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HSBC Bank plc (63AS)

  Print          Annual reports

Tuesday 22 February, 2022

HSBC Bank plc

HSBC Bank plc 2021 Annual Report and Accounts 2/2

RNS Number : 4289C
HSBC Bank plc
22 February 2022
 

 

 

Financial statements

 

 

Page

Consolidated income statement

108

Consolidated statement of comprehensive income

109

Consolidated balance sheet

110

Consolidated statement of cash flows

111

Consolidated statement of changes in equity

112

HSBC Bank plc balance sheet

114

HSBC Bank plc statement of cash flows

115

HSBC Bank plc statement of changes in equity

116

 

 

Notes on the financial

statements

 

1

Basis of preparation and significant accounting policies

118

2

Net fee income

128

3

Net income from financial instruments measured at fair value through profit or loss

128

4

Insurance business

129

5

Employee compensation and benefits

130

6

Auditors' remuneration

134

7

Tax

135

8

Dividends

138

9

Segmental analysis

138

10

Trading assets

140

11

Fair values of financial instruments carried at fair value

140

12

Fair values of financial instruments not carried at fair value

148

13

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

150

14

Derivatives

150

15

Financial investments

155

16

Assets pledged, collateral received and assets transferred

155

17

Interests in associates and joint ventures

156

18

Investments in subsidiaries

156

19

Structured entities

158

20

Goodwill and intangible assets

159

21

Prepayments, accrued income and other assets

161

22

Trading liabilities

161

23

Financial liabilities designated at fair value

161

24

Accruals, deferred income and other liabilities

163

25

Provisions

163

26

Subordinated liabilities

164

27

Maturity analysis of assets, liabilities and off-balance sheet commitments

165

28

Offsetting of financial assets and financial liabilities

167

29

Called up share capital and other equity instruments

168

30

Contingent liabilities, contractual commitments, guarantees and contingent assets

169

31

Finance lease receivables

170

32

Legal proceedings and regulatory matters

170

33

Related party transactions

173

34

Business disposals

175

35

Events after the balance sheet date

175

36

HSBC Bank plc's subsidiaries, joint ventures and associates

175

 

 

Consolidated income statement

for the year ended 31 December

 

 

2021

2020

 

Notes*

£m

£m

Net interest income

 

  1,754 

  1,898 

-  interest income1,2

 

  3,149 

  4,086 

-  interest expense3

 

  (1,395)

  (2,188)

Net fee income

2

  1,413 

  1,400 

-  fee income

 

  2,706

  2,674

-  fee expense

 

  (1,293)

  (1,274)

Net income from financial instruments held for trading or managed on a fair value basis

3

  1,733 

  1,758 

Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss

3

  1,214 

  254

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

3

  (8)

  17

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

3

  493 

  285

Gains less losses from financial investments

 

  60 

  95

Net insurance premium income

4

  1,906 

  1,559 

Other operating income4

 

  594 

  417

Total operating income

 

  9,159 

  7,683 

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

4

  (3,039)

  (1,783)

Net operating income before change in expected credit losses and other credit impairment charges5

 

  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

 

  (5,462)

  (6,705)

-  employee compensation and benefits

5

  (2,023)

  (2,340)

-  general and administrative expenses

 

  (3,265)

  (3,092)

-  -  depreciation and impairment of property, plant and equipment and right of use assets

 

  (110)

  (372)

-  amortisation and impairment of intangible assets

20

  (64)

  (901)

Operating profit/(loss)

 

  832 

  (1,613)

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

17

  191 

  (1)

Profit/(loss) before tax

 

  1,023 

  (1,614)

Tax credit

7

  23 

  136

Profit/(loss) for the period

 

  1,046 

  (1,478)

Profit/(loss) attributable to  the parent company

 

  1,041 

  (1,488)

Profit attributable to non-controlling interests

 

  5 

  10

 

*  For Notes on the financial statements, see page 118.

1  Interest income includes £1,986m (2020: £2,773m) of interest recognised on financial assets measured at amortised cost; £659m (2020: £656m) of negative interest recognised on financial liabilities and £504m (2020: £657m) of interest recognised on financial assets measured at fair value through other comprehensive income. Include within this is £61m (2020: £57m) interest recognised on impaired financial assets.

2  Interest revenue calculated using the effective interest method comprises interest recognised on financial assets measured at either amortised cost or fair value through other comprehensive income.

3  Interest expense includes £616m (2020: £1,299m) of interest on financial liabilities, excluding interest on financial liabilities held for trading or designated or otherwise mandatorily measured at fair value.

4  2021 balances include £65m gain recognised from sale of HSBC Trinkaus & Burkhardt AG's one property which was classified as held for sale.

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

 

Consolidated statement of comprehensive income

for the year ended 31 December

 

2021

2020

 

£m

£m

Profit/(loss) for the year

  1,046 

  (1,478)

Other comprehensive (expense)/income

 

 

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

 

 

Debt instruments at fair value through other comprehensive income

  (237)

  213

-  fair value (losses)/gains

  (247)

  366

-  fair value gains transferred to the income statement on disposal

  (63)

  (90)

-  expected credit (recoveries)/losses recognised in the income statement

  (5)

  8

-  income taxes

  78 

  (71)

Cash flow hedges

  (165)

  118

-  fair value (losses)/gains

  (40)

  86

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

  (202)

  72

-  income taxes

  77 

  (40)

Exchange differences

  (603)

  467

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

 

 

Remeasurement of defined benefit asset/liability

  44 

  (8)

-  before income taxes

  61 

  (18)

-  income taxes

  (17)

  10

Equity instruments designated at fair value through other comprehensive income

  2 

  2

-  fair value gains

  2 

  2

-  income taxes

  -

  -

Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk

  2 

  67

-  fair value gains

  3 

  93

-  income taxes

  (1)

  (26)

Other comprehensive (expense)/income for the year, net of tax

  (957)

  859

Total comprehensive income/(expense) for the year

  89 

  (619)

Attributable to:

 

 

-  shareholders of the parent company

  93 

  (653)

-  non-controlling interests

  (4)

  34

Total comprehensive income/(expense) for the year

  89 

  (619)

 

 

Consolidated balance sheet

at 31 December

 

 

2021

2020

 

Notes*

£m

£m

Assets

 

 

 

Cash and balances at central banks

 

  108,482 

  85,092 

Items in the course of collection from other banks

 

  346 

  243

Trading assets

10

  83,706 

  86,976 

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

13

  18,649 

  16,220 

Derivatives

14

  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

15

  41,300 

  51,826 

Prepayments, accrued income and other assets

21

  43,127 

  55,565 

Current tax assets

 

  1,135 

  444

Interests in associates and joint ventures

17

  743 

  497

Goodwill and intangible assets

20

  894 

  766

Deferred tax assets

7

  599 

  597

Total assets

 

  596,611 

  681,150 

Liabilities and equity

 

 

 

Liabilities

 

 

 

Deposits by banks

 

  32,188 

  34,305 

Customer accounts

 

  205,241 

  195,184 

Repurchase agreements - non-trading

 

  27,259 

  34,903 

Items in the course of transmission to other banks

 

  489 

  290

Trading liabilities

22

  46,433 

  44,229 

Financial liabilities designated at fair value

23

  33,608 

  40,792 

Derivatives

14

  139,368 

  199,232 

Debt securities in issue

 

  9,428 

  17,371 

Accruals, deferred income and other liabilities

24

  43,456 

  53,395 

Current tax liabilities

 

  97 

  139

Liabilities under insurance contracts

4

  22,264 

  22,816 

Provisions

25

  562 

  861

Deferred tax liabilities

7

  15 

  20

Subordinated liabilities

26

  12,488 

  13,764 

Total liabilities

 

  572,896 

  657,301 

Equity

 

 

 

Total shareholders' equity

 

  23,584 

  23,666 

-  called up share capital

29

  797 

  797

-  other equity instruments

29

  3,722 

  3,722 

-  other reserves

 

  (5,670)

  (4,682)

-  retained earnings

 

  24,735 

  23,829 

Non-controlling interests

 

  131 

  183

Total equity

 

  23,715 

  23,849 

Total liabilities and equity

 

  596,611 

  681,150 

 

*  For Notes on the financial statements, see page 118.

The accompanying notes on pages 118 to 178, and the audited sections of the 'Report of the Directors' on pages 21 to 96 form an integral part of these financial statements.

The financial statements were approved by the Board of Directors on 21 February 2022 and signed on its behalf by:

 

 

Dave Watts

Director

 

Consolidated statement of cash flows

for the year ended 31 December

 

2021

2020

 

£m

£m

Profit/(loss) before tax

  1,023 

  (1,614)

Adjustments for non-cash items

 

 

Depreciation, amortisation and impairment1

  174 

  1,273 

Net gain from investing activities

  (62)

  (99)

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

  (191)

  1

Change in expected credit losses gross of recoveries and other credit impairment charges

  (171)

  810

Provisions including pensions

  104 

  424

Share-based payment expense

  96 

  78

Other non-cash items included in profit/loss before tax

  (198)

  135

Elimination of exchange differences2

  4,926 

  (2,527)

Changes in operating assets and liabilities

  9,602 

  35,418 

-  change in net trading securities and derivatives

  8,157 

  8,070 

-  change in loans and advances to banks and customers

  11,149 

  6,780 

-  change in reverse repurchase agreements - non-trading

  9,538 

  16,084 

-  change in financial assets designated and otherwise mandatorily measured at fair value

  (2,429)

  735

-  change in other assets

  10,924 

  (7,513)

-  change in deposits by banks and customer accounts

  7,940 

  28,262 

-  change in repurchase agreements - non-trading

  (7,643)

  (14,482)

-  change in debt securities in issue

  (7,943)

  (7,668)

-  change in financial liabilities designated at fair value

  (7,191)

  (402)

-  change in other liabilities

  (12,295)

  5,432 

-  contributions paid to defined benefit plans

  (24)

  (22)

-  tax paid

  (581)

  142

Net cash from operating activities

  15,303 

  33,899 

-  purchase of financial investments

  (18,890)

  (21,037)

-  proceeds from the sale and maturity of financial investments

  25,027 

  17,417 

-  net cash flows from the purchase and sale of property, plant and equipment

  52 

  (70)

-  net investment in intangible assets

  (45)

  (150)

-  net cash outflow from investment in associates and acquisition of businesses and subsidiaries

  (85)

  (371)

-  net cash flow on disposal of subsidiaries, businesses, associates and joint ventures

  -

  57

Net cash from investing activities

  6,059 

  (4,154)

-  redemption of preference shares and other equity instruments

  -

  (318)

-  subordinated loan capital issued

  10,466 

  -

-  subordinated loan capital repaid3

  (10,902)

  (18)

-  dividends to the parent company

  (194)

  (263)

-  funds received from the parent company

  -

  1,000 

-  dividends paid to non-controlling interests

  (1)

  -

Net cash from financing activities

  (631)

  401

Net increase/(decrease) in cash and cash equivalents

  20,731 

  30,146 

Cash and cash equivalents at 1 Jan

  125,304 

  92,338 

Exchange difference in respect of cash and cash equivalents

  (5,112)

  2,820 

Cash and cash equivalents at 31 Dec4

  140,923 

  125,304 

Cash and cash equivalents comprise of

 

 

-  cash and balances at central banks

  108,482 

  85,092 

-  items in the course of collection from other banks

  346 

  243

-  loans and advances to banks of one month or less

  7,516 

  8,676 

-  reverse repurchase agreement with banks of one month or less

  17,430 

  21,020 

-  treasury bills, other bills and certificates of deposit less than three months

  235 

  685

-  cash collateral and net settlement accounts

  7,403 

  9,878 

-  less: items in the course of transmission to other banks

  (489)

  (290)

Cash and cash equivalents at 31 Dec4

  140,923 

  125,304 

 

1  Included within 2020 are the impact of impairment and write-offs related principally to our businesses in the UK and HSBC Continental Europe (£994m).

2  Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.

3  Subordinated liabilities changes during the year are attributable to cash flows from issuance £10,466m (2020: Nil)) and repayment of £(10,902)m (2020: £(18)m) of securities as presented in the Consolidated statement of cash flows. Non-cash changes during the year included foreign exchanges gains/(losses) £(512)m (2020: £351m) and fair value gains/(losses) £(82)m (2020: £69m).

4  At 31 December 2021, £9,410m (2020: £11,828m) was not available for use by the group, of which £1,393m (2020: £2,460m) related to mandatory deposits at central banks.

Interest received was £4,285m (2020: £5,424m), interest paid was £2,919m (2020: £3,725m) and dividends received were £704m (2020: £423m).

 

Consolidated statement of changes in equity

for the year ended 31 December

 

 

 

 

Other reserves

 

 

 

 

Called up
share
capital

Other
equity
instruments

Retained
earnings

Financial
assets at
FVOCI
reserve

Cash
flow
hedging
reserve

Foreign
exchange
reserve

Group

reorganisa-

tion

reserve

('GRR')4

Total
share-
holders'
equity

Non-
controlling
interests

Total
equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 1 Jan 2021

  797 

  3,722 

  23,829 

  1,309 

  158 

  1,543 

  (7,692)

  23,666 

  183 

  23,849 

Profit for the year

  -

  -

  1,041 

  -

  -

  -

  -

  1,041 

  5 

  1,046 

Other comprehensive (expense)/income (net of tax)

  -

  -

  46 

  (234)

  (165)

  (595)

  -

  (948)

  (9)

  (957)

-  debt instruments at fair value through other comprehensive income

  -

  -

  -

  (236)

  -

  -

  -

  (236)

  (1)

  (237)

-  equity instruments designated at fair  value through other comprehensive income

  -

  -

  -

  2 

  -

  -

  -

  2 

  -

  2 

-  cash flow hedges

  -

  -

  -

  -

  (165)

  -

  -

  (165)

  -

  (165)

-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1

  -

  -

  2 

  -

  -

  -

  -

  2 

  -

  2 

-  remeasurement of defined benefit asset/liability

  -

  -

  44 

  -

  -

  -

  -

  44 

  -

  44 

-  exchange differences

  -

  -

  -

  -

  -

  (595)

  -

  (595)

  (8)

  (603)

Total comprehensive income/(expense) for the year

  -

  -

  1,087 

  (234)

  (165)

  (595)

  -

  93 

  (4)

  89 

Dividends to the parent company2

  -

  -

  (194)

  -

  -

  -

  -

  (194)

  (1)

  (195)

Net impact of equity-settled share-based payments

  -

  -

  (10)

  -

  -

  -

  -

  (10)

  -

  (10)

Change in business combinations and other movements3

  -

  -

  23 

  6 

  -

  -

  -

  29 

  (47)

  (18)

At 31 Dec 2021

  797 

  3,722 

  24,735 

  1,081 

  (7)

  948 

  (7,692)

  23,584 

  131 

  23,715 

 

1  At 31 December 2021, the cumulative amount of change in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a loss of £165m. The cumulative change on 31 December 2020 was a loss of £189m.

2  The dividends to the parent company are the coupons payment on additional tier 1 instruments.

3  Additional shares were acquired in HSBC Trinkaus & Burkhardt AG and HSBC Bank Armenia cjsc, increasing the group's interest to 100%.

4  The Group reorganisation reserve ('GRR') is an accounting reserve resulting from the ring-fencing implementation. The GRR does not form part of regulatory capital.
 

 

 

Consolidated statement of changes in equity (continued)

for the year ended 31 December

 

 

 

 

 

Other reserves

 

 

 

 

Called up
share
capital

Other equity
instruments

Retained
earnings

Financial
assets at
FVOCI
 reserve

Cash flow
hedging
reserve

Foreign
exchange
reserve

Group
reorganisa-
tion reserve
('GRR')

Total share-
holders'
 equity

Non-
controlling
interests

Total equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 1 Jan 2020

  797

  3,722 

  24,449 

  1,089 

  40

  1,098 

  (7,692)

  23,503 

  509

  24,012 

Loss for the year

  -

  -

  (1,488)

  -

  -

  -

  -

  (1,488)

  10

  (1,478)

Other comprehensive income (net of tax)

  -

  -

  56

  216

  118

  445

  -

  835

  24

  859

-  debt instruments at fair value through other comprehensive income

  -

  -

  -

  214

  -

  -

  -

  214

  (1)

  213

-  equity instruments designated at fair value through other comprehensive income

  -

  -

  -

  2

  -

  -

  -

  2

  -

  2

-  cash flow hedges

  -

  -

  -

  -

  118

  -

  -

  118

  -

  118

-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1

  -

  -

  67

  -

  -

  -

  -

  67

  -

  67

-  remeasurement of defined benefit asset/liability

  -

  -

  (11)

  -

  -

  -

  -

  (11)

  3

  (8)

-  exchange differences

  -

  -

  -

  -

  -

  445

  -

  445

  22

  467

Total comprehensive (expense)/income for the year

  -

  -

  (1,432)

  216

  118

  445

  -

  (653)

  34

  (619)

Capital securities issued during the period

  -

  -

  -

  -

  -

  -

  -

  -

  -

  -

Dividends to the parent company2

  -

  -

  (263)

  -

  -

  -

  -

  (263)

  -

  (263)

Net impact of equity-settled share-based payments

  -

  -

  11

  -

  -

  -

  -

  11

  -

  11

Capital contribution3

  -

  -

  1,000 

  -

  -

  -

  -

  1,000 

  -

  1,000 

Change in business combinations and other movements4

  -

  -

  64

  4

  -

  -

  -

  68

  (360)

  (292)

At 31 Dec 2020

  797

  3,722 

  23,829 

  1,309 

  158

  1,543 

  (7,692)

  23,666 

  183

  23,849 

1  At 31 December 2020, the cumulative amount of change in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a loss of £189m.

2  The dividends to the parent company includes, £51m on preference shares and £212m paid as coupons on additional tier 1 instruments.

3  HSBC UK Holdings Limited injected £1bn of CET1 capital into HSBC Bank plc during March 2020 to improve the capital base of the group, impacted by Covid-19. There was no new issuance of share capital.

4  Additional shares were acquired in HSBC Trinkaus & Burkhardt AG in May 2020, increasing the group's interest from 80.67% to 99.33%.

.

 

HSBC Bank plc balance sheet

at 31 December

 

 

2021

2020

 

Notes*

£m

£m

Assets

 

 

 

Cash and balances at central banks

 

  63,008 

  48,777 

Items in the course of collection from other banks

 

  211 

  37

Trading assets

10

  70,790 

  73,035 

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

13

  3,215 

  1,865 

Derivatives

14

  125,787 

  182,066 

Loans and advances to banks

 

  6,778 

  8,063 

Loans and advances to customers

 

  33,936 

  43,241 

Reverse repurchase agreements - non-trading

 

  39,708 

  50,137 

Financial investments

15

  26,542 

  30,969 

Prepayments, accrued income and other assets

21

  31,490 

  38,775 

Current tax assets

 

  1,071 

  388

Investments in subsidiary undertakings

18

  6,479 

  6,458 

Goodwill and intangible assets

20

  34 

  31

Deferred tax assets

7

  509 

  549

Total assets

 

  409,558 

  484,391 

Liabilities and equity

 

 

 

Liabilities

 

 

 

Deposits by banks

 

  14,655 

  17,484 

Customer accounts

 

  124,706 

  119,974 

Repurchase agreements - non-trading

 

  22,344 

  26,996 

Items in the course of transmission to other banks

 

  172 

  14

Trading liabilities

22

  31,161 

  26,673 

Financial liabilities designated at fair value

23

  20,869 

  24,687 

Derivatives

14

  127,651 

  181,032 

Debt securities in issue

 

  5,658 

  15,356 

Accruals, deferred income and other liabilities

24

  30,170 

  38,571 

Current tax liabilities

 

  5 

  9

Provisions

25

  250 

  413

Deferred tax liabilities

7

  -

  3

Subordinated liabilities

26

  12,218 

  13,360 

Total liabilities

 

  389,859 

  464,572 

Equity

 

 

 

Called up share capital

29

  797 

  797

Other equity instruments

29

  3,722 

  3,722 

Other reserves

 

  (5,173)

  (4,799)

Retained earnings

 

  20,353 

  20,099 

Total equity

 

  19,699 

  19,819 

Total liabilities and equity

 

  409,558 

  484,391 

 

*  For Notes on the financial statements, see page 118.  

Profit after tax for the year was £455m (2020: loss after tax £(644)m).

The accompanying notes on pages 118 to 178, and the audited sections of the 'Report of the Directors' on pages 21 to 96 form an integral part of these financial statements.

The financial statements were approved by the Board of Directors on 21 February 2022 and signed on its behalf by:

 

 

Dave Watts

Director

 

HSBC Bank plc statement of cash flows

for the year ended 31 December

 

 

2021

2020

 

 

£m

£m

Profit/(loss) before tax

 

  273 

  (936)

Adjustments for non-cash items

 

 

 

Depreciation, amortisation and impairment1

 

  18 

  635

Net (gain)/loss from investing activities

 

  (34)

  (67)

Change in expected credit losses gross of recoveries and other credit impairment charges

 

  (216)

  457

Provisions including pensions

 

  42 

  154

Share-based payment expense

 

  71 

  56

Other non-cash items included in profit/loss before tax

 

  (7)

  8

Elimination of exchange differences2

 

  1,073 

  108

Changes in operating assets and liabilities

 

  4,150 

  27,197 

-  change in net trading securities and derivatives

 

  11,761 

  11,580 

-  change in loans and advances to banks and customers

 

  9,712 

  8,568 

-  change in reverse repurchase agreements - non-trading

 

  5,651 

  5,890 

-  change in financial assets designated and otherwise mandatorily measured at fair value

 

  (1,350)

  1,264 

-  change in other assets3

 

  4,383 

  (3,771)

-  change in deposits by banks and customer accounts

 

  1,903 

  12,062 

-  change in repurchase agreements - non-trading

 

  (4,652)

  (9,331)

-  change in debt securities in issue

 

  (9,698)

  318

-  change in financial liabilities designated at fair value

 

  (3,831)

  500

-  change in other liabilities

 

  (9,357)

  (71)

-  contributions paid to defined benefit plans

 

  (21)

  (22)

-  tax paid

 

  (351)

  210

Net cash from operating activities

 

  5,370 

  27,612 

-  purchase of financial investments

 

  (15,185)

  (13,882)

-  proceeds from the sale and maturity of financial investments

 

  18,285 

  11,791 

-  net cash flows from the purchase and sale of property, plant and equipment

 

  (4)

  (9)

-  net investment in intangible assets

 

  (8)

  (98)

Net cash from investing activities

 

  3,088 

  (2,198)

-  subordinated loan capital issued

 

  10,466 

  -

-  subordinated loan capital repaid4

 

  (10,791)

  (313)

-  funds received from the parent company

 

  -

  1,000 

-  dividends to the parent company

 

  (194)

  (263)

Net cash from financing activities

 

  (519)

  424

Net increase/(decrease) in cash and cash equivalents

 

  7,939 

  25,838 

Cash and cash equivalents at 1 Jan

 

  77,605 

  51,235 

Exchange difference in respect of cash and cash equivalents

 

  (1,730)

  532

Cash and cash equivalents at 31 Dec

 

  83,814 

  77,605 

Cash and cash equivalents comprise of:

 

 

 

-  cash and balances at central banks

 

  63,008 

  48,777 

-  items in the course of collection from other banks

 

  211 

  37

-  loans and advances to banks of one month or less

 

  4,323 

  5,338 

-  reverse repurchase agreement with banks of one month or less

 

  9,779 

  14,558 

-  treasury bills, other bills and certificates of deposit less than three months

 

  175 

  279

-  cash collateral and net settlement accounts

 

  6,490 

  8,630 

-  less: items in the course of transmission to other banks

 

  (172)

  (14)

Cash and cash equivalents at 31 Dec

 

  83,814 

  77,605 

 

1  Included within 2020 is the impact of impairment related to our business in the UK (£531m).

2  Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.

3  Includes additional investment in subsidiaries £17m (2020: £443m).

4  Subordinated liabilities changes during the year are attributable to cash flows from issuance £10,466m (2020: Nil) and repayment of £(10,791)m (2020: £(313)m) of securities as presented in the HSBC Bank plc statement of cash flows. Non-cash changes during the year included foreign exchanges gains(losses) £(489)m (2020: £329m) and fair value gains £(82)m (2020: £69m).

Interest received was £2,321m (2020: £3,211m), interest paid was £1,827m (2020: £2,539m) and dividends received was £902m (2020: £555m).

 

 

HSBC Bank plc statement of changes in equity

for the year ended 31 December

 

 

 

 

Other reserves

 

 

Called up
share
capital

Other
equity
instruments

Retained
earnings

Financial
assets at
FVOCI
reserve

Cash flow
hedging
reserve

Foreign
exchange
reserve

Group

reorganisation

reserve

('GRR')4

Total
shareholders'
equity

 

£m

£m

£m

£m

£m

£m

£m

£m

At 1 Jan 2021

  797 

  3,722 

  20,099 

  351 

  55 

  43 

  (5,248)

  19,819 

Profit for the year

  -

  -

  455 

  -

  -

  -

  -

  455 

Other comprehensive (expense)/income (net of tax)

  -

  -

  14 

  (216)

  (137)

  (21)

  -

  (360)

-  debt instruments at fair value through other
comprehensive income

  -

  -

  -

  (215)

  -

  -

  -

  (215)

-  equity instruments designated at fair value through other comprehensive income

  -

  -

  -

  (1)

  -

  -

  -

  (1)

-  cash flow hedges

  -

  -

  -

  -

  (137)

  -

  -

  (137)

-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1

  -

  -

  -

  -

  -

  -

  -

  -

-  remeasurement of defined benefit asset/liability

  -

  -

  14 

  -

  -

  -

  -

  14 

-  exchange differences

  -

  -

  -

  -

  -

  (21)

  -

  (21)

Total comprehensive income/(expense) for the period

  -

  -

  469 

  (216)

  (137)

  (21)

  -

  95 

Dividends to the parent company2

  -

  -

  (194)

  -

  -

  -

  -

  (194)

Net impact of equity-settled share-based

  -

  -

  (10)

  -

  -

  -

  -

  (10)

Change in business combinations and other movements3

  -

  -

  (11)

  -

  -

  -

  -

  (11)

At 31 Dec 2021

  797 

  3,722 

  20,353 

  135 

  (82)

  22 

  (5,248)

  19,699 

 

1  At 31 December 2021, the cumulative amount of change in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a loss of £72m. The cumulative change on 31 December 2020 was a loss of £76m.

2  The dividends to the parent company are the coupons payment on additional tier 1 instruments.

3  Additional shares were acquired in HSBC Trinkaus & Burkhardt AG in Feb 2021, increasing the group's interest from 99.33% to 100.00%.

4  The Group reorganisation reserve ('GRR') is an accounting reserve resulting from the ring-fencing implementation. The GRR does not form part of regulatory capital.

 

 

HSBC Bank plc statement of changes in equity (continued)

for the year ended 31 December

 

 

 

 

Other reserves

 

 

Called up share capital

Other equity instruments

Retained earnings

Financial assets at FVOCI reserve

Cash flow hedging reserve

Foreign exchange reserve

Group reorganisation reserve ('GRR')

Total shareholders' equity

 

£m

£m

£m

£m

£m

£m

£m

£m

1 January 2020

  797

  3,722 

  19,876 

  182

  (32)

  77

  (5,248)

  19,374 

Loss for the year

  -

  -

  (644)

  -

  -

  -

  -

  (644)

Other comprehensive income/(expense) (net of tax)

  -

  -

  107

  170

  87

  (28)

  -

  336

-  debt instruments at fair value through other comprehensive income

  -

  -

  -

  168

  -

  -

  -

  168

-  equity instruments designated at fair value through other comprehensive income

  -

  -

  -

  2

  -

  -

  -

  2

-  cash flow hedges

  -

  -

  -

  -

  87

  -

  -

  87

-  changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1

  -

  -

  92

  -

  -

  -

  -

  92

-  remeasurement of defined benefit asset/liability

  -

  -

  15

  -

  -

  -

  -

  15

-  exchange differences

  -

  -

  -

  -

  -

  (28)

  -

  (28)

Total comprehensive (expense)/income for the period

  -

  -

  (537)

  170

  87

  (28)

  -

  (308)

Capital securities issued during the period

  -

  -

  -

  -

  -

  -

  -

  -

Dividends to the parent company2

  -

  -

  (263)

  -

  -

  -

  -

  (263)

Net impact of equity-settled share-based payments

  -

  -

  11

  -

  -

  -

  -

  11

Capital contribution3

  -

  -

  1,000 

  -

  -

  -

  -

  1,000 

Change in business combinations and other movements4

  -

  -

  12

  (1)

  -

  (6)

  -

  5

At 31 Dec 2020

  797

  3,722 

  20,099 

  351

  55

  43

  (5,248)

  19,819 

1  At 31 December 2020, the cumulative amount of change in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a loss of £76m.

2  The dividends to the parent company includes £51m on preference shares and £212m paid as coupons on additional tier 1 instruments.

3  HSBC UK Holdings Limited injected £1bn of CET1 capital into HSBC Bank plc during March 2020 to improve the capital base of the group, impacted by Covid-19. There was no new issuance of share capital.

4  Additional shares were acquired in HSBC Trinkaus & Burkhardt AG in May 2020, increasing the group's interest from 80.67% to 99.33%.

Notes on the Financial Statements

 

1

Basis of preparation and significant accounting policies

 

1.1  Basis of preparation

(a)  Compliance with International Financial Reporting Standards

The consolidated financial statements of the group and the separate financial statements of HSBC Bank plc comply with UK-adopted international accounting standards and with the requirements of the Companies Act 2006, and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. These financial statements are also prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB'), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRSs as issued by the IASB for the periods presented. There were no unendorsed standards effective for the year ended
31 December 2021 affecting these consolidated and separate financial statements.

Standards adopted during the year ended 31 December 2021

There were no new accounting standards or interpretations that had a significant effect on the group in 2021. Accounting policies have been consistently applied.

(b)  Future accounting developments

Minor amendments to IFRSs

The IASB has not published any minor amendments effective from 1 January 2021 that are applicable to the group. However, the IASB has published a number of minor amendments to IFRSs that are effective from 1 January 2022 and 1 January 2023. The group expects they will have an insignificant effect, when adopted, on the consolidated financial statements of the group and the separate financial statements of HSBC Bank plc.

New IFRSs

IFRS 17 'Insurance Contracts'

IFRS 17 'Insurance Contracts' was issued in May 2017, with amendments to the standard issued in June 2020. The standard sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. Following the amendments, IFRS 17 is effective from 1 January 2023. The standard has been endorsed for use in the EU but has not yet been endorsed for use in the UK. The group is in the process of implementing IFRS 17. Industry practice and interpretation of the standard are still developing. Therefore, the likely financial impact of its implementation remains uncertain. However, we have the following expectations as to the impact compared with our current accounting policy for insurance contracts, which is set out in policy 1.2(j) below:

• Under IFRS 17, there will be no present value of in-force business ('PVIF') asset recognised. Instead the estimated future profit will be included in the measurement of the insurance contract liability as the contractual service margin ('CSM'), representing unearned profit, and this will be gradually recognised in revenue as services are provided over the duration of the insurance contract. While the profit over the life of an individual contract will be unchanged, its emergence will be later under IFRS 17. The removal of the PVIF asset and the recognition of CSM, which is a liability, will reduce equity. The PVIF asset will be eliminated to equity on transition, together with other adjustments to assets and liabilities to reflect IFRS 17 measurement requirements and any consequential amendments to financial assets in the scope of IFRS 9.

• IFRS 17 requires increased use of current market values in the measurement of insurance liabilities. Changes in market conditions for certain products measured under the general measurement approach are immediately recognised in profit or loss, while changes in market conditions for other products measured under the variable fee approach are included in the measurement of CSM.

• In accordance with IFRS 17, directly attributable costs will be incorporated in the CSM and recognised in the results of insurance services as a reduction in reported revenue, as profit is recognised over the duration of insurance contracts. Costs that are not directly attributable remain in operating expenses. This will result in a reduction in reported operating expenses compared with the current accounting policy.

• We intend to provide an update on the likely financial impacts in later 2022 financial reports, when we expect that this will be reasonably estimable.

(c)  Foreign currencies

The functional currency of the bank is sterling, which is also the presentational currency of the consolidated financial statements of the group.

Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured at historical cost, which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is recognised.

In the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not sterling are translated into the group's presentation currency at the rate of exchange at the balance sheet date, while their results are translated into sterling at the average rates of exchange for the reporting period. Exchange differences arising are recognised in other comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement.

(d)  Presentation of information

Certain disclosures required by IFRSs have been included in the audited sections of this Annual Report and Accounts 2021 as follows:

• disclosures concerning the nature and extent of risks relating to financial instruments and insurance contracts are included in the 'Report of the Directors: Risk' on pages 21 to 87;

 

 

 

 

• the 'Own funds' disclosure is included in the 'Report of the Directors: Capital Risk in 2021' on page 73; and

• in publishing the parent company financial statements together with the group financial statements, the bank has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its individual income statement and related notes.

(e)  Critical accounting estimates and judgements

The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted, as the 'critical accounting estimates and judgements' in section 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management's estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of these financial statements. Management's selection of the group's accounting policies that contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved.

(f)  Segmental analysis

HSBC Bank plc's chief operating decision maker is the group Chief Executive, supported by the group Executive Committee, and operating segments are reported in a manner consistent with the internal reporting provided to the group Chief Executive and the group Executive Committee.

Measurement of segmental assets, liabilities, income and expenses is in accordance with the bank's accounting policies. Segmental income and expenses include transfers between segments and these transfers are conducted at arm's length. Shared costs are included in segments on the basis of the actual recharges made.

The types of products and services from which each reportable segment derives its revenue are discussed in the 'Strategic Report - Our global businesses' on page 6.

(g)  Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the group and the company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the uncertainty that the global Covid-19 pandemic has had on the group's operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity.

 

1.2  Summary of significant accounting policies

(a)  Consolidation and related policies

Investments in subsidiaries

Where an entity is governed by voting rights, the group consolidates when it holds - directly or indirectly - the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal.

Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets.

The bank's investments in subsidiaries are stated at cost less impairment losses.

Critical accounting estimates and judgements

Investments in subsidiaries are tested for impairment when there is an indication that the investment may be impaired, which involves estimations of value in use reflecting management's best estimate of the future cash flows of the investment and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows:

Judgements

Estimates

• The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests for impairment more frequently than once a year when indicators of impairment exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management's best estimate of future business prospects

 

• The future cash flows of each investment are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management's view of future business prospects at the time of the assessment

• The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of equity assigned to the investment. The cost of equity percentage is generally derived from a capital asset pricing model and the market implied cost of equity, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management's control

• Key assumptions used in estimating impairment in subsidiaries are described in Note 18

 

Group sponsored structured entities

The group is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing that entity or in bringing together relevant counterparties so the transaction that is the purpose of the entity could occur. The group is generally not considered a sponsor if the only involvement with the entity is merely administrative.

Interests in associates and joint arrangements

Joint arrangements are investments in which the group, together with one or more parties, has joint control. Depending on the group's rights and obligations, the joint arrangement is classified as either a joint operation or a joint venture. The group classifies investments in entities over which it has significant influence, and those that are neither subsidiaries nor joint arrangements, as associates.

 

The group recognises its share of the assets, liabilities and results in a joint operation. Investments in associates and interests in joint ventures are recognised using the equity method. The attributable share of the results and reserves of joint ventures and associates are included in the consolidated financial statements of the group based on either financial statements made up to 31 December or pro-rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and
31 December.

Investments in associates and joint ventures are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisition of interests in joint ventures and associates is not tested separately for impairment, but is assessed as part of the carrying amount of the investment.

(b)  Income and expense

Operating income

Interest income and expense

Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value, are recognised in 'Interest income' and 'Interest expense' in the income statement using the effective interest method. However, as an exception to this, interest on debt instruments issued by the group for funding purposes that are designated under the fair value option to reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.

Interest on credit-impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Non-interest income and expense

The group generates fee income from services provided at a fixed price over time, such as account service and card fees, or when the group delivers a specific transaction at a point in time, such as broking services and import/export services. With the exception of certain fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and HSBC's performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee income is generally earned from short-term contracts with payment terms that do not include a significant financing component.

The group acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades, the group acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement.

The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement. Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.

Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities.

Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:

• 'Net income from financial instruments held for trading or managed on a fair value basis': This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss.

• 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss': This includes interest income, interest expense and dividend income in respect of financial assets and liabilities measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately identifiable from other trading derivatives.

• 'Changes in fair value of designated debt instruments and related derivatives': Interest paid on the debt instruments and interest cash flows on related derivatives is presented in interest expense where doing so reduces and accounting mismatch.

• 'Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss': This includes interest on instruments that fail the solely payments of principal and interest ('SPPI') test, see (d) below.

The accounting policies for insurance premium income are disclosed in Note 1.2(j).

(c)  Valuation of financial instruments

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, the group recognises the difference as a trading gain or loss at inception (a 'day 1 gain or loss'). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction either until the transaction matures or is closed out or the valuation inputs become observable.

The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the financial statements, unless they satisfy the IFRS offsetting criteria. Financial instruments are classified into one of three fair value hierarchy levels, described in Note 11, 'Fair values of financial instruments carried at fair value'.

 

Critical accounting estimates and judgements

The majority of valuation techniques employ only observable market data. However, certain financial instruments are classified on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the measurement of fair value is more judgemental:

Judgements

Estimates

• An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument's inception profit or greater than 5% of the instrument's valuation is driven by unobservable inputs

• 'Unobservable' in this context means that there is little or no current market data available from which to determine the price at which an arm's length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used)

• Details on the group's level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonable possible alternative assumptions in determining their fair value are set out in Note 11

 

(d)  Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs.

The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. When the group intends to hold the loan, the loan commitment is included in the impairment calculations set out below.

Non-trading reverse repurchase, repurchase and similar agreements

When debt securities are sold subject to a commitment to repurchase them at a predetermined price ('repos'), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell ('reverse repos') are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement.

Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo agreements.

(e)  Financial assets measured at fair value through other comprehensive income

Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair value through other comprehensive income ('FVOCI'). These comprise primarily debt securities. They are recognised on the trade date when HSBC enters into contractual arrangements to purchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income statement as 'Gains less losses from financial instruments'. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in profit or loss.

(f)  Equity securities measured at fair value with fair value movements presented in other comprehensive income

The equity securities for which fair value movements are shown in other comprehensive income are business facilitation and other similar investments where HSBC holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are not transferred to profit or loss. Otherwise, equity securities are measured at fair value through profit or loss (except for dividend income, which is recognised in profit or loss).

(g)  Financial instruments designated at fair value through profit or loss

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below and are so designated irrevocably at inception:

• the use of the designation removes or significantly reduces an accounting mismatch;

• a group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; and

• the financial liability contains one or more non-closely related embedded derivatives.

Designated financial assets are recognised when HSBC enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when the rights to the cash flows expire or are transferred. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in 'Net income from financial instruments held for trading or managed on a fair value basis' or 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss' except for the effect of changes in the liabilities' credit risk, which is presented in 'Other comprehensive income', unless that treatment would create or enlarge an accounting mismatch in profit or loss.

Under the above criterion, the main classes of financial instruments designated by HSBC are:

• Debt instruments for funding purposes that are designated to reduce an accounting mismatch: The interest and/or foreign exchange exposure on certain fixed-rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy.

• Financial assets and financial liabilities under unit-linked and non-linked investment contracts: A contract under which HSBC does not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with

• discretionary participation features ('DPF'), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise be measured at either fair value through other comprehensive income or amortised cost. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in the same line.

• Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance evaluated on a fair value basis.

(h)  Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss, with changes in fair value generally recorded in the income statement. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in 'Interest expense' together with the interest payable on the issued debt.

Hedge accounting

When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses these derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged.

Fair value hedge

Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.

Cash flow hedge

The effective portion of gains and losses on hedging instruments is recognised in other comprehensive income and the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income statement within 'Net trading income'. The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.

Derivatives that do not qualify for hedge accounting

Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.

(i)  Impairment of amortised cost and FVOCI financial assets

Expected credit losses are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months, or less, where the remaining life is less than 12 months, ('12-month ECL'). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where 12-month ECL is recognised are considered to be 'stage 1'; financial assets which are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in 'stage 3'. Purchased or originated credit-impaired financial assets ('POCI') are treated differently as set out below.

Credit impaired (stage 3)

The group determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether:

• contractual payments of either principal or interest are past due for more than 90 days;

• there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition; and

• the loan is otherwise considered to be in default.

If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired.

Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less
ECL allowance.

Write-off

Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In

 

 

 

 

 

circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

Renegotiation

Loans are identified as renegotiated and classified as credit impaired when we modify the contractual payment terms due to significant credit distress of the borrower. Renegotiated loans remain classified as credit impaired until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity or derecognition.

A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms or if the terms of an existing agreement are modified such that the renegotiated loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances are considered to be POCI and will continue to be disclosed as renegotiated loans.

Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any evidence of being credit impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash flows, over the minimum observation period, and there are no other indicators of impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would not be reversed.

Loan modifications other than renegotiated loans

Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that HSBC's rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates and no payment-related concession has been provided. Mandatory and general offer loan modifications that are not borrower-specific, for example market-wide customer relief programmes, have not been classified as renegotiated loans and generally have not resulted in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy. Changes made to these financial instruments that are economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change of the interest rate benchmark.

Significant increase in credit risk (stage 2)

An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale. However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and included on a watch or worry list, are included in stage 2.

For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default ('PD'), which encompasses a wide range of information including the obligor's customer risk rating ('CRR'), macroeconomic condition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at reporting date. The quantitative measure of significance varies depending on the credit quality at origination as follows:

 

 

0.1-1.2

15bps

2.1-3.3

30bps

 

For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates.

For loans originated prior to the implementation of IFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle PDs and through-the-cycle migration probabilities, consistent with the instrument's underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration-based thresholds, as set out in the table below:

 

 

0.1

5 notches

1.1-4.2

4 notches

4.3-5.1

3 notches

5.2-7.1

2 notches

7.2-8.2

1 notch

8.3

0 notch

 

Further information about the 23-grade scale used for CRR can be found on page 32.

 

 

 

 

 

 

For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.

For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporates all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than
12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies loans with a PD higher than would be expected from loans that are performing as originally expected, and higher than what would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.

Unimpaired and without significant increase in credit risk (stage 1)

ECL resulting from default events that are possible within the next 12 months ('12-month ECL') are recognised for financial instruments that remain in stage 1.

Purchased or originated credit impaired

Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes the recognition of a new financial instrument following a renegotiation where concessions have been granted for economic or contractual reasons relating to the borrower's financial difficulty that otherwise would not have been considered. The amount of change-in-lifetime ECL is recognised in profit or loss until the POCI is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition.

Movement between stages

Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are not POCI will continue to be in stage 3 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. For loans that are assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available evidence is assessed on a case-by-case basis.

Measurement of ECL

The assessment of credit risk and the estimation of ECL are unbiased and probability-weighted, and incorporate all available information that is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.

In general, HSBC calculates ECL using three main components, a probability of default, a loss given default ('LGD') and the exposure at default ('EAD').

The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively.

The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money.

HSBC makes use of the Basel II IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the following table:

 

 

 

PD

• Through the cycle (represents long-run average PD throughout a full economic cycle)

• The definition of default includes a backstop of 90+ days past due, although this has been modified to 180+ days past due for some portfolios, particularly UK and US mortgages

• Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD)

• Default backstop of 90+ days past due for all portfolios

EAD

• Cannot be lower than current balance

• Amortisation captured for term products

LGD

• Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn)

• Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data

• Discounted using cost of capital

• All collection costs included

• Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral)

• No floors

• Discounted using the original effective interest rate of the loan

• Only costs associated with obtaining/selling collateral included

Other

 

• Discounted back from point of default to balance sheet date

 

While 12-month PDs are recalibrated from Basel II models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life.

 

 

 

 

 

The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on the credit risk officer's estimates as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on its estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by HSBC Group and the judgement of the credit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to the most likely outcome.

Period over which ECL is measured

Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which HSBC is exposed to credit risk. For wholesale overdrafts, credit risk management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of the next substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility.

However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit HSBC's exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period HSBC remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

Forward-looking economic inputs

HSBC applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of its view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 41.

Critical accounting estimates and judgements

The calculation of the group's ECL under IFRS 9 requires the group to make a number of judgements, assumptions and estimates. The most significant are set out below:

 

 

• Defining what is considered to be a significant increase in credit risk

• Selecting and calibrating the PD, LGD and EAD models, which support the calculations, including making reasonable and supportable judgements about how models react to current and future economic conditions

• Selecting model inputs and economic forecasts, including determining whether sufficient and appropriately weighted economic forecasts are incorporated to calculate unbiased expected loss

• Making management judgemental adjustments to account for late breaking events, model and data limitations and deficiencies, and expert credit judgements

• The section 'Measurement uncertainty and sensitivity analysis of ECL estimates', marked as audited from page 41 sets out the assumptions used in determining ECL, and provides an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions

 

 

(j)  Insurance contracts

A contract is classified as an insurance contract where the group accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. In addition, the group issues investment contracts with discretionary participation features ('DPF') which are also accounted for as insurance contracts as required by IFRS 4 'Insurance Contracts'.

Net insurance premium income

Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are established.

Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they relate.

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

Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.

Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when notified.

Reinsurance recoveries are accounted for in the same period as the related claim.

Liabilities under insurance contracts

Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by reference to the value of the relevant underlying funds or indices.

 

Future profit participation on insurance contracts with DPF

Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and management's expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by the contractual terms, regulation or past distribution policy.

Investment contracts with DPF

While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by IFRS 4. The group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability.

In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.

Present value of in-force long-term insurance business

The group recognises the value placed on insurance contracts, and investment contracts with DPF, that are classified as long-term and
in-force at the balance sheet date, as an asset. The asset represents the present value of the equity holders' interest in the issuing insurance companies' profits expected to emerge from these contracts written at the balance sheet date. The present value of
in-force long-term insurance business ('PVIF') is determined by discounting those expected future profits using appropriate assumptions in assessing factors such as future mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in 'Other operating income' on a gross of tax basis.

(k)  Employee compensation and benefits

Share-based payments

The group enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for the provision of their services. The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement. Expenses are recognised when the employee starts to render service to which the award relates.

Cancellations result from the failure to meet a non-vesting condition during the vesting period, and are treated as an acceleration of vesting recognised immediately in the income statement. Failure to meet a vesting condition by the employee is not treated as a cancellation, and the amount of expense recognised for the award is adjusted to reflect the number of awards expected to vest.

Post-employment benefit plans

The group operates a number of pension schemes including defined benefit, defined contribution and post-employment benefit schemes.

Payments to defined contribution schemes are charged as an expense as the employees render service.

Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.

Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.

The cost of obligations arising from other post-employment plans are accounted for on the same basis as defined benefit pension plans.

(l)  Tax

Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same statement in which the related item appears.

Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. Payments associated with any incremental base erosion and anti-abuse tax are reflected in tax expense in the period incurred.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods as the assets will be realised or the liabilities settled.

Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.

 

Critical accounting judgements

The recognition of deferred tax assets depends on judgements

 

• In assessing the probability and sufficiency of future taxable profit, we consider the availability of evidence to support the recognition of deferred tax assets. taking into account the inherent risk in long term forecasting and drivers of recent history of tax losses where applicable, taking into account the future reversal of existing taxable temporary differences and tax planning strategies including corporate reorganisations. Specific judgements supporting deferred tax assets are described in Note 7.

 

(m)  Provisions, contingent liabilities and guarantees

Provisions

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.

Critical accounting estimates and judgements

The recognition and measurement of provisions requires the group to make a number of judgements, assumptions and estimates. The most significant are

set out below:

 

 

• Determining whether a present obligation exists. Professional advice is taken on the assessment of litigation and similar obligations

• Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous estimates as appropriate. At more advanced stages, it is typically easier to make estimates around a better defined set of possible outcomes

• Provisions for legal proceedings and regulatory matters remain very sensitive to the assumptions used in the estimate. There could be a wider range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result, it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions because of the diverse nature and circumstances of such matters and the wide range of uncertainties involved

 

 

Contingent liabilities, contractual commitments and guarantees

Contingent liabilities

Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to legal proceedings or regulatory matters, are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.

Financial guarantee contracts

Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable.

The bank has issued financial guarantees and similar contracts to other group entities. The group elects to account for certain guarantees as insurance contracts in the bank's financial statements, in which case they are measured and recognised as insurance liabilities. This election is made on a contract by contract basis, and is irrevocable.

(n)  Impairment of non-financial assets

Software under development is tested for impairment at least annually. Other non-financial assets are property, plant and equipment, intangible assets (excluding goodwill) and right-of-use assets. They are tested for impairment at the individual asset level when there is indication of impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition, impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be the principal operating legal entities divided by global business.

Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying value of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs. When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU.

Impairment loss recognised in prior periods for non-financial assets is reversed when there has been a change in the estimate used to determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior periods.

 

2

Net fee income

 

Net fee income by product type

 

2021

2020

 

£m

£m

Account services

  271 

  239

Funds under management

  465 

  424

Cards

  44 

  44

Credit facilities

  246 

  250

Broking income

  368 

  369

Unit trusts

  5 

  3

Imports/exports

  40 

  41

Remittances

  84 

  62

Underwriting

  286 

  360

Global custody

  200 

  220

Insurance agency commission

  17 

  19

Other

  680 

  643

Fee income

  2,706 

  2,674 

Less: fee expense

  (1,293)

  (1,274)

Net fee income

  1,413 

  1,400 

 

Net fee income by global business

 

MSS

GB

GBM
Other

CMB

WPB

Corporate Centre

Total

 

£m

£m

£m

£m

£m

£m

£m

Year ended 31 Dec 2021

 

 

 

 

 

 

 

Fee income

  1,251 

  861 

  89 

  415 

  633 

  (543)

  2,706 

Less: fee expense

  (1,245)

  (188)

  (83)

  (54)

  (255)

  532 

  (1,293)

Net fee income

  6 

  673 

  6 

  361 

  378 

  (11)

  1,413 

 

 

 

 

 

 

 

 

Year ended 31 Dec 20201

 

 

 

 

 

 

 

Fee income

  1,243 

  857

  94

  407

  603

  (530) 

  2,674 

Less: fee expense

  (1,209) 

  (172) 

  (123) 

  (51) 

  (245) 

  526

  (1,274) 

Net fee income

  34

  685

  (29) 

  356

  358

  (4) 

  1,400 

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

Net fee income includes £935m of fees earned on financial assets that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate) (2020: £883m), £221m of fees payable on financial liabilities that are not at fair value through profit of loss (other than amounts included in determining the effective interest rate) (2020: £176m), £709m of fees earned on trust and other fiduciary activities (2020: £688m), and £61m of fees payable relating to trust and other fiduciary activities (2020: £68m).

 

3

Net income from financial instruments measured at fair value through profit or

loss

 

 

2021

2020

 

£m

£m

Net income arising on:

 

 

Net Trading activities

  3 

  1,948 

Other instruments managed on a fair value basis

  1,730 

  (190)

Net income from financial instruments held for trading or managed on a fair value basis

  1,733 

  1,758 

Financial assets held to meet liabilities under insurance and investment contracts

  1,305 

  290

Liabilities to customers under investment contracts

  (91)

  (36)

Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss

  1,214 

  254

Derivatives managed in conjunction with the group's issued debt securities

  (337)

  112

Other changes in fair value

  329 

  (95)

Changes in fair value of designated debt and related derivatives

  (8)

  17

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

  493 

  285

Year ended 31 Dec

  3,432 

  2,314 

 

 

4

Insurance business

.

Net insurance premium income

 

Non-linked insurance

Linked life insurance

Investment contracts with DPF1

Total

 

£m

£m

£m

£m

Gross insurance premium income

  218 

  429 

  1,360 

  2,007 

Reinsurers' share of gross insurance premium income

  (100)

  (1)

  -

  (101)

Year ended 31 Dec 2021

  118 

  428 

  1,360 

  1,906 

 

Gross insurance premium income

  205

  274

  1,185 

  1,664 

Reinsurers' share of gross insurance premium income

  (100) 

  (5) 

  -

  (105) 

Year ended 31 Dec 2020

  105

  269

  1,185 

  1,559 

1  Discretionary participation features.

 

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

 

Non-linked insurance

Linked life insurance

Investment contracts with DPF1

Total

 

£m

£m

£m

£m

Gross claims and benefits paid and movement in liabilities

  120 

  550 

  2,420 

  3,090 

-  claims, benefits and surrenders paid

  126 

  106 

  1,554 

  1,786 

-  movement in liabilities

  (6)

  444 

  866 

  1,304 

Reinsurers' share of claims and benefits paid and movement in liabilities

  (45)

  (6)

  -

  (51)

-  claims, benefits and surrenders paid

  (68)

  (1)

  -

  (69)

-  movement in liabilities

  23 

  (5)

  -

  18 

Year ended 31 Dec 2021

  75 

  544 

  2,420 

  3,039 

 

Gross claims and benefits paid and movement in liabilities

  143

  300

  1,404 

  1,847 

-  claims, benefits and surrenders paid

  102

  93

  1,578 

  1,773 

-  movement in liabilities

  41

  207

  (174) 

  74

Reinsurers' share of claims and benefits paid and movement in liabilities

  (64) 

  -

  -

  (64) 

-  claims, benefits and surrenders paid

  (62) 

  (3) 

  -

  (65) 

-  movement in liabilities

  (2) 

  3

  -

  1

Year ended 31 Dec 2020

  79

  300

  1,404 

  1,783 

1  Discretionary participation features.

 

Liabilities under insurance contracts

 

Non-linked insurance

Linked life insurance

Investment contracts with DPF1

Total

 

£m

£m

£m

£m

Gross liabilities under insurance contracts at 1 Jan 2021

  594 

  1,512 

  20,710 

  22,816 

Claims and benefits paid

  (126)

  (106)

  (1,554)

  (1,786)

Increase in liabilities to policyholders

  120 

  550 

  2,420 

  3,090 

Exchange differences and other movements2

  (32)

  (18)

  (1,806)

  (1,856)

Gross liabilities under insurance contracts at 31 Dec 2021

  556 

  1,938 

  19,770 

  22,264 

Reinsurers' share of liabilities under insurance contracts

  (93)

  (53)

  -

  (146)

Net liabilities under insurance contracts at 31 Dec 2021

  463 

  1,885 

  19,770 

  22,118 

 

Gross liabilities under insurance contracts at 1 Jan 2020

  576

  1,295 

  19,638 

  21,509 

Claims and benefits paid

  (102) 

  (93) 

  (1,578) 

  (1,773) 

Increase in liabilities to policyholders

  143

  300

  1,404 

  1,847 

Exchange differences and other movements2

  (23) 

  10

  1,246 

  1,233 

Gross liabilities under insurance contracts at 31 Dec 2020

  594

  1,512 

  20,710 

  22,816 

Reinsurers' share of liabilities under insurance contracts

  (118) 

  (47) 

  -

  (165) 

Net liabilities under insurance contracts at 31 Dec 2020

  476

  1,465 

  20,710 

  22,651 

1  Discretionary participation features.

2  'Exchange differences and other movements' includes movements in liabilities arising from net unrealised investment gains recognised in other comprehensive income.

The key factors contributing to the movement in liabilities to policyholders included movement in the market value of assets supporting policyholder liabilities, death claims, surrenders, lapses, new business, the declaration of bonuses and other amounts attributable to policyholders.

 

5

Employee compensation and benefits

 

 

2021

2020

 

£m

£m

Wages and salaries

  1,609 

  1,917 

Social security costs

  341 

  367

Post-employment benefits1

  73 

  56

Year ended 31 Dec

  2,023 

  2,340 

1  Includes £37m (2020: £36m) in employer contributions to the defined contribution pension plans.

 

Average number of persons employed by the group during the year

 

2021

2020

 

£m

£m

MSS

  4,322 

  4,590 

GB

  2,458 

  2,857 

GBM Other

  140 

  158

CMB

  3,023 

  3,396 

WPB

  6,709 

  6,807 

Corporate Centre

  171 

  58

Year ended 31 Dec1,2

  16,823 

  17,866 

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

2  Average numbers of headcount in corporate centre are allocated in respective businesses on the basis of amounts charged to the respective global businesses.

 

Share-based payments

'Wages and salaries' includes the effect of share-based payments arrangements, of which £96m were equity settled (2020: £76m), as follows:

 

2021

2020

 

£m

£m

Restricted share awards

  96 

  77

Savings-related and other share award option plans

  1 

  2

Year ended 31 Dec

  97 

  79

 

 

HSBC share awards

 

 

Deferred share awards (including annual incentive awards, LTI awards delivered shares) and Group Performance Share Plan ('GPSP')

• An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted.

• Deferred awards generally require employees to remain in employment over the vesting period and are generally not subject to performance conditions after the grant date. An exception to these are the LTI awards, which are subject to performance conditions.

• Deferred share awards generally vest over a period of three, five or seven years.

• Vested shares may be subject to a retention requirement post-vesting.

• Awards are subject to malus and clawback.

International Employee Share Purchase Plan ('ShareMatch')

• The plan was first introduced in Hong Kong in 2013 and now includes employees based in 28 jurisdictions.

• Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency.

• Matching awards are added at a ratio of one free share for every three purchased.

• Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months.

 

 

 

Movement on HSBC share awards

 

2021

2020

 

Number

Number

 

(000s)

(000s)

Restricted share awards outstanding at 1 Jan

  24,367 

  24,578 

Additions during the year1

  15,479 

  16,823 

Released in the year1

  (16,690)

  (16,024)

Forfeited in the year

  (1,328)

  (1,010)

Restricted share awards outstanding at 31 Dec

  21,828 

  24,367 

Weighted average fair value of awards granted (£)

  4.49 

  5.58 

1  Includes a number of share option plans transferred from or to other subsidiaries of HSBC Holdings plc.

 

HSBC share option plans

 

 

Savings-related share option plans ('Sharesave')

• From 2014, eligible employees for the UK plan can save up to £500 per month with the option to use the savings to acquire shares.

• These are generally exercisable within six months following either the third or fifth anniversary of the commencement of a three-year or five-year contract, respectively.

• The exercise price is set at a 20% (2020: 20%) discount to the market value immediately preceding the date of invitation.

 

Calculation of fair values

The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant.

 

Movement on HSBC share option plans

 

Savings-related
share option plans

 

Number

WAEP1

 

(000s)

£

Outstanding at 1 Jan 2021

  7,206 

  2.96 

Granted during the year2

  984 

  3.25 

Exercised during the year

  (227)

  3.97 

Expired during the year

  (99)

  4.70 

Forfeited during the year

  (928)

  3.68 

Outstanding at 31 Dec 2021

  6,936 

  2.87 

Weighted average remaining contractual life (years)

  2.98 

 

 

Outstanding at 1 Jan 2020

  4,245 

  4.78 

Granted during the year2

  5,909 

  2.56 

Exercised during the year

  (107) 

  4.43 

Expired during the year

  (78) 

  4.64 

Forfeited during the year

  (2,763) 

  4.79 

Outstanding at 31 Dec 2020

  7,206 

  2.96 

Weighted average remaining contractual life (years)

  3.64 

 

1  Weighted average exercise price.

2  Includes a number of share option plans transferred from or to other subsidiaries of HSBC Holdings plc.

 

 

Post-employment benefit plans

We operate a number of pension plans throughout Europe for our employees. Some are defined benefit plans, of which HSBC Trinkaus & Burkhardt Pension Plan is the most prominent within the group. The pension risk section on page 73 contains details about policies and practices associated with the pensions plans.

The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and the discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future, or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions together with the rights of third parties such as trustees.

HSBC Trinkaus & Burkhardt Pension Plan

The plan is a final salary scheme and is calculated based on the employee length of service multiplied by a predefined benefit accrual and earnings. The pension is paid when the benefit falls due and is a specified pension payment, lump-sum or combination thereof. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the operation of the plan. Its assets are held separately from the assets of the group.

The strategic aim of the investment is to achieve, as continuously as possible, an increase in value over time. For this purpose, the fund invests mainly in government bonds, corporate bonds, investment funds and equities. It invests predominantly in developed regions. Overall, emphasis is placed on having a high degree of diversification.

The latest measurement of the defined benefit obligation of the plan at 31 December 2021 was carried out by Tim Voetmann and Hans-Peter Kieselmann, at Willis Towers Watson GmbH, who are Fellows of the German Association of Actuaries ('DAV'), using the projected unit credit method. The next measurement will have an effective date of 31 December 2022.

 

Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans

 

Fair value of plan assets

Present value of defined benefit obligations

Total

 

£m

£m

£m

Defined benefit pension plans

  668 

  (742)

  (74)

Defined benefit healthcare plans

  -

  (68)

  (68)

At 31 Dec 2021

  668 

  (810)

  (142)

Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities')

 

 

  (196)

Total employee benefit assets (within 'Prepayments, accrued income and other assets')

 

 

  54 

 

Defined benefit pension plans

  693

  (876) 

  (183) 

Defined benefit healthcare plans

  -

  (75) 

  (75) 

At 31 Dec 2020

  693

  (951) 

  (258) 

Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities')

 

 

  (288) 

Total employee benefit assets (within 'Prepayments, accrued income and other assets')

 

 

  30

 

 

Defined benefit pension plans

 

Net asset/(liability) under defined benefit pension plans

 

Fair value of plan assets

Present value of defined benefit obligations

Net defined benefit asset/(liability)

 

HSBC Trinkaus &

Burkhardt

Pension Plan2

Other
plans

HSBC Trinkaus &

Burkhardt

Pension Plan2

Other
plans

HSBC Trinkaus &

Burkhardt

Pension Plan2

Other
plans

 

£m

£m

£m

£m

£m

£m

At 1 Jan 2021

  435 

  258 

  (489)

  (387)

  (54)

  (129)

Service cost

  -

  -

  (7)

  (27)

  (7)

  (27)

-  current service cost

  -

  -

  (8)

  (11)

  (8)

  (11)

-  past service cost and gains from settlements

  -

  -

  1 

  (16)

  1 

  (16)

Net interest income/(cost) on the net defined benefit asset/(liability)

  3 

  4 

  (3)

  (3)

  -

  1 

Remeasurement effects recognised in other comprehensive income

  17 

  (2)

  26 

  16 

  43 

  14 

-  return on plan assets (excluding interest income)

  17 

  (2)

  -

  -

  17 

  (2)

-  actuarial gains/(losses)

  -

  -

  26 

  16 

  26 

  16 

-  other changes

  -

  -

  -

  -

  -

  -

Exchange differences

  (28)

  (1)

  29 

  9 

  1 

  8 

Benefits paid

  -

  (15)

  10 

  19 

  10 

  4 

Other movements1

  7 

  (10)

  (4)

  69 

  3 

  59 

At 31 Dec 2021

  434 

  234 

  (438)

  (304)

  (4)

  (70)

 

At 1 Jan 2020

  405

  175

  (434)

  (325)

  (29)

  (150)

Service cost

  -

  -

  (12)

  (1)

  (12)

  (1)

-  current service cost

  -

  -

  (14)

  (10)

  (14)

  (10)

-  past service cost and gains from settlements

  -

  -

  2

  9

  2

  9

Net interest income/(cost) on the net defined benefit asset/(liability)

  3

  16

  (4)

  (16)

  (1)

  -

Remeasurement effects recognised in other comprehensive income

  (3)

  84

  (20)

  (79)

  (23)

  5

-  return on plan assets (excluding interest income)

  (3)

  26

  -

  -

  (3)

  26

-  actuarial gains/(losses)

  -

  -

  (21)

  (27)

  (21)

  (27)

-  other changes

  -

  58

  1

  (52)

  1

  6

Exchange differences

  23

  -

  (24)

  (9)

  (1)

  (9)

Benefits paid

  -

  (39)

  10

  46

  10

  7

Other movements1

  7

  22

  (5)

  (3)

  2

  19

At 31 Dec 2020

  435

  258

  (489)

  (387)

  (54)

  (129)

1  Other movements include contributions by the group, contributions by employees, administrative costs and tax paid by plan.

2  The HSBC Trinkaus & Burkhardt Pension Plan and its comparatives have been disclosed as it is considered to be a prominent plan within the group. Figures disclosed comprise this prominent plan and other plans in Germany.

 

HSBC Trinkaus & Burkhardt AG does not expect to make contributions to the HSBC Trinkaus & Burkhardt Pension Plan during 2022. Benefits expected to be paid from the HSBC Trinkaus & Burkhardt Pension Plan to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

 

 

Benefits expected to be paid from plans

 

2022

2023

2024

2025

2026

2027-2031

 

£m

£m

£m

£m

£m

£m

HSBC Trinkaus & Burkhardt Pension Plan1

  10 

  9

  9

  11

  10

  59

1  The duration of the defined benefit obligation is 17.1 years for the HSBC Trinkaus & Burkhardt Pension Plan under the disclosure assumptions  adopted (2020: 18.2 years).

Fair value of plan assets by asset classes

 

31 Dec 2021

31 Dec 2020

 

Value

Quoted
market price
in active
market

No quoted
market price
in active
market

Thereof HSBC

Value

Quoted
market price
 in active
market

No quoted
market price
 in active
market

Thereof HSBC

 

£m

£m

£m

£m

£m

£m

£m

£m

HSBC Trinkaus & Burkhardt Pension Plan

 

 

 

 

 

 

 

 

Fair value of plan assets

  434 

  377 

  57 

  -

  435

  418

  17

  -

-  equities

  11 

  11 

  -

  -

  19

  19

  -

  -

-  bonds

  112 

  112 

  -

  -

  109

  109

  -

  -

-  other

  311 

  254 

  57 

  -

  307

  290

  17

  -

 

Post-employment defined benefit plans' principal actuarial financial assumptions

The group determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA-rated or equivalent) debt instruments with maturities consistent with those of the defined benefit obligations.

Key actuarial assumptions

 

Discount rate

Inflation rate

Rate of
increase for
pensions

Rate of pay
increase

 

%

%

%

%

HSBC Trinkaus & Burkhardt Pension Plan

 

 

 

 

At 31 Dec 2021

  1.14 

  1.75 

  1.75 

  1.75 

 

 

 

 

 

At 31 Dec 2020

  0.70 

  1.75 

  1.50 

  2.50 

 

Mortality tables and average life expectancy at age 65

 

Mortality
table

Life expectancy at age 65 for a male member currently:

Life expectancy at age 65 for a female member currently:

 

 

Aged 65

Aged 45

Aged 65

Aged 45

HSBC Trinkaus & Burkhardt Pension Plan

 

 

 

 

 

At 31 Dec 2021

RT 2018G1

  20.6 

  23.4 

  24.0 

  26.3 

 

 

 

 

 

 

At 31 Dec 2020

RT 2018G

  20.3 

  23.1 

  23.8 

  26.0 

1  Heubeck tables: RT 2018G. It is generally accepted and used mortality tables for occupational pension plans in Germany taking into account future mortality improvements and lighter mortality for higher-paid pensioners.

The effect of changes in key assumptions

 

HSBC Trinkaus & Burkhardt Pension Plan Obligation

 

Financial impact of increase

Financial impact of decrease

 

2021

2020

2021

2020

 

£m

£m

£m

£m

Discount rate - increase/decrease of 0.25%

  (13)

  (15)

  13 

  16

Inflation rate - increase/decrease of 0.25%

  11 

  16

  (9)

  (12)

Pension payments and deferred pensions - increase/decrease of 0.25%

  9 

  10

  (8)

  (10)

Pay - increase/decrease of 0.25%

  2 

  4

  (2)

  (4)

Change in mortality - increase of 1 year

  16 

  19

N/A

N/A

 

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this in unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit asset recognised in the balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period.

 

Directors' emoluments

The aggregate emoluments of the Directors of the bank, computed in accordance with the Companies Act 2006 as amended by statutory instrument 2008 No.410, were:

 

 

2021

2020

 

£000

£000

Fees1

  1,525 

  1,256 

Salaries and other emoluments2, 5

  3,569 

  2,321 

Annual incentives3

  694 

  576

Long-term incentives4

  511 

  727

Year ended 31 Dec

  6,299 

  4,880 

1  Fees paid to non-executive Directors.

2  Salaries and other emoluments include Fixed Pay Allowances.

3  Discretionary annual incentives for executive Directors are based on a combination of individual and corporate performance, and are determined by the Remuneration Committee of the bank's parent company, HSBC Holdings plc. Incentive awards made to executive directors are delivered in the form of cash and HSBC Holdings plc shares. The total amount shown is comprised of £346,959 (2020: £288,050) in cash and £346,959 (2020: £288,050) in Restricted Shares, which is the upfront portion of the annual incentive granted in respect of performance year 2021.

4  The amount shown is comprised of £274,177 (2020: £428,822) in deferred cash, £237,259 (2020: £289,261) in deferred Restricted Shares, and £0 (2020: £8,826) in shares under the Group Performance Share Plan ('GPSP'). These amounts relate to the portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2021. The total vesting period of deferred cash and share awards is no less than three years, with 33% of the award vesting on each of the first and second anniversaries of the date of the award, and the balance vesting on the third anniversary of the date of the award. The deferred share awards are subject to at least a six-month retention period upon vesting. Details of the Plans are contained within the Directors' Remuneration Report of HSBC Holdings plc. The cost of any awards subject to service conditions under the HSBC Share Plan 2011 are recognised through an annual charge based on the fair value of the awards, apportioned over the period of service to which the award relates.

5  Includes a payment of £1,380,193 (2020: £93,097) made to a Director as compensation for loss of employment.

 

 

No Director exercised share options over HSBC Holdings plc ordinary shares during the year.

Retirement benefits accruing to one Director under a money purchase scheme in respect of Directors' qualifying services (2020: one Director).  

In addition, there were payments during 2021 under unfunded retirement benefit agreements to former Directors of £396,363 (2020: £785,548). The provision at 31 December 2021 in respect of unfunded pension obligations to former Directors amounted to £5,387,505 (2020: £10,245,741).

Of these aggregate figures, the following amounts are attributable to the highest paid Director:

 

2021

2020

 

£000

£000

Salaries and other emoluments

  1,399 

  1,392 

Annual incentives1

  558 

  417

Long-term incentives2

  390 

  677

Year ended 31 Dec

  2,347 

  2,486 

1  Awards made to the highest paid Director are delivered in the form of cash and HSBC Holdings plc shares. The amount shown comprises £279,225 (2020: £208,736) in cash and £279,225 (2020: £208,736) in Restricted Shares.

2  The amount shown comprises £209,492 (2020: £402,567) in deferred cash, £180,147 (2020: £274,104) in deferred Restricted Shares. These amounts relate to a portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2021. The total vesting period of deferred cash and share awards is no less than three years, with 33% of the award vesting on each of the first and second anniversaries of the date of the award, and the balance vesting on the third anniversary of the date of the award. The share awards are subject to a six-month retention period upon vesting.

No pension contributions were made by the bank in respect of services by the highest paid Director during the year   (2020: 19,298).

 

6

Auditors' remuneration

 

 

2021

2020

 

£m

£m

Audit fees payable to PwC

  10.4 

  11.3 

Other audit fees payable

  0.4 

  0.4 

Year ended 31 Dec

  10.8 

  11.7 

 

 

Fees payable by the group to PwC

 

 

2021

2020

 

 

£m

£m

Fees for HSBC Bank plc's statutory audit1

 

  4.8 

  5.3 

Fees for other services provided to the group

 

  14.3 

  13.1 

-  audit of the group's subsidiaries2

 

  5.6 

  6.0 

-  audit-related assurance services3

 

  5.7 

  4.2 

-  other assurance services4

 

  3.0 

  2.9 

Year ended 31 Dec

 

  19.1 

  18.4 

1  Fees payable to PwC for the statutory audit of the consolidated financial statements of the group and the separate financial statements of HSBC Bank plc. They exclude amounts payable for the statutory audit of the bank's subsidiaries which have been included in 'Fees for other services provided to the group'.

2  Including fees payable to PwC for the statutory audit of the bank's subsidiaries.

3  Including services for assurance and other services that relate to statutory and regulatory filings, including interim reviews.

4  Including permitted services relating to attestation reports on internal controls of a service organisation primarily prepared for and used by third-party end user, including comfort letters.

Fees payable for non-audit services for HSBC Bank plc are not disclosed separately because such fees are disclosed on a consolidated basis for the group.

 

7

Tax

 

 

Tax expense

 

2021

2020

 

£m

£m

Current tax

  (187)

  195

-  for this year

  (245)

  186

-  adjustments in respect of prior years

  58 

  9

Deferred tax

  164 

  (331)

-  origination and reversal of temporary differences

  248 

  (339)

-  effect of changes in tax rates

  (56)

  (26)

-  adjustments in respect of prior years

  (28)

  34

Year ended 31 Dec1

  (23)

  (136)

1  In addition to amounts recorded in the income statement, a tax credit of £135m (2020: charge of £135m) was recorded directly to equity.

The group's profits are taxed at different rates depending on the country in which the profits arise. The key applicable corporate tax rates in 2021 included the UK and France. The UK tax rate applying to HSBC Bank plc and its banking subsidiaries was 27% (2020: 27%), comprising 19% corporation tax plus 8% surcharge on UK banking profits. The applicable tax rate in France was 28% (2020: 32%) and will reduce to 26% from 1 January 2022. Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

During 2021, legislation was enacted to increase the main rate of UK corporation tax from 19% to 25% from 1 April 2023, increasing the tax credit for 2021 by £56m due to the remeasurement of deferred tax balances. In the UK Budget on 27 October 2021, HM Treasury announced that the UK banking surcharge rate will reduce from 8% to 3% with effect from 1 April 2023. The reduction in the UK banking surcharge rate has not been reflected for accounting purposes as the legislation to effect this change had not been substantively enacted at the balance sheet date.

In December 2021, the OECD published model rules that provided a template for countries to implement a new global minimum tax rate of 15% from 2023. In January 2022, the UK government opened a consultation on how the UK implements the rules. The impact on HSBC will depend on exactly how the UK implements the model rules, as well as the profitability and local tax liabilities of HSBC's operations in each tax jurisdiction from 2023. Separately, potential changes to tax legislation and tax rates in the countries in which we operate could increase our effective tax rate in future as governments seek revenue to pay for Covid-19 support packages.

 

 

 

Tax reconciliation  

The tax charged to the income statement differs from the tax expense that would apply if all profits had been taxed at the UK corporation tax rate as follows:

 

2021

2020

 

£m

%

£m

%

Profit/(loss) before tax

 1,023

 

  (1,614) 

 

Tax expense

 

 

 

 

Taxation at UK corporation tax rate

  194 

  19.0 

  (307) 

  19.0 

Impact of taxing overseas profits at different rates

  7 

  0.7 

  (75) 

  4.6 

UK banking surcharge

  (2)

  (0.2)

  (100) 

  6.2 

Items increasing the tax charge in 2021:

 

 

 

 

- impact of temporary differences between French tax returns and IFRS

  324 

  31.7 

  -

  -

- bank levy

  72 

  7.0 

  31

  (1.9)

- adjustments in respect of prior periods

  30 

  2.9 

  45

  (2.8)

Items reducing the tax charge in 2021:

 

 

 

 

- tax impact of planned sale of French retail banking business

  (324)

  (31.7)

  -

  -

- non-taxable income and gains

  (92)

  (9.0)

  (55) 

  3.4 

- impact of changes in tax rates

  (56)

  (5.5)

  (26) 

  1.6 

- deductions for AT1 coupon payments

  (53)

  (5.2)

  (51) 

  3.2 

 - movements in unrecognised deferred tax

  (47)

  (4.6)

  321

  (19.9)

- effect of profits in associates and joint ventures

  (43)

  (4.2)

  (3) 

  0.2 

- other permanent differences

  (26)

  (2.5)

  24

  (1.5)

- local taxes and overseas withholding taxes

  (4)

  (0.4)

  49

  (3.0)

- other

  (3)

  (0.3)

  11

  (0.7)

Year ended 31 Dec

  (23)

  (2.3)

  (136) 

  8.4 

 

 

 

The effective tax rate for the year was (2.3)% (2020: 8.4%), reflecting a tax credit arising on a profit before tax. The tax credit 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 for 2020 was reduced by 19.9% by the non-recognition of deferred tax on losses arising in France.

The signing of a framework agreement for the planned sale of the French retail banking business resulted in a tax deduction (tax value of £324m) for a provision for loss on disposal which was recorded in the French tax return. A deferred tax liability of the same amount arises as a consequence of the temporary difference between the French tax basis and IFRS in respect of this provision.

Accounting for taxes involves some estimation because the tax law is uncertain and the application requires a degree of judgement, which authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account external advice where appropriate. We do not expect significant liabilities to arise in excess of the amounts provided. The current tax asset includes an estimate of tax recoverable from HMRC with regards to past dividends received from EU resident companies. The ultimate resolution of this matter involves litigation for which the outcome is uncertain.

 

Movement of deferred tax assets and liabilities

 

 

Retirement benefits

Loan impairment provisions

Property, plant and equipment

FVOCI investments

Goodwill and intangibles

Relief for tax losses 2

Other1

Total

The group

 

£m

£m

£m

£m

£m

£m

£m

£m

Assets

 

  63 

  66 

  171 

  -

  157 

  418 

  -

  875 

Liabilities

 

  -

  (9)

  (6)

  (166)

  -

  -

  (117)

  (298)

At 1 Jan 2021

 

  63 

  57 

  165 

  (166)

  157 

  418 

  (117)

  577 

Income statement

 

  28 

  (10)

  51 

  3 

  55 

  (37)

  (254)

  (164)

Other comprehensive income

 

  (17)

  2 

  (1)

  105 

  -

  -

  82 

  171 

At 31 Dec 2021

 

  74 

  49 

  215 

  (58)

  212 

  381 

  (289)

  584 

Assets3

 

  74 

  53 

  215 

  -

  212 

  381 

  -

  935 

Liabilities3

 

  -

  (4)

  -

  (58)

  -

  -

  (289)

  (351)

 

Assets

 

  82

  41

  172

  -

  142

  82

  2

  521

Liabilities

 

  -

  (6) 

  (6) 

  (123) 

  -

  -

  -

  (135) 

At 1 Jan 2020

 

  82

  35

  166

  (123) 

  142

  82

  2

  386

Income statement

 

  (37) 

  22

  (1) 

  (3) 

  15

  351

  (16) 

  331

Other comprehensive income

 

  18

  -

  -

  (40) 

  -

  (15) 

  (103) 

  (140) 

At 31 Dec 2020

 

  63

  57

  165

  (166) 

  157

  418

  (117) 

  577

Assets3

 

  63

  66

  171

  -

  157

  418

  -

  875

Liabilities3

 

  -

  (9) 

  (6) 

  (166) 

  -

  -

  (117) 

  (298) 

1  Other deferred tax assets and liabilities relate to share-based payments, cash flow hedges and temporary differences arising between IFRS and French tax returns.

2  The deferred tax asset recognised in respect of tax losses mainly relates to France (£294m), the UK (£40m) and US State tax losses of the New York branch of HSBC Bank plc (£28m), all of which are supported by future profit forecasts.

3  After netting off balances within countries, the balances as disclosed in the financial statements are as follows: deferred tax assets £599m (2020: £597m); and deferred tax liabilities £15m (2020: £20m).

 

Management has assessed the likely availability of future taxable profits against which to recover the deferred tax assets of the Company and the Group, taking into consideration the reversal of existing taxable temporary differences, past business performance and forecasts of future business performance.

The group's net deferred tax asset of £584m (2020: £577m) included a net UK deferred tax asset of £448m (2020: £507m), of which £103m related to UK banking tax losses which are expected to be substantially recovered within one year, and a net deferred asset of £7m (2020: £nil) in France, of which £294m (2020: £nil) related to tax losses which are expected to be substantially recovered within 10 years.

Management is satisfied that although the Company recorded a UK tax loss in the year, the aforementioned evidence is sufficient to support recognition of all UK deferred tax assets. These deferred tax assets are supported by future profit forecasts for the whole of HSBC's UK tax group. This includes a number of companies which are not part of the HSBC Bank plc group, in particular HSBC UK Bank plc and its subsidiaries.

Following the signing of a framework agreement in 2021 for the planned sale of the French retail banking business, that business is now excluded from our deferred tax analysis as its sale is considered probable. Although the French consolidated tax group recorded a tax loss in both 2020 and 2021, this would have been taxable profit if the effects of the retail banking business and other non-recurring items, mainly related to the restructuring of the European business, were excluded. The French net deferred tax asset is supported by forecasts of taxable profit, also taking into consideration the history of profitability in the remaining businesses. No net deferred tax asset was recognised as at 31 December 2020 as management did not consider there to be convincing evidence of sufficient future taxable profits to support recognition.

 

Movement of deferred tax assets and liabilities

 

Retirement benefits

Property, plant and equipment

Goodwill and intangibles

Relief for tax losses2

Other1

Total

The bank

£m

£m

£m

£m

£m

£m

Assets2

  16 

  162 

  156 

  416 

  -

  750 

Lliabilities2

  -

  -

  -

  -

  (204)

  (204)

At 1 Jan 2021

  16 

  162 

  156 

  416 

  (204)

  546 

Income statement

  2 

  45 

  35 

  (347)

  73 

  (192)

Other comprehensive income

  (1)

  -

  -

  -

  154 

  153 

Foreign exchange and other adjustments

  -

  -

  -

  -

  2 

  2 

At 31 Dec 2021

  17 

  207 

  191 

  69 

  25 

  509 

Assets3

  17 

  207 

  191 

  69 

  25 

  509 

Liabilities3

  -

  -

  -

  -

  -

  -

 

Assets

  23

  151

  145

  53

  -

  372

Liabilities

  -

  -

  -

  -

  (47) 

  (47) 

At 1 Jan 2020

  23

  151

  145

  53

  (47) 

  325

Income statement

  (10) 

  11

  11

  377

  (41) 

  348

Other comprehensive income

  3

  -

  -

  (14) 

  (116) 

  (127) 

At 31 Dec 2020

  16

  162

  156

  416

  (204) 

  546

Assets3

  16

  162

  156

  416

  -

  750

Liabilities3

  -

  -

  -

  -

  (204) 

  (204) 

1  Other deferred tax assets and liabilities relate to fair value of own debt, loan impairment allowances, share-based payments and cash flow hedges.

2  The deferred tax asset recognised in respect of losses mainly relates to US State tax losses of the New York branch of HSBC Bank plc and losses in the UK; both are supported by future profit forecasts.

3  After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets £510m (2020: £549m) and deferred tax liabilities nil (2020: £3m).

 

Unrecognised deferred tax

The group

The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was £1,944m (2020: £2,081m). These amounts consist of unused tax losses, tax credits and temporary differences of £1,141m (2020: £925m) arising in the New York branch of HSBC Bank plc and of £782m (2020: £1,137m) arising in France. Of the unrecognised losses, £394m expire within 10 years (2020: £88m), and the remainder expire after 10 years or do not expire. The value of the French losses which are recognised is based on analysis of the probability of recovery, taking into account forecasting uncertainty.

The bank

The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was £1,141m (2020: £925m). These amounts include unused tax losses, tax credits and temporary differences arising in the New York branch of HSBC Bank plc of £1,141m (2020: 925m). Of the unrecognised losses, £394m expire within 10 years (2020: £88m), and the remainder expire after 10 years.

There are no unrecognised deferred tax liabilities arising from the group's investments in subsidiaries and branches.

 

8

Dividends

 

 

Dividends to the parent company

 

2021

2020

 

£ per share

£m

£ per share

£m

Dividends on preference shares classified as equity

 

 

 

 

Dividend on HSBC Bank plc non-cumulative third dollar preference shares1

  0.001 

  -

  1.47 

  51

Total

  0.001 

  -

  1.47 

  51

Total coupons on capital securities classified as equity

 

  194 

 

  212

Dividends to parent

 

  194 

 

  263

1  In 2021,the liquidation value of USD third dollar preference shares reduced to $0.01 per share.

.

 

No dividend was declared on ordinary share capital in respect of 2021 and 2020.

 

Total coupons on capital securities classified as equity

 

 

 

 

 

2021

2020

 

First call date

£m

£m

Undated Subordinated additional Tier 1 instruments

 

 

 

-  €1,900m Undated Subordinated Resettable Additional Tier 1 instrument 2015

Dec 2020

84

103

-  €235m Undated Subordinated Resettable Additional Tier 1 instrument  2016

Jan 2022

12

11

-  €300m Undated Subordinated Resettable Additional Tier 1 instrument 2018

Mar 2023

10

10

-  £555m Undated Subordinated Resettable Additional Tier 1 instrument 2018

Mar 2023

28

28

-  £500m Undated Subordinated Resettable Additional Tier 1 instrument 2019

Nov 2024

24

24

-  €250m Undated Subordinated Resettable Additional Tier 1 instrument 2019

Nov 2024

7

8

-  £431m Undated Subordinated Resettable Additional Tier 1 instrument 2019

Dec 2024

20

20

-  €200m Undated Subordinated Resettable Additional Tier 1 instrument 2019

Jan 2025

9

8

Total

 

  194 

  212

 

 

 

9

Segmental analysis

 

Basis of preparation

The Chief Executive, supported by the rest of the Executive Committee, is considered the Chief Operating Decision Maker ('CODM') for the purposes of identifying the group's reportable segments. Business results are assessed by the CODM on the basis of adjusted performance that removes the effects of significant items from reported results. We therefore present a reconciliation between reported and adjusted results as required by IFRSs.

Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and functions to the extent that they can be meaningfully attributed to businesses and countries. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to businesses are included in Corporate Centre.

Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms. The intra-group elimination items for the businesses are presented in Corporate Centre.

Change in reportable segments

During the year, Global Banking and Markets ('GBM') in Europe has been re-segmented into Market & Securities Services ('MSS'), Global Banking ('GB') and GBM Other to align with the reorganised GBM management structure and internal reporting to the Executive Committee and CODM. This does not change the Group's management of its global GBM strategy.

Comparative data have been re-presented accordingly.

Our businesses

HSBC provides a comprehensive range of banking and related financial services to its customers through its global businesses. The products and services offered to customers are organised by these global businesses.

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. These business segment are our reportable segments under IFRS 8 'Operating Segments'.

 

 

By operating segment:

Adjusted profit/(loss) before tax

 

2021

 

MSS

GB

GBM
 Other

CMB

WPB

Corporate Centre

Total

 

£m

£m

£m

£m

£m

£m

£m

Net operating income/(expense) before change in expected credit losses and other credit impairment charges1

    2,055 

    1,367 

    579 

    1,095 

    1,275 

  (41) 

    6,330 

-  of which: net interest income/(expense)

    (232)