight tools and techniques to improve end-to-end identification and management of these risks.

• We accelerated the transformation of our approach to managing financial risks across the businesses and risk functions, including initiatives to enhance portfolio monitoring and analytics, credit risk, traded risk and treasury risk management, as well as the models used to manage financial risks.

• We are progressing with a comprehensive regulatory reporting programme to strengthen our processes, improve consistency, and enhance controls.

• We continued to enhance our approach to portfolio and concentration risk management, through clearly defined roles and responsibilities, and improving our data and management information reporting capabilities.

• We continued the development of our climate risk management capabilities. Our climate risk programme will shape our approach to climate risk across four key pillars: governance and risk appetite; risk management; stress testing; and disclosures. We enhanced our risk appetite statement with quantitative climate risk metrics.

• We continued to improve the effectiveness of our financial crime controls with a targeted update of our fraud controls. We refreshed our financial crime and fraud policies, ensuring they remained up to date and addressed changing and emerging risks, and we continued to meet our regulatory obligations.

• We introduced enhanced governance and oversight around model adjustments and related processes for IFRS 9 models.


 

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

Geopolitical risk

Our operations and portfolios are exposed to risks associated with political instability, civil unrest and military conflict, which could lead to disruption of our operations, physical risk to our staff and/ or physical damage to our assets.

We will increasingly need to consider potential regulatory, reputational and market risks arising from the evolving geopolitical landscape.

The Covid-19 pandemic brought supply chain issues into focus and has heightened geopolitical tensions, which could have potential ramifications for the group and our customers.

Tensions between Russia and the US and a number of European states have heightened significantly following the escalation of hostilities between Russia and Ukraine. While negotiations are ongoing to seek a resolution, a continuation of or any further deterioration to the situation could have significant geopolitical implications, including economic, social and political repercussions on the group and its customers. In addition, the US, the UK and the EU have threatened a significant expansion of sanctions and trade restrictions against Russia in the event of a Russian incursion into Ukraine, and Russian countermeasures are also possible.

Political disagreements between the UK and the EU, notably over the future operation of the Northern Ireland Protocol, has meant work on the creation of a framework for voluntary regulatory cooperation in financial services following the UK's withdrawal from the EU has stalled. While negotiations are continuing, it is unclear whether or when an agreement will be reached, and this has led to speculation that the UK may trigger Article 16 of the Protocol, which could suspend the operation of the Protocol in certain respects. Any decision to do so could be met with retaliatory action by the EU, complicating the terms of trade between the UK and the EU and potentially preventing progress in other areas such as financial services. 

Mitigating actions

• We closely monitor geopolitical and economic developments in key markets and sectors and undertake scenario analysis where appropriate. This helps us to take portfolio actions where necessary, including enhanced monitoring, amending our risk appetite and/or reducing limits and exposures.

• We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management action being taken to rebalance exposures and manage risk appetite where necessary.

• We regularly review key portfolios to help ensure that individual customer or portfolio risks are understood and our ability to manage the level of facilities offered through any downturn is appropriate.

• We continue to monitor geopolitical tensions involving Russia and Ukraine and any potential impacts on the group and our customers.

• We continue to monitor the UK's relationship with the EU, and assess the potential impact on our people, operations and portfolios.

• We have taken steps, where necessary, to enhance physical security in those geographical areas deemed to be at high risk from terrorism and military conflicts.

Cyber threat and unauthorised access to systems

We continue to operate in a challenging cyber threat environment, which requires ongoing investment in business and technical controls to defend against these threats. 

Key threats include unauthorised access to our data, advanced malware attacks, attacks on third-party suppliers and security vulnerabilities being exploited.

 


Mitigating actions

• We continually evaluate threat levels for the most prevalent attack types and their potential outcomes. To further protect our business and our customers we strengthened our controls to reduce the likelihood and impact of advanced malware, data leakage, exposure through third parties and security vulnerabilities.

• We continue to enhance our cybersecurity capabilities, including cloud security, identity and access management, metrics and data analytics, and third-party security reviews. An important part of our defence strategy is ensuring our people remain aware of cybersecurity issues and know how to report incidents.

• We report and review cyber risk and control effectiveness regularly at executive and non-executive Board level. We also report it across our businesses and functions, to help ensure appropriate visibility and governance of the risk and mitigating actions.

• We participate globally in several industry bodies and working groups to share information about tactics employed by cyber-crime groups and to collaborate in fighting, detecting and preventing cyber-attacks on financial organisations.

Regulatory focus on conduct of business

We keep abreast of the emerging regulatory compliance and conduct agenda, which currently includes, but is not limited to: ESG matters; operational resilience; how digital and technology changes, including payments, are impacting financial institutions; how we are ensuring good customer outcomes, including addressing customer vulnerabilities; regulatory reporting; and employee compliance. We monitor regulatory developments closely and engage with regulators, as appropriate, to help ensure new regulatory requirements are implemented effectively and in a timely way.

The competitive landscape in which we operate may be impacted by future regulatory changes and government intervention. In the UK, potential regulatory developments include any legislative changes resulting from a statutory review for ring-fencing, which has been undertaken by an independent panel appointed by HM Treasury. The panel has recommended several adjustments to the regime and HM Treasury is reviewing these recommendations. Legislative amendments may be proposed in due course.

Mitigating actions

• We monitor for regulatory developments to understand the evolving regulatory landscape and respond with changes in a timely way.

• We engage, wherever possible, with governments and regulators to make a positive contribution to regulations and ensure that new requirements are considered properly and can be implemented effectively. We hold regular meetings with relevant authorities to discuss strategic contingency plans, including those arising from geopolitical issues. 

• We launched our simplified conduct approach to align to our new purpose and values, in particular the value 'we take responsibility'.

Financial crime and fraud risk

Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. The financial crime threats we face have continued to evolve, often in tandem with broader geopolitical, socioeconomic and technological shifts in our markets, leading to challenges such as managing conflicting laws and approaches to legal and regulatory regimes. Financial crime risk evolved during the Covid-19 pandemic, notably with the manifestation of fraud risks linked to the economic slowdown and resulting deployment of government relief measures. The accelerated digitisation of financial services has fostered significant changes to the payments ecosystem, including a multiplicity of providers and new payment mechanisms, not all of which are subject to the same level of regulatory scrutiny or regulations as financial institutions.

This is presenting increasing challenges to the industry in terms of maintaining required levels of transparency, notably where institutions serve as intermediaries. Developments around digital assets and currencies, notably the role of stablecoins and central bank digital currencies, have continued at pace, with an increasing regulatory and enforcement focus on the financial crimes linked to these types of assets.

Expectations with respect to the intersection of ESG issues and financial crime as our organisation, customers and suppliers transition to net zero, are increasing, not least with respect to potential 'greenwashing'. Companies also face a heightened regulatory focus on both human rights issues and environmental crimes, from a financial crime perspective. We also continue to face increasing challenges presented by national data privacy requirements, which may affect our ability to manage financial crime risks holistically and effectively.

Mitigating actions

• We are strengthening our fraud and surveillance controls, and investing in next generation capabilities to fight financial crime through the application of advanced analytics and artificial intelligence.

• We are looking at the impact of a rapidly changing payments ecosystem to ensure our financial crime controls remain appropriate for changes in customer behaviour and gaps in regulatory coverage, including the development of procedures and controls to manage the risks associated with direct and indirect exposure to digital assets and currencies.

• We are assessing our existing policies and control framework to ensure that developments in the ESG space are considered and the risks mitigated.

• We work with jurisdictions and relevant international bodies to address data privacy challenges through international standards, guidance, and legislation to help enable effective management of financial crime risk.

• We work closely with our regulators and engage in public-private partnerships, playing an active role in shaping the industry's financial crime controls for the future, notably with respect to the enhanced, and transparent, use of technology.

Ibor transition

Interbank offered rates ('Ibors') have historically been used extensively to set interest rates on different types of financial transactions and for valuation purposes, risk measurement and performance benchmarking.

Following the UK's Financial Conduct Authority ('FCA') announcement in July 2017 that it would no longer continue to persuade or require panel banks to submit rates for the London interbank offered rate ('Libor') after 2021, we have been actively working to transition legacy contracts from Ibors to products linked to near risk-free replacement rates ('RFRs') or alternative reference rates. In March 2021, in accordance with the 2017 FCA announcement, ICE Benchmark Administration Limited ('IBA') announced that it would cease publication of 24 of the 35 main Libor currency interest rate benchmark settings from the end of 2021, and that the most widely used US dollar Libor settings would cease from 30 June 2023. The FCA subsequently used its regulatory powers to compel IBA to publish the remaining six sterling and Japanese yen settings, from 1 January 2022, under an amended methodology, commonly known as 'synthetic' Libor. As a result, our focus during 2021 was on the transition of legacy contracts referencing the Euro Overnight Index average ('Eonia') and the Libor settings that demised from the end of 2021, including those settings subsequently being published on a 'synthetic' basis.

During 2021, we continued the development of IT and RFR product capabilities, implemented supporting operational processes, and engaged with our clients to discuss options for the transition of their legacy contracts. The successful implementation of new processes and controls, as well as the transition of contracts away from Ibors, reduced the heightened financial and non-financial risks to which we were exposed. However, while all but exceptional Libor contract issuance ceased in 2021, or from the end of 2021 for US dollar Libor, we remain exposed to material risks. These include, from so-called 'tough legacy' contracts, that have not been able to be transition to a new rate and will use a 'synthetic' Libor or a contractual fallback rate, and from legacy contracts that reference US dollar Libor, which are expected to demise from June 2023.

Financial risks have been largely mitigated as a result of the implementation of model and pricing changes. However, differences in US dollar Libor and its replacement RFR, Secured Overnight Funding Rate ('SOFR'), create a basis risk in the trading book and banking book due to the asymmetric adoption of SOFR across assets, liabilities and products that we need to actively manage through appropriate financial hedging. Additionally, the comparatively limited use of SOFR for new RFR products to date and lack of alignment around conventions could potentially delay transition of some US dollar Libor contracts into 2023. This would compress the amount of time to transition these contracts, which could lead to heightened operational and conduct-related risk as a result.

Additional non-financial risks, including regulatory compliance risk, resilience risk, financial reporting risk, and legal risk also remain for 'tough legacy' contracts, and the US dollar legacy portfolio. These risks continue to be actively managed and mitigated with a focus on ensuring that fair outcomes for our clients are achieved.

These risks are present in different degrees across our product offering.

Transition of Legacy contracts 

During 2021, we successfully transitioned over 90% of legacy Ibor lending contracts in sterling, Swiss franc, euro and Japanese yen Libor interest rates, as well as Eonia, directly or via appropriate fallback mechanisms. The majority of the remaining contracts will transition in advance of their next interest payment date, with only a small proportion of 'tough legacy' contracts remaining. We expect that out of approximately 1000 lending contracts there will be less than 20 'tough legacy' contracts, the majority of which will be transitioned to alternative rates during 2022. Our approach to transition 'tough legacy' and US dollar legacy Ibor contracts will differ by product and business area, but will be based on the lessons learned from the successful transition of contracts during 2021. We will continue to communicate with our clients and investors in a structured manner and be client led in the timing and nature of the transition.

For derivatives, approximately 99% of our sterling, Swiss franc, euro and Japanese yen Libor interest rate exposures at the end of 2021 had successfully transitioned directly or via appropriate fallback mechanisms, leaving a small number of 'tough legacy' contracts. There are expected to be less than 20 bilateral derivatives trades that remain 'tough legacy,' the majority of which are expected to mature or transition in 2022. We anticipate our 'tough legacy' and US dollar exposure will continue to reduce through 2022 as a result of contract maturities, and active transition. We will continue to look to actively reduce our US dollar exposure by transitioning trades ahead of the demise date of 30 June 2023, by working with our clients to determine their needs and how we transition their contracts. Additionally, we are working with market participants, including clearing houses, to ensure we are able to transition our cleared derivative contracts as the US dollar Libor benchmark demise date approaches.

For our loan book, approximately 85% of our reported exposure at the end of 2021 linked to sterling, Swiss franc, euro and Japanese yen Libor interest rate contracts that required no further client negotiation but remained drawn on Libor as they have yet to reach their next interest payment date. The majority of the remaining exposure linked to benchmarks that demised from the end of 2021 relates to contracts where discussions with our clients and other market participants, for syndicated transactions, have continued in early 2022, in advance of their next scheduled interest payment date, and this has led to further transitions being completed.

A small number of 'tough legacy' contracts, less than 20, that were unable to transition prior to their first interest payment date in 2022, are expected to use legislative reliefs, such as 'synthetic' Libor, or an alternative rate determined by the contractual fallback language and in the main will be transitioned during 2022. For the remaining demising Ibors, notably US dollar Libor, we have implemented new products and processes and updated our systems in readiness for transition. Global Banking, Commercial Banking and Global Private Banking have begun to engage with clients who have upcoming contract maturities with a view to refinancing using an appropriate replacement rate. Further communications and outreach to customers with US dollar Libor contracts with later maturities will occur in due course.

Where we hold bonds issued by other institutions, we have remained dependent on the issuer's agents to engage in the transition process, although analysis will be undertaken of the issuers in US dollar Libor bonds to reduce our exposure, as occurred through 2021.

The completion of an orderly transition from the remaining Ibors, notably US dollar Libor, continues to be our programme's key objective through 2022 and 2023, with the aim of putting systems and processes in place to help achieve this.

Mitigating actions

• The global Ibor transition programme, which is overseen by the Group Chief Risk and Compliance Officer, will continue to deliver IT and operational processes to meet its objectives.

• We carry out extensive training, communication and client engagement to facilitate appropriate selection of new rates and products.

• We have dedicated teams in place to support the transition.

• We actively transitioned legacy contracts and ceased new issuance of Libor-based contracts, other than those allowed under regulatory exemptions, with associated monitoring and controls.

• We assess, monitor and dynamically manage risks arising from Ibor transition, and implement specific mitigating controls when required.

• We continue to actively engage with regulatory and industry bodies to mitigate risks relating to 'tough legacy' contracts.

Financial instruments impacted by IBOR reforms

Interest Rate Benchmark Reform Phase 2, the amendments to IFRSs issued in August 2020, represents the second phase of the IASB's project on the effects of interest rate benchmark reform.

The amendments address issues affecting financial statements when changes are made to contractual cash flows and hedging relationships.

Under these amendments, changes made to a financial instrument measured at other than fair value through profit or loss that are economically equivalent and required by interest rate benchmark reform, do not result in the derecognition or a change in the carrying amount of the financial instrument. Instead they require the effective interest rate to be updated to reflect the change in the interest rate benchmark. In addition, hedge accounting will not be discontinued solely because of the replacement of the interest rate benchmark if the hedge meets other hedge accounting criteria.

 


(audited)


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


USD Libor

GBP Libor

EONIA

Others1

At 31 Dec 2021

£m

£m

£m

£m

Non-derivative financial assets2





Loans and advances to customers

  5,999 

  2,562 

  -

  26 

Financial investments

  1,171 

  140 

  -

  -

Others

  693 

  499 

  -

  -

Total non-derivative financial assets

  7,863 

  3,201 

  -

  26 

Non-derivative financial liabilities





Subordinated liabilities

  1,145 

  -

  -

  -

Others

  479 

  181 

  -

  -

Total non-derivative financial liabilities

  1,624 

  181 

  -

  -

Derivative notional contract amount





Foreign exchange

  8,288 

  1,568 

  -

  1,080 

Interest rate

  1,567,577 

  215,377 

  1,679 

  76,059 

Others

  -

  -

  -

  -

Total derivative notional contract amount

  1,575,865 

  216,945 

  1,679 

  77,139 

 

At 31 Dec 2020





Non-derivative financial assets2





Loans and advances to customers

  7,782 

  4,323 

  1

  183

Financial investments

  1,187 

  406

  -

  -

Others

  1,043 

  1,033 

  -

  1

Total non-derivative financial assets

  10,012 

  5,762 

  1

  184

Non-derivative financial liabilities2





Subordinated liabilities

  1,135 

  900

  -

  -

Others

  798

  510

  3

  1

Total non-derivative financial liabilities

  1,933 

  1,410 

  3

  1

Derivative notional contract amount





Foreign exchange

  6,296 

  2,768 

  -

  8,148 

Interest rate

  1,694,279 

  865,545 

  196,515 

  126,545 

Others

  7

  -

  -

  -

Total derivative notional contract amount

  1,700,582 

  868,313 

  196,515 

  134,693 

1  Comprises financial instruments referencing other significant demising benchmark rates (euro Libor, Swiss franc Libor, Japanese Yen Libor, SOR and THBFIX Sibor).

2  Gross carrying amount excluding allowances for expected credit losses.

3  The amounts in the above table do not represent amounts at risk as the steps to transition for certain trades have been completed.

 


The amounts in the above table relate to the group's main operating entities where we have material exposures impacted by Ibor reform, including in the United Kingdom, France and Germany. The amounts provide an indication of the extent of the group's exposure to the Ibor benchmarks that are due to be replaced. Amounts are in respect of financial instruments that:

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

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

• are recognised on the group's consolidated balance sheet.

In March 2021, the administrator of Libor, IBA, announced that the publication date of most US dollar Libor tenors has been extended from 31 December 2021 to 30 June 2023. Publication of one-week and two-month tenors ceased after 31 December 2021. This change, together with the extended publication dates of Sibor, SOR and THBFIX, reduce the amounts presented at 31 December 2021 in the above table as some financial instruments included at 31 December 2020 will reach their contractual maturity date prior to the extended publication dates. Comparative data have not been re-presented.


Environmental, social and governance risk

We are subject to financial and non-financial risks associated with environmental, social and governance related matters ('ESG') which can impact us both directly and indirectly through our customers.

Climate-related risk increased over 2021, owing to the pace and volume of policy and regulatory changes regionally, particularly on climate risk management, stress testing and scenario analysis and disclosures. If we fail to meet regulatory expectations or requirements on climate risk management, this could have regulatory compliance and reputational impacts.

We face increased reputational, legal and regulatory risks as we make progress towards the HSBC Group's net zero ambition, as stakeholders are likely to place greater focus on our actions, disclosures and financing decisions related to this. We will face additional risks if we are perceived to mislead stakeholders regarding our climate strategy, the climate impact of a product or service, or regarding the commitments of our customers.

To track and report on our progress towards achieving our ambition, we rely on internal and external data, guided by certain industry standards. While emissions reporting has improved over time, data remains of limited quality and consistency. Methodologies we have used may evolve in line with market practice and regulation as well as due to developments in climate science. Any developments in data and methodologies could result in revisions, meaning that reported figures may not be reconcilable or comparable year-on-year.  We may also have to re-evaluate our progress towards the HSBC Group's climate-related ambition in future and this could result in reputational, legal and regulatory risks.

Climate risk will also have an impact on model risk, as models play an important role in risk management and the financial reporting of climate-related risks. The uncertain impacts of climate change and data limitations, present challenges to creating reliable and accurate model outputs.

We could also face increased resilience; retail credit; and wholesale credit risks owing to the increase in frequency and severity of weather events and chronic shifts in weather patterns.

These risks could impact our own critical operations, resulting in customer detriment and operational losses for the group. Our customers' operations and assets could also be affected, reducing their ability to afford mortgage or loan repayments, leading to credit risk impacts for the firm.

There is increasing evidence that a number of nature-related risks beyond climate change - which include risks that can be represented more broadly by economic dependence on nature - can and will have significant economic impact. These risks arise when the provision of natural services - such as water availability, air quality, and soil quality - is compromised by overpopulation, urban development, natural habitat and ecosystem loss, and other environmental stresses beyond climate change. They can show themselves in various ways, including through macroeconomic, market, credit, reputational, legal and regulatory risks, for both the group and our customers.

Mitigating actions 

• We continue to deepen our understanding of the drivers of climate risk and managing our exposure to climate risk is a priority. Our dedicated Climate Risk Oversight Forums are responsible for shaping and overseeing our approach and providing support in managing climate risk in the region.

• Our climate risk programme continues to accelerate the development of our climate risk management capabilities across four key pillars - governance and risk appetite, risk management, stress testing and scenario analysis and disclosures. We are also enhancing our approach to greenwashing risk.

• In December 2021, the HSBC Group published its thermal coal phase-out policy committing to phase out the financing of coal-fired power and thermal coal mining in EU/OECD markets by the end of 2030, and globally by the end of 2040. The policy helps us chart the path to net zero and is a component of our approach towards managing the climate risk of our lending portfolio and wider banking activities.

• We have started to incorporate the outcomes and insights from the Bank of England's Climate Biennial Exploratory Scenario into climate risk management, and are currently engaged in the 2022 ECB Climate Risk Stress Test.

• We have delivered climate risk training to our legal entity board and wider target audiences.

• In 2021, we joined several industry working groups dedicated to helping us access and manage nature-related risks, such as the Taskforce on Nature-Related Financial Disclosure ('TNFD'). Our asset management business also published its biodiversity policy to publicly explain how our analysts address nature-related issues.

• We continue to engage with our customers, investors and regulators proactively on the management of climate risks. We also engage with initiatives actively, including the EU Taxonomy disclosures, Climate Financial Risk Forum, Equator Principles, Taskforce on Climate-related Financial Disclosures and CDP (formerly the Carbon Disclosure Project) to drive best practice for climate risk management.

For further details on ESG, see our ESG review on page 8 and for further details on our approach to climate risk management, see 'Areas of special interest' on page 28. For further details on ESG risk management see 'Financial crime and fraud risk on page 23.


Internally driven

People risk

Our success in delivering our strategic priorities and managing the regulatory environment proactively depends on the development and retention of our leadership and high-performing employees. The ability to continue to attract, develop and retain competent individuals in an employment market impacted by the Covid-19 pandemic is challenging particularly due to organisational restructuring. Changed working arrangements, local Covid-19 restrictions and health concerns during the pandemic also impact on employee mental health and well-being.

Mitigating actions

• We have put in place measures to help support our people so they are able to work safely during the Covid-19 pandemic.

• We promote a diverse and inclusive workforce and provide active support across a wide range of health and wellbeing activities. We continue to build our speak up culture through active campaigns.

• We monitor people risks that have arisen due to organisational restructuring, helping to ensure we manage redundancies sensitively and support impacted employees.

• Launch of the Future Skills Curriculum through HSBC University to help provide the critical skills that will enable employees and HSBC to be successful in the future.

• We continue to develop succession plans for key management roles, with actions agreed and reviewed on a regular basis by the group's Executive Committee.

• We have robust plans in place, driven by senior management, to mitigate the effect of external factors that may impact our employment practices. Political, legislative and regulatory challenges are closely monitored to minimise the impact on the attraction and retention of talent and key performers.

IT systems infrastructure and resilience

HSBC is committed to investing in the reliability and resilience of its IT systems and critical services. HSBC does so in order to protect its customers and ensure they do not receive disruption to services, which could result in reputational and regulatory damage.

The group's strategy includes simplification of our technology estate to reduce complexity and costs; this includes consolidation of our core banking systems onto a single strategic platform. The target state will leverage existing and known technology, and will be simpler and easier to maintain. However, as with any strategic transformation programme risks associated with implementation must be managed continuously.

Mitigating actions

• We continue to invest in transforming how software solutions are developed, delivered and maintained, with a particular focus on providing high-quality, stable and secure services. As part of this, we are concentrating on improving system resilience and service continuity testing. We have enhanced the security features of our software development life cycle and improved our testing processes and tools.

• During 2021, we have upgraded many of our IT systems, simplified our service provision and replaced older IT infrastructure and applications. These enhancements led to continued global improvements in service availability during 2021 for both our customers and employees.

• We manage implementation risks arising from the simplification of our technology estate continuously via thorough oversight of these risks at all levels of the programme and reporting up to our Risk Committee.

Execution risk

In order to deliver our strategic objectives and meet mandatory regulatory requirements, it is important for the group 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 managing the operational implications of the disposal of our French retail business, large transformation programmes including the simplification and integration of our IT Systems and other restructuring programmes across Europe.

Mitigating actions

• Our prioritisation and governance processes for significant projects are monitored by the group's Executive Committee.

• We continue to work to strengthen our change management practices to deliver sustainable change, increased adoption of Agile ways of working, and a more consistent standard of delivery. For HSBC Bank plc, this includes embedding of an improved Group-wide change framework released in the first half of 2021, which sets out the mandatory principles and standards to be adhered to when leading and delivering change.

Model risk

Model risk arises whenever business decision-making includes reliance on models. We use models in both financial and

non-financial contexts and in a range of business applications such as customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. Assessing model performance is a continuous undertaking. Models can need redevelopment as market conditions change. This was required following the outbreak of Covid-19 as some models used for estimating credit losses needed to be redeveloped due to the significant change to inputs including GDP, unemployment rates and housing prices; and the varying government support measures introduced.

Prior to the Covid-19 outbreak a key area of focus was improving and enhancing our model risk governance, and this activity continued throughout 2021. We prioritised the redevelopment and validation of internal ratings-based ('IRB') and internal models methods ('IMM') models, in relation to counterparty credit, as part of the IRB repair and Basel III programmes with a key focus on enhancing the quality of data used as model inputs.

Mitigating actions

• We appointed model risk stewards for our key entities to support, oversee and guide the global businesses and functions on model risk management. The risk stewards provide close monitoring of changes in model behaviour, working closely with business and function model owners and sponsors.

• We worked with the model owners of IRB models and traded risk models to increase our engagement on management of model risk with key regulators including the PRA and the ECB.

• We embedded the model risk policy and model risk standards in all business and functions to enable a more risk-based approach to model risk management.

• We made further enhancements to our control framework for models used in financial reporting processes to address the control weaknesses that emerged as a result of significant increases in model adjustments and overlays that were applied to compensate for the impact of Covid-19 on models and to introduce a requirement for the second line of defence to approve material models prior to use.

• The model inventory system was enhanced to support the management of model risk for multiple applications of a single model.

• We have submitted the first set of IRB models for regulatory approval in 2021. The redevelopment and validation of remaining IRB and IMM models for counterparty credit and our internal models approach ('IMA') for traded risk models is in progress. Models are expected to undergo PRA approval over the next 12 months.

Data management

We use a large number of systems and growing quantities of data to support our customers. Risk arises if data is incorrect, unavailable, misused, or if the privacy of our customers and colleagues is unprotected. Along with other banks and financial institutions, we need to meet external regulatory obligations and laws that cover data, such as the Basel Committee on Banking Supervisions 239 guidelines and the General Data Protection Regulation ('GDPR').

Mitigating actions

• Through our global data management framework, we monitor proactively the quality, availability and security of data that supports our customers and internal processes. We resolve any identified data issues in a timely manner.

• We have made improvements to our data policies and are implementing an updated control framework to enhance the end-to-end management of data risk by our businesses and functions.

• We protect customer data via our data privacy framework, which establishes practices, design principles and guidelines that enable us to demonstrate compliance with data privacy laws and regulations.

• We continue to modernise our data and analytics infrastructure through investments in Cloud technology, data visualisation, machine learning and artificial intelligence.

• We educate our employees on data risk and data management and have delivered global mandatory training on the importance of protecting data and managing data appropriately.

T


Third Party Risk Management

We use third parties to provide a range of services, in common with other financial service providers. Risks arising from the use of third-party service providers and their supply chain may be less transparent. It is critical that we ensure we have appropriate risk management policies, processes and practices over the selection, governance and oversight of third parties and their supply chain, particularly for key activities that could affect our operational resilience. Any deficiency in the management of risks associated with our third parties could affect our ability to support our strategic approach and meet our customer and regulatory expectations.

Mitigating actions

• We have enhanced our control framework for external supplier arrangements to ensure the risks associated with third-party arrangements are understood and managed effectively by our  businesses and functions across the group.

• We have applied the same control standards to intra-group arrangements as we have for external third-party arrangements to ensure we are managing them effectively.

• We are implementing the changes required by our new third-party risk policy to comply with new regulations as defined by our regulators.


 

Areas of special interest

 


Risks related to Covid-19

Despite the successful roll-out of vaccines across the world, the Covid-19 pandemic and its effect on the global economy have continued to impact our customers and organisation. The global vaccination roll-out in 2021 helped reduce the social and economic impact of the Covid-19 pandemic and high vaccination rates are enabling many countries across Europe in 2022 to ease Covid-19-related restrictions on activity and constraints on travel. However, the emergence of the Omicron variant in late 2021, demonstrated the continued risk new variants pose.

The pandemic necessitated governments to respond at unprecedented levels to protect public health, and to support local economies and livelihoods. The resulting government support measures and restrictions have created additional challenges, given the rapid pace of change and significant operational demands. Renewed outbreaks, particularly those resulting from the emergence of variants of the virus, emphasise the ongoing threat of Covid-19 and could result in further tightening of government restrictions. There remains a divergence in approach taken by countries to the level of restrictions on activity and travel. Such diverging approaches to future pandemic waves could prolong or worsen supply chain and international travel disruptions.

We continue to support our personal and business customers through market-specific measures initiated during the Covid-19 pandemic, and by supporting government schemes that focus on the parts of the economy most impacted by the pandemic. For further details of our customer relief programmes, see page 60.

The rapid introduction and varying nature of the government support schemes introduced throughout the Covid-19 pandemic has led to increased operational risks, including complex conduct considerations, increased reputational risk and increased risk of fraud. These risks are likely to be heightened further as and when those government support schemes are unwound. We are focused upon avoiding and mitigating any conduct risks that may arise from the implementation decisions we have had to make and also those that may be created if our customers find themselves in financial difficulties as a result of the impact of the Covid-19 pandemic.

The impact of the pandemic on the long-term prospects of businesses in the most vulnerable sectors of the economy - such as retail, hospitality and commercial real estate - remains uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in ECL estimates. In addition, in times of stress, fraudulent activity is often more prevalent, leading to potentially significant credit or operational losses.

As economic conditions improve, and government support measures come to an end, there is a risk that the outputs of IFRS 9 models may have a tendency to underestimate loan losses. To help mitigate this risk, model outputs and management adjustments are closely monitored and independently reviewed for reliability and appropriateness prior to inclusion in the financial results.

Despite the ongoing economic recovery, significant uncertainties remain in assessing the duration and impact of the Covid-19 pandemic, including whether any subsequent outbreaks result in a reimposition of government restrictions. There is a risk that economic activity remains below pre-pandemic levels for a prolonged period, increasing inequality across markets, and it will likely be some time before societies return to pre-pandemic levels of social interactions. As a result, there may still be a requirement for additional mitigating actions including further use of adjustments, overlays and model redevelopment.

Governments and central banks in major economies have deployed extensive measures to support their local populations. This is expected to reverse partially in 2022. Central banks in major markets are expected to raise interest rates, but such increases are expected to be gradual and monetary policy is expected to remain accommodative overall. Governments are also expected to reduce the level of fiscal support they offer households and businesses as the appetite for broad lockdowns and public health restrictions decreases. Government debt has risen in most advanced economies, and is expected to remain high into the medium term. High government debt burdens have raised fiscal vulnerabilities, increasing the sensitivity of debt service costs to interest rate increases and potentially reducing the fiscal space available to address future economic downturns. HSBC's Central scenario used to calculate impairment assumes that economic activity will continue to recover through 2022, surpassing peak pre-pandemic levels of GDP in our key markets. It is assumed that private sector growth accelerates, ensuring a strong recovery is sustained even as pandemic-related fiscal support is withdrawn. However, there is a high degree of uncertainty associated with economic forecasts in the current environment and there are significant risks to our Central scenario. The degree of uncertainty varies by our key markets, driven by country specific trends in the evolution of the pandemic, associated policy responses and ongoing impacts felt from the Trade and Cooperation Agreement in place between the UK and the EU from 1 January 2021. For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 41.

We continue to monitor the situation closely, and given the novel and prolonged nature of the pandemic, additional mitigating actions may be required.

Climate-related risks

Climate change can have an impact across HSBC's risk taxonomy through both transition and physical channels.

Transition risk can arise from the move to a low-carbon economy, such as through policy, regulatory and technological changes.

Physical risk can arise through increasing frequency and severity of weather or other climatic events, such as flooding, or chronic changes in precipitation patterns, temperatures or sea levels.

These have the potential to cause both idiosyncratic and systemic risks, resulting in potential financial and non-financial impacts for the group. Financial impacts could materialise if transition and physical risks impact the ability of our customers to repay their loans. Non-financial impacts could materialise if our own assets or operations are impacted by extreme weather or chronic changes in weather patterns, or as a result of business decisions to achieve our climate ambition.


How climate risk can impact our customers

Climate change could impact our customers in two main ways. Firstly, customer business models may fail to align to a low-carbon economy, which could mean that new climate-related regulation, policy or technological changes would have a material impact on their business. Secondly, extreme weather events or chronic changes in weather patterns may damage our customers' assets and supply chain leaving them unable to operate their business or perhaps even live in their home.

One of the most valuable ways we can help our customers navigate the transition challenges and to become more resilient to the physical impacts of climate change is through financing and investment. To do this effectively, we must understand the risks they are facing.

The table below summarises the key categories of transition and physical risk, with examples of how our customers might be affected financially by climate change and the shift to a low-carbon economy.


Transition

Policy and legal

Mandates on, and regulation of, existing products and services

Litigation from parties who have suffered from the effects of climate change


Technology

Replacement of existing products with lower emission options


End-demand (market)

Changing consumer behaviour


Reputational

Increased scrutiny following a change in stakeholder perceptions of climate-related action or inaction

Physical

Acute

Increased frequency and severity of weather events


Chronic

Changes in precipitation patterns
Rising temperatures

Integrating climate into enterprise-wide risk management

Our approach to climate risk management is aligned to HSBC Group's risk management framework and three line of defence model which sets out how we identify, assess and manage our risks. This approach ensures the Board and senior management have visibility and oversight of our key climate risks.

Climate Risk Appetite

Our developing climate risk appetite measures support the oversight and management of the financial and non-financial risks from climate change, meet regulatory expectations and support the business to deliver our climate ambition in a safe and sustainable way. Our initial measures are focused on the oversight and management of our key climate risks: wholesale credit risk, retail credit risk, reputational risk, resilience risk and regulatory compliance.

Our future ambition for our climate risk appetite is to:

• Adapt the Risk Appetite Statement metrics to incorporate forward looking transition plans and net zero commitments.

• Expand to consider other financial and non-financial risks.

• Use enhanced scenario analysis capabilities.

• Broaden the scope of risks to include climate considerations in Market Risk, Liquidity Risk, Legal Risk and Environmental Risk management.

  Climate Risk Policies, Processes and Controls

We are integrating climate risk into the supporting policies, processes and controls for our key climate risks and we will continue to update these as our climate risk management capabilities mature over time. For example, we have updated our policy on product management and developed the first version of a climate risk scoring tool for our corporate portfolios. In addition, HSBC Group has published the new Thermal Coal Phase-Out Policy and we are implementing this in the region.

Climate Risk Governance and Reporting

Our key climate risks are reported and governed through our climate risk governance structure. Our Climate Risk Oversight Forums are responsible for the oversight, management and escalation of all climate related matters in the region. The regional Risk Management Meeting and the Risk Committee receive scheduled updates on climate risk, and regular updates on our climate risk appetite and top and emerging climate risks.

Our Chief Risk Officer is responsible for the manner by which financial risks from climate change should be identified and managed in line with the group's risk management framework. 

We have assessed the impact of climate risk on our balance sheet and have concluded that there is no material impact on the financial statements for the year ended 31 December 2021.

Climate Risk Programme

Our dedicated Climate Risk Programme continues to accelerate the development of our climate risk management capabilities. The key achievements in 2021 include:

• We delivered tailored training sessions on climate risk to our legal entity board.

• We delivered training to colleagues across the three lines of defence to increase their understanding of how climate risk can impact their role, and we also included an introduction to our climate ambition in our global mandatory training.

• We developed our climate risk scoring tool for corporate customers for use in priority regions, which builds on our corporate transition questionnaire.

• We have continued to develop our climate stress testing and scenario analysis capabilities, including model development to deliver on the ECB climate stress testing exercise.

We will continue to enhance our climate risk management capabilities throughout 2022. This will include the further roll-out of training, refinement of our risk appetite, enhancement of our climate risk scoring tool and increasing the availability and quality of data so that new metrics can be developed.

How climate risk can impact the group

Below, we provide detail on how climate risk impacts to our customers might manifest across our key climate risks, and the potential time frames involved using four main drivers under transition risk; policy and legal, technology, end-demand (market) and reputational; and two main drivers under physical risk; acute and chronic.



Financial risks

Non-financial risk

Risk type

Wholesale credit

Retail credit

Strategic risk (reputational)

Resilience risk

Regulatory compliance risk

Timescale1

Short-long term

Medium-long term

Short-long term

Short-long term

Short-medium

Transition risk drivers






- Policy and legal

l

l



l

- Technology

l





- End-demand (market)

l

l




- Reputational

l

l

l



Physical risk drivers






- Acute - increased frequency and severity of weather event

l

l


l


- Chronic - changes in weather pattern

l

l


l


1  Short term: less than one year; medium term: period to 2030; long term: period to 2050.


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 (continued)

Credit risk (see page 32)


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 using various internal risk management measures and 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.

Treasury risk (see page 70)


The risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural foreign exchange exposures and changes in market interest rates, and including the financial risks arising from historic and current provision of pensions and other post employment benefits to staff and their dependants.

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

Treasury risk is:

• measured through appetites set as target and minimum ratios;

• monitored and projected against appetites and using stress and scenario testing; and

• managed through control of resources in conjunction with risk profiles and cashflows.

Market risk (see page 77)


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 84.

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.

Resilience risk (see page 80)


Resilience risk is the risk that we are unable to provide critical services to our customers, affiliates, and counterparties as a result of sustained and significant operational disruption.

Resilience risk arises from failures or inadequacies in processes, people, systems or external events. These may be driven by rapid technological innovation, changing behaviours of our consumers, cyber-threats and attacks, crossborder dependencies, and third party relationships.

Resilience risk is:

• measured through a range of metrics with defined maximum acceptable impact tolerances, and against our agreed risk appetite. 

• monitored through oversight of enterprise processes, risks, controls and strategic change programmes; and

• managed by continuous monitoring and thematic reviews.

Regulatory compliance risk (see page 81)


Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct and breaching related financial services regulatory standards.

Regulatory compliance risk arises from the failure to observe the letter and spirit of relevant laws, codes, rules, regulations and standards of good practice. This could result in poor market or customer outcomes leading to fines, penalties and reputational damage to our business.

Regulatory compliance risk is:

• measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our regulatory compliance teams;

• monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance 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 help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.

Financial crime risk (see page 81)

Financial crime risk is the risk of knowingly or unknowingly helping parties to commit or to further potentially illegal activity through HSBC, including money laundering, fraud, bribery and corruption, tax evasion, sanctions breaches, and terrorist and proliferation financing.

Financial crime risk arises from day-to-day banking operations involving customers, third parties and employees.

Financial crime risk is:

• measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement of, and assessment by, our regulatory compliance teams;

• monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance 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 help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.

Model risk (see page 83)

Model risk is the potential for adverse consequences from business decisions informed by models, which can be exacerbated by errors in methodology, design or the way they are used. 

 

 

Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models. 

Model risk is:

• measured by reference to model performance tracking and the output of detailed technical reviews, with key metrics including model review statuses and findings;

• monitored against model risk appetite statements, insight from the independent review function, feedback from internal and external audits, and regulatory reviews; and

• managed by creating and communicating appropriate policies, procedures and guidance, training colleagues in their application, and supervising their adoption to ensure operational effectiveness.

 

 

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, and these, are covered by the Group's risk management processes. There are though specific risks inherent to the insurance operations as noted below.

Description of risks - insurance manufacturing operations

Financial risk (see page 84)


For insurance entities, Financial risk includes the risk of not being able to
effectively match liabilities arising under insurance contracts with appropriate investments and that the expected sharing of financial performance with policyholders under certain contracts is not possible.

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 risk, 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 84)


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

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

Credit risk management

Key developments in 2021

We continued to actively manage the risks resulting from the Covid-19 outbreak and its impacts on our customers and operations in 2021. For further details of market-specific measures to support our personal and business customers, see page 28. Outside these Covid-19 initiatives, there have been no material changes to credit risk policy and we continue to apply the requirements of IFRS 9 'Financial Instruments' within Credit risk.

Climate Risk

For our Global Banking and Commercial Banking wholesale clients operating in high transition risk sectors, a detailed Transition Risk Questionnaire is completed which assess both the climate risk the client faces and their plans to adapt to a Net Zero world. This information is taken into consideration as part of the broader client credit assessment. During 2022, we will broaden our assessments to include other high risk sectors which may be vulnerable to other climate considerations, including physical risk. This will also be embedded as part of the usual credit assessment process.

Governance and structure

We have established group-wide credit risk management and related IFRS 9 processes. We continue to actively assess the impact of economic developments in key markets on specific customers, customer segments or portfolios. As credit conditions change, we take mitigating action, including the revision of risk appetites or limits and tenors, as appropriate. In addition, we continue to evaluate the terms under which we provide credit facilities within the context of individual customer requirements, the quality of the relationship, local regulatory requirements, market practices and our local market position.

Credit risk sub-function

(Audited)

Credit approval authorities are delegated by the Board to the Chief Executive together with the authority to sub-delegate them. The Credit risk sub-function in Risk is responsible for the key policies and processes for managing credit risk, which include formulating credit policies and risk rating frameworks, guiding the appetite for credit risk exposures, undertaking independent reviews and objective assessment of credit risk, and monitoring performance and management of portfolios.

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.


 

Key risk management process

IFRS 9 'Financial Instruments' process

The IFRS 9 process comprises three main areas: modelling and data; implementation; and governance.

Modelling and data

The Group has established IFRS 9 modelling and data processes in various geographies, which are subject to internal model risk governance including independent review of significant model developments.

Implementation

A centralised impairment engine performs the ECL calculation using data, which is subject to a number of validation checks and enhancements, from a variety of client, finance and risk systems. Where possible, these checks and processes are performed in a globally consistent and centralised manner.

Governance

Management review forums are established in order to review and approve the impairment results. Management review forums have representatives from Credit Risk and Finance. Required members of the committee are the heads of Wholesale Credit, Market Risk, and Wealth and Personal Banking Risk, as well as the global business Chief Financial Officers and the Chief Accounting Officer.

Concentration of 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.


 

Credit quality of financial instruments

(Audited)

Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the Group to support the calculation of our minimum credit regulatory capital requirement. The five credit quality classifications each encompass 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 Customer Risk Rating ('CRR') to external credit rating.

Wholesale lending

The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor probability of default ('PD'). All corporate customers are rated using the 10- or 23-grade scale, depending on the degree of sophistication of the Basel 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 indicative and may vary over time.

Retail lending

Retail lending credit quality is based on a 12-month point-in-time probability-weighted PD.


 


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

12 month probability-weighted PD %

Quality classification1,2







Strong

BBB and above

A- and above

CRR1 to CRR21

0 - 0.169

Band 1 and 2

0.000 - 0.500

Good

BBB- to BB

BBB+ to BBB-

CRR3

0.170 - 0.740

Band 3

0.501 - 1.500

Satisfactory

BB- to B and unrated

BB+ to B and unrated

CRR4 to CRR5

0.741 - 4.914

Band 4 and 5

1.501 - 20.000

Sub-standard

B- to C

B- to C

CRR6 to CRR8

4.915 - 99.999

Band 6

20.001 - 99.999

Credit impaired

Default

Default

CRR9 to CRR10

100

Band 7

100

1  Customer risk rating ('CRR').

2  12-month point-in-time probability-weighted PD.


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.

• 'Good' exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk.

• 'Satisfactory' exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk.

• 'Sub-standard' exposures require varying degrees of special attention and default risk is of greater concern.

• 'Credit-impaired' exposures have been assessed as described in Note 1.2(i) on the Financial Statements.

 


Renegotiated loans and forbearance

'Forbearance' describes concessions made on the contractual terms of a loan in response to an obligor's financial difficulties.

A loan is classed as 'renegotiated' when we modify the contractual payment terms on concessionary terms because we have significant concerns about the borrowers' ability to meet contractual payments when due. Non-payment-related concessions (e.g. covenant waivers), while potential indicators of impairment, do not trigger identification as renegotiated loans.

Loans that have been identified as renegotiated retain this designation until maturity or derecognition.

For details of our policy on derecognised renegotiated loans, see Note 1.2(i) on the financial statements.

Credit quality of renegotiated loans

On execution of a renegotiation, the loan will also be classified as credit impaired if it is not already so classified. In wholesale lending, all facilities with a customer, including loans that have not been modified, are considered credit impaired following the identification of a renegotiated loan.

Wholesale renegotiated loans are classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, observed over a minimum one-year period, and there are no other indicators of impairment. Personal renegotiated loans generally remain credit impaired until repayment, write-off or derecognition.

Renegotiated loans and recognition of expected credit losses

(Audited)

For retail lending, unsecured renegotiated loans are generally segmented from other parts of the loan portfolio. Renegotiated expected credit loss assessments reflect the higher rates of losses typically encountered with renegotiated loans. For wholesale lending, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessments. The individual impairment assessment takes into account the higher risk of the future non-payment inherent in renegotiated loans.

 


Impairment assessment

(Audited)

For details of our impairment policies on loans and advances and financial investments see Note 1.2(i) 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(i) on the financial statements.

Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due. The standard period runs until the end of the month in which the account becomes 180 days contractually delinquent. Write-off periods may be extended, generally to no more than 360 days past due. However, in exceptional circumstances, they may be extended further.

For secured facilities, write-off should occur upon repossession of collateral, receipt of proceeds via settlement, or determination that recovery of the collateral will not be pursued.

Any secured assets maintained on the balance sheet beyond 60 months of consecutive delinquency-driven default require additional monitoring and review to assess the prospect of recovery.

There are exceptions in a few countries where local regulation or legislation constrain earlier write-off, or where the realisation of collateral for secured real estate lending takes more time. In the event of bankruptcy or analogous proceedings, write-off may occur earlier than the maximum periods stated above. Collection procedures may continue after write-off.


Credit risk in 2021

At 31 December 2021, gross loans and advances to customers and banks of £103.1bn decreased by £12.5bn, compared with
31 December 2020. This included adverse foreign exchange movements of £4.3bn. Excluding foreign exchange movements, the decline was driven by a £7.1bn decrease in wholesale loans and advances to customers and a £1.5bn decrease in loans and advances to banks. This was partly offset by a £0.4bn increase in personal loans and advances .

During the first half of 2021, the group experienced a release in allowances for ECL, reflecting an improvement of the economic outlook.  This trend continued during the second half of the year following better than expected levels of credit performance and lower levels of stage 3 charges. However, in the later part of the year the trend slowed down due to the emergence of the new Covid-19 Omicron variant. Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers decreased by £258m from 31 December 2020.

This was attributable to:

• a £225m decrease in wholesale loans and advances to customers, of which £156m was driven by stages 1 and 2; and

• a £33m increase in personal loans and advances to customers, of which £14m was driven by stages 1 and 2.

During the first six months of the year, the group experienced significant migrations from stage 2 to stage 1, reflecting an improvement of  the economic outlook. This trend continued during the second half of 2021 as forward economic guidance ('FEG') remained broadly stable in comparison with 30 June 2021.

Stage 3 balances at 31 December 2021 remained broadly stable  compared with 31 December 2020.  

The ECL release for 2021 was £174m, inclusive of recoveries, Uncertainty remains as some countries emerge from the pandemic at different speeds of recovery, government support measures unwind and the emergence of new strains of the virus test the efficacy of vaccination programmes.

During 2021, we continued to provide Covid-19-related support to customers under the current policy framework. For further details of market-specific measures to support our personal and business customers, see page 60.

Summary of credit risk

The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS9 are applied and the associated allowance for ECL. The allowance for ECL decreased from £1,632m at
31 December 2020 to £1,240m at 31 December 2021.

The allowance for ECL at 31 December 2021 comprised of £1,168m (2020: £1,497m) in respect of assets held at amortised cost, £72m (2020: £135m) in respect of loans and other credit related commitments, and financial guarantees, and £19m (2020: £22m) in respect of debt instruments measured at FVOCI.


 

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

(Audited)






31 Dec 2021

 31 Dec 2020


Gross carrying/nominal amount

Allowance for ECL1

Gross carrying/nominal amount

Allowance for ECL1

The group

£m

£m

£m

£m

Loans and advances to customers at amortised cost

  92,331 

  (1,154)

  102,960 

  (1,469)

-  personal

  25,394 

  (163)

  26,499 

  (208)

-  corporate and commercial

  56,087 

  (964)

  62,987 

  (1,168)

-  non-bank financial institutions

  10,850 

  (27)

  13,474 

  (93)

Loans and advances to banks at amortised cost

  10,789 

  (5)

  12,662 

  (16)

Other financial assets measured at amortised cost

  202,137 

  (9)

  202,763 

  (12)

-  cash and balances at central banks

  108,482 

  -

  85,093 

  (1)

-  items in the course of collection from other banks

  346 

  -

  243

  -

-  reverse repurchase agreements - non trading

  54,448 

  -

  67,577 

  -

-  financial investments

  10 

  -

  15

  -

-  prepayments, accrued income and other assets2

  38,851 

  (9)

  49,835 

  (11)

Total gross carrying amount on balance sheet

  305,257 

  (1,168)

  318,385 

  (1,497)

Loans and other credit related commitments

  115,695 

  (55)

  143,036 

  (112)

-  personal

  2,269 

  (1)

  2,211 

  (1)

-  corporate and commercial

  63,352 

  (48)

  75,863 

  (89)

-  financial

  50,074 

  (6)

  64,962 

  (22)

Financial guarantees3

  11,054 

  (17)

  3,969 

  (23)

-  personal

  26 

  -

  32

  -

-  corporate and commercial

  9,894 

  (16)

  2,735 

  (19)

-  financial

  1,134 

  (1)

  1,202 

  (4)

Total nominal amount off balance sheet4

  126,749 

  (72)

  147,005 

  (135)


  432,006 

  (1,240)

  465,390 

  (1,632)







Fair value

Memorandum allowance for ECL5

Fair value

Memorandum allowance for ECL5


£m

£m

£m

£m

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

  41,188 

  (19)

  51,713 

  (22)

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

2  Includes only those financial instruments which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 110 includes both financial and non-financial assets.

3  Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.

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

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

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



(Audited)






31 Dec 2021

 31 Dec 2020


Gross carrying/nominal amount

Allowance for ECL1

Gross carrying/nominal amount

Allowance for ECL1

The bank

£m

£m

£m

£m

Loans and advances to customers at amortised cost

  34,286 

  (350)

  43,831 

  (590)

-  personal

  3,680 

  (6)

  3,582 

  (13)

-  corporate and commercial

  21,182 

  (308)

  26,014 

  (494)

-  non-bank financial institutions

  9,424 

  (36)

  14,235 

  (83)

Loans and advances to banks at amortised cost

  6,782 

  (4)

  8,078 

  (15)

Other financial assets measured at amortised cost

  135,033 

  (1)

  135,900 

  (1)

-  cash and balances at central banks

  63,008 

  -

  48,777 

  -

-  items in the course of collection from other banks

  211 

  -

  37

  -

-  reverse repurchase agreements-non trading

  39,708 

  -

  50,137 

  -

-  financial investments

  3,337 

  -

  2,214 

  -

-  prepayments, accrued income and other assets2

  28,769 

  (1)

  34,735 

  (1)

Total gross carrying amount on balance sheet

  176,101 

  (355)

  187,809 

  (606)

Loans and other credit related commitments

  31,255 

  (29)

  45,308 

  (81)

-  personal

  589 

  -

  352

  -

-  corporate and commercial

  19,175 

  (26)

  25,444 

  (66)

-  financial

  11,491 

  (3)

  19,512 

  (15)

Financial guarantees3

  1,270 

  (7)

  1,510 

  (13)

-  personal

  3 

  -

  3

  -

-  corporate and commercial

  527 

  (6)

  457

  (9)

-  financial

  740 

  (1)

  1,050 

  (4)

Total nominal amount off balance sheet4

  32,525 

  (36)

  46,818 

  (94)


  208,626 

  (391)

  234,627 

  (700)







Fair value

Memorandum allowance for ECL5

Fair value

Memorandum allowance for ECL5


£m

£m

£m

£m

Debt instruments measured at FVOCI

  23,152 

  (4)

  28,699 

  (9)

 

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

2  Includes only those financial instruments which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 110 includes both financial and non-financial assets.

3  Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.

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

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


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

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

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

 


Stage 3: There is objective evidence of impairment, and are therefore considered to be in default or otherwise credit-impaired on which a lifetime ECL is recognised.

• Purchased or originated credit-impaired ('POCI'): Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses on which a lifetime ECL is recognised.

 


Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
31 December 2021

(Audited)


Gross carrying/nominal amount2


Allowance for ECL


ECL coverage %



Stage 1

Stage 2

Stage 3

POCI3

Total

Stage 1

Stage 2

Stage 3

POCI3

Total

Stage 1

Stage 2

Stage 3

POCI3

Total

The group

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

%

%

%

%

Loans and advances to customers at amortised cost

  80,730 

  9,121 

  2,478 

  2 

  92,331 

  (86)

  (158)

  (908)

  (2)

  (1,154)

0.1

1.7

36.6

100.0

1.2

-  personal

  24,255 

  686 

  453 

  -

  25,394 

  (22)

  (16)

  (125)

  -

  (163)

0.1

2.3

27.6

-

0.6

-  corporate and commercial

  46,237 

  8,066 

  1,782 

  2 

  56,087 

  (58)

  (137)

  (767)

  (2)

  (964)

0.1

1.7

43.0

100.0

1.7

-  non-bank financial institutions

  10,238 

  369 

  243 

  -

  10,850 

  (6)

  (5)

  (16)

  -

  (27)

0.1

1.4

6.6

-

0.2

Loans and advances to banks at amortised cost

  10,750 

  39 

  -

  -

  10,789 

  (4)

  (1)

  -

  -

  (5)

-

2.6

-

-

-

Other financial assets measured at amortised cost

  202,048 

  47 

  42 

  -

  202,137 

  -

  -

  (9)

  -

  (9)

-

-

21.4

-

-

Loan and other credit-related commitments

  107,922 

  7,571 

  202 

  -

  115,695 

  (25)

  (22)

  (8)

  -

  (55)

-

0.3

4.0

-

-

-  personal

  2,152 

  114 

  3 

  -

  2,269 

  (1)

  -

  -

  -

  (1)

-

-

-

-

-

-  corporate and commercial

  56,325 

  6,829 

  198 

  -

  63,352 

  (20)

  (20)

  (8)

  -

  (48)

-

0.3

4.0

-

0.1

-  financial

  49,445 

  628 

  1 

  -

  50,074 

  (4)

  (2)

  -

  -

  (6)

-

0.3

-

-

-

Financial guarantees1

  10,215 

  740 

  99 

  -

  11,054 

  (3)

  (7)

  (7)

  -

  (17)

-

0.9

7.1

-

0.2

-  personal

  23 

  2 

  1 

  -

  26 

  -

  -

  -

  -

  -

-

-

-

-

-

-  corporate and commercial

  9,257 

  540 

  97 

  -

  9,894 

  (2)

  (7)

  (7)

  -

  (16)

-

1.3

7.2

-

0.2

-  financial

  935 

  198 

  1 

  -

  1,134 

  (1)

  -

  -

  -

  (1)

0.1

-

-

-

0.1

At 31 Dec 2021

  411,665 

  17,518 

  2,821 

  2 

  432,006 

  (118)

  (188)

  (932)

  (2)

  (1,240)

-

1.1

33.0

100.0

0.3

1  Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.

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

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


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


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


 

Stage 2 days past due analysis at 31 December 2021

(Audited)

Gross carrying amount

Allowance for ECL

ECL coverage %



Of which:

Of which:


Of which:

Of which:


Of which:

Of which:


Stage 2

1 to 29 DPD1,2

30 and > DPD1,2

Stage 2

1 to 29 DPD1,2

30 and > DPD1,2

Stage 2

1 to 29 DPD1,2

30 and > DPD1,2

The group

£m

£m

£m

£m

£m

£m

%

%

%

Loans and advances to customers at amortised cost:

  9,121 

  56 

  237 

  (158)

  (1)

  (1)

1.7

1.8

0.4

-  personal

  686 

  49 

  29 

  (16)

  (1)

  (1)

2.3

2.0

3.4

-  corporate and commercial

  8,066 

  7 

  199 

  (137)

  -

  -

1.7

-

-

-  non-bank financial institutions

  369 

  -

  9 

  (5)

  -

  -

1.4

-

-

Loans and advances to banks at amortised cost

  39 

  -

  -

  (1)

  -

  -

2.6

-

-

Other financial assets measured at amortised cost

  47 

  -

  -

  -

  -

  -

-

-

-

1  Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.

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



 

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
31 December 2020 (continued)

(Audited)


Gross carrying/nominal amount2

Allowance for ECL

ECL coverage %


Stage 1

Stage 2

Stage 3

POCI3

Total

Stage 1

Stage 2

Stage 3

POCI3

Total

Stage 1

Stage 2

Stage 3

POCI3

Total

The group

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

%

%

%

%

Loans and advances to customers at amortised cost

  83,179 

  16,774 

  2,966 

  41

  102,960 

  (129)

  (297)

  (1,031)

  (12)

  (1,469)

0.2

1.8

34.8

29.3

1.4

-  personal

  24,991 

  974

  534

  -

  26,499 

  (18)

  (37)

  (153)

  -

  (208)

0.1

3.8

28.7

-

0.8

-  corporate and commercial

  46,773 

  14,052 

  2,121 

  41

  62,987 

  (100)

  (225)

  (831)

  (12)

  (1,168)

0.2

1.6

39.2

29.3

1.9

-  non-bank financial institutions

  11,415 

  1,748 

  311

  -

  13,474 

  (11)

  (35)

  (47)

  -

  (93)

0.1

2.0

15.1

-

0.7

Loans and advances to banks at amortised cost

  12,533 

  129

  -

  -

  12,662 

  (13)

  (3)

  -

  -

  (16)

0.1

2.3

-

-

0.1

Other financial assets measured at amortised cost

  202,659 

  65

  39

  -

  202,763 

  (2)

  -

  (10)

  -

  (12)

-

-

25.6

-

-

Loan and other credit-related commitments

  128,956 

  13,814 

  266

  -

  143,036 

  (34)

  (68)

  (10)

  -

  (112)

-

0.5

3.8

-

0.1

-  personal

  1,991 

  217

  3

  -

  2,211 

  -

  (1)

  -

  -

  (1)

-

0.5

-

-

-

-  corporate and commercial

  65,199 

  10,404 

  260

  -

  75,863 

  (29)

  (51)

  (9)

  -

  (89)

-

0.5

3.5

-

0.1

-  financial

  61,766 

  3,193 

  3

  -

  64,962 

  (5)

  (16)

  (1)

  -

  (22)

-

0.5

33.3

-

-

Financial guarantees1

  2,839 

  1,008 

  121

  1

  3,969 

  (4)

  (10)

  (9)

  -

  (23)

0.1

1.0

7.4

-

0.6

-  personal

  26

  5

  1

  -

  32

  -

  -

  -

  -

  -

-

-

-

-

-

-  corporate and commercial

  1,878 

  737

  119

  1

  2,735 

  (3)

  (7)

  (9)

  -

  (19)

0.2

0.9

7.6

-

0.7

-  financial

  935

  266

  1

  -

  1,202 

  (1)

  (3)

  -

  -

  (4)

0.1

1.1

-

-

0.3

At 31 Dec 2020

  430,166 

  31,790 

  3,392 

  42

  465,390 

  (182)

  (378)

  (1,060)

  (12)

  (1,632)

-

1.2

31.3

28.6

0.4

1  Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.

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

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

Stage 2 days past due analysis at 31 December 2020 (continued)

(Audited)

Gross carrying amount

Allowance for ECL

ECL coverage %



Of which:

Of which:


Of which:

Of which:


Of which:

Of which:


Stage 2

1 to 29 DPD1,2

30 and > DPD1,2

Stage 2

1 to 29 DPD1,2

30 and > DPD1,2

Stage 2

1 to 29 DPD1,2

30 and > DPD1,2

The group

£m

£m

£m

£m

£m

£m

%

%

%

Loans and advances to customers at amortised cost

  16,774 

  64

  50

  (297)

  (3)

  (2)

1.8

4.7

4.0

-  personal

  974

  54

  39

  (37)

  (2)

  (2)

3.8

3.7

5.1

-  corporate and commercial

  14,052 

  9

  11

  (225)

  (1)

  - 

1.6

11.1

-

-  non-bank financial institutions

  1,748 

  1

  - 

  (35)

  - 

  - 

2.0

-

-

Loans and advances to banks at amortised cost

  129

  - 

  - 

  (3)

  - 

  - 

2.3

-

-

Other financial assets measured at amortised cost

  65

  - 

  - 

  -

  - 

  - 

-

-

-

1  Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.

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

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
31 December 2021

(Audited)


Gross carrying/nominal amount2


Allowance for ECL


ECL coverage %



Stage 1

Stage 2

Stage 3

POCI3

Total

Stage 1

Stage 2

Stage 3

POCI3

Total

Stage 1

Stage 2

Stage 3

POCI3

Total

The bank

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

%

%

%

%

Loans and advances to customers at amortised cost

  30,105 

  3,197 

  984 

  -

  34,286 

  (33)

  (47)

  (270)

  -

  (350)

0.1

1.5

27.4

-

1.0

-  personal

  3,544 

  88 

  48 

  -

  3,680 

  (1)

  (2)

  (3)

  -

  (6)

-

2.3

6.3

-

0.2

-  corporate and commercial

  17,608 

  2,893 

  681 

  -

  21,182 

  (28)

  (45)

  (235)

  -

  (308)

0.2

1.6

34.5

-

1.5

-  non-bank financial institutions

  8,953 

  216 

  255 

  -

  9,424 

  (4)

  -

  (32)

  -

  (36)

-

-

12.5

-

0.4

Loans and advances to banks at amortised cost

  6,775 

  7 

  -

  -

  6,782 

  (3)

  (1)

  -

  -

  (4)

-

14.3

-

-

0.1

Other financial assets measured at amortised cost

  134,984 

  21 

  28 

  -

  135,033 

  -

  -

  (1)

  -

  (1)

-

-

3.6

-

-

Loan and other credit-related commitments

  28,911 

  2,301 

  43 

  -

  31,255 

  (15)

  (11)

  (3)

  -

  (29)

0.1

0.5

7.0

-

0.1

-  personal

  585 

  2 

  2 

  -

  589 

  -

  -

  -

  -

  -

-

-

-

-

-

-  corporate and commercial

  17,010 

  2,124 

  41 

  -

  19,175 

  (12)

  (11)

  (3)

  -

  (26)

0.1

0.5

7.3

-

0.1

-  financial

  11,316 

  175 

  -

  -

  11,491 

  (3)

  -

  -

  -

  (3)

-

-

-

-

-

Financial guarantees1

  1,060 

  150 

  60 

  -

  1,270 

  (1)

  -

  (6)

  -

  (7)

0.1

-

10.0

-

0.6

-  personal

  2 

  1 

  -

  -

  3 

  -

  -

  -

  -

  -

-

-

-

-

-

-  corporate and commercial

  437 

  31 

  59 

  -

  527 

  -

  -

  (6)

  -

  (6)

-

-

10.2

-

1.1

-  financial

  621 

  118 

  1 

  -

  740 

  (1)

  -

  -

  -

  (1)

0.2

-

-

-

0.1

At 31 Dec 2021

  201,835 

  5,676 

  1,115 

  -

  208,626 

  (52)

  (59)

  (280)

  -

  (391)

-

1.0

25.1

-

0.2

1  Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.

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

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

Stage 2 days past due analysis at 31 December 2021

(Audited)

Gross carrying amount

Allowance for ECL

ECL coverage %



Of which:

Of which:


Of which:

Of which:


Of which:

Of which:


Stage 2

1 to 29 DPD1

30 and > DPD1

Stage 2

1 to 29 DPD1

30 and > DPD1

Stage 2

1 to 29 DPD1

30 and > DPD1

The bank

£m

£m

£m

£m

£m

£m

%

%

%

Loans and advances to customers at amortised cost:

  3,197 

  19 

  6 

  (47)

  (1)

  -

1.5

5.3

-

-  personal

  88 

  19 

  6 

  (2)

  (1)

  -

2.3

5.3

-

-  corporate and commercial

  2,893 

  -

  -

  (45)

  -

  -

1.6

-

-

-  non-bank financial institutions

  216 

  -

  -

  -

  -

  -

-

-

-

Loans and advances to banks at amortised cost

  7 

  -

  -

  (1)

  -

  -

14.3

-

-

Other financial assets measured at amortised cost

  21 

  -

  -

  -

  -

  -

-

-

-

1  Days past due ('DPD'). Up-to-date accounts in stage 2 are not shown in amounts presented above.



 

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
31 December 2020 (continued)

(Audited)


Gross carrying/nominal amount2


Allowance for ECL


ECL coverage %



Stage 1

Stage 2

Stage 3

POCI3

Total

Stage 1

Stage 2

Stage 3

POCI3

Total

Stage 1

Stage 2

Stage 3

POCI3

Total

The bank

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

%

%

%

%

%

Loans and advances to customers at amortised cost

  34,629 

  7,921 

  1,279 

  2

  43,831 

  (79)

  (158)

  (351)

  (2)

  (590)

0.2

2.0

27.4

100.0

1.3

-  personal

  3,455 

  70

  57

  -

  3,582 

  (1)

  (8)

  (4)

  -

  (13)

-

11.4

7.0

-

0.4

-  corporate and commercial

  18,670 

  6,424 

  918

  2

  26,014 

  (70)

  (121)

  (301)

  (2)

  (494)

0.4

1.9

32.8

100.0

1.9

-  non-bank financial institutions

  12,504 

  1,427 

  304

  -

  14,235 

  (8)

  (29)

  (46)

  -

  (83)

0.1

2.0

15.1

-

0.6

Loans and advances to banks at amortised cost

  7,995 

  83

  -

  -

  8,078 

  (12)

  (3)

  -

  -

  (15)

0.2

3.6

-

-

0.2

Other financial assets measured at amortised cost

  135,843 

  35

  22

  -

  135,900 

  -

  -

  (1)

  -

  (1)

-

-

4.5

-

-

Loan and other credit-related commitments

  39,343 

  5,905 

  60

  -

  45,308 

  (28)

  (48)

  (5)

  -

  (81)

0.1

0.8

8.3

-

0.2

-  personal

  338

  14

  -

  -

  352

  -

  -

  -

  -

  -

-

-

-

-

-

-  corporate and commercial

  21,895 

  3,492 

  57

  -

  25,444 

  (23)

  (39)

  (4)

  -

  (66)

0.1

1.1

7.0

-

0.3

-  financial

  17,110 

  2,399 

  3

  -

  19,512 

  (5)

  (9)

  (1)

  -

  (15)

-

0.4

33.3

-

0.1

Financial guarantees1

  1,203 

  253

  54

  -

  1,510 

  (2)

  (4)

  (7)

  -

  (13)

0.2

1.6

13.0

-

0.9

-  personal

  2

  1

  -

  -

  3

  -

  -

  -

  -

  -

-

-

-

-

-

-  corporate and commercial

  331

  73

  53

  -

  457

  (1)

  (1)

  (7)

  -

  (9)

0.3

1.4

13.2

-

2.0

-  financial

  870

  179

  1

  -

  1,050 

  (1)

  (3)

  -

  -

  (4)

0.1

1.7

-

-

0.4

At 31 Dec 2020

  219,013 

  14,197 

  1,415 

  2

  234,627 

  (121)

  (213)

  (364)

  (2)

  (700)

0.1

1.5

25.7

100.0

0.3

1  Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.

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

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

Stage 2 days past due analysis at 31 December 2020 (continued)

(Audited)

Gross carrying amount

Allowance for ECL

ECL coverage %



Of which:

Of which:


Of which:

Of which:


Of which:

Of which:


Stage 2

1 to 29

 DPD1

30 and > DPD1

Stage 2

1 to 29

DPD1

30 and > DPD1

Stage 2

1 to 29

DPD1

30 and > DPD1

The bank