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HSBC Holdings PLC (HSBA)

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Wednesday 11 March, 2020

HSBC Holdings PLC

Annual Financial Report - 8 of 9

RNS Number : 6664F
HSBC Holdings PLC
11 March 2020
 


10

Segmental analysis

The Group Chief Executive, supported by the rest of the GMB, is considered the Chief Operating Decision Maker ('CODM') for the purposes of identifying the Group's reportable segments. Global business results are assessed by the CODM on the basis of adjusted performance that removes the effects of significant items and currency translation from reported results. We therefore present these results on an adjusted basis as required by IFRSs. The 2018 and 2017 adjusted performance information is presented on a constant currency basis. The 2018 and 2017 income statements are converted at the average rates of exchange for 2019, and the balance sheets at 31 December 2018 and 31 December 2017 at the prevailing rates of exchange on 31 December 2019.

Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully attributed to global businesses. 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 global businesses are included in Corporate Centre.

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

Our global businesses

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

•   RBWM offers a broad range of products and services to meet the personal banking and wealth management needs of individual customers. Typically, customer offerings include personal banking products, such as current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services, as well as wealth management services, including insurance and investment products, global asset management services and financial planning services.

•   CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance and investments. CMB also offers its customers access to products and services offered by other global businesses, such as GB&M, which include foreign exchange products, raising capital on debt and equity markets and advisory services.

•   GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.

•   GPB provides a range of services to high net worth individuals and families with complex and international needs within the Group's major markets.


HSBC adjusted profit before tax and balance sheet data

 

 

2019

 

 

Retail
Banking and
Wealth
Management

Commercial
Banking

Global
Banking and
Markets

Global
Private
Banking

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

$m

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

1

23,400

 

15,292

 

14,916

 

1,848

 

(47

)

55,409

 

-  external

 

17,026

 

14,805

 

18,517

 

1,445

 

3,616

 

55,409

 

-  inter-segment

 

6,374

 

487

 

(3,601

)

403

 

(3,663

)

-

 

of which: net interest income/(expense)

 

16,525

 

11,226

 

5,601

 

879

 

(3,612

)

30,619

 

Change in expected credit losses and other credit impairment charges

 

(1,390

)

(1,184

)

(153

)

(22

)

(7

)

(2,756

)

Net operating income/(expense)

 

22,010

 

14,108

 

14,763

 

1,826

 

(54

)

52,653

 

Total operating expenses

 

(14,017

)

(6,801

)

(9,417

)

(1,424

)

(1,136

)

(32,795

)

Operating profit/(loss)

 

7,993

 

7,307

 

5,346

 

402

 

(1,190

)

19,858

 

Share of profit in associates and joint ventures

 

55

 

-

 

-

 

-

 

2,299

 

2,354

 

Adjusted profit before tax

 

8,048

 

7,307

 

5,346

 

402

 

1,109

 

22,212

 

 

 

%

%

%

%

%

%

Share of HSBC's adjusted profit before tax

 

36.2

 

32.9

 

24.1

 

1.8

 

5.0

 

100.0

 

Adjusted cost efficiency ratio

 

59.9

 

44.5

 

63.1

 

77.1

 

(2,417.0

)

59.2

 

Adjusted balance sheet data

 

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

 

395,393

 

346,060

 

246,266

 

47,593

 

1,431

 

1,036,743

 

Interests in associates and joint ventures

 

449

 

-

 

-

 

-

 

24,025

 

24,474

 

Total external assets

 

526,621

 

367,509

 

1,066,584

 

52,224

 

702,214

 

2,715,152

 

Customer accounts

 

689,283

 

386,522

 

292,284

 

62,943

 

8,083

 

1,439,115

 

 



 

HSBC adjusted profit before tax and balance sheet data (continued)

 

 

 

2018

 

 

Retail
Banking
and Wealth
Management

Commercial
Banking

Global
Banking and
Markets

Global
Private
Banking

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

$m

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

1

21,374

 

14,465

 

15,025

 

1,757

 

(290

)

52,331

 

-  external

 

16,794

 

14,226

 

17,554

 

1,474

 

2,283

 

52,331

 

-  inter-segment

 

4,580

 

239

 

(2,529

)

283

 

(2,573

)

-

 

of which: net interest income/(expense)

 

15,432

 

10,380

 

5,122

 

873

 

(2,189

)

29,618

 

Change in expected credit losses and other credit impairment (charges)/recoveries

 

(1,134

)

(712

)

31

 

7

 

119

 

(1,689

)

Net operating income/(expense)

 

20,240

 

13,753

 

15,056

 

1,764

 

(171

)

50,642

 

Total operating expenses

 

(13,255

)

(6,275

)

(9,170

)

(1,425

)

(1,781

)

(31,906

)

Operating profit/(loss)

 

6,985

 

7,478

 

5,886

 

339

 

(1,952

)

18,736

 

Share of profit in associates and joint ventures

 

33

 

-

 

-

 

-

 

2,413

 

2,446

 

Adjusted profit before tax

 

7,018

 

7,478

 

5,886

 

339

 

461

 

21,182

 

 

 

%

%

%

%

%

%

Share of HSBC's adjusted profit before tax

 

33.1

 

35.3

 

27.8

 

1.6

 

2.2

 

100.0

 

Adjusted cost efficiency ratio

 

62.0

 

43.4

 

61.0

 

81.1

 

(614.1

)

61.0

 

Adjusted balance sheet data

 

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

 

367,917

 

337,099

 

247,125

 

39,602

 

2,533

 

994,276

 

Interests in associates and joint ventures

 

398

 

-

 

-

 

-

 

21,903

 

22,301

 

Total external assets

 

482,967

 

364,638

 

1,025,737

 

45,520

 

670,333

 

2,589,195

 

Customer accounts

 

649,172

 

362,274

 

294,584

 

65,053

 

8,655

 

1,379,738

 

 

 

 

2017

 

 

Retail
Banking and
Wealth
Management

Commercial
Banking

Global
Banking and
Markets

Global
Private
Banking

Corporate Centre

Total

 

Footnotes

$m

$m

$m

$m

$m

$m

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

1

19,708

 

12,883

 

14,823

 

1,698

 

1,061

 

50,173

 

-  external

 

16,582

 

13,009

 

16,086

 

1,433

 

3,063

 

50,173

 

-  inter-segment

 

3,126

 

(126

)

(1,263

)

265

 

(2,002

)

-

 

of which: net interest income/(expense)

 

13,573

 

8,822

 

4,746

 

812

 

(499

)

27,454

 

Loan impairment charges and other credit risk provisions/(recoveries)

 

 

(941

)

(468

)

(439

)

(17

)

179

 

(1,686

)

Net operating income

 

18,767

 

12,415

 

14,384

 

1,681

 

1,240

 

48,487

 

Total operating expenses

 

(12,386

)

(5,770

)

(8,709

)

(1,384

)

(2,010

)

(30,259

)

Operating profit/(loss)

 

6,381

 

6,645

 

5,675

 

297

 

(770

)

18,228

 

Share of profit in associates and joint ventures

 

12

 

-

 

-

 

-

 

2,316

 

2,328

 

Adjusted profit before tax

 

6,393

 

6,645

 

5,675

 

297

 

1,546

 

20,556

 

 

 

%

%

%

%

%

%

Share of HSBC's adjusted profit before tax

 

31.1

 

32.3

 

27.6

 

1.4

 

7.6

 

100.0

 

Adjusted cost efficiency ratio

 

62.8

 

44.8

 

58.8

 

81.5

 

189.4

 

60.3

 

Adjusted balance sheet data

 

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

 

337,768

 

308,870

 

246,890

 

40,013

 

7,382

 

940,923

 

Interests in associates and joint ventures

 

364

 

-

 

-

 

-

 

21,558

 

21,922

 

Total external assets

 

457,126

 

340,211

 

960,732

 

46,706

 

667,822

 

2,472,597

 

Customer accounts

 

629,442

 

356,488

 

276,634

 

65,491

 

11,017

 

1,339,072

 


1  Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also referred to as revenue.

Reported external net operating income is attributed to countries and territories on the basis of the location of the branch responsible for reporting the results or advancing the funds:

 

 

2019

2018

2017

 

Footnotes

$m

$m

$m

Reported external net operating income by country/territory

1

56,098

 

53,780

 

51,445

 

-  UK

 

9,011

 

10,340

 

11,057

 

-  Hong Kong

 

18,449

 

17,162

 

14,992

 

-  US

 

4,471

 

4,379

 

4,573

 

-  France

 

1,942

 

1,898

 

2,203

 

-  other countries

 

22,225

 

20,001

 

18,620

 

1  Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also referred to as revenue.

 

Adjusted results reconciliation

 

 

2019

2018

2017

 

 

Adjusted

Significant items

Reported

Adjusted

Currency translation

Significant items

Reported

Adjusted

Currency translation

Significant items

Reported

 

Footnotes

$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

$m

Revenue

1

55,409

 

689

 

56,098

 

52,331

 

1,617

 

(168

)

53,780

 

50,173

 

1,344

 

(72

)

51,445

 

ECL

 

(2,756

)

-

 

(2,756

)

(1,689

)

(78

)

-

 

(1,767

)

N/A

N/A

N/A

N/A

LICs

 

N/A

N/A

N/A

N/A

N/A

N/A

N/A

(1,686

)

(83

)

-

 

(1,769

)

Operating expenses

 

(32,795

)

(9,554

)

(42,349

)

(31,906

)

(1,109

)

(1,644

)

(34,659

)

(30,259

)

(915

)

(3,710

)

(34,884

)

Share of profit in associates and joint ventures

 

2,354

 

-

 

2,354

 

2,446

 

90

 

-

 

2,536

 

2,328

 

47

 

-

 

2,375

 

Profit/(loss) before tax

 

22,212

 

(8,865

)

13,347

 

21,182

 

520

 

(1,812

)

19,890

 

20,556

 

393

 

(3,782

)

17,167

 


1  Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also referred to as revenue.

Adjusted balance sheet reconciliation

 

2019

2018

2017

 

Reported and adjusted

Adjusted

Currency translation

Reported

Adjusted

Currency translation

Reported

 

$m

$m

$m

$m

$m

$m

$m

Loans and advances to customers (net)

1,036,743

 

994,276

 

(12,580

)

981,696

 

940,923

 

22,041

 

962,964

 

Interests in associates and joint ventures

24,474

 

22,301

 

106

 

22,407

 

21,922

 

822

 

22,744

 

Total external assets

2,715,152

 

2,589,195

 

(31,071

)

2,558,124

 

2,472,597

 

49,174

 

2,521,771

 

Customer accounts

1,439,115

 

1,379,738

 

(17,095

)

1,362,643

 

1,339,072

 

25,390

 

1,364,462

 

 

Adjusted profit reconciliation

 

 

2019

2018

2017

 

Footnotes

$m

$m

$m

Year ended 31 Dec

 

 

 

 

Adjusted profit before tax

 

22,212

 

21,182

 

20,556

 

Significant items

 

(8,865

)

(1,812

)

(3,782

)

-  customer redress programmes (revenue)

 

(163

)

53

 

(108

)

-  disposals, acquisitions and investment in new businesses (revenue)

 

768

 

(113

)

274

 

-  fair value movements on financial instruments

1

84

 

(100

)

(245

)

-  costs of structural reform

2

(158

)

(361

)

(420

)

-  costs to achieve

 

-

 

-

 

(3,002

)

-  customer redress programmes (operating expenses)

 

(1,281

)

(146

)

(655

)

-  disposals, acquisitions and investment in new businesses (operating expenses)

 

-

 

(52

)

(53

)

-  gain on partial settlement of pension obligation

 

-

 

-

 

188

 

-  goodwill impairment

 

(7,349

)

-

 

-

 

-  past service costs of guaranteed minimum pension benefits equalisation

 

-

 

(228

)

-

 

-  restructuring and other related costs

 

(827

)

(66

)

-

 

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

 

61

 

(816

)

198

 

-  currency translation on significant items

 

 

17

 

41

 

Currency translation

 

 

520

 

393

 

Reported profit before tax

 

13,347

 

19,890

 

17,167

 

1  Fair value movements on financial instruments include non-qualifying hedges and debt value adjustments on derivatives.

2  Comprises costs associated with preparations for the UK's exit from the European Union, costs to establish the UK ring-fenced bank (including the UK ServCo group) and costs associated with establishing an intermediate holding company in Hong Kong.



11

Trading assets

 

 

 

2019

2018

 

Footnotes

$m

$m

Treasury and other eligible bills

 

21,789

 

22,674

 

Debt securities

 

126,043

 

130,539

 

Equity securities

 

78,827

 

60,896

 

Trading securities

 

226,659

 

214,109

 

Loans and advances to banks

1

8,402

 

10,425

 

Loans and advances to customers

1

19,210

 

13,596

 

Year ended 31 Dec

 

254,271

 

238,130

 

1  Loans and advances to banks and customers include reverse repos, stock borrowing and other accounts.

 

Trading securities1

 

 

 

 

 

2019

2018

 

Footnotes

$m

$m

US Treasury and US Government agencies

2

25,722

 

34,664

 

UK Government

 

10,040

 

9,710

 

Hong Kong Government

 

9,783

 

10,772

 

Other governments

 

72,456

 

66,530

 

Asset-backed securities

3

4,691

 

3,351

 

Corporate debt and other securities

 

25,140

 

28,186

 

Equity securities

 

78,827

 

60,896

 

At 31 Dec

 

226,659

 

214,109

 

1  Included within these figures are debt securities issued by banks and other financial institutions of $17,846m (2018: $18,918m), of which $2,637m (2018: $2,367m) are guaranteed by various governments.

2  Includes securities that are supported by an explicit guarantee issued by the US Government.

3  Excludes asset-backed securities included under US Treasury and US Government agencies.


12

Fair values of financial instruments carried at fair value

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk taker.

Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is used. For inactive markets, HSBC sources alternative market information, with greater weight given to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument comparability, consistency of data sources, underlying data accuracy and timing of prices.

For fair values determined using valuation models, the control framework includes development or validation by independent support functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming operational and are calibrated against external market data on an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including portfolio changes, market movements and other fair value adjustments.

The majority of financial instruments measured at fair value are in GB&M. GB&M's fair value governance structure comprises its Finance function, Valuation Committees and a Valuation Committee Review Group. Finance is responsible for establishing procedures governing valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the Valuation Committees, which consist of independent support functions. These committees are overseen by the Valuation Committee Review Group, which considers all material subjective valuations.

Financial liabilities measured at fair value

In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread that is appropriate to HSBC's liabilities. The change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The difference in the valuations is attributable to the Group's own credit spread. This methodology is applied consistently across all securities.

Structured notes issued and certain other hybrid instruments are included within trading liabilities and are measured at fair value. The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes.

Gains and losses arising from changes in the credit spread of liabilities issued by HSBC, recorded in other comprehensive income, reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.

Fair value hierarchy

Fair values of financial assets and liabilities are determined according to the following hierarchy:

•   Level 1 - valuation technique using quoted market price. These are financial instruments with quoted prices for identical instruments in active markets that HSBC can access at the measurement date.

•   Level 2 - valuation technique using observable inputs. These are financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

•   Level 3 - valuation technique with significant unobservable inputs. These are financial instruments valued using valuation techniques where one or more significant inputs are unobservable.


Financial instruments carried at fair value and bases of valuation

 

2019

2018

 

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Recurring fair value measurements
at 31 Dec

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Trading assets

186,653

 

62,639

 

4,979

 

254,271

 

178,100

 

53,271

 

6,759

 

238,130

 

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

26,505

 

9,373

 

7,749

 

43,627

 

23,125

 

12,494

 

5,492

 

41,111

 

Derivatives

1,728

 

239,131

 

2,136

 

242,995

 

1,868

 

203,534

 

2,423

 

207,825

 

Financial investments

271,467

 

84,087

 

2,023

 

357,577

 

263,885

 

78,882

 

2,000

 

344,767

 

Liabilities

 

 

 

 

 

 

 

 

Trading liabilities

66,925

 

16,192

 

53

 

83,170

 

66,300

 

18,073

 

58

 

84,431

 

Financial liabilities designated at fair value

9,549

 

149,901

 

5,016

 

164,466

 

6,815

 

136,362

 

5,328

 

148,505

 

Derivatives

1,331

 

235,864

 

2,302

 

239,497

 

2,845

 

201,234

 

1,756

 

205,835

 


Transfers between Level 1 and Level 2 fair values

 

Assets

Liabilities

 

Financial investments

Trading assets

Designated
and otherwise mandatorily measured at fair value

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 

$m

$m

$m

$m

$m

$m

$m

At 31 Dec 2019

 

 

 

 

 

 

 

Transfers from Level 1 to Level 2

5,257

 

3,304

 

1,332

 

24

 

278

 

-

 

-

 

Transfers from Level 2 to Level 1

3,486

 

2,726

 

673

 

111

 

220

 

-

 

117

 

At 31 Dec 2018

 

 

 

 

 

 

 

Transfers from Level 1 to Level 2

367

 

435

 

2

 

1

 

79

 

-

 

-

 

Transfers from Level 2 to Level 1

17,861

 

4,959

 

85

 

128

 

1,821

 

-

 

138

 


Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.

Fair value adjustments

Fair value adjustments are adopted when HSBC determines there are additional factors considered by market participants that are not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement, such as when models are enhanced and therefore fair value adjustments may no longer be required.


Global Banking and Markets and Corporate Centre fair value adjustments

 

 

 

 

 

2019

2018

 

GB&M

Corporate Centre

GB&M

Corporate Centre

 

$m

$m

$m

$m

Type of adjustment

 

 

 

 

Risk-related

1,040

 

125

 

1,042

 

138

 

-  bid-offer

428

 

79

 

430

 

76

 

-  uncertainty

115

 

1

 

99

 

6

 

-  credit valuation adjustment

355

 

38

 

442

 

52

 

-  debt valuation adjustment

(126

)

-

 

(198

)

-

 

-  funding fair value adjustment

241

 

7

 

256

 

4

 

-  other

27

 

-

 

13

 

-

 

Model-related

71

 

3

 

79

 

3

 

-  model limitation

68

 

3

 

79

 

3

 

-  other

3

 

-

 

-

 

-

 

Inception profit (Day 1 P&L reserves)

72

 

-

 

85

 

-

 

At 31 Dec

1,183

 

128

 

1,206

 

141

 


Bid-offer

IFRS 13 'Fair value measurement' requires the use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position.

Uncertainty

Certain model inputs may be less readily determinable from market data and/or the choice of model itself may be more subjective. In these circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in HSBC's valuation model.

Credit and debt valuation adjustments

The credit valuation adjustment ('CVA') is an adjustment to the valuation of over-the-counter ('OTC') derivative contracts to reflect the possibility that the counterparty may default and that HSBC may not receive the full market value of the transactions.

The debt valuation adjustment ('DVA') is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that HSBC may default, and that it may not pay the full market value of the transactions.

HSBC calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not netted across Group entities.

HSBC calculates the CVA by applying the probability of default ('PD') of the counterparty, conditional on the non-default of HSBC, to HSBC's expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure.

For most products HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty.

The methodologies do not, in general, account for 'wrong-way risk'. Wrong-way risk is an adverse correlation between the counterparty's probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the currency of the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation.

Funding fair value adjustment

The funding fair value adjustment ('FFVA') is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HSBC or the counterparty. The FFVA and DVA are calculated independently.

Model limitation

Models used for portfolio valuation purposes may be based upon a simplified set of assumptions that do not capture all current and future material market characteristics. In these circumstances, model limitation adjustments are adopted.

Inception profit (Day 1 P&L reserves)

Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed in Note 1.


Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3

 

Assets

Liabilities

 

Financial investments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Total

Trading liabilities

Designated at fair value

Derivatives

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

$m

Private equity including strategic investments

716

 

4

 

7,289

 

-

 

8,009

 

4

 

-

 

-

 

4

 

Asset-backed securities

874

 

934

 

28

 

-

 

1,836

 

-

 

-

 

-

 

-

 

Loans held for securitisation

-

 

1

 

39

 

-

 

40

 

-

 

-

 

-

 

-

 

Structured notes

-

 

3

 

-

 

-

 

3

 

47

 

5,016

 

-

 

5,063

 

Derivatives with monolines

-

 

-

 

-

 

66

 

66

 

-

 

-

 

-

 

-

 

Other derivatives

-

 

-

 

-

 

2,070

 

2,070

 

-

 

-

 

2,302

 

2,302

 

Other portfolios

433

 

4,037

 

393

 

-

 

4,863

 

2

 

-

 

-

 

2

 

At 31 Dec 2019

2,023

 

4,979

 

7,749

 

2,136

 

16,887

 

53

 

5,016

 

2,302

 

7,371

 

 

 

 

 

 

 

 

 

 

 

Private equity including strategic investments

427

 

20

 

5,106

 

-

 

5,553

 

12

 

-

 

-

 

12

 

Asset-backed securities

1,030

 

1,140

 

32

 

-

 

2,202

 

-

 

-

 

-

 

-

 

Loans held for securitisation

-

 

-

 

49

 

-

 

49

 

-

 

-

 

-

 

-

 

Structured notes

-

 

3

 

-

 

-

 

3

 

46

 

5,328

 

-

 

5,374

 

Derivatives with monolines

-

 

-

 

-

 

65

 

65

 

-

 

-

 

-

 

-

 

Other derivatives

-

 

-

 

-

 

2,358

 

2,358

 

-

 

-

 

1,755

 

1,755

 

Other portfolios

543

 

5,596

 

305

 

-

 

6,444

 

-

 

-

 

1

 

1

 

At 31 Dec 2018

2,000

 

6,759

 

5,492

 

2,423

 

16,674

 

58

 

5,328

 

1,756

 

7,142

 


Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, derivatives with monolines, certain 'other derivatives' and predominantly all Level 3 ABSs are legacy positions. HSBC has the capability to hold these positions.

Private equity including strategic investments

The fair value of a private equity investment (including strategic investments) is estimated on the basis of an analysis of the investee's financial position and results, risk profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; or the price at which similar companies have changed ownership.

Asset-backed securities

While quoted market prices are generally used to determine the fair value of the asset-backed securities ('ABSs'), valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For certain ABSs, such as residential mortgage-backed securities, the valuation uses an industry standard model with assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature.

Structured notes

The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.

Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates.

Derivatives

OTC derivative valuation models calculate the present value of expected future cash flows, based upon 'no arbitrage' principles. For many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources.


 

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy

Movement in Level 3 financial instruments

 

 

Assets

Liabilities

 

 

Financial invest-ments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 

Footnotes

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2019

 

2,000

 

6,759

 

5,492

 

2,423

 

58

 

5,328

 

1,756

 

Total gains/(losses) recognised in profit or loss

 

6

 

(112

)

598

 

278

 

(4

)

195

 

930

 

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

 

-

 

(112

)

-

 

278

 

(4

)

-

 

930

 

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

 

-

 

-

 

598

 

-

 

-

 

195

 

-

 

-  gains less losses from financial investments at fair value through other comprehensive income

 

10

 

-

 

-

 

-

 

-

 

-

 

-

 

-  expected credit loss charges and other credit risk charges

 

(4

)

-

 

-

 

-

 

-

 

-

 

-

 

Total gains/(losses) recognised in other comprehensive income ('OCI')

1

269

 

76

 

(1

)

49

 

1

 

18

 

52

 

-  financial investments: fair value gains/(losses)

 

261

 

-

 

-

 

-

 

-

 

-

 

-

 

-  exchange differences

 

8

 

76

 

(1

)

49

 

1

 

18

 

52

 

Purchases

 

271

 

2,206

 

2,353

 

-

 

8

 

157

 

-

 

New issuances

 

-

 

154

 

-

 

-

 

6

 

1,601

 

-

 

Sales

 

(10

)

(895

)

(276

)

-

 

(9

)

(193

)

-

 

Settlements

 

(329

)

(2,107

)

(434

)

(100

)

(7

)

(1,048

)

(162

)

Transfers out

 

(471

)

(1,558

)

(23

)

(710

)

(9

)

(1,079

)

(473

)

Transfers in

 

287

 

456

 

40

 

196

 

9

 

37

 

199

 

At 31 Dec 2019

 

2,023

 

4,979

 

7,749

 

2,136

 

53

 

5,016

 

2,302

 

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2019

 

(4

)

(22

)

477

 

279

 

-

 

57

 

(407

)

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

 

-

 

(22

)

-

 

279

 

-

 

-

 

(407

)

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

 

-

 

-

 

477

 

-

 

-

 

57

 

-

 

-  loan impairment recoveries and other credit
risk provisions

 

(4

)

-

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Movement in Level 3 financial instruments (continued)

 

 

Assets

Liabilities

 

 

Financial invest-ments

Trading assets

Designated and otherwise mandatorily measured at fair value through profit or loss

Derivatives

Trading liabilities

Designated at fair value

Derivatives

 

Footnotes

$m

$m

$m

$m

$m

$m

$m

At 1 Jan 2018

 

1,767

 

5,080

 

3,958

 

2,444

 

93

 

4,107

 

1,949

 

Total gains/(losses) recognised in profit or loss

 

251

 

284

 

608

 

597

 

(4

)

(637

)

255

 

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

 

-

 

284

 

-

 

597

 

(4

)

-

 

255

 

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

 

-

 

-

 

608

 

-

 

-

 

(637

)

-

 

-  gains less losses from financial investments at fair value through other comprehensive income

 

251

 

-

 

-

 

-

 

-

 

-

 

-

 

Total gains/(losses) recognised in other comprehensive income ('OCI')

1

17

 

(274

)

(107

)

(113

)

(3

)

(144

)

(82

)

-  financial investments: fair value gains/(losses)

 

15

 

-

 

-

 

-

 

-

 

-

 

-

 

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

 

-

 

-

 

6

 

6

 

-

 

-

 

2

 

-  exchange differences

 

2

 

(274

)

(113

)

(119

)

(3

)

(144

)

(84

)

Purchases

 

275

 

4,377

 

2,172

 

-

 

3

 

76

 

-

 

New issuances

 

-

 

975

 

-

 

-

 

6

 

2,442

 

-

 

Sales

 

(51

)

(1,589

)

(395

)

-

 

(11

)

-

 

-

 

Settlements

 

(141

)

(2,021

)

(541

)

(191

)

(2

)

(32

)

(18

)

Transfers out

 

(685

)

(1,402

)

(285

)

(337

)

(24

)

(1,112

)

(464

)

Transfers in

 

567

 

1,329

 

82

 

23

 

-

 

628

 

116

 

At 31 Dec 2018

 

2,000

 

6,759

 

5,492

 

2,423

 

58

 

5,328

 

1,756

 

Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2018

 

 

-

 

(5

)

199

 

342

 

(5

)

274

 

(351

)

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

 

-

 

(5

)

-

 

342

 

(5

)

-

 

(351

)

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

 

-

 

-

 

199

 

-

 

-

 

274

 

-

 

-  loan impairment recoveries and other credit risk provisions

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

1  Included in 'financial investments: fair value gains/(losses)' in the current year and 'exchange differences' in the consolidated statement of comprehensive income.

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.


Effect of changes in significant unobservable assumptions to reasonably possible alternatives

Sensitivity of Level 3 fair values to reasonably possible alternative assumptions

 

 

2019

2018

 

 

Reflected in profit or loss

Reflected in OCI

Reflected in profit or loss

Reflected in OCI

 

 

Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes

Favourable
changes

Un-
favourable
changes

 

Footnotes

$m

$m

$m

$m

$m

$m

$m

$m

Derivatives, trading assets and trading liabilities

1

255

 

(230

)

-

 

-

 

269

 

(257

)

-

 

-

 

Designated and otherwise mandatorily measured at fair value through profit or loss

 

532

 

(417

)

-

 

-

 

394

 

(310

)

-

 

-

 

Financial investments

 

48

 

(53

)

22

 

(22

)

34

 

(36

)

23

 

(22

)

At 31 Dec

 

835

 

(700

)

22

 

(22

)

697

 

(603

)

23

 

(22

)

1  Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these instruments are risk managed.


The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.


Key unobservable inputs to Level 3 financial instruments

The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31 December 2019. The core range of inputs is the estimated range within which 90% of the inputs fall.

 

Quantitative information about significant unobservable inputs in Level 3 valuations

 

 

Fair value

 

 

2019

2018

 

 

Assets

Liabilities

Valuation
techniques

Key unobservable
inputs

Full range
of inputs

Core range
of inputs1

Full range
of inputs

Core range
of inputs1

 

Footnotes

$m

$m

 

 

Lower

Higher

Lower

Higher

Lower

Higher

Lower

Higher

Private equity including
strategic investments

 

8,009

 

4

 

See below

See below

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Asset-backed securities

2

1,836

 

-

 

 

 

 

 

 

 

 

 

 

 

-  CLO/CDO

 

373

 

-

 

Market proxy

Prepayment rate

0%

9%

0%

9%

0%

10%

0%

10%

 

 

 

 

Market proxy

Bid quotes

0

100

0

100

0

100

50

100

-  other ABSs

 

1,463

 

-

 

Market proxy

Bid quotes

0

101

61

98

0

271

71

99

Loans held for securitisation

 

40

 

-

 

 

 

 

 

 

 

 

 

 

 

Structured notes

 

3

 

5,063

 

 

 

 

 

 

 

 

 

 

 

-  equity-linked notes

 

-

 

3,768

 

Model -
Option model

Equity volatility

5%

90%

6%

56%

8%

79%

13%

53%

 

 

 

 

Model - Option model

Equity correlation

9%

93%

9%

93%

17%

93%

40%

77%

-  FX-linked notes

 

-

 

1,046

 

Model - Option model

FX volatility

1%

23%

3%

22%

1%

27%

3%

25%

-  other

 

3

 

249

 

 

 

 

 

 

 

 

 

 

 

Derivatives with monolines

 

66

 

-

 

Model - Discounted
cash flow

Credit spread

0.4%

2%

0.4%

2%

0.2%

1%

0.2%

1%

Other derivatives

 

2,070

 

2,302

 

 

 

 

 

 

 

 

 

 

 

-  Interest rate derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

  securitisation swaps

 

314

 

640

 

Model - Discounted
cash flow

Prepayment
 rate

6%

7%

6%

7%

6%

7%

6%

7%

  long-dated swaptions

 

838

 

51

 

Model - Option model

IR volatility

8%

22%

8%

21%

13%

39%

14%

36%

  other

 

255

 

155

 

 

 

 

 

 

 

 

 

 

 

-  FX derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

  FX options

 

93

 

218

 

Model - Option model

FX volatility

1%

25%

5%

11%

1%

27%

7%

12%

  other

 

119

 

104

 

 

 

 

 

 

 

 

 

 

 

-  Equity derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

  long-dated single stock options

 

230

 

293

 

Model - Option model

Equity volatility

0%

89%

7%

74%

5%

83%

5%

81%

  other

 

78

 

712

 

 

 

 

 

 

 

 

 

 

 

-  Credit derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

  other

 

143

 

129

 

 

 

 

 

 

 

 

 

 

 

Other portfolios

 

4,863

 

2

 

 

 

 

 

 

 

 

 

 

 

-  structured certificates

 

1,515

 

-

 

Model - Discounted cash flow

Credit volatility

4%

4%

4%

4%

2%

4%

2%

4%

-  repurchase agreements

 

1,604

 

-

 

 

 

 

 

 

 

 

 

 

 

-  other

3

1,744

 

2

 

 

 

 

 

 

 

 

 

 

 

At 31 Dec 2019

 

16,887

 

7,371

 

 

 

 

 

 

 

 

 

 

 

1  The core range of inputs is the estimated range within which 90% of the inputs fall.

2  Collateralised loan obligation/collateralised debt obligation.

3  'Other' includes a range of smaller asset holdings.


Private equity including strategic investments

Given the bespoke nature of the analysis in respect of each private equity holding, it is not practical to quote a range of key unobservable inputs.

Prepayment rates

Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the due date. They vary according to the nature of the loan portfolio and expectations of future market conditions, and may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and macroeconomic modelling.

Market proxy

Market proxy pricing may be used for an instrument when specific market pricing is not available but there is evidence from instruments with common characteristics. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence.

Volatility

Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option.

Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio.

Correlation

Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one. It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market price pair.

Credit spread

Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit spreads may be implied from market prices and may not be observable in more illiquid markets.

Inter-relationships between key unobservable inputs

Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC's net risk position in respect of each variable.


HSBC Holdings

Basis of valuing HSBC Holdings' financial assets and liabilities measured at fair value

 

 

2019

2018

 

Footnotes

 

$m

$m

Valuation technique using observable inputs: Level 2

 

 

 

Assets at 31 Dec

 

 

 

-  derivatives

 

2,002

 

707

 

-  financial investments

 

-

 

-

 

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

1

61,964

 

23,513

 

Liabilities at 31 Dec

 

 

 

-  designated at fair value

 

30,303

 

25,049

 

-  derivatives

 

2,021

 

2,159

 

1  In 2019, due to the restructuring of the Group's Asia and UK operations to meet resolution and recovery requirements, changes in the terms of financial assets have resulted in the derecognition of principal amounts of $33.3bn, relating to financial assets measured at amortised cost. Under the revised terms, financial assets with principal amounts of $33.3bn (2018: nil) measured on fair value basis have been recognised.

 


13

Fair values of financial instruments not carried at fair value


Fair values of financial instruments not carried at fair value and bases of valuation

 

 

Fair value

 

Carrying
amount

Quoted market
price Level 1

Observable
inputs Level 2

Significant
unobservable
inputs Level 3

Total

 

$m

$m

$m

$m

$m

At 31 Dec 2019

 

 

 

 

 

Assets

 

 

 

 

 

Loans and advances to banks

69,203

 

-

 

68,508

 

739

 

69,247

 

Loans and advances to customers

1,036,743

 

-

 

10,365

 

1,027,178

 

1,037,543

 

Reverse repurchase agreements - non-trading

240,862

 

16

 

240,199

 

691

 

240,906

 

Financial investments - at amortised cost

85,735

 

26,202

 

62,572

 

287

 

89,061

 

Liabilities

 

 

 

 

 

Deposits by banks

59,022

 

-

 

58,951

 

-

 

58,951

 

Customer accounts

1,439,115

 

-

 

1,439,362

 

150

 

1,439,512

 

Repurchase agreements - non-trading

140,344

 

-

 

140,344

 

-

 

140,344

 

Debt securities in issue

104,555

 

-

 

104,936

 

-

 

104,936

 

Subordinated liabilities

24,600

 

-

 

28,861

 

385

 

29,246

 

 

 

 

 

 

 

At 31 Dec 2018

 

 

 

 

 

Assets

 

 

 

 

 

Loans and advances to banks

72,167

 

-

 

68,378

 

3,791

 

72,169

 

Loans and advances to customers

981,696

 

-

 

10,518

 

974,559

 

985,077

 

Reverse repurchase agreements - non-trading

242,804

 

81

 

241,407

 

1,369

 

242,857

 

Financial investments - at amortised cost

62,666

 

1,790

 

60,073

 

216

 

62,079

 

Liabilities

 

 

 

 

 

Deposits by banks

56,331

 

-

 

56,308

 

-

 

56,308

 

Customer accounts

1,362,643

 

-

 

1,362,794

 

151

 

1,362,945

 

Repurchase agreements - non-trading

165,884

 

-

 

165,884

 

-

 

165,884

 

Debt securities in issue

85,342

 

-

 

85,430

 

-

 

85,430

 

Subordinated liabilities

22,437

 

-

 

24,968

 

373

 

25,341

 

Other financial instruments not carried at fair value are typically short term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost.


Valuation

Fair value is an estimate of 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. It does not reflect the economic benefits and costs that HSBC expects to flow from an instrument's cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies.

Loans and advances to banks and customers

To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans.

The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants' expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit-impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.

Deposits by banks and customer accounts

The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

Fair values in debt securities in issue and subordinated liabilities are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments.

Repurchase and reverse repurchase agreements - non-trading

Fair values of repurchase and reverse repurchase agreements that are held on a non-trading basis provide approximate carrying amounts.

This is due to the fact that balances are generally short dated.


HSBC Holdings

The methods used by HSBC Holdings to determine fair values of financial instruments for the purposes of measurement and disclosure are described above.

Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet

 

 

2019

2018

 

 

Carrying amount

Fair value1

Carrying amount

Fair value1

 

Footnotes

$m

$m

$m

$m

Assets at 31 Dec

 

 

 

 

 

Loans and advances to HSBC undertakings

 

10,218

 

10,504

 

56,144

 

56,801

 

Financial investments - at amortised cost

2

16,106

 

16,121

 

 

 

Liabilities at 31 Dec

 

 

 

 

 

Amounts owed to HSBC undertakings

 

464

 

464

 

949

 

949

 

Debt securities in issue

 

56,844

 

59,140

 

50,800

 

51,552

 

Subordinated liabilities

 

18,361

 

22,536

 

17,715

 

20,224

 

1  Fair values (other than Level 1 financial investments) were determined using valuation techniques with observable inputs (Level 2).

2  The 2019 period includes $16.1bn (2018: nil) of investments in highly liquid securities.


14

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

or loss

 

 

 

2019

 

2018

 

 

 

Designated at fair value

Mandatorily measured at fair value

Total

Designated at fair value

Mandatorily measured at fair value

Total

 

 

$m

$m

$m

$m

$m

$m

Securities

 

2,344

 

35,808

 

38,152

 

2,349

 

30,217

 

32,566

 

-  treasury and other eligible bills

 

630

 

31

 

661

 

641

 

29

 

670

 

-  debt securities

 

1,714

 

4,838

 

6,552

 

1,708

 

4,839

 

6,547

 

-  equity securities

 

-

 

30,939

 

30,939

 

-

 

25,349

 

25,349

 

Loans and advances to banks and customers

 

1

 

4,555

 

4,556

 

-

 

7,717

 

7,717

 

Other

 

-

 

919

 

919

 

-

 

828

 

828

 

At 31 Dec

 

2,345

 

41,282

 

43,627

 

2,349

 

38,762

 

41,111

 

 

Securities1

 

 

 

2019

 

2018

 

 

 

Designated at fair value

Mandatorily measured at fair value

Total

Designated at fair value

Mandatorily measured at fair value

Total

 

Footnotes

$m

$m

$m

$m

$m

$m

Hong Kong Government

 

4

 

-

 

4

 

4

 

-

 

4

 

Other governments

 

666

 

754

 

1,420

 

673

 

713

 

1,386

 

Asset-backed securities

2

-

 

363

 

363

 

-

 

399

 

399

 

Corporate debt and other securities

 

1,674

 

3,752

 

5,426

 

1,672

 

3,756

 

5,428

 

Equities

 

-

 

30,939

 

30,939

 

-

 

25,349

 

25,349

 

At 31 Dec

 

2,344

 

35,808

 

38,152

 

2,349

 

30,217

 

32,566

 

1  Included within these figures are debt securities issued by banks and other financial institutions of $366m (2018 re-presented: $676m), of which nil (2018: nil) are guaranteed by various governments.

2  Excludes asset-backed securities included under US Treasury and US Government agencies.


15

Derivatives


Notional contract amounts and fair values of derivatives by product contract type held by HSBC

 

Notional contract amount

Fair value - Assets

Fair value - Liabilities

 

Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Foreign exchange

8,207,629

 

31,899

 

84,083

 

455

 

84,538

 

84,498

 

740

 

85,238

 

Interest rate

17,895,349

 

177,006

 

183,668

 

1,208

 

184,876

 

175,095

 

2,031

 

177,126

 

Equities

1,077,347

 

-

 

9,053

 

-

 

9,053

 

11,237

 

-

 

11,237

 

Credit

345,644

 

-

 

4,744

 

-

 

4,744

 

5,597

 

-

 

5,597

 

Commodity and other

93,245

 

-

 

1,523

 

-

 

1,523

 

2,038

 

-

 

2,038

 

Gross total fair values

27,619,214

 

208,905

 

283,071

 

1,663

 

284,734

 

278,465

 

2,771

 

281,236

 

Offset (Note 30)

 

 

 

 

(41,739

)

 

 

(41,739

)

At 31 Dec 2019

27,619,214

 

208,905

 

283,071

 

1,663

 

242,995

 

278,465

 

2,771

 

239,497

 

 

 

 

 

 

 

 

 

 

Foreign exchange

7,552,462

 

29,969

 

85,959

 

458

 

86,417

 

82,494

 

653

 

83,147

 

Interest rate

24,589,916

 

163,271

 

155,293

 

1,080

 

156,373

 

154,257

 

2,261

 

156,518

 

Equities

1,256,550

 

-

 

10,198

 

-

 

10,198

 

10,750

 

-

 

10,750

 

Credit

346,596

 

-

 

3,414

 

-

 

3,414

 

3,776

 

-

 

3,776

 

Commodity and other

74,159

 

-

 

1,134

 

-

 

1,134

 

1,355

 

-

 

1,355

 

Gross total fair values

33,819,683

 

193,240

 

255,998

 

1,538

 

257,536

 

252,632

 

2,914

 

255,546

 

Offset (Note 30)

 

 

 

 

(49,711

)

 

 

(49,711

)

At 31 Dec 2018

33,819,683

 

193,240

 

255,998

 

1,538

 

207,825

 

252,632

 

2,914

 

205,835

 

The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

Derivative assets and liabilities increased during 2019, driven by yield curve movements and changes in foreign exchange rates.


Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries

 

Notional contract amount

Assets

Liabilities

 

Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total

 

$m

$m

$m

$m

$m

$m

$m

$m

Foreign exchange

24,980

 

-

 

161

 

-

 

161

 

766

 

-

 

766

 

Interest rate

48,937

 

36,769

 

435

 

1,406

 

1,841

 

1,072

 

183

 

1,255

 

At 31 Dec 2019

73,917

 

36,769

 

596

 

1,406

 

2,002

 

1,838

 

183

 

2,021

 

 

 

 

 

 

 

 

 

 

Foreign exchange

16,623

 

1,120

 

207

 

-

 

207

 

628

 

155

 

783

 

Interest rate

44,059

 

38,418

 

283

 

217

 

500

 

538

 

838

 

1,376

 

At 31 Dec 2018

60,682

 

39,538

 

490

 

217

 

707

 

1,166

 

993

 

2,159

 


Use of derivatives

For details regarding the use of derivatives, see page 139 under 'Market Risk'.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenue based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Substantially all of HSBC Holdings' derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as shown in the following table:


Unamortised balance of derivatives valued using models with significant unobservable inputs

 

 

2019

2018

 

Footnotes

$m

$m

Unamortised balance at 1 Jan

 

86

 

106

 

Deferral on new transactions

 

145

 

161

 

Recognised in the income statement during the year:

 

(154

)

(158

)

-  amortisation

 

(80

)

(96

)

-  subsequent to unobservable inputs becoming observable

 

(3

)

(2

)

-  maturity, termination or offsetting derivative

 

(71

)

(60

)

Exchange differences

 

1

 

(4

)

Other

 

(5

)

(19

)

Unamortised balance at 31 Dec

1

73

 

86

 

1  This amount is yet to be recognised in the consolidated income statement.


Hedge accounting derivatives

HSBC applies hedge accounting to manage the following risks: interest rate, foreign exchange and net investment in foreign operations.  Further details on how these risks arise and how they are managed by the Group can be found in the 'Report of the Directors'.

Fair value hedges

HSBC enters into fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value caused by movements in market interest rates on certain fixed-rate financial instruments that are not measured at fair value through profit or loss, including debt securities held and issued.

HSBC hedging instrument by hedged risk

 

Hedging instrument

 

 

Carrying amount

 

 

 

Notional amount1

Assets

Liabilities

Balance sheet presentation

Change in fair value2

Hedged risk

$m

$m

$m

$m

Interest rate3

122,753

 

1,056

 

2,208

 

Derivatives

(1,531

)

At 31 Dec 2019

122,753

 

1,056

 

2,208

 

 

(1,531

)

 

Interest rate3

123,551

 

915

 

2,123

 

Derivatives

283

 

At 31 Dec 2018

123,551

 

915

 

2,123

 

 

283

 

1  The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

2  Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3  The hedged risk 'interest rate' includes inflation risk.

HSBC hedged item by hedged risk

 

Hedged item

Ineffectiveness

 

Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

Change in fair value1

Recognised in profit and loss

 

 

Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

90,617

 

 

1,859

 

 

Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income

2,304

 

(7

)

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

153

 

 

4

 

 

Loans and advances to banks

5

 

1,897

 

 

12

 

 

Loans and advances to customers

24

 

 

15,206

 

 

797

 

Debt securities in issue

(1,011

)

 

3,009

 

 

39

 

Deposits by banks

202

 

At 31 Dec 2019

92,667

 

18,215

 

1,875

 

836

 

 

1,524

 

(7

)

 

 

 

HSBC hedged item by hedged risk (continued)

 

Hedged item

Ineffectiveness

 

Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

Change in fair value1

Recognised in profit and loss

 

 

Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

93,469

 

 

231

 

 

Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income

(425

)

(37

)

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

1,455

 

 

(6

)

 

Loans and advances to customers

(4

)

 

14,171

 

 

(155

)

Debt securities in issue

124

 

 

4,780

 

 

45

 

Deposits by banks

(15

)

 

At 31 Dec 2018

94,924

 

18,951

 

225

 

(110

)

 

(320

)

(37

)

 

1  Used in effectiveness testing; comprising amount attributable to the designated hedged risk that can be a risk component.

2  The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were assets of $482m for FVOCI and assets of $2m for debt issued.

3  The hedged risk 'interest rate' includes inflation risk.


HSBC Holdings hedging instrument by hedged risk

 

Hedging instrument

 

 

Carrying amount

 

 

 

Notional amount1,4

 

Assets

Liabilities

Balance sheet presentation

Change in fair value2

Hedged risk

$m

$m

$m

$m

Interest rate3

36,769

 

1,406

 

183

 

Derivatives

1,704

 

At 31 Dec 2019

36,769

 

1,406

 

183

 

 

1,704

 


1  The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

2  Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3  The hedged risk 'interest rate' includes foreign exchange risk.

4  The notional amount of non-dynamic fair value hedges is equal to $36,769m, of which the weighted-average maturity date is March 2027 and the weighted-average swap rate is 1.53%. The majority of these hedges are internal to HSBC Group.

HSBC Holdings hedged item by hedged risk

 

Hedged item

Ineffectiveness

 

Carrying amount

Accumulated fair value hedge adjustments included in carrying amount2

 

Change in fair value1

Recognised in profit and loss

 

 

Assets

Liabilities

Assets

Liabilities

Balance sheet presentation

Profit and loss presentation

Hedged risk

$m

$m

$m

$m

$m

$m

Interest rate3

 

38,126

 

 

1,088

 

Debt securities in issue

(1,697

)

7

 

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

 

At 31 Dec 2019

-

 

38,126

 

-

 

1,088

 

 

(1,697

)

7