The Hongkong and Shanghai
Banking Corporation Limited
Annual Report and Accounts 2021

Contents

Certain defined terms
Page

Certain defined terms
Cautionary statement regarding forward-looking statements

1
1

Chinese translation
Financial Highlights

1
2

Report of the Directors
Financial Review

3
10

Risk
Statement of Directors’ Responsibilities

14
67

Independent Auditor’s Report

68

Consolidated Financial Statements
Consolidated income statement73

Consolidated statement of comprehensive income
Consolidated balance sheet

74
75

Consolidated statement of cash flows
Consolidated statement of changes in equity

76
77

Notes on the Consolidated Financial
Statements
1

Basis of preparation and significant accounting policies

79

2
3
4
5
6
7
8
9

Operating profit
Insurance business
Employee compensation and benefits
Tax
Dividends
Trading assets
Derivatives

89
92
93
96
97
97
98

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

99

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

Loans and advances to customers
Financial investments
Assets pledged, assets transferred and collateral received
Investments in subsidiaries
Interests in associates and joint ventures
Goodwill and intangible assets
Property, plant and equipment
Prepayments, accrued income and other assets
Customer accounts
Trading liabilities
Financial liabilities designated at fair value
Debt securities in issue
Accruals and deferred income, other liabilities and provisions
Subordinated liabilities
Share capital
Other equity instruments
Maturity analysis of assets and liabilities

99
100
101
102
102
105
106
107
108
108
108
108
108
109
109
110
110

Analysis of cash flows payable under financial liabilities byremaining contractual maturities

113

28
29
30
31
32
33
34
35
36
37
38
39
40

Contingent liabilities, contractual commitments and guarantees
Other commitments
Offsetting of financial assets and financial liabilities
Segmental analysis
Related party transactions
Fair values of financial instruments carried at fair value
Fair values of financial instruments not carried at fair value
Structured entities
Bank balance sheet and statement of changes in equity
Legal proceedings and regulatory matters
Ultimate holding company
Events after the balance sheet date
Approval of financial statements

114
114
114
115
117
119
125
126
128
130
130
131
131

This document comprises the Annual Report and Accounts 2021
for The Hongkong and Shanghai Banking Corporation Limited (‘theBank’) and its subsidiaries (together ‘the group’). References to‘HSBC’, ‘the Group’ or ‘the HSBC Group’ within this document
mean HSBC Holdings plc together with its subsidiaries. Within thisdocument the Hong Kong Special Administrative Region of thePeople’s Republic of China is referred to as ‘Hong Kong’. The
abbreviations ‘HK$m’ and ‘HK$bn’ represent millions and billions(thousands of millions) of Hong Kong dollars respectively.

Cautionary statement regarding forwardlooking statements
This Annual Report and Accounts contains certain forward-looking
statements with respect to the financial condition, results ofoperations and business of the group.
Statements that are not historical facts, including statements
about the Bank’s beliefs and expectations, are forward-looking
statements. Words such as ‘expects’, ‘anticipates’, ‘intends’,‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably
possible’, variations of these words and similar expressions areintended to identify forward-looking statements. These statements
are based on current plans, estimates and projections, andtherefore undue reliance should not be placed on them. Forwardlooking statements speak only as of the date they are made, and it
should not be assumed that they have been revised or updated in
the light of new information or future events.
Forward-looking statements involve inherent risks anduncertainties. Readers are cautioned that a number of factors
could cause actual results to differ, in some instances materially,
from those anticipated or implied in any forward-looking
statement.

Chinese translation
A Chinese translation of the Annual Report and Accounts 2021 isavailable upon request from: Communications (Asia), Level 32,
HSBC Main Building, 1 Queen’s Road Central, Hong Kong. The
report is also available, in English and Chinese, on the Bank’s
website at www.hsbc.com.hk.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

1

Financial Highlights | Report of the Directors

Financial Highlights
2021

2020

HK$m

HK$m

Net operating income before change in expected credit losses and other credit impairment charges
Profit before tax

178,658
86,563

189,338
90,196

Profit attributable to shareholders
At the year-end

67,34869,447

Total shareholders’ equity
Total equity

856,809923,511845,353
911,531

Total capital1
Customer accounts

590,478
6,177,182

614,545
5,911,396

Total assets
Ratios9,903,393

9,416,403

For the year%%

Return on average ordinary shareholders’ equity
Post-tax return on average total assets

8.0
0.7

8.6
0.8

Cost efficiency ratio
Net interest margin

58.7
1.37

50.6
1.62

Advances-to-deposits ratio
Capital ratios

62.2

62.1

Common equity tier 1 capital
Tier 1 capital

15.4
16.8

17.2
18.8

Total capital

18.7

20.8

1 Capital is calculated in accordance with the Banking (Capital) Rules issued by the Hong Kong Monetary Authority (‘HKMA’) under section 97C(1)of the Banking Ordinance.

Established in Hong Kong and Shanghai in 1865, The Hongkong and Shanghai Banking Corporation Limited is the founding member ofthe HSBC Group – one of the world’s largest banking and financial services organisations. It is the largest bank incorporated in Hong
Kong and one of Hong Kong’s three note-issuing banks. It is a wholly-owned subsidiary of HSBC Holdings plc, the holding company of
the HSBC Group, which has an international network covering Europe, Asia, the Middle East and North Africa, North America and Latin
America.

The Hongkong and Shanghai Banking Corporation Limited
Incorporated in the Hong Kong SAR with limited liability
Registered Office and Head Office: HSBC Main Building, 1 Queen’s Road Central, Hong Kong
Telephone: (852) 2822 1111 Web: www.hsbc.com.hk.

2

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Report of the Directors
Principal Activities
The group provides a comprehensive range of domestic andinternational banking and related financial services, principally in
the Asia–Pacific region.

Asia Strategy
Asia’s growth story remains at the heart of HSBC’s future. Basedon the region’s strong and sustained underlying fundamentals of
economic growth, trade, and wealth creation, HSBC’s strategy inthe region remains aligned to the biggest opportunities to create
further shareholder value. We are well positioned to further extend
the strengths of our leading Hong Kong franchise across theGreater Bay Area, and in other key growth markets, including India
and Southeast Asia. By increasing investment in our people andtechnology, we will further grow our leading Asian WealthManagement business, while maintaining our distinct position as
the leading international bank for our corporate and commercial
clients. We remain focused on connecting Asia to the world
through HSBC’s global network, supporting the ongoing transition
to a low-carbon economy as a Sustainable Finance leader,
continually streamlining our organisation to realise greater
operating efficiencies, and improving service for our domestic,
regional, and global clients through our technology, talent, and
156 years of experience in the region.

Consolidated Financial Statements
The consolidated financial statements of the group are set out on
pages 73 to 131.

Subordinated Liabilities, Share Capital and Other
Equity Instruments
Details on subordinated liabilities issued by the group are set out
in Notes 23 and 32. Details on share capital and other equity
instruments of the Bank are set out in Notes 24 and 25 on theConsolidated Financial Statements.

Dividends
The interim dividends paid in respect of 2021 are set out in Note 6
on the Consolidated Financial Statements.

Directors
The Directors at the date of this report are set out below:

Peter Tung Shun Wong, GBS, JP
Non-executive Chairman (since 7 June 2021)
He is also an advisor to the Group Chairman and the Group Chief
Executive of HSBC Holdings plc, and Chairman and a non-executive
Director of HSBC Bank (China) Company Limited. He holds a Bachelor ofArts, a Master of Business Administration and a Master of Science from
Indiana University.
Before his retirement as an HSBC employee in June 2021, he was an
executive Director, Chief Executive and Deputy Chairman of the Bank. He
was also a non-executive Director of Hang Seng Bank Limited.

David Gordon Eldon, GBS, CBE, JP
Non-executive Deputy Chairman (Director since 4 June 2021; Deputy
Chairman since 7 June 2021)
He is also non-executive Chairman and a Director of Octopus Holdings
Limited, Octopus Cards Limited and Octopus Cards Client Funds Limited.
He holds an Honorary Doctor of Business Administration from City
University of Hong Kong and is a Fellow of the UK Chartered Institute ofBankers and the Hong Kong Institute of Bankers.
Before his retirement as an HSBC employee in 2005 after 37 years ofservice, he was an executive Director, Chief Executive Officer andChairman of the Bank. He was also non-executive Chairman of Hang Seng
Bank Limited and a Director of HSBC Holdings plc.

David Yi Chien Liao
Co-Chief Executive Officer (since 7 June 2021)
He is also a member of the Group Executive Committee of HSBC Holdings
plc. He is also a non-executive Director of Hang Seng Bank Limited andBank of Communications Co., Ltd. He holds a Bachelor of Arts (major inJapanese and Economics) from the University of London.
He has previously held a number of senior positions within the Group,
including the Head of Global Banking Coverage for Asia-Pacific and a
Director and Chief Executive Officer of HSBC Bank (China) Company
Limited.

Surendranath Ravi Rosha
Co-Chief Executive Officer (since 7 June 2021)
He is also a member of the Group Executive Committee of HSBC Holdings
plc and a non-executive Director of HSBC Bank Australia Limited. He
holds a Bachelor of Commerce from Sydenham College of Commerce &Economics, Bombay University and a Master of Business Administrationfrom the Indian Institute of Management, Ahmedabad.
He has previously held a number of senior positions within the Group,
including the Chief Executive Officer of HSBC India and Regional Head ofFinancial Institutions Group, Asia-Pacific.

Graham John Bradley
Independent non-executive Director
He is also non-executive Chairman and a Director of Volt Bank Limited,
Volt Corporation Limited, United Malt Group Limited and Shine JusticeLtd.; and Chairman and a Director of EnergyAustralia Holdings Limited,
Infrastructure New South Wales and Virgin Australia International
Holdings Limited. He holds a Bachelor of Arts and a Bachelor of Laws
(Hons I) from Sydney University and a Master of Laws from Harvard
University.
He was non-executive Chairman and a Director of HSBC Bank Australia
Limited from 2004 to 2020. Before this, he was Managing Director andChief Executive Officer of Perpetual Limited from 1995 until his retirementin 2003.

Dr Christopher Wai Chee Cheng, GBS, OBE
Independent non-executive Director
He is also Chairman of Wing Tai Properties Limited; and an independent
non-executive Director of NWS Holdings Ltd. and Eagle AssetManagement (CP) Limited. He holds a Bachelor of Business
Administration from University of Notre Dame; a Master of Business
Administration from Columbia University; a Doctorate in Social Sciences
honoris causa from The University of Hong Kong; and an Honorary Degreeof Doctor of Business Administration from The Hong Kong Polytechnic
University.

Sonia Chi Man Cheng
Independent non-executive Director
She is also the Chief Executive Officer of Rosewood Hotel Group. She isalso an executive Director of New World Development Company Limited
and Chow Tai Fook Jewellery Group Limited; and a Director of New World
China Land Limited. She holds a Bachelor of Arts degree with a field ofconcentration in Applied Mathematics from Harvard University.

Yiu Kwan Choi
Independent non-executive Director
He is also an independent non-executive Director of HSBC Bank (China)
Company Limited. He holds a higher certificate in Accountancy from The
Hong Kong Polytechnic University and is a fellow member of The Hong
Kong Institute of Bankers.
He was Deputy Chief Executive of the Hong Kong Monetary Authority(‘HKMA’) in charge of Banking Supervision when he retired in January
2010. Before this, he was Deputy Chief Executive of the HKMA in chargeof Monetary Policy and Reserves Management from June 2005 to August
2007 and held various senior positions in the HKMA including Executive
Director (Banking Supervision), Head of Administration, and Head of
Banking Policy from 1993 to 2005.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

3

Report of the Directors

Rajnish Kumar
Independent non-executive Director (since 26 August 2021)
He is also non-executive Chairman of Resilient Innovations Pvt. Ltd.; anindependent Director of Larsen & Toubro Infotech Limited; an adviser toKotak Investment Advisors Ltd.; a Director of Lighthouse Communities
Foundation; and a member of the Board of Governors of the Management
Development Institute in India. He is also a senior adviser to Baring Private
Equity Asia Pte Ltd. in Singapore. He holds a Master of Science in Physics
from Meerut University and a Post Graduate Certificate in Business
Management from XLRI Jamshedpur in India, and is a Certified Associateof the Indian Institute of Bankers.
He was formerly Chairman of the State Bank of India until he retired in
October 2020.

Beau Khoon Chen Kuok
Independent non-executive Director
He is also Chairman and Managing Director of Kerry Group Limited. He
holds a Bachelor of Economics from Monash University. He waspreviously Chairman and Chief Executive Officer of Shangri-La Asia
Limited; Chairman of Kerry Properties Limited; and Non-Executive Directorof Wilmar International Limited.

Irene Yun-lien Lee
Independent non-executive Director
She is also an independent non-executive Director of HSBC Holdings plc
and independent non-executive Chairman of the Board of Hang Seng Bank
Limited. She is also executive Chairman of Hysan Development Company
Limited. She holds a Bachelor of Arts (Distinction) in History of Art from
Smith College, Northampton, Massachusetts, USA. She is also a memberof the Honourable Society of Gray’s Inn, UK and a Barrister-at-Law inEngland and Wales.

Victor Tzar Kuoi Li
Non-executive Director
He is also Chairman and Managing Director of CK Asset Holdings Limited;
Chairman and a Group Co-Managing Director of CK Hutchison Holdings
Limited; Chairman of CK Infrastructure Holdings Limited and CK Life
Sciences Int’l., (Holdings) Inc.; a non-executive Director of Power Assets
Holdings Limited and HK Electric Investments Manager Limited; and a
non-executive Director and Deputy Chairman of HK Electric Investments
Limited. He is also Deputy Chairman of Li Ka Shing Foundation Limited, Li
Ka Shing (Global) Foundation and Member Deputy Chairman of Li Ka
Shing (Canada) Foundation. He holds a Bachelor of Science degree in Civil
Engineering, a Master of Science degree in Civil Engineering, both
received from Stanford University; and a degree of Doctor of Laws,
honoris causa (LL.D.) from The University of Western Ontario.

Ewen James Stevenson
Non-executive Director (since 5 October 2021)
He is also the Group Chief Financial Officer and an executive Director of
HSBC Holdings plc. He holds a Bachelor of Commerce and Administration
and a Bachelor of Law from Victoria University of Wellington, New
Zealand.
He was Chief Financial Officer of Royal Bank of Scotland Group plc from2014 to 2018. He held a number of roles at Credit Suisse, including coHead of the Europe, the Middle East and Africa Investment Banking
Division and co-Head of the Global Financial Institutions Group.

Kevin Anthony Westley, BBS
Independent non-executive Director
He is also an independent non-executive Director of Fu Tak Iam
Foundation Limited and a member of the investment committee of theWest Kowloon Cultural District Authority. He holds a Bachelor of Arts
(Hons) from the University of London (LSE) and is a Fellow of the Instituteof Chartered Accountants in England and Wales.
He was Chairman (from 1996) and Chief Executive (from 1992) of HSBC
Investment Bank Asia Limited (formerly named as Wardley Limited) until
his retirement in 2000 and subsequently acted as an advisor to the Bankand the Group in Hong Kong.

Tan Sri (Sir) Francis Sock Ping Yeoh, KBE, CBE
Independent non-executive Director
He is also executive Chairman of YTL Corporation Berhad, YTL Land &Development Berhad, YTL Power International Berhad, YTL Cement
Berhad, Malayan Cement Berhad and YTL E-Solutions Berhad. He holds a
Bachelor of Science (Hons) in Civil Engineering and an Honorary Doctorate
of Engineering from the University of Kingston.

4

During the year, David Gordon Eldon was appointed as a nonexecutive Director with effect from 4 June 2021. At the conclusionof the 2021 Annual General Meeting (‘AGM’) held on 7 June 2021:
Laura May Lung Cha, Jennifer Xinzhe Li, Zia Mody and Bin Hwee
Quek (née Chua) stepped down as Directors; Peter Tung Shun
Wong, the former Deputy Chairman and Chief Executive, was redesignated as a non-executive Director and was appointed
Chairman; David Gordon Eldon was appointed as Deputy
Chairman; and David Yi Chien Liao and Surendranath Ravi Rosha
were appointed as executive Directors and co-Chief Executive
Officers. Rajnish Kumar was appointed as an independent nonexecutive Director with effect from 26 August 2021. Ewen James
Stevenson was appointed as a non-executive Director with effectfrom 5 October 2021. Save for the above, all the Directors served
throughout the year.
A list of the directors of the Bank’s subsidiary undertakings(consolidated in the financial statements) during the period from
1 January 2021 to the date of this report will be available on the
Bank’s website www.hsbc.com.hk/legal/regulatory-disclosures/.

Secretary
Paul Stafford is the Corporation Secretary.

Permitted Indemnity Provision
The Bank’s Articles of Association provide that the Directors andother officers of the Bank shall be indemnified out of the Bank’s
assets against any liability incurred by them or any of them as theholder of any such office or appointment to a person other thanthe Bank or an associated company of the Bank in connection
with any negligence, default, breach of duty or breach of trust in
relation to the Bank or associated company. In addition, theBank’s ultimate holding company, HSBC Holdings plc, has
maintained directors’ and officers’ liability insurance providing
appropriate cover for the directors and officers within the Group,
including the Directors of the Bank and its subsidiaries.

Directors’ Interests in Transactions,
Arrangements or Contracts
Save as disclosed in Note 32 on the Consolidated Financial
Statements, no transactions, arrangements or contracts that weresignificant in relation to the Bank’s business and in which a
Director or his or her connected entities had, directly or indirectly,
a material interest were entered into by or subsisted with theBank, its holding companies, its subsidiaries or subsidiaries of its
holding companies during the year.

Directors’ Rights to Acquire Shares or Debentures
To help align the interests of employees with shareholders,
executive Directors of the Bank and HSBC Holdings plc are eligible
to be granted conditional awards over ordinary shares in HSBC
Holdings plc by that company (being the ultimate holding
company) under the HSBC Share Plan 2011 and the HSBCInternational Employee Share Purchase Plan.
Executive Directors of the Bank and HSBC Holdings plc are eligible
to receive an annual incentive award based on the outcome of theperformance measures (financial and non-financial) set out in theirannual performance scorecard. Annual incentive awards arenormally delivered in cash and/or shares, and these generally havea deferral rate of 60% or 40% if the annual incentive award is
below GBP500,000. The period over which annual incentive
awards would be deferred is determined in accordance with therequirements of the Prudential Regulation Authority (‘PRA’)
Remuneration Rules, i.e. seven years for Senior Managers(individuals in PRA and Financial Conduct Authority (‘FCA’)designated Senior Management Functions), five years for Risk
Managers, and four years for other Material Risk Takers (‘MRTs’).
From January 2017 onwards, all share awards granted to MRTs
are subject to a minimum retention period of one year as opposed
to six months previously. However, for certain individuals whose
variable pay awards will be deferred for at least five years and who
are not considered to be members of senior management, theirretention period may be kept at six months.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

All unvested deferred awards made under the HSBC Share Plan
2011 are subject to the application of malus, i.e. the cancellation
and reduction of unvested deferred awards. All paid or vested
variable pay awards made to identified staff and MRTs will be
subject to clawback for a period of seven years from the date ofaward. For Senior Managers, this may be extended to 10 years in
the event of an ongoing internal or regulatory investigation at theend of the seven-year period.
Executive Directors and other senior executives of HSBC Holdings
plc are subject to Group minimum shareholding requirements.
Individuals are given five years from 2014 or (if later) their
appointment to build up the recommended levels of shareholding.
HSBC operates an anti-hedging policy for Group, sectorial andlocal MRTs including executive Directors in accordance with the
PRA Rules, who are required to certify each year via the Bank's
Global Personal Account Dealing system that they have notentered into any personal hedging strategies in relation to theirholdings of HSBC shares as part of the Global Personal Account
Dealing Certification.
The HSBC International Employee Share Purchase Plan is an
employee share purchase plan offered to employees in Hong Kong
since 2013 and has been extended to further countries in the
HSBC Group from 2014. For every three shares in HSBC Holdings
plc purchased by an employee (‘Investment Shares’), a conditional
award to acquire one share is granted (‘Matching Shares’). The
employee becomes entitled to the Matching Shares subject tocontinued employment with HSBC and retention of the Investment
Shares until the third anniversary of the start of the relevant plan
year. HSBC Holdings Savings-Related Share Option Plan (UK) is an
all employee share plan under which eligible employees may be
granted options to acquire HSBC Holdings ordinary shares.
Employees may make monthly contributions, up to a maximum
defined limit, over a period of three or five years and shares are
exercisable within six months following either the third or fifth
anniversary of the commencement. The exercise price is set at a
20% discount to the market value immediately preceding the dateof invitation.

comprises an equal number of independent non-executive
Directors and non-executive Directors.
As a principal subsidiary of the HSBC Group, the Bank complies
with the Group’s subsidiary accountability framework including its
responsibility for overseeing the implementation of the framework
for all Group companies in Asia-Pacific. The principles of thesubsidiary accountability framework, which were refreshed in
2021, set out high-level principles to promote effective governanceand improve communications and connectivity between HSBC
Holding plc and its subsidiaries.

Board of Directors
The Board, led by the Chairman, provides entrepreneurial
leadership of the Bank within a framework of prudent andeffective controls which enables risks to be assessed andmanaged. The Board is collectively responsible for the long-term
success of the Bank and delivery of sustainable value toshareholders. The Board sets the strategy and risk appetite for thegroup and approves capital and operating plans presented bymanagement for the achievement of the strategic objectives it has
set.

Directors
The Bank has a unitary Board. The authority of each Director is
exercised in Board meetings where the Board acts collectively. As
at the date of this report, the Board comprises: the non-executive
Chairman; the non-executive Deputy Chairman; two executive
Directors who are the co-Chief Executive Officers; two other nonexecutive Directors; and nine independent non-executive
Directors.

Independent non-executive Directors

Apart from these arrangements, at no time during the year was
the Bank, its holding companies, its subsidiaries or any fellow
subsidiaries a party to any arrangements to enable the Directors toacquire benefits by means of the acquisition of shares in ordebentures of the Bank or any other body corporate.

Independent non-executive Directors do not participate in the daily
business management of the Bank. They bring an external
perspective, constructively challenge and help develop proposals
on strategy, scrutinise the performance of management inmeeting agreed goals and objectives, and monitor the risk profileand reporting of performance of the Bank. The independent nonexecutive Directors bring experience from a number of industries
and business sectors, including the leadership of large complex
multinational enterprises. The Board has determined that there arenine independent non-executive Directors. In making thisdetermination, it was agreed that there are no relationships orcircumstances likely to affect the judgement of the independent
non-executive Directors, with any relationships or circumstancesthat could appear to do so not considered to be material.

Donations

Chairman and co-Chief Executive Officers

Donations made by the Bank and its subsidiaries during the year
amounted to HK$380m (2020: HK$345m).

The roles of the Chairman and co-Chief Executive Officers are
separate and held respectively by an experienced non-executive
Director and two full-time employees of the HSBC Group. There isa clear division of responsibilities between leading the Board andthe executive responsibility for running the Bank’s business.

During the year, Peter Wong, Ewen Stevenson, Surendra Roshaand David Liao acquired or were awarded shares of HSBC
Holdings plc under the terms of the HSBC Share Plan 2011.

Compliance with the Banking (Disclosure) Rules
The Directors are of the view that the Annual Report and Accounts
2021 and Banking Disclosure Statements 2021 fully comply with
the Banking (Disclosure) Rules made under section 60A of the
Banking Ordinance and the Financial Institutions (Resolution)(Loss-absorbing Capacity Requirements – Banking Sector) Rules(‘LAC Rules’) made under section 19(1) of the Financial Institutions(Resolution) Ordinance ('FIRO').

Auditor
The Consolidated Financial Statements have been audited byPricewaterhouseCoopers (‘PwC’). A resolution to reappoint PwC
as auditor of the Bank will be proposed at the forthcoming AGM.

Corporate Governance
The Bank is committed to high standards of corporate governance.
As an Authorised Institution, the Bank is subject to and complies
with the HKMA Supervisory Policy Manual CG-1 ‘Corporate
Governance of Locally Incorporated Authorised Institutions’ ('SPM
CG-1') except that following Board and Committee changes on.
7 June 2021 the membership of the Bank’s Nomination
Committee has not comprised a majority of independent nonexecutive Directors. The Bank’s Nomination Committee currently

The Chairman provides leadership to the Board in promoting theoverall effectiveness of the Bank, in particular the development ofstrategy and monitoring of the execution and delivery of Board
approved strategies and plans by the co-Chief Executive Officers
and management. The Chairman’s role includes promoting an
open and inclusive culture on the Board to facilitate open andcritical discussion and challenge and leading the Board in setting
an appropriate ‘tone from the top’ and in the oversight of theBank’s corporate culture. The Chairman also leads an annual
evaluation of the performance of the Board, its Committees andindividual Directors, including contributing to consideration of
succession planning of the Board, its Committees and senior
executive management. The role also involves maintaining
external relationships with key stakeholders and communicating
their views to the Board.
The co-Chief Executive Officers are responsible for ensuring
implementation of the strategy and policy as established by the
Board and the day-to-day running of operations. The co-Chief
Executive Officers are co-Chairmen of the Executive Committee.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

5

Report of the Directors

The Asia-Pacific heads of Global Businesses and Global Functions
report to the co-Chief Executive Officers.

Deputy Chairman
The role of the non-executive Deputy Chairman is to deputise
formally for the Chairman of the Board in his absence and support
the Chairman in the exercise of his responsibilities. The Deputy
Chairman also acts as an intermediary for other non-executive
Directors when necessary and leads the non-executive directors in
the annual performance evaluation of the Chairman and inensuring a clear division of responsibility between the Chairman
and co-Chief Executive Officers. The role involves maintaining
external relationships with key stakeholders and communicating
their views to the Board.

Board Committees
The Board has established various committees consisting of
Directors and senior management. The committees include the
Executive Committee, Audit Committee, Risk Committee,
Nomination Committee, Remuneration Committee and Chairman's
Committee. The Chairmen of the Executive Committee and of each
Board committee that includes independent non-executive
Directors report to each subsequent Board meeting on the relevant
committee’s proceedings.
The Board has also established an Asset, Liability and CapitalManagement Committee and a Risk Management Meeting. The
Executive Committee has the delegated authority to approve anychanges in the membership and terms of reference of the Asset,
Liability and Capital Management Committee and the Risk
Management Meeting.
To align with the revised Group Financial Crime Risk Governance
Framework, the former Financial Crime Risk Management
Committee was demised and its responsibility to oversee financial
crime risks was integrated into the Risk Management Meeting in
the first quarter of 2021.
The Board and each Board committee have terms of reference todocument their responsibilities and governance procedures. The
key roles of the committees are described in the paragraphs
below.

Executive Committee
The Executive Committee is responsible for the exercise of all of
the powers, authorities and discretions of the Board in so far as
they concern the management, operations and day-to-day runningof the group, in accordance with such policies and directions as
the Board may from time to time determine, with power to subdelegate. A schedule of items that require the approval of theBoard is maintained.
The Bank’s co-Chief Executive Officers, David Liao andSurendranath Rosha, are co-Chairmen of the Committee. The
current members of the Committee are: Justin Chan (Head ofMarkets & Securities Services, Greater China); Hitendra Dave
(Chief Executive Officer, India); Frank Fang (Head of Commercial
Banking, Hong Kong); Philip Fellowes (Chief of Staff, Asia-Pacific);
Darren Furnarello (Chief Compliance Officer, Asia-Pacific); David
Grimme (Chief Operating Officer, Asia-Pacific); Martin Haythorne(Chief Risk Officer, Asia-Pacific); Gregory Hingston (Chief
Executive Officer, HSBC Global Insurance and Partnerships andInterim Head of Wealth and Personal Banking, South Asia); Ming
Lau (Chief Financial Officer, Asia-Pacific and Global Commercial
Banking); Stuart Lea (Head of Global Banking, South-Asia); Kaber
Mclean (Chief Executive Officer Australia); Stuart Milne (Chief
Executive Officer Malaysia); Amanda Murphy (Head ofCommercial Banking, Southeast Asia and South Asia); Susan
Sayers (Regional General Counsel, Asia-Pacific); Monish
Tahilramani (Global Head of Markets & Securities Services
Emerging Markets, Japan, Australia); David Thomas (Regional
Head of Human Resources, Asia-Pacific); Mark Wang (President
and Chief Executive Officer China) and Kee Joo Wong (Chief
Executive Officer, Singapore). Paul Stafford (Corporation
Secretary) is the Committee Secretary. In attendance are: Daisuke
Kitamura (Interim Head of Global Banking, North-Asia); Astor Law(Head of Global Internal Audit, Asia-Pacific); Jessica Lee (Regional
6

Head of Communications Asia-Pacific); Luanne Lim (Interim Chief
Executive Officer, Hong Kong) and Philip Miller (Deputy
Corporation Secretary). The Committee met eleven times in 2021.
In between Committee meetings, there were periodic ‘check-in’
sessions held by the Committee Co-Chairmen with members to
discuss urgent or important matters and to support effective
communication.

Asset, Liability and Capital Management
Committee
The Asset, Liability and Capital Management Committee (‘ALCO’)is chaired by the Chief Financial Officer and is an advisorycommittee to provide recommendations and advice to support theChief Financial Officer's individual accountability for the efficientmanagement of the Bank’s assets, liabilities and capital within theconstraints of liquidity and funding ratios, capital ratios, and key
balance sheet risks such as interest rate risk, market risk andequity risk. The Committee also has responsibilities for the Bank's
resolution planning activities.
The Committee consists of Ming Lau (Chief Financial Officer, AsiaPacific and Global Commercial Banking), David Liao andSurendranath Rosha (co-Chief Executive Officers), the Regional
Treasurer, Asia Pacific, the Regional Head of Asset and Liability
Management, Asia-Pacific, the Regional Head of CapitalManagement, Asia-Pacific, the Head of Markets Treasury, AsiaPacific, and other senior executives of the Bank most of whom aremembers of the Executive Committee. The Committee met ten
times in 2021.

Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer
and is a formal governance committee established to support theChief Risk Officer’s individual accountability for the oversight ofenterprise risk and provide recommendations and advice to theChief Risk Officer on enterprise-wide management of all risks,
including key policies and frameworks for the management of risk
within the Bank. The Risk Management Meeting consists of Martin
Haythorne (Chief Risk Officer, Asia-Pacific), David Liao andSurendranath Rosha (co-Chief Executive Officers), the Head of
Global Internal Audit, Asia-Pacific and other senior executives of
the Bank most of whom are members of the Executive Committee.
The Risk Management Meeting met ten times in 2021.

Audit Committee
The Audit Committee has non-executive responsibility foroversight of and advice to the Board on matters relating tofinancial reporting and internal financial controls. The current
members of the Committee are Kevin Westley (Chairman of theCommittee), Graham Bradley, Yiu Kwan Choi, David Eldon, Rajnish
Kumar and Irene Lee. Except David Eldon who is a non-executive
Director, all members are independent non-executive Directors.
The Committee met four times in 2021.
The Audit Committee monitors the integrity of the Consolidated
Financial Statements and disclosures relating to financial
performance, the effectiveness of the internal audit function andthe external audit process, and the effectiveness of internalfinancial control systems. The Committee reviews the adequacy of
resources and expertise as well as succession planning for thefinance function. It reviews, and considers changes to, the Bank’s
accounting policies. The Committee advises the Board on theappointment, re-appointment, or removal of the external auditor
and reviews and monitors the external auditor’s independence andobjectivity. The Committee reviews matters escalated for its
attention by subsidiaries’ audit committees and receives minutesof meetings of the ALCO.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Risk Committee
The Risk Committee has non-executive responsibility for oversightof and advice to the Board on risk-related matters impacting the
Bank and its subsidiaries, including risk governance and internal
control systems (other than internal controls over financial
reporting). The current members of the Committee are Graham
Bradley (Chairman of the Committee), Christopher Cheng, Sonia
Cheng, Yiu Kwan Choi, David Eldon, Rajnish Kumar, Irene Lee and
Kevin Westley. Except David Eldon who is a non-executive
Director, all members are independent non-executive Directors.
The Committee met five times in 2021.
All of the Bank’s activities involve, to varying degrees, theidentification, assessment, monitoring and management of risk or
combinations of risks. The Board, advised by the Risk Committee,
requires and encourages a strong risk culture which shapes the
Bank’s attitude to risk. The Bank’s risk governance is supported by
the Group’s risk management framework which provides a clear
policy of risk ownership and accountability of all staff for
identifying, assessing and managing risks within the scope of theirassigned responsibilities. This personal accountability, reinforced
by clear and consistent employee communication on risk that sets
the tone from senior leadership, the governance structure,
mandatory learning and remuneration policy, helps to foster adisciplined and constructive culture of risk management andcontrol throughout the group.
The Board and the Risk Committee oversee the maintenance anddevelopment of a strong risk management framework bycontinually monitoring the risk environment, top and emerging
risks facing the group and mitigating actions planned and taken.
The Risk Committee reviews the Group risk management policies
and procedures at least annually and advises the Board if these areappropriate for the circumstances of the Bank. It also reviews local
risk management policies at least annually, and approves orrecommends any changes to the Board for approval.
The Committee reviews any revisions to the group’s risk appetitestatement twice a year and recommends any proposed changes tothe Board for approval. The Committee reviews management’s
assessment of risk against the risk appetite statement andprovides scrutiny of management’s proposed mitigating actions.
The Committee monitors the risk profiles for all of the risk
categories within the group’s business. The Committee also
monitors the effectiveness of the Bank’s risk management andinternal controls other than those over financial reporting. Regular
reports from the Risk Management Meeting are also presented ateach Risk Committee meeting to report on the ongoing
monitoring, assessment and management of the risk environment
and the effectiveness of the risk management framework. The
Committee reviews matters escalated for its attention bysubsidiaries’ risk committees and receives minutes of meetings of
the Risk Management Meeting.

Nomination Committee
The Nomination Committee is responsible for leading the process
for Board appointments and for identifying and approving, or
nominating for the approval of the Board, candidates forappointment to the Board and certain senior management roles.
Appointments to the Board and certain senior management roles
are subject to the approval of the HKMA. The Committee
considers plans for orderly succession to the Board and theappropriate balance of skills, knowledge and experience on the
Board. The Committee also reviews the board succession plans ofcertain subsidiaries of the Bank and considers and endorses
appointments to boards of directors of those subsidiaries.
The current members of the Committee are Christopher Cheng(Chairman of the Committee), Peter Wong (Chairman of theBoard), David Eldon (Deputy Chairman of the Board) and Beau
Kuok. Christopher Cheng and Beau Kuok are independent nonexecutive Directors and Peter Wong and David Eldon are nonexecutive Directors. The Committee met eight times in 2021.
A rigorous selection process, overseen by the Nomination
Committee and based upon agreed requirements using an external
search consultancy when appropriate, is followed in relation to theappointment of non-executive Directors. Before recommending an
appointment of a Director to the Board, the Committee evaluates
the Board composition including the balance of skills, knowledge
and experience, as well as diversity and the role and capabilities
required. In identifying suitable Board candidates, the Committee
considers candidates’ backgrounds, knowledge and experience topromote diversity of views, and takes into account the required
time commitment and any potential conflicts of interest.

Chairman’s Committee
The Chairman’s Committee acts on behalf of the Board either inaccordance with authority delegated by the Board from time totime or as specifically set out within its terms of reference. The
Committee meets with such frequency and at such times as it may
determine and can implement previously agreed strategic
decisions by the full Board, approve specified matters subject totheir prior review by the full Board, and act exceptionally on urgent
matters within its terms of reference.
The current members of the Committee comprise the Chairman of
the Board, the Deputy Chairman of the Board, the co-Chief
Executive Officers and the Chairmen of the Audit and Risk
Committees. The Committee met three times in 2021.

Remuneration Committee
The Group Remuneration Committee is responsible for setting theprinciples, parameters and governance framework for the Group‘sremuneration strategy applicable to all Group employees, which isadopted by the Bank. The Remuneration Committee of the Bank is
responsible for the oversight of matters related to remuneration
impacting the Bank and its subsidiaries, in particular, overseeing
the implementation and operation of the Group’s remuneration
strategy and satisfying itself that the remuneration frameworkcomplies with local laws, rules or regulations; is in line with therisk appetite, business strategy, culture and values, and long-term
interests of the Bank; and is appropriate to attract, retain andmotivate employees to support the success of the Bank. The
Committee annually reviews the effectiveness and compliance of
the Group's remuneration strategy as adopted by the Bank
alongside the submission of the Bank's HKMA Supervisory Policy
Manual CG-5 'Guideline on a Sound Remuneration System' SelfAssessment as conducted by Deloitte LLP. The current membersof the Committee, all being independent non-executive Directors,
are Irene Lee (Chairman of the Committee), Christopher Cheng,
Beau Kuok, Sonia Cheng and Francis Yeoh. The Committee met
eight times in 2021.The following is a summary of theCommittee's key activities during 2021:
Details of the Committee’s key activities
Senior Management*• Reviewed and approved senior management's remuneration and pay
proposals• Reviewed and approved the performance scorecards for the Co-Chief
Executive and Executive Committee members of the BankAll employees• Approved 2020/2021 performance year pay review matters• Reviewed remuneration framework effectiveness• Received updates on notable events and regulatory and corporate
governance matters• Reviewed and approved 2021 Material Risk Taker (‘MRT’) identification
approaches and outcomes• Reviewed attrition data and plans to address area of concerns• Approved 2021 remuneration related regulatory submissions*

Senior Management includes the Chief Executive of the Bank, Chief
Executive of Hang Seng Bank Limited, Executive Committee
members, Alternate Chief Executives and Managers as registeredwith HKMA.

Remuneration Strategy
Our performance and pay strategy underpinned by our Group’s
Remuneration Strategy and principles aims to competitively
reward long-term sustainable performance. We aim to do this byattracting, motivating and retaining the very best people,

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

7

Report of the Directors

regardless of gender, ethnicity, age, disability or any other factor
unrelated to performance or experience.
The strategy supports the long-term interests of our stakeholders,which includes the customers and the communities we serve, ourshareholders and our regulators. The strategy is underpinned by
the below principles designed to support a fair and appropriate
pay and performance approach, whilst recognizing the need forflexibility in a hybrid workplace. These include:• Ensuring that the decisions made are fair, appropriate and freefrom bias. Managers are encouraged to challenge theirassessment by questioning whether they were objective andbased on facts;• Rewarding and recognizing our people for sustainable
performance and values aligned behavior upholding ourrefreshed purpose and values. As such, subject to local law,
employee receive a behavior rating as well as a performance
rating to ensure performance is assessed not only on what isachieved, but also on how it is achieved;• Supporting a culture of continuous feedback through manager
and employee empowerment and creating a culture where
employees can fulfil their potential, gain new skills and develop
their careers for the future;• To deliver a balanced, simple and transparent total reward
package that supports employee well-being; and• Compliance with relevant regulation across all of our countries
and territories.
More details of the Bank’s remuneration strategy are contained
within the Annual Report and Accounts 2021 of HSBC Holdingsplc.
The Bank as an authorised institution under the Banking
Ordinance is required by HKMA Supervisory Policy Manual CG-5
'Guideline on a Sound Remuneration System' ('the Guideline') toassess whether their existing remuneration systems and policy arein line with the principles in the Guideline, independently of
management and at least annually. The annual review for 2020
was commissioned externally to Deloitte LLP and the results wereapproved by the Remuneration Committee in April 2021. The
review confirmed that the Bank’s remuneration strategy as
adopted from the Group is consistent with the principles set out in
the Guideline.

Recovery and Resolution Planning
The group is subject to recovery and resolution requirements inmany of the jurisdictions in which it operates.

Recovery
The group maintains creditable and executable recovery plans thatare designed to present clear and tested strategies and recovery
actions to restore capital to a stable and viable position, thus
lowering the probability of failure. The Bank typically submits
recovery plans on an annual basis to the HKMA and to otherregulators that have implemented recovery planning requirements.
The Bank’s recovery plans are continually re-appraised, and thisinvolves stress testing and ‘fire drill’ tests.

Resolution
Resolution refers to the exercise of statutory powers where afinancial institution and/or its parent or other group company isdeemed by its regulators to be failing, or likely to fail and it is notreasonably likely that action could be taken that would result in
the institution recovering.
The group continues to engage with the HKMA and the otherprincipal Asian regulators in addressing any identified
impediments to resolvability of the group, ensuring resolvability
capabilities being developed are in line with the local requirements
and regulatory expectations.
The Financial Institutions (Resolution) (Loss-absorbing Capacity
Requirements–Banking Sector) Rules (‘LAC Rules’) require thegroup to have sufficient loss-absorbing capacity (‘LAC’) which canbe written down or converted into equity at an intermediate
8

holding company in Hong Kong to recapitalise the group as awhole in the event of failure. HSBC Asia Holdings Limited, awholly-owned subsidiary of HSBC Holdings plc and theintermediate holding company of the group, is designated as theresolution entity for the group, where adequate LAC has to beavailable in a form that will be bailed-in at the point of resolution.
As part of the Resolvability Assessment Framework (‘RAF’) issued
by the Bank of England and Prudential Regulation Authority(‘PRA’) which places the onus on firms to demonstrate their own
resolvability, HSBC Group is required to have capabilities as of.
1st January 2022 to achieve the resolvability outcomes: (i) haveadequate resources in resolution; (ii) be able to continue businessthrough resolution and restructuring; and (iii) be able to coordinate its resolution and communicate effectively withstakeholders. The group is part of the HSBC Group-wide RAF
implementation. The RAF requires HSBC to prepare a report on the
HSBC Group’s assessment of its preparedness for resolution,
which must be submitted to the PRA on a biennial basis. HSBC
submitted its first such report to the PRA in October 2021 and will
publish a public summary of the report in June 2022. The BoE will
similarly publish a statement concerning the resolvability of HSBC
at the same time.

Environmental, Social and Governance
We are committed to building a business for the long term,
developing relationships that last. We maintain high standards ofgovernance and meet our responsibilities to society.

Environmental matters
Continuing our Sustainable Finance leadership in Asia
As part of the Group’s Climate Strategy, the Group has committed
to align its business to net-zero by 2050. In the fourth quarter of
2020, the Group announced an ambitious plan to prioritise
financing and investment that supports the transition to a net zeroglobal economy – this reinforces our global sustainable financecommitments made in 2017. In early 2021, the Group proposed a
Climate Resolution on actions to take in connection with ourambition to align our provision of finance with a net zero outcome
by 2050, and has published our thermal-coal phase-out policy aswell as an update on our approach to financed emissions in
December 2021.
Our net zero ambition represents a material step up in our support
for customers as we collectively work towards building a thriving
low carbon economy. We have made strong progress inundertaking greater sustainable finance business in Asia. In 2021,
the group was awarded ‘Asia’s Best Bank of Sustainable Finance’by Euromoney for the fourth consecutive year since award
inception. Throughout the year, we continued to expand oursustainable finance market leadership, product and service
offerings across our Commercial Banking ('CMB'), Wealth andPersonal Banking ('WPB'), Global Banking ('GB') and Markets andSecurities Services ('MSS') businesses.
GB and MSS’s ESG Solutions Unit continues to lead the business’s
effort in providing advice, expertise and financing ideas to clientsin Asia and around the world. We have fronted the building of the
Asian market on Sustainability Linked Loans ('SLLs') and Green
Loans. We have continued our leadership in the Green/ Social/
Sustainable and Sustainability-Linked issuances space, and havearranged the world’s first government Global Medium Term Note
Programme dedicated to green bond issuances and the first 30year green bond being issued by an Asian government for the
HKSAR Government, the first ever transition bonds issuancealigned to the ICMA Climate Transition Finance Handbook, as well
as ASEAN’s first green SRI Sukuk through HSBC Amanah.
In CMB, we have expanded SLL and Sustainable/Green Trade
Facilities to clients in Asia. We have launched a SLL Programme tosupport corporates in the services sector in Hong Kong byencouraging and linking environmental and social performancetargets through the financing product, and have arranged
numerous SLLs across Asian markets. We have also developed
green liability product solutions in Asia, namely green deposits forour corporate clients in Hong Kong, Thailand and India.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

In WPB, we continue to support clients’ sustainable aspirations byembedding ESG across client engagement and investment
solutions. We focus on product development, thought leadership,
developing an ESG culture and embedding ESG throughout thebusiness. We offer a comprehensive suite of sustainable
investment products to help clients to fulfil their sustainability
preferences while delivering financial goals. These include ESG
funds, green, social and sustainability bonds, structured products
and green certificate of deposits.

Business Review
The Bank is exempt from the requirement to prepare a business
review under section 388(3) of the Companies Ordinance Cap. 622
since it is an indirect wholly-owned subsidiary of HSBC Holdings
plc.

More information about our assessment of climate risk can befound in ‘Areas of special interest' on pages 23 to 26.

Employee matters

On behalf of the Board

We are opening up a world of opportunity for our colleagues
through building an inclusive organisation that values difference,takes responsibility, and seeks different perspectives for theoverall benefit of our customers.

Peter Wong, Chairman
22 February 2022

We want to encourage a dynamic culture where our colleagues
can expect to be treated with dignity and respect. We are anorganisation that takes action where we find behaviours that fallshort of this aspiration. We monitor our progress through metrics
that we value and have benchmarked against peers.
Listening to our colleagues is critical to the business we conduct,and is reflected in our purpose and values, which were establishedthrough an enterprise-wide engagement activity.
We continue to seek innovative ways that encourage and provide
opportunities for our people to speak up. We recognise that attimes people may not feel comfortable speaking up through theusual channels. HSBC Confidential is our global whistleblowing
channel, open to colleagues past and present as an anonymouschannel through which they can raise concerns confidentially attheir discretion.

Social matters
We have a responsibility to invest in the long-term prosperity of
the communities where we operate. We recognise that technology
is developing at a rapid pace and that a range of new and different
skills are now needed to succeed in the workplace. For thisreason, much of our focus is on programmes that develop
employability and financial capability. We also back initiatives that
support responsible business, and contribute to disaster relief
efforts based on need. More details on customer relief
programmes can be found on pages 46 to 47.

Human rights
Our commitment to respecting human rights, principally as they
apply to our employees, our suppliers and through our financial
services lending, is aligned to that of the Group, the details of
which are set out in the HSBC's Statement on Human Rights,
which is available on www.hsbc.com/our-approach/measuringour-impact.

Anti-corruption and anti-bribery
We require compliance with all applicable anti-bribery andcorruption laws in all markets and jurisdictions in which we
operate. We have a global anti-bribery and corruption policy,
which gives practical effect to these laws and regulations, but also
requires compliance with the spirit of laws and regulations todemonstrate our commitment to ethical behaviours and conduct
as part of our environmental, social and corporate governance.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

9

Financial Review

Financial Review
Results for 2021
(Unaudited)

Profit before tax for 2021 reported by The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries(together ‘the group’) decreased by HK$3,633m, or 4%, to HK$86,563m.
Consolidated income statement and balance sheet data by reportable segments(Audited)
Wealth andPersonal
Banking1

Commercial
Banking1

GlobalBanking1,2Markets andSecurities
Services2

Corporate
Centre3

Other (GBMother)2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Year ended 31 Dec 2021
Net interest income
Net fee income/(expense)

50,632
23,827

29,106
9,828

15,070
5,746

3,497
5,730

(2,640)
243

2,448
(78)

98,11345,296

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

22,1953,551

39

19,363214

513

45,875956
58,645
202
156,457

368
3,499
39
46,391——
237
21,092——
1,113
29,703—(422)
599(2,006)

343
—
(157)
3,069

1,667
61,722
2,033
254,706(72,658)(3,743)

—

—

353

—

(76,048)

Gains less losses from financial investments
Net insurance premium income/(expense)
Other operating income
Total operating income
Net insurance claims and benefits paid and movement inliabilities to policyholders
Net operating income before change in expected credit
losses and other credit impairment charges

83,79942,64821,092

29,703(1,653)

3,069

178,658– of which: externalinter-segment
Change in expected credit losses and other credit impairment
charges

80,5703,229

43,398(750)

20,539553

29,64459(2,284)631

6,791(3,722)

178,658—(1,224)(3,295)(2,013)

(10)

(6)

9

(6,539)Net operating income
Operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Balance sheet data at 31 Dec 2021
Loans and advances to customers (net)Customer accounts

82,575(49,429)
33,146
137
33,28339,353(20,839)
18,514—
18,514

19,079(10,152)
8,927
—
8,927

29,693(14,629)
15,064—
15,064(1,659)(7,332)(8,991)
19,183
10,192

3,078(2,495)583—
583

172,119(104,876)
67,243
19,32086,563

1,544,449
3,407,789

1,315,961
1,659,464

927,542891,994

49,887
211,621

1,540
28

1,560
6,286

3,840,939
6,177,182

Year ended 31 Dec 2020
Net interest income
Net fee income/(expense)

59,783
22,17434,192
9,002

16,993
5,382

3,389
4,973

(5,357)
162

2,513
(23)

111,513
41,670Net income from financial instruments measured at fair value
through profit or loss

18,927

2,985

(140)

20,5442,067

884

45,267772
58,261
5,056
164,973

450
3,627
66
50,322——
303
22,538——1,250
30,156

(15)
(325)
(372)
(3,840)

417
—
(691)
3,100

1,624
61,563
5,612
267,249(74,394)(3,700)

—

—

183

—

(77,911)

Gains less losses from financial investments
Net insurance premium income/(expense)
Other operating income
Total operating income
Net insurance claims and benefits paid and movement inliabilities to policyholders
Net operating income before change in expected credit losses
and other credit impairment charges

90,57946,622

22,53830,156(3,657)

3,100

189,338– of which: externalinter-segment
Change in expected credit losses and other credit impairment
charges

77,66912,91049,975(3,353)25,868(3,330)33,633(3,477)(4,711)
1,054

6,904
(3,804)

189,338—(4,441)(12,145)(1,089)

(16)

(5)

(23)

(17,719)

Net operating income
Operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Balance sheet data at 31 Dec 2020
Loans and advances to customers (net)Customer accounts

86,138(47,292)
38,846
6
38,852

34,477(19,391)
15,086—15,086

21,449(9,261)
12,188—12,18830,140(12,317)
17,823—
17,823(3,662)(5,132)(8,794)
14,3995,605

3,077(2,435)642—
642

171,619(95,828)
75,791
14,40590,196

1,463,558
3,333,360

1,206,857
1,472,646

966,765
899,564

24,998204,431

3,402
449

3,101
946

3,668,681
5,911,396

1 In 2021, the cards acquiring business has been transferred from Commercial Banking ('CMB') and Global Banking ('GB') to Wealth and Personal
Banking ('WPB') to align with the business model. Comparatives have been re-presented to conform to the current year's presentation.
2 In the second half of 2021, the reportable segments have been changed to reflect the change in the management of the Global Banking andMarkets ('GBM') business, with the splitting out of GB and Markets and Securities Services ('MSS') as separate reportable segments, whilst GBMOther (previously reported within GBM) is now reported under 'Other (GBM-other)'. Comparatives have been re-presented to conform to thecurrent year's presentation. Further details on the change in reportable segments are set out in Note 31 'Segmental analysis' in the Annual Reportand Accounts 2021.
3 Includes inter-segment elimination.

10

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

balance sheet exposures and from the favourable revaluation on
structured deposits.

Financial Review
Effective from the second half of 2021, the operating segment of
GBM has been expanded into Global Banking (‘GB’), Markets andSecurities Services (‘MSS’) and Global Banking and Markets –Other (‘GBM–other’) to reflect changes to both the management
structure and internal reporting to the Chief Operating Decision
Maker to execute the Group’s GBM strategy in Asia. GB and MSS
are separate reportable segments. GBM–other, which mainlycomprises of business activities which are jointly managed by GB
and MSS, is reported under ‘Other (GBM–other)’. MSS includes
revenues for products and services sold to GB clients that are notnecessarily reflected on a shared basis in the GB segment. MSS
and GB comprise certain costs and cost allocations that are split
for internal reporting purposes but are shared in nature and not
wholly directly attributable to any one segment. GBM-other mainlycomprises of distinct business activities that are jointly managed
by GB and MSS. The new reporting structure does not change theGroup’s management of its global GBM strategy.
The commentary that follows compares the group's financial
performance for the year ended 2021 with 2020.

Results Commentary(Unaudited)

The group reported profit before tax of HK$86,563m, a decrease of
HK$3,633m, or 4%. Net operating income before change in
expected credit losses and other credit risk provisions decreased
by HK$10,680m, or 6%, driven by lower net interest income, while
operating expenses increased by HK$9,048m, or 9%, frominvestments in technology and our wealth businesses. As a result,the cost efficiency ratio increased from 50.6% in 2020 to 58.7% in
2021.
Net interest income decreased by HK$13,400m, or 12%.
Excluding the favourable foreign exchange impact, net interest
income decreased by HK$15,010m, or 13%, driven by Hong Kong
primarily due to narrower customer deposit spreads and lower
reinvestment yields as market interest rates decreased, partly
offset by balance sheet growth. Net interest income in India andMalaysia also decreased, reflecting the same impact from thelower interest rate environment.
Net fee income increased by HK$3,626m, or 9%. Excluding thefavourable foreign exchange impact, net fee income increased by
HK$3,114m, or 7%, driven by WPB in Hong Kong from an increasein unit trust income due to an increase in sales volumes, coupledwith higher funds under management fees due to increased fundsize, reflecting improved market sentiment compared to 2020. Net
fee income in MSS also increased, mainly from higher global
custody and securities brokerage fees due to increased equities
turnover, coupled with higher funds under management fees. To alesser extent, an increase was also noted in CMB, mainly fromhigher trade-related fees as global trade volumes recovered during2021, coupled with higher remittance fees as customer activity
increased.

Net insurance premium income increased by HK$159m,
remained flat. Gross insurance premium income increased by 3%,
mainly in Singapore and mainland China, reflecting higher sales
volumes, largely offset by increased reinsurance arrangements inHong Kong.
Other operating income decreased by HK$3,579m, or 64%,
driven by the unfavourable movement in the present value of inforce long-term insurance business ('PVIF'), partly offset by the
non-recurrence of revaluation losses on investment properties inHong Kong in 2020.
The unfavourable movement in PVIF reflected adverse assumptionchanges and experience variances in Hong Kong and Singapore,
primarily due to interest rates movements, partly offset by anincrease in the value of new business written, mainly in HongKong.
The movement in PVIF was partly offset by a corresponding
movement in ‘Net insurance claims and benefits paid andmovement in liabilities to policyholders’.
Net insurance claims and benefits paid and movement inliabilities to policyholders decreased by HK$1,863m, or 2%,
driven by the unfavourable movement in PVIF, partly offset byhigher investment returns to policyholders due to the morefavourable equity market performance compared with the prioryear.
Change in expected credit losses and other credit risk
provisions decreased by HK$11,180m, or 63%, notably in CMB,
mainly reflecting the non-recurrence of charges in relation to theunfavourable forward economic outlook as impacted byCoronavirus Disease 2019 ('Covid-19') in 2020, and also fromlower specific charges due to the non-recurrence of a significant
charge in the prior year. A decrease was also noted in WPB,
reflecting the same impact from the forward economic outlook
update in the prior year. The decreases in CMB and WPB werepartly offset by an increase in GB, mainly due to an increase inallowance relating to mainland China's commercial real estate
sector.
Total operating expenses increased by HK$9,048m, or 9%.
Excluding the unfavourable foreign exchange impact, operating
expenses increased by HK$7,719m, or 8%, reflecting an increase
in investments in technology, including investments in our digital
capabilities, and in our Asia wealth business. Employeecompensation and benefits also increased, mainly from higher
performance-related pay and wage inflation, partly offset by lower
average headcount across the region.
Share of profit in associates and joint ventures increased by
HK$4,915m, or 34%. Excluding the favourable foreign exchange
impact, the share of profit in associates and joint ventures
increased by HK$3,857m, or 25%, mainly from Bank ofCommunications Co., Limited.

Net income from financial instruments measured at fairvalue through profit or loss increased by HK$608m, or 1%.
Net income from assets and liabilities of insurance businesses,
including related derivatives, measured at fair value through profit
or loss increased by HK$5,052m, or 38%, mainly in WPB in Hong
Kong, driven by higher revaluation gains on the equity portfolio
held to support insurance and investment contracts due toimproved market conditions. To the extent that these gains are
attributable to policyholders, there is an offsetting movement
reported under ‘Net insurance claims and benefits paid andmovement in liabilities to policyholders’.
Net income from financial instruments held for trading or
managed on a fair value basis decreased by HK$3,813m, or 12%,driven by Hong Kong from lower trading income in Global Debt
Markets, Global Foreign Exchange and Securities Financing
businesses, partly offset by higher Equities trading income. The
decrease was partly offset by an increase in mainland China fromthe favourable movement in foreign exchange translation of
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

11

Financial Review

Net interest income(Unaudited)
2021

2020

HK$m

HK$m

Net interest income
Average interest-earning assets

98,113
7,173,973

111,5136,882,970%%

Net interest spread
Contribution from net free funds
Net interest margin

1.32
0.05
1.37

1.53
0.09
1.62

Net interest income (‘NII’) decreased by HK$13,400m, or 12%.
Excluding the favourable foreign exchange impact, net interest
income decreased by HK$15,010m, or 13%, driven by Hong Kong
primarily due to narrower customer deposit spreads and lower
reinvestment yields as market interest rates decreased, partly
offset by balance sheet growth. To a lesser extent, net interest
income in India and Malaysia also decreased.
Average interest-earning assets increased by HK$291bn, or
4%, driven by Hong Kong, mainland China and India, mainlyreflecting growth in the commercial surplus as customer deposits
increased.

Net interest margin ('NIM') dropped by 25 basis points ('bps'),with decreases noted across the region, primarily in Hong Kongand mainland China, as market interest rates decreased
significantly compared to the prior year. This resulted in narrower
customer deposit spreads and lower reinvestment yields. The
increase in commercial surplus, which was primarily deployed into
reverse repurchase agreements and other short-term funds, also
contributed to lower yields.

Insurance manufacturing(Unaudited)

The following table shows the results of our insurance manufacturing operations by income statement line item, and separately the
insurance distribution income earned by the group's bank channels.
Results of insurance manufacturing operations and insurance distribution income earned by the group's bank channels

Insurance manufacturing operations1
Net interest income
Net fee expense
Net income from financial instruments measured at fair value
Net insurance premium income
Change in present value of in-force long-term insurance business
Other operating income/(expense)
Total operating income
Net insurance claims and benefits paid and movement in liabilities to policyholders
Net operating income before change in expected credit losses and other credit impairment charges
Change in expected credit losses and other credit impairment charges
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Annualised new business premiums of insurance manufacturing operations
Distribution income earned by the group's bank channels

2021

2020

HK$m

HK$m

16,527(3,617)
18,036
62,135(1,294)719
92,506(76,361)
16,145(216)
15,929(3,464)
12,465137
12,602
19,136
4,135

15,654(2,923)
13,812
61,874
3,840(364)
91,893(78,093)
13,800(440)
13,360(2,595)
10,765
6
10,771
15,749
4,092

1 The results presented for insurance manufacturing operations are shown before elimination of intercompany transactions with the group's noninsurance operations.

12

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Insurance manufacturing
Profit before tax from the insurance manufacturing operations
increased by HK$1,831m, or 17%, driven by more favourable
equity markets compared to 2020, together with higher new
business volumes.
Net interest income increased by 6% from growth in invested
funds, reflecting net new business and renewal premium inflows
on life insurance contracts.
Net income from financial instruments measured at fair value
increased, mainly from gains on the equity portfolio held to
support insurance and investment contracts in Hong Kong, due tomore favourable equity market performance.
Net insurance premium income increased from higher sales
volumes mainly in Singapore and mainland China, partly offset byincreased reinsurance arrangements in Hong Kong.
The unfavourable movement in PVIF reflected adverse assumptionchanges and experience variances in Hong Kong and Singapore
primarily due to interest rates movements, partly offset by anincrease in the value of new business written, mainly in HongKong.
To the extent that the above gains or losses are attributable topolicyholders, there is an offsetting movement reported under ‘Net
insurance claims and benefits paid and movement in liabilities topolicyholders'.
Annualised new business premiums increased by HK$3,387m, or
22%, mainly in Hong Kong reflecting new business initiatives,
product launches and marketing promotions to support domestic
sales. New business levels in 2020 were impacted by the onset of
Covid-19.

Balance sheet commentary compared with 31
December 2020
(Unaudited)

The consolidated balance sheet at 31 December 2021 is set out in
the Consolidated Financial Statements.
Gross loans and advances to customers increased by
HK$175bn, or 5%. Excluding the unfavourable foreign exchangetranslation effects of HK$13bn, gross loans and advances tocustomers increased by HK$188bn, driven by an increase inresidential mortgages of HK$77bn, mainly in Hong Kong andAustralia. In addition, corporate and commercial lending and nonbank financial institution lending increased by HK$62bn and
HK$37bn respectively, mainly in Hong Kong, mainland China andIndia.
Overall credit quality remained strong, with total gross impairedloans and advances as a percentage of gross loans and advances
standing at 1.11% at the end of 2021 (2020: 0.99%). The change in
expected credit losses as a percentage of average gross customer
advances was 0.18% for 2021 (2020: 0.44%).

Interests in associates and joint ventures
At 31 December 2021, an impairment review on the group’s
investment in Bank of Communications Co., Ltd (‘BoCom’) was
carried out and it was concluded that the investment was not
impaired based on our value-in-use calculation (see Note 14 on theConsolidated Financial Statements for further details). As
discussed in that note, in future periods, the value in use may
increase or decrease depending on the effect of changes to model
inputs. It is expected that the carrying amount will continue toincrease due to retained profits earned by BoCom. At the point
where the carrying amount exceeds the value in use, impairment
would be recognised. The group would continue to recognise its
share of BoCom’s profit or loss, but the carrying amount would be
reduced to equal the value in use, with a corresponding reductionin the income statement. An impairment review would continue tobe performed at each subsequent reporting period, with thecarrying amount and income adjusted accordingly.
Customer deposits rose by HK$266bn, or 4%, to HK$6,177bn.
The advances-to-deposits ratio was 62.2% at the end of the year
(2020: 62.1%).
Shareholders’ equity grew by HK$11bn to HK$857bn at
31 December 2021, mainly reflecting the current year’s profit, netof dividend payments.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

13

Risk

• communication with risk stewards on the developing risklandscape;Risk• strength of our capital, liquidity and balance sheet;

Our approach to risk

• compliance with applicable laws and regulations;(Unaudited)• effectiveness of the applicable control environment to mitigate
risk, informed by risk ratings from risk control assessments;

Our risk appetite
We recognise the importance of a strong culture, which refers toour shared attitudes, values and standards that shape behaviours
related to risk awareness, risk taking and risk management. All our
people are responsible for the management of risk, with theultimate accountability residing with the Board.
We seek to build our business for the long term by balancing
social, environmental and economic considerations in thedecisions we make. Our strategic priorities are underpinned by ourendeavour to operate in a sustainable way. This helps us to carryout our social responsibility and manage the risk profile of thebusiness. We are committed to managing and mitigating climaterelated risks, both physical and transition, and continue toincorporate consideration of these into how we manage andoversee risks internally and with our customers.
The following principles guide the group’s overarching appetite forrisk and determine how our businesses and risks are managed.

Financial position• We aim to maintain a strong capital position, defined byregulatory and internal capital ratios.
• We carry out liquidity and funding management for each
operating entity, on a stand-alone basis.

Operating model• We seek to generate returns in line with our risk appetite andstrong risk management capability.
• We aim to deliver sustainable and diversified earnings andconsistent returns for shareholders.

Business practice• We have zero tolerance for any of our people knowingly
engaging in any business, activity or association where
foreseeable reputational risk or damage has not been
considered and/or mitigated.
• We have no appetite for deliberately or knowingly causing
detriment to consumers, or incurring a breach of the letter or
spirit of regulatory requirements.
• We have no appetite for inappropriate market conduct by any
member of staff or by any group business.
•

We are committed to managing the climate risks that have an
impact on our financial position, and delivering on our net zeroambition.

Enterprise-wide application
Our risk appetite encapsulates the consideration of financial andnon-financial risks. We define financial risk as the risk of afinancial loss as a result of business activities. We actively takethese types of risks to maximise shareholder value and profits.
Non-financial risk is the risk to achieving our strategy or objectives
as the result of failed internal processes, people and systems orfrom external events.
Our risk appetite is expressed in both quantitative and qualitative
terms and applied at the global business level and to material
operating entities. It continues to evolve and expand its scope aspart of our regular review process.
The Board reviews and approves the group’s risk appetite twice ayear to make sure it remains fit for purpose. The group’s risk
appetite is considered, developed and enhanced through:• an alignment with our strategy, purpose, values and customer
needs;• functionality, capacity and resilience of available systems to
manage risk; and• the level of available staff with the required competencies tomanage risks.
We formally articulate our risk appetite through our risk appetitestatement (‘RAS’), which is approved by the Board on therecommendation of the group Risk Committee ('RC'). Setting out
our risk appetite ensures that we agree a suitable level of risk forour strategy. In this way, risk appetite informs our financial
planning process and helps senior management to allocate capitalto business activities, services and products.
The RAS consists of qualitative statements and quantitative
metrics, covering financial and non-financial risks. It is applied tothe development of business line strategies, strategic and businessplanning, and remuneration. At a group level, performance against
the RAS is reported to the group Risk Management Meeting(‘RMM’) alongside key risk indicators to support targeted insightand discussion on breaches of risk appetite and associatedmitigating actions. This reporting allows risks to be promptly
identified and mitigated, and informs risk-adjusted remuneration
to drive a strong risk culture.
Most global businesses and strategically important entities are
required to have their own RAS, which is monitored to help ensure
it remains aligned with the group’s RAS. Each RAS and businessactivity is guided and underpinned by qualitative principles and/or
quantitative metrics.

Risk management
We recognise that the primary role of risk management is toprotect our customers, business, colleagues, shareholders and thecommunities that we serve, while ensuring we are able to support
our strategy and provide sustainable growth. This is supported
through our three lines of defence model described on page 16.
The implementation of our business strategy, which include amajor transformation programme, remains a key focus. As we
implement change initiatives, we actively manage the execution
risks. We also perform periodic risk assessments, including
against strategies to help ensure retention of key personnel for ourcontinued safe operation.
We aim to use a comprehensive risk management approachacross the organisation and across all risk types, underpinned by
the group's culture and values. This is outlined in our risk
management framework, including the key principles, policies andpractices that we employ in managing material risks, bothfinancial and non-financial.
The framework fosters continual monitoring, promotes risk
awareness and encourages a sound operational and strategic
decision making and escalation process. It also supports aconsistent approach to identifying, assessing, managing andreporting the risks we accept and incur in our activities, with clear
accountabilities. We continue to actively review and develop ourrisk management framework and enhance our approach to
managing risk, through our activities with regard to: people andcapabilities; governance; reporting and management information;
credit risk management models; and data.

Our risk management framework
The following diagram and descriptions summarise key aspects of
the risk management framework, including governance, structure,risk management tools and our culture, which together help alignemployee behaviour with risk appetite.

• trends highlighted in other group risk reports;
14

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Key components of our risk management framework
HSBC Values and risk culture

Non-executive risk governance

The Board approves the group's risk appetite, plans and performancetargets. It sets the ‘tone from the top’ and is advised by the group's Risk
Committee.

Executive risk governanceOur executive risk governance structure is responsible for the enterprisewide management of all risks, including key policies and frameworks forthe management of risk within the group.

Three lines of defence model

Our ‘three lines of defence’ model defines roles and responsibilities forrisk management. An independent Risk function helps ensure thenecessary balance in risk/return decisions.

Risk governance

Roles and
responsibilities

Risk appetite
Enterprise-wide risk management tools
Processes and tools
Active risk management:
identification/assessment,
monitoring, management and reporting

Policies and procedures define the minimum requirements for thecontrols required to manage our risks.

Policies and proceduresInternal controls

The group has processes in place to identify/assess, monitor, manage
and report risks to help ensure we remain within our risk appetite.

Control activities

Operational and resilience risk management defines minimum standards
and processes for managing operational risks and internal controls.

Systems and infrastructure

The group has systems and/or processes that support the identification,
capture and exchange of information to support risk management
activities.

Risk governance
The Board has ultimate responsibility for the effective
management of risk and approves our risk appetite. It is advised
on risk-related matters by the RC.
The group's Chief Risk Officer, supported by the RMM, holds
executive accountability for the ongoing monitoring, assessmentand management of the risk environment and the effectiveness of
the risk management framework.
The management of regulatory compliance risk and financial crime
risk resides with the group's Chief Compliance Officer. Oversight ismaintained by the group's Chief Risk Officer, in line with hisenterprise risk oversight responsibilities, through the RMM.

Day-to-day responsibility for risk management is delegated tosenior managers with individual accountability for decision
making. All our people have a role to play in risk management.
These roles are defined using the three lines of defence model,
which takes into account the group’s business and functional
structures as described in the following commentary, 'Our
responsibilities’.
We use a defined executive risk governance structure to help
ensure there is appropriate oversight and accountability of risk,
which facilitates reporting and escalation to the RMM. This
structure is summarised in the following table.

Governance structure for the management of risk
Authority

MembershipResponsibilities include:

Risk Management
Meeting of the group

group Chief Risk Officergroup General Counsel
group Co-Chief Executives
group Chief Financial Officergroup heads of global business and global
functions• Supporting the group Chief Risk Officer in exercising Board-delegated risk
management authority.
• Overseeing the implementation of risk appetite and the risk management
framework.
• Forward-looking assessment of the risk environment, analysing possible risk
impacts and taking appropriate action.
• Monitoring all categories of risk and determining appropriate mitigating
action.
• Promoting a supportive group culture in relation to risk management andconduct.

Global business/Siterisk management
meetings

Global business/Site Chief Risk Officer
Global business/Site Chief Executive
Global business/Site Chief Financial Officer
Global business/Site heads of global functions• Supporting the Chief Risk Officer in exercising Board-delegated risk
management authority.
• Forward-looking assessment of the risk environment, analysing the possible
risk impact and taking appropriate action.
• Implementation of risk appetite and the risk management framework.
• Monitoring all categories of risk and determining appropriate mitigating
actions.
• Embedding a supportive culture in relation to risk management and controls.

The Board committees with responsibility for oversight of risk-related matters are set out on page 6.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

15

Risk

Our responsibilities

Stress testing and recovery planning

All our people are responsible for identifying and managing risk
within the scope of their roles. Roles are defined using the threelines of defence model, which takes into account our business andfunctional structures as described below.

The group operates a wide-ranging stress testing programme thatis a key part of our risk management and capital and liquidity
planning. Stress testing provides management with key insights
into the impact of severely adverse events on the group, andprovides confidence to regulators on the group’s financial stability.

Three lines of defence
To create a robust control environment to manage risks, we usean activity-based three lines of defence model. This model
delineates management accountabilities and responsibilities forrisk management and the control environment.
The model underpins our approach to risk management byclarifying responsibility and encouraging collaboration, as well as
enabling efficient coordination of risk and control activities.
The three lines of defence are summarised below:• The first line of defence owns the risks and is responsible for
identifying, recording, reporting and managing them in linewith risk appetite, and ensuring that the right controls andassessments are in place to mitigate them.
• The second line of defence challenges the first line of defence
on effective risk management, and provides advice andguidance in relation to the risk.
• The third line of defence is our Global Internal Audit function,
which provides independent assurance that our risk
management approach and processes are designed andoperating effectively.

Risk function
The group’s Risk function, headed by the group’s Chief Risk
Officer, is responsible for the group’s risk management
framework. This responsibility includes establishing andmonitoring of risk profiles, and identifying and managing forwardlooking risk. The group’s Risk function is made up of sub-functions
covering all risks to our business. Forming part of the second lineof defence, the group's Risk function is independent from theglobal businesses, including sales and trading functions, toprovide challenge, appropriate oversight and balance in risk/return
decisions.
Responsibility for minimising both financial and non-financial risklies with our people. They are required to manage the risks of thebusiness and operational activities for which they are responsible.
We maintain adequate oversight of our risks through our various
specialist risk stewards as well as the collective accountability heldby our Chief Risk Officers at sites and global businesses.
We have continued to strengthen the control environment and ourapproach to the management of non-financial risk, as broadly set
out in our risk management framework. The management of nonfinancial risk focuses on governance and risk appetite, andprovides a single view of the non-financial risks that matter themost and the associated controls. It incorporates a risk
management system designed to enable the active managementof non-financial risk. Our ongoing focus is on simplifying ourapproach to non-financial risk management, while driving more
effective oversight and better end-to-end identification andmanagement of non-financial risks. This is overseen by the
Operational and Resilience Risk function, headed by the group
Head of Operational and Resilience Risk.

16

Our stress testing programme assesses our capital and liquidity
strength through a rigorous examination of our resilience toexternal shocks. As well as undertaking regulatory-driven stresstests, we conduct our own internal stress tests, in order tounderstand the nature and level of all material risks, quantify the
impact of such risks and develop plausible business-as-usual
mitigating actions.
Many of our regulators – including the Hong Kong Monetary
Authority (‘HKMA’) – use stress testing as a prudential regulatory
tool, and the group has focused significant governance andresources to meet their requirements.

Internal stress tests
Our internal capital assessment uses a range of stress scenariosthat explore risks identified by management. They include
potential adverse macroeconomic, geopolitical and operationalrisk events, as well as other potential events that are specific to
the group.
The selection of stress scenarios is based upon the output of ouridentified top and emerging risks and our risk appetite. Stresstesting analysis helps management understand the nature andextent of vulnerabilities to which the group is exposed. Using thisinformation, management decides whether risks can or should be
mitigated through management actions or, if they were to
crystallise, be absorbed through capital and liquidity. This in turninforms decisions about preferred capital and liquidity levels andallocations.
In addition to the group-wide stress testing scenarios, each major
subsidiary and branch conducts regular macroeconomic andevent-driven scenario analyses specific to its region. They also
participate, as required, in the regulatory stress testing
programmes of the jurisdictions in which they operate, and thestress tests of the HKMA. Global functions and businesses also
perform bespoke stress testing to inform their assessment of risks
to potential scenarios.
We also conduct reverse stress tests each year at a group level
and, where required, at subsidiary entity level to understandpotential extreme conditions that would make our business model
non-viable. Reverse stress testing identifies potential stresses andvulnerabilities we might face, and helps inform early warning
triggers, management actions and contingency plans designed tomitigate risks.
The group stress testing programme is overseen by the RC andresults are reported, where appropriate, to the RMM and RC.

Recovery and resolution plans
Recovery and resolution plans form part of the integral framework
safeguarding the group’s financial stability. The group's recovery
plan, together with stress testing, helps us understand the likely
outcomes of adverse business or economic conditions and in theidentification of mitigating actions.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Key developments in 2021

Our current top and emerging risks are as follows:

In 2021, it was announced that Mark McKeown was retiring fromhis role of the group's Chief Risk Officer in late October 2021.
Martin Haythorne, who was the Global Head of Wholesale Credit
and Lending, has been appointed as the group's Chief Risk Officer
with effect from 2 August 2021.

Externally driven

We continued to actively manage the risks resulting from theCovid-19 pandemic and its impacts on our customers andoperations during 2021, as well as other key risks described in thissection.
In addition, we enhanced our risk management in the following
areas:• We streamlined the articulation of our risk appetite framework,
providing further clarity on how risk appetite interacts withstrategic planning and recovery planning processes.
• We continued to simplify our approach to non-financial risk
management, with the implementation of more effective
oversight tools and techniques to improve end-to-end
identification and management of these risks.
• We accelerated the transformation of our approach to
managing financial risks across the businesses and riskfunctions, including initiatives to enhance portfolio monitoring
and analytics, credit risk management, traded risk
management, treasury risk management and models used to
manage financial risks.
•

We are progressing with a comprehensive regulatory reporting
programme to strengthen our global processes, improveconsistency, and enhance controls.

•

We launched an enhanced approach to Conduct for allcolleagues, businesses and geographies, establishing theoutcomes to be achieved for customers and markets in all risk
disciplines, operations and technologies and integrating it into
our approach to culture and our risk management
arrangements.

Geopolitical and macroeconomic risks(Unaudited)

Our operations and portfolios are exposed to risks associated with
political instability, civil unrest and military conflict, which could
lead to disruption of our operations, physical risk to our staff and/or physical damage to our assets.
Global tensions over trade, technology and ideology are
manifesting themselves in divergent regulatory standards andcompliance regimes, presenting long-term strategic challenges for
multinational businesses.
The Covid-19 pandemic brought supply chain issues into focus,
with shortages appearing across several regions and products
throughout 2020 and 2021, and it is not expected that these issues
will ease significantly before mid-2022.
The pandemic has also heightened geopolitical tensions, which
could have implications for the group and its customers.
The group will increasingly need to consider potential regulatory,
reputational and market risks arising from the evolving geopoliticallandscape. In 2021, there was an escalation of tensions between
China and the US, and increasingly extending to the UK, the EU,
India and other countries.
The US-China relationship in particular remains complex, withdivisions over a number of critical issues. The US, the UK, the EU,
Canada and other countries have imposed various sanctions andtrade restrictions on Chinese persons and companies, and the UScontinues to develop its approach to perceived strategiccompetition with China.

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

Certain US measures are particularly relevant. The US Hong Kong
Autonomy Act authorises secondary sanctions against non-US
financial institutions found to be knowingly conduct significant
transactions with individuals and entities that are determined by
the US to have undermined Hong Kong’s autonomy. In addition,
the US has imposed restrictions on US persons’ ability to buy orsell certain publicly traded securities of certain Chinese companies
linked to China’s defence and related material or surveillance
sectors.

• We established a dedicated Climate Risk Oversight Forum tooversee our approach to climate risk. Globally, the Group has
appointed a Group Head of Climate Risk in support of ourclimate change strategy and to oversee the development of ourclimate risk management capabilities. We leveraged on theGroup climate risk programme, which continues to drive thedelivery of our enhanced climate risk management approach.

There are also increasing discussions between the US and othergovernments on multilateral efforts to address certain issues with
China, which are likely to create a more complex operating
environment for the group and its customers. Notably, with its
traditional allies including the EU, UK, and Canada, the US has
increasingly instituted sanctions in response to allegations ofhuman rights abuses in Xinjiang.

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

China in turn has announced a number of its own sanctions andtrade restrictions that target foreign individuals and companies.
These have been imposed mainly against certain public officials
associated with the implementation of foreign sanctions against
China. China has promulgated new laws that provide a legal
framework for imposing further sanctions and export restrictions,
including a law prohibiting the implementation of, or compliancewith, foreign sanctions against China and which also creates a
private right of action in the Chinese courts for damages causedby third parties implementing foreign sanctions or otherdiscriminatory measures. These and any future measures andcountermeasures that may be taken by the US, China and othercountries may affect the group, its customers, and the markets inwhich we operate.

Top and emerging risks(Unaudited)

We use a top and emerging risks process to provide a forwardlooking view of issues with the potential to threaten the executionof our strategy or operations over the medium to long term.
We proactively assess the internal and external risk environment,
as well as review the themes identified across our region andglobal businesses, for any risks that may require global escalation,
updating our top and emerging risks as necessary.

As the geopolitical landscape evolves, compliance by multinational
corporations with their legal or regulatory obligations in one
jurisdiction may be seen as supporting the law or policy objectivesof that jurisdiction over another, creating additional compliance,
reputational and political risks for the group. We maintain an open
dialogue with our regulators on the impact of legal and regulatory
obligations on our business and customers.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

17

Risk

Expanding data privacy and cybersecurity laws in a number ofmarkets could pose potential challenges to intra-group data
sharing. These developments could increase financial institutions’compliance burdens in respect of cross-border transfers of
personal information.
Monetary and fiscal policies in developed markets will likely
remain broadly accommodative for some time owing to
uncertainty over the economic outlook. However, rising global
inflation – partly on the back of higher energy prices – is puttingpressure on central banks to tighten monetary policy. The US
Federal Reserve Board began tapering its asset purchases from
November 2021 and financial markets currently expect it to raise
the Federal Funds rate over the next year. The European Central
Bank is on course to end its extraordinary asset purchaseprogramme in March 2022.
Persistent supply issues or further increases in energy prices – forinstance as a result of escalation in the Russia-Ukraine crisis –could keep inflation high and force central banks to tightenmonetary policies faster than currently envisaged. Conversely,
monetary policy tightening may be constrained by the emergenceand spread of new Covid-19 variants that dampen economic
recovery. We continue to monitor our risk profile closely in thecontext of uncertainty over monetary policies.
Market concerns remain about repercussions for the Chinese
domestic economy from the recent instability in the commercial
real estate sector. Such repercussions may occur directly throughfinancial exposures to the Chinese commercial real estate sector,
or indirectly through the effect of a slowdown in economic activity
in China and in the supply chain to the real estate sector. While at
31 December 2021 we had no direct credit exposure to developers
classified as falling within the 'red' category of the ‘three red lines’
framework used by the Chinese government in its governance ofthe real estate sector, deteriorating operating performance andchallenging liquidity conditions were more broadly seen across thesector. We continue to monitor the situation closely, including
potential indirect impacts, and seek to take mitigating actions as
required.
The global economic recovery in 2021 eased financial difficulties
for some of our customers, which contributed to a reduction in
ECL charges.
For further details on customer relief programmes, see pages 46 to
47.

Mitigating actions• We closely monitor geopolitical and economic developments in
key markets and sectors and undertake scenario analysis whereappropriate. This helps us to take portfolio actions where
necessary, including enhanced monitoring, amending our risk
appetite and/or reducing limits and exposures.
• We stress test portfolios of particular concern to identify
sensitivity to loss under a range of scenarios, with management
actions to rebalance exposures and manage risk appetite where
necessary.
• We regularly review key portfolios to help ensure that individual
customer or portfolio risks are understood and our ability to
manage the level of facilities offered through any downturn isappropriate.
• We have taken steps to enhance physical security in thosegeographical areas deemed to be at high risk from terrorism
and military conflicts.

18

Environmental, social and governance risk
(Unaudited)

We are subject to financial and non-financial risks associated withenvironmental, social and governance ('ESG') risk. Our main ESG
risks are climate risk, nature-related risks and human rights risks.
These can impact us both directly and indirectly through ourcustomers.
Climate-related risk increased over 2021, owing to the pace andvolume of policy and regulatory changes globally particularly on
climate risk management, stress testing and scenario analysis anddisclosures. If we fail to meet evolving regulatory expectations or
requirements on climate risk management, this could haveregulatory compliance and reputational impacts for the group.
We face increased reputational, legal and regulatory risks as we
make progress towards our net zero ambition, with stakeholders
likely to place a greater focus on our actions such as thedevelopment of climate-related policies, our disclosures andinvestment decisions relating to our ambition. To track and reporton progress towards achieving our ambition, we rely on internaland external data, guided by certain industry standards. Whileemissions reporting has improved over time, data remain oflimited quality and consistency. Methodologies we have used may
develop over time in line with market practice and regulation as
well as owing to developments in climate science. Any
developments in data and methodologies could result in revisions,meaning that reported figures may not be reconcilable orcomparable year-on-year. We may also have to re-evaluate ourprogress towards our climate-related targets in future and this
could result in reputational, legal and regulatory risks.
Climate risk will also have an impact on model risk, as models play
an important role in risk management and the financial reportingof climate-related risks. The uncertain impacts of climate change
and data limitations, present challenges to creating reliable andaccurate model outputs.
We could also face increased resilience, retail credit and wholesalecredit risks owing to the increase in frequency and severity of
weather events and chronic shifts in weather patterns. These risks
could impact our own critical operations resulting in customer
detriment and operational losses for HSBC. Our customers’
operations and assets could also be affected, reducing their ability
to afford mortgage or loan repayments, leading to credit risk
impacts for the group.
There is increasing evidence that a number of nature-related risks
beyond climate change - which include risks that can be
represented more broadly by the economic dependency on nature– can and will have significant economic impact. These risks arise
when the provision of natural services – such as water availability,
air quality, and soil quality – is compromised by overpopulation,
urban development, natural habitat and ecosystem loss, and otherenvironmental stresses beyond climate change. They can show
themselves in various ways, including through macroeconomic,
market, credit, reputational, legal and regulatory risks, for both
HSBC and its customers. In 2021, we added nature-related risks as
a new emerging risk driver, under the umbrella theme of ESG
Risks and continue to engage with investors, regulators andcustomers on nature-related risks to evolve our approach andunderstand best practice risk mitigation.
Regulation and disclosure requirements in relation to humanrights, and to Modern Slavery in particular, are increasing.
Businesses are expected to explain more about their efforts to
identify and respond to the risk of negative human rights impacts
arising from the actions of their employees, suppliers, customers
and those in whom they invest.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Mitigating actions• We continue to deepen our understanding of the drivers ofclimate risk as well as manage our exposure. We haveestablished a dedicated Climate Risk Oversight Forum foroverseeing our approach and providing support in managing
climate risk.
• Our climate risk programme continues to accelerate thedevelopment of our climate risk management capabilities
across four key pillars – governance and risk appetite, risk
management, stress testing and scenario analysis, anddisclosures. We are also enhancing our approach togreenwashing risk.
•

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

• We have started to incorporate the outcomes and insights fromthe Bank of England’s Climate Biennial Exploratory Scenarioand HKMA Climate Risk Stress Test into climate risk
management.
•

We are undertaking training and adding additional roles withspecialist skills to manage climate-related risks.

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

With the help of external stakeholders, we continued to review
and improve our approach to human rights issues, following
the UN Guiding Principles on Business and Human Rights.

• In 2021, the Group joined several industry working groups
dedicated to helping us assess and manage nature-relatedrisks, such as the Taskforce on Nature-Related Financial
Disclosure (‘TNFD’). The Group's asset management businessalso published its biodiversity policy to publicly explain how ouranalysts address nature-related issues.
• We continue to engage with our customers, investors andregulators proactively on the management of ESG risks. The
Group also engages with initiatives, including the Climate
Financial Risk Forum, Equator Principles, Taskforce on Climaterelated Financial Disclosures and CDP (formerly the Carbon
Disclosure Project) to drive best practice for climate risk
management.

Ibor transition(Unaudited)

Interbank offered rates (‘Ibors’) have historically been used
extensively to set interest rates on different types of financialtransactions and for valuation purposes, risk measurement andperformance benchmarking.
Following the UK’s Financial Conduct Authority (‘FCA’)
announcement in July 2017 that it would no longer continue topersuade or require panel banks to submit rates for the London
interbank offered rate (‘Libor’) after 2021, we have been actively
working to transition legacy contracts from Ibors and meet clientneeds for products linked to new near risk-free replacement rates('RFRs') or alternative reference rates. In March 2021, in
accordance with the 2017 FCA announcement, ICE Benchmark
Administration Limited (‘IBA’) announced that it would cease
publication of 26 of the 35 main Libor currency interest ratebenchmark settings from the end of 2021, but that the mostwidely used US dollar Libor settings would cease from 30 June
2023. As a result, our focus during 2021 was on the transition of
legacy contracts referencing the Euro Overnight Index average(‘Eonia’) and the Libor settings that demised from the end of 2021.
During 2021, we continued the development of IT and RFR
product capabilities, implemented supporting operational
processes, and engaged with our clients to discuss options for thetransition of their legacy contracts. The successful implementationof new processes and controls, as well as the transition ofcontracts away from Ibors, reduced the heightened financial andnon-financial risks to which we were exposed. However, while allbut exceptional new Libor contract issuance ceased during 2021,
and from the end of 2021 for US dollar, we remain exposed torisks, including from a small population of so-called ‘tough legacy’contracts, which reference Ibors that demised from the end of2021, and have not been able to be transitioned to a new rate or
do not have clear fallback language in place, and from legacy
contracts that reference US dollar Libor and other regional rates
demising at later dates ('demising regional rates'), which are
expected to demise from June 2023.
Financial risks have been largely mitigated as a result of theimplementation of model and pricing changes. However,differences in US dollar Libor and its replacement RFR, Secured
Overnight Funding Rate (‘SOFR’), create a basis risk in the tradingbook and banking book due to the asymmetric adoption of SOFR
across assets, liabilities and products that we need to actively
manage through appropriate financial hedging. Such basis risk isalso created for other demising regional rates. Additionally, thecomparatively limited use of SOFR in financial markets to date
could result in insufficient liquidity to transition legacy US dollar
contracts during 2022. This could potentially delay transition ofsome US dollar contracts into 2023, compressing the amount oftime for transition, which could lead to heightened operational andconduct related risks as a result.
Additional non-financial risks, including financial reporting risks
relating to potential mis-statements due to the complexity inapplying accounting reliefs relating to amendments of legacy
contracts and legal risk continue to exist.
These risks are present in different degrees across our productoffering.

Transition legacy contracts
During 2021, we either successfully transitioned or confirmed
appropriate fallback for over 99% of legacy Ibor contracts insterling, Swiss franc, euro and Japanese yen Libor interest rates,
as well as Eonia, with only a very small proportion of ‘toughlegacy’ contracts remaining. Our approach to transition ‘toughlegacy’ and US dollar Libor and other demising regional rates
legacy contracts will differ by product and business area, but will
be based on the lessons learned from the successful transition ofcontracts during 2021. We will continue to communicate with ourclients and investors in a structured manner and be client led in
the timing and nature of the transition.
For derivatives, all of our sterling, Swiss franc, euro and Japanese
yen Libor interest rate exposure at year-end has rates determinedby fallback mechanisms, or had no further such rate fixings post
year end. We anticipate our US dollar Libor and demising regional
rates exposures will continue to reduce through 2022 as a result ofcontract maturities, active transition and the cessation of new US
dollar Libor issuance and that of demising regional rates. We willcontinue to look to actively reduce our US dollar and demisingregional rates exposures by transitioning trades ahead of thedemise date of 30 June 2023, by working with our clients todetermine their needs and alternative approaches. Additionally, we
are working with market participants, including clearing houses, toensure we are able to transition contracts as the US dollar Liborand demising regional rates cessation dates approach.
For our loan book, over 90% of our reported exposure at the endof 2021 relates to sterling, Swiss franc, euro and Japanese yen
Libor interest rate contracts that required no further clientnegotiation. The remaining exposure relates to a small number of‘tough legacy’ contracts where discussions with our clients andother market participants, for syndicated transactions, havecontinued in early 2022, and this has led to further transitions
being completed. Contracts that are unable to transition prior totheir first interest payment date in 2022 are expected to use analternative rate determined by the contractual language andgoverning law. For the remaining demising Ibors, notably US
dollar Libor and demising regional rates, we have implemented
new products and processes and updated our systems inreadiness for transition. Global Banking, Commercial Banking and
Global Private Banking have begun to engage with clients who

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

19

Risk

have upcoming contract maturities with a view to refinancing
using an appropriate replacement rate. Further communications
and outreach to customers with US dollar Libor and demisingregional rates contracts with later maturities will occur in due
course.
For the group’s non-derivative financial liabilities at 31 December
2021, there were three Japanese Yen Total Loss Absorbing
Capacity (‘TLAC’) instruments at fixed to floating rate where the
JPY Libor benchmark will be used to reset the coupon rate if thebank chooses not to redeem these instruments on the respective
call date, or dates, for each series. The interest rate for these
instruments is currently at fixed rate and the earliest call date
before the coupon rate reset among these instruments is in
September 2023.
We remain mindful of the various factors that impact on Iborremediation strategy for our regulatory capital and TLAC
instruments, including – but not limited to – timescales for
cessation of relevant Ibor rates, constraints relating to thegoverning law of outstanding instruments, and the potential
relevance of legislative solutions. We remain committed in seeking
to remediate or mitigate relevant risks relating to Ibor-demise, as
appropriate, on our outstanding regulatory capital and TLAC
instruments before the relevant calculation, which may occur postcessation of the relevant Ibor rate or rates.
Where we hold bonds issued by other institutions, we haveremained dependent on the issuer’s agents to engage in thetransition process, although analysis will be undertaken of theissuers in US dollar Libor and other demising regional rate bonds
to reduce our exposure, as occurred through 2021.
The completion of an orderly transition from the remaining Ibors,notably US dollar Libor and other demising regional rates,
continues to be our programme’s key objective through 2022 and2023, with the aim of putting systems and processes in place tohelp achieve this.

Mitigating actions• Our global Ibor transition programme, which is overseen by theGroup Chief Risk and Compliance Officer, will continue todeliver IT and operational processes to meet its objectives.
• We carry out extensive training, communication and client
engagement to facilitate appropriate selection of new rates andproducts and we have dedicated teams in place to support thetransition.
• We actively transition legacy contracts and ceased newissuance of Libor and demising regional rate based contracts,
in line with regulatory expectations and with associatedmonitoring and controls.
• We assess, monitor and dynamically manage risks arising from
Ibor transition, and implement specific mitigating controls
when required.
• We continue to actively engage with regulatory and industry
bodies to mitigate risks relating to 'tough legacy' contracts.

Financial instruments impacted by Ibor reform(Audited)

Amendments to HKFRSs issued in October 2020 (Interest Rate
Benchmark Reform Phase 2) represents the second phase of the
project on the effects of interest rate benchmark reform,
addressing issues affecting financial statements when changes are
made to contractual cash flows and hedging relationships as aresult of reform.
Under these amendments, changes made to a financial instrument
measured at other than fair value through profit or loss that areeconomically equivalent and required by interest rate benchmark
reform, do not result in the derecognition or a change in the
carrying amount of the financial instrument. Instead, they require
the effective interest rate to be updated to reflect the change in
the interest rate benchmark. In addition, hedge accounting will not
be discontinued solely because of the replacement of the interest
rate benchmark if the hedge meets other hedge accounting
criteria.
Financial instruments yet to transition to alternative benchmarks, by main
benchmark(Audited)

USD LiborJapanese Yen
Libor

Others1Sibor

GBP Libor

At 31 Dec 2021
Non-derivative financial assets2
Non-derivative financial liabilities
Derivative notional contract amount

HK$m

HK$m

HK$m

HK$m

HK$m

206,508
147,198
8,547,665

2,846
10,930798,92156,291——

22,197—
88,2184,779—
715,439

At 31 Dec 2020
Non-derivative financial assets2
Non-derivative financial liabilities
Derivative notional contract amount

253,239
119,269
6,252,168

2,688
12,192
3,281,539

63,100—299

33,797—82,902

15,7244,125
1,383,582

1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (Euro Libor, Swiss Franc
Libor, Eonia, SGD Swap Offer Rate ('SOR') and Thai Baht Interest Rate Fixing ('THBFIX')).
2 Gross carrying amount excluding allowances for expected credit losses.

The amounts in the above table relate to the group's main operating entities1 and provide an indication of the extent of the group's
exposure to the Ibor benchmarks which are due to be replaced. Amounts are in respect of financial instruments that:• contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark;• have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and• are recognised on the group's consolidated balance sheet.
1 Entities where we have material exposures impacted by Ibor reform in countries/territories comprising of Hong Kong, Singapore, Thailand,
Australia and Japan.

In March 2021, the administrator of Libor, IBA, announced that the
publication date of most US dollar Libor tenors is extended from31 December 2021 to 30 June 2023. Publication of one-week andtwo-month tenors will cease after 31 December 2021. Thischange, together with the extended publication dates of Sibor,
SOR and THBFIX, reduce the amounts presented at 31 December
2021 in the above table as some financial instruments included at
31 December 2020 will reach their contractual maturity date prior
20

to the extended publication dates. Comparative data have notbeen re-presented.
For further details on our approach to Ibor transition, see ‘Top andemerging risks – Ibor transition’ (unaudited) above.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Financial crime risk environment

Mitigating actions(Unaudited)• We monitor for regulatory developments to understand the
evolving regulatory landscape and respond with changes in atimely way.

Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. The financial crime threats we face have continued to
evolve, often in tandem with broader geopolitical, socioeconomic
and technological shifts in our markets, leading to challenges suchas managing conflicting laws and approaches to legal andregulatory regimes.
Financial crime risk evolved during the Covid-19 pandemic,
notably with the manifestation of fraud risks linked to theeconomic slowdown and the resulting deployment of government
relief measures. The accelerated digitisation of financial services
has fostered significant changes to the payments ecosystem,
including a multiplicity of providers and new payment
mechanisms, not all of which are subject to the same level ofregulatory scrutiny or regulations as financial institutions. This ispresenting increasing challenges to the industry in terms of
maintaining required levels of transparency, notably where
institutions serve as intermediaries. Developments around digitalassets and currencies, notably the role of stablecoins and central
bank digital currencies, have continued at pace, with an increasing
regulatory and enforcement focus on financial crimes linked tothese types of assets.
Expectations with respect to intersection of ESG issues andfinancial crime as our organisation, customers and suppliers
transition to net zero, are increasing, not least with respect topotential ‘greenwashing’. Companies also face as a heightened
regulatory focus on both human rights issues and environmental
crimes, from a financial crime perspective. We also continue toface increasing challenges presented by national data privacy
requirements, which may affect our ability to manage financial
crime risks holistically and effectively.

Mitigating actions• We are strengthening our fraud and surveillance controls, andinvesting in next generation capabilities to fight financial crime
through the application of advanced analytics and artificial
intelligence.
• We are looking at the impact of a rapidly changing payments
ecosystem to ensure our financial crime controls remain
appropriate for changes in customer behaviour and gaps inregulatory coverage, including the development of procedures
and controls to manage the risks associated with direct andindirect exposure to digital assets and currencies.
• We are assessing our existing policies and control framework
to ensure that developments in the ESG space are considered
and the risks mitigated.
• We work with jurisdictions and relevant international bodies toaddress data privacy challenges through international
standards, guidance, and legislation to help enable effective
management of financial crime risk.
• We work closely with our regulators and engage in publicprivate partnerships, playing an active role in shaping theindustry’s financial crime controls for the future, notably withrespect to the enhanced, and transparent, use of technology.

Regulatory compliance risk environment including
conduct(Unaudited)

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

• We engage, wherever possible, with governments andregulators to make a positive contribution to regulations andensure that new requirements are considered properly and canbe implemented effectively.
• We hold regular meetings with relevant authorities to discuss
strategic contingency plans, including those arising fromgeopolitical issues.
• We launched our simplified conduct approach to align to our
new purpose and values, in particular the value ‘we takeresponsibility’.

Cyber threat and unauthorised access to systems(Unaudited)

Together with other organisations, we continue to operate in an
increasingly hostile cyber threat environment, which requires
ongoing investment in business and technical controls to defend
against these threats.
Key threats include unauthorised access to online customer
accounts, advanced malware attacks, attacks on our third-party
suppliers, and security vulnerabilities being exploited.

Mitigating actions• We continually evaluate threat levels for the most prevalentattack types and their potential outcomes. To further protect
the group and our customers and help ensure the safe
expansion of our global business lines, we strengthen ourcontrols to reduce the likelihood and impact of advanced
malware, data leakage, exposure through third parties andsecurity vulnerabilities.
• We continue to enhance our cybersecurity capabilities,
including Cloud security, identity and access management,
metrics and data analytics, and third-party security reviews. An
important part of our defence strategy is ensuring ourcolleagues remain aware of cybersecurity issues and know how
to report incidents.
• We report and review cyber risk and control effectiveness at
executive and non-executive Board level. We also report acrossour global businesses, functions and regions to help ensure
appropriate visibility and governance of the risk and mitigating
actions.
• The Group participates globally in several industry bodies andworking groups to share information about tactics employed bycyber-crime groups and to collaborate in fighting, detecting andpreventing cyber-attacks on financial organisations.

Digitalisation and technological advances(Unaudited)

Developments in technology and changes in regulation areenabling new entrants to the industry. This challenges the group
to continue to innovate and optimise in order to take advantage of
new digital capabilities to best serve our customers.

Mitigating actions• We continue to monitor this emerging risk, as well as theadvances in technology to understand how changes may
impact our customers and business.
• We closely monitor and assess impacts to financial crime andthe impact on payment transparency and architecture.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

21

Risk

Internally driven
Data management(Unaudited)

We use a large number of systems and growing quantities of data
to support our customers. Risk arises if data is incorrect,
unavailable, or misused, or if the privacy of our customers andcolleagues are unprotected. Along with other banks and financial
institutions, we need to meet external regulatory obligations andlaws that cover data, such as the Basel Committee on Banking
Supervision's guidelines 239 ‘Principles for effective risk data
aggregation and risk reporting’ and the General Data Protection
Regulation (‘GDPR’).

Mitigating actions• Through our global data management framework, we monitor
proactively the quality, availability and security of data that
supports our customers and internal processes. We resolve any
identified data issues in a timely manner.
• We have made improvements to our data policies and are
implementing an updated control framework to enhance theend-to-end management of data risk by our global businesses,
global functions and markets.
• We protect customer data via our data privacy framework,
which establishes practices, design principles and guidelinesthat enable us to demonstrate compliance with data privacy
laws and regulations.
• We continue to modernise our data and analytics infrastructure
through investments in Cloud technology, data visualisation,
machine learning and artificial intelligence.
• We delivered global mandatory training on the importance ofprotecting data and managing data appropriately.

IT systems infrastructure and resilience(Unaudited)

We operate an extensive technology landscape, which mustremain resilient in order to support customers, the organisationand markets globally. Technology risks arise where technology is
not understood, maintained and development of technology is notcontrolled.

Mitigating actions• We continue to invest in transforming how software solutions
are developed, delivered and maintained. We concentrate on
improving system resilience and service continuity testing. We
continue to ensure security is built into our softwaredevelopment life cycle and improved our testing processes andtools.
• We continue to upgrade many of our IT systems, simplify ourservice provision and replace older IT infrastructure andapplications. These enhancements supported global
improvements in service availability during 2021 for both ourcustomers and colleagues.

Risks arising from the receipt of services from third
parties(Unaudited)

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

Mitigating actions• We have enhanced our control framework for external supplierarrangements to ensure the risks associated with third-party

22

arrangements are understood and managed effectively by our
global businesses, global functions and markets.
• We have applied the same control standards to intra-grouparrangements as we have for external third party arrangements
to ensure we are managing them effectively.
• We are implementing the changes required by the new global
third-party risk policy to comply with new regulations as
defined by our regulators.

Risks associated with workforce capability, capacityand environmental factors with potential impact on
growth(Unaudited)

Our success in delivering our strategic priorities and managing theregulatory environment proactively depends on the development
and retention of our leadership and high-performing employees. Avery competitive employment market will continue to test ourability to attract and retain talent. Changed working arrangements,
local Covid-19 restrictions and health concerns during the
pandemic have also impacted employee mental health and wellbeing.

Mitigating actions• We have put in place measures to help support our people sothey are able to work safely during the Covid-19 pandemic.
While our approach to workplace recovery around the world isconsistent, the measures we take in different locations are
specific to their environment.
• We promote a diverse and inclusive workforce and provide
active support across a wide range of health and well-being
activities. We continue to build our speak-up culture throughactive campaigns.
• We monitor people risks that could arise due to organisational
restructuring, helping to ensure we manage redundancies
sensitively and support impacted employees. We encourage
our people leaders to focus on talent retention at all levels, with
an empathetic mindset and approach, while ensuring the whole
proposition of working at HSBC is well understood.
• Our Future Skills curriculum helps provide critical skills that will
enable employees and HSBC to be successful in the future.
• We continue to develop succession plans for key management
roles, with actions agreed and reviewed on a regular basis by
the group Executive Committee.

Change execution risk
(Unaudited)

We have continued our increased investment in strategic change
to support the delivery of our strategic priorities and regulatorycommitments. This requires change to be executed safely andefficiently.

Mitigating actions• A Global Transformation Programme is progressing with thedelivery of strategic change commitments made in February2020 to restructure our business, reallocate capital into higher
growth and higher return businesses and markets, and tosimplify our organisation to improve operational resilience andreduce costs.
•

The remit of the Transformation Oversight Executive
Committee established in 2020 to oversee the Global
Transformation Programme was expanded in 2021 to oversee
the prioritisation, strategic alignment and management ofexecution risk for all change portfolios and initiatives.

• We continue to work to strengthen our change management
practices to deliver sustainable change, increased adoption ofAgile ways of working and a more consistent standard ofdelivery. The Transformation Oversight Executive Committee
oversees the continued embedding of our improved Groupwide change framework released in May 2021, which sets out
the mandatory principles and standards relating to leading anddelivering change.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Areas of special interest(Unaudited)

During 2021, a number of areas were identified and considered aspart of our top and emerging risks because of the effect they may
have on the group. While considered under the themes captured
under top and emerging risks, in this section we have placed aparticular focus on the Covid-19 pandemic and climate-relatedrisks.

Risks related to Covid-19
Despite the successful roll-out of vaccines around the world, theCovid-19 pandemic and its effect on the global economy havecontinued to impact our customers and organisation. The global
vaccination roll-out in 2021 helped reduce the social and economic
impact of the Covid-19 pandemic, although there has beensignificant divergence in the speed at which vaccines have been
deployed around the world. Most developed countries have now
vaccinated a large proportion of their populations, but many lessdeveloped countries have struggled to secure supplies and are at
an earlier stage of their roll-out. By the end of 2021, highvaccination rates had ensured that many Covid-19-related
restrictions on activity in developed markets had been lifted andtravel constraints were easing. However, the emergence of theOmicron variant in late 2021 demonstrated the continued risk newvariants pose.
The pandemic necessitated governments to respond at
unprecedented levels to protect public health, and to support local
economies and livelihoods. The resulting government support
measures and restrictions created additional challenges, given the
rapid pace of change and significant operational demands.
Renewed outbreaks, particularly those resulting from theemergence of variants of the virus, emphasise the ongoing threatof Covid-19 and could result in further tightening of government
restrictions. There remains a divergence in approach taken bycountries to the level of restrictions on activity and travel. Suchdiverging approaches to future pandemic waves could prolong or
worsen supply chain and international travel disruptions.
We continue to support our personal and business customers
through market-specific measures initiated during the Covid-19
pandemic, and by supporting national government schemes that
focus on the parts of the economy most impacted by the
pandemic. For further details of our customer relief programmes,
see pages 46 to 47.
The rapid introduction and varying nature of the government
support schemes introduced throughout the Covid-19 pandemic
has led to increased operational risks, including complex conductconsiderations, increased reputational risk and increased risk of
fraud. These risks are likely to be heightened further as and whenthose remaining government support schemes are unwound.
These events have also led to increased litigation risk.
The impact of the pandemic on the long-term prospects ofbusinesses in the most vulnerable sectors of the economy – suchas retail, hospitality, travel and commercial real estate – remains
uncertain and may lead to significant credit losses on specificexposures, which may not be fully captured in ECL estimates. In
addition, in times of stress, fraudulent activity is often moreprevalent, leading to potentially significant credit or operational
losses.
As economic conditions improve, and government support
measures come to an end, there is a risk that the outputs ofHKFRS 9 models may have a tendency to underestimate loan
losses. To help mitigate this risk, model outputs and management
adjustments are closely monitored and independently reviewed at
the group and country level for reliability and appropriateness.
Despite the ongoing economic recovery, significant uncertainties
remain in assessing the duration and impact of the Covid-19
pandemic, including whether any subsequent outbreaks result in a
reimposition of government restrictions. There is a risk that
economic activity remains below pre-pandemic levels for a
prolonged period increasing inequality across markets, and it will
likely be some time before societies return to pre-pandemic levelsof social interactions. As a result, there may still be a requirement
for additional mitigating actions including further use ofadjustments, overlays and model redevelopment.
Governments and central banks in major economies have
deployed extensive measures to support their local populations.
This is expected to reverse partially in 2022. Central banks incertain markets are expected to raise interest rates, but suchincreases are expected to be gradual and monetary policy is
expected to remain accommodative overall. Policy tightening inemerging markets has already begun in order to counteract rising
inflation and the risk of capital outflows. Some governments arealso expected to reduce the level of fiscal support they offer
households and business as the appetite for broad lockdowns andpublic health restrictions decreases. Government debt has risen in
many economies, and is expected to remain high into the medium
term. High government debt burdens have raised fiscal
vulnerabilities, increasing the sensitivity of debt service costs tointerest rate increases and potentially reducing the fiscal space
available to address future economic downturns.
Our Central scenario used to calculate impairment assumes that
economic activity will continue to recover through 2022,
surpassing peak pre-pandemic levels of GDP in all our key
markets. It is assumed that the private sector growth accelerates,
ensuring strong recovery is sustained even as pandemic-related
fiscal support is withdrawn. However, there is a high degree of
uncertainty associated with economic forecasts in the current
environment and there are significant risks to our Central scenario.
The degree of uncertainty varies by market, driven by territoryspecific trends in the evolution of the pandemic and associatedpolicy responses. As a result, our Central scenario for impairment
has not been assigned an equal likelihood of occurrence acrossour key markets. For further details of our Central and otherscenarios, see ‘Measurement uncertainty and sensitivity analysis
of ECL estimates’ on pages 35 to 39.
We continue to monitor the situation closely, and given the noveland prolonged nature of the pandemic, additional mitigating
actions may be required.

Climate-related risks
Climate change can have an impact across HSBC’s risk taxonomy
through both transition and physical channels. Transition risk canarise from the move to a low-carbon economy, such as throughpolicy, regulatory and technological changes. Physical risk canarise through increasing severity and/or frequency of severe
weather or other climatic events, such as rising sea levels andflooding. These have the potential to cause both idiosyncratic andsystemic risks, resulting in potential financial and non-financial
impacts for HSBC. Financial impacts could materialise if transitionand physical risks impact the ability of our customers to repay
their loans. Non-financial impacts could materialise if our own
assets or operations are impacted by extreme weather or chronicchanges in weather patterns, or as a result of business decisions
to achieve our climate ambition.

How climate change is impacting our customers
Climate change could impact our customers in two main ways.
Firstly, customer business models may fail to align to a low-carbon
economy, which could mean that new climate-related regulation
would have a material impact on their business. Secondly,
extreme weather events or chronic changes in weather patterns
may damage our customers’ assets leaving them unable tooperate their business or live in their home.
One of the most valuable ways we can help our customers
navigate the transition challenges and to become more resilient to
the physical impacts of climate change is through financing andinvestment. To do this effectively, we must understand the risks
they are facing.
The table below summarises the key categories of transition,
physical risk, with examples of how our customers might beaffected financially by climate change and the shift to a lowcarbon economy.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

23

Risk

Climate risk governance and reporting

Climate risk

Main causes of financial impact on customers

Transition

Policy and legal

Mandates on, and regulation of,existing products and services
Litigation from parties who havesuffered from the effects of climatechange.

Technology

Replacement of existing products withlower emission options.

End-demand(market)Changing consumer behaviour.

Reputational

Increased scrutiny following a change
in stakeholder perceptions of climaterelated action or inaction.

Acute

Increased frequency and severity of
weather events.

Chronic

Changes in precipitation patterns
Rising temperatures.

PhysicalOur key climate risks are reported and governed through our
climate risk governance structure. Our Climate Risk Oversight
Forum is responsible for the oversight, management andescalation of climate risks across the group. Our Climate Risk
management information dashboard includes metrics relating toour key climate risks, and is reported to the Climate Risk Oversight
Forum. In addition, our key wholesale credit exposures areincluded as part of our broader ESG management information
dashboard, which is presented to the group Executive Committee
each quarter. The group RMM and the RC receive scheduled
updates on climate risk, and receive regular updates on our
climate risk appetite and top and emerging climate risks.
To ensure climate risk is appropriately managed and governed,
climate related measures covering risk responsibilities relating to
the four pillars of governance, risk management, stress testing andscenario analysis and disclosures were included in the group Chief
Risk Officer’s scorecard in 2021.

Integrating climate risk into enterprise-wide risk
management

Climate risk programme

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

Our dedicated programme continues to accelerate thedevelopment of our climate risk management capabilities. The key
achievements in 2021 include:• We delivered tailored training sessions to our legal entity
boards.

Climate risk appetite• We delivered training to colleagues across the three lines ofdefence so they can understand climate risk as part of theirrole. and we also included an introduction to our climate
ambition in our global mandatory training.

Our climate risk appetite metrics aim to support the oversight andmanagement of the financial and non-financial risks from climatechange, meet regulatory expectations and support the business todeliver our climate ambition in a safe and sustainable way. Our
measures are focused on the oversight and management of our
key climate risks – wholesale credit risk, retail credit risk,
reputational risk, resilience risk and regulatory compliance risk.
Our future ambition for our climate risk appetite is to:• We developed our climate risk scoring tool for corporate
customers for use in priority regions, which builds on our
corporate transition questionnaire.
• We have continued to develop our stress test and scenario
analysis capabilities, including model development anddelivered regulatory climate stress tests. These are being used
to further improve our understanding of our risk exposures foruse in risk management and business decision making.

• adapt the risk appetite metrics to incorporate forward looking
transition plans and net zero commitments;• expand metrics to consider other financial and non-financial
risks; andWe will continue to enhance our climate risk management
capabilities throughout 2022. This will include the further roll-outof training, refinement of our risk appetite, enhancement of ourclimate risk scoring tool and increasing the availability and qualityof data so that new metrics can be developed.

• use enhanced scenario analysis capabilities.

Climate risk policies, processes and controls
We have also integrated climate risk into the supporting policies,
processes and controls for our key climate risks. We have updated
our policy on product management, and developed the firstversion of a climate risk scoring tool for our corporate portfolios. In
addition, we published and started to implement our new Thermal
Coal Phase-out Policy.

How climate risk can impact HSBC
Below, we provide detail on how climate risk impacts to ourcustomers might manifest across our key climate risks, and thepotential time frames involved using the Task Force on Climaterelated Financial Disclosures four main drivers of transition climate
risk – policy and legal, technology, end-demand (market) andreputational – and two physical risk drivers – acute and chronic.

Risk management framework
Financial risks

Non-financial risks

Risk type

Wholesale credit

Retail credit

Strategic risk
(reputational)

Timescale1

All term
periods

Medium–longterm

All term
periods

l
l
l
l

l

l
l

l

Regulatory
Resilience risk compliance risk
All term
periods

Short–medium
termTransition risk drivers– Policy and legal– Technology– End-demand (market)– Reputational

l

l

l

Physical risk drivers– Acute – increased frequency and severity of weather events– Chronic – changes in weather patterns

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

24

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021llWholesale credit risk

Reputational risk

Identification and assessment

Identification and assessment

We have identified six key sectors where our wholesale credit
customers have the highest climate risk, based on their carbon
emissions. These are oil and gas, building and construction,
chemicals, automotive, power and utilities, and metals andmining.

We implement sustainability risk policies, including the Equator
Principles as part of our broader reputational risk framework. We
focus on sensitive sectors that may have a high adverse impact on
people or the environment, and in which we have a significant
number of customers. A key area of focus is high-carbon sectors,
which include power generation, mining, agricultural commodities
and forestry. During 2021, the Group published its thermal coalphase-out policy.

We continue to roll out our transition and physical riskquestionnaire to our largest customers in high-risk sectors, withthe addition of four more sectors: agriculture, manufacturing, realestate and transportation. The questionnaires will help us toassess and improve our understanding of the impact of climatechange on our customers’ business models and any relatedtransition strategies. It also helps us to identify potential business
opportunities to support the transition. In 2022, we intend toincrease the scope of the questionnaire by adding more countries
and territories to the scope.

Management
In 2021 we developed a scoring tool, which provides a climate risk
score for each customer based on questionnaire responses. The
climate risk score will then be used in portfolio level management
information to assess and compare clients. The scoring tool will beenhanced and refined over time as more data becomes available.
The results of the tool have been provided to business and risk
management teams. During 2021, we also performed a climaterelated stress test. In 2022 we aim to further embed climate risk
considerations in our credit risk management processes.

Aggregation and reporting
We currently report our transition risk exposure and RWAs
consumed by the six high risk sectors in the wholesale portfolio.
We also report the proportion of questionnaire responses thatreported either having a board policy or management plan fortransition risk.
We will continue to report these metrics in 2022 and will aim tocascade these measures to global businesses and to provide
insight on the climate risk profile of our portfolio and customers.

Management
As the primary point of contact for our customers, our relationshipmanagers are responsible for checking that our customers meet
policies aimed at reducing carbon impacts. The Group's global
network of more than 75 sustainability risk managers provides
local policy support and expertise to relationship managers. A
central Sustainability Risk team provides a higher level of guidance
and is responsible for the oversight of policy compliance andimplementation over wholesale banking activity. During 2021, we
introduced a refreshed assurance framework, which took a riskbased approach focusing on higher risks.

Aggregation and reporting
The Group's Sustainability Risk Oversight Forum provides a Groupwide forum for senior members of our Global Risk and Complianceteam and global businesses affected by sustainability risk. It also
oversees the development and implementation of sustainability
risk policies. Cases involving complex sustainability risk issues
related to customers, transactions or third parties are managed
through the reputational risk and client selection governanceprocess. The Group reports annually on its implementation of theEquator Principles and the corporate loans, project-related bridgeloans and advisory mandates completed under the principles. With
the introduction of Equator Principles IV, a training programme
was delivered to raise the awareness of the changes andobligations therein.

Regulatory compliance risk

Retail credit risk

Identification and assessment

Identification and assessment

Compliance continues to prioritise the identification andassessment of compliance risks that may arise from increased
focus more generally on climate risk. Although not an exhaustive
list, key Regulatory Compliance risks under consideration include
those related to product management, mis-selling, marketing,conflicts of interest and regulatory change.

We manage retail credit risk under a framework of controls thatenable the identification and assessment of credit risk, across theretail portfolio.
In 2021, we completed a Group-wide climate scenario analysis
stress testing exercise. This enabled us to enhance ourunderstanding and assess the impact of physical risk to ourmortgage portfolio under three potential future climate scenarios,with a focus on Hong Kong.
Understanding the impact of future climate risk relies heavily upon
the availability of quality data, as well as on the evolution ofclimate risk modelling expertise. As this matures, we plan toexpand our approach to additional markets.

Management
We are focusing on embedding climate risk into retail risk
management, prioritising exposure in the largest residential
mortgage portfolios.
We continue to update our risk management framework andpolicy to reflect lessons learnt.

Aggregation and reporting
We manage and monitor the integration of climate risk acrossWealth and Personal Banking ('WPB') through the RMM.
We have also developed and are implementing metrics to support
active risk management, which will be tracked and monitored
through relevant Credit Risk meetings.

An area of particular focus is the risk of greenwashing. We regard
greenwashing as the act of knowingly or unknowingly misleading
stakeholders regarding our climate strategy, the climate impact/
benefits of a product or service or regarding the climate
commitments of our customers. For the Compliance function,
product-based greenwashing is a key area of focus. Whenconsidering product-based greenwashing, we seek to:• effectively and consistently consider climate risk factors in thedevelopment and ongoing governance of new, changed orwithdrawn products and services through the enhancement ofexisting risk management frameworks utilised within theGroup’s operating entities and lines of business, enabling
climate risks to be identified and assessed in a timely manner;• ensure that climate-related products and services offered tocustomers are appropriately designed and that related sales
practices and marketing materials are clear, fair and not
misleading; and• develop climate-related products and services consistent withthe evolving expectations of the Group’s regulators and otherrelevant authorities.

Management
We continue to develop our compliance policies and underlying
measurement capability to enhance the management of climate
risks in line with our climate ambitions and risk appetite.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

25

Risk

As such, we have integrated and are continuing to enhance
climate risk considerations within our product and customer lifecycle policies. This includes specific climate risk requirements
relating to new product approvals and ongoing productmanagement. Our policies set the minimum standards that are
required to manage the risk of breaches of our regulatory duty tocustomers, including those related to climate risk, ensuring faircustomer outcomes are achieved.
In addition, we have placed significant focus this year on
supporting and improving the capability of our Compliancecolleagues through specific climate risk training, communications
and guidance materials to ensure the robust identification,assessment and management of climate risks.

Aggregation and reporting
We continue to operate an ESG and Climate Risk Working Group
at Group level. This working group tracks and monitors theintegration and embedding of climate risk within the managementof Regulatory Compliance risks and controls more generally, andmonitors ongoing regulatory and legislative changes across thesustainability and climate risk agenda.
We have also developed and implemented climate risk metrics
and indicators aligned to wider Regulatory Compliance risks. .
The Compliance function is also represented at the group’s
Climate Risk Oversight Forum.

26

Resilience risk
Identification and assessment
Our assessment of climate risk identified building unavailability,
workplace safety, information technology and cybersecurity risk,
transaction processing risk, and third-party risk, as the key risksfacing our operational resilience.
We are currently working with industry partners to repeat andextend the 2020 stress testing, given developments in industry
understanding of climate risk. We will continue to work with ourpartners to identify and assess emerging climate risks.

Management
In 2021, we reviewed existing policies, processes and controls,
which were then revised as required. This work will continue insubsequent years.
Identification of new tooling, both internally and throughcollaboration with business partners, for the management ofclimate risk is ongoing with new tooling being introduced as
appropriate.
Our stress test results will continue to inform our approach toclimate risk management.

Aggregation and reporting
Our exposure to climate risk will continue to be aggregated andreported to the Non-Financial Risk Management Board and otherrelevant formal governance forums.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Our material banking risks(Unaudited)

The material risk types associated with our banking and insurance manufacturing operations are described in the following tables:
Description of risks – banking operations
Risks

Credit risk
Credit risk is the risk of financial loss if acustomer or counterparty fails to meet an
obligation under a contract.

Treasury risk
Treasury risk is the risk of having
insufficient capital, liquidity or funding
resources to meet financial obligations
and satisfy regulatory requirements,
including the risk of adverse impact onearnings or capital due to structuralforeign exchange exposures and changes
in market interest rates, together withpension and insurance risk.

Market risk
Market risk is the risk of adverse financial
impact on trading activities arising fromchanges in market parameters such as
interest rates, foreign exchange rates,
asset prices, volatilities, correlations andcredit spreads.

Arising from

Measurement, monitoring and management of risk

Credit risk arises principally fromdirect lending, trade finance andleasing business, but also fromcertain other products such as
guarantees and derivatives.

Credit risk is:• measured as the amount that could be lost if a customer orcounterparty fails to make repayments;• monitored using various internal risk management measures andwithin limits approved by individuals within a framework ofdelegated authorities; and• managed through a robust risk control framework, which outlines
clear and consistent policies, principles and guidance for risk
managers.

Treasury risk arises from changes tothe respective resources and risk
profiles driven by customer
behaviour, management decisions, or
pension plan fiduciary decisions. It
also arises from the external
environment, including changes tomarket parameters such as interest
rates or foreign exchange rates,
together with updates to theregulatory requirements.

Treasury risk is:• measured through risk appetite and more granular limits, set toprovide an early warning of increasing risk, minimum ratios of
relevant regulatory metrics, and metrics to monitor the key risk
drivers impacting treasury resources;• monitored and projected against appetites and by using operatingplans based on strategic objectives together with stress and scenario
testing; and• managed through control of resources in conjunction with risk
profiles, strategic objectives and cash flows.

Exposure to market risk is separated
Market risk is:
into two portfolios: trading and non• measured using sensitivities, value at risk (‘VaR’) and stress testing,trading. Market risk exposures arisinggiving a detailed picture of potential gains and losses for a range offrom our insurance operations aremarket movements and scenarios, as well as tail risks over specified
discussed on the following page.
time horizons;• monitored using value at risk, stress testing and other measures; and• managed using risk limits approved by the Board for the group andthe various global businesses.

Resilience risk
Resilience risk is the risk that we areunable to provide critical services to ourcustomers, affiliates and counterparties
as a result of sustained and significant
operational disruption.

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

Resilience risk arises from failures orinadequacies in processes, people,
systems or external events.

Resilience risk is:• measured through a range of metrics with defined maximum
acceptable impact tolerances, and against our agreed risk appetite;• monitored through oversight of enterprise processes, risks, controls
and strategic change programmes; and• managed by continual monitoring and thematic reviews.

Regulatory compliance risk arises
from the risks associated withbreaching our duty to our customers,
inappropriate market conduct andbreaching other regulatory
requirements.

Regulatory compliance risk is:• measured by reference to risk appetite, identified metrics, incident
assessments, regulatory feedback and the judgement andassessment of our regulatory compliance teams;• monitored against the first line of defence risk and control
assessments, the results of the monitoring and control assurance
activities of the second line of defence functions, and the results ofinternal and external audits and regulatory inspections; and• managed by establishing and communicating appropriate policies
and procedures, training employees in them, and monitoring activity
to help ensure their observance. Proactive risk control and/or
remediation work is undertaken where required.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

27

Risk

Description of risks – banking operations (continued)
Risks

Arising from

Measurement, monitoring and management of risk

Financial crime risk arises from dayto-day banking operations involving
customers, third parties andemployees. Exceptional
circumstances which impact day to
day operations may additionally
increase financial crime risk.

Financial crime risk is:• measured by reference to risk appetite, identified metrics, incident
assessments, regulatory feedback and the judgement andassessment of our financial crime risk teams;• monitored against the first line of defence risk and control
assessments, the results of the monitoring and control assurance
activities of the second line of defence functions, and the results ofinternal and external audits and regulatory inspections; and• managed by establishing and communicating appropriate policies
and procedures, training employees in them, and monitoring activity
to help ensure their observance. Proactive risk control and/or
remediation work is undertaken where required.

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

Model risk
Model risk is the potential for adverse
consequences from business decisions
arising from the use of models that havebeen inadequately designed,
implemented or used or that model does
not perform in line with expectations andpredictions.

Model risk arises in both financial and Model risk is:
non-financial contexts whenever• measured by reference to model performance tracking and thebusiness decision making includes
output of detailed technical reviews, with key metrics including
reliance on models.
model review statuses and findings;• monitored against model risk appetite statements, insight from theindependent review function, feedback from internal and external
audits, and regulatory reviews; and• managed by creating and communicating appropriate policies,
procedures and guidance, training colleagues in their application,and supervising their adoption to ensure operational effectiveness.

Our insurance manufacturing subsidiaries are regulated separatelyfrom our banking operations. Risks in the insurance entities aremanaged using methodologies and processes that are subject tooversight at group level. Our insurance operations are also subject

to some of the same risks as our banking operations, and these
are covered by the group's risk management processes. There are
specific risks inherent to the insurance operations as noted below.

Description of risks – insurance manufacturing operations
Risks

Arising from

Measurement, monitoring and management of risk

Exposure to financial risks arises from:• market risk affecting the fair valuesof financial assets or their future
cash flows;• credit risk; and• liquidity risk of entities being unable
to make payments to policyholders
as they fall due.

Financial risk is:• measured (i) for credit risk, in terms of economic capital and theamount that could be lost if a counterparty fails to make repayments;(ii) for market risk, in terms of economic capital, internal metrics andfluctuations in key financial variables; and (iii) for liquidity risk, interms of internal metrics including stressed operational cash flow
projections;• monitored through a framework of approved limits and delegatedauthorities; and• managed through a robust risk control framework, which outlines
clear and consistent policies, principles and guidance. This includes
using product design, asset liability matching and bonus rates.

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

Insurance risk
Insurance risk is the risk that, over time, • The cost of claims and benefits can
the cost of insurance policies written,
be influenced by many factors,
including claims and benefits, may
including mortality and morbidity
exceed the total amount of premiums
experience, as well as lapse andand investment income received.
surrender rates.

28

Insurance risk is:• measured in terms of life insurance liabilities and economic capital
allocated to insurance underwriting risk;• monitored through a framework of approved limits and delegatedauthorities; and• managed through a robust risk control framework which outlines
clear and consistent policies, principles and guidance. This includes
using product design, underwriting, reinsurance and claimshandling procedures.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Key risk management processes

Credit risk

HKFRS 9 'Financial Instruments' process

Overview(Unaudited)(Audited)

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

The HKFRS 9 process comprises three main areas: modelling anddata; implementation; and governance.
Modelling and data
(Unaudited)

Key developments in 2021

We have established HKFRS 9 modelling and data processes invarious geographies, which are subject to internal model risk
governance including independent review of significant model
developments.

(Unaudited)

Implementation

There were no material changes to the policies and practices
for the management of credit risk in 2021. We continued to apply
the requirements of HKFRS 9 'Financial Instruments' within theCredit Risk sub-function.

(Unaudited)

Credit risk management

Due to the Covid-19 pandemic and its continued effects on the
global economy, we provided short-term support to customers
through market-specific measures under the current credit policy
framework. We have also implemented the guidance provided byregulators on managing the credit portfolio as required throughout
the course of the customer relief life cycle.
The extent of our support depends on the degree of countryspecific government support measures, restrictions, associatedpolicy responses, and the effects of new Covid-19 variants.
The majority of the customer relief programmes that we provided
during the Covid-19 pandemic ended by 31 December 2021 andwill not be reassessed under the revised definition of default. For
further details of market-specific measures to support our personaland business customers, see pages 46 to 47.
In 2022, we will adopt the EBA ‘Guidelines on the application ofdefinition of default . There is expected to be no material impact
on our retail and wholesale portfolios.

Governance and structure(Unaudited)

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

Credit risk sub-function(Audited)

Credit approval authorities are delegated by the Board to thegroup Co-Chief Executives together with the authority to subdelegate them. The Credit Risk sub-function in Global Risk is
responsible for the key policies and processes for managing credit
risk, which include formulating group credit policies and risk rating
frameworks, guiding the group’s appetite for credit risk exposures,
undertaking independent reviews and objective assessment ofcredit risk, and monitoring performance and management of
portfolios.
The principal objectives of our credit risk management are:• to maintain across HSBC a strong culture of responsible
lending, and robust risk policies and control frameworks;• to both partner and challenge our businesses in defining,
implementing and continually re-evaluating our risk appetite
under actual and scenario conditions; andA centralised impairment engine performs the expected credit
losses calculation using data, which is subject to a number ofvalidation checks and enhancements, from a variety of client,finance and risk systems. Where possible, these checks andprocesses are performed in a globally consistent and centralisedmanner.
Governance(Unaudited)Management review forums are established in key sites and atgroup level in order to review and approve the impairment results.
Management review forums have representatives from Credit Risk
and Finance, and the group's ECL is approved by the group's Chief
Risk Officer and Chief Financial Officer in the forum. Other key
members of the management review forums are the group headsof Wholesale Credit and Wealth and Personal Banking Risk, aswell as the group head of Loan Management Unit and the groupfinancial controller. The key site and group level approvals aresubsequently reported up to the global business impairment
committee for final approval of the Group’s ECL for the period.
Required members of the committee are the global heads ofWholesale Credit, Market Risk, and Wealth and Personal Banking
Risk, as well as the relevant Global business Chief Financial Officer
and the Global Financial controller.

Concentration of exposure(Audited)

Concentrations of credit risk arise when a number ofcounterparties or exposures that have comparable economic
characteristics, or such counterparties are engaged in similar
activities or operate in the same geographical areas or industry
sectors so that their collective ability to meet contractual
obligations is uniformly affected by changes in economic, politicalor other conditions. We use a number of controls and measures tominimise undue concentration of exposure in our portfolios acrossindustries, countries and global businesses. These include portfolio
and counterparty limits, approval and review controls, and stresstesting.

Credit quality of financial instruments(Audited)

Our risk rating system facilitates the internal ratings-based
approach under the Basel framework adopted by the group to
support the calculation of our minimum credit regulatory capitalrequirement. The five credit quality classifications encompass a
range of granular internal credit rating grades assigned towholesale and retail customers, and the external ratings attributedby external agencies to debt securities.
For debt securities and certain other financial instruments, externalratings have been aligned to the five quality classifications based
upon the mapping of related customer risk rating (‘CRR’) to
external credit rating.

• to ensure there is independent, expert scrutiny of credit risks,
their causes and their mitigation.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

29

Risk

Wholesale lending(Unaudited)

The CRR 10-grade scale summarises a more granular underlying
23-grade scale of obligor probability of default (‘PD’). All corporate
customers are rated using the 10 or 23-grade scale, depending on
the degree of sophistication of the Basel approach adopted for the
exposure.

the average of issuer-weighted historical default rates. This
mapping between internal and external ratings is indicative andmay vary over time.

Retail lending(Unaudited)

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

Each CRR band is associated with an external rating grade byreference to long-run default rates for that grade, represented by
Credit quality classification(Unaudited)
Sovereign debt
securities
and bills

Quality classification1, 2StrongGood
SatisfactorySub-standard
Credit impaired

1
2

Other debt
securities
and bills

Wholesale lending
and derivatives

Retail lending

External credit
ratingExternal credit
ratingInternal credit
rating12-month Baselprobability ofdefault %Internal credit
rating

12 monthprobabilityweighted PD %BBB and above
BBB- to BB
BB- to B andunrated

A- and above
BBB+ to BBB-CRR 1 to CRR 2
CRR 3

0 – 0.169
0.170 – 0.740

Band 1 and 2Band 30.000 – 0.500
0.501 – 1.500

BB+ to B andunratedCRR 4 to CRR 5

0.741 – 4.914

Band 4 and 5

1.501 – 20.000

B- to C
Default

B- to C
Default

CRR 6 to CRR 8
CRR 9 to CRR 10

4.915 – 99.999
100

Band 6
Band 720.001 – 99.999
100

Customer risk rating (‘CRR’).
12-month PIT PD.

Quality classification definitions‘Strong’ exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of
expected loss.
‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk.
‘Satisfactory’ exposures require closer monitoring and demonstrate an average-to-fair capacity to meet financial commitments, with moderate default risk.
‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern.
‘Credit-impaired’ exposures have been assessed as described in Note 1.2(i) on the Consolidated Financial Statements.

Renegotiated loans and forbearance

Renegotiated loans and recognition of expected credit losses(Audited)(Audited)‘Forbearance’ describes concessions made on the contractual
terms of a loan in response to an obligor’s financial difficulties.

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

A loan is classed as ‘renegotiated’ when we modify thecontractual payment terms on concessionary terms because wehave significant concerns about the borrowers’ ability to meet
contractual payments when due. Non-payment-related
concessions (e.g. covenant waivers), while potential indicators of
impairment, do not trigger identification as renegotiated loans
under our existing disclosures.
Loans that have been identified as renegotiated retain thisdesignation until maturity or derecognition under our existing
disclosures.
For details of our policy on derecognised renegotiated loans, seeNote 1.2(i) on the financial statements.

Credit quality of renegotiated loans(Unaudited)

On execution of a renegotiation, a loan will also be classified as
credit impaired if it is not already so classified. In wholesalelending, all facilities with a customer, including loans that have notbeen modified, are considered credit impaired following theidentification of a renegotiated loan under our existing disclosures.
Wholesale renegotiated loans are classified as credit-impaired until
there is sufficient evidence to demonstrate a significant reductionin the risk of non-payment of future cash flows, observed over aminimum one-year period, and there are no other indicators of
impairment. Personal renegotiated loans generally remain credit
impaired until repayment, write-off or derecognition.

30

Customer Relief Programmes and renegotiated loans(Unaudited)

In response to the Covid-19 pandemic, governments andregulators around the world encouraged a range of customer relief
programmes including payment deferrals. In determining whether
a customer is experiencing financial difficulty for the purposes ofidentifying renegotiated loans a payment deferral requested undersuch schemes, or an extension thereof, is not automaticallydetermined to be evidence of financial difficulty and would
therefore not automatically trigger identification as renegotiatedloans. Rather, information provided by payment deferrals is
considered in the context of other reasonable and supportable
information. The HKFRS 9 treatment of customer relief
programmes is explained on pages 46 to 47.

Impairment assessment(Audited)

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Write-off of loans and advances(Audited)

For details of our policy on the write-off of loans and advances,see Note 1.2(i) on the financial statements.
Unsecured personal facilities, including credit cards, are generally
written off at between 150 and 210 days past due. The standard
period runs until the end of the month in which the accountbecomes 180 days contractually delinquent. However, in
exceptional circumstances to achieve a fair customer outcome andin line with regulatory expectations, they may be extended further.

Any secured assets maintained on the balance sheet beyond 60
months of consecutive delinquency-driven default require
additional monitoring and review to assess the prospect ofrecovery.
There are exceptions in a few countries and territories where local
regulation or legislation constrains earlier write-off, or where therealisation of collateral for secured real estate lending takes moretime. Write-off, either partially or in full, may be earlier when there
is no reasonable expectation of further recovery, for example, inthe event of a bankruptcy or equivalent legal proceedings.
Collection procedures may continue after write-off.

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

Summary of credit risk
The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in
HKFRS 9 are applied and the associated allowance for expected credit losses ('ECL').
Summary of financial instruments to which the impairment requirements in HKFRS 9 are applied(Audited)
2021
Gross
carrying/
nominalamountAt 31 Dec
Loans and advances to customers at amortised cost
Loans and advances to banks
Other financial assets measured at amortised cost
– cash and balances at central banks– items in the course of collection from other banks– Hong Kong Government certificates of indebtedness– reverse repurchase agreements – non-trading– financial investments– prepayments, accrued income and other assets2
Amounts due from Group companies
Total gross carrying amount on-balance sheet
Loans and other credit related commitments
Financial guarantee
Total nominal amount off-balance sheet3

At 31 Dec
Debt instruments measured at Fair Value through Other Comprehensive Income (‘FVOCI’)4

2020

Allowance for
ECL1

Gross
carrying/
nominalamountAllowance for
ECL1

HK$m

HK$m

HK$m

HK$m

3,872,956
432,286
2,114,301
276,857
21,632332,044803,775
502,997
176,996
99,604
6,519,147
1,826,335
34,302
1,860,637
8,379,784(32,017)
(39)
(639)
—
—
—
—
(433)
(206)
—
(32,695)
(580)
(44)
(624)
(33,319)

3,697,568
403,908
1,869,268
347,999
21,943
313,404
520,344475,553
190,025
82,8496,053,593
1,725,963
32,358
1,758,321
7,811,914(28,887)
(24)
(713)
—
—
—
—
(527)
(186)
—
(29,624)
(825)
(124)
(949)
(30,573)

Fair value

Allowance for
ECL

Fair value

Allowance for
ECL

HK$m

HK$m

HK$m

HK$m

1,541,909(121)

1,689,820(167)

1 The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial
asset, in which case the ECL is recognised as a provision.
2 Includes only those financial instruments that are subject to the impairment requirements of HKFRS 9. 'Prepayments, accrued income and otherassets', as presented within the consolidated balance sheet on page 75, which includes both financial and non-financial assets.
3 Represents the maximum amount at risk should the contracts be fully drawn upon and client defaults.
4 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL isrecognised in 'Change in expected credit losses and other credit impairment charges' in the consolidated income statement.

The following table provides an overview of the group’s credit risk by stage and industry, and the associated ECL coverage. The financial
assets recorded in each stage have the following characteristics:• Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL
is recognised.
• Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime
ECL is recognised.
• Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise
credit impaired on which a lifetime ECL is recognised.
• POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which alifetime ECL is recognised.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

31

Risk

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector(Audited)
Gross carrying/nominal amount1

Allowance for ECL

ECL coverage %Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

%

Loans andadvances tocustomers

3,349,434

480,632

41,332

1,558

3,872,956(2,603)(9,426) (19,654)(334) (32,017)– personal

1,461,358

60,795

10,158—1,532,311(1,236)(2,965)– corporate2

1,626,514

398,273

31,0681,556

2,057,411(1,131)(6,384) (17,859)– financial
institutions3

261,562

21,564106

2283,234

(236)

(77)

(30)

(2)

Loans andadvances tobanks(1,765)

0.1

2.0

47.6

21.4

0.8

(5,966)

0.1

4.9

17.4

—

0.4

(332) (25,706)

0.1

1.6

57.5

21.3

1.2

(345)

0.1

0.4

28.3

100.0

0.1

—

431,079

1,207

—

—

432,286

(36)

(3)

—

—

(39)

0.0

0.2

—

—

0.0

Other
financialassets2,092,847

21,164289

12,114,301

(482)

(140)

(17)

—

(639)

0.0

0.7

5.9

—

0.0

Loan andother creditrelated
commitments

1,782,353

43,711271—

1,826,335

(260)

(295)

(25)

—

(580)

0.0

0.7

9.2

—

0.0

– personal– corporate2

1,245,694
417,349

6,976
30,978

154
117

—
—

1,252,824
448,444

—
(247)

—
(288)

—
(25)

—
—

—
(560)

—
0.1

—
0.9

—
21.4

—
—

—
0.1

– financial
institutions3

119,310

5,757

—

—

125,067

(13)

(7)

—

—

(20)

0.0

0.1

—

—

0.0

Financialguarantee

30,214

4,048

40

—

34,302

(14)

(14)

(16)

—

(44)

0.0

0.3

40.0

—

0.1

– personal– corporate2

4,000
22,995

—
4,011

1
39

—
—

4,001
27,045

(1)
(13)

—
(14)

(1)
(15)

—
—

(2)
(42)

0.0
0.1

—
0.3

100.0
38.5

—
—

0.0
0.2

– financial
institutions3

3,219

37

—

—

3,256

—

—

—

—

—

—

—

—

—

—

7,685,927

550,762

41,932

1,559

8,280,180(3,395)(334) (33,319)

0.0

1.8

47.0

21.4

0.4

At 31 Dec
2021

(9,878) (19,712)

The above table does not include balances due from Group companies.
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Includes corporate and commercial.
3 Includes non-bank financial institutions.

Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30
days past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets
by those less than 30 and greater than 30 days past due and therefore presents those amounts classified as stage 2 due to ageing (30DPD) and those identified at an earlier stage (less than 30 DPD).
Stage 2 days past due analysis for loans and advances to customers(Audited)
Gross carrying amount

Allowance for ECL

ofwhich:

ofwhich:

ofwhich:

Stage 2

Up-todate

1 to 29
DPD1,230 and >DPD1,2

HK$m

HK$m

HK$m

480,632
60,795398,273
21,564471,298
53,316396,420
21,562

6,788
5,048
1,738
2

ECL coverage %ofwhich:

ofwhich:

ofwhich:

ofwhich:

ofwhich:

ofwhich:

Stage 2

Up-todate

1 to 29
DPD1,230 and >DPD1,2

Stage 2

Up-todate

1 to 29DPD

30 and
> DPD

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

2,546
2,431
115
—

(9,426)(2,965)(6,384)(77)(8,862)(2,460)(6,325)
(77)

(226)
(173)
(53)
—

(338)
(332)
(6)
—

2.0
4.9
1.6
0.4

1.9
4.6
1.6
0.4

3.3
3.4
3.0
—

13.3
13.7
5.2
—

At 31 Dec 2021
Loans and advances tocustomers at amortised cost
– personal– corporate and commercial– non-bank financial institutions

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

32

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector(continued)(Audited)
Gross carrying/nominal amount1

Allowance for ECL

ECL coverage %Stage 1

Stage 2

Stage 3

POCI

Total Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

%

Loans andadvances tocustomers

3,150,921

510,040

35,752855

3,697,568(4,393)(6,438) (17,694)(362)(28,887)

0.1

1.3

49.5

42.3

0.8

– personal– corporate2

1,381,495
1,580,976

61,790391,635

9,062
26,514—853

1,452,347
1,999,978(1,809)(2,428)(3,463) (1,872)(2,897) (15,763)

—
(360)

(7,144)(21,448)

0.1
0.2

5.6
0.7

20.7
59.5

—
42.2

0.5
1.1

– financial
institutions3

188,450

56,615176

2245,243

(156)

(78)

(59)

(2)

(295)

0.1

0.1

33.5

100.0

0.1

Loans andadvances tobanks

401,256

2,652

—

—

403,908

(19)

(5)

—

—

(24)

0.0

0.2

—

—

0.0

Other financial
assets1,854,154

14,834279

11,869,268

(452)

(221)

(40)

—

(713)

0.0

1.5

14.3

—

0.0

Loan andother creditrelated
commitments

1,677,242

48,538183—

1,725,963

(514)

(281)

(30)

—

(825)

0.0

0.6

16.4

—

0.0

– personal– corporate2

1,205,969
388,833

6,129
34,095

79
104

—
—

1,212,177
423,032

(1)
(492)

—
(266)

—
(30)

—
—

(1)
(788)

0.0
0.1

—
0.8

—
28.8

—
—

0.0
0.2

– financial
institutions3

82,440

8,314

—

—

90,754

(21)

(15)

—

—

(36)

0.0

0.2

—

—

0.0

Financialguarantee

25,786

6,522

50

—

32,358

(51)

(56)

(17)

—

(124)

0.2

0.9

34.0

—

0.4

– personal– corporate2

4,043
20,737

2
6,241

6
44

—
—

4,051
27,022

—
(51)

—
(56)

(1)
(16)

—
—

(1)
(123)

—
0.2

—
0.9

16.7
36.4

—
—

0.0
0.5

– financial
institutions3

1,006

279

—

—

1,285

—

—

—

—

—

—

—

—

—

—

7,109,359

582,586

36,264856

7,729,065(5,429)(7,001) (17,781)(362)(30,573)

0.1

1.2

49.0

42.3

0.4

At 31 Dec
2020

The above table does not include balances due from Group companies.
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Includes corporate and commercial.
3 Includes non-bank financial institutions.

Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30
days past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets
by those less than 30 and greater than 30 days past due and therefore presents those amounts classified as stage 2 due to ageing (30DPD) and those identified at an earlier stage (less than 30 DPD).
Stage 2 days past due analysis for loans and advances to customers (continued)(Audited)
Gross carrying amount

Allowance for ECL

ECL coverage %of which:of which:of which:of which:of which:of which:of which:of which:of which:

Stage 2

Up-todate

1 to 29
DPD1,230 and >DPD1,2

Stage 2

Up-todate

1 to 29
DPD1,230 and >DPD1,2

Stage 2

Up-todate

1 to 29DPD

30 and >
DPD

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

Loans and advances to customers at
amortised cost

510,040

499,567

6,590

3,883

(6,438)(5,505)

(268)

(665)

1.3

1.1

4.1

17.1

– personal– corporate and commercial– non-bank financial institutions

61,790391,635
56,61553,063389,941
56,563

5,311
1,227
52

3,416
467
—

(3,463)(2,897)(78)(2,642)(2,785)
(78)

(204)
(64)
—

(617)
(48)
—

5.6
0.7
0.1

5.0
0.7
0.1

3.8
5.2
—

18.1
10.3
—

At 31 Dec 2020

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

33

Risk

Credit exposure
Maximum exposure to credit risk
(Audited)

This section provides information on the maximum exposure to credit risk associated with balance sheet items as well as loan and othercredit-related commitments.
‘Maximum exposure to credit risk’ table
The following table presents our maximum exposure to credit risk before taking account of any collateral held or other credit enhancements (unless suchenhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net
exposure to credit risk, and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, themaximum exposure to credit risk equals their carrying amount; for financial guarantees and other guarantees granted, it is the maximum amount that wewould have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is generally the full amount of thecommitted facilities.

Other credit risk mitigants
There are arrangements in place that reduce our maximum exposure to credit risk. These include a charge over collateral on borrowers’
specific assets, such as properties, collateral held in the form of financial instruments that are not held on the balance sheet and shortpositions in securities. In addition, for financial assets held as part of linked insurance/investment contracts the risk is predominantly
borne by the policyholder.
Collateral available to mitigate credit risk is disclosed in the Collateral section on pages 47-50.
Maximum exposure to credit risk before collateral held or other credit enhancements(Audited)

Cash and balances at central banks
Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness
Trading assets
Derivatives
Financial assets designated at fair value
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers
Financial investments
Amounts due from Group companies
Other assets
Total on-balance sheet exposure to credit risk
Total off-balance sheet
Financial guarantees and other similar contracts
Loan and other credit-related exposure
At 31 Dec

2021

2020

HK$m

HK$m

276,857
21,632332,044478,030
365,167
33,274
803,775
432,247
3,840,939
2,044,473
112,719
180,757
8,921,914
3,506,253
377,487
3,128,766
12,428,167

347,999
21,943
313,404
434,029422,945
35,145
520,344403,884
3,668,681
2,164,846
83,203
197,362
8,613,785
3,326,935
325,6313,001,304
11,940,720

Total exposure to credit risk remained broadly unchanged in 2021 with loans and advances continuing to be the largest element.

Credit deterioration of financial instruments(Audited)
A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2, stage 3 (credit impaired) and POCI
financial instruments can be found in Note 1.2(i) on the Consolidated Financial Statements.

34

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Measurement uncertainty and sensitivity analysis
of ECL estimates(Audited)

Despite a broad recovery in economic conditions during 2021, ECL
estimates continue to be subject to a high degree of uncertainty,
and management judgements and estimates continued to reflect a
degree of caution, both in the selection of economic scenarios andtheir weightings, and through management judgemental
adjustments.
The recognition and measurement of ECL involves the use ofsignificant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions
to credit risk models to estimate future credit losses, andprobability-weight the results to determine an unbiased ECL
estimate. Management judgemental adjustments are used toaddress late-breaking events, data and model limitations, model
deficiencies and expert credit judgements.

Methodology
Four economic scenarios are used to capture the current
economic environment and to articulate management’s view of
the range of potential outcomes. Scenarios produced to calculate
ECL are aligned to the group’s top and emerging risks.
In the second quarter of 2020, to ensure that the severe risks
associated with the pandemic were appropriately captured,
management added a fourth, more severe, scenario to use in themeasurement of ECL. Starting in the fourth quarter of 2021,
HSBC’s methodology has been adjusted so that the use of four
scenarios, of which two are downside scenarios, is the standard
approach to ECL calculation.
Three of these scenarios are drawn from consensus forecasts anddistributional estimates. The Central scenario is deemed the ‘most
likely’ outcome, and usually attracts the largest probability
weighting, while the outer scenarios represent the tails of the
distribution which are less likely to occur. The Central scenario iscreated using the average of a panel of external forecasters.
Consensus Upside and Downside scenarios are created withreference to distributions for select markets that capture
forecasters' views of the entire range of outcomes. In the later
years of the scenarios, projections revert to long-term consensus
trend expectations. In the consensus outer scenarios, reversion totrend expectations is done mechanically with reference tohistorically observed quarterly changes in the values ofmacroeconomic variables.
The fourth scenario, Downside 2, is designed to represent
management’s view of severe downside risks. It is a globallyconsistent, narrative driven, scenario that explores more extreme
economic outcomes than those captured by the consensus
scenarios. In this scenario, variables do not, by design, revert tolong-term trend expectations. They may instead explore alternative
states of equilibrium, where economic activity moves permanently
away from past trends.
The two consensus, ‘Upside’ and ‘Downside’ scenarios areconstructed to be consistent with a 10% probability and theDownside 2 to a 5% probability. The Central Scenario is assigned
the remaining 75%. This weighting scheme is deemed appropriate
for the unbiased estimation of ECL in most circumstances.
Management may, however, depart from this probability based
scenario weighting approach when the economic outlook isdetermined to be more uncertain and risks are elevated.

Economic forecasts remain subject to a high degree of
uncertainty. Risks to the economic outlook are dominated by the
progression of the pandemic, vaccine roll-out and the public policy
response. Geopolitical risks also remain significant and include
continued differences between the US and other countries with
China over a range of economic and strategic defence issues.
The key markets covered in the scenarios include Hong Kong andmainland China, and the scenarios used to calculate ECL in the
Annual Report and Accounts 2021 are described below.

The consensus Central scenario
HSBC’s Central scenario features a continued recovery ineconomic growth in 2022 as activity and employment gradually
return to the levels reached prior to the outbreak of Covid-19.
Our Central scenario assumes that the stringent restrictions on
activity, imposed across several countries and territories in 2020
and 2021 are not repeated. The new viral strain that emerged latein 2021, Omicron, has only a limited impact on the recovery,
according to this scenario. Consumer spending and business
investment, supported by elevated levels of private sector savings,
are expected to drive the economic recovery as fiscal andmonetary policy support recedes.
Regional differences in the speed of economic recovery in theCentral scenario reflect differences in the progression of thepandemic, roll-out of vaccination programmes, national level
restrictions imposed and scale of support measures. Global GDP is
expected to grow by 4.2% in 2022 in the Central scenario and theaverage rate of global GDP growth is 3.1% over the five-year
forecast period. This exceeds the average growth rate over the
five-year period prior to the onset of the pandemic.
The key features of our Central scenario are:
• Economic activity continues its recovery, growing at amoderate rate in 2022. GDP growth in our key markets hasrecovered to pre-pandemic levels.
• Unemployment in mainland China has recovered to prepandemic levels. In Hong Kong, unemployment declines tolevels only slightly higher than existed pre-pandemic.
• Covid related fiscal spending recedes in 2022 as fewer
restrictions on activity allow fiscal support to be withdrawn.
Deficits remain high in several countries as they embark on
multi-year investment programmes to support recovery,
productivity growth and climate transition.
• Inflation across many of our key markets remains elevatedthrough 2022. Supply-driven price pressures persist throughthe first half of 2022 before gradually easing. In subsequent
years, inflation quickly converges back towards central banktarget rates.
• Policy interest rates in key markets rise gradually over our
projection period, in line with economic recovery.
• The West Texas Intermediate oil price is forecast to average
US$62 per barrel over the projection period.
In the longer term, growth reverts back towards similar levels thatexisted prior to the pandemic, suggesting that the damage to longterm economic prospects is expected to be minimal. The Central
scenario was first created with forecasts available in November,and subsequently updated in December. Probability weights
assigned to the Central scenario vary from 70% to 80% and reflect
relative differences in uncertainty across markets.

Description of Consensus Economic Scenarios
The economic assumptions presented in this section have been
formed internally with reference to external forecasts specificallyfor the purpose of calculating ECL.
The global economy experienced a recovery in 2021, following an
unprecedented contraction in 2020. Restrictions to mobility andtravel eased across certain markets, aided by the successful rollout of vaccination programmes. The emergence of new variants
that potentially reduce the efficacy of vaccines remains a risk.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

35

Risk

The following table describes key macroeconomic variables andthe probabilities assigned in the consensus Central scenario.

• continued differences between the US and other countries with
China, which could affect sentiment and restrict global
economic activity; andCentral scenario 2022-2026
Hong Kong Mainland China
%

%

3.1
2.9
2.6
2.7

5.3
5.4
5.1
5.1

2022
2023
2024
5 Year average
House price growth (annual average
rate)
2022
2023
2024
5 Year average
Short term interest rate (annual
average rate)

4.1
3.6
3.5
3.6

3.8
3.7
3.8
3.8

3.4
2.4
2.0
2.6

0.3
4.7
4.9
3.5

2022
2023

0.5
1.1

3.1
3.2

2024
5 Year average

1.6
1.4

3.4
3.4

Probability

70.0

80.0

GDP growth rate (annual average rate)
2022
2023
2024
5 Year average
Unemployment rate (annual averagerate)

The consensus Upside scenario
Compared with the Central scenario, the consensus Upside
scenario features a faster recovery in economic activity during thefirst two years, before converging to long-run trend expectations.

• the re-emergence of social unrest in Hong Kong.

The consensus Downside Scenario
In the consensus Downside scenario, the economic recovery is
considerably weaker compared with the Central scenario. GDP
growth is expected to be lower, unemployment rates risemoderately and asset and commodity prices fall, before gradually
recovering towards their long-run trend expectations. The scenario
is consistent with the key downside risks articulated above.
Further outbreaks of Covid-19, coupled with delays in vaccination
programmes, lead to longer-lasting restrictions on economic
activity in this scenario. Other global risks also increase and driveincreased risk-aversion in asset markets.
The following table describes key macroeconomic variables andthe probabilities assigned in the consensus Downside scenario.
Consensus Downside scenario worst outcome
Hong Kong

Mainland
China

%

%

GDP growth rate(1.0) (4Q22)

2.3 (4Q22)

Unemployment rate
House price growth
Short-term interest rate
Probability

5.6 (2Q22)
4.0 (2Q22)(7.9) (4Q22) (3.7) (2Q22)
0.4 (1Q22)
2.9 (1Q22)
20.0
10.0

Note: Extreme point in the consensus Downside is 'worst outcome' inthe scenario, i.e. lowest GDP growth, highest unemployment rate etc, infirst two years of the scenario.

Downside 2 scenario

The following table describes key macroeconomic variables andthe probabilities assigned in the consensus Upside scenario.

The Downside 2 scenario features a deep global recession. In this
scenario, new Covid-19 variants emerge that cause infections torise sharply in 2022, resulting in setbacks to vaccination
programmes and the rapid imposition of restrictions on mobility
and travel across some countries. The scenario also assumes
governments and central banks are unable to significantly increasefiscal and monetary support, which results in abrupt corrections inlabour and asset markets.

Consensus Upside scenario best outcome

The following table describes key macroeconomic variables andthe probabilities assigned in the Downside 2 scenario.

The scenario is consistent with a number of key upside risk
themes. These include the orderly and rapid global abatement ofCovid-19 via successful containment and ongoing vaccine
efficacy; de-escalation of tensions between the US and China andcontinued fiscal and monetary support.

Hong Kong Mainland China

GDP growth rate
Unemployment rate
House price growth
Short-term interest rate
Probability%%

10.3 (4Q22)
2.7 (4Q23)
11.9 (4Q22)
0.6 (1Q22)
5.0

11.8 (4Q22)
3.5 (1Q23)
8.2 (4Q22)
3.2 (1Q22)
5.0

Note: Extreme point in the consensus Upside is ‘best outcome’ in the
scenario, for example the highest GDP growth and the lowest
unemployment rate etc, in first two years of the scenario.

Downside scenarios
The progress of the pandemic and the ongoing public policy
response continues to be a key source of risk. Downside scenarios
assume that new strains of the virus result in an acceleration in
infection rates and increased pressure on public health services,
necessitating restrictions on activity. The reimposition of such
restrictions could be assumed to have damaging effect on
consumer and business confidence.
Government fiscal programmes in advanced economies in 2020
and 2021 were supported by accommodative actions taken by
central banks. These measures have provided households andfirms with significant support. An inability or unwillingness tocontinue with such support or the untimely withdrawal of support
present a downside risk to growth.
While Covid-19 and related risks dominate the economic outlook,geopolitical risks also present a threat. These risks include:36

Downside 2 scenario worst outcome

GDP growth rate
Unemployment rate
House price growth
Short-term interest rate
Probability

Hong Kong

Mainland
China

%

%

(8.2) (4Q22) (4.8) (4Q22)
6.1 (4Q22)
5.4 (4Q23)(17.7) (4Q22) (24.8) (4Q22)
1.3 (2Q22)
4.0 (2Q22)
5.0
5.0

Note: Extreme point in the Downside 2 is 'worst outcome' in the
scenario, for example lowest GDP growth and the highest
unemployment rate, in first two years of the scenario.

Scenario weighting
In reviewing the economic conjuncture, the level of uncertainty
and risks, management has considered both global and countryspecific factors. This has led management to assign scenario
probabilities that are tailored to its view of uncertainty in individual
markets.
To inform its view, management have considered the progressionof the virus in individual markets, the efficacy of vaccine roll-outs,
the degree of current and expected future government support
and connectivity with other countries. Management has also been
guided by the policy response and economic performance throughthe pandemic, as well as the evidence that economies haveadapted as the virus has progressed.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

A key consideration in the fourth quarter was the emergence ofthe new variant, Omicron. The virulence and severity of the newstrain, in addition to the continued efficacy of vaccines against it,
was unknown when the variant first first emerged. Management
therefore determined that uncertainty attached to forecasts has
increased and sought to reflect this in scenario weightings.
China’s significant capacity to extend policy support to theeconomy and manage through Covid related disruptions, ledmanagement to conclude that the outlook for mainland China was
the least uncertain of our key markets. The Central scenario wasgiven an 80% probability while a total of 15% has been assigned
to the two Downside scenarios. In Hong Kong, the combination ofrecurrent outbreaks and the other risks outlined above, ledmanagement to assign a 25% weight to the two Downside
scenarios.

Critical accounting estimates and judgements
The calculation of ECL under HKFRS 9 involves significant
judgements, assumptions and estimates. Despite a general
recovery in economic conditions during 2021, the level of
estimation uncertainty and judgement has remained high during2021 as a result of the ongoing economic effects of the Covid-19
pandemic and other sources of economic instability, including
significant judgements relating to:• the selection and weighting of economic scenarios, given
rapidly changing economic conditions in an unprecedented
manner, uncertainty as to the effect of government and central
bank support measures designed to alleviate adverse economic
impacts, and a wider distribution of economic forecasts than
before the pandemic. The key judgements are the length oftime over which the economic effects of the pandemic will
occur and the speed and shape of recovery. The main factors
include the effectiveness of pandemic containment measures,the pace of roll-out and effectiveness of vaccines, and theemergence of new variants of the virus, plus a range of
geopolitical uncertainties, which together represent a highdegree of estimation uncertainty, particularly in assessing
Downside scenarios;• estimating the economic effects of those scenarios on ECL,
where there is no observable historical trend that can bereflected in the models that will accurately represent the effectsof the economic changes of the severity and speed brought
about by the Covid-19 pandemic and recovery from thoseconditions. Modelled assumptions and linkages between
economic factors and credit losses may underestimate oroverestimate ECL in these conditions, and there is significant
uncertainty in the estimation of parameters such as collateralvalues and loss severity; and• the identification of customers experiencing significant
increases in credit risk and credit impairment, particularly
where those customers have accepted payment deferrals andother reliefs designed to address short-term liquidity issues
given muted default experience to date. The use of
segmentation techniques for indicators of significant increases
in credit risk involves significant estimation uncertainty.

How economic scenarios are reflected in of ECL
calculations
Models are used to reflect economic scenarios on ECL estimates.
As described above, modelled assumptions and linkages based on
historical information could not alone produce relevant information
under the conditions experienced in 2021, and judgemental
adjustments were still required to support modelled outcomes.
We have developed a globally consistent methodologies for theapplication of forward economic guidance into the calculation of
ECL for wholesale and retail credit risk. These standard
approaches are described below, followed by the management
judgemental adjustments made, including those to reflect thecircumstances experienced in 2021.

For our wholesale portfolios, a global methodology is used for theestimation of the term structure of probability of default (‘PD’) andloss given default (‘LGD’). For PDs, we consider the correlation of
forward economic guidance to default rates for a particularindustry in a country. For LGD calculations we consider thecorrelation of forward economic guidance to collateral values andrealisation rates for a particular country and industry. PDs and
LGDs are estimated for the entire term structure of each
instrument.
For impaired loans, LGD estimates take into account independent
recovery valuations provided by external consultants whereavailable, or internal forecasts corresponding to anticipatedeconomic conditions and individual company conditions. In
estimating the ECL on impaired loans that are individuallyconsidered not to be significant, we incorporate forward economic
guidance proportionate to the probability-weighted outcome andthe Central scenario outcome for non-stage 3 populations.
For our retail portfolios, the impact of economic scenarios on PD ismodelled at a portfolio level. Historical relationships between
observed default rates and macroeconomic variables areintegrated into HKFRS 9 ECL estimates by using economic
response models. The impact of these scenarios on PD is modelledover a period equal to the remaining maturity of the underlying
asset or assets. The impact on LGD is modelled for mortgage
portfolios by forecasting future loan-to-value (‘LTV’) profiles for theremaining maturity of the asset by using national level forecasts of
the house price index and applying the corresponding LGD
expectation.
These models are based largely on historical observations andcorrelations with default rates. Management judgemental
adjustments are described below.

Management judgemental adjustments
In the context of HKFRS 9, management judgemental adjustments
are short-term increases or decreases to the ECL at either acustomer, segment or portfolio level to account for late-breaking
events, model and data limitations and deficiencies, and expert
credit judgement applied following management review andchallenge.
At 31 December 2021, management judgements were applied toreflect credit risk dynamics not captured by our models. The
drivers of the management judgemental adjustments reflect thechanging economic outlook and evolving risks across ourgeographies.
Where the macroeconomic and portfolio risk outlook continues toimprove, supported by low levels of observed defaults,
adjustments initially taken to reflect increased risk expectations
have been retired or reduced.
However, other adjustments have increased where modelled
outcomes are overly sensitive and not aligned to observedchanges in the risk of the underlying portfolios during the
pandemic, or where sector-specific risks are not adequately
captured.
The effect of management judgmental adjustments are considered
for balances and ECL when determining whether or not asignificant increase in credit risk has occurred and are attributed or
allocated to a stage as appropriate. This is in accordance with theinternal adjustments framework.
Management judgmental adjustments are reviewed under thegovernance process for HKFRS 9 (as detailed in the unaudited
section 'Credit risk management' on page 29). Review andchallenge focuses on the rationale and quantum of theadjustments with further review by the second line of defence
where significant. For some management judgemental
adjustments, internal frameworks establish the conditions underwhich these adjustments should no longer be required and assuch are considered as part of the governance process. This
internal governance process allows management judgemental
adjustments to be reviewed regularly and, where possible, toreduce the reliance on these through model recalibration or
redevelopment, as appropriate.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

37

Risk

Management judgemental adjustments made in estimating the
scenario-weighted reported ECL at 31 December 2021 are set out
in the following table. The table includes adjustments in relation todata and model limitations, including those driven by late-breaking
events and sector specific risks and as a result of the regularprocess of model development and implementation.
Management judgemental adjustments to ECL
as at 31 December 20211

Low-risk counterparties (banks,
sovereigns and government entities)2

RetailWholesale

Total

HK$bn

HK$bn

HK$bn

0.1

(0.2)

(0.1)

4.1

4.1

Corporate lending adjustments
Retail model default suppression
adjustments
Macroeconomic-related adjustments
Pandemic-related economic recovery
adjustments
Other retail lending adjustments
Total

—
(0.4)

(0.4)

0.6

0.6

0.7
1.0

—

3.9

0.7
4.9

resulted from improvement in industry outlook and portfolio
quality.
At 31 December 2021, retail management judgemental
adjustments were an ECL increase of HK$1.0bn (31 December
2020: HK$2.7bn increase):• Pandemic-related economic recovery adjustments increased
ECL by HK$0.6bn (31 December 2020: HK$0) to adjust for theeffects of the volatile pace of recovery from the pandemic. This
is where in management’s judgement, supported byquantitative analyses of portfolio and economic metrics,
modelled outcomes are overly sensitive given the limited
observed deterioration in the underlying portfolio during the
pandemic.
• Other retail lending adjustments increased ECL by HK$0.7bn(31 December 2020: HK$0.3bn) and macroeconomic-related
adjustments decreased ECL by HK$0.4bn (31 December 2020:
HK$0.9bn increase). These were primarily to address areas
such as model recalibration and redevelopment, customer relief
and data limitations.
•Management judgemental adjustments to ECL
as at 31 December 20201

Low-risk counterparties (banks,
sovereigns and government entities)2

RetailWholesale

Total

HK$bn

HK$bn

HK$bn

0.2

—

0.2

3.0

3.0

Corporate lending adjustments
Retail model default suppression
adjustments

1.3

1.3

Macroeconomic-related adjustments3
Pandemic-related economic recovery
adjustments

0.9

0.9

—

—

Other retail lending adjustments3
Total

0.3
2.7

0.3
5.7

3.0

1 Management judgemental adjustments presented in the table reflectincreases in ECL.
2 Low-risk counterparties for Retail is comprised of adjustments
relating to WPB Insurance only.
3 Retail lending probability of default adjustments are reported under'Macroeconomic-related adjustments' and 'Other retail lending
adjustments'. Comparatives are re-presented to conform to thecurrent year's presentation.

Management judgemental adjustments at 31 December 2021
were an increase to ECL of HK$3.9bn for the wholesale portfolio
and an increase to ECL of HK$1bn for the retail portfolio.
During 2021, management judgemental adjustments reflected an
evolving macroeconomic outlook and the relationship of themodelled ECL to this outlook and to late-breaking and sector
specific risks.
At 31 December 2021, wholesale management judgemental
adjustments were an ECL increase of HK$0.9bn mainly fromincrease in Corporate lending adjustment by HK$1.2bn. These
principally reflected the outcome of management judgements forhigh-risk and vulnerable sectors in some of our key markets,
supported by credit experts’ input, portfolio risk metrics,
quantitative analyses and benchmarks. Considerations include riskof individual exposures under different macroeconomic scenariosand comparison of key risk metrics to pre-pandemic levels,
resulting in either releases or increases to ECL in each geography.
The increase in adjustment impact relative to 31 December 2020
was mostly driven by management judgements as a result of theeffect of further improvement of macroeconomic scenarios onmodelled outcomes and increased dislocation of modelled
outcomes to management expectations for high-risk sectors,
mainly for real estate sector. The adjustment for real estate wasrecommended focusing on the uncertainty for the higher risk
China commercial real estate offshore exposures booked in Hong
Kong on account of tightening liquidity and increased refinancing
risks, resulting in the downgrade of some previously highly-rated
borrowers. The increase management adjustment for real estate
sector was partly offset by adjustment releases in other sectors
38

All retail model default suppression adjustments were removed
in 2021.

Economic scenarios sensitivity analysis of ECL
estimates
Management considered the sensitivity of the ECL outcome
against the economic forecasts as part of the ECL governanceprocess by recalculating the ECL under each scenario describedabove for selected portfolios, applying a 100% weighting to eachscenario in turn. The weighting is reflected in both thedetermination of a significant increase in credit risk and themeasurement of the resulting ECL.
The ECL calculated for the Upside and Downside scenarios should
not be taken to represent the lower and upper limits of possible
ECL outcomes. The impact of defaults that might occur in the
future under different economic scenarios is captured byrecalculating ECL for loans at the balance sheet date.
There is a particularly high degree of estimation uncertainty innumbers representing more severe risk scenarios when assigned a
100% weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted
obligors because the measurement of ECL is relatively moresensitive to credit factors specific to the obligor than future
economic scenarios. Therefore, it is impracticable to separate theeffect of macroeconomic factors in individual assessments. When
compared with the performing portfolio, the defaulted obligors
represent a significantly smaller portion of the wholesale
exposures, even if accounting for the larger portion of theallowance for ECL.
For retail credit risk exposures, the sensitivity analysis includes
ECL for loans and advances to customers related to defaulted
obligors. This is because the retail ECL for secured mortgage
portfolios including loans in all stages is sensitive tomacroeconomic variables.

Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated inclusive ofmanagement judgemental adjustments, as appropriate to eachscenario. The results tables exclude portfolios held by the
insurance business and small portfolios, and as such cannot bedirectly compared to personal and wholesale lending presented inother credit risk tables. Additionally in both the wholesale andretail analysis, the comparative period results for additional andalternative Downside scenarios are not directly comparable to thecurrent period, because they reflect different risk profiles relativewith the Consensus scenarios for the period end.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Wholesale analysis

Retail analysis

HKFRS 9 ECL sensitivity to future economic conditions1

HKFRS 9 ECL sensitivity to future economic conditions1

ECL coverage of financial instruments
subject to significant measurement
uncertainty at 31 December 20212
Reported ECL
Consensus scenarios ECL
Central scenario
Upside scenario
Downside scenario
Alternative (Downside 2) scenario ECL

Hong Kong

Mainland
China

HK$m

HK$m

5,981

1,162

5,085
3,712
7,674
14,575

881
281
1,684
6,286

Reported
ECL

ECL coverage ofloans andadvances tocustomers

ECL coverage of financial instruments subject
to significant measurement uncertainty at 31
December 20202

Mainland
China

HK$m

HK$m

Reported ECL
Consensus scenarios
Central scenario
Upside scenario
Downside scenario

3,675

897

3,009
1,638
5,208

718
217
1,954

Alternative scenarios

10,568

8,979

HK$m

HK$m

HK$m

HK$m

HK$m

2,554

2,395

1,884

2,802

4,198

At 31 December
20212
Hong KongHKFRS 9 ECL sensitivity to future economic conditions1

HKFRS 9 ECL sensitivity to future economic conditions1
Hong Kong

CentralUpside Downside Alternative
Scenario Scenario
Scenario
Scenarios

ECL coverage ofloans and advances
to customers

Reported
ECL

CentralScenario

UpsideScenario

Downside
Scenario

Alternative
Scenarios

HK$m

HK$m

HK$m

HK$m

HK$m

2,959

2,822

2,711

3,043

4,153

At 31 December
20202
Hong Kong

1 ECL sensitivities exclude portfolios using less complex modelling
approaches.
2 ECL sensitivity includes only on-balance sheet financial instruments
to which HKFRS 9 impairment requirements are applied.

1 Excludes ECL and financial instruments relating to defaulted obligors
because the measurement of ECL is relatively more sensitive to credit
factors specific to the obligor than future economic scenarios.
2 Includes off-balance sheet financial instruments that are subject tosignificant measurement uncertainty.

At 31 December 2021, the most significant level of ECL sensitivity
related to the judgements over the China offshore real estate
portfolio booked in Hong Kong.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

39

Risk

Reconciliation of changes in gross carrying/nominal amount and allowances for loans andadvances to banks and customers, including loan
commitments and financial guarantees

The transfers of financial instruments represents the impact ofstage transfers upon the gross carrying/nominal amount andassociated allowance for ECL.
The net remeasurement of ECL arising from stage transfers
represents the increase or decrease due to these transfers, forexample, moving from a 12-month (stage 1) to a lifetime (stage 2)
ECL measurement basis. Net remeasurement excludes theunderlying customer risk rating ('CRR')/probability of default ('PD')
movements of the financial instruments transferring stage. This iscaptured, along with other credit quality movements in the‘changes in risk parameters – credit quality’ line item.

(Unaudited)

The following disclosure provides a reconciliation by stage of thegroup’s gross carrying/nominal amount and allowances for loans
and advances to banks and customers, including loan
commitments and financial guarantees. Movements are calculated
on a quarterly basis and therefore fully capture stage movements
between quarters. If movements were calculated on a year-to-datebasis they would only reflect the opening and closing position of
the financial instrument.

Changes in ‘New financial assets originated or purchased’, ‘assets
derecognised (including final repayments)’ and ‘changes to risk
parameters – further lending/repayments’ represent the impact
from volume movements within the group’s lending portfolio.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including
loan commitments and financial guarantees(Audited)Stage 1Grosscarrying/
nominalamountStage 2

Allowance
for ECLGross
carrying/
nominalamountStage 3

Allowance
for ECLGross
carrying/
nominalamount

POCI

Total

Allowance
for ECLGross
carrying/
nominalamountAllowance
for ECLGross
carrying/
nominalamountAllowance
for ECL

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 1 Jan 2021
Transfers of financial instruments:– transfers from stage 1 to stage 2– transfers from stage 2 to stage 1– transfers to stage 3– transfers from stage 3

5,254,097(82,216)(790,973)
716,431(9,067)
1,393(4,978)(1,758)1,689(3,412)104(139)

567,753
62,505790,973(716,431)(14,911)2,874(6,781)
3,758(1,689)
3,412
2,238
(203)

35,984
19,711——
23,978(4,267)(17,739)(2,000)——(2,342)
342

855
—
—
—
—
—

(362)
—
—
—
—
—

5,858,689
—
—
—
—
—

(29,860)—————

Net remeasurement of ECL arisingfrom transfer of stage

—

1,686

—

(2,347)

—

(107)

—

—

—

(768)

New financial assets originated andpurchased

1,621,239(1,183)

—

—

—

—

973

—

1,622,212(1,183)

Assets derecognised (including final
repayments)(1,086,986)

314(120,885)

674(5,745)

1,165

(9)

—

(1,213,625)

2,153

Changes to risk parameters –further lending/repayment(93,466)

1,078

19,54087(2,332)

998

(263)

25

(76,521)2,188

Changes in risk parameters – credit
quality

—

2,078

—

(4,768)—(6,612)—49—(9,253)

Changes to model used for ECL
calculation

—

(126)

—

(377)

—

7

—

—

—

(496)

Assets written off

—

—

—

—

(4,531)

4,531

—

—

(4,531)

4,531

Credit-related modifications that
resulted in derecognition
Foreign exchange
OthersAt 31 Dec 2021

—

—

—

—

(973)

—

—

—

(973)

—

(23,231)43
5,589,480(28)
1(2,916)684—
529,59718(1)(9,737)(478)
341,63965(1)(19,693)

2
—
1,558

(1)
(45)
(334)

(23,023)46
6,162,274

54(46)(32,680)

ECL income statement charge forthe year(7,359)Recoveries
Others

1,011
(169)

Total ECL income statement
charge for the year

(6,517)
At 31 Dec 2021

Year ended 31 Dec 2021

Gross carrying/nominal amount

Allowance for ECL

HK$m

HK$m

HK$m

As above
Other financial assets measured at amortised cost
Non-trading reverse repurchase agreement commitments
Performance and other guarantees not considered for HKFRS 9
Amounts due from Group companies

6,162,274
2,114,301
3,605
N/A
99,604(32,680)
(639)
—
N/A
—

(6,517)
(184)
—
145

Summary of financial instruments to which the impairment requirements in
HKFRS 9 are applied/Summary consolidated income statement

8,379,784(33,319)(6,556)

Debt instruments measured at FVOCI
Total allowance for ECL/total income statement ECL charge for the year

1,541,909
N/A

(121)
(33,440)

17(6,539)40

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

ECL charge—

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including
loan commitments and financial guarantees (continued)(Audited)Stage 1Grosscarrying/
nominalamountStage 2

Allowance
for ECLGross
carrying/
nominalamountStage 3

Allowance
for ECLGross
carrying/
nominalamount

POCI

Total

Allowance
for ECLGross
carrying/
nominalamountAllowance
for ECLGross
carrying/
nominalamountAllowance
for ECL

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 1 Jan 2020

5,383,650(3,839)331,701(4,874)

16,775(9,032)

1,152

(300)

5,733,278(18,045)

Transfers of financial instruments:– transfers from stage 1 to stage 2(288,695)(975,023)(2,585)2,504

259,962
975,023

4,322(2,504)28,733—(1,737)
—

—
—

—
—

—
—

—
—

– transfers from stage 2 to stage 1– transfers to stage 3

702,624(17,478)(5,130)95(702,624)(14,362)

5,130
1,821

—
31,840—(1,916)

—
—

—
—

—
—

—
—

– transfers from stage 3

1,182

(54)

1,925

(125)

(3,107)

179

—

—

—

—

Net remeasurement of ECL arisingfrom transfer of stage

—

1,978

—

(2,598)—(5,702)———(6,322)

New financial assets originated andpurchased

1,422,036(1,743)

—

—

—

—

2

—

1,422,038(1,743)

Assets derecognised (including final
repayments)(1,093,254)

320(182,195)687(4,244)

1,357

—

—

(1,279,693)

2,364

Changes to risk parameters – further
lending/repayment(235,616)(1,037)

140,675

4

41

606

(293)

10

(95,193)(417)

Changes in risk parameters – credit
quality

—

1,501

—

(6,709)—(9,339)

—

(71)

—

(14,618)

Changes to model used for ECL
calculation

—

489

—

2,626

—

26

—

—

—

3,141

Assets written off

—

—

—

—

(6,064)

6,058

—

—

(6,064)

6,058

Credit-related modifications that
resulted in derecognition
Foreign exchange
OthersAt 31 Dec 2020
ECL income statement charge forthe year

—

—

—

—

(4)

2

—

—

(4)

2

65,9742
5,254,097(67)
5(4,978)17,610—567,753(237)(2)(6,781)744
335,98414
8(17,739)

(6)
—
855

(1)
—
(362)

84,322
55,858,689(291)
11(29,860)(17,595)

Recoveries
Others733(154)

Total ECL income statement charge
for the year

(17,016)
At 31 Dec 2020

Year ended 31 Dec 2020

Gross carrying/nominal
amountAllowance for ECL

HK$m

HK$m

HK$m

As above
Other financial assets measured at amortised cost
Non-trading reverse repurchase agreement commitments
Performance and other guarantees not considered for HKFRS 9
Amounts due from Group companies

5,858,689
1,869,268
1,108
N/A
82,849(29,860)
(713)
—
N/A
—

(17,016)
(452)
—
(147)
—

Summary of financial instruments to which the impairment requirements in HKFRS 9 areapplied/Summary consolidated income statement

7,811,914(30,573)(17,615)

Debt instruments measured at FVOCI
Total allowance for ECL/total income statement ECL charge for the year

1,689,820
N/A

(167)
(30,740)(104)(17,719)

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

ECL charge

41

Risk

Credit quality

no direct relationship between the credit quality assessment andstages 1 and 2, though typically the lower credit quality bands
exhibit a higher proportion in stage 2.

Credit quality of financial instruments(Audited)

We assess the credit quality of all financial instruments that are
subject to credit risk. The credit quality of financial instruments isa point-in-time assessment of the probability of default of financial
instruments, whereas stages 1 and 2 are determined based onrelative deterioration of credit quality since initial recognition.
Accordingly, for non-credit-impaired financial instruments, there is

The five credit quality classifications each encompass a range of
granular internal credit rating grades assigned to wholesale andretail lending businesses and the external ratings attributed byexternal agencies to debt securities, as shown in the table on page30 (unaudited).

Distribution of financial instruments by credit quality at 31 December 2021
(Audited)
Gross carrying/notional amount
StrongGood

Satisfactory

Substandard

Creditimpaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Loans and advances to customers held at
amortised cost

2,076,114

876,388

838,222

39,34242,8903,872,956(32,017)3,840,939– personal– corporate and commercial– non-bank financial institutions
Loans and advances to banks
Cash and balances at central banks

1,290,946
648,930
136,238
423,839
269,108

136,390653,853
86,145
5,750
7,663

91,809685,887
60,526
2,611
86

3,008
36,117217
86—

10,15832,624108——

1,532,311
2,057,411
283,234
432,286
276,857(5,966)(25,706)
(345)
(39)
—

1,526,345
2,031,705
282,889432,247
276,857

Items in the course of collection from otherbanks

21,632————

21,632—

21,632

Hong Kong Government certificates ofindebtedness

332,044

—

—

—

—

332,044—

332,044

Reverse repurchase agreements – non-trading
Financial investments held at amortised cost
Prepayments, accrued income and other assets

530,900
406,588
95,520144,373
88,76545,945

128,502
7,644
34,642

—
—
599

—
—
290

803,775
502,997
176,996

—
(433)
(206)

803,775
502,564
176,790

Debt instruments measured at fair value throughother comprehensive income1

1,438,300

72,69730,085——

1,541,082—(121)

1,540,961—

389,531

65,272

21,676518

1,033

478,030—

478,030

In-scope for HKFRS 9 impairment

Out-of-scope for HKFRS 9 impairment
Trading assets
Other financial assets designated and otherwise
mandatorily measured at fair value throughprofit or loss

25,738

2,386

900

—

—

29,024—29,024

Derivatives

161,471

49,735

5,222

45

—

216,473—

216,473

Total gross carrying amount on-balance
sheet

6,170,785

1,358,974

1,069,590

40,59044,2138,684,152(32,816)

8,651,336

Percentage of total credit quality
Loan and other credit related commitments
Financial guarantee and similar contracts
Total nominal off-balance sheet amount71%
1,732,590
135,199
1,867,789

16%
699,474
151,565
851,03912%
491,037
64,012555,049

—%

1%
983
456
1,439

100%
2,943,484
354,879
3,298,363

(580)
(204)
(784)

2,942,904
354,675
3,297,579

19,4003,647
23,047

The above table does not include balances due from Group companies.
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss
allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes
fair value gains and losses.

42

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Distribution of financial instruments by credit quality at 31 December 2020 (continued)(Audited)
Gross carrying/notional amount
StrongGood

Satisfactory

Substandard

Creditimpaired

Total

Allowance for
ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Loans and advances to customers held at
amortised cost

1,926,557

861,848

832,072

40,48436,607

3,697,568(28,887)

3,668,681– personal– corporate and commercial

1,220,972
604,310

146,492
631,415

70,098702,801

5,723
34,085

9,062
27,367

1,452,347
1,999,978(7,144)(21,448)

1,445,203
1,978,530– non-bank financial institutions
Loans and advances to banks

101,275
393,732

83,941
8,441

59,173
1,650

676
85

178
—

245,243
403,908

(295)
(24)

244,948
403,884

Cash and balances at central banks

338,968

8,332

699

—

—

347,999—

347,999

Items in the course of collection from otherbanks

21,943————

21,943—

21,943

Hong Kong Government certificates ofindebtedness

313,404

—

—

—

—

313,404—

313,404

Reverse repurchase agreements – non-trading

315,534

135,842

68,968——520,344—

520,344

Financial investments held at amortised cost
Prepayments, accrued income and other assets

389,024
100,460

75,79246,003

10,73742,535

—
747

—
280

475,553
190,025

(527)
(186)

475,026
189,839

1,579,022

69,90930,197——

1,679,128—(167)

1,678,961—

360,104

47,456

24,962

1,507—

434,029—434,029

In-scope for HKFRS 9 impairment

Debt instruments measured at fair value
through other comprehensive income1
Out-of-scope for HKFRS 9 impairment
Trading assets
Other financial assets designated and otherwise
mandatorily measured at fair value throughprofit or loss
Derivatives
Total gross carrying amount on-balance sheet
Percentage of total credit quality
Loan and other credit related commitments
Financial guarantee and similar contracts
Total nominal off-balance sheet amount23,285

6,068

2,197

—

—

31,550—31,550258,643
6,020,676
71%
1,627,804
101,381
1,729,185

75,131
1,334,822
16%
704,123
121,415825,538

11,431
1,025,448
12%
464,52178,434542,955

318
43,141
1%
14,9684,046
19,0142
36,889
0%
1,978
879
2,857

345,5258,460,976
100%
2,813,394
306,155
3,119,549—(29,791)

345,525
8,431,185

(825)
(432)
(1,257)2,812,569
305,723
3,118,292

The above table does not include balances due from Group companies.
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss
allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes
fair value gains and losses.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

43

Risk

Distribution of financial instruments to which the impairment requirements in HKFRS 9 are applied, by credit quality and stage
allocation(Audited)
Gross carrying/notional amount
StrongGood

Satisfactory

Substandard

Creditimpaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Loans and advances to banks

423,839

5,750

2,611

86

—

432,286(39)

432,247– stage 1– stage 2

423,561
278

5,241
509

2,244
367

33
53

—
—

431,079
1,207

(36)
(3)

431,043
1,204– stage 3– POCI

—
—

—
—

—
—

—
—

—
—

—
—

—
—

—
—

2,076,114
2,034,725

876,388732,858

838,222577,785

39,342
4,066

42,890—3,872,956
3,349,434

41,389—143,530—

260,437—

35,276——41,332

480,632
41,332(9,426)(19,654)471,206
21,678

(334)

1,224

Loans and advances to customers at amortised cost– stage 1– stage 2– stage 3– POCI(32,017) 3,840,939(2,603) 3,346,831

—

—

—

—

1,558

1,558

Other financial assets measured at amortised cost

1,655,792

286,746

170,874599

290

2,114,301(639) 2,113,662– stage 1– stage 2

1,651,199
4,593

278,343
8,403

163,190
7,684

115
484

—
—

2,092,847
21,164(482) 2,092,365(140)
21,024– stage 3– POCI

—
—

—
—

—
—

—
—

289
1

289
1

Loan and other credit-related commitments– stage 1

1,347,783
1,344,540

311,803297,202

162,448
138,722

4,030
1,889

271
—

1,826,335
1,782,353(580) 1,825,755(260) 1,782,093– stage 2– stage 3– POCI
Financial guarantees– stage 1– stage 2– stage 3– POCIAt 31 Dec 2021
Debt instruments at FVOCI1– stage 1– stage 2– stage 3– POCIAt 31 Dec 2021

3,243
—
—
11,35011,127223——
5,514,878

14,601——
12,188
10,8901,298——
1,492,875

23,726
—
—
9,883
8,038
1,845
—
—
1,184,038

2,141
—
—
841
159
682
—
—
44,898

—
271
—
40
—
—
40
—
43,491

43,711271—
34,30230,2144,048
40—
8,280,180(295)
43,416
(25)
246
—
—
(44)
34,258(14)
30,200
(14)
4,034
(16)
24
—
—
(33,319) 8,246,861

1,438,161
139——
1,438,300

72,697———
72,69730,085———30,085

—
—
—
—
—

—
—
—
—
—

1,540,943
139——
1,541,082(121) 1,540,822
—
139
—
—
—
—
(121) 1,540,961

(17)
—

272
1

The above table does not include balances due from Group companies.
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss
allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes
fair value gains and losses.

44

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Distribution of financial instruments to which the impairment requirements in HKFRS 9 are applied, by credit quality and stage
allocation (continued)(Audited)
Gross carrying/notional amount
StrongGood

Satisfactory

Substandard

Creditimpaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Loans and advances to banks

393,732

8,441

1,650

85

—

403,908(24)

403,884– stage 1– stage 2392,766
966

7,082
1,359

1,408
242

—
85

—
—

401,256
2,652

(19)
(5)

401,237
2,647– stage 3– POCI

—
—

—
—

—
—

—
—

—
—

—
—

—
—

—
—

1,926,557
1,907,066

861,848
697,619832,072
541,177

40,484
5,059

36,607—

3,697,568
3,150,921(28,887)(4,393)

3,668,681
3,146,528

19,491—

164,229—

290,895—

35,425——35,752510,040
35,752(6,438)(17,694)503,602
18,058Loans and advances to customers at amortised cost– stage 1– stage 2– stage 3– POCI

—

—

—

—

855

855

(362)

493

Other financial assets measured at amortised cost

1,479,334

265,966

122,941747

280

1,869,268(713)

1,868,555– stage 1– stage 2

1,475,066
4,268

263,384
2,582

115,572
7,369

132
615

—
—

1,854,154
14,834

(452)
(221)

1,853,702
14,613– stage 3– POCI

—
—

—
—

—
—

—
—

279
1

279
1

(40)
—

239
1

Loan and other credit-related commitments– stage 1

1,270,557
1,269,249

328,523
307,836

122,817
98,578

3,883
1,579

183
—

1,725,963
1,677,242

(825)
(514)

1,725,138
1,676,728– stage 2– stage 3– POCI
Financial guarantees– stage 1– stage 2– stage 3– POCIAt 31 Dec 2020
Debt instruments at FVOCI1– stage 1– stage 2– stage 3– POCIAt 31 Dec 2020

1,308
—
—
7,694
7,272
422
—
—
5,077,874

20,687——
12,634
11,095
1,539——
1,477,412

24,239——10,896
7,374
3,522
—
—
1,090,376

2,304
—
—
1,084
45
1,039
—
—
46,283

—
183
—
50
—
—
50
—
37,12048,538183—
32,35825,7866,522
50—
7,729,065

(281)
(30)
—
(124)
(51)
(56)
(17)
—
(30,573)

48,257
153—
32,23425,7356,466
33—
7,698,492

1,578,971
50——
1,579,021

69,88624——
69,91030,197———30,197

—
—
—
—
—

—
—
—
—
—

1,679,054
74——
1,679,128

(167)
—
—
—
(167)

1,678,887
74——
1,678,961

The above table does not include balances due from Group companies.
1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss
allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes
fair value gains and losses.

Mainland China commercial real estate(Unaudited)

The following table presents the group's total exposure to mainland China commercial real estate ('CRE') at 31 December 2021, bycountry/territory and credit quality. Mainland China reported real estate exposures comprise exposures booked in mainland China andoffshore where the ultimate parent and beneficial owner is based in mainland China, and all exposures booked on mainland Chinabalance sheets.
Mainland China CRE exposure
Hong
Kong

Mainland
China

Rest of
AsiaPacific

Total

HK$m

HK$m

HK$m

HK$m

Loans and advances to customers1
Guarantees issued and others2

77,22913,624

53,116
18,533658
127

131,00332,284

Total mainland China CRE
exposure at 31 Dec 2021

90,85371,649785

163,287– Strong– Good– Satisfactory– Sub-standard– Impaired
At 31 Dec 2021

27,63020,681
26,384
12,245
3,913
90,85330,141
18,35722,26394
794
71,649

239
—
546
—
—
785

58,01039,03849,193
12,3394,707
163,287

Allowance for ECL

4,371

379

15

4,765

Distribution of mainland China
CRE exposure by credit quality

At 31 December 2021, the group had no direct credit exposure todevelopers in the ‘red’ category of the Chinese government's‘three red lines’ framework. The group’s exposures related tocompanies whose primary activities are focused on residential,commercial and mixed-use real estate activities. Lending is
generally focused on tier 1 and 2 cities.
Booked in Hong Kong are higher risk exposures to a combinationof state and privately owned enterprises. This portfolio had 89% of
exposure booked with a credit quality of ‘satisfactory’ or above,
but had a higher degree of uncertainty due to tightening liquidity
and increased refinancing risks. In addition, offshore exposures
are typically higher risk than onshore exposures. At 31 December
2021, the group had allowances for ECL of HK$4,371m held
against mainland China commercial real estate exposures bookedin Hong Kong. We will continue to monitor the prevailing situation
closely.

1 Amounts represent gross carrying amount.
2 Amounts represent nominal amount.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

45

Risk

Credit-impaired loans(Audited)

We determine that a financial instrument is credit impaired and instage 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 isdeemed 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.

Customer relief programmes

for both personal and wholesale customers in market-wide
schemes. The following table presents the number of personalaccounts/wholesale customers and the associated drawn loan
values of customers under these schemes and HSBC-specificmeasures for major markets at 31 December 2021. Whenschemes expire, accounts and customers and their associateddrawn balances are no longer reported under relief regardless of
their repayment status. In relation to personal lending, the majorityof relief measures, including payment holidays, relate to existing
lending, while in wholesale lending the relief measures comprisepayment holidays, refinancing of existing facilities and new
lending under government-backed schemes.
At 31 December 2021, the gross carrying value of loans topersonal customers under relief was HK$10.5bn (31 December
2020: HK$19.9bn). The decrease in personal customer relief during
the year was driven by customers exiting relief measures. The
gross carrying value of loans to wholesale customers under relief
was HK$67.3bn (31 December 2020: HK$91.8bn). We continue tomonitor the recoverability of loans granted under customer relief
programs, including loans to a small number of customers thatwere subsequently found to be ineligible for such relief. The
ongoing performance of such loans remains an area of uncertainty
at 31 December 2021.

(Unaudited)

In response to the Covid-19 outbreak, governments and regulators
across Asia-Pacific have introduced a number of support measures
Personal lending
31 Dec 2021

Market-wide schemes
Number of accounts in mortgage customer relief
Drawn loan value of accounts in mortgage customer relief
Number of accounts in other personal lending customer relief
Drawn loan value of accounts in other personal lending customer relief
HSBC-specific measures
Number of accounts in mortgage customer relief
Drawn loan value of accounts in mortgage customer relief
Number of accounts in other personal lending customer relief
Drawn loan value of accounts in other personal lending customer relief

Total

Other
markets1

Total

8
5,284
33
4,455

8
5,284
33
4,455

—
—
—
—

6
7,518
37
2,818

6
7,518
37
2,818

—
448
—
267

—
23
2
35

—
471
2
302

3
8,713
1
582

—
128
5
196

3
8,841
6
778

HK$m

—
448
—
267

8
5,307
35
4,490

8
5,755
35
4,757

3
8,713
1
582

6
7,646
42
3,014

9
16,359
43
3,596

%

0.1

1.3

0.5

1.2

2.0

1.5

%

0.1

4.2

1.3

0.2

2.7

1.0

Other
markets

Total

000s
000s
HK$m
000s
HK$m
000s
HK$m

Other
markets1————

31 Dec 2020
Hong
Kong

HK$m

Hong
Kong

Total personal lending under market-wide schemes and HSBC-specificmeasures
Number of accounts in mortgage customer relief
Drawn loan value of accounts in mortgage customer relief
Number of accounts in other personal lending customer relief
Drawn loan value of accounts in other personal lending customer relief
Market-wide schemes and HSBC-specific measures – mortgage relief
as a proportion of total mortgages
Market-wide schemes and HSBC-specific measures – other personal
lending relief as a proportion of total other personal lending loans andadvance

000s
HK$m
000s

Wholesale lending
31 Dec 2021

Market-wide schemes
Number of customers under market-wide measures
Drawn loan value of customers under market-wide schemes
HSBC-specific measures
Number of customers under HSBC-specific measures
Drawn loan value of customers under HSBC-specific measures
Total wholesale lending under market-wide schemes and HSBCspecific measures
Number of customers
Drawn loan values
Market-wide schemes and HSBC-specific measures as a proportion of
total wholesale lending loans and advances

31 Dec 2020

Hong
Kong

Other
markets

Total

Hong
Kong

1
22,671

1
5,152

2
27,823

3
82,356—5,178

387,534

535,95813,497

639,455

—
1

—
4,295

—
4,296

HK$m

6
58,6292
8,649

867,2783
82,357—9,473

391,830

%

4.1

0.9

2.9

5.9

1.1

4.1

000s
HK$m
000s
HK$m

000s

Number of accounts/customers below 500 is rounded to zero in the above table.
1 Other markets in personal lending mainly represent Malaysia and Singapore.

46

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

The initial granting of customer relief does not automaticallytrigger a migration to stage 2 or 3. However, information provided
by payment deferrals is considered in the context of otherreasonable and supportable information. This forms part of theoverall assessment for significant increase in credit risk and for
credit impairment, to identify loans for which lifetime ECL isappropriate. An extension in payment deferral does not
automatically result in stage 2 or stage 3. The key accounting andcredit risk judgement to ascertain whether a significant increase incredit risk has occurred is whether the economic effects of
Covid-19 on the customer are likely to be temporary over the
lifetime of the loan, and do not indicate that a concession is being
made in respect of financial difficulty that would be consistent
with stage 3.
The following narratives provides further details on the major relief
programmes offered in Hong Kong and Malaysia.

Wholesale lending
Given the persistence of the Covid-19 pandemic around the world
and the severity of the ensuing impact on the global and local
economy, HKMA – together with the Banking Sector SME Lending
Coordination Mechanism – announced on 21 September 2021 that
the Pre-approved Principal Payment Holiday Scheme would be
extended for another six months until April 2022. HKMA and thecoordination mechanism agreed that all principal payments ofloans falling due between November 2021 and April 2022 byeligible corporate customers would be deferred by another six
months except for repayments of trade loans, which would be
deferred by 90 days.

Personal lending
Hong Kong
Mortgages
Customer relief granted on Hong Kong mortgages consists ofdeferred principal repayment of up to 12 months. This relief
programme was available to existing HSBC mortgage loancustomers who had a good repayment record during the six
months prior to application. The scheme has now been closed toapplications.

is the case for reverse repurchase agreements and for certain
loans and advances to customers where the loan to value (‘LTV’) isvery low.
Mitigants may include a charge on borrowers’ specific assets,such as real estate or financial instruments. Other credit risk
mitigants include short positions in securities and financial assets
held as part of linked insurance/investment contracts where therisk is predominantly borne by the policyholder. Additionally, risk
may be managed by employing other types of collateral and credit
risk enhancements, such as second charges, other liens andunsupported guarantees. Guarantees are normally taken from
corporates and export credit agencies. Corporates would normallyprovide guarantees as part of a parent/subsidiary relationship andspan a number of credit grades. The export credit agencies will
normally be investment grade.
Certain credit mitigants are used strategically in portfolio
management activities. While single name concentrations arise inportfolios managed by Global Banking and Corporate Banking, it is
only in Global Banking that their size requires the use of portfolio
level credit mitigants. Across Global Banking, risk limits andutilisations, maturity profiles and risk quality are monitored andmanaged proactively. This process is key to the setting of risk
appetite for these larger, more complex, geographically distributed
customer groups. While the principal form of risk management
continues to be at the point of exposure origination, through thelending decision-making process, Global Banking also utilises loan
sales and credit default swap (‘CDS’) hedges to manage
concentrations and reduce risk. These transactions are theresponsibility of a dedicated Global Banking portfolio management
team. Hedging activity is carried out within agreed credit
parameters, and is subject to market risk limits and a robust
governance structure. Where applicable, CDSs are entered into
directly with a central clearing house counterparty. Otherwise, ourexposure to CDS protection providers is diversified among mainlybanking counterparties with strong credit ratings.
CDS mitigants are held at portfolio level and are not reported in
the presentation below.

Collateral on loans and advances(Audited)

Malaysia
The Malaysian government has since April 2020 mandated several
targeted relief assistance for customers impacted by Covid-19. The
programs mainly comprised 6-month payment moratorium for
unemployed or a reduction in monthly payment corresponding to
reduction in income. The active relief takers in the portfolio
comprises enrolments into the targeted relief assistance rolled out
from 7 July 2021 where eligibility criteria was relaxed. The latest
mandated relief assistance rolled out since 15 November 2021 istargeted at the lower income segment, requires documentary
proof of unemployment or income reduction and a notification to
the credit bureau. Repeated enrolments are allowed.

Collateral and other credit enhancements(Audited)

Although collateral can be an important mitigant of credit risk, it is
the group’s general practice to lend on the basis of the customer’sability to meet their obligations out of cash flow resources rather
than placing primary reliance on collateral and other credit riskenhancements. Depending on the customer’s standing and thetype of product, facilities may be provided without any collateralor other credit enhancements. For other lending, a charge overcollateral is obtained and considered in determining the credit
decision and pricing. In the event of default, the bank may utilise
the collateral as a source of repayment.
Depending on its form, collateral can have a significant financial
effect in mitigating our exposure to credit risk. Where there issufficient collateral, an expected credit loss is not recognised. ThisThe collateral measured in the following tables consists offixed first charges on real estate, and charges over cash andmarketable financial instruments. The values in the tables
represent the expected market value on an open market basis; noadjustment has been made to the collateral for any expected costsof recovery. Marketable securities are measured at their fair value.
Other types of collateral such as unsupported guarantees andfloating charges over the assets of a customer’s business are notmeasured in the following tables. While such mitigants have value,
often providing rights in insolvency, their assignable value is not
sufficiently certain and they are therefore assigned no value fordisclosure purposes.
The LTV ratios presented are calculated by directly associatingloans and advances with the collateral that individually anduniquely supports each facility. When collateral assets are sharedby multiple loans and advances, whether specifically or, moregenerally, by way of an all monies charge, the collateral value is
pro-rated across the loans and advances protected by thecollateral.
For credit-impaired loans, the collateral values cannot be directlycompared with impairment allowances recognised. The LTV
figures use open market values with no adjustments.
Impairment allowances are calculated on a different basis, byconsidering other cash flows and adjusting collateral values forcosts of realising collateral.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

47

Risk

Personal lending(Unaudited)

The following table provides a quantification of the value of fixed charges we hold over specific assets where we have a history of
enforcing, and are able to enforce, collateral in satisfying a debt in the event of the borrower failing to meet its contractual obligations,and where the collateral is cash or can be realised by sale in an established market. The collateral valuation excludes any adjustments for
obtaining and selling the collateral and, in particular, loans shown as not collateralised or partially collateralised may also benefit fromother forms of credit mitigants.
Residential mortgages including loan commitments by level of collateral(Audited)
2021
Gross carrying/nominalamount2020
ECL
coverage

Gross carrying/nominalamountECL
coverage

HK$m

%

HK$m

%

Stage 1
Fully collateralised

1,201,044

0.0

1,124,513

0.0

LTV ratio:– less than 70%

1,004,531

0.0

940,033

0.0– 71% to 90%– 91% to 100%

169,824
26,6890.0
0.0

148,242
36,2380.0
0.0

Partially collateralised (A):– collateral value on A

256
242

0.0

2,852
2,762

0.0

Total
Stage 2
Fully collateralised
LTV ratio:– less than 70%– 71% to 90%– 91% to 100%
Partially collateralised (B):– collateral value on B
Total
Stage 3
Fully collateralised
LTV ratio:– less than 70%– 71% to 90%– 91% to 100%
Partially collateralised (C):– collateral value on C
Total
At 31 Dec

1,201,300

0.0

1,127,365

0.0

23,7580.4

26,554

0.6

20,691
2,860
207
28
23
23,786

0.3
1.0
2.4
3.6

0.4
1.4
2.0
3.4

0.4

22,045
4,059
450
116
111
26,670

5,113

5.2

4,556

6.4

4,153
827
133
104
91
5,217
1,230,303

4.5
7.7
14.3
29.8

3,185
1,245
126
119
103
4,675
1,158,710

4.7
8.8
25.4
52.1

5.7
0.0

0.6

Other personal lending(Unaudited)

Other personal lending consists primarily of personal loans, overdrafts and credit cards, all of which are generally unsecured, except
lending to private banking customers which are generally secured.
Commercial real estate loans and advances(Unaudited)

The value of commercial real estate collateral is determined by using a combination of external and internal valuations and physicalinspections. For commercial real estate, where the facility exceeds regulatory threshold requirements, group policy requires an
independent review of the valuation at least every three years, or more frequently as the need arises. In Hong Kong, market practice istypically for lending to major property companies to be either secured by guarantees or unsecured.

48

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

7.5
0.1

Commercial real estate loans and advances including loan commitments by level of collateral(Audited)
2021
Gross
carrying
nominalamount
HK$m

2020

ECL
coverageGrosscarrying/
nominalamountECL
coverage

%

HK$m

%

Stage 1
Not collateralised

268,3970.0

303,890

0.0

Fully collateralised
Partially collateralised (A):315,939
14,2600.1
0.1

321,650
20,941

0.1
0.3– collateral value on A
Total

7,790
598,5960.0

12,163646,4810.1

Stage 2
Not collateralised

68,871

5.8

23,644

0.1

Fully collateralised

69,4380.7

73,991

0.6

Partially collateralised (B):

7,626

2.2

3,092

1.3

3,159
145,935

3.2

1,315
100,727

0.5

Stage 3Not collateralised

1,541

35.8

—

—

Fully collateralised
Partially collateralised (C):

3,085
21

11.3
33.3

298
—

6.4
—

– collateral value on C
Total
POCI
Not collateralised
Fully collateralised
Partially collateralised (D):– collateral value on D
Total
At 31 Dec

14
4,647

19.5

—
298

6.4

– collateral value on B
Total

—
764
—
—
764
749,942

—
—
—
—
0.8

—
—
—
—
—
747,506

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

—
—
—
—
0.1

49

Risk

Other corporate, commercial and non-bank financial institutions
lending(Unaudited)

Other corporate, commercial and financial (non-bank) loans areanalysed separately in the following table. For financing activities
in other corporate and commercial lending, collateral value is notstrongly correlated to principal repayment performance.

Collateral values are generally refreshed when an obligor’s generalcredit performance deteriorates and we have to assess the likely
performance of secondary sources of repayment should it provenecessary to rely on them.
Accordingly, the following table reports values only for customers
with CRR 8–10, recognising that these loans and advances
generally have valuations that are comparatively recent.

Other corporate, commercial and non-bank financial institutions loans and advances including loan commitments by level of collateral(Audited)
2021
Gross
carrying/
nominalamount
HK$m

2020

ECL coverageGrosscarrying/
nominalamount

ECL coverage

%

HK$m

%

2,044,385

0.0

1,918,586

0.1

431,547
262,1180.1
0.0

398,232
242,375

0.1
0.1

108,645
2,738,050

0.0

103,5822,559,193

0.1

314,470

0.4

294,547

0.4

113,991
37,862
15,205466,3230.7
0.4

129,799
40,104
19,214464,4500.9
1.1

17,171
2,551
7,621
4,102
27,343

80.2
17.3
36.8

16,948
3,555
7,753
4,171
28,256

75.1
18.4
31.8

351
442
—
—
793
3,232,509

47.6
37.8
—

506
348
—
—
854
3,052,753

36.4
51.4
—

Stage 1
Not collateralised
Fully collateralised
Partially collateralised (A):– collateral value on A
Total
Stage 2
Not collateralised
Fully collateralised
Partially collateralised (B):– collateral value on B
Total
Stage 3Not collateralised
Fully collateralised
Partially collateralised (C):– collateral value on C
Total
POCI
Not collateralised
Fully collateralised
Partially collateralised (D):– collateral value on D
Total
At 31 Dec

0.4

62.2

42.1
0.6

0.6

56.1

42.5
0.7

Other credit risk exposures

Derivatives(Unaudited)(Unaudited)

In addition to collateralised lending described above, other credit
enhancements are employed and methods used to mitigate credit
risk arising from financial assets. These are summarised below:

We participate in transactions exposing us to counterparty credit
risk. Counterparty credit risk is the risk of financial loss if thecounterparty to a transaction defaults before satisfactorily settlingit. It arises principally from over-the-counter (‘OTC’) derivatives
and securities financing transactions and is calculated in both thetrading and non-trading books. Transactions vary in value by
reference to a market factor such as an interest rate, exchange
rate or asset price.

• Some securities issued by governments, banks and otherfinancial institutions may benefit from additional credit
enhancements provided by government guarantees that cover
the assets.
• Debt securities issued by banks and financial institutions
include asset-backed securities (‘ABSs’) and similar
instruments, which are supported by underlying pools offinancial assets. Credit risk associated with ABSs is reduced
through the purchase of credit default swap (‘CDS’) protection.

The counterparty risk from derivative transactions is taken into
account when reporting the fair value of derivative positions. The
adjustment to the fair value is known as the credit value
adjustment (‘CVA’).

• The group’s maximum exposure to credit risk includes financial
guarantees and similar contracts granted, as well as loan andother credit-related commitments. Depending on the terms of
the arrangement, we may use additional credit mitigation if aguarantee is called upon or a loan commitment is drawn andsubsequently defaults.

50

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

the Global Treasury business, within the market risk limits
approved by the RMM.

Treasury Risk
Overview(Unaudited)

Treasury risk is the risk of having insufficient capital, liquidity or
funding resources to meet financial obligations and satisfy
regulatory requirements, including the risk of adverse impact onearnings or capital due to structural foreign exchange exposuresand changes in market interest rates, together with pension andinsurance risk.
Treasury risk arises from changes to the respective resources andrisk profiles driven by customer behaviour, management decisions
or the external environment.

Pension risk is managed through a network of local governanceforums. The regional Pension Risk Management Meeting oversees
all pension plans sponsored by HSBC in Asia-Pacific, and ischaired by the Regional Head of Traded and Treasury Risk
Management.
The Treasury Risk Management function carries out independent
review, challenge and assurance of the appropriateness of the risk
management activities undertaken by Global Treasury. Internal
Audit provides independent assurance that risk is managed
effectively.

Capital risk
Capital management

Approach and policy(Audited)(Unaudited)

The main objective in the management of treasury risk is tomaintain appropriate levels of capital, liquidity, funding, foreignexchange and market risk to support business strategy, and meet
regulatory and stress testing-related requirements.

Our approach to capital management is driven by our strategicand organisational requirements, taking into account theregulatory, economic and commercial environment in which we
operate.

The approach to treasury management is driven by our strategicand organisational requirements, taking into account theregulatory, economic and commercial environment. We aim to
maintain a strong capital and liquidity base to support the risks
inherent in our business and invest in accordance with ourstrategy, meeting both consolidated and local regulatory
requirements at all times.

It is our objective to maintain a strong capital base to support therisks inherent in our business, to invest in accordance with ourstrategy and to meet regulatory capital requirements at all times.
To achieve this, our policy is to hold capital in a range of different
forms and all capital raising is agreed with major subsidiaries aspart of their individual and the group’s capital management
processes.

Our policy is underpinned by our risk management framework, ourinternal capital adequacy assessment process (‘ICAAP’) and ourinternal liquidity adequacy assessment process (‘ILAAP’). The risk
framework incorporates a number of measures aligned to ourassessment of risks for both internal and regulatory purposes.

The policy on capital management is underpinned by a capitalmanagement framework and our ICAAP. The framework
incorporates key capital risk appetites for CET1, Tier1, Total
Capital, Loss Absorbing Capacity ('LAC') and Leverage Ratio,
which enables us to manage our capital in a consistent manner.
The framework defines regulatory capital and economic capital as
the two primary measures for the management and control ofcapital.

Treasury risk management
Key developments in 2021

Capital measures:(Unaudited)• We continued to roll out second line of defence for liquidity,
capital and interest rate risk in the banking book ('IRRBB') in
Asia-Pacific sites during 2021.
• An internal liquidity metric (‘ILM’) was introduced during 2021
for all Asia-Pacific sites to supplement the Liquidity Coverage
Ratio ('LCR') and Net Stable Funding Ratio ('NSFR') metrics.
• We enhanced our risk management of structural foreignexchange (‘SFX’) risk. We hedge structural foreign exchange
positions where it is capital efficient to do so, and subject toapproved limits.
• A first line team was created within the Global Treasury
function to be accountable for monitoring and managing thefinancial risk and capital implications of the Group’s employee
defined benefit pension plans. This change creates clearerdelineation of the roles and responsibilities of the first andsecond lines of defence.

Governance and structure(Unaudited)

The Board approves the policy and risk appetite for Liquidity andCapital. It is supported and advised by the Risk Committee (‘RC’).
The Global Treasury function actively manages capital and liquidity
risk on an on-going basis and provides support to the Asset andLiability Management Committee (‘ALCO’), and is overseen by theTreasury Risk Management function and the Risk Management
Meeting (‘RMM’). Global Treasury also manages SFX risk,
including implementing hedging strategies approved by Chief
Financial Officer, supported by ALCO, and treasury risk.
The Global Treasury function further manages interest rate risk in
the non-trading banking book, maintaining the transfer pricing
framework and informing the ALCO and local ALCOs of the groupand site’s overall banking book interest rate exposure. Banking
book interest rate positions may be transferred to be managed by• regulatory capital is the capital which we are required to hold inaccordance with the rules established by regulators; and• economic capital is the internally calculated capital requirement
to support risks to which we are exposed and forms a core partof the ICAAP.
ICAAP is an assessment of the group’s capital position, outlining
both regulatory and internal capital resources and requirements
resulting from our business model, strategy, risk profile andmanagement, performance and planning, risks to capital, and theimplications of stress testing. Our assessment of capital adequacyis driven by an assessment of risks. These risks include credit,
market, operational, pension, insurance, structural foreignexchange, interest rate risk in the banking book. The group’s
ICAAP supports the determination of the capital risk appetite andtarget ratios, as well as enables the assessment and determinationof capital requirements by regulators.
Our capital management process is articulated in our annual
capital plan which is approved by the Board. The plan is drawn up
with the objective of maintaining both an appropriate amount of
capital and an optimal mix between the different components ofcapital. Each subsidiary manages its own capital to support its
planned business growth and meet its local regulatory
requirements within the context of the approved annual group
capital plan. In accordance with the Capital Management
Framework, capital generated by subsidiaries in excess of planned
requirements is returned to the Bank, normally by way ofdividends.
The Bank is the primary provider of capital to its subsidiaries andthese investments are substantially funded by the Bank’s own
capital issuance and profit retention. As part of its capitalmanagement process, the Bank seeks to maintain a prudent
balance between the composition of its capital and that of its
investment in subsidiaries.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

51

Risk

The principal forms of capital are included in the following
balances on the consolidated balance sheet: share capital, other
equity instruments, retained earnings, other reserves andsubordinated liabilities.

Regulatory capital requirements(Audited)

The Hong Kong Monetary Authority (‘HKMA’) supervises thegroup on both a consolidated and solo-consolidated basis andtherefore receives information on the capital adequacy of, and sets
capital requirements for, the group as a whole and on a soloconsolidated basis. Individual banking subsidiaries and branches
are directly regulated by their local banking supervisors, who set
and monitor their capital adequacy requirements. In mostjurisdictions, non-banking financial subsidiaries are also subject tothe supervision and capital requirements of local regulatory
authorities.
The group uses the advanced internal ratings-based approach to
calculate its credit risk for the majority of its non-securitisation
exposures. For securitisation exposures, the group uses the
securitisation internal ratings-based approach, securitisation
external ratings-based approach, securitisation standardised
approach or securitisation fall-back approach to determine credit
risk for its banking book securitisation exposures. For counterparty
credit risk, the group uses both the standardised (counterparty
credit risk) approach and the internal models approach to calculate
its default risk exposures for derivatives, and the comprehensive
approach for SFTs. For market risk, the group uses an internal
models approach to calculate its general market risk for the risk
categories of interest rate and foreign exchange (including gold)
exposures, and equity exposures. The group also uses an internal
models approach to calculate its market risk in respect of specificrisk for interest rate exposures and equity exposures. The groupuses the standardised (market risk) approach for calculating othermarket risk positions, as well as trading book securitisation
exposures, and the standardised (operational risk) approach to
calculate its operational risk.
During the year, the individual entities within the group and thegroup itself complied with all of the capital requirements of the
HKMA.

Basel III
(Unaudited)

The Basel III capital rules set out the minimum CET1 capitalrequirement of 4.5% and total capital requirement of 8%. At
31 December 2021, the capital buffers applicable to the group
include the Capital Conservation Buffer (‘CCB’), theCountercyclical Capital Buffer (‘CCyB’) and the Higher Loss
Absorbency (‘HLA’) requirement for Domestic Systemically
Important Banks (‘D-SIB’). The CCB is 2.5% and is designed toensure banks build up capital outside periods of stress. The CCyB
is set on an individual country basis and is built up during periodsof excess credit growth to protect against future losses. On
28 October 2021, the HKMA maintained the CCyB for Hong Kongat 1.0%. On 24 December 2021, the HKMA maintained the D-SIB
designation as well as HLA requirement at 2.5% for the group.
The group is classified as a material subsidiary under the Financial
Institutions (Resolution) (Loss-absorbing Capacity Requirements –Banking Sector) Rules (‘LAC Rules’) and therefore is subject to the
LAC requirements to maintain its internal LAC risk-weighted ratio
and the internal LAC leverage ratio at or above specified
minimums.

52

Leverage ratio(Unaudited)

Basel III introduces a simple non risk-based leverage ratio as acomplementary measure to the risk-based capital requirements. It
aims to constrain the build-up of excess leverage in the banking
sector, introducing additional safeguards against model risk andmeasurement errors. The ratio is a volume-based measurecalculated as tier 1 capital divided by total on- and off-balance
sheet exposures.
At

Leverage ratio
Capital and leverage ratio exposure
measureTier 1 capital
Total exposure measure

31 Dec31 Dec

2021

2020

%

%

5.8

6.4

HK$m

HK$m

530,701
9,192,814

555,553
8,705,672

The decrease in the leverage ratio from 31 December 2020 to
31 December 2021 was mainly due to the rise in the exposure
measure and the decrease in Tier 1 capital.
Further details regarding the group’s leverage position can beviewed in the Banking Disclosure Statement 2021, which will beavailable in the Regulatory Disclosure Section of our website:www.hsbc.com.hk.

Capital adequacy at 31 December 2021
(Unaudited)

The following tables show the capital ratios, RWAs and capitalbase as contained in the ‘Capital Adequacy Ratio’ return submitted
to the HKMA on a consolidated basis under the requirements ofsection 3C(1) of the Banking (Capital) Rules.
The basis of consolidation for financial accounting purposes is
described in Note 1 on the Consolidated Financial Statements anddiffers from that used for regulatory purposes. Further informationon the regulatory consolidation basis and a full reconciliation
between the group’s accounting and regulatory balance sheets
can be viewed in the Banking Disclosure Statement 2021.
Subsidiaries not included in the group's consolidation forregulatory purposes are securities and insurance companies andthe capital invested by the group in these subsidiaries is deductedfrom regulatory capital, subject to threshold.
The Bank and its banking subsidiaries maintain regulatory reserves
to satisfy the provisions of the Banking Ordinance and local
regulatory requirements for prudential supervision purposes. At
31 December 2021, the effect of this requirement is to reduce theamount of reserves which can be distributed to shareholders by
HK$18,587m (31 December 2020: HK$18,063m).
We closely monitor and consider future regulatory change andcontinue to evaluate the impact upon our capital requirements ofregulatory developments. This includes the Basel III Reforms
package, which is currently scheduled for implementation by the
HKMA starting from 1 July 2023. We will continue to participate in
consultations and monitor progress on the implementation. Basedon the results of latest HKMA consultations, we foresee a mild
positive impact on our capital ratios on initial application. The
RWA output floor under the Basel III Reforms will commence once
implemented, with a five-year transitional provision. Any impact
from the output floor would be towards the end of the transition
period. We are expecting the issuance of draft rules in 2022 which
will enable us to better estimate the impact.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Capital ratios

Risk-weighted assets by reportable segments(Unaudited)(Unaudited)At

At

31 Dec31 Dec31 Dec

2021

2020

2021

2020

%

%

HK$m

HK$m

Common equity tier 1 (‘CET1’) capital ratio

15.4

17.2

Wealth and Personal Banking

Tier 1 capital ratio
Total capital ratio

16.8
18.7

18.8
20.8

Commercial Banking
Global Banking
Markets and Securities Services
Corporate Centre

Risk-weighted assets by risk type

Other (GBM-other)
Total(Unaudited)At
31 DecCredit risk
Counterparty credit risk
Market risk
Operational risk
Total

31 Dec621,757

583,078

1,157,241
566,587

1,072,171
561,332

410,599
334,450

322,828
356,801

65,9193,156,553

60,783
2,956,993

31 Dec

2021

2020

HK$m

HK$m

2,497,803

2,378,821

148,188
172,831

113,650
107,661

337,731
3,156,553

356,861
2,956,993

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

53

Risk

Capital base(Unaudited)

The following table sets out the composition of the group’s capital base under Basel III at 31 December 2021.
Capital base(Unaudited)At
31 Dec31 Dec

2021

2020

HK$m

HK$m

714,139856,809(1,454)(44,615)(96,601)
28,73066,702(11,800)(26,172)(258,215)(1,834)(28,883)(3,353)

712,119845,353(1,454)(44,615)(87,165)
27,907
66,178(10,801)(27,470)(230,574)(1,648)(23,276)(3,273)

(60)
1,322

(33)
1,814

– defined benefit pension fund assets– significant Loss-absorbing capacity (‘LAC’) investments in unconsolidated financial sector entities(18)(139,239)(12)(119,868)– property revaluation reserves1– regulatory reserve(67,563)(18,587)(66,215)(18,063)

Total CET1 capital
Additional tier 1 (‘AT1’) capital

484,654509,452

Total AT1 capital before regulatory deductions– perpetual subordinated loans

46,07344,615

46,101
44,615– allowable non-controlling interests in AT1 capital
Regulatory deductions to AT1 capital

1,458
(26)

1,486
—

– significant LAC investments in unconsolidated financial sector entities
Total AT1 capital(26)
46,047—
46,101

Total tier 1 capital
Tier 2 capital

530,701

555,553

Total tier 2 capital before regulatory deductions– perpetual subordinated debt2

67,802
3,119

66,717
3,101– term subordinated debt
– property revaluation reserves1

14,972
31,057

15,69830,451– impairment allowances and regulatory reserve eligible for inclusion in tier 2 capital– allowable non-controlling interests in tier 2 capital

17,471
1,183

16,451
1,016

Regulatory deductions to tier 2 capital– significant LAC investments in unconsolidated financial sector entities(8,025)(8,025)(7,725)(7,725)59,777590,478

58,992
614,545

Common equity tier 1 (‘CET1’) capital
Shareholders’ equity– shareholders’ equity per balance sheet– revaluation reserve capitalisation issue– other equity instruments– unconsolidated subsidiaries
Non-controlling interests– non-controlling interests per balance sheet– non-controlling interests in unconsolidated subsidiaries– surplus non-controlling interests disallowed in CET1
Regulatory deductions to CET1 capital– valuation adjustments– goodwill and intangible assets– deferred tax assets net of deferred tax liabilities– cash flow hedging reserve– changes in own credit risk on fair valued liabilities

Total tier 2 capital
Total capital

1 Includes the revaluation surplus on investment properties which is reported as part of retained earnings and adjustments made in accordance with
the Banking (Capital) Rules issued by the HKMA.
2 This Tier 2 capital instrument is grandfathered under Basel III and will be phased out in full after 31 December 2021.

A detailed breakdown of the group’s CET1 capital, AT1 capital, Tier 2 capital and regulatory deductions can be viewed in the Banking
Disclosure Statement 2021.

54

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Non-trading book foreign exchange exposures
Structural foreign exchange exposures(Unaudited)

Structural foreign exchange exposures represent net assets orcapital investments in subsidiaries, branches, joint arrangements
or associates, the functional currencies of which are currencies
other than the Hong Kong dollar. An entity’s functional currency isnormally that of the primary economic environment in which theentity operates.
Exchange differences on structural exposures are recognised inother comprehensive income ('OCI’). The group uses Hong Kong
dollar as our presentation currency in our consolidated financial
statements. Therefore, our consolidated balance sheet is affectedby exchange differences between Hong Kong dollar and all the
non-Hong Kong dollar functional currencies of underlying
subsidiaries.
Our structural foreign exchange exposures are managed with theprimary objective of ensuring, where practical, that ourconsolidated capital ratios and the capital ratios of individual
banking subsidiaries are largely protected from the effect ofchanges in exchange rates.

that operating entities have robust strategies, policies, processes
and systems for the identification, measurement, management
and monitoring of liquidity risk over an appropriate set of time
horizons, including intra-day. The ILAAP informs the validation ofrisk tolerance and the setting of risk appetite. It also assesses thecapability to manage liquidity and funding effectively in eachmajor entity. These metrics are set and managed locally but are
subject to robust global review and challenge to ensure
consistency of approach and application of the Group’s policies
and controls.

Framework(Unaudited)

Global Treasury function is responsible for the application ofpolicies and controls at a local operating entity level. The elementsof liquidity and funding risk management framework areunderpinned by a robust governance framework, with the two
major elements being:• Asset and Liability Management Committees (‘ALCOs’) at thegroup and entity level; and• annual internal liquidity adequacy assessment process (‘ILAAP’)
used to validate risk tolerance and set risk appetite.

We hedge structural foreign exchange positions where it is capitalefficient to do so, and subject to approved limits. Hedging
positions are monitored and rebalanced periodically to manage
RWA or downside risks associated with group’s foreign currency
investments.

All operating entities are required to prepare an ILAAP document
at appropriate frequency. Compliance with liquidity and funding
requirements is monitored and reported to ALCO, RMM and
Executive Committee on a regular basis.

The group had the following net structural foreign currency
exposures that were not less than 10% of the total net structuralforeign currency exposures:• maintaining compliance with relevant regulatory requirementsof the operating entity;

At 31 Dec 2021
Renminbi
US dollars
At 31 Dec 2020
Renminbi

LCYm

HK$m equivalent

221,207
10,224271,42179,731

210,707250,116

Transactional foreign exchange exposures(Unaudited)

Transactional foreign exchange exposures arise from transactionsin the banking book generating profit and loss or OCI reserves in acurrency other than the reporting currency of the operating entity.
Transactional foreign exchange exposure generated through profit
and loss is periodically transferred to Markets and Securities
Services and managed within limits with the exception of limited
residual foreign exchange exposure arising from timing differences
or for other reasons. Transactional foreign exchange exposure
generated through OCI reserves is managed by the Markets
Treasury business within a limit framework to be agreed in the firsthalf of 2022.

Liquidity and Funding Risk management processes include:• projecting cash flows under various stress scenarios andconsidering the level of liquid assets necessary in relation
thereto;• monitoring liquidity and funding ratios against internal andregulatory requirements;• maintaining a diverse range of funding sources with adequate
back-up facilities;• managing the concentration and profile of term funding;• managing contingent liquidity commitment exposures withinpre­determined limits;• maintaining debt financing plans;• monitoring of depositor concentration in order to avoid undue
reliance on large individual depositors and ensuring asatisfactory overall funding mix; and• maintaining liquidity and funding contingency plans. These
plans identify early indicators of stress conditions and describe
actions to be taken in the event of difficulties arising fromsystemic or other crises, while minimising adverse long-term
implications for the business.

Liquidity and funding risk

Management of liquidity and funding risk

Overview(Audited)(Audited)

Liquidity risk is the risk that we do not have sufficient financial
resources to meet our obligations as they fall due. Liquidity riskarises from mismatches in the timing of cash flows.
Funding risk is the risk that we cannot raise funding or can only do
so at excessive cost.

Funding and liquidity plans form part of the financial resource planthat is approved by the Board. The Board-level appetite measures
are the liquidity coverage ratio (‘LCR’) and net stable funding ratio(‘NSFR’). An internal liquidity metric (‘ILM’) was introduced in
January 2021 to supplement the LCR and NSFR metrics. An
appropriate funding and liquidity profile is managed through awider set of measures:

The group has comprehensive policies, metrics and controls,
which aims to allow us to withstand severe but plausible liquidity
stresses. The group manages liquidity and funding risk at an
operating entity level to make sure that obligations can be met in
the jurisdiction where they fall due, generally without reliance onother parts of the group.

• a minimum LCR requirement;

Operating entities are required to meet internal minimum
requirements and any applicable regulatory requirements at all
times. These requirements are assessed through the Internal
Liquidity Adequacy Assessment Process ('ILAAP'), which ensures• a minimum LCR requirement by currency;• a minimum NSFR requirement or other appropriate metric;• an ILM;• a legal entity depositor concentration limit;• cumulative term funding maturity concentrations limit;• intra-day liquidity;• the application of liquidity funds transfer pricing; andThe Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

55

Risk

• forward-looking funding assessments.
Sources of funding

Interdependent assets and liabilities included in the group's NSFR
are certificates of indebtedness held and legal tender notes issued.

(Unaudited)

Interest Rate Risk in the Banking Book

Our primary sources of funding are customer current accounts andcustomer savings deposits payable on demand or at short notice.
We issue wholesale securities (secured and unsecured) to
supplement our customer deposits and change the currency mix,
maturity profile or location of our liabilities.

(Unaudited)

Currency mismatch in the LCR

Interest rate risk in the banking book is the risk of an adverse
impact to earnings or capital due to changes in market interest
rates. It is generated by our non-traded assets and liabilities,
specifically loans, deposits and financial instruments that are notheld for trading intent or held in order to hedge positions held withtrading intent. Interest rate risk that can be economically hedged
may be transferred to the Markets Treasury business. Hedging is
generally executed through interest rate derivatives or fixed-rate
government bonds. Any interest rate risk that Markets Treasury
cannot economically hedge is not transferred and will remain
within the global business where the risks originate.

(Unaudited)Group policy requires all operating entities to monitor material
single currency LCR. Limits are set to ensure that outflows can be
met, given assumptions on stressed capacity in the FX swap
markets.
Additional collateral obligations(Unaudited)

Under the terms of our current collateral obligations of derivative
contracts (which are ISDA compliant CSA contracts), theadditional collateral required to post in the event of one-notch andtwo-notch downgrade in credit ratings is immaterial.

Measurement of interest rate risk in the banking bookprocesses
Assessment and risk appetite

The Global Treasury function uses a number of measures tomonitor and control interest rate risk in the banking book,including:Liquidity and funding risk in 2021•

net interest income sensitivity; and(Unaudited)•

economic value of equity sensitivity.

The group is required to calculate its LCR and NSFR on aconsolidated basis in accordance with rule 11(1) of The Banking(Liquidity) Rules ('BLR'), and is required to maintain both LCR and
NSFR of not less than 100%.
The average LCR of the group for the period are as follows:
Quarter ended

Average LCR

31 Dec31 Dec

2021

2020

%

%

154.3

172.1

The liquidity position of the group remained strong in 2021. The
average LCR decreased by 17.8 percentage points from 172.1%
for the quarter ended 31 December 2020 to 154.3% for the quarter
ended 31 December 2021, mainly as a result of an increase incustomer loans and other securities.
The majority of high quality liquid assets ('HQLA') included in the
LCR are Level 1 assets as defined in the BLR, which consist mainlyof government debt securities.
The total weighted amount of HQLA of the group for the period
are as follows:
Weighted amount (averagevalue) at quarter ended

Level 1 assets
Level 2A assets
Level 2B assets
Total

31 Dec31 Dec

2021

2020

HK$m

HK$m

1,767,933
79,36864,106
1,911,407

1,870,016
78,51534,468
1,982,999

The NSFR of the group for the period are as follows:
Quarter ended

Net stable funding ratio

31 Dec31 Dec

2021

2020

%

%

151.9

159.3

The funding position of the group remained robust in 2021,
highlighting a surplus of stable funding relative to the required
stable funding requirement. The NSFR decreased by 7.4
percentage points from 159.3% for the quarter ended.
31 December 2020 to 151.9% for the quarter ended 31 December
2021, mainly as a result of an increase in customer loans andother securities.
56

Net interest income sensitivity
A principal part of our management of non-traded interest rate risk
is to monitor the sensitivity of expected net interest income (‘NII’)
under varying interest rate scenarios (i.e. simulation modelling),
where all other economic variables are held constant. This
monitoring is undertaken at an entity level by local ALCOs, whereentities calculate both one-year and five-year NII sensitivities
across a range of interest rate scenarios.
NII sensitivity figures represent the effect of pro forma movements
in projected yield curves based on a static balance sheet size andstructure. The exception to this is where the size of the balances or
repricing is deemed interest rate sensitive, for example, noninterest-bearing current account migration and fixed-rate loan
early prepayment. These sensitivity calculations do not incorporate
actions that would be taken by Markets Treasury or in thebusiness that originates the risk to mitigate the effect of interest
rate movements.
The NII sensitivity calculations assume that interest rates of all
maturities move by the same amount in the ‘up-shock’ scenario.
The sensitivity calculations in the ‘down-shock’ scenarios reflect
no floors to the shocked market rates. However, customer
product-specific interest rate floors are recognised whereapplicable.
Economic value of equity sensitivity
Economic value of equity (‘EVE’) represents the present value ofthe future banking book cash flows that could be distributed toequity holders under a managed run-off scenario. This equates tothe current book value of equity plus the present value of future
NII in this scenario. EVE can be used to assess the economic
capital required to support interest rate risk in the banking book.
An EVE sensitivity represents the expected movement in EVE due
to pre-specified interest rate shocks, where all other economic
variables are held constant. Operating entities are required tomonitor EVE sensitivities as a percentage of capital resources.

Pension Risk
(Unaudited)

Our global pensions strategy is to move from defined benefit todefined contribution plans, where local law allows and it isconsidered competitive to do so. We will continue to review andenhance our risk appetite metrics to assist the internal monitoringof our de-risking programmes.
In defined contribution pension plans, the contributions that HSBC
is required to make are known, while the ultimate pension benefit
will vary, typically with investment returns achieved by investment

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

choices made by the employee. While the market risk to HSBC of
defined contribution plans is low, the group is still exposed tooperational and reputational risk.
In defined benefit pension plans, the level of pension benefit is
known. Therefore, the level of contributions required by HSBC willvary due to a number of risks, including:•Governance and structure(Unaudited)

The following diagram summarises the main business areas wheretrading and non-trading market risks reside, and the market risk
measures used to monitor and limit exposures.
Trading risk

investments delivering a return below that required to provide
the projected plan benefits;•

the prevailing economic environment leading to corporate
failures, thus triggering write-downs in asset values (bothequity and debt); and•a change in interest rate expectations, causing an increase in
the value of plan liabilities.

Pension risk is assessed using an economic capital model thattakes into account potential variations in these factors. The impactof these variations on both pension assets and pension liabilities isassessed using a 1-in-200-year stress test. Scenario analysis andother stress tests are also used to support pension risk
management. To fund the benefits associated with defined benefit
plans, sponsoring group companies make regular contributions inaccordance with advice from actuaries and in consultation withthe plan’s fiduciaries where relevant. These contributions arenormally set to ensure that there are sufficient funds to meet thecost of the accruing benefits for the future service of active
members. However, higher contributions are required when plan
assets are considered insufficient to cover the existing pension
liabilities. Contribution rates are typically revised annually or once
every three years, depending on the plan.
The defined benefit plans invest contributions in a range ofinvestments designed to limit the risk of assets failing to meet aplan’s liabilities. Any changes in expected returns from theinvestments may also change future contribution requirements. In
pursuit of these long-term objectives, an overall target allocation isestablished between asset classes of the defined benefit plan. In
addition, each permitted asset class has its own benchmarks, suchas stock-market indices. The target allocations are reviewed
regularly, typically once every three to five years, and more
frequently if required by local legislation or circumstances. The
process generally involves an asset and liability review.

Non-trading risk

• Foreign exchange andcommodities• Interest rates• Credit spreads• Equities• Foreign exchange• Interest rates1• Credit spreads

Global business

MSS and GBM Other

MSS, GB, GBM Other, ALCM
CMB and WPB

Risk measure

VaR | Sensitivity | Stress
Testing

VaR | Sensitivity | Stress
Testing

Risk types

1 The interest rate risk on the fixed-rate securities issued by HSBC
Holdings is not included in the group value at risk.
.

Where appropriate, we apply similar risk management policies andmeasurement techniques to both trading and non-trading
portfolios. Our objective is to manage and control market risk
exposures to optimise return on risk while maintaining a market
profile consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by
the group's Board of Directors. These limits are allocated acrossbusiness lines and to the Group’s legal entities. The group has anindependent market risk management and control sub-function,
which is responsible for measuring, monitoring and reporting
market risk exposures against limits on a daily basis. Each
operating entity is required to assess the market risks arising in its
business and to transfer them either to its local Markets andSecurities Services or Market Treasury unit for management, or toseparate books managed under the supervision of the local ALCO.
The Traded Risk function enforces the controls around trading inpermissible instruments approved for each site as well as changes
that follow completion of the new product approval process.
Trading Risk also restricts trading in the more complex derivatives
products to offices with appropriate levels of product expertiseand robust control systems.

Market Risk

Key risk management processes

Overview

Monitoring and limiting market risk exposures(Audited)(Unaudited)

Market risk is the risk that movements in market factors, such as
foreign exchange rates, interest rates, credit spreads, equity prices
and commodity prices, will reduce our income or the value of ourportfolios. Exposure to market risk is separated into two portfolios:
trading portfolios and non-trading portfolios.

Our objective is to manage and control market risk exposureswhile maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk exposures
including sensitivity analysis, VaR and stress testing.

Market risk management

Sensitivity analysis

Key developments in 2021

(Unaudited)(Unaudited)

There were no material changes to our policies and practices forthe management of market risk in 2021.

Sensitivity analysis measures the impact of individual market
factor movements on specific instruments or portfolios, includinginterest rates, foreign exchange rates and equity prices. We use
sensitivity measures to monitor the market risk positions withineach risk type. Granular sensitivity limits are set for trading desks
with consideration of market liquidity, customer demand andcapital constraints, among other factors.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

57

Risk

Value at risk
(Audited)

VaR is a technique for estimating potential losses on risk positions
as a result of movements in market rates and prices over a
specified time horizon and to a given level of confidence. The useof VaR is integrated into market risk management and calculated
for all trading positions regardless of how we capitalise them. In
addition, we calculate VaR for non-trading portfolios to have acomplete picture of risk. Where we do not calculate VaR explicitly,
we use alternative tools as summarised in the ‘Stress testing’section below.
Our models are predominantly based on historical simulation thatincorporates the following features:• historical market rates and prices, which are calculated withreference to foreign exchange rates, commodity prices, interest
rates, equity prices and the associated volatilities;• potential market movements that are calculated with reference
to data from the past two years; and• calculations to a 99% confidence level and using a one-day
holding period.
The models also incorporate the effect of option features on theunderlying exposures. The nature of the VaR models means thatan increase in observed market volatility will lead to an increase in
VaR without any changes in the underlying positions.

VaR model limitations(Audited)

Although a valuable guide to risk, VaR is used with awareness of
its limitations. For example:• the use of historical data as a proxy for estimating future
market moves may not encompass all potential market events,
particularly those that are extreme in nature.
• the use of a one-day holding period for risk management
purposes of trading and non-trading books assumes that thisshort period is sufficient to hedge or liquidate all positions.
• the use of a 99% confidence level by definition does not take
into account losses that might occur beyond this level ofconfidence.
• VaR is calculated on the basis of exposures outstanding at theclose of business and therefore does not reflect intra-day
exposures.

Risk not in VaR framework(Unaudited)

The risks not in VaR (‘RNIV’) framework captures and capitalises
material market risks that are not adequately covered in the VaRmodel.
Risk factors are reviewed on a regular basis and are either
incorporated directly in the VaR models, where possible, or
quantified through either the VaR-based RNIV approach or a stresstest approach within the RNIV framework. While VaR-based RNIVs
are calculated by using historical scenarios, stress-type RNIVs are
estimated on the basis of stress scenarios whose severity iscalibrated to be in line with the capital adequacy requirements.
The outcome of the VaR-based RNIV approach is included in theoverall VaR calculation but excluded from the VaR measure used
for regulatory back-testing. In addition, the stressed VaR measure
also includes risk factors considered in the VaR-based RNIV
approach. Stress-type RNIVs include a de-peg risk measure tocapture risk to pegged and heavily-managed currencies.

Stress testing(Unaudited)

Stress testing is an important procedure that is integrated into ourmarket risk management framework to evaluate the potential
impact on portfolio values of more extreme, although plausible,
events or movements in a set of financial variables. In such
scenarios, losses can be much greater than those predicted by
VaR modelling.
58

Stress testing is implemented at legal entity, regional and overall
Group levels. A set of scenarios is used consistently across all
regions within the Group. The risk appetite around potential stresslosses for the Group is set and monitored against a referral limit.
Market risk reverse stress tests are designed to identify
vulnerabilities in our portfolios by looking for scenarios that lead toloss levels considered severe for the relevant portfolio. These
scenarios may be quite local or idiosyncratic in nature, andcomplement the systematic top-down stress testing.
Stress testing and reverse stress testing provide senior
management with insights regarding the ‘tail risk’ beyond VaR, forwhich our appetite is limited.

Trading portfolios(Audited)

Trading portfolios comprise positions held for client servicing andmarket-making, with the intention of short-term resale and/or tohedge risks resulting from such positions.

Back-testing(Audited)

We routinely validate the accuracy of our VaR models by backtesting the VaR metric against both actual and hypothetical profit
and loss. Hypothetical profit and loss excludes non-modelled items
such as fees, commissions and revenue of intra-day transactions.
The number of back-testing exceptions is used to gauge how well
the models are performing. We consider enhanced internalmonitoring of a VaR model if more than five profit exceptions ormore than five loss exceptions occur in a 250-day period.
We back-test our VaR at set levels of our Group entity hierarchy.

Market risk in 2021
(Unaudited)

Financial markets were resilient in 2021. During the first half of theyear, the rollout of Covid vaccination programmes, loose financial
conditions and continued fiscal support contributed to a gradualreopening of major economies. Concerns of rising inflationarypressures were mainly interpreted as transitory. Whilst the path ofmonetary policies remained uncertain, central banks continued toprovide liquidity. This supported risk assets valuations, while
volatility in most asset classes remained subdued. In the second
half of 2021, amid the emergence of new Covid variants, global
equities reached further record highs, as investors focused on
global economic resilience and corporate earnings. Yields followed
a downward trend for most of 3Q-21, before reversing in the final
weeks of the year, when markets began pricing a faster pace ofinterest rate rise in some of the major economies, due topersistently elevated inflation and the expectation of a tightermonetary policies. Credit markets remained strong, with credit
benchmark indices for investment-grade and high-yield debt close
to pre-pandemic levels. Nevertheless a wave of volatility anduncertainty in the Chinese property sector due to liquidity crunch
resulting numerous rating downgrades and defaults during thesecond half of 2021.
We continued to manage market risk prudently during 2021.
Sensitivity exposures and VaR remained within appetite as thebusiness pursued its core market-making activity in support of ourcustomers. Market risk was managed using a complementary setof risk measures and limits, including stress and scenario analysis.

Trading portfolios(Audited)

Value at risk of the trading portfolios
Trading VaR was predominantly generated by Markets andSecurities Services business. Interest rate risks from marketmaking activities were the main drivers of trading VaR. Total
trading VaR was higher as at 31 December 2021 compared to.
31 December 2020 mainly due to the reduction in portfolio
diversification across different asset class VaR.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

The trading VaR for the year is shown in the table below.
Trading value at risk, 99% 1 day1
(Audited)
Foreignexchange andcommodityInterest
rate

EquityCreditspreadPortfolio
diversification2

Total3

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2021
Year end
Average
Maximum

36
49
78

135
158
218

60
77
108

31
34
62

(74)

188
177
241

At 31 Dec 2020
Year end
Average
Maximum

50
48
96

130
140
250

62
62
118

45
49
106

(143)

144
172
251

1 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.
2 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction inunsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange,
together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A
negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types,
it is not meaningful to calculate a portfolio diversification benefit for these measures.
3 The total VaR is non-additive across risk types due to diversification effects.

We prioritise our efforts on material risks and areas undergoingstrategic growth, aligning our location strategy to this need. We
also remotely provide oversight and stewardship, including
support of chief risk officers, in territories where we have nophysical presence.

Resilience risk
(Unaudited)

Overview
Resilience risk is the risk that we are unable to provide criticalservices to our customers, affiliates and counterparties, as a resultof sustained and significant operational disruption. Resilience riskarises from failures or inadequacies in processes, people, systems
or external events.

Resilience risk management
Key developments in 2021
The Operational and Resilience Risk sub-function provides robust
non-financial risk steward oversight of the management of risk by
the Group businesses, functions and legal entities. It also provides
effective and timely independent challenge. During the year we
carried out a number of initiatives to strengthen the managementof non-financial risks:• We developed a more robust understanding of our risk andcontrol environment, by updating our material risk taxonomy
and control libraries, and refreshing material risk and control
assessments.
• We further strengthened our non-financial risk governance andsenior leadership focus.
• We created a consolidated view of all risk issues across theGroup enabling better senior management focus, read acrosson material control issues and intervention as required.
• We improved how we provide better analysis and reporting of
non-financial risks, with more risk practitioners having accessto a wider range of management information on their risks andcontrols.
• We increased the capability of risk stewards to allow for
effective stewardship to be in place across the Group.
• We strengthened read across of issues and near misses byimplementing a Group-wide harmonized approach acrossbusinesses, functions and regions.

Governance and structure
The Operational and Resilience Risk target operating model
provides a globally consistent view across resilience risks,strengthening our risk management oversight while operating
effectively as part of a simplified non-financial risk structure. Weview resilience risk across seven risk types related to: third parties
and supply chains; information, technology and cybersecurity;
payments and manual processing; physical security; businessinterruption and contingency risk; building unavailability; andworkplace safety.
The principal senior management meeting for operational andresilience risk governance is the Non-Financial Risk Management
Board, chaired by the Group Chief Risk and Compliance Officer,
with an escalation path to the Group Risk Management Meeting.

Key risk management processes
Operational resilience is our ability to anticipate, prevent, adapt,
respond to, recover and learn from internal or external disruption,
protecting customers, the markets we operate in and economic
stability. Resilience is determined by assessing whether we areable to continue to provide our most important services, within anagreed level. We accept we will not be able to prevent all
disruption, we prioritise investment to continually improve theresponse and recovery strategies for our most important businessservices.

Business operations continuity
Business Continuity, in response to the Covid 19 pandemic,
remains in place across a number of locations where the Group
operates, allowing the majority of service level agreements to be
maintained. There were no significant impacts to service delivery
in locations where the Group operates.

• We enhanced risk management oversight across our mostmaterial change initiatives to support growth in our strategictransformation in 2021.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

59

Risk

Regulatory compliance risk
(Unaudited)

Overview
Regulatory compliance risk is the risk that we fail to observe theletter and spirit of all relevant laws, codes, rules, regulations andstandards of good market practice, which as a consequence incurfines and penalties and suffer damage to our business.
Regulatory compliance risk arises from the risks associated withbreaching our duty to our customers and inappropriate market
conduct, as well as breaching regulatory licensing, permissions
and rules.

Regulatory compliance risk management
Key developments in 2021
We have continued to embed the structural changes made in theprior year to our wider approach to Compliance Risk Management.
The integration of the Risk and Compliance functions in May 2021
brought together two complementary functions which will
strengthen the Regulatory Conduct mandate and our capability todrive ever greater standards in regard to conduct of our business.
In June 2021, we also announced HSBC’s new purpose-led
approach to conduct. As part of this, we took the opportunity toalign and simplify our approach, making conduct easier tounderstand and showing how it fulfils our value: ‘we takeresponsibility’.

Governance and structure
Following the creation of the Group Regulatory Conduct capability
in May 2020, we have continued to evolve our structure in
response to the ever-changing business and industry needs. In
March 2021, a new Regulatory Conduct Strategic Delivery andAnalytics team was created to drive the Regulatory Conduct
strategic priorities, and provides oversight of Regulatory Conduct
sponsored projects.
The Regulatory Conduct capability continues to work closely with
the Chief Compliance Officers and their respective teams to help
them identify and manage regulatory compliance risks across the
Bank. They also work together to ensure good conduct outcomesand provide enterprise-wide support on the regulatory agenda.

Key risk management processes
The Group Regulatory Conduct capability is responsible for setting
global policies, standards and risk appetite to guide the Group’s
management of regulatory compliance. It also devises clear
frameworks and support processes to protect against regulatorycompliance risks. The capability at the Group level provides
oversight, review and challenge to the local Chief Compliance
Officers and their teams to help them identify, assess and mitigate
regulatory compliance risks, where required. Global policies arereviewed regularly and procedures are in place for prompt
identification and escalation of actual or potential regulatory
breach. Relevant reportable events are escalated to the RMM andthe Risk Committee, as appropriate.

Conduct of businessOur new simplified Conduct Approach, which was launched inJune 2021, guides us to do the right thing and to recognise thereal impact we have for our customers and the financial markets inwhich we operate. It complements our Purpose and Values,
setting outcomes to be achieved for our customers and markets. It
recognises cultural and behavioural drivers of good conduct
outcomes and applies across all risk disciplines, operational
processes and technologies.
During 2021:• We understood and serviced our customers’ ongoing needs
and continued to champion a strong conduct and customerfocused culture. This was demonstrated through providing
support to our customers facing financial difficulties as a resultof the prolonged impacts of the pandemic and the resulting
uncertainty in trading conditions.
60• We began the integration of climate risk into the Group's risk
management approach to recognise the importance ofstrengthened controls and oversight for our related activities.
• We operated resiliently and securely to avoid harm to ourcustomers and markets by continuing to embed conduct within
our business line processes and through our Non- Financial and
Financial Risk Steward activities.
• We continued our focus on culture and behaviours as a driverof good conduct outcomes.
• We placed a particular focus on the importance of well-being
and collaborative working as we continued to adapt tochanging working practices as the pace of change resulting
from the pandemic varied across our markets.
• We continued to emphasise and worked to create anenvironment in which employees are encouraged and feel safeto speak up.
• We delivered our annual global mandatory training course on
conduct to reinforce the importance of conduct for allcolleagues.
• The Board continues to maintain oversight of conduct mattersthrough the Risk Committee.

Financial crime risk
(Unaudited)

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

Financial crime risk management
Key developments in 2021
We consistently review the effectiveness of our financial crime risk
management framework, which includes consideration ofgeopolitical and wider economic factors, and 2021 was no
exception. We continued to support the Business in navigating thecomplex and dynamic nature of geopolitics as it relates tosanctions and export control risk. A key focus area in this regard
relates to the array of new regulations and designations in 2021
and in alignment with our policy, which is to comply with allapplicable sanctions regulations in the jurisdictions in which we
operate.
We also continued to progress several key financial crime risk
management initiatives, including:• We deployed a key component of our intelligence-led, dynamic
risk assessment capabilities for customer account monitoring in
one of our home markets, and undertook importantenhancements to our traditional transaction monitoring
systems.
• We strengthened our anti-fraud capabilities, notably withrespect to the early identification of first party lending fraud andthe identification of new strategic detection tools.
• We continued to develop leading-edge surveillance technology
and capabilities to identify potential market abuse, including
testing machine learning capabilities to detect unauthorised
trading.
• We invested in the use of artificial intelligence (AI) andadvanced analytics techniques to manage financial crime risk,
notably new automated capabilities in name and transaction
screening.
• We implemented a market leading gifts and entertainment
recording and approval system, which, in combination with an
expenses reconciliation tool, allows us to manage our gifts andentertainment risk consistently and effectively.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Governance and structure
We have continued to review the effectiveness of our governanceframework to manage financial crime risk. The framework aims toenable us to comply with the letter and the spirit of all applicablefinancial crime laws and regulations, as well as our own
standards, values and policies relating to financial crime risks.
In 2021, the Risk and Compliance functions were integrated at
Group level, allowing us to make better use of a broader range ofperspectives from other risk disciplines.

Key risk management processes
We assess the effectiveness of our end-to-end financial crime risk
management framework on an ongoing basis and invest inenhancing our operational control capabilities and technology
solutions to deter and detect criminal activity. We have simplified
our framework by streamlining and de-duplicating policy
requirements. We also strengthened our financial crime risktaxonomy and control libraries, improving our investigative andmonitoring capabilities through technology deployments, as well
as developing more targeted metrics. We have also enhanced
governance and reporting.
We are committed to working in partnership with the wider
industry and the public sector in managing financial crime risk,
protecting the integrity of the financial system and thecommunities we serve. We participate in numerous public-private
partnerships and information-sharing initiatives around the world
also supporting national governments and international standard
setters' reform activity. In 2021, there was a particular focus onreform activity in Singapore where we are active participants in a
key initiative undertaken by the Monetary Authority of Singapore,
known as Project Cosmic, which establishes a framework to
enable financial institutions to share information with each otherwhen certain financial crime risk concerns have been identified.
We took part in a number of roundtables organised by the
Financial Action Task Force, the global money laundering andterrorist financing watchdog, supporting its strategic review. We
also supported its work on digitisation and beneficial ownershipregisters. These align with our objectives of promoting a public
policy and regulatory environment that embraces the use oftechnology in building the future financial crime framework toensure our bank is more resilient and secure, while enabling
benefits for customers.

Skilled Person/Independent Consultant

Risk Committee received regular updates on the Skilled Person’s
and the Independent Consultant’s reviews.

Model risk
(Unaudited)

Overview
Model risk is the risk of inappropriate or incorrect businessdecisions arising from the use of models that have been
inadequately designed, implemented or used, or from models that
do not perform in line with expectations and predictions.

Key developments in 2021
In 2021, we continued to make improvements in our model risk
management processes, amid regulatory changes in model
requirements. Initiatives during the year included:• Re-development, validation, and submission of critical Internal
Rating Based (‘IRB’) Approach models for credit risk, Internal
Model Method (‘IMM’) for counterparty credit risk and Internal
Model Approach (‘IMA’) models for market risk, to the HKMA
in response to regulatory capital changes. These new models
have been built to enhance standards using improved data as aresult of investment in processes and systems.
• Redeveloped and validated models impacted by changes toalternative rate setting mechanisms due to IBOR transition.
• Further enhancements to our control framework for our
Sarbannes-Oxley were made to address the control
weaknesses that emerged as a result of significant increases inmodel adjustments and overlays that were applied tocompensate for the impact of COVID-19 on models and to
introduce a requirement for second line to approve material
models prior to use.
• Model owners in Business and Functions continued to embed
the requirements included in the Model Risk Policy andStandards introduced in 2020. On-going training on model risk
continued to be delivered to front line teams to improve theirawareness of model risk and their adherence to the governanceframework.
• New Model Risk Appetite measures were rolled out in HBAP,aligned across the Bank. The new measures are more forward
looking and helped Businesses and Functions manage model
risk more effectively.

In December 2012, HSBC Holdings entered into a number ofagreements, including an undertaking with the UK Financial
Services Authority (replaced with a Direction issued by the UK
Financial Conduct Authority (‘FCA’) in 2013 and again in 2020), as
well as a cease-and-desist order with the US Federal Reserve
Board (‘FRB’), both of which contained certain forward-looking
anti-money laundering and sanctions-related obligations. HSBC
also agreed to retain an independent compliance monitor (whowas, for FCA purposes, a ‘Skilled Person’ under section 166 of the
Financial Services and Markets Act and, for FRB purposes, an‘Independent Consultant’) to produce periodic assessments of theGroup’s AML and sanctions compliance programme.

• There has been greater level of involvement by Businesses andFunctions in the development and management of models.
This included hiring of staff with strong model risk skills andenhanced focus on key model risk drivers such as data quality
and model methodology.

In 2020, HSBC’s engagement with the independent compliancemonitor, acting in his roles as both Skilled Person and Independent
Consultant, concluded. The role of FCA Skilled Person was
assigned to a new individual in the second quarter of 2020.
Separately, a new FRB Independent Consultant was appointed in
the second quarter of 2021 pursuant to the cease-and-desist order.

• HBAP regional engagement strategy has been established in
response to the growing maturity of model risk managementand demand across the Region.

The new Skilled Person issued his final report in June 2021,
concluding his review. The 2021 FCA Firm Evaluation Letter
confirmed that there is no requirement for a further Skilled Person
review. The new Independent Consultant carried out the eighth
annual review for the FRB and issued his report in November
2021.
In accordance with the Direction issued by the FCA to HSBC
Holdings in 2020, the Group Risk Committee retains oversight ofmatters relating to anti-money laundering, sanctions, terrorist
financing and proliferation financing. Throughout 2021, the Group• The transformation of the Model Risk Management teamcontinued with changes to the model validation processes
including new system and process. Key hires were made during
the year to strengthen oversight and expertise within the
Function. Also, changes to the Model Inventory systemprovided Businesses and Functions improved functionality andmore detailed information related to model risk.

• Models related to climate risk and models using advanced
analytics and machine learning became a critical area of focus
and would grow in importance in 2022 and beyond. In
response, qualified specialist skills were added to the model
risk teams to manage the increased model risk in these areas.

Governance
The governance structure implemented in 2020 is fully operational.
The HBAP Model Risk Committee (MRC) established in 2021
provides oversight of models used in HBAP. The Committee ischaired by the HBAP Chief Risk Officer and the Regional Heads ofBusinesses participate in these meetings. Authorised sub-forums

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

61

Risk

operating under the remit of the HBAP MRC, oversee model risk
management activities based on associated model categories.

Insurance manufacturing operations risk
management

Key risk management processes

Key developments in 2021

A variety of modelling approaches, including regression,
simulation, sampling, machine learning and judgemental
scorecards for a range of business applications were used. These
activities include customer selection, product pricing, financial
crime transaction monitoring, creditworthiness evaluation andfinancial reporting.
Our model risk management policies and procedures wereregularly reviewed, and required the First Line of Defence todemonstrate comprehensive and effective controls based on alibrary of model risk controls provided by Model Risk
Management.
Model Risk Management also reports on model risk to senior
management on a regular basis through the use of the risk map,
risk appetite metrics and regular key updates.
The effectiveness of these processes, including the Regionalmodel oversight committee structure, were regularly reviewed toensure clarity in authority, coverage and escalations and thatappropriate understanding and ownership of model risk continued
to be embedded in the Businesses and Functions.

Insurance manufacturing operations risk

(Unaudited)

The insurance manufacturing subsidiaries follow the group’s risk
management framework. In addition, there are specific policies
and practices relating to the risk management of insurance
contracts. There were no material changes to these policies andpractices over 2021, although enhancements were made to the
product pricing and profitability framework to allow for thetransition to HKFRS 17.

Governance and structure(Unaudited)

Insurance risks are managed to a defined risk appetite, which isaligned to the group's risk appetite and risk management
framework, including the group’s ‘Three lines of defence’ model.
The Global Insurance Risk Management Meeting oversees the risk
and control framework for insurance business in the group.
The monitoring of the risks within our insurance operations iscarried out by Insurance Risk teams. The Bank’s risk stewardshipfunctions support the Insurance Risk teams in their respective
areas of expertise.

Stress and scenario testing

Overview(Unaudited)(Unaudited)

Stress testing forms a key part of the risk management framework
for the insurance business. We participate in local and Group-wide
regulatory stress tests, as well as internally developed stress andscenario tests, including Group internal stress test exercises. The
results of these stress tests and the adequacy of management
action plans to mitigate these risks are considered in the group
ICAAP and the entities’ regulatory Own Risk and Solvency
Assessments ('ORSAs').

The key risks for our insurance manufacturing operations aremarket risks, in particular interest rate and equity, credit risks andinsurance underwriting and operational risks. These have a direct
impact on the financial results and capital positions of theinsurance operations. Liquidity risk, whilst significant in otherparts of the group, is relatively minor for our insurance operations.

HSBC’s Insurance business(Unaudited)

We sell insurance products through a range of channels including
our branches, direct channels and third-party distributors. The
majority of sales are through an integrated bancassurance modelthat provides insurance products principally for customers withwhom we have a banking relationship.
The insurance contracts we sell relate to the underlying needs ofour customers, which we can identify from our point-of-salecontacts and customer knowledge. For the products wemanufacture, the majority of sales are of savings, universal life andprotection contracts.
We choose to manufacture these insurance products in HSBC
subsidiaries based on an assessment of operational scale and risk
appetite. Manufacturing insurance allows us to retain the risks andrewards associated with writing insurance contracts by keeping
part of the underwriting profit and investment income within thegroup.
We have life insurance manufacturing operations in Hong Kong,
Singapore and mainland China. We also have a life insurance
manufacturing associate in India.
Where we do not have the risk appetite or operational scale to bean effective insurance manufacturer, we engage with a small
number of leading external insurance companies in order toprovide insurance products to our customers through our banking
network and direct channels. These arrangements are generally
structured with our exclusive strategic partners and earn the groupa combination of commissions, fees and a share of profits. We
distribute insurance products in all of our geographical regions
Insurance products are sold through all global businesses, but
predominantly by WPB and CMB through our branches and directchannels.

62

Key risk management processes
Market risk
(Audited)

All our insurance manufacturing subsidiaries have market riskmandates that specify the investment instruments in which they
are permitted to invest and the maximum quantum of market riskthat they may retain. They manage market risk by using, among
others, some or all of the techniques listed below, depending on
the nature of the contracts written:• We are able to adjust bonus rates to manage the liabilities topolicyholders for products with discretionary participating
features (‘DPF’). The effect is that a significant portion of themarket risk is borne by the policyholder.
• We use asset and liability matching where asset portfolios are
structured to support projected liability cash flows. The groupmanages its assets using an approach that considers asset
quality, diversification, cash flow matching, liquidity, volatility
and target investment return. We use models to assess theeffect of a range of future scenarios on the values of financial
assets and associated liabilities, and ALCOs employ theoutcomes in determining how best to structure asset holdings
to support liabilities.
• We use derivatives to protect against adverse market
movements.
• We design new products to mitigate market risk, such aschanging the investment return sharing portion between
policyholders and the shareholder.
• We exit, to the extent possible, investment portfolios whoserisk is considered unacceptable.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Credit risk

Insurance underwriting risk

(Audited)(Unaudited)

Our insurance manufacturing subsidiaries also have credit riskmandates and limits within which they are permitted to operate,
which consider the credit risk exposure, quality and performanceof their investment portfolios. Our assessment of thecreditworthiness of issuers and counterparties is based primarily
upon internationally recognised credit ratings and other publicly
available information.

Our insurance manufacturing subsidiaries primarily use thefollowing frameworks and processes to manage and mitigate
insurance underwriting risks:

Stress testing is performed on investment credit exposures using
credit spread sensitivities and default probabilities.
We use a number of tools to manage and monitor credit risk.
These include a credit report containing a watch-list ofinvestments with current credit concerns, primarily investmentsthat may be at risk of future impairment or where highconcentrations to counterparties are present in the investment
portfolio. Sensitivities to credit spread risk are assessed andmonitored regularly.

Capital and liquidity risk

• a formal approval process for launching new products or
making changes to products;• a product pricing and profitability framework which requires
initial and ongoing assessment of the adequacy of premiums
charged on new insurance contracts to meet the risks
associated with them;• a framework for customer underwriting;• reinsurance which cedes risks above our appetite thresholds tothird party reinsurer thereby limiting our exposure; and• oversight of expense and reserving risks by entity Actuarial
Control Committees.

Insurance manufacturing operations risk in 2021
Measurement(Audited)

Capital risk for our insurance manufacturing subsidiaries isassessed in the ICAAP based on their financial capacity to support
the risks to which they are exposed. Capital adequacy is assessedon both the group’s economic capital basis, and the relevant local
insurance regulatory basis. The group’s economic capital basis islargely aligned to European Solvency II regulations, other than inHong Kong where this is based on the emerging Hong Kong Risk
Based Capital regulations.

(Unaudited)

The tables below show the composition of assets and liabilities bycontract type. 91% (2020: 92%) of both assets and liabilities arederived from Hong Kong.

Risk appetite buffers are set to ensure that the operations are able
to remain solvent on both bases, allowing for business-as-usual
volatility and extreme but plausible stress events.
Liquidity risk is managed by cash flow matching and maintaining
sufficient cash resources, investing in high credit-quality
investments with deep and liquid markets, monitoring investment
concentrations and restricting them where appropriate, andestablishing committed contingency borrowing facilities.
Insurance manufacturing subsidiaries complete quarterly liquidity
risk reports and an annual review of the liquidity risks to which
they are exposed.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

63

Risk

Balance sheet of insurance manufacturing subsidiaries by type of contract(Audited)

Non-linked

Unit-linked

Shareholders'assetsand liabilities

HK$m

HK$m

HK$m

HK$m

Financial assets– financial assets designated and otherwise mandatorily measured at fair value throughprofit or loss

637,317160,555

37,38235,906

46,971457

721,670
196,918– derivatives– financial investments measured at amortised cost

631
432,7336479

3
37,734640
470,946– financial investments measured at fair value through other comprehensive income– other financial assets1

5,780
37,618

—
991

592
8,185

6,372
46,794

Reinsurance assets
PVIF2

28,874—

6——
63,76528,88063,765Total

At 31 Dec 2021

Other assets and investment properties

13,626

4

5,304

18,934

Total assets

679,817

37,392116,040

833,249

Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts

28,397
608,590

7,030
29,645——35,427638,235

Deferred tax3
Other liabilities

9
—

—
—

10,57935,26910,58835,269Total liabilities
Total equity

636,996—

36,675—45,848
113,730

719,519
113,730

Total equity and liabilities

636,996

36,675

159,578

833,249

At 31 Dec 2020
Financial assets– financial assets designated and otherwise mandatorily measured at fair value throughprofit or loss

577,666
129,597

42,621
41,366

40,776384

661,063
171,347– derivatives– financial investments measured at amortised cost
– financial investments measured at fair value through other comprehensive income– other financial assets1
Reinsurance assets
PVIF2
Other assets and investment properties
Total assets
Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts
Deferred tax3
Other liabilities
Total liabilities
Total equity
Total equity and liabilities

1,323
410,169
4,971
31,60627,299—13,422
618,387
31,786547,1289—
578,923—
578,923

20
222
—
1,013
6
—
1
42,628
7,732
34,348——42,080—42,0803
34,824502
5,063—
65,052
4,652
110,480——
10,43637,22047,656
102,836
150,492

1,346
445,215
5,473
37,682
27,30565,052
18,075
771,495
39,518581,476
10,44537,220668,659
102,836
771,495

1
2
3
4Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
Present value of in-force long-term insurance business.
‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.
Balance sheet of insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance
operations.

Key risk types
Market risk
(Audited)

Description and exposure
Market risk is the risk of changes in market factors affecting
capital or profit. Market factors include interest rates, equity andgrowth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued. Our
most significant life insurance products are contracts withdiscretionary participating features (‘DPF’). These products
typically include some form of capital guarantee or guaranteed
return on the sums invested by the policyholders, to which
discretionary bonuses are added if allowed by the overall
performance of the funds. These funds are primarily invested in
fixed interest assets, with a proportion allocated to other asset
classes to provide customers with the potential for enhanced
returns.

64

DPF products expose the group to the risk of variation in asset
returns, which will impact our participation in the investment
performance. In addition, in some scenarios the asset returns canbecome insufficient to cover the policyholders' financial
guarantees, in which case the shortfall has to be met by the group.
Reserves are held against the cost of such guarantees.
The cost of such guarantees is accounted for as a deduction fromthe present value of in-force 'PVIF' asset, unless the cost of suchguarantees is already explicitly allowed for within the insurance
contracts liabilities.
For unit-linked contracts, market risk is substantially borne by thepolicyholders, but some market risk exposure typically remains as
fees earned are related to the market value of the linked assets.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Sensitivities

the market environment. The sensitivities presented allow foradverse changes in policyholders’ behaviour that may arise in
response to changes in market rates.

(Unaudited)

Where appropriate, the effects of the sensitivity tests on profit
after tax and total equity incorporate the impact of the stress on
the PVIF. The relationship between the profit and total equity andthe risk factors is non-linear; therefore the results disclosed should
not be extrapolated to measure sensitivities to different levels ofstress. For the same reason, the impact of the stress is not
symmetrical on the upside and downside. The sensitivities reflect
the established risk sharing mechanism with policyholders for

The following table illustrates the effects of selected interest rate,equity price and foreign exchange rate scenarios on our profit for
the year and the total equity of our insurance manufacturingsubsidiaries.
The differences between the impacts on profit after tax and equity
are driven by the changes in value of the bonds measured at fairvalue through other comprehensive income, which are only
accounted for in equity.

participating products, and are stated before allowance formanagement actions which may mitigate the effect of changes in

Sensitivity of the group’s insurance manufacturing subsidiaries to market risk factors(Audited)
31 Dec 2021
Effect on profit
after tax

31 Dec 2020

Effect on total
equityEffect on profit
after tax

Effect on total
equity

HK$m

HK$m

HK$m

HK$m

+100 basis points parallel shift in yield curves(1,257)(2,036)(1,673)(2,283)-100 basis points parallel shift in yield curves
10% increase in equity prices

1,201
2,388

1,980
2,388

1,613
2,167

2,223
2,167

10% decrease in equity prices
10% increase in USD exchange rate compared to all currencies
10% decrease in USD exchange rate compared to all currencies(2,426)635(635)(2,426)635(635)(2,183)673(673)(2,183)673(673)

Credit risk

Liquidity risk

(Audited)(Audited)

Description and exposure

Description and exposure

Credit risk is the risk of financial loss if a customer or counterparty
fails to meet their obligation under a contract. It arises in two mainareas for our insurance manufacturers:

Liquidity risk is the risk that an insurance operation, thoughsolvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can securethem only at excessive cost.

• risk associated with credit spread volatility and default by debt
security counterparties after investing premiums to generate areturn for policyholders and shareholders; andThe following table shows the expected undiscounted cash flows
for insurance liabilities at 31 December 2021. The liquidity risk
exposure is wholly borne by the policyholders in the case of unitlinked business and is shared with the policyholders for
non-linked insurance.

• risk of default by reinsurance counterparties and nonreimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect ofthese items are shown in the table on page 64.
The credit quality of the reinsurers’ share of liabilities underinsurance contracts is assessed as ‘strong’ or ‘good’ (as definedon page 30), with 100% of the exposure being neither past due nor
impaired (2020: 100%).

The profile of the expected maturity of insurance contracts at
31 December 2021 remained comparable with 2020.
The remaining contractual maturity of investment contract
liabilities is included in the table on page 111.

Credit risk on assets supporting unit-linked liabilities ispredominantly borne by the policyholders. Therefore our exposure
is primarily related to liabilities under non-linked insurance andinvestment contracts and shareholders’ funds. The credit quality of
insurance financial assets is included in the table on page 42. The
risk associated with credit spread volatility is to a large extent
mitigated by holding debt securities to maturity, and sharing a
degree of credit spread experience with policyholders.
Expected maturity of insurance contract liabilities(Audited)
Expected cash flows (undiscounted)

At 31 Dec 2021
Non-linked insurance contracts
Unit-linked

At 31 Dec 2020
Non-linked insurance contracts
Unit-linked

Within 1 year

1-5 years

5-15 years

Over 15 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

53,098
8,073
61,171

187,589
14,353201,942

324,654
14,852
339,506

662,058
8,115
670,173

1,227,399
45,393
1,272,792

47,444
8,558
56,002

168,81118,308187,119

311,975
14,708326,683

517,761
9,162
526,923

1,045,991
50,736
1,096,727

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

65

Risk

Insurance underwriting risk
Description and exposure(Unaudited)

Insurance underwriting risk is the risk of loss through adverse
experience, in either timing or amount, of insurance underwriting
parameters (non-economic assumptions). These parameters
include mortality, morbidity, longevity, lapses and expense rates.
The principal risk we face is that, over time, the cost of thecontract, including claims and benefits may exceed the total
amount of premiums and investment income received.
The table on page 64 analyses our life insurance risk exposures bytype of contract.
The insurance risk profile and related exposures remain largely
consistent with those observed at 31 December 2020.
Sensitivities

Mortality and morbidity risk is typically associated withlife insurance contracts. The effect on profit of an increase inmortality or morbidity depends on the type of business being
written.
Sensitivity to lapse rates depends on the type of contracts being
written. For a portfolio of term assurance, an increase in lapse
rates typically has a negative effect on profit due to the lossof future income on the lapsed policies. However, some contract
lapses have a positive effect on profit due to the existence ofpolicy surrender charges. We are most sensitive to a change inlapse rates on unit-linked and universal life contracts.
Expense rate risk is the exposure to a change in the allocated costof administering insurance contracts. To the extent that increased
expenses cannot be passed on to policyholders, an increase in
expense rates will have a negative effect on our profits. The risk isgenerally greater for Singapore and mainland China than for Hong
Kong.

(Audited)

The table below shows the sensitivity of profit and total equity toreasonably possible changes in non-economic assumptions acrossall our insurance manufacturing subsidiaries.
Sensitivity analysis(Audited)

Effect on profit after tax and total equity at 31 Dec
10% increase in mortality and/or morbidity rates
10% decrease in mortality and/or morbidity rates
10% increase in lapse rates
10% decrease in lapse rates
10% increase in expense rates
10% decrease in expense rates

66

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

2021

2020

HK$m

HK$m

(637)
650
(606)
680
(368)
359

(613)
629
(575)
676
(352)
360

Statement of Directors’ Responsibilities
The following statement, which should be read in conjunction with the Auditor’s statement of their responsibilities set out in their reporton pages 68-72, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the Auditor
in relation to the Consolidated Financial Statements.
The Directors of The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) are responsible for the preparation of the Bank’s
Annual Report and Accounts, which contains the Consolidated Financial Statements of the Bank and its subsidiaries (together ‘thegroup’), in accordance with applicable law and regulations.
The Hong Kong Companies Ordinance requires the Directors to prepare for each financial year the consolidated financial statements forthe group and the balance sheet for the Bank.
The Directors are responsible for ensuring adequate accounting records are kept that are sufficient to show and explain the group’stransactions, such that the group’s consolidated financial statements give a true and fair view.
The Directors are responsible for preparing the consolidated financial statements that give a true and fair view and are in accordance with
Hong Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants. The Directors
have elected to prepare the Bank’s balance sheet on the same basis.
The Directors as at the date of this report, whose names and functions are set out in the ‘Report of the Directors’ on pages 3-9 of thisAnnual Report and Accounts, confirm to the best of their knowledge that:• the Consolidated Financial Statements, which have been prepared in accordance with HKFRSs and in accordance with the applicableset of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the group; and• the management report represented by the Financial Review, the Risk and Capital Reports includes a fair review of the development
and performance of the business and the position of the group, together with a description of the principal risks and uncertainties thatthe group faces.

On behalf of the Board

Peter Wong
Chairman
22 February 2022

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

67

Independent Auditor’s Report

Independent Auditor’s Report
To the Shareholder of The Hongkong and Shanghai Banking Corporation Limited(incorporated in Hong Kong with limited liability)
OpinionWhat we have audited
The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited (the 'Bank’) and its subsidiaries (the'group’), which are set out on pages 73 to 131, comprise:• the consolidated balance sheet as at 31 December 2021;• the consolidated income statement for the year then ended;• the consolidated statement of comprehensive income for the year then ended;• the consolidated statement of changes in equity for the year then ended;• the consolidated statement of cash flows for the year then ended; and• the notes1 on the consolidated financial statements, which include significant accounting policies and other explanatory information.
1 Certain required disclosures as described in Note 1.1(d) on the consolidated financial statements have been presented elsewhere in the Annual
Report and Accounts 2021, rather than in the notes on the consolidated financial statements. These are cross-referenced from the consolidated
financial statements and are identified as audited.

Our opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the group as at
31 December 2021, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordancewith Hong Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants (‘HKICPA’)and have been properly prepared in compliance with the Hong Kong Companies Ordinance.

Basis for Opinion
We conducted our audit in accordance with Hong Kong Standards on Auditing (‘HKSAs’) issued by the HKICPA. Our responsibilities
under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements
section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence
We are independent of the group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (‘the Code’), and we havefulfilled our other ethical responsibilities in accordance with the Code.

Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated
financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matters identified in our audit are summarised as follows:• Allowances for expected credit losses on loans and advances to customers• Impairment assessment of investment in associate – Bank of Communications Co., Limited (‘BoCom’)• The present value of in-force long-term insurance business (‘PVIF’) and liabilities under non-linked life insurance contracts

68

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Allowances for expected credit losses on loans and advances to customers
Nature of the Key Audit Matter

How our audit addressed the Key Audit Matter

At 31 December 2021, the group recorded allowances for expected credit
losses (‘ECL’) on loans and advances to customers of HK$32.0bn.
The determination of the ECL on loans and advances to customers requires
the use of complex credit risk methodologies that are applied in models
using the group’s historic experience of the correlations between defaults
and losses, borrower creditworthiness, segmentation of customers or
portfolios and economic conditions.
It also requires the determination of assumptions which involve estimation
uncertainty. The assumptions that we focused our audit on include thosewith greater levels of management judgement and for which variations havethe most significant impact on ECL on loans and advances to customers.
Specifically, these included economic scenarios and their likelihood, as wellas customer risk ratings. Likewise, there is inherent uncertainty with theconsensus economic forecast data from external economists as well as theprospects of future recoverability of credit impaired wholesale exposures.
The progression of the Covid-19 pandemic and other current
macroeconomic conditions impact the inherent risk and estimation
uncertainty involved in determining the ECL on loans and advances tocustomers.
Management judgemental adjustments to ECL on loans and advances tocustomers therefore continue to be made. This includes judgemental
adjustments to the ECL for certain wholesale sectors, as well as adjustments
related to the retail portfolio.

We tested controls in place over the methodologies, their application,
significant assumptions and data used to determine the ECL on loans andadvances to customers. These included controls over:• Model development, validation and monitoring;• Approval of economic scenarios;• Approval of the probability weightings assigned to economic scenarios;• Assigning customer risk ratings;• Approval of management judgemental adjustments; and• Review of input and assumptions applied in estimating the recoverabilityof credit-impaired wholesale exposures.
We performed substantive audit procedures over the compliance of ECL
methodologies with the requirements of HKFRS 9. We engaged
professionals with experience in ECL modelling to assess theappropriateness of changes to models during the year, and for a sample ofthose models, independently reperformed the modelling for certain aspectsof the ECL calculation. We also assessed the appropriateness of
methodologies and related models that did not change during the year.
We further performed the following to assess the significant assumptions
and data:• We challenged the appropriateness of the significant assumptions;• We involved our economic experts in assessing the reasonableness of theseverity and likelihood of certain economic scenarios;• We tested a sample of customer risk ratings assigned to wholesale
exposures; and• We have independently assessed other significant assumptions andobtained corroborating evidence.
For a sample of management judgemental adjustments, we challenged theappropriateness of these and assessed the ECL determined.
Matters discussed with the Audit Committee
We further considered whether the judgements made in selecting the
We discussed the appropriateness of the methodologies, their application,
significant assumptions and determining the management judgemental
significant assumptions and related disclosures with the Audit Committee,
giving consideration to the current macroeconomic conditions. This included adjustments would give rise to indicators of possible management bias.
management judgemental adjustments made to derive the ECL on loans and We assessed the adequacy of the disclosures in relation to ECL on loans andadvances to customers. We further discussed the governance and controls
advances to customers made in the consolidated financial statements in theover the process in determining ECL on loans and advances to customers.
context of the applicable financial reporting framework.
Relevant references in the consolidated financial statements

Risk: Credit Risk, as cross-referenced from the consolidated financial statements (only information identified as audited), page 29-50
Note 1.2 (i) on the consolidated financial statements: Basis of preparation and significant accounting policies - Impairment of amortised cost and FVOCI
financial assets, page 83-86
Note 2 (e) on the consolidated financial statements: Operating profit – Change in expected credit losses and other credit impairment charges, page 91
Note 10 on the consolidated financial statements: Loans and advances to customers, page 99

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

69

Independent Auditor’s Report

Impairment assessment of investment in associate – Bank of Communications Co., Limited (‘BoCom’)
Nature of the Key Audit Matter

How our audit addressed the Key Audit Matter

At 31 December 2021, the fair value of the investment in BoCom, based on
the share price, was HK$118.2bn lower than the carrying value ('CV') of
HK$184.8bn. This is an indicator of potential impairment. An impairment
test was performed, with supporting sensitivity analysis, using a value in use('VIU') model. The VIU was HK$8.2bn in excess of the CV. On this basis, no
impairment was recorded.
The methodology applied in the VIU model is dependent on various
assumptions, both short term and long term in nature. These assumptions,which are subject to estimation uncertainty, are derived from a combinationof management’s judgement, analysts’ forecasts, market data or otherrelevant information.
The assumptions that we focused our audit on were those with greaterlevels of management judgement and subjectivity, and for which variations
had the most significant impact on the VIU. Specifically, these included thediscount rate, operating income growth rate, long-term profit and asset
growth rates, cost-income ratio, expected credit losses, effective tax rates,
and capital requirements (including Capital Adequacy Ratio, Tier 1 Capital
Adequacy ratio and risk-weighted assets as a percentage of total assets).

We tested controls in place over significant assumptions, the methodology
and its application used to determine the VIU. We assessed theappropriateness of the methodology used, its application, and themathematical accuracy of the calculations. In respect of the significant
assumptions, we performed the following:• Challenged the appropriateness of the significant assumptions and, where
relevant, their interrelationships;• Obtained corroborating evidence for data supporting significant
assumptions that may include historic experience, external market
information, third-party sources including analyst reports, informationfrom BoCom management and historical publicly available BoComfinancial information;• Determined a reasonable range for the discount rate assumption, with theassistance of our valuation experts, and compared it to the discount rateused by management; and• Assessed whether the judgements made in selecting the significant
assumptions give rise to indicators of possible management bias.
We observed the meetings in March, May, September and November 2021
between management and BoCom management, held specifically to identify
facts and circumstances impacting significant assumptions relevant to thedetermination of the VIU.
Representations were obtained from the Bank that assumptions used wereconsistent with information currently available to the Bank.
We assessed the adequacy of the disclosures in relation to BoCom made in
the consolidated financial statements in the context of the applicablefinancial reporting framework.

Matters discussed with the Audit Committee

We discussed the appropriateness of the methodology, its application andsignificant assumptions with the Audit Committee. We also discussed thedisclosures made in relation to BoCom, including the use of sensitivity
analysis to explain estimation uncertainty and the changes in certain
assumptions that would result in the VIU being equal to the CV.

Relevant references in the consolidated financial statements

Note 1.2 (a) on the consolidated financial statements: Basis of preparation and significant accounting policies - Consolidated and related policies, page
80-81
Note 14 on the consolidated financial statements: Interests in associates and joint ventures, page 102-105

70

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

The present value of in-force long-term insurance business (‘PVIF’) and liabilities under non-linked life insurance contracts
Nature of the Key Audit Matter

How our audit addressed the Key Audit Matter

At 31 December 2021, the group has recorded an asset for PVIF of
HK$63.8bn and liabilities under non-linked life insurance contracts of
HK$608.5bn.
The determination of these balances requires the use of complex actuarial
methodologies that are applied in models and involves judgement about
future outcomes. Specifically, judgement is required in deriving the
economic and non-economic assumptions. These assumptions are subject toestimation uncertainty, both for PVIF asset and the liabilities under nonlinked life insurance contracts.

We tested controls in place over the methodologies, their application,
significant assumptions and data for PVIF asset and the liabilities under nonlinked life insurance contracts. Specifically, these included controls over:•policy data reconciliations from the policyholder administration system
to the actuarial valuation system;•
assumptions setting;•review and determination of methodologies used, and its application inmodels; and•results aggregation and analysis processes.
With the assistance of our actuarial experts, we performed the following
additional audit procedures to assess the methodologies used, theirMatters discussed with the Audit Committee
application, significant assumptions, data and disclosures:
We discussed the appropriateness of the methodologies, their application,•
We assessed the appropriateness of the methodologies used, theirsignificant assumptions and related disclosures with the Audit Committee. In
application and the mathematical accuracy of the calculations;relation to assumptions, we focused on those for which variations had the•
We challenged the appropriateness of the significant assumptions and,most significant impact on the valuation of PVIF and liabilities under nonwhere relevant, their interrelationships. We have independently
linked life insurance contracts carrying value.
assessed these assumptions and obtained relevant corroborating
evidence. We further considered whether the judgements made in
selecting the significant assumptions would give rise to indicators ofpossible management bias;•
We performed substantive audit procedures over critical data used in
the determination of these balances to ensure these are relevant andreliable; and•We assessed the adequacy of the disclosures in relation to the asset for
PVIF and liabilities under non-linked life insurance contracts made in the
consolidated financial statements in the context of the applicablefinancial reporting framework.
Relevant references in the consolidated financial statements

Risk: Insurance manufacturing operations risk, as cross-referenced from the consolidated financial statements (only information identified as audited), page62-66
Note 1.2 (j) on the consolidated financial statements: Basis for preparation and significant accounting policies - Insurance contracts, page 87
Note 3 on the consolidated financial statements: Insurance business, page 92
Note 15 on the consolidated financial statements: Goodwill and intangible assets, page 105-106

Other Information
The directors of the Bank are responsible for the other information. The other information comprises all of the information included in the
Annual Report and Accounts 2021, Banking Disclosure Statement as at 31 December 2021 and List of the directors of the Bank's
subsidiary undertakings (during the period from 1 January 2021 to 22 February 2022) other than the consolidated financial statements
and our auditor’s report thereon. We have obtained some of the other information including Certain defined terms, Cautionary statement
regarding forward-looking statements, Chinese translation, Financial Highlights, Report of the Directors, Financial Review, Risk andStatement of Directors' Responsibilities sections of the Annual Report and Accounts 2021 prior to the date of this auditor’s report. The
remaining other information, including Banking Disclosure Statement as at 31 December 2021 and List of the directors of the Bank's
subsidiary undertakings (during the period from 1 January 2021 to 22 February 2022), is expected to be made available to us after that
date. The other information does not include the specific information presented therein that is identified as being an integral part of theconsolidated financial statements and, therefore, covered by our audit opinion on the consolidated financial statements.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any formof assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above
and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our
knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude
that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in thisregard.
When we read the remaining other information, if we conclude that there is a material misstatement therein, we are required tocommunicate the matter to the Audit Committee and take appropriate action considering our legal rights and obligations.

Responsibilities of Directors and the Audit Committee for the Consolidated Financial Statements
The directors of the Bank are responsible for the preparation of the consolidated financial statements that give a true and fair view inaccordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the directors
determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing the group’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.
The Audit Committee is responsible for overseeing the group’s financial reporting process.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

71

Independent Auditor’s Report

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely toyou, as a body, in accordance with Section 405 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume
responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level ofassurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout theaudit. We also:• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by the directors.
• Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s ability tocontinue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s reportto the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may
cause the group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, andwhether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fairpresentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to
express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of thegroup audit. We remain solely responsible for our audit opinion.
We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, actions taken to eliminate threats or safeguards applied.
From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of
the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our
auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Lars Christian Jordy Nielsen.

PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 22 February 2022

72

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Consolidated Financial Statements
Consolidated income statement
for the year ended 31 December
Notes

Net interest income

2a– interest income– interest expense
Net fee income– fee income

2b

2021

2020

HK$m

HK$m

98,113

111,513

121,382(23,269)

147,376(35,863)

45,29657,81941,67052,370– fee expense
Net income from financial instruments held for trading or managed on a fair value basis

2c(12,523)
28,359(10,700)
32,172

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

2c

18,18013,128Changes in fair value of designated debts issued and related derivatives

2c

(639)

(171)

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
Gains less losses from financial investments

2c

(25)
1,667

138
1,624

3

61,722
2,033

61,563
5,612

254,706(76,048)
178,658(6,539)172,119(39,261)(52,327)(8,891)(4,397)(104,876)
67,243
19,32086,563(14,015)
72,548267,249(77,911)
189,338(17,719)
171,619(36,183)(46,304)(9,405)(3,936)(95,828)
75,791
14,40590,196(14,505)
75,69164,633
2,715
5,200
72,54866,9972,450
6,244
75,691

Net insurance premium income
Other operating income

2d

Total operating income
Net insurance claims and benefits paid and movement in liabilities to policyholders
Net operating income before change in expected credit losses and other credit impairment charges
Change in expected credit losses and other credit impairment charges
Net operating income
Employee compensation and benefits
General and administrative expenses
Depreciation and impairment of property, plant and equipment
Amortisation and impairment of intangible assets
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Tax expense
Profit for the year
Attributable to:– ordinary shareholders of the parent company– other equity holders– non-controlling interests
Profit for the year

3

2e

4
2f
2g

5

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

73

Consolidated Financial Statements

Consolidated statement of comprehensive income
for the year ended 31 December
2021

2020

HK$m

HK$m

72,54875,691

Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Debt instruments at fair value through other comprehensive income(4,009)2,238– fair value gains/(losses)– fair value gains transferred to the income statement(3,907)(1,276)

4,642(1,648)– expected credit (recoveries)/losses recognised in the income statement– income taxes

(17)
1,191

112
(868)

Cash flow hedges– fair value gains/(losses)

(700)
7,038

969
(4,393)– fair value (gains)/losses reclassified to the income statement– income taxes(7,850)
112

5,551
(189)

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

596
3,973

(726)
17,891

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

4,771(5,774)– fair value gains/(losses)– income taxes

5,643
(872)

(6,914)1,140

Equity instruments designated at fair value through other comprehensive income– fair value gains/(losses)– income taxes
Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk
– before income taxes– income taxes
Remeasurement of defined benefit asset/liability– before income taxes– income taxes
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Attributable to:– ordinary shareholders of the parent company– other equity holders– non-controlling interests
Total comprehensive income for the year

(3,480)(3,478)
(2)
522
631
(109)
724
885
(161)
2,397
74,945

1,647
1,654
(7)
257
320
(63)
(315)
(384)
69
16,187
91,87867,1482,715
5,082
74,94582,7382,450
6,690
91,878

Profit for the year
Other comprehensive income/(expense)74

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Consolidated balance sheet
at 31 December
2021

2020

HK$m

HK$m

AssetsCash and balances at central banks

276,857

347,999

Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness

21,632332,044

21,943
313,404

777,450
365,167

600,414422,945

202,399803,775

178,960
520,344432,247
3,840,939

403,884
3,668,681

2,051,575
112,719

2,175,432
83,203

188,485
95,181

168,754
89,968129,827
3,353

128,537
3,325

269,743
9,903,393

288,610
9,416,403

332,044
25,701
255,374
280,310
6,177,182
92,723355,791
138,965
67,364
1,890
356,233
219,206
638,145
2,378
32,522
4,054
8,979,882

313,404
25,699136,157
248,628
5,911,396
60,812428,211167,013
79,4192,701
296,308
215,987
581,406
2,669
30,997
4,065
8,504,872

172,335
44,615
151,804
488,055
856,80966,702
923,511
9,903,393

172,335
44,615
149,500
478,903845,353
66,178911,5319,416,403

Notes

Trading assets
Derivatives

7

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
Reverse repurchase agreements – non-trading

98Loans and advances to banks
Loans and advances to customers

10

Financial investments
Amounts due from Group companies

32

11Interests in associates and joint ventures
Goodwill and intangible assets

14

Property, plant and equipment
Deferred tax assets

16

Prepayments, accrued income and other assets
Total assets

17

15

5

Liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Trading liabilities
Derivatives
Financial liabilities designated at fair value
Debt securities in issue
Retirement benefit liabilities
Amounts due to Group companies
Accruals and deferred income, other liabilities and provisions
Liabilities under insurance contracts
Current tax liabilities
Deferred tax liabilities
Subordinated liabilities
Total liabilities
EquityShare capital
Other equity instruments
Other reserves
Retained earnings
Total shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity

18
19
8
20
21
4
32
22
3

5
23

24
25

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

75

Consolidated Financial Statements

Consolidated statement of cash flows
for the year ended 31 December
2021

2020

HK$m

HK$m

Profit before tax
Adjustments for non-cash items:

86,56390,196

Depreciation and amortisation
Net gain from investing activities

13,288(1,890)13,341(567)

Share of profits in associates and joint ventures(Gain)/Loss on disposal of subsidiaries, businesses, associates and joint ventures(19,320)(4)(14,405)
70

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

7,549
607

18,452
114

Share-based payment expense
Other non-cash items included in profit before tax

913
5,416

735
(3,896)

Elimination of exchange differences
Changes in operating assets and liabilities

8,024(22,323)

Change in net trading securities and derivatives
Change in loans and advances to banks and customers(159,767)(172,484)(10,696)
11,959Change in reverse repurchase agreements – non-trading
Change in financial assets designated and otherwise mandatorily measured at fair value through profit or loss

(174,643)(23,439)(60,741)(25,449)

Change in other assets
Change in deposits by banks and customer accounts

43,706
297,468(119,373)
547,781

119,217(12,055)(28,048)
129,7105,525(356)(12,648)
113,332(1,233,472)
1,193,780(2,718)96
2,267(10,835)—(13)(50,895)
57,764(24,102)(63,523)(29,861)
32,576
1,047,807(25,299)
1,055,084

29,761(27,514)
6,722
42,517
5,053(602)(25,466)
455,669(875,648)
823,410(3,768)72
6,284(7,331)
69—(56,912)——(59,121)(59,121)339,636
677,664
30,507
1,047,807

276,857
21,632
326,691
34,580306,241
114,784(25,701)
1,055,084

347,999
21,943286,356
43,570186,599
187,039(25,699)
1,047,807

Change in repurchase agreements – non-trading
Change in debt securities in issue
Change in financial liabilities designated at fair value
Change in other liabilities
Dividends received from associates
Contributions paid to defined benefit plans
Tax paid
Net cash from operating activities
Purchase of financial investments
Proceeds from the sale and maturity of financial investments
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment and assets held for sale
Proceeds from disposal of customer loan portfolios
Net investment in intangible assets
Net cash inflow on sale of subsidiaries
Net cash outflow on purchase of subsidiaries
Net cash from investing activities
Subordinated loan capital issued1
Subordinated loan capital repaid1
Dividends paid to shareholders of the parent company and non-controlling interests
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 Jan
Exchange differences in respect of cash and cash equivalents
Cash and cash equivalents at 31 Dec2
Cash and cash equivalents comprise– cash and balances at central banks– items in the course of collection from other banks– loans and advances to banks of one month or less– net settlement accounts and cash collateral– reverse repurchase agreements with banks of one month or less– treasury bills, other bills and certificates of deposit less than three months– less: items in the course of transmission to other banks
Cash and cash equivalents at 31 Dec2

Interest received was HK$133,964m (2020: HK$160,120m), interest paid was HK$26,553m (2020: HK$46,104m) and dividends received
were HK$5,592m (2020: HK$3,946m).
1 Changes in subordinated liabilities (including those issued to group companies) during the year included amounts from issuance and repayments
as presented above, and non-cash changes from foreign exchange loss of HK$494m in 2021 (2020: exchange gain of HK$303m) and fair value
loss after hedging of HK$7,768m in 2021 (2020: HK$8,261m gain). These balances are presented under ‘Amounts due to Group companies’ in the
consolidated balance sheet.
2 At 31 December 2021 HK$128,756m (2020: HK$149,565m) was not available for use by the group, of which HK$67,340m (2020: HK$71,049m)
related to mandatory deposits at Central banks.

76

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Consolidated statement of changes in equity
for the year ended 31 December
Other reserves

Sharecapital1

Otherequityinstruments

Retainedearnings

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cash
flow
hedge
reserve

Total
shareholders’equityForeignexchangereserve

Other

HK$m

HK$m

HK$m

HK$m

HK$m

(10,688) 85,740

845,353

66,178911,5312

Noncontrollinginterests

Total
equity

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

172,335

44,615478,903

63,793

9,883

772

Profit for the year——

67,348

—

—

—

—

—

67,3485,200

72,548Other comprehensive income/(expense)(net of tax)

—

—

1,160

4,359

(5,992)

(619)

3,558

49

2,515

(118)

2,397

– debt instruments at fair value
through other comprehensive income

—

—

—

—

(3,775)———(3,775)(234)(4,009)– equity instruments designated at fairvalue through other comprehensive
income————(2,737)———(2,737)(743)(3,480)– cash flow hedges

—

—

—

—

—

(619)

—

—

(619)

(81)

(700)

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

—

—

521

—

—

—

—

—

521

1

522

– property revaluation

—

—

—

4,359

—

—

—

—

4,359

412

4,771

– remeasurement of defined benefit
asset/liability

—

—

612

—

—

—

—

—

612

112

724

—
—

—
—

27
—

—
—

520
—

—
—

—
3,558

49
—

596
3,558

—
415

596
3,973

—
—

—
—

68,5084,359(5,992)

(619)

3,558

49

69,863

5,082

74,945(59,105)

—

—

—

—

—

(59,105)(4,418)(63,523)

—
—

—
—

131
(382)

—
(3,162)

—
(22)

—
—

—
—

(173)
4,306

(42)
740

(2)
(138)

(44)
602

172,335

44,615

488,055

64,9903,869

153(7,130) 89,922

856,80966,702

923,511

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

77

At 1 Jan 2021

– share of other comprehensive
income of associates and joint
ventures– exchange differences
Total comprehensive income/(expense) for the year
Dividends paid3
Movement in respect of share-based
payment arrangements
Transfers and other movements4
At 31 Dec 2021

Consolidated Financial Statements

Consolidated statement of changes in equity (continued)
for the year ended 31 December
Other reserves

Sharecapital1

Otherequityinstruments

Retainedearnings

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cash
flow
hedge
reserve

Foreignexchangereserve

Other2

Total
shareholders’equityNoncontrollinginterests

Total
equity

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

172,335—

44,615—

464,629
69,44772,013
—

6,959
—

(104)
—

(28,118)—

82,349—814,678
69,44764,603
6,244

879,281
75,691Other comprehensive income/(expense) (net of tax)

—

—

(98)

(5,286)

2,921

876

17,430(102)

15,741446

16,187– debt instruments at fair value
through other comprehensive
income

—

—

—

—

2,203

—

—

—

2,203

35

2,238

– equity instruments designated atfair value through othercomprehensive income

—

—

—

—

1,299

—

—

—

1,299

348

1,647

– cash flow hedges

—

—

—

—

—

876

—

—

876

93

969

– changes in fair value of financial
liabilities designated at fair value
upon initial recognition arisingfrom changes in own credit risk

—

—

257

—

—

—

—

—

257

—

257

– property revaluation

—

—

—

(5,286)

—

—

—

—

(5,286)(488)(5,774)– remeasurement of defined
benefit asset/liability

—

—

(312)

—

—

—

—

—

(312)

(3)

(315)

– share of other comprehensive
expense of associates and joint
ventures

—

—

(43)

—

(581)

—

—

(102)

(726)

—

(726)

– exchange differences

—

—

—

—

—

—

17,430—17,430461

17,891

Total comprehensive income/(expense) for the year——

69,349(5,286)

2,921

876

17,430(102)

85,188

6,690

91,878Dividends paid3——(54,268)

—

—

—

—

—

(54,268)(4,853)(59,121)

Movement in respect of sharebased payment arrangements

—

—

120

—

—

—

—

213

333

12

345

—
172,335—
44,615(927)
478,903(2,934)
63,793

3
9,883

—
772

—
(10,688)

3,280
85,740(578)
845,353(274)
66,178(852)
911,531

At 1 Jan 2020
Profit for the year

Transfers and other movements4
At 31 Dec 2020

1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous
years.
2 The other reserves mainly comprise share of associates’ other reserves, purchase premium arising from transfer of business from fellow
subsidiaries, property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The sharebased payment reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC
Holdings plc.
3 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
4 The movements include transfers from retained earnings to other reserves in associates according to local regulatory requirements, and from theproperty revaluation reserve to retained earnings in relation to depreciation of revalued properties.

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The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Notes on the Consolidated Financial Statements
1

Basis of preparation and significant accounting policies

1.1 Basis of preparation(a)Compliance with Hong Kong Financial Reporting Standards

The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries(together ‘the group’) have been prepared in accordance with Hong Kong Financial Reporting Standards (‘HKFRSs’) as issued by theHong Kong Institute of Certified Public Accountants (‘HKICPA’) and accounting principles generally accepted in Hong Kong. These
consolidated financial statements also comply with the requirements of the Hong Kong Companies Ordinance (Cap. 622) which areapplicable to the preparation of the 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 havebeen consistently applied to all the years presented, unless otherwise stated.

(b)

Future accounting developments

Minor amendments to HKFRSs
The HKICPA has published a number of minor amendments to HKFRSs which 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.

New HKFRSs
HKFRS 17 ‘Insurance Contracts’
HKFRS 17 ‘Insurance Contracts’ was issued in January 2018, with amendments to the standard issued in October 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, HKFRS 17 is effective from 1 January 2023. The group is in the process of implementing HKFRS 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 the group’s current accounting policy forinsurance contracts, which is set out in Note 1.2(j) below:• Under HKFRS 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 theprofit over the life of an individual contract will be unchanged, its emergence will be later under HKFRS 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 HKFRS 17 measurement requirements and any consequential
amendments to financial assets in the scope of HKFRS 9.
• HKFRS 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 HKFRS 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 will 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 on our insurance business in later 2022 financial reports, when we
expect that this will be reasonably estimable.

(c)Foreign currencies

Items included in each of the group’s entities are measured using the currency of the primary economic environment in which the entity
operates (the ‘functional currency’). The group’s consolidated financial statements are presented in Hong Kong dollars.
Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominatedin 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 othercomprehensive income (‘OCI’) 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, liabilities and results of foreign operations whose functional currency is not Hong
Kong dollars are translated into the group’s presentation currency at the rate of exchange at the balance sheet date, while their results
are translated into Hong Kong dollars at the average rates of exchange for the reporting period. Exchange differences arising arerecognised in OCI. On disposal of a foreign operation, exchange differences previously recognised in OCI are reclassified to the income
statement.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

79

Notes on the Consolidated Financial Statements(d)Presentation of information

Certain disclosures required by HKFRSs have been included in the sections marked as ('Audited') in this Annual Report and Accounts asfollows:• Consolidated income statement and balance sheet data by reportable segments are included in the 'Financial Review' on page 10 as
specified as ‘Audited’.
• Disclosures on 'Financial instruments impacted by IBOR reform' are included in the 'Top and Emerging Risks' section on page 20 as
specified as 'Audited'.
• Disclosures concerning the nature and extent of risks relating to banking and insurance activities are included in the ‘Risk' section on
pages 29 to 59 and pages 62 to 66 as specified as ‘Audited’.
• Capital disclosures are included in the ‘Treasury Risk’ section on pages 51 to 54 as specified as ‘Audited’.
In accordance with the group’s policy to provide disclosures that help investors and other stakeholders understand the group’s
performance, financial position and changes to them, the information provided in the Risk section goes beyond the minimum levels
required by accounting standards, statutory and regulatory requirements. In addition, the group assesses good practicerecommendations issued from time to time by relevant regulators and standard setters and will assess the applicability and relevance ofsuch guidance, enhancing disclosures where appropriate.

(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 Note 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 bymanagement for the purposes of the Consolidated 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 ofjudgement and estimation uncertainty involved.

(f)

Segmental analysis

The group’s chief operating decision-maker is the Executive Committee, which operates as a general management committee under the
direct authority of the Board. Operating segments are reported in a manner consistent with the internal reporting provided to the
Executive Committee.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the group’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.

(g)

Going concern

The Consolidated Financial Statements are prepared on a going concern basis, as the Directors are satisfied that the group and parent
company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considereda wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capitalrequirements 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 topass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of otherfactors, 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 fairvalue or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made for eachbusiness combination.
The Bank’s investments in subsidiaries are stated at cost less impairment losses.

Goodwill
Goodwill is allocated to cash-generating units (‘CGU’) for the purpose of impairment testing, which is undertaken at the lowest level atwhich goodwill is monitored for internal management purposes. Impairment testing is performed at least once a year, or whenever there
is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.

Interests in associates
The group classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint
arrangements, as associates.
Investments in associates are recognised using the equity method. The attributable share of the results and reserves of associates is
included in the consolidated financial statements of the group based on either financial statements made up to 31 December or amounts
adjusted for any material transactions or events occurring between the date the financial statements are available and
31 December.
Investments in associates are assessed at each reporting date and tested for impairment when there is an indication that the investment
may be impaired. Goodwill on acquisitions of interests in associates is not tested separately for impairment but is assessed as part of thecarrying amount of the investment.

80

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Critical accounting estimates and judgements
The most significant critical accounting estimates relate to the assessment of impairment of our investment in Bank of Communications Co. Limited(‘BoCom’), which involves estimations of value in use.
Judgements

Estimates• The VIU calculation uses discounted cash flow projections based on management’s
best estimates of future earnings available to ordinary shareholders prepared inaccordance with HKAS 36.
• Key assumptions are used in estimating BoCom’s value in use, the sensitivity of thevalue in use calculations to different assumptions and a sensitivity analysis thatshows the changes in key assumptions that would reduce the excess of value in use
over the carrying amount (the ‘headroom’) to nil are described in Note 14.

(b)

Income and expenses

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 arerecognised 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 purposeof 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 thegroup 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 bevariable depending on the size of the customer portfolio and the group’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 asignificant financing component.
The group acts as principal in the majority of contracts with customers, with the exception of broking services. For brokerage trades
where the group acts as an agent in the transaction it 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 thecustomer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of theagreement.
Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included inaccount 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 toeach 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 otherfinancial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding theeffect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in thefair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit orloss.
• ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value throughprofit 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 debt instruments and interest cash
flows on related derivatives is presented in interest expense where doing so reduces an 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 totransfer 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 adifference 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 gainor 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 until the transaction matures, is closed out, the valuation inputs become observable or thegroup enters into an offsetting transaction.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

81

Notes on the Consolidated Financial Statements

The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a groupof financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments ismeasured on a net basis but the underlying financial assets and liabilities are presented separately in the Consolidated Financial
Statements, unless they satisfy the HKFRSs offsetting criteria.

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• Details on the group’s level 3 financial instruments and the
inputs if, in the opinion of management, a significant proportion of the instrument’s
sensitivity of their valuation to the effect of applying reasonable
inception profit or greater than 5% of the instrument’s valuation is driven bypossible alternative assumptions in determining their fair value
unobservable inputs.
are set out in Note 33.
• ‘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).

(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 thesefinancial 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 thelending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. When the group intends tohold 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 thebalance 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 purchaseand 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 (‘FVOCI’)

Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which containcontractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at FVOCI.
These comprise primarily debt securities. They are recognised on the trade date when the group enters into contractual arrangements topurchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value andchanges therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) arerecognised in OCI until the assets are sold. Upon disposal, the cumulative gains or losses in OCI 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 the income statement.

(f)Equity securities measured at fair value with fair value movements presented in OCI

The equity securities for which fair value movements are shown in OCI are business facilitation and other similar investments where thegroup holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are
not transferred to the income statement. Dividend income is recognised in the income statement.

(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.
• The financial liability contains one or more non-closely related embedded derivatives.
Designated financial assets are recognised when the group 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 the group 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 andliabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’ except for the effect ofchanges in the liabilities' credit risk which is presented in OCI, unless that treatment would create or enlarge an accounting mismatch inprofit or loss.
Under the above criterion, the main classes of financial instruments designated by the group are:82

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

• 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 the group 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 andcertain 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 bemeasured at either fair value through OCI 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 otherindices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified asassets 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 the group 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 thesederivatives 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 berecognised 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 arecalculated 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 OCI and the ineffective portion of the change in fairvalue of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income
statement within ‘Net income from financial instruments held for trading or managed on a fair value basis’. The accumulated gains andlosses recognised in OCI 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 OCI remains in equity until
the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, thecumulative gain or loss previously recognised in OCI 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 notapplied.

(i)

Impairment of amortised cost and FVOCI financial assets

Expected credit losses (‘ECL’) are recognised for loans and advances to banks and customers, non-trading reverse repurchaseagreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments andfinancial 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 12month ECL is recognised are considered to be ‘stage 1’; financial assets that are considered to have experienced a significant increase incredit risk are in ‘stage 2’; and financial assets for which there is objective evidence of impairment so are considered to be in default orotherwise 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 arealigned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

83

Notes on the Consolidated Financial Statements

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 asignificant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity orderecognition.
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 the group’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 atmarket rates and no payment-related concession has been provided. Mandatory and general offer loan modifications that are notborrower-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 ratebenchmark 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 byconsidering 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 accountreasonable 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, andthe geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be asignificant 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 andcredit 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 the reporting date. The quantitative measure ofsignificance varies depending on the credit quality at origination as follows:
Origination CRR

Significance trigger – PD to increase by

0.1–1.2
2.1–3.3

15bps
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 HKFRS 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 (‘TTC’) PDs and TTC 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:

84

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Origination CRR

Additional significance criteria – Number of CRR grade notches deterioration
required to identify as significant credit deterioration (stage 2) (> or equal to)

0.1
1.1–4.2
4.3–5.1
5.2–7.1
7.2–8.2
8.3

5 notches
4 notches
3 notches
2 notches
1 notch0 notchFurther information about the 23-grade scale used for CRR can be found on page 30.
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 meetits 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 havebeen 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 is recognised for financial instruments that remain instage 1.

Purchased or originated credit-impaired (‘POCI’)
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 income statement 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 aretransferred 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-paymentof future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that areassessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original orrevised 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 informationthat is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecastsof future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time valueof money.
In general, the group 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.
The group makes use of the Basel II IRB framework where possible, with recalibration to meet the differing HKFRS 9 requirements as set
out in the following table:

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

85

Notes on the Consolidated Financial Statements

Model

Regulatory capitalPD• Through the cycle (represents long-run average PD throughout a • Point in time (based on current conditions, adjusted to take intofull economic cycle)
account estimates of future conditions that will impact PD)• The definition of default includes a backstop of 90+ days past
• Default backstop of 90+ days past due for all portfolios
due

HKFRS 9EAD

• 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 aschanges in value of collateral)• No floors• Discounted using the original effective interest rate of the loan
• Only costs associated with obtaining/selling collateral included• Discounted back from point of default to balance sheet date

Other

While 12-month PDs are re-calibrated from Basel 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 thatthe recovery of the outstanding amount will include realisation of collateral based on the 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 tothe economic scenarios applied more generally by the group and the judgement of the credit risk officer in relation to the likelihood of theworkout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios andwork-out strategies is approximated and applied as an adjustment to the most likely outcome.

Period over which ECL is measured
ECL is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-monthor lifetime ECL) is the maximum contractual period over which the group 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 andcancel the undrawn commitment does not serve to limit the group’s exposure to credit risk to the contractual notice period, thecontractual period does not determine the maximum period considered. Instead, ECL is measured over the period the group remains
exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where theperiod is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis andranging 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
The group 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 inmost economic environments. In certain economic environments, additional analysis may be necessary and may result in additional/
alternative 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 pages 35 to 39.

Critical accounting estimates and judgements
The calculation of the group’s ECL under HKFRS 9 requires the group to make a number of judgements, assumptions and estimates. The most significant
are set out below:
Judgements

Estimates• Defining what is considered to be a significant increase in credit risk
• Determining the lifetime and point of initial recognition of overdrafts and credit cards• 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 andappropriately weighted economic forecasts are incorporated to calculate unbiased expectedloss• Making management adjustments to account for late breaking events, model and data
limitations and deficiencies, and expert credit judgements• The sections ‘Measurement uncertainty andsensitivity analysis of ECL estimates’ marked asaudited from pages 35 to 39, set out the assumptions
used in determining ECL and provide an indication of
the sensitivity of the result to the application ofdifferent weightings being applied to different
economic assumptions.

86

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

(j)Insurance contracts

A contract is classified as an insurance contract where the group accepts significant insurance risk from another party by agreeing tocompensate 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 withdiscretionary participation features ('DPF') which are also accounted for as insurance contracts as required by HKFRS 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 areaccounted 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.

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 andmanagement’s expectation of the future performance of the assets backing the contracts, as well as other experience factors such asmortality, 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
HKFRS 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 performanceof the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or OCI, following thetreatment 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.

Liabilities under insurance contracts and Present value of in-force long-term insurance businessLiabilities 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 byreference to the value of the relevant underlying funds or indices.
The group recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term andin-force at the balance sheet date, as an asset. The PVIF asset is presented gross of attributable tax in the balance sheet and movementsin the PVIF asset are included in ‘Other operating income’ on a gross of tax basis.

Critical accounting estimates and judgements
The valuation of the PVIF and insurance contract liabilities are dependent on economic assumptions (e.g. future investment returns) and non-economic
assumptions (e.g. related to policyholder behaviour or demographics).
Judgements

Estimates• The PVIF asset represents the value of the equity holders’ interest in the issuing insurance• The assumptions are reassessed at each reporting
companies’ profits expected to emerge from these contracts written at the balance sheet
date and changes in the estimates which affect thedate. It is determined by discounting those expected future profits using appropriate
value of PVIF and Insurance contract liabilities are
assumptions in assessing factors such as future mortality, lapse rates, investment returns andreflected in the income statement. More informationlevels of expenses, and a risk discount rate that reflects the risk premium attributable to theis included in Note 15 for PVIF and Note 3 forrespective contracts. The PVIF incorporates allowances for both non-market risk and the value
Liabilities under insurance contracts.
of financial options and guarantees.
• The sections marked as audited on pages 62 to 66,• Insurance contract liabilities are set in accordance with local actuarial principles in each
‘Insurance manufacturing operations risk
market, aligned with local regulatory measurement frameworks. Core judgements made inmanagement’ provide an indication of the sensitivity
applying these frameworks include demographic and behavioural assumptions, expenseof the result to the application of different weightings
assumptions and investment return assumptions.
being applied to different economic and noneconomic assumptions.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

87

Notes on the Consolidated Financial Statements(k)

Property

Land and buildings
Land and buildings held for own use are carried at their revalued amount, being the fair value at the date of the revaluation less any
subsequent accumulated depreciation and impairment losses.
Revaluations are performed by professional qualified valuers, on a market basis, with sufficient regularity to ensure that the net carrying
amount does not differ materially from the fair value. Surpluses arising on revaluation are credited firstly to the income statement, to theextent of any deficits arising on revaluation previously charged to the income statement in respect of the same land and buildings, andare thereafter taken to the ‘Property revaluation reserve’. Deficits arising on revaluation are first set off against any previous revaluation
surpluses included in the ‘Property revaluation reserve’ in respect of the same land and buildings, and are thereafter recognised in theincome statement.
Leasehold land and buildings are depreciated on a straight-line basis over the shorter of the unexpired terms of the leases or theremaining useful lives.
The Government of Hong Kong owns all the land in Hong Kong and permits its use under leasehold arrangements. Similar arrangements
exist in mainland China. The group accounts for its interests in own use leasehold land and land use rights in accordance with HKFRS 16
but discloses these as owned assets when the right of use are considered sufficient to constitute control.

Investment properties
The group holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties areincluded on balance sheet at fair value with changes in fair value being recognised in the income statement.

(l)

Employee compensation and benefits

Post-employment benefit plans
The group operates a number of pension schemes including defined benefit and 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 mainlycomprises 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 excludinginterest and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. 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 theplan.

(m) 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 OCI or directly in equity, in which case the tax is recognised in the same statement as 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 ofprevious 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.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and theamounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the
periods in which 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.

(n)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 orconstructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.

Contingent liabilities 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 Consolidated Financial Statements but are disclosed unless theprobability 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, whichis 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.

88

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

(o)Impairment of non-financial assets

Software under development is tested for impairment at least annually. Other non-financial assets such as property, plant and equipment,
intangible assets (excluding goodwill) and right-of-use assets are tested for impairment at the individual asset level when there isindication 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 and branches divided in a similar manner as the group's operating segments.
Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher ofthe fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying value of its assets andliabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on areasonable 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 theextent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to thehigher of their respective individual recoverable amount or nil. This impairment is not allocated to financial assets within a CGU.
Impairment loss recognised in prior periods for non-financial assets is reversed when there has been a change in the estimate used todetermine 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 beenrecognised in prior periods.

2

Operating profit(a)

Net interest income

Net interest income includes:
2021

2020

HK$m

HK$m

Interest income recognised on impaired financial assets
Interest income recognised on financial assets measured at amortised cost
Interest income recognised on financial assets measured at FVOCI

315
106,916
14,461

220
127,178
20,167

Interest expense on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise
mandatorily measured at fair value(20,907)(33,135)(b)

Net fee income

Net fee income by reportable segments
Wealth andPersonal
Banking1

Commercial
Banking1

GlobalBanking1,2Markets andSecurities
Services2

Corporate
Centre3

Other (GBMother)2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Account services
Funds under management

809
5,927

929
639

367
16

70
2,028

—
—

—
—

2,175
8,610

Cards
Credit facilities
Broking income
Imports/exports
Unit trusts
Underwriting
Remittances
Global custody
Insurance agency commission
Other
Fee income
Fee expense
Year ended 31 Dec 2021

7,559
409
5,477
—
7,373
1
255
976
1,326
2,329
32,441(8,614)23,827

207
1,371
69
2,462
176
1
1,843
50
114
2,675
10,536
(708)
9,828

40
1,304
—
594
1
869
715
47
1
2,497
6,451
(705)
5,746

—
62
869
—
—
683
—
3,414
—
3,413
10,539(4,809)
5,730

—
—
—
—
—
—
—
—
—
(2,156)(2,156)
2,399
243

—
—
—
—
—
—
—
—
—
8
8
(86)
(78)

7,806
3,146
6,415
3,056
7,550
1,554
2,813
4,487
1,441
8,766
57,819(12,523)
45,296

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

89

Notes on the Consolidated Financial Statements

Net fee income by reportable segments (continued)
Wealth andPersonal
Banking1

Commercial
Banking1

GlobalBanking1,2Markets andSecurities
Services2

Corporate
Centre3

Other (GBMother)2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Account services
Funds under management

864
5,071

864
677

297
8

62
1,788

3
—

8
—

2,098
7,544

Cards
Credit facilities

6,732
349

171
1,347

35
1,175

—
—

1
—

—
—

6,939
2,871

Broking income
Imports/exports

5,473
—

58
2,176

—
755

682
—

—
1

—
—

6,213
2,932

Unit trusts
Underwriting

5,991
1

142
1

1
838

—
683

—
(12)

—
—

6,134
1,511

Remittances
Global custody

290
942

1,630
53

697
70

—
2,928

(18)
—

—
—

2,599
3,993

Insurance agency commission
Other

1,308
2,312

107
2,363

1
2,288

—
3,263

—
(2,121)

—
15

1,416
8,120

Fee income
Fee expense

29,333(7,159)

9,589
(587)

6,165
(783)

9,406
(4,433)(2,146)
2,308

23
(46)

52,370(10,700)

Year ended 31 Dec 2020

22,174

9,002

5,382

4,973

162

(23)

41,6701 In 2021, the cards acquiring business has been transferred from Commercial Banking ('CMB') and Global Banking ('GB') to Wealth and Personal
Banking ('WPB') to align with the business model. Comparatives have been re-presented to conform to the current year's presentation.
2 In the second half of 2021, the reportable segments have been changed to reflect the change in the management of the Global Banking andMarkets ('GBM') business, with the splitting out of GB and Markets and Securities Services ('MSS') as separate reportable segments, whilst GBMOther (previously reported within GBM) is now reported under 'Other (GBM-other)'. Comparatives have been re-presented to conform to thecurrent year's presentation. Further details on the change in reportable segments are set out in Note 31 'Segmental analysis' in the Consolidated
Financial Statements.
3 Includes inter-segment elimination.

Net fee income includes:
2021

2020

HK$m

HK$m

Fees earned on financial assets that are not at fair value through profit and loss (other than amounts included in determining theeffective interest rate)

9,742

9,373

– fee income– fee expense
Fee earned on trust and other fiduciary activities– fee income– fee expense

15,173(5,431)
11,242
12,801(1,559)13,850(4,477)
9,745
11,012(1,267)(c)

Net income from financial instruments measured at fair value through profit or loss
2021

2020

HK$m

HK$m

Net income/(expense) arising on:
Net trading activities
Other instruments managed on a fair value basis
Net income from financial instruments held for trading or managed on a fair value basis
Financial assets held to meet liabilities under insurance and investment contracts
Liabilities to customers under investment contracts

29,888(1,529)28,35917,837343

35,141(2,969)32,172
15,873(2,745)

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

18,18013,128Change in fair value of designated debt issued and related derivatives1
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
Year ended 31 Dec

(639)
(25)
45,875(171)
138
45,267

1 Includes debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting
mismatch.

(d)Other operating income

Movement in present value of in-force insurance business
Gains/(losses) on investment properties
Losses on disposal of property, plant and equipment and assets held for sale
Gains/(losses) on disposal of subsidiaries, associates and business portfolios
Rental income from investment properties
Dividend income
Other
Year ended 31 Dec

2021

2020

HK$m

HK$m

(1,294)
277
(54)
4
393
198
2,509
2,033

3,840
(996)
(61)
(70)
370
165
2,364
5,612

There was a gain on disposal of loans and receivables of HK$77m in the year (2020: loss of HK$52m). There was a loss on disposal of
financial liabilities measured at amortised cost of HK$136m in the year (2020: nil).
90

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

(e)Change in expected credit losses and other credit impairment charges

Change in expected credit losses and other credit impairment charges arising from the following asset categories:
2021

2020

HK$m

HK$m

Loans and advances to banks and customers

7,055

16,509– new allowances net of allowance releases– recoveries of amounts previously written off

8,065(1,010)17,242(733)

Loan commitments and guarantees
Other financial assets

(683)
167

654
556

Year ended 31 Dec

6,539

17,719Change in expected credit losses as a percentage of average gross customer advances was 0.18% for 2021 (2020: 0.44%).

(f)

General and administrative expenses
2021

2020

HK$m

HK$m

Premises and equipment

2,867

2,804

Marketing and advertising expenses
Other administrative expenses1

2,417
47,043

1,959
41,541

Year ended 31 Dec

52,32746,304

1 Include recharges from fellow group entities. Further details are set out in Note 32.

Included in operating expenses were direct operating expenses of HK$37m (2020: HK$31m) arising from investment properties thatgenerated rental income in the year. Direct operating expenses arising from investment properties that did not generate rental income
amounted to HK$4m (2020: HK$3m).

(g)

Depreciation and impairment of property, plant and equipment

Owned property, plant and equipment
Other right-of-use assets
Year ended 31 Dec

(h)

2021

2020

HK$m

HK$m

6,019
2,872
8,891

6,059
3,346
9,405

Auditors’ remuneration

Auditors’ remuneration amounted to HK$152m (2020: HK$163m).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

91

Notes on the Consolidated Financial Statements

3

Insurance business

Net insurance premium Income
Non-linked
insurance

Unit-linked

Total

HK$m

HK$m

HK$m

Gross insurance premium income

62,9372,398

65,335

Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2021

(3,594)
59,343(19)
2,379(3,613)61,722Gross insurance premium income

61,9791,693

63,672

Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2020

(2,091)
59,888(18)
1,675(2,109)61,563Non-linked
insurance

Unit-linked

Total

HK$m

HK$m

HK$m

Gross claims and benefits paid and movement in liabilities to policyholders– claims, benefits and surrenders paid

78,15918,573

1,898
6,735

80,05725,308– movement in liabilities
Reinsurers’ share of claims and benefits paid and movement in liabilities

59,586(4,013)(4,837)
4

54,749(4,009)– claims, benefits and surrenders paid– movement in liabilities
Year ended 31 Dec 2021

(2,048)(1,965)74,146

(39)
43
1,902

(2,087)(1,922)
76,048Gross claims and benefits paid and movement in liabilities to policyholders– claims, benefits and surrenders paid– movement in liabilities
Reinsurers’ share of claims and benefits paid and movement in liabilities– claims, benefits and surrenders paid– movement in liabilities
Year ended 31 Dec 2020

74,81025,87648,934(2,459)(2,773)314
72,351

5,594
5,990
(396)
(34)
(50)
16
5,560

80,404
31,866
48,538(2,493)(2,823)
330
77,911Net

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

Liabilities under insurance contracts
2021

Non-linked insurance
At 1 Jan
Claims and benefits paid
Increase/(decrease) in liabilities to policyholders
Exchange differences and other movements1
At 31 Dec
Unit-linked
At 1 Jan
Claims and benefits paid
Increase/(decrease) in liabilities to policyholders
Exchange differences and other movements1
At 31 Dec
Total liabilities to policyholders

2020

Gross

Reinsurers’
share2Net

Gross

Reinsurers’
share2

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

547,058(18,573)
78,1591,856
608,500(25,361)
2,048(4,013)(35)(27,361)

521,697(16,525)
74,146
1,821
581,139

494,181(25,876)
74,8103,943
547,058(26,247)
2,773(2,459)572(25,361)

467,934(23,103)
72,351
4,515
521,697

34,348(6,735)
1,898
134
29,645638,145

(4)
39
4
(44)
(5)
(27,366)

34,344(6,696)1,902
9029,640610,779

34,579(5,990)5,594
165
34,348581,406

(35)
50
(34)
15
(4)
(25,365)

34,544(5,940)5,560
18034,344
556,041

1 'Exchange differences and other movements’ includes movements in liabilities arising from net unrealised investment gains recognised in othercomprehensive income.
2 Amounts recoverable from reinsurance of liabilities under insurance contracts are included in the consolidated balance sheet in ‘Prepayment,
accrued income and other assets’.

The key factors contributing to the movement in liabilities to policyholders included movements in the market value of assets supporting
policyholder liabilities, death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, thedeclaration of bonuses and other amounts attributable to policyholders.

92

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

4

Employee compensation and benefits
2021

2020

HK$m

HK$m

Wages and salaries1
Social security costs

35,736
1,344

33,367893

Post-employment benefits– defined contribution pension plans

2,181
1,651

1,923
1,528

– defined benefit pension plans
Year ended 31 Dec

530
39,261

395
36,183

1 'Wages and salaries’ includes the effect of share-based payments arrangements of HK$951m (2020: HK$694m).

Post-employment benefit plans
The group operates a number of post-employment benefit plans for its employees. Some of these plans are defined benefit plans, ofwhich the largest plan is The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (the 'Principal Plan’).
The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and thediscounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they arerecoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether asurplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions.

Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value ofplan assets

Present value of
defined benefit
obligations

Net defined
benefit liability

HK$m

HK$m

HK$m

10,453(13,140)(2,687)

Service cost
– current service cost

—
—

(475)
(492)

(475)
(492)

– past service cost and gains/(losses) from settlements
Net interest income/(expense) on the net defined benefit asset/(liability)

—
79

17
(125)

17
(46)

Re-measurement effects recognised in other comprehensive income– return on plan assets (excluding interest income)

500
500

385
—

885
500

– actuarial gains
Contributions by the group

—
356

385
—

385
356

Benefits paid
Exchange differences and other movements(1,340)
27

1,407
3

67
30

At 31 Dec 2021
Retirement benefit liabilities recognised on the balance sheet

10,075(11,945)(1,870)(1,890)

At 1 Jan 2021

Retirement benefit assets recognised on the balance sheet (within ‘Prepayment, accrued income and otherassets’)At 1 Jan 2020
Service cost
– current service cost
– past service cost and gains/(losses) from settlements
Net interest income/ (expense) on the net defined benefit asset/(liability)
Re-measurement effects recognised in other comprehensive income– return on plan assets (excluding interest income)– actuarial losses
Contributions by the group
Benefits paid
Exchange differences and other movements
At 31 Dec 2020
Retirement benefit liabilities recognised on the balance sheet
Retirement benefit assets recognised on the balance sheet (within ‘Prepayment, accrued income and otherassets’)20
10,302(12,848)(2,546)

—
—

(318)
(492)

(318)
(492)

—
202

174
(263)

174
(61)

446
446
—
602
(1,097)(2)
10,453

(830)
—
(830)
—
1,153
(34)
(13,140)

(384)
446
(830)
602
56
(36)
(2,687)(2,701)The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

14

93

Notes on the Consolidated Financial Statements

Fair value of plan assets by asset classes
At 31 Dec 2021

At 31 Dec 2020

Value

Quoted market
price in active
marketThereof HSBC

Value

Quoted market
price in active
marketThereof HSBC

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Fair value of plan assets– equities

10,075
1,232

10,075
1,232

257
—

10,453
1,547

10,453
1,547

219
—

– bonds– alternative investments

5,676
2,490

5,676
2,490

—
—

5,562
2,838

5,562
2,838

—
—

677

677

257

506

506

219

– other1

1 Other mainly consists of cash and cash deposits.

The Principal Plan
In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (‘LSRBS’), the Principal Plan, covers employees of thegroup and HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the Group set up in Hong Kong aspart of the recovery and resolution planning to provide functional support services to the group, as well as certain other local employeesof the Group. The Principal Plan comprises a funded defined benefit scheme (which provides a lump sum benefit on retirement and is
now closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees, andthe group has been providing defined contribution plans to all new employees. Since the defined benefit scheme of the Principal Plan is a
final salary lump sum scheme, its exposure to longevity risk and interest rate risk is limited compared to a scheme that provides annuity
payments.
The Principal Plan is a funded plan with assets which are held in trust funds separate from the group. The investment strategy of thedefined benefit scheme of the Principal Plan is to hold the majority of assets in fixed income investments, with a smaller portion in
equities. The target asset allocation for the portfolio is as follows: Fixed income investments 75% and Equity 25%. Each investment
manager has been assigned a benchmark applicable to their respective asset class. The actuarial funding valuation of the Principal Plan isconducted at least on a triennial basis in accordance with the local practice and regulations. The actuarial assumptions used to conduct
the actuarial funding valuation of the Principal Plan vary according to the economic conditions.
The trustee, which is a subsidiary of the Bank, assumes the overall responsibility for the Principal Plan and the group has established amanagement committee and a number of sub-committees to broaden the governance and manage the concomitant issues.
Both the group and ServCo participate in the Principal Plan that shares risks between the entities which are under common control of theGroup. As agreed between the group and ServCo, the net defined benefit cost of the defined benefit scheme of the Principal Plan shall becharged separately. Details on the defined benefit scheme of the Principal Plan are disclosed below.
Net asset/(liability) under the defined benefit scheme of the Principal Plan
Included within the group

Fair valueof planassetsIncluded within ServCo

Present
value ofdefinedbenefitobligationsNet
definedbenefitliability

Fair valueof planassetsPresent
value ofdefinedbenefitobligationsNet
definedbenefitliability

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 1 Jan 2021
Service cost
– current service cost
Net interest income/(expense) on the net defined benefit asset/(liability)
Re-measurement effects recognised in other comprehensive income– return on plan assets (excluding interest income)– actuarial gains
Contributions
Benefits paid
Exchange differences and other movements
At 31 Dec 2021
Retirement benefit liabilities recognised on the balance sheet

4,486
—
—
22
265
265
—
166
(585)
70
4,424

(5,330)
(179)
(179)
(26)
118
—
118
—
585
(83)
(4,915)

(844)
(179)
(179)
(4)
383
265
118
166
—
(13)
(491)
(491)

4,288
—
—
21
250
250
—
149
(682)
(81)
3,945

(5,001)
(171)
(171)
(24)
240
—
240
—
682
83
(4,191)

(713)
(171)
(171)
(3)
490
250
240
149
—
2
(246)
(246)

At 1 Jan 2020
Service cost
– current service cost
Net interest income/ (expense) on the net defined benefit asset/(liability)
Re-measurement effects recognised in other comprehensive income– return on plan assets (excluding interest income)– actuarial losses
Contributions
Benefits paid
Exchange differences and other movements
At 31 Dec 2020
Retirement benefit liabilities recognised on the balance sheet

4,654
—
—
80
114
114
—
183
(549)
4
4,486

(5,252)
(182)
(182)
(89)
(325)
—
(325)
—
549
(31)
(5,330)

(598)
(182)
(182)
(9)
(211)
114
(325)
183
—
(27)
(844)
(844)

4,445
—
—
76
110
110
—
174
(484)
(33)
4,288

(4,960)
(175)
(175)
(84)
(297)
—
(297)
—
484
31
(5,001)

(515)
(175)
(175)
(8)
(187)
110
(297)
174
—
(2)
(713)
(713)

The group expects to make HK$160m of contributions to the defined benefit scheme of the Principal Plan and ServCo expects to make
HK$136m contributions to the defined benefit scheme of the Principal Plan during 2022. This is determined separately by the group and
ServCo by reference to the actuarial funding valuation carried out by the Principal Plan's local actuary.
94

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate forthe five years thereafter, are as follows:
Benefits expected to be paid from the defined benefit scheme of the Principal Plan1
As reported by:– The group– ServCo

2022

2023

2024

2025

2026

HK$m

HK$m

HK$m

HK$m

HK$m

2027-2031
HK$m

381
286

467
284

383
333

362
365

396
287

1,896
1,785

1 The duration of the defined benefit obligation is seven years for the Principal Plan under the disclosure assumptions adopted (2020: seven years).

Fair value of plan assets of the defined benefit scheme of the Principal Plan by asset classes
At 31 Dec 2021

Fair value of plan assets– equities– bonds– alternative investments– other1

At 31 Dec 2020

Value

Quoted market
price in active
marketThereof HSBC

Value

Quoted market
price in active
marketThereof HSBC

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

8,369
1,839
4,731
1,723
76

8,369
1,839
4,731
1,723
76

76
—
—
—
76

8,775
2,448
4,537
1,676
114

8,775
2,448
4,537
1,676
114

124
—
—
—
124

1 Other mainly consists of cash and cash deposits.

The Principal Plan’s key actuarial financial assumptions
The group and ServCo determine the discount rate to be applied to the defined benefit scheme's obligations in consultation with the
Principal Plan’s local actuary, on the basis of the current average yields of Hong Kong Government bonds and Hong Kong Exchange
Fund Notes, with maturities consistent with that of the defined benefit obligations.
The key actuarial assumptions used to calculate the group’s obligations for the defined benefit scheme of the Principal Plan for theyear, and used as the basis for measuring the expenses were as follows:
Key actuarial assumptions for the defined benefit scheme of the Principal Plan
Discount rate

Rate of pay increase% p.a.

% p.a.

At 31 Dec 2021

1.30

3.00

0.50

2% p.a. for 2020 and 2021
and 3% p.a. thereafterAt 31 Dec 2020

Actuarial assumption sensitivities
The discount rate and rate of pay increase are sensitive to changes in market conditions arising during the reporting period. The
following table shows the financial impact of assumption changes on the defined benefit scheme of the Principal Plan at year end:
The effect of changes in key assumptions on the defined benefit scheme of the Principal Plan
Impact on HSBC Group Hong Kong Local Staff Retirement Benefit
Scheme obligation
Financial impact of increase

Discount rate – increase/decrease of 0.25%
Pay – increase/decrease of 0.25%

Financial impact of decrease

2021

2020

2021

2020

HK$m

HK$m

HK$m

HK$m

(158)
160

(180)
182

162
(157)

185
(178)

Directors’ emoluments
The aggregate emoluments of the Directors of the Bank disclosed pursuant to section 4 of the Companies (Disclosure of Information
about Benefits of Directors) Regulation were HK$131m (2020: HK$106m). This comprises fees (which represent the aggregate
emoluments paid to or receivable by directors in respect of their services as a director) of HK$30m (2020: HK$26m) and other
emoluments of HK$101m (2020: HK$80m) which includes contributions to pension schemes of HK$1m (2020: nil). Non-cash benefits
which are included in other emoluments mainly relate to share-based payment awards, and the provision of housing and furnishing.
Details on loans to directors are set out in Note 32.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

95

Notes on the Consolidated Financial Statements

5

Tax

The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2020: 16.5%) on the profits forthe year assessable in Hong Kong. Overseas branches and subsidiaries have similarly provided for tax in the countries in which they
operate at the appropriate rates of tax in force in 2021. Deferred taxation is provided for in accordance with the group’s accounting policy
in Note 1.2(m).
Tax expense
2021

2020

HK$m

HK$m

Current tax– Hong Kong taxation – on current year profit

12,4895,719

14,2797,316– Hong Kong taxation – adjustments in respect of prior years– overseas taxation – on current year profit

(158)
7,151

(457)
7,668

– overseas taxation – adjustments in respect of prior years
Deferred tax

(223)
1,526

(248)
226

– origination and reversal of temporary differences– effect of changes in tax rates

1,209
9

(414)
36

– adjustments in respect of prior years
Year ended 31 Dec

308
14,015604
14,505

Tax reconciliation
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the applicable tax
rates in the countries concerned as follows:
Reconciliation between taxation charge and accounting profit at applicable tax rates

Profit before tax
Notional tax on profit before tax, calculated at the rates applicable to profits in the countries concerned
Effects of profits in associates and joint ventures
Non-taxable income and gains
Local taxes and overseas withholding taxes
Permanent disallowables
OthersYear ended 31 Dec

2021

2020

HK$m

HK$m

86,563
17,463(3,186)(3,181)
2,695
577
(353)
14,01590,196
18,058(2,523)(3,291)
2,270
523
(532)
14,505

Movements of deferred tax assets and liabilities

AssetsLiabilities
At 1 Jan 2021
Exchange and other adjustments
Charge/(credit) to income statement
Charge/(credit) to other comprehensive
incomeExpenseprovisions

Impairment
allowance on
financial
instruments

Revaluationof properties

Other2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

—
(10,662)(10,662)
2
232

1,294
—
1,294
(42)
286

2,676
—
2,676
(75)
80

—
(14,645)(14,645)
(1)
524

3,088
(9,167)(6,079)(11)(2,506)

7,160(34,832)(27,672)(133)(1,526)

Accelerated
capitalallowances

Insurancebusiness

HK$m

102
(358)
(256)
(6)
(142)
—

—

1

(1)

(863)

1,025

162

At 31 Dec 2021
Assets1
Liabilities1

(404)
176
(580)

(10,428)—(10,428)

1,539
1,557
(18)

2,680
2,680
—

(14,985)—(14,985)(7,571)
2,106(9,677)(29,169)6,519(35,688)

AssetsLiabilities
At 1 Jan 2020
Exchange and other adjustments
Charge/(credit) to income statement

183
(332)
(149)
6
(113)

—
(10,140)(10,140)
(19)
(503)

1,290
—
1,290
81
(63)

1,478
—
1,478
23
1,176

—
(16,462)(16,462)
(52)
729

2,280
(6,007)(3,727)73(1,452)

5,231(32,941)(27,710)112(226)

Charge/(credit) to other comprehensive
incomeAt 31 Dec 2020
Assets1
Liabilities1

—

—

(14)

(1)

1,140

(973)

152

(256)
102
(358)

(10,662)—(10,662)

1,294
1,294
—

2,676
2,676
—

(14,645)—(14,645)(6,079)3,088(9,167)(27,672)
7,160(34,832)

1 After netting off balances within countries, the balances as disclosed in the Consolidated Financial Statements are as follows: deferred tax assets
HK$3,353m (2020: HK$3,325m); and deferred tax liabilities HK$32,522m (2020: HK$30,997m).
2 Other included deferred tax of HK$5,523m (2020: HK$4,295m) provided in respect of distributable reserves or post-acquisition reserves ofassociates that, on distribution or sale, would attract withholding tax.

The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$3,130m (2020: HK$3,969m). Of
this amount, HK$733m (2020: HK$1,917m) has no expiry date and the remaining will expire within 10 years.

96

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Deferred tax is not recognised in respect of the group‘s investments in subsidiaries and branches where remittance or other realisation is
not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise.

6

Dividends

Dividends to shareholders of the parent company
2021

Dividends paid on ordinary shares
In respect of previous year:– fourth interim dividend
In respect of current year:– first interim dividend paid
– second interim dividend paid
– third interim dividend paid
Total
Distributions on other equity instruments
Dividends to shareholders

2020

HK$ per share

HK$m

HK$ per share

HK$m

0.47

21,6650.58

27,026

0.26
0.24
0.24
1.21

12,211
11,153
11,361
56,3902,715
59,105

0.13
0.19
0.22
1.12

5,814
8,915
10,06351,8182,450
54,268On 15 February 2022, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2021 of
HK$0.23 per ordinary share (HK$10,584m) (2020: HK$0.47 per ordinary share (HK$21,665m)). No liability was recorded in the financial
statements in respect of the fourth interim dividend for 2021.
Total coupons on other equity instruments

US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.510%)1
US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.030%)1
US$1,000m Fixed rate perpetual subordinated loan (interest rate fixed at 6.090%)1
US$1,200m Fixed rate perpetual subordinated loan (interest rate fixed at 6.172%)1
US$600m Fixed rate perpetual subordinated loan (interest rate fixed at 5.910%)1
US$1,100m Fixed rate perpetual subordinated loan (interest rate fixed at 6.000%)1
Total

1

7

2021
HK$m

2020
HK$m

456
422
474
576
275
512
2,715

454
420
370
445
249
512
2,450

These subordinated loans were issued in May and June 2019 and discretionary coupons are paid annually.

Trading assets

Treasury and other eligible bills
Debt securities
Equity securities
Other1
At 31 Dec

2021

2020

HK$m

HK$m

132,104
274,508
299,420
71,418
777,450

113,668
265,255
166,385
55,106600,414

1 'Other' includes reverse repos, stock borrowing, term lending and other accounts with banks and customers.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

97

Notes on the Consolidated Financial Statements

8

Derivatives

Notional contract amounts and fair values of derivatives by product contract type
Notional contract amountForeign ExchangeInterest rate
EquityCreditCommodity and other
Gross total

Fair value – Assets

Fair value – Liabilities

Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

17,721,333
30,392,783

74,732
218,885

155,110368,523

3,401
4,321

158,511
372,844150,034
372,342523
1,406

150,557
373,748

845,058
413,340——

18,611
3,446——

18,611
3,446

14,8004,437——

14,8004,437

146,377
49,518,891—
293,617

1,884
547,574

—
7,722

1,884
555,296

2,378
543,991

—
1,929

2,378
545,920

OffsetAt 31 Dec 2021

(190,129)
365,167(190,129)355,791

Foreign Exchange

18,274,306

100,371

238,746

232

238,978

261,792

2,625

264,417

Interest rate

26,906,526

304,554357,195

6,099

363,294

327,675

6,718

334,393

Equity591,614—

13,810—13,81019,072—

19,072CreditCommodity and other553,790
115,673

—
—

5,381
2,138

—
—

5,381
2,138

5,955
5,030

—
—

5,955
5,030

46,441,909

404,925

617,2706,331

623,601(200,656)

619,524

9,343

628,867(200,656)

Gross total
OffsetAt 31 Dec 2020

422,945428,211

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.

Use of derivatives
The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risk
arising from client business, and to manage and hedge the group’s own risks. Derivatives (except for derivatives which are designated as
effective hedging instruments) are held for trading. Within the held for trading classification are two types of derivative instruments:
those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet thequalifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments
designated at fair value. These activities are described more fully below.
The group’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly
to ensure that they remain within acceptable risk levels. When entering into derivative transactions, the group employs the same credit
risk management framework to assess and approve potential credit exposures that it uses for traditional lending.

Trading derivatives
Most of the group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing ofderivative 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 ofgenerating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from clienttransactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying
hedging derivatives.

Derivatives valued using models with unobservable inputs
Any initial gain or loss on financial instruments where the valuation is dependent on unobservable parameters is deferred over the life of
the contract or until the instrument is redeemed, transferred or sold or the fair value becomes observable. All derivatives that are part ofqualifying hedging relationships have valuations based on observable market parameters.
The aggregate unobservable inception profit yet to be recognised in the income statement is immaterial.

Hedge accounting derivatives
The group applies hedge accounting to manage the following risks: interest rate and foreign exchange. The group uses derivatives(principally interest rate and currency swaps) for hedging purposes in the management of its own asset and liability portfolios andstructural positions. This enables the group to optimise its overall costs of accessing debt capital markets, and to mitigate the market risk
which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities. The accounting
treatment of hedging transactions varies according to the nature of the instrument hedged and the type of hedging transaction.
Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, or cash flow hedges.

Fair value hedges
The group enters into to fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value due to movements inmarket interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss, including debt
securities held and issued.
Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fairvalue of derivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items
and hedging instruments.
For some debt securities held, the group manages interest rate risk in a dynamic risk management strategy. The assets in scope of thisstrategy are high quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements.
The interest rate risk of the group's fixed rate debt securities issued is managed in a non-dynamic risk management strategy.

98

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Cash flow hedges
The group’s cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage
the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates
and foreign-currency basis.
The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuancesof non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of
future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on thebasis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows
representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness andineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.
The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes inforeign exchange market rates with cross-currency swaps; these are considered non-dynamic hedges.

Interest rate benchmark reform
At 31 December 2021, HK$99,608m (2020: HK$192,048m) of the notional amounts of interest rate derivatives designated in hedge
accounting relationships do not represent the extent of the risk exposure managed by the group but they are expected to be directly
affected by market-wide Ibors reform and in scope of HKFRS Interest Rate Benchmark Reform Phase 1 amendments.
Further details regarding the impact of the market-wide benchmarks reform is set out in the 'Top and emerging risks' section on page 20
as specified as 'Audited'.

9

Financial assets designated and otherwise mandatorily measured at fair value through profit
or loss
2021

Treasury and other eligible bills
Debt securities
Equity securities
Other1
At 31 Dec

2020

Designated atfair value

Mandatorily
measured atfair value

Total

Designated atfair value

Mandatorily
measured atfair value

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

—
12,847——
12,847241
11,066
169,125
9,120
189,552

241
23,913
169,125
9,120
202,399

94
14,400——14,494200
8,455
143,815
11,996
164,466294
22,855
143,815
11,996
178,960

1 ‘Other’ includes loans and advance to banks and customers, and default fund contribution.

10

Loans and advances to customers

Gross loans and advances to customers
Expected credit loss allowances
At 31 Dec

2021

2020

HK$m

HK$m

3,872,956(32,017)3,840,939

3,697,568(28,887)
3,668,681

The following table provides an analysis of gross loans and advances to customers by industry sector based on the Statistical
Classification of economic activities in the European Community (‘NACE’).
Analysis of gross loans and advances to customers

Residential mortgages
Credit card advances
Other personal
Total personal
Real estate
Wholesale and retail trade
Manufacturing
Transportation and storage
Other
Total corporate and commercial
Non-bank financial institutions
At 31 Dec
By geography1
Hong Kong
Rest of Asia Pacific

2021

2020

HK$m

HK$m

1,167,487
89,005
275,819
1,532,311
635,217428,785
410,033
111,388471,988
2,057,411
283,234
3,872,956

1,097,760
86,735
267,852
1,452,347
638,560
394,624
379,853
97,204
489,737
1,999,978245,2433,697,568

2,447,799
1,425,157

2,357,375
1,340,193

1 The geographical information shown above is classified by the location of the principal operations of the subsidiary or the branch responsible foradvancing the funds.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

99

Notes on the Consolidated Financial Statements

Finance lease receivables and hire purchase contracts
The group leases a variety of assets to third parties under finance leases. At the end of lease terms, assets may be sold to third parties orleased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income. Loans andadvances to customers include receivables under finance leases and hire purchase contracts having the characteristics of finance leases.
Net investment in finance leases and hire purchase contracts
2021

Amounts receivable– within one year
– one to two years– two to three years– three to four years– four to five years– after five years

2020

Total future
minimum
payments

Unearnedfinance
income

HK$m

HK$m

4,205
3,543
2,757
2,357
2,200
22,13337,195(1,213)(1,051)
(912)
(762)
(647)
(3,203)(7,788)Present value

Total future
minimum
payments

Unearnedfinance
incomePresent value

HK$m

HK$m

HK$m

HK$m

2,992
2,492
1,845
1,595
1,553
18,93029,407(378)
29,029

3,715
3,439
2,717
2,135
1,913
22,186
36,105

(811)
(678)
(554)
(475)
(415)
(3,014)(5,947)

2,904
2,761
2,163
1,660
1,498
19,17230,158(392)
29,766

Expected credit loss allowances
At 31 Dec

11

Financial investments

Financial investments measured at fair value through other comprehensive income– treasury and other eligible bills– debt securities– equity securities
Debt instruments measured at amortised cost– treasury and other eligible bills– debt securities
At 31 Dec

2021

2020

HK$m

HK$m

1,549,011
653,245888,664
7,102
502,5646,900
495,664
2,051,575

1,700,406
790,627
899,193
10,586
475,026
4,443
470,583
2,175,432

Equity instruments measured at fair value through other comprehensive income
2021

Type of equity instruments
Business facilitation
Investments required by central institutions
OthersAt 31 Dec

100

2020

Fair value

Dividends
recognised

Fair value

Dividends
recognised

HK$m

HK$m

HK$m

HK$m

6,540
420
142
7,102

189
3
6
198

9,826
413
347
10,586

157
3
6
166

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

12

Assets pledged, assets transferred and collateral received

Assets pledged
Financial assets pledged to secure liabilities
2021

2020

HK$m

HK$m

Treasury bills and other eligible securities
Loans and advances to banks

57,631
3,211

46,846
1,830

Loans and advances to customers
Debt securities

30,975
134,747

28,30776,913Equity securities
Cash collateral included in other assets

47,45375,951

17,60886,240Assets pledged at 31 Dec
Amount of liabilities secured

349,968
275,815

257,744
210,185

The table above shows assets where a charge has been granted to secure liabilities on a legal and contractual basis. These transactions
are conducted under terms that are usual and customary to collateralised transactions including repurchase agreements, securities
lending, derivative margining, and include assets pledged to cover short positions and to facilitate settlement processes with clearing
houses as well as swaps of equity and debt securities. The group places both cash and non-cash collateral in relation to derivativetransactions.
Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificatesof indebtedness are held.
Financial assets pledged as collateral which the counterparty has the right to sell or repledge was HK$85,162m (2020: HK$30,386m).

Assets transferred
Transferred financial assets not qualifying for full derecognition and associated financial liabilities
2021

2020

Carrying amount of:Carrying amount of:TransferredassetsRepurchase agreements
Securities lending agreements

Associatedliabilities

Transferredassets

Associatedliabilities

HK$m

HK$m

HK$m

HK$m

135,994
44,171
180,165

124,663282
124,945

85,715
18,946
104,661

77,32235
77,357

The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt
securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending
agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to berecognised in full while a related liability, reflecting the group’s obligation to repurchase the assets for a fixed price at a future date, isalso recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no
associated liability as the non-cash collateral received is not recognised on the balance sheet. The group is unable to use, sell or pledge
the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged
assets.

Collateral received
Assets accepted as collateral relate primarily to standard securities borrowing, reverse repurchase agreements, swaps of securities andderivative margining. The group is obliged to return equivalent securities. These transactions are conducted under terms that are usual
and customary to standard securities borrowing, reverse repurchase agreements and derivative margining.
Fair value of collateral accepted as security for assets

Fair value of collateral permitted to sell or repledge in the absence of default
Fair value of collateral actually sold or repledged

2021

2020

HK$m

HK$m

1,134,296
377,117709,091
128,783

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

101

Notes on the Consolidated Financial Statements

13

Investments in subsidiaries

Main subsidiaries of the Bank
The group’s interest inissued share capital/
registered or charter capital

Place of incorporation

Principal activity

Hang Seng Bank Limited

Hong Kong

Banking

62.14%HSBC Bank (China) Company Limited
HSBC Bank Malaysia Berhad

People's Republic of China Banking
Malaysia
Banking

100%
100%

HSBC Bank Australia Limited1
HSBC Bank (Taiwan) Limited1

Australia
TaiwanBanking
Banking100%
100%Singapore

Banking
Retirement benefits andlife insurance

100%

HSBC Bank (Singapore) Limited
1

HSBC Life (International) Limited

Bermuda100%

1 Held indirectly.

All the above subsidiaries are included in the group’s consolidated financial statements. All these subsidiaries make their financial
statements up to 31 December.
The principal places of business are the same as the places of incorporation except for HSBC Life (International) Limited which operates
mainly in Hong Kong.
The proportion of voting rights held is the same as the proportion of ownership interest held.
The main subsidiaries are regulated banking and insurance entities in the Asia-Pacific region and, as such, are required to maintaincertain minimum levels of capital and liquid assets to support their operations. The effect of these regulatory requirements is to limit theextent to which the subsidiaries may transfer funds to the Bank in the form of repayment of shareholder loans or cash dividends.
Subsidiary with significant non-controlling interest

Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests
Profit attributable to non-controlling interests
Accumulated non-controlling interests of the subsidiary
Dividends paid to non-controlling interests
Summarised financial information (before intra-group eliminations):– total assets– total liabilities– net operating income before change in expected credit losses and other credit impairment charges– profit for the year
– other comprehensive income/(expense) for the year
– total comprehensive income for the year

14

2021

2020

HK$m

HK$m

37.86%
5,272
65,431
4,415

37.86%
6,300
64,9754,849

1,820,185
1,635,769
33,265
13,946(357)
13,5891,759,787
1,576,592
35,433
16,6701,079
17,749Interests in associates and joint ventures

Associates

Share of net assets
Goodwill
Impairment
At 31 Dec

2021

2020

HK$m

HK$m

184,402
4,141(58)
188,485

164,767
4,011(24)
168,754

The above balance represented the group’s interests in associates.

Principal associate
Place of incorporation

Bank of Communications Co., Ltd

The group’s interest in issued share capital

People’s Republic of China

19.03%

Bank of Communications Co., Ltd. is listed on recognised stock exchanges. The fair value represents valuation based on the quoted
market price of the shares held (Level 1 in the fair value hierarchy) and amounted to HK$66,579m at 31 December 2021
(2020: HK$57,815m).

Bank of Communications Co., Ltd (‘BoCom’)
The group’s investment in BoCom is classified as an associate. Significant influence in BoCom was established with consideration of all
relevant factors, including representation on BoCom’s Board of Directors and participation in a Resource and Experience Sharing
agreement (‘RES’). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom’s financial and operating
policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28, whereby theinvestment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group’s share of BoCom’s net
assets. An impairment test is required if there is any indication of impairment.

102

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Impairment testing
At 31 December 2021, the fair value of the group’s investment in BoCom had been below the carrying amount for approximately ten
years. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment at.
31 December 2021 as the recoverable amount as determined by a value-in-use (‘VIU’) calculation was higher than the carrying value.
At
31 Dec 2021

BoCom

31 Dec 2020

VIU

Carrying
value

Fair
value

VIU

Carrying
value

Fair
value

HK$bn

HK$bn

HK$bn

HK$bn

HK$bn

HK$bn

193.0

184.8

66.6

169.3

165.4

57.8

Compared with 31 December 2020, the extent to which the VIU exceeds the carrying value (‘headroom’) increased by HK$4.3bn. The
increase in headroom was principally due to the impact on the VIU from BoCom's actual performance, which was better than earlier
estimates, revisions to management's best estimates of BoCom's future earnings in the short to medium term, and the net impact ofrevisions to certain long-term assumptions.
In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs aredescribed below and are based on factors observed at period-end. The factors that could result in a change in the VIU and an impairment
include a short-term underperformance by BoCom, a change in regulatory capital requirements or an increase in uncertainty regarding
the future performance of BoCom resulting in a downgrade of the forecast of future asset growth or profitability. An increase in the
discount rate could also result in a reduction of VIU and an impairment. At the point where the carrying value exceeds the VIU,
impairment would be recognised.
If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying
value.

Basis of recoverable amountThe impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying
amount. The VIU calculation uses discounted cash flow projections based on management’s best estimates of future earnings available
to ordinary shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best
estimate. There are two main components to the VIU calculation. The first component is management’s best estimate of BoCom’s
earnings, which is based on explicit forecasts over the short to medium term. This results in forecast earnings growth that is lower thanrecent historical actual growth and also reflects the uncertainty arising from the current economic outlook. Reflecting management's
intent to continue to retain its investment, earnings beyond the short to medium term are then extrapolated into perpetuity using a longterm growth rate to derive a terminal value, which comprises the majority of the VIU. The second component is the capital maintenancecharge (‘CMC’), which is management’s forecast of the earnings that need to be withheld in order for BoCom to meet capitalrequirements over the forecast period, meaning that CMC is deducted when arriving at management’s estimate of future earnings
available to ordinary shareholders. The principal inputs to the CMC calculation include estimates of asset growth, the ratio of riskweighted assets to total assets and the expected capital requirements. An increase in the CMC as a result of a change to these principal
inputs would reduce VIU. Additionally, management considers other qualitative factors, to ensure that the inputs to the VIU calculation
remain appropriate.

Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in accordance with the requirements of HKAS 36:•

Long-term profit growth rate: 3% (2020: 3%) for periods after 2025, which does not exceed forecast GDP growth in mainland China
and is consistent with forecasts by external analysts.

•

Long-term asset growth rate: 3% (2020: 3%) for periods after 2025, which is the rate that assets are expected to grow to achieve
long-term profit growth of 3%.

•

Discount rate: 10.03% (2020: 11.37%) based on a capital asset pricing model (‘CAPM’), using market data. The discount rate used iswithin the range of 8.7% to 10.1% (2020 equivalent range: 10.9% to 11.9%) indicated by the CAPM. The lower rate reflects theimpact of a relative reduction in the volatility of Chinese banks equity prices and a decrease in mainland China’s credit risk due to its
relatively quick recovery from the impact of the Covid-19 outbreak. While the CAPM range sits at the lower end of the range adopted
by selected external analysts of 9.9% to 13.5% (2020: 10.3% to 15.0%), we continue to regard the CAPM range as the mostappropriate basis for determining this assumption.

•

Expected credit losses as a percentage of customer advances (‘ECLs’): ranges from 0.98% to 1.12% (2020: 0.98% to 1.22%) in the
short to medium term, reflecting reported credit experience through the ongoing Covid-19 outbreak in mainland China followed by an
expected reversion to recent historical levels. For periods after 2025, the ratio is 0.97% (2020: 0.88%), which is higher than BoCom’s
average ECLs in recent years prior to the Covid-19 outbreak.

•Risk-weighted assets as a percentage of total assets: ranges from 61.0% to 62.4% (2020: 61.0% to 62.0%) in the short to medium
term, reflecting reductions that may arise from a subsequent lowering of ECLs and a continuation of the trend of strong retail loan
growth. For periods after 2025, the ratio is 61.0% (2020: 61.0%). These rates are similar to BoCom’s actual results in recent years andforecasts disclosed by external analysts.

•

Operating income growth rate: ranges from 5.1% to 6.2% (2020: 3.5% to 6.7%) in the short to medium term, and is lower than
BoCom’s actual results in recent years and the forecasts disclosed by external analysts, reflecting BoCom’s most recent actual
results, global trade tensions and industry developments in mainland China.

•

Cost-income ratio: ranges from 35.5% to 36.1% (2020: 36.3% to 36.8%) in the short to medium term. These ratios are similar to
BoCom's actual results in recent years and forecasts disclosed by external analysts.

•

Effective tax rate (‘ETR’): ranges from 6.8% to 15.0% (2020: 7.8% to 16.5%) in the short to medium term, reflecting BoCom’s actual
results and an expected increase towards the long-term assumption through the forecast period. For periods after 2025, the rate is
15.0% (2020: 16.8%), which is higher than the recent historical average, and aligned to the minimum tax rate as proposed by the
OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

103

Notes on the Consolidated Financial Statements•

Capital requirements: capital adequacy ratio ('CAR') of 12.5% (2020: 11.5%) and tier 1 capital adequacy ratio of 9.5% (2020: 9.5%),
based on BoCom’s capital risk appetite and capital requirements respectively. The CAR assumption was updated to 12.5% from
11.5% following the approval of BoCom's capital management plan in March 2021.

The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:
Key assumption

Changes to key assumption to reduce headroom to nil

•
•
•
•
•
•
•
•
•
•

•
•
•
•
•
•
•
•
•
•

Long-term profit growth rateLong-term asset growth rate
Discount rate
Expected credit losses as a percentage of customer advances
Risk-weighted assets as a percentage of total assets
Operating income growth rate
Cost-income ratio
Long-term effective tax rate
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio

Decrease by 26 basis points
Increase by 22 basis points
Increase by 34 basis points
Increase by 4 basis points
Increase by 183 basis points
Decrease by 37 basis points
Increase by 102 basis points
Increase by 301 basis points
Increase by 37 basis points
Increase by 193 basis points

The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivityof the VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur atthe same time. The selected rates of reasonably possible changes to key assumptions are largely based on external analysts’ forecasts
which can change period to period.
Favourable change

At 31 December 2021
Long-term profit growth rate1
Long-term asset growth rate1
Discount rate2
Expected credit losses as a percentage of customer advances
Risk-weighted assets as a percentage of total assets
Operating income growth rate
Cost-income ratio
Long-term effective tax rate
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio
At 31 December 2020
Long-term profit growth rate1
Long-term asset growth rate1
Discount rate
Expected credit losses as a percentage of customer advances
Risk-weighted assets as a percentage of total assets
Operating income growth rate
Cost-income ratio
Long-term effective tax rate
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio

Unfavourable change

Increase in
VIU

VIU

Decrease in
VIU

bps

HK$bn

HK$bn

VIU

bps

HK$bn

HK$bn

+87
-69
-133

33.1
22.9
42.2

226.1
215.9
235.2

-69
+87
+207

(20.5)(36.2)(40.8)

172.5
156.8
152.2

2021 to 2025: 103
2026 onwards: 91

11.9

204.9

2021 to 2025: 121
2026 onwards: 105(21.0)

172.0

-111
+37
-152
-104
—
—

2.2
8.2
13.6
2.9
—
—

195.2
201.2
206.6
195.9
193.0
193.0

+280
-58
+174
+1000
+325
+364

(15.8)(13.6)(12.7)(27.4)(77.6)(50.0)

177.2
179.4
180.3
165.6
115.4
143.0

—
-50
-47

—
11.0
9.4

169.3
180.3
178.7

-50
—
+53

(10.0)
—
(9.3)

159.3
169.3
160.0

2020 to 2024: 96
2025 onwards: 76

17.7

187.0

2020 to 2024: 122
2025 onwards: 95(16.5)

152.8

-40
+2
-149
-316
—
—

0.4
0.9
9.9
6.9
—
—

169.7
170.2
179.2
176.2
169.3
169.3

+166
-69
+120
+820
+297
+263

(6.7)
(11.8)(9.6)(17.7)(61.0)(41.5)

162.6
157.5
159.7
151.6
108.3
127.8

1 The reasonably possible ranges of the long-term profit growth rate and long-term asset growth rate assumptions reflect the close relationshipbetween these assumptions, which would result in offsetting changes to each assumption.
2 The unfavourable change in the reasonably possible ranges of the discount rate assumption reflects the impact of adopting the average of the rates
adopted by selected external analysts.

Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of
VIU is HK$148.3bn to HK$228.4bn (2020 equivalent range: HK$133.4bn to HK$199.1bn). The range is based on impacts set out in thetable above arising from the favourable/unfavourable change in the earnings in the short to medium term, the long-term expected credit
losses as a percentage of customer advances and a 50bps increase/decrease in the discount rate. The discount rate has been included
this year reflecting the relative materiality of movements in this assumption. All other long-term assumptions, and the basis of the CMC
have been kept unchanged when determining the reasonably possible range of the VIU.

Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2021, the group included theassociate’s results on the basis of financial statements made up for the 12 months to 30 September 2021, but taking into account thefinancial effect of significant transactions or events in the period from 1 October 2021 to 31 December 2021.

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The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Selected balance sheet information of BoComAt 30 Sep

Cash and balances at central banks

2021

2020

HK$m

HK$m

960,732

945,836

Loans and advances to banks and other financial institutions
Loans and advances to customers

771,522
7,751,362

832,226
6,751,280

Other financial assets
Other assets

4,223,488
375,073

3,941,375
349,120

Total assets
Deposits by banks and other financial institutions

14,082,177
2,238,612

12,819,837
2,122,220

Customer accounts
Other financial liabilities

8,572,625
1,779,110

7,852,322
1,605,846

Other liabilities
Total liabilities

312,486
12,902,833

241,177
11,821,565

Total equity

1,179,344

998,272

Reconciliation of BoCom’s net assets to carrying amount in the group’s consolidated financial statements
At 30 Sep
2021

2020

HK$m

HK$m

The group’s share of ordinary shareholders' equity
Goodwill

180,738
4,044

161,433
3,912

Carrying amount

184,782

165,345

Selected income statement information of BoCom
For the 12 months ended 30 Sep

Net interest income
Net fee and commission income
Change in expected credit losses
Depreciation and amortisation
Tax expense– profit for the year
– other comprehensive income
Total comprehensive income
Dividends received from BoCom

2021

2020

HK$m

HK$m

191,076
55,735(75,402)(17,851)(8,119)110,370(2,861)
107,509
5,386

170,586
49,624(75,220)(16,069)(6,656)
79,585(5,965)73,6204,907

Using the latest period for which BoCom has disclosed this information (at 30 June 2021), the group's share of associates' contingent liabilities was
HK$432,259m (2020: HK$356,609m).

15

Goodwill and intangible assets

Goodwill and intangible assets include goodwill arising on business combinations, the present value of in-force long-term insurance
business, and other intangible assets.

Goodwill
Present value of in-force long-term insurance business
Other intangible assets1
At 31 Dec

2021

2020

HK$m

HK$m

7,116
63,76524,30095,181

7,109
65,052
17,80789,968

1 Included within other intangible assets is internally generated software with a net carrying value of HK$21,670m (2020: HK$15,283m). During theyear, capitalisation of internally generated software was HK$10,681m (2020: HK$7,241m), amortisation charge was HK$4,115m (2020:
HK$3,233m) and impairment charge was HK$184m (2020: HK$603m).

The present value of in-force long-term insurance business
When calculating the present value of in-force long term ('PVIF') insurance business, expected cash flows are projected after adjusting fora variety of assumptions made by each insurance operation to reflect local market conditions and management’s judgement of future
trends, and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology).
Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.
Actuarial Control Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. Allchanges to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by
the Actuarial Control Committee.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

105

Notes on the Consolidated Financial Statements

Movements in PVIF
2021

2020

HK$m

HK$m

At 1 Jan
Changes in PVIF of long-term insurance business

65,052(1,294)

61,075
3,840– value of new business written during the year
– expected return1

7,381(5,950)5,360(6,743)– assumption changes and experience variances (see below)– other adjustments(2,873)
148

5,268
(45)

Exchange differences and otherAt 31 Dec

7
63,765

137
65,052

1 ‘Expected return’ represents the unwinding of the discount rate and reversal of expected cash flows for the period.

Assumption changes and experience variances
Included within this line item are:• HK$440m (2020: HK$1,022m), directly offsetting interest rate-driven changes to the valuation of liabilities under insurance contracts.
• HK$(2,519)m (2020: HK$1,916m), reflecting the future expected sharing of returns with policyholders on contracts with discretionary
participation features (‘DPF’), to the extent this sharing is not already included in liabilities under insurance contracts.
• HK$(794)m (2020: HK$2,330m), driven by other assumptions changes and experience variances.

Key assumptions used in the computation of PVIF for the main life insurance operations
Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed
market movements. The following are the key long-term assumptions used in the computation of PVIF for Hong Kong insurance entities,
being the main life insurance operations:
2021

2020

%

%

Weighted average risk free rate

1.40

0.71

Weighted average risk discount rate
Expense inflation

5.20
3.00

4.96
3.00

Sensitivity to changes in economic assumptions
The group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances
for risks not reflected in the best-estimate cash flow modelling. Where the insurance operations provide options and guarantees topolicyholders, the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit
addition to the technical provisions required by regulators. See page 65 for further details of these guarantees and the impact of changes
in economic assumptions on our insurance manufacturing subsidiaries.

Sensitivity to changes in non-economic assumptions
Policyholder liabilities and PVIF are determined by reference to non-economic assumptions, including mortality and/or morbidity, lapse
rates and expense rates. See page 66 for further details on the impact of changes in non-economic assumptions on our insurance
manufacturing operations.

16

Property, plant and equipment

Owned property, plant and equipment1
Other right-of-use assets
At 31 Dec

2021

2020

HK$m

HK$m

121,0728,755
129,827

118,747
9,790
128,537

1 Included leasehold land and buildings of HK$110,458m (2020: HK$108,320m) for which the right of use are considered sufficient to constitutecontrol. They are therefore presented as owned assets.

106

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Movement in owned property, plant and equipment
2021

2020

Land andbuildings

Investment
properties

Total

Land andbuildings

Investment
properties

Equipment

HK$m

HK$m

HK$m

Equipment

Total

HK$m

HK$m

HK$m

HK$m

HK$m

100,791(67)

13,16716

15,266(112)

129,224(163)

111,473453

13,33531

16,922365

141,730
849

Additions
Disposals

667
(58)

2
—

2,049
(1,456)

2,718(1,514)

770
(12)

635
—

2,363
(4,384)

3,768(4,396)

Transfers

—

—

—

—

—

—

—

—

Cost or valuation
At 1 Jan
Exchange and other adjustments

Elimination of accumulated depreciation onrevalued land and buildings(4,633)——(4,633)(4,737)——(4,737)

Surplus/(deficit) on revaluation
Reclassifications

5,643
24

277
3

—
—

5,920
27

(6,914)
(242)

(996)
162

—
—

(7,910)(80)

At 31 Dec
Accumulated depreciation

102,367

13,465

15,747

131,579

100,791

13,167

15,266129,224

90
30

—
—

10,387(46)

10,477
(16)

84
10

—
—

13,043305

13,127
315

4,645
(45)

—
—

1,374
(1,295)

6,019(1,340)

4,734
(1)

—
—

1,325
(4,286)

6,059(4,287)

—

—

—

—

—

—

—

—

(4,633)——(4,633)(4,737)——(4,737)87
102,280—
13,465

10,4205,327

10,507
121,072

90
100,701—
13,167

10,387
4,879

10,477
118,747

At 1 Jan
Exchange and other adjustments
Charge for the year
Disposals
Transfers
Elimination of accumulated depreciation onrevalued land and buildings
At 31 Dec
Net book value at 31 Dec

The carrying amount of land and buildings, had they been stated at cost less accumulated depreciation, would have been as follows:

Cost less accumulated depreciation

2021

2020

HK$m

HK$m

17,121

17,085

Valuation of land and buildings and investment properties
The group’s land and buildings and investment properties were revalued as at 31 December 2021. The basis of valuation for land andbuildings and investment properties was open market value. The resultant values are Level 3 in the fair value hierarchy. The fair values forland and buildings are determined by using a direct comparison approach which values the properties in their respective existing states
and uses, assuming sale with immediate vacant possession and by making reference to comparable sales evidence. The valuations take
into account the characteristics of the properties (unobservable inputs) which include the location, size, shape, view, floor level, year ofcompletion and other factors collectively. The premium or discount applied to the characteristics of the properties is within minus 20%
and plus 20%. In determining the open market value of investment properties, expected future cash flows have been discounted to theirpresent values. The net book value of ‘Land and buildings’ includes HK$6,854m (2020: HK$7,189m) in respect of properties which werevalued using the depreciated replacement cost method.
Valuation of land and buildings and investment properties in Hong Kong, Macau and mainland China were largely carried out by
Cushman & Wakefield Limited, who have recent experience in the location and type of properties and who are members of the Hong
Kong Institute of Surveyors. This represents 92% by value of the group’s properties subject to valuation. Other properties were valued bydifferent independent professionally qualified valuers.

17

Prepayments, accrued income and other assets

Prepayments and accrued income
BullionAcceptances and endorsements
Reinsurers’ share of liabilities under insurance contracts (Note 3)
Current tax assets
Settlement accounts
Cash collateral and margin receivables
Other assets
At 31 Dec

2021

2020

HK$m

HK$m

24,98652,98655,78927,366
2,674
24,57744,17737,188
269,743

24,301
61,26946,70525,3652,783
33,796
58,58435,807
288,610Prepayments, accrued income and other assets included HK$180,757m (2020: HK$197,362m) of financial assets, the majority of whichwere measured at amortised cost.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

107

Notes on the Consolidated Financial Statements

18

Customer accounts

Customer accounts by country/territory

Hong Kong

2021

2020

HK$m

HK$m

4,284,719

4,120,955

Mainland China
Singapore

462,187
448,976

440,608
427,537

Australia
India

220,233
191,116

227,072
156,615

Malaysia
Taiwan128,673
120,744

124,036
124,375

Indonesia
Other46,938273,596

40,304
249,894

At 31 Dec

6,177,182

5,911,396

19

Trading liabilities
2021

2020

HK$m

HK$m

Deposits by banks1

1,005

222

Customer accounts1
Net short positions in securities
At 31 Dec

6,091
85,62792,723835
59,75560,812

1 ‘Deposits by banks’ and ‘Customer accounts’ include repos, stock lending and other amounts.

20

Financial liabilities designated at fair value

Deposits by banks and customer accounts
Debt securities in issue
Liabilities to customers under investment contracts
At 31 Dec

2021

2020

HK$m

HK$m

59,611
43,92835,426
138,965

77,822
49,67339,518167,013

The carrying amount of financial liabilities designated at fair value was HK$1,385m lower than the contractual amount at maturity(2020: HK$735m higher). The cumulative loss in fair value attributable to changes in credit risk was HK$62m (2020: HK$25m).

21

Debt securities in issue
2021

2020

HK$m

HK$m

Bonds and medium-term notes
Other debt securities in issue

79,852
31,44094,89434,198

Total debt securities in issue
Included within:

111,292

129,092– financial liabilities designated at fair value (Note 20)
At 31 Dec

(43,928)
67,364(49,673)
79,41922

Accruals and deferred income, other liabilities and provisions

Accruals and deferred income
Acceptances and endorsements
Settlement accounts
Cash collateral and margin payables
Share-based payment liability to HSBC Holdings plc
Lease liabilities
Other liabilities1
Provisions for liabilities and charges
At 31 Dec

2021

2020

HK$m

HK$m

23,02055,824
26,15853,541
1,431
9,165
48,6681,399
219,206

21,58846,77530,05660,714
1,124
10,05743,881
1,792
215,987

1 Mainly includes marginal deposit on letter of credit and credit card settlement account.

Accruals and deferred income, other liabilities and provisions included HK$209,441m (2020: HK$207,899m) of financial liabilities whichwere measured at amortised cost.

108

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Movement in provisions
Restructuring
costs

Other

Total

HK$m

HK$m

HK$m

At 31 Dec 2020
Additions

116
357

419
333

535
690

Amounts utilised
Unused amounts reversed

(309)
(59)

(258)
(24)

(567)
(83)

Exchange and other movements
At 31 Dec 2021

43
148

(4)
466

39
614

Provisions (excluding contractual commitments)

Contractual commitments1
At 31 Dec 2020

1,257

Net change in expected credit loss provision and other movements
At 31 Dec 2021

(472)
785

Total Provisions at 31 Dec 2021

1,399

At 31 Dec 2019

208

812

1,020

Additions
Amounts utilised

222
(269)

296
(356)

518
(625)

Unused amounts reversed
Exchange and other movements

(42)
(3)

(361)
28

(403)
25

At 31 Dec 2020
Contractual commitments

116

419

535

At 31 Dec 2019
Net change in expected credit loss provision and other movements
At 31 Dec 2019
Total Provisions at 31 Dec 2020

776
481
1,257
1,792

1 Contractual commitments include provisions for contingent liabilities measured under HKFRS 9 ‘Financial Instruments’ in respect of financial
guarantees and expected credit loss provisions in relation to off-balance sheet guarantees and commitments.

23

Subordinated liabilities

Subordinated liabilities issued to third parties measured at amortised cost consist of undated primary capital notes and other loan capital
having an original term to maturity of five years or more. Subordinated liabilities issued to Group entities are not included in the tablebelow.

US$400m
MYR500m
At 31 Dec

Undated floating rate primary capital notes
Fixed rate (5.050%) subordinated bonds due 2027, callable from 20221

2021

2020

HK$m

HK$m

3,119
935
4,054

3,101
964
4,065

1 The interest rate on the MYR500m 5.05% callable subordinated bonds due 2027 will increase by 1% from November 2022.

24

Share capital

Paid up share capital in HK$
Paid up share capital in US$1
At 31 Dec

2021

2020

HK$m

HK$m

116,103
56,232
172,335

116,103
56,232
172,335

Ordinary shares issued and fully paid
2021
At 31 Dec

2020

HK$m

Number

HK$m

Number172,335

46,440,991,798

172,335

46,440,991,798

1 Paid up share capital in US$ represents preference shares which were redeemed or bought back via payment out of distributable profits and forwhich the amount was transferred from retained earnings to share capital in accordance with the requirements of the Companies Ordinance.

There were no new ordinary shares issued in 2021 (2020: nil). The holder of the ordinary shares is entitled to receive dividends as
declared from time to time, rank equally with regard to the Bank’s residual assets and are entitled to one vote per share at shareholder
meetings of the Bank.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

109

Notes on the Consolidated Financial Statements

25

Other equity instruments

Other equity instruments comprise additional tier 1 capital instruments in issue which are accounted for as equity.

US$1,000m Fixed rate perpetual subordinated loan, callable from Mar 20251
US$900m Fixed rate perpetual subordinated loan, callable from Sep 20262
US$700m Fixed rate perpetual subordinated loan, callable from Mar 20253
US$500m Fixed rate perpetual subordinated loan, callable from Mar 20253
US$600m Fixed rate perpetual subordinated loan, callable from May 20274
US$900m Fixed rate perpetual subordinated loan, callable from Sep 20245
US$1,100m Fixed rate perpetual subordinated loan, callable from Jun 20246
At 31 Dec

1
2
3
4
5
6

2021

2020

HK$m

HK$m

7,834
7,063
5,467
3,905
4,685
7,044
8,617
44,615

7,834
7,063
5,467
3,905
4,685
7,044
8,617
44,615Interest rate fixed at 6.090%.
Interest rate fixed at 6.510%.
Interest rate fixed at 6.172%.
Interest rate fixed at 5.910%.
Interest rate fixed at 6.030%.
Interest rate fixed at 6.000%.

The additional tier 1 capital instruments are perpetual subordinated loans on which coupon payments may be cancelled at the sole
discretion of the Bank. The subordinated loans will be written down at the point of non-viability on the occurrence of a trigger event as
defined in the Banking (Capital) Rules. They rank higher than ordinary shares in the event of a wind-up.

26

Maturity analysis of assets and liabilities

The following tables provide an analysis of consolidated total assets and liabilities by residual contractual maturity at the balance sheet
date. These balances are included in the maturity analysis as follows:• Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are includedin the ‘Due not more than 1 month’ time bucket, because trading balances are typically held for short periods of time.
• Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the ‘Due over 5 years’ timebucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the
instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the ‘Due over
5 years’ time bucket.
• Non-financial assets and liabilities with no contractual maturity are included in the ‘Due over 5 years’ time bucket.
• Liabilities under insurance contracts are irrespective of contractual maturity included in the ‘Due over 5 years’ time bucket in thematurity table provided below. An analysis of the expected maturity of liabilities under insurance contracts based on undiscounted
cash flows is provided on page 65. Liabilities under investment contracts are classified in accordance with their contractual maturity.
Undated investment contracts are included in the ‘Due over 5 years’ time bucket, however, such contracts are subject to surrenderand transfer options by the policyholders.

110

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Maturity analysis of assets and liabilities

Due not
more than
1 monthDue over1 monthbut not
more than
3 months

Due over3 months
but not
more than
6 months

Due over6 months
but not
more than
9 months

Due over9 months
but not
more than
1 yearDue over1 year but
not morethan 2years

Due over2 years but
not morethan 5years

Due over5 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Financial assets
Cash and balances at central banks

276,857

—

—

—

—

—

—

—

276,857

Items in the course of collection from otherbanks

21,632

—

—

—

—

—

—

—

21,632

Hong Kong Government certificates ofindebtedness

332,044

—

—

—

—

—

—

—

332,044

Trading assets
Derivatives

768,376
361,447

7,082
1,079

208
466

431
769

—
131

815
441

538
713

—
121

777,450
365,167

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

5,880

172

1,636

884

1,561

3,781

11,244

177,241

202,399

Reverse repurchase agreements – non-trading

528,832

223,041

34,435

5,081

1,865

9,384

1,137

—

803,775

Loans and advances to banks
Loans and advances to customers

277,060
605,21680,547
402,921

20,767
312,336

7,667
177,577

7,532
171,989

20,248410,594

17,908731,226518
1,029,080

432,247
3,840,939

Financial investments
Amounts due from Group companies

247,163
84,688405,109
1,302

187,038
1,189

107,3292,227

118,0292,441

232,350
6,138

307,7535,857

446,80417

2,051,575
103,859

119,499
31,4493,628,694 1,152,702——
3,628,694 1,152,702

19,062
577,137—
577,137

3,708
305,673—
305,673

2,034
305,582—
305,582805
684,556—
684,556750
1,077,126—
1,077,126

3,450
1,657,231
514,692
2,171,923

180,757
9,388,701
514,692
9,903,393

—

—

—

—

—

—

332,044

Accrued income and other financial assets
Financial assets at 31 Dec 2021
Non-financial assets
Total assets at 31 Dec 2021
Financial liabilities
Hong Kong currency notes in circulation

332,044—

Items in the course of transmission to otherbanks

25,701

—

—

—

—

—

—

—

25,701

Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Trading liabilities
Derivatives
Financial liabilities designated at fair value
Debt securities in issue
Amounts due to Group companies
Accruals and other financial liabilities
Subordinated liabilities1
Total financial liabilities at 31 Dec 2021
Non-financial liabilities
Total liabilities at 31 Dec 2021

231,463
269,405
5,722,470
92,723354,567
32,086
4,304
114,388
124,346—
7,303,497—
7,303,497

4,713
2,140
272,462—304
21,8495,509
17,50440,286—364,767—
364,767368
6,780
88,483—74
11,05917,363
1,401
24,070—149,598—
149,598—
1,019
34,813—212
4,967
12,374
222
5,135—
58,742—58,742

1,104
526
32,417
—
79
5,574
3,963
223
3,820
—
47,706—47,7067,570
440
11,792
—
241
8,789
9,320
21,6994,802—
64,653—64,653

2,904—
14,741—274
18,89912,324
66,205
5,197—
120,544—
120,544

7,252
—
4
—
40
35,742
2,207
134,534
1,785
4,054
185,618
684,757
870,375

255,374
280,310
6,177,182
92,723355,791
138,965
67,364356,176
209,441
4,054
8,295,125684,757
8,979,882

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

111

Notes on the Consolidated Financial Statements

Maturity analysis of assets and liabilities (continued)

Due not
more than1month

Due over 1
month butnot morethan 3monthsDue over 3
months but
not morethan 6monthsDue over 6
months but
not morethan 9months

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Cash and balances at central banks

347,999

—

—

—

—

Items in the course of collection from otherbanks

21,943————

Hong Kong Government certificates ofindebtedness

313,404———

Trading assets

594,141

4,561

476

431

Derivatives

422,69223

16

Due over 9
Due over 1
Due over 2
months but year but not
years butnot more more than 2
not morethan 1 year
years than 5 years

Due over 5
years

Total

HK$m

HK$m

HK$m

—

—

—

347,999———

21,943————

313,404

—

805

—

—

600,414

13

26

101

74

—

422,945

Financial assets

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

7,318

1,240

1,334

1,214

1,033

4,648

11,967150,206

178,960

Reverse repurchase agreements – non-trading
Loans and advances to banks

372,199
239,097

113,000
81,31819,15022,587

2,869
19,5761,000
16,278

4,143
8,792

7,983
15,186—
1,050

520,344403,884

Loans and advances to customers
Financial investments

641,990248,651

313,288488,129

277,385
251,982

180,152
75,127

159,612
127,736

411,350
218,219

693,898
330,863

991,006
434,725

3,668,681
2,175,432

Amounts due from Group companies
Accrued income and other financial assets

72,856
140,7883,741
30,145464
16,209

2
2,754

—
1,748

3,814
797

2,326
431

—
4,490

83,203
197,362

Financial assets at 31 Dec 2020
Non-financial assets
Total assets at 31 Dec 2020
Financial liabilities
Hong Kong currency notes in circulation

3,423,078—
3,423,078

1,035,445—
1,035,445

589,603—589,603

282,138—
282,138

307,433—
307,433

652,669—
652,669

1,062,728—
1,062,728

1,581,477
481,832
2,063,309

8,934,571
481,832
9,416,403

313,404

—

—

—

—

—

—

—

313,404

Items in the course of transmission to otherbanks

25,699

—

—

—

—

—

—

—

25,699Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Trading liabilities
Derivatives
Financial liabilities designated at fair value
Debt securities in issue
Amounts due to Group companies
Accruals and other financial liabilities
Subordinated liabilities1
Financial liabilities at 31 Dec 2020
Non-financial liabilities
Total liabilities at 31 Dec 2020

109,062
237,905
5,396,286
60,812421,829
40,325
5,056
78,046
128,880—
6,817,304—
6,817,304

4,816
3,157
332,854—
1,566
28,300
11,234
20,13537,418—439,480—
439,480—
2,782
89,287—
1,207
11,481
12,556766
20,038—138,117—138,117

1,187
3,621
39,727—176
7,517
13,611
33
3,326—
69,198—69,1985,223
76
27,186
—
404
7,176
3,991
332
4,565
—
48,953—
48,953—
1,087
18,676
—
1,281
8,930
16,02524,397
4,516—
74,912—
74,912

8,024
—
7,376
—
1,436
17,024
14,37455,8605,357—
109,451—
109,451

7,845
—
4
—
312
46,2602,572
116,705
3,799
4,065
181,562
625,895
807,457

136,157
248,628
5,911,396
60,812428,211167,013
79,419296,274
207,899
4,065
7,878,977
625,895
8,504,872

1 The maturity for subordinated liabilities is based on the earliest date on which the group is required to pay, i.e. the callable date.

112

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

27

Analysis of cash flows payable under financial liabilities by remaining contractual maturities
Due over 1
month but not
Due not more
more than 3than 1 month
monthsDue between
3 and
12 months

Due between
1 and 5 years

Due after
5 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2021
Hong Kong currency notes in circulation

332,044

—

—

—

—

332,044

Items in the course of transmission to other banks
Repurchase agreements – non-trading

25,701
231,531

—
4,714

—
1,517

—
10,530—7,289

25,701
255,581

Deposits by banks
Customer accounts

269,681
5,723,441

2,140
273,282

8,341
157,735

451
28,638—
4

280,6136,183,100

Trading liabilities
Derivatives

92,723354,584

—
416

—
384

—
621

—
40

92,723356,045

Financial liabilities designated at fair value
Debt securities in issue

33,2884,336

22,323
5,667

21,90334,62928,536
22,63235,7682,370

141,818
69,634

Amounts due to Group companies
Other financial liabilities

113,944
123,460

19,52339,607

7,301
31,486108,035
10,630147,000
1,854

395,803
207,037

Subordinated liabilities—
7,304,733

15
367,68744
263,340

236
210,309

4,207
198,532

4,502
8,344,601

Loan and other credit-related commitments
Financial guarantees

2,945,560
41,843

—
—

—
—

—
—

—
—

2,945,560
41,843

10,292,136
91%

367,6873%

263,3402%

210,3092%

198,532
2%

11,332,004

Proportion of cash flows payable in period

313,404
25,699109,090
238,153
5,397,993
60,812421,81140,602
5,121
78,063
127,644—6,818,392
2,815,447
39,923
9,673,762
90%

—
—
4,818
3,263
333,682—
1,462
29,077
11,44521,92036,64816442,331——442,331
4%

—
—
6,602
6,630
158,267—
1,561
26,45731,445
5,873
26,09847
262,980——
262,980
2%

—
—
8,076
1,238
28,007—2,840
26,54931,69997,021
9,208
249
204,887136—
205,023
2%

—
—
7,885
—
16
—
312
46,371
2,686
122,569
3,792
5,225
188,856——
188,8562%

313,404
25,699136,471249,284
5,917,965
60,812427,986
169,056
82,396
325,446
203,390
5,537
7,917,446
2,815,583
39,923
10,772,952

At 31 Dec 2020
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Trading liabilities
Derivatives
Financial liabilities designated at fair value
Debt securities in issue
Amounts due to Group companies
Other financial liabilities
Subordinated liabilities
Loan and other credit-related commitments
Financial guarantees
Proportion of cash flows payable in period

The balances in the above tables incorporate all cash flows relating to principal and future coupon payments on an undiscounted basis.
Trading liabilities and trading derivatives have been included in the ‘On demand’ time bucket as they are typically held for short periodsof time. The undiscounted cash flows payable under hedging derivative liabilities are classified according to their contractual maturity.
Investment contract liabilities have been included in financial liabilities designated at fair value, whereby the policyholders have theoptions to surrender or transfer at any time, and are reported in the ‘Due after 5 years’ time bucket. A maturity analysis prepared on thebasis of the earliest possible contractual repayment date (assuming that all surrender and transfer options are exercised) would result in
all investment contracts being presented as falling due within one year or less. The undiscounted cash flows potentially payable underloan commitments and financial guarantee contracts are classified on the basis of the earliest date they can be called. Cash flows
payable in respect of customer accounts are primarily contractually repayable on demand or at short notice.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

113

Notes on the Consolidated Financial Statements

28

Contingent liabilities, contractual commitments and guarantees
2021

2020

HK$m

HK$m

Guarantees and contingent liabilities:– financial guarantees1

41,84339,923– performance and other guarantees2– other contingent liabilities

335,849
1,751

286,139
3,644

At 31 Dec
Commitments3:

379,443

329,706– documentary credits and short-term trade-related transactions– forward asset purchases and forward forward deposits placed

32,28440,74529,581
38,2462,872,531
2,945,560

2,747,756
2,815,583– undrawn formal standby facilities, credit lines and other commitments to lend
At 31 Dec

1 Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a
specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
2 Performance and other guarantees include re-insurance letters of credit related to particular transactions, trade-related letters of credit issued
without provision for the issuing entity to retain title to the underlying shipment, performance bonds, bid bonds, standby letters of credit and othertransaction-related guarantees.
3 Includes HK$1,826,335m of commitments at 31 December 2021 (2020: HK$1,725,963m) to which the impairment requirements in HKFRS 9 areapplied where the group has become party to an irrevocable commitment.

The above table discloses the nominal principal amounts of commitments (excluding other commitments as disclosed in Note 29),
guarantees and other contingent liabilities, which represent the amounts at risk should contracts be fully drawn upon and clients default.
The amount of the commitments shown above reflects, where relevant, the expected level of take-up of pre-approved facilities. As asignificant proportion of guarantees and commitments are expected to expire without being drawn upon, the total of the nominal
principal amounts is not representative of future liquidity requirements.
It also reflects the group’s maximum exposure under a large number of individual guarantee undertakings. The risks and exposures fromguarantees are captured and managed in accordance with HSBC’s overall credit risk management policies and procedures. Guarantees
are subject to an annual credit review process.
Other contingent liabilities at 31 December 2021 included amounts in relation to legal and regulatory matters as set out in
Note 37.

29

Other commitments

Capital commitments
At 31 December 2021, capital commitments, mainly related to the commitment for purchase of properties, were HK$4,826m(2020: HK$8,531m).

30

Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable
right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability
simultaneously (‘the offset criteria’).
The ‘Amounts not set off in the balance sheet’ include transactions where:• the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right to set
off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and• in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-cash
collateral has been received/pledged.
For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and therelevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains
appropriate.

114

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Offsetting of financial assets and financial liabilities
Amounts subject to enforceable netting arrangements
Amounts not offset in thebalance sheet

NetamountAmounts not
subject toenforceablenettingarrangements1

Balancesheet total

Grossamounts

Amounts
offsetNetamounts
reported in
the balance
sheet

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Derivatives

524,603(190,129)

334,474(267,072)(12,886)(36,005)

18,511

30,693365,167

Reverse repos, stock borrowing and similar
agreements classified as:

867,597(71,412)796,185—(794,195)

(749)

1,241

90,247886,432– trading assets– non-trading assets4

60,417807,180(79)(71,333)

60,338735,847——(59,771)(734,424)

(552)
(197)

15
1,226

7,393
82,85467,731
818,701

1,392,200(261,541)

1,130,659(267,072) (807,081)(36,754)

19,752120,940

1,251,599

Derivatives

516,525(190,129)

326,396(267,072)(10,552)(27,837)

20,93529,395355,791

Repos, stock lending and similar agreements
classified as:

330,366(71,412)258,954—(258,523)

(3)

428

68,664

327,618– trading liabilities– non-trading liabilities5

6,807
323,559(79)(71,333)

6,728
252,226——(6,721)(251,802)

—
(3)

7
421

—
68,664

6,728
320,890

846,891(261,541)

585,350(267,072) (269,075)(27,840)

21,363

98,059683,409

At 31 Dec 2020
Financial assets2
Derivatives

583,241(200,656)

382,585(290,517)(11,009)(45,001)

36,05840,360422,945

Reverse repos, stock borrowing and similar
agreements classified as:

532,974(19,276)

513,698—(513,476)

(166)

56

61,715575,41346,922
486,052
1,116,215—(19,276)(219,932)

46,922466,776
896,283——(290,517)(46,892)(466,584)(524,485)—(166)(45,167)30
26
36,114

4,680
57,035102,075

51,602523,811
998,358

Financial liabilities3
Derivatives

584,214(200,656)

383,558(290,517)(15,977)(47,483)

29,58144,653428,211

Repos, stock lending and similar agreements
classified as:

146,768(19,276)

127,492—(127,281)

(21)

190

51,205

178,697

1,605
145,163
730,982—(19,276)(219,932)

1,605
125,887
511,050——(290,517)(1,595)(125,686)(143,258)—(21)(47,504)10
180
29,771—
51,20595,858

1,605
177,092
606,908

Financial
instruments

Non-cashcollateralCashcollateral

At 31 Dec 2021
Financial assets2

Financial liabilities3– trading assets– non-trading assets4– trading liabilities– non-trading liabilities5

1 These exposures continue to be secured by financial collateral, but the group may not have sought or been able to obtain a legal opinion
evidencing enforceability of the offsetting right.
2 Amounts presented in the balance sheet included balances due from Group companies of HK$167,054m (2020: HK$79,027m).
3 Amounts presented in the balance sheet included balances due to Group companies of HK$217,572m (2020: HK$129,230m).
4 Amounts presented in the balance sheet included reverse repos with third parties of HK$803,775m (2020: HK$520,344m).
5 Amounts presented in the balance sheet included repos with third parties of HK$255,374m (2020: HK$136,157m).

31

Segmental analysis

The Executive Committee (‘EXCO’) is considered the Chief Operating Decision Maker ('CODM') for the purpose of identifying the group’s
operating segments. Operating segment results are assessed by the CODM on the basis of performance measured in accordance withHKFRSs. Although the CODM reviews information on a number of bases, business performance is assessed and capital resources areallocated by operating segments, and the segmental analysis is presented based on reportable segments as assessed under HKFRS 8'Operating Segments'.
Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income
and expenses. These allocations include the costs of certain support services and global functions to the extent that they can bemeaningfully attributed to operational business lines and geographical regions. While such allocations have been made on a systematicand consistent basis, they necessarily involve a degree of subjectivity. Costs which are not allocated to other operating segments areincluded in the ‘Corporate Centre’.
Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company andinter-business line transactions. All such transactions are undertaken on arm’s length terms. The intra-group elimination items for theoperating segments are presented in the Corporate Centre.

Change in operating and reportable segments
Effective from the second half of 2021, the operating and reportable segments have been changed to reflect the change in managementof the Global Banking and Markets business, with the splitting out of Global Banking, Markets and Securities Services and Global
Banking and Markets – Other as separate operating segments following realignments within our internal reporting to the CODM. Global
Banking and Markets and Securities Services are separate reportable segments. Global Banking and Markets – Other, which mainlycomprises of business activities which are jointly managed by GB and MSS, is reported under 'Other (GBM-other)'. Comparatives havebeen re-presented to conform to the current year's presentation.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

115

Notes on the Consolidated Financial Statements

Our global businesses and reportable segments
The group provides a comprehensive range of banking and related financial services to our customers in our global businesses: Wealthand Personal Banking (‘WPB’), Commercial Banking (‘CMB’) and Global Banking and Markets ('GBM'). The products and services offeredto customers are organised by these global businesses.
• WPB provides a full range of retail banking and wealth products to our customers from personal banking to ultra high net worth
individuals. Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages andpersonal loans, credit cards, debit cards and local and international payment services. We also provide wealth management services,
including insurance and investment products, global asset management services, investment management and Private Wealth
Solutions for customers with more sophisticated and international requirements.
• CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and mediumsized 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 GBM,
which include foreign exchange products, raising capital on debt and equity markets and advisory services.
• GBM comprises of two separate reportable segments: Global Banking ('GB') and Markets and Securities Services ('MSS'). GB provides
tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focusedbusiness lines deliver a full range of banking capabilities including financing, advisory and transaction services. MSS provides services
in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.
• Corporate Centre includes strategic investments such as our investment in BoCom, Central Treasury revenue, and costs which are notallocated to global businesses, mainly in relation to investments in technology.
Performance by reportable segments is presented in the ‘Financial Review’ on page 10 as specified as 'Audited'.
Information by geographical region

For the year ended 31 Dec 2021
Total operating income
Profit before tax
At 31 Dec 2021
Total assets
Total liabilities
Credit commitments and contingent liabilities (contract amounts)
For the year ended 31 Dec 2020
Total operating income
Profit before tax
At 31 Dec 2020
Total assets
Total liabilities
Credit commitments and contingent liabilities (contract amounts)

Hong Kong

Rest of
Asia-PacificIntra-segment
elimination

Total

HK$m

HK$m

HK$m

HK$m

174,859
41,04379,06745,520780—

254,706
86,563

7,035,497
6,559,271
1,792,675

3,696,064
3,248,779
1,532,328(828,168)(828,168)—

9,903,393
8,979,882
3,325,003

190,128
57,93776,95532,259166—

267,249
90,196

6,636,693
6,141,296
1,727,502

3,487,821
3,071,687
1,417,787(708,111)(708,111)—

9,416,403
8,504,872
3,145,289

Information by country/territory
Revenue1

Non-current assets2

For the year ended 31 Dec

Hong Kong
Mainland China
Australia
India
Indonesia
Malaysia
Singapore
TaiwanOther
Total

At 31 Dec

2021
HK$m

2020
HK$m

2021
HK$m

2020
HK$m

106,966
19,381
7,351
10,614
3,242
5,174
10,671
3,124
12,135
178,658

120,873
16,974
6,665
10,296
3,649
5,415
9,924
2,932
12,610189,338

134,400
196,477
1,837
2,534
3,584
2,022
2,933
2,802
3,140
349,729

126,286
176,462
2,229
2,241
3,701
1,932
3,040
2,687
3,627
322,205

1 Revenue (defined as ‘Net operating income before change in expected credit losses and other impairment charges') is attributable to countries
based on the location of the principal operations of the branch, subsidiary, associate or joint venture.
2 Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures andcertain other assets.

116

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

32

Related party transactions

The group’s related parties include the parent, fellow subsidiaries, associates, joint ventures, post-employment benefit plans for thegroup’s employees, Key Management Personnel (‘KMP’) as defined by HKAS 24, close family members of KMP and entities that arecontrolled or jointly controlled by KMP or their close family members.
Particulars of transactions with related parties are set out below.

(a) Inter-company
The group is wholly owned by HSBC Asia Holdings Limited, which in turn is a wholly-owned subsidiary of HSBC Holdings plc(incorporated in England).
The group entered into transactions with its fellow subsidiaries in the normal course of business, including the acceptance and placementof interbank deposits, correspondent banking transactions and off-balance sheet transactions. The Bank also acted as agent for the
distribution of retail investment funds for fellow subsidiaries and paid professional fees for services provided by fellow subsidiaries.
The group shared the costs of certain IT projects and also used certain processing services of fellow subsidiaries. These costs arereported under ‘General and administrative expenses – other administrative expenses in the income statement.
The aggregate amount of income and expenses arising from these transactions during the year and the balances of amounts due to andfrom the relevant parties at the year end were as follows:
2021

Income and expenses for the year
Interest income

2020

Immediate
holding company

Ultimate holding
company

Fellow
subsidiaries

Immediate
holding company

Ultimate holding
company

Fellow
subsidiaries

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

—

—

220

—

—

480

6,773
—

(651)
—

(286)
2,538

6,489
—

(339)
—

39
2,744

Fee expense

—

1

1,428

—

—

1,272

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

—

1

2

18

—

(19)
249

—

—

—

129

1,770

—
—

—
787

—
916

Interest expense1
Fee income

Net insurance premium income
Other operating income
Net insurance claims and benefits paid andmovement in liabilities to policyholders

—

—

(179)

—

—

—

General and administrative expenses2
At 31 Dec

—

(141)

47,842—

5,270

33,632

Assets– trading assets3

9
—

1,147
22

260,256
4,232

—
—

2,707
14

157,916159– derivative assets– other assets3,6

—
9

989
136

147,704
108,320

—
—

2,488
205

74,932
82,825

Liabilities– trading liabilities3

223,565—

1,069—

283,630
25

198,211
—

3,676
11

182,145572– financial liabilities designated at fair value3,4– derivative liabilities

175,655——18

7152,013

131,370———887,724– other liabilities3,6– subordinated liabilities3,5,6

1,388
46,522980
71

131,585—

1,448
65,3933,593
72

93,841—————

22,815
2,076

—
—

—
—

19,907
2,189

Guarantees
Commitments

1 The amount includes interest expenses on debt instruments issued by the group for funding purposes that are designated under the fair value
option to reduce an accounting mismatch, and interest expenses/(income) on derivatives managed in conjunction with those debt instruments.
Comparatives have been re-presented to conform to the current year's presentation.
2 This includes reimbursement of amount from ultimate holding company in accordance to the billing arrangement of the Group.
3 These balances are presented under ‘Amounts due from/to Group companies’ in the consolidated balance sheet.
4 The balance at 31 December 2021 included subordinated liabilities of HK$175,655m to meet Total Loss Absorbing Capacity (‘TLAC’) requirements(2020: HK$131,370m). During the year, there were repayment of HK$4,437m and issuance of HK$54,460m (2020: no movement).The carrying
amount of financial liabilities designated at fair value was HK$7,211m higher than the contractual amount at maturity (2020: HK$12,518m). The
cumulative loss in fair value attributable to changes in credit risk was HK$1,815m (2020: HK$2,490m). The balances are largely under Level 2.
5 The balance at 31 December 2021 included subordinated liabilities of HK$46,522m to meet TLAC requirements (2020: HK$65,393m).During theyear, there were repayment of HK$19,665m and issuance of HK$3,304m (2020: no movement).
6 The fair value hierarchy of assets and liabilities at amortised cost are under level 2 and the fair value has no material difference with carrying value.

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates
and security, as for comparable transactions with third-party counterparties.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

117

Notes on the Consolidated Financial Statements(b)

Share option and share award schemes

The group participates in various share option and share plans operated by HSBC whereby share options or shares of HSBC are granted
to employees of the group. The group recognises an expense in respect of these share options and share awards. The cost borne by theultimate holding company in respect of share options is treated as a capital contribution and is recorded within ‘Other reserves’. In
respect of share awards, the group recognises a liability to the ultimate holding company over the vesting period. This liability ismeasured at the fair value of the shares at each reporting date, with changes since the award dates adjusted through the capital
contribution account within ‘Other reserves’. The balances of the capital contribution and the liability at 31 December 2021 amounted to
HK$3,436m and HK$1,431m respectively (2020: HK$3,609m and HK$1,124m respectively).

(c)Post-employment benefit plans

At 31 December 2021, HK$9.2bn (2020: HK$9.3bn) of the group’s post-employment plan assets were under management by groupcompanies, earning management fees of HK$65m in 2021 (2020: HK$59m). At 31 December 2021, the group’s post-employment benefit
plans had placed deposits of HK$783m (2020: HK$641m) with its banking subsidiaries, earning interest payable to the schemes of
HK$0.5m (2020: HK$0.2m). The above outstanding balances arose from the ordinary course of business and on substantially the sameterms, including interest rates and security, as comparable transactions with third-party counterparties.

(d)

Associates and joint ventures

The group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and noninterest bearing deposits and current accounts. Details of interests in associates and joint ventures are set out in Note 14.
The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful
information to represent the amount of transactions and outstanding balances during the year.
Transactions and balances during the year with associates and joint ventures
2021
Highest balance
during the year

Amounts due from associates – unsubordinated
Amounts due to associates
Commitments

2020
Balance at
31 December

Highest balance
during the year

Balance at
31 December

HK$m

HK$m

HK$m

HK$m

35,304
26,4904,722

32,663
8,348
1,479

33,57742,377
1

22,811
17,263
1

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates
and security, as comparable transactions with third‑party counterparties.

(e)

Key Management Personnel

Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling theactivities of the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Boardof Directors and Group Executive Committee members of HSBC Holdings plc.
Compensation of Key Management Personnel

Salaries and other short-term benefits
Post employment benefits
Termination benefits
Share-based payments
Total

2021

2020

HK$m

HK$m

314

315

9
5

9
4

123
451

103
431

Transactions, arrangements and agreements involving Key Management Personnel

During the year
Highest average assets1
Highest average liabilities1
Contribution to group‘s profit before tax
At the year end
Guarantees
Commitments

2021

2020

HK$m

HK$m

107,31771,516
1,510

100,834
71,488
1,733

13,263
13,624

12,452
16,701

1 The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during theyear.

Transactions, arrangements and agreements are entered into by the group with companies that may be controlled by Key Management
Personnel of the group and their immediate relatives. These transactions are primarily loans and deposits, and were entered into in theordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions withpersons or companies of a similar standing or, where applicable, with other employees. The transactions did not involve more than thenormal risk of repayment or present other unfavourable features. Change in expected credit losses recognised for the year, and expectedcredit loss allowances against balances outstanding at the end of the year, in respect of Key Management Personnel were insignificant(2020: insignificant).
On 8 October 2019, the group acted as Joint Global Co-ordinator and Underwriter on aggregated EUR4.25bn and GBP800m Senior Noteissuances for CK Hutchison Group Telecom Finance S.A. in 6 tranches, with tenors of 4 to 15 years and coupon rates of 0.375% to2.625%. CK Hutchison Group Telecom Finance S.A. is a wholly-owned subsidiary of an associated body corporate (CK Hutchison
Holdings Limited) of Mr Victor Li, a non-executive Director of the Bank.
118

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

(f)Loans to directors

Directors are defined as the Directors of the Bank, its ultimate holding company, HSBC Holdings plc and intermediate holding
companies. Loans to directors also include loans to companies that are controlled by, and entities that are connected with these
directors. Particulars of loans to directors disclosed pursuant to section 17 of the Companies (Disclosure of Information about Benefits of
Directors) Regulation are as follows:
Aggregate amount outstanding at
31 DecBy the Bank
By subsidiaries

Maximum aggregate amountoutstanding during the year

2021

2020

2021

2020

HK$m

HK$m

HK$m

HK$m

3,755
13
3,768

2,690
4
2,694

3,967
14
3,981

4,291
9
4,300

These amounts include principal and interest, and the maximum liability that may be incurred under guarantees.

33

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 independentof the risk taker.
Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent pricedetermination or validation is utilised. For inactive markets, the group 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, instrumentcomparability, consistency of data sources, underlying data accuracy and timing of prices.
Fair value of investment funds are sourced from the underlying fund managers which are based upon an assessment of the underlying
investees’ financial positions, results, risk profile and prospects.
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 MSS and Insurance. The group's fair value governance structure
comprises its Finance function and Valuation Committees. Finance is responsible for establishing procedures governing valuation andensuring fair values are in compliance with accounting standards. The fair values are reviewed by the group's relevant Valuation
Committees, which consist of independent support functions. Within MSS and Insurance, these Committees are overseen by the Group's
Valuation Committee Review Group and the Group Insurance Valuation and Impairment Committee respectively. These two Group
Committees considers all material subjective valuations.

Financial liabilities measured at fair value
In certain circumstances, the group records its own debt in issue at fair value, based on quoted prices in an active market for the specificinstrument. 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 which is appropriate to thegroup'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 ‘Financial liabilities designated at fair value’ and aremeasured at fair value. The credit spread applied to these instruments is derived from the spreads at which the group issues structured
notes.
Gains and losses arising from changes in the credit spread of liabilities issued by the group reverse over the contractual life of the debt,
provided that the debt is not repaid at a premium or a discount.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

119

Notes on the Consolidated Financial Statements

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: financial instruments with quoted prices for identical instruments in active
markets that the group can access at the measurement date.
• Level 2 – valuation technique using observable inputs: 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: financial instruments valued using valuation techniques where one
or more significant inputs are unobservable.
Financial instruments carried at fair value and bases of valuation
Fair Value Hierarchy
Level 1

Level 2

Level 3

Third-party
totalIntercompany2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

537,816

236,388

3,246

777,450—

777,450440

212,740

3,294

216,474

148,693

365,167

At 31 Dec 2021
AssetsTrading assets1
Derivatives
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss

93,54434,20374,652

202,399—

202,399

1,153,521

391,816

3,674

1,549,011—

1,549,011

Trading liabilities1
Derivatives
Financial liabilities designated at fair value1

73,647963—

19,076200,667
118,516—2,130
20,44992,723203,760
138,965—
152,031—92,723355,791
138,965

At 31 Dec 2020
AssetsTrading assets1
Derivatives
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss

403,730
2,140

195,447
342,357

1,237
1,028

600,414345,525—
77,420600,414422,945

Financial investments
Liabilities

Financial investments
Liabilities
Trading liabilities1
Derivatives
Financial liabilities designated at fair value1

97,59031,83649,534

178,960—

178,960

1,315,696

378,075

6,635

1,700,406—

1,700,406

52,504
2,015
—

8,308
334,934
146,529—
3,538
20,48460,812
340,487
167,013—87,724—60,812428,211167,013

1 Amounts with HSBC Group entities are not reflected here.
2 Derivatives balances with HSBC Group entities are largely under ‘Level 2’.

Transfers between Level 1 and Level 2 fair values
AssetsFinancialinvestments

Liabilities

Designatedand otherwise
mandatorily
Tradingmeasured at
assetsfair value

Derivatives

Trading
liabilities

Designated atfair value

Derivatives

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2021
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1

57,471
36,07329,852
20,948

1,970
1,679

802
—

1,012
3,452

—
—

1,652
—

At 31 Dec 2020
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1

31,80937,387

20,534
26,796

1,901
1,860

—
5

236
191

—
—

—
—

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each Group's quarterly reporting period. Transfers
into and out of levels of the fair value hierarchy are primarily attributable to changes in observability of valuation inputs and pricetransparency.

120

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Fair value adjustments
Fair value adjustments are adopted when the group 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 recognitionof profits or losses within the income statement, such as when models are enhanced and therefore fair value adjustments may no longer
be required.

Bid-offerHKFRS 13 requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typicallygenerate 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 conservativevalues for uncertain parameters and/or model assumptions, than those used in the group’s valuation model.

Credit valuation adjustment (‘CVA’) and debit valuation adjustment (‘DVA’)The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect the possibility that the counterparty
may default and the group may not receive the full market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that the group may default, and that thegroup may not pay the full market value of the transactions.
The group 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.
The group calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of thegroup, to the group’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event ofdefault. Conversely, the group calculates the DVA by applying the PD of the group, conditional on the non-default of the counterparty, tothe expected positive exposure of the counterparty to the group 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 the group uses a simulation methodology, which incorporates a range of potential exposures over the life of theportfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such ascounterparty netting agreements and collateral agreements with the counterparty.
The methodologies do not, in general, account for ‘wrong-way risk’ which arises when the underlying value of the derivative prior to any
CVA is positively correlated to the PD of the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied
to reflect this risk in the valuation.

Funding fair value adjustment (‘FFVA’)
The 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, whereavailable and is adjusted for events that may terminate the exposure, such as the default of the group or the counterparty. The FFVA and
DVA are calculated independently.

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

Inception profit (Day 1 profit or loss reserves)
Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant
unobservable inputs.

Effects of changes in significant unobservable assumptions to reasonably possible alternatives
The key unobservable inputs to Level 3 financial instruments include volatility and correlation for structured notes and deposits valued
using option models, bid quotes for corporate bonds valued using approaches that take into account market comparables, and multiple
items for private equity and related investments. In the absence of an active market, the fair value of private equity and strategic
investments is estimated on the basis of an analysis of the investee’s financial position and results, risk profile, prospects and otherfactors, as well as by reference to market valuations for similar entities quoted in an active market, or the price at which similar
companies have changed ownership. The change in fair values due to changes in reasonably possible alternative assumptions for theseunobservable inputs is not significant.
Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to measure a
range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of thevaluation technique employed, the availability and reliability of observable proxies and historical data. When the available data is not
amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval. The
sensitivity of Level 3 fair values to reasonably possible alternative assumptions is not significant.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

121

Notes on the Consolidated Financial Statements

Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3
AssetsLiabilities

Financialinvestments

Trading
assetsDesignatedandotherwise
mandatorily
measured atfair value
through
profit orloss

Derivatives

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Private equity and related investments
Structured notes

3,121
—

4
—

74,295———77,420——20,449———20,449OthersAt 31 Dec 2021

553
3,674

3,242
3,246

357
74,652

3,294
3,294

7,446
84,866—
20,449

2,130
2,130

2,130
22,579

Private equity and related investments

Derivatives

Total

Designatedat fair value

6,167

—

49,274—55,441———

Structured notes
Others

—
468

—
1,237

—
260

—
1,028

—
2,993

20,484——
3,538

20,484
3,538

At 31 Dec 2020

6,635

1,237

49,534

1,028

58,434

20,484

3,538

24,022

Private equity and related investments
The fair value of a private equity investment (including private equity, infrastructure and private credit, primarily held to support our
Insurance business, and 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; the price at whichsimilar companies have changed ownership; or from published net asset values (‘NAVs’) received. If necessary, adjustments are made to
the NAV of funds to obtain the best estimate of fair value.

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 andforeign 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.

122

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
AssetsFinancialinvestments

Liabilities

Designatedand otherwise
mandatorily
measured atfair value
Trading through profit
assetsor loss

Derivatives

Designatedat fair value

Derivatives

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

6,635

1,237

49,534

1,028

20,484

3,538

Total gains/(losses) recognised in profit or loss

(7)

(2,211)

11,700

4,002(3,207)3,082– net income/(losses) from financial instruments held for trading or
managed on a fair value basis—(2,211)

—

4,002

—

3,082

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

11,700—(3,207)—

At 1 Jan 2021

– gains less losses from financial investments at fair value through othercomprehensive income

(7)

—

—

—

—

—

Total gains recognised in other comprehensive income (‘OCI’)– financial investments: fair value (losses)(3,013)(3,002)

10
—

11
—

18
—

386
(3)

23
—

– exchange differences
Purchases

(11)
1,383

10
5,082

11
22,232

18
—

389
—

23
—

—
(35)

—
(561)

—
(6)

—
—

9,196
—

—
—

(1,289)
—
—
3,674

(87)
(691)
467
3,246

(7,898)(921)—
74,652(1,247)
(614)
107
3,294

(7,165)(2,895)3,650
20,449(4,060)
(878)
425
2,130

Unrealised gains/(losses) recognised in profit or loss relating to assets andliabilities held at 31 Dec 2021—

(2,278)

11,236

2,686

113

(34)

– net income/(losses) from financial instruments held for trading or
managed on a fair value basis—(2,278)

—

2,686

—

(34)

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

11,236

—

113

—

5,622
—

557
43

32,291
3,205

833
2,627

20,571(2,113)

2,422
3,401

– net income from financial instruments held for trading or managed on afair value basis

—

43

—

2,627

—

3,401

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

—

—

3,205

—

(2,113)—New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 Dec 2021

At 1 Jan 2020
Total gains/(losses) recognised in profit or loss

– gains less losses from financial investments at fair value through othercomprehensive income

—

—

—

—

—

—

1,529
1,485
44
554
—
—
(1,070)
—
—
6,635

(2)
—
(2)
852
—
(335)
—
(266)
388
1,237

(6)
—
(6)
16,714——(2,484)(189)
349,5346—
6———(1,244)(1,216)
22
1,028

857
(24)
881
—
6,468
—
(3,896)(2,735)
1,332
20,484——————(1,620)(1,070)405
3,538

Unrealised gains/(losses) recognised in profit or loss relating to assets andliabilities held at 31 Dec 2020

—

5

2,741

587

(13)

(1,838)– net income/(losses) from financial instruments held for trading or
managed on a fair value basis

—

5

—

587

—

(1,838)– changes in fair value of other financial instruments mandatorily measured
at fair value through profit or loss

—

—

2,741

—

(13)

—

Total gains/(losses) recognised in other comprehensive income (‘OCI’)– financial investments: fair value gains/(losses)– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 Dec 2020

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each Group's 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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

123

Notes on the Consolidated Financial Statements

Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Sensitivity of fair values to reasonably possible alternative assumptions
2021
Reflected in profit or loss
Favourable
changes
HK$m

Unfavourable
changes
HK$m

158

(162)

3,741

(3,742)

—

—

3,899

(3,904)157

Derivatives, trading assets and trading
liabilities1
Financial assets and liabilities designated andotherwise mandatorily measured at fair value
through profit or loss
Financial investments
At 31 Dec

1

2020
Reflected in OCI

Reflected in profit or loss

Favourable
changes
HK$m

Unfavourable
changes
HK$m—

Reflected in OCI

Favourable
changes
HK$m

Unfavourable
changes
HK$m

Favourable
changes
HK$m

Unfavourable
changes
HK$m

—

211

(211)

—

—

—

—

2,478

(2,478)

—

—

157

(157)

—

—

309

(309)

(157)

2,689

(2,689)

309

(309)

‘Derivatives, trading assets and trading liabilities’ are presented as one category to reflect the manner in which these instruments are riskmanaged.

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 observableproxy and historical data.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the mostfavourable 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
2021.
Quantitative information about significant unobservable inputs in Level 3 valuations
Fair value

Private equity and related investments

Assets Liabilities Valuation
HK$m
HK$m techniques

Key unobservable
inputs77,420See below— See below

Structured notes—

20,449– equity-linked notes—

15,517– FX-linked notes– other
Others1
At 31 Dec 2021

—
—
7,446
84,866

Model – Option model
Model – Option model
4,733 Model – Option model
199
2,130
22,5792021

2020

Full range
of inputs

Full range
of inputs

Lower

HigherLower

Higher

6%
22%
2%

90%
97%
36%

6%
39%
3%

72%
88%
36%

Equity volatility
Equity correlation
FX volatility

1 ‘Others’ includes a range of smaller asset holdings.

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

Volatility
Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strikeand maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated fromobservable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price.

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, group's 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.

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 otherevents. Furthermore, the effect of changing market variables on the group's portfolio will depend on the group’s net risk position in
respect of each variable.

124

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

34

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 Hierarchy

Carrying
amountQuotedmarket price
Level 1

Observable
inputsLevel 2Significant
unobservable
inputsLevel 3

Total

HK$m

HK$m

HK$m

HK$m

HK$m

803,775—

802,881947

803,828432,247
3,840,939——

424,175
65,2688,356
3,765,148

432,5313,830,416

Financial investments – at amortised cost
Liabilities1

502,564

89,050449,284

2,142

540,476

Repurchase agreements – non-trading

255,374—

255,366—

255,366

Deposits by banks

280,310—

280,408—

280,408

Customer accounts
Debt securities in issue

6,177,182
67,364——

6,177,676
67,842——

6,177,676
67,842

Subordinated liabilities

4,054

—

3,864

—

3,864

520,344403,884
3,668,681
475,025———
81,912518,295
393,953
61,885450,962

2,106
10,374
3,588,431
2,012

520,401
404,3273,650,316
534,886

136,157
248,628
5,911,396
79,419
4,065

—
—
—
—
—

136,157
248,629
5,911,813
80,066
3,749

—
—
—
—
—

136,157
248,629
5,911,813
80,066
3,749

At 31 Dec 2021
Assets1
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers

At 31 Dec 2020
Assets1
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers
Financial investments – at amortised cost
Liabilities1
Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Debt securities in issue
Subordinated liabilities

1 Amounts with HSBC Group entities are not reflected here. Further details are set out in Note 32.

The fair values above are stated at a specific date and may be significantly different from the amounts which will actually be paid on thematurity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values
given the size of the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to thegroup as a going concern.
Other financial instruments not carried at fair value are typically short term in nature or re-priced 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, Hong Kong currency
notes in circulation, other financial assets and other financial liabilities, 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 the group 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 noobservable market prices are available may differ from those of other companies.

Repurchase and reverse repurchase agreements – non-trading
Fair values approximate carrying amounts as these balances are generally short dated.

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 ofsimilar 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 fromthird-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expectedcustomer prepayment rates, using assumptions that the group 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 thefair 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 ofcredit 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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

125

Notes on the Consolidated Financial Statements

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 are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices
for similar instruments.

35

Structured entities

The group is involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets,
conduits and investment funds, established either by the group or a third party.

Consolidated structured entities
The group uses consolidated structured entities to securitise customer loans and advances it originates to diversify its sources of funding
for asset origination and capital efficiency purposes. The loans and advances are transferred by the group to the structured entities forcash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. The group's transactions
with these entities are not significant.

Unconsolidated structured entities
The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by the group. The group enters intotransactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specificinvestment opportunities.
Nature and risks associated with the group’s interests in unconsolidated structured entities

Total asset values of the entities (HK$bn)
0–4
4–15
15–39
39–196196+
Number of entities at 31 Dec 2021
Total assets in relation to the group's interests in the unconsolidated
structured entities

Securitisations

HSBC
managed funds

Non-HSBC
managed funds

Other

Total

65
11
—
—
—
76

65
37
15
1
1
119

114
130
91
50
3
388

21
—
—
—
—
21

265
178
106
51
4
604

HK$m

HK$m

HK$m

HK$m

HK$m

35,22532,22386,044

10,140163,632– trading assets

—

1,041

—

432

1,473

– financial assets designated and otherwise mandatorily measured at fairvalue through profit or loss—

31,182

86,044—

117,226—
35,225
—
—

—
—
—
—

—
—
—
—

—
9,625
—
83

—
44,850
—
83

—

—

—

60

60

—
402
35,627—
6,999
39,222—
26,246112,29060
5,939
16,01960
39,586203,158– derivatives– loans and advances to customers– financial investments– other assets
Total liabilities in relation to the group's interests in the unconsolidated
structured entities– derivatives
Other off balance sheet commitments
The group’s maximum exposure at 31 Dec 2021

126

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Nature and risks associated with the group’s interests in unconsolidated structured entities (continued)
Securitisations

HSBC
managed funds

Non-HSBC
managed funds

Other

Total

0–4
4–15

52
9

62
34

104
107

25
1

243
151

15–39
39–196

—
—

18
3

56
46

—
—

74
49

196+
Number of entities at 31 Dec 2020

—
61

1
118

5
318

—
26

6
523

HK$m

HK$m

HK$m

HK$m

HK$m

26,80826,476

71,481

8,521

133,286

204

1,653

—

—

1,857

—

24,823

71,481—96,304

—

—

—

—

—

26,604
—

—
—

—
—

8,218
—

34,822
—

—

—

—

303

303

—

—

—

56

56

—
539

—
3,822

—
23,024

56
7,137

56
34,522

27,34730,29894,505

15,602

167,752

Total asset values of the entities (HK$bn)

Total assets in relation to the group's interests in the unconsolidated
structured entities– trading assets– financial assets designated and otherwise mandatorily measured at fairvalue through profit or loss
– derivatives– loans and advances to customers– financial investments– other assets
Total liabilities in relation to the group's interests in the unconsolidated
structured entities– derivatives
Other off balance sheet commitments
The group's maximum exposure at 31 Dec 2020

The maximum exposure to loss from the group’s interests in unconsolidated structured entities represents the maximum loss it could
incur as a result of its involvement with these entities regardless of the probability of the loss being incurred.
• For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential
future losses.
• For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the
carrying value of these interests at the balance sheet reporting date.
The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate the group’s
exposure to loss.

Securitisations
The group has interests in unconsolidated securitisation vehicles through holding notes issued by these entities.

HSBC managed funds
The group establishes and manages money market funds and non-money market investment funds to provide customers withinvestment opportunities. The group, as fund manager, may be entitled to receive management and performance fees based on theassets under management. The group may also retain units in these funds.

Non-HSBC managed funds
The group purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs.

Other
The group has established structured entities in the normal course of business, such as structured credit transactions for customers, toprovide finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to theinterest disclosed above, the group enters into derivative contracts, reverse repos and stock borrowing transactions with structured
entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management
solutions.

Structured entities sponsored by the group
The amount of assets transferred to and income received from such sponsored entities during 2021 and 2020 were not significant.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

127

Notes on the Consolidated Financial Statements

36

Bank balance sheet and statement of changes in equity

Bank balance sheet at 31 December 2021
2021

2020

HK$m

HK$m

AssetsCash and balances at central banks

203,988

291,071

Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness

17,825332,044

16,836
313,404

Trading assets
Derivatives

647,625
346,937

486,764
396,126

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
Reverse repurchase agreements – non-trading

3,246
488,312

5,945
299,876

Loans and advances to banks
Loans and advances to customers

230,592
1,984,297

243,107
1,928,622

Financial investments
Amounts due from Group companies

893,848544,587

950,866
400,073

Investments in subsidiaries
Interests in associates and joint ventures

101,535
39,83095,241
39,830Goodwill and intangible assets
Property, plant and equipment

19,22672,312

14,00971,523

1,275
145,729
6,073,208

1,266
165,667
5,720,226

332,044
19,101
175,476
224,650
3,816,715
46,585
337,010
36,39725,393
1,098
482,995
120,846
481
9,339
3,119
5,631,249

313,404
18,40473,606
194,778
3,610,409
29,039396,21241,50729,452
1,574
413,865
121,091
616
9,192
3,101
5,256,250

172,335
44,615
19,218205,791
441,959
6,073,208

172,335
44,61525,726
221,300
463,976
5,720,226

Deferred tax assets
Prepayments, accrued income and other assets
Total assets
Liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Trading liabilities
Derivatives
Financial liabilities designated at fair value
Debt securities in issue
Retirement benefit liabilities
Amounts due to Group companies
Accruals and deferred income, other liabilities and provisions
Current tax liabilities
Deferred tax liabilities
Subordinated liabilities
Total liabilities
EquityShare capital
Other equity instruments
Other reserves
Retained earnings
Total equity
Total equity and liabilities

128

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

Bank statement of changes in equity for the year ended 31 December 2021
Other reserves

Sharecapital1

Otherequityinstruments

Retainedearnings

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cash
flow
hedge
reserve

Foreignexchangereserve

Other2Total
equity

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

172,335

44,615

221,300

35,196

6,364

605(12,679)(3,760)463,976

Profit for the year——

40,815

—

—

—

—

—

40,815

Other comprehensive income/(expense) (netof tax)

—

—

912

3,453

(4,834)(542)(2,690)—(3,701)– debt instruments at fair value throughother comprehensive income

—

—

—

—

(3,289)———(3,289)– equity instruments designated at fair value
through other comprehensive income

—

—

—

—

(1,545)———(1,545)– cash flow hedges

—

—

—

—

—

(542)

—

—

(542)

– changes in fair value of financial liabilities
designated at fair value upon initialrecognition arising from changes in own
credit risk

—

—

524

—

—

—

—

—

524

– property revaluation

—

—

—

3,453

—

—

—

—

3,453

– remeasurement of defined benefit asset/
liability

—

—

388

—

—

—

—

—

388

– exchange differences

—

—

—

—

—

—

(2,690)—(2,690)

Dividends paid3

—
—

—
—

41,727(59,105)

3,453—(4,834)—(542)—(2,690)———37,114(59,105)

Movement in respect of share-based
payment arrangements
Transfers and other movements4

—
—

—
—

115
1,754

—
(1,749)

—
(6)

—
—

—
—

(140)
—

(25)
(1)

At 31 Dec 2021

172,335

44,615

205,791

36,9001,524

63(15,369)(3,900)441,959

At 1 Jan 2020
Profit for the year
Other comprehensive income/(expense) (netof tax)172,335—

44,615—

223,538
50,41440,976
—

3,504
—

(119)
—

(13,327)—(3,933)—

467,589
50,414

At 1 Jan 2021

Total comprehensive income/(expense)
for the year

—

—

2

(4,255)

2,860

724

648

—

(21)

– debt instruments at fair value throughother comprehensive income

—

—

—

—

2,149

—

—

—

2,149

– equity instruments designated at fair value
through other comprehensive income

—

—

—

—

711

—

—

—

711

– cash flow hedges

—

—

—

—

—

724

—

—

724

– changes in fair value of financial liabilities
designated at fair value upon initialrecognition arising from changes in own
credit risk

—

—

306

—

—

—

—

—

306

– property revaluation

—

—

—

(4,255)

—

—

—

—

(4,255)– remeasurement of defined benefit asset/
liability

—

—

(304)

—

—

—

—

—

(304)

– exchange differences

—

—

—

—

—

—

648

—

648

Total comprehensive income/(expense) for the
year

—

—

50,416(4,255)

2,860

724

648

—

50,393

Dividends paid3——(54,268)

—

—

—

—

—

(54,268)

Movement in respect of share-based
payment arrangements

—

—

103

—

—

—

—

173

276

—
172,335—
44,615

1,511
221,300(1,525)35,196

—
6,364

—
605

—
(12,679)—(3,760)(14)
463,976

Transfers and other movements4
At 31 Dec 2020

1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous
years.
2 The other reserves mainly comprise purchase premium arising from transfer of business from fellow subsidiaries, property revaluation reserve
relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment reserve is used to record
the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.
3 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
4 The movements include transfers from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

129

Notes on the Consolidated Financial Statements

37

Legal proceedings and regulatory matters

The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations.
Apart from the matters described below, the group considers that none of these matters are material. The recognition of provisions isdetermined in accordance with the accounting policies set out in Note 1.2(n). While the outcomes of legal proceedings and regulatory
matters are inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been
made in respect of these matters as at 31 December 2021. Any provision recognised does not constitute an admission of wrongdoing or
legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters
as a class of contingent liabilities.

Anti-money laundering and sanctions-related matters
In December 2012, HSBC Holdings plc ('HSBC Holdings') entered into a number of agreements, including an undertaking with the UK
Financial Services Authority (replaced with a Direction issued by the UK Financial Conduct Authority (‘FCA’) in 2013 and again in 2020) as
well as a cease-and-desist order with the US Federal Reserve Board (‘FRB’), both of which contained certain forward-looking anti-money
laundering (‘AML’) and sanctions-related obligations. Over the past several years, HSBC has retained a Skilled Person under section 166of the Financial Services and Markets Act and an Independent Consultant, under the FRB cease-and-desist order to produce periodic
assessments of the Group’s AML and sanctions compliance programme. The Skilled Person completed its engagement in the second
quarter of 2021, and the FCA has determined that no further Skilled Person work is required. Separately, the Independent Consultant
continues to work pursuant to the FRB cease-and-desist order.
Based on the facts currently known, it is not practicable to predict the resolution of these matters, including the timing or any possible
impact on HSBC, which could be significant.

Singapore Interbank Offered Rate (‘Sibor’), Singapore Swap Offer Rate (‘SOR’) and Australia Bank Bill
Swap Rate (‘BBSW’)
In July and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York
District Court on behalf of persons who transacted in products related to the Sibor, SOR and BBSW benchmark rates. The complaints
allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws,
and state law.
In the Sibor/SOR litigation, in October 2021, the Bank reached a settlement in principle with the plaintiffs to resolve this action. The
settlement remains subject to court approval.
In the BBSW litigation, in November 2018, the court dismissed all foreign defendants, including all HSBC entities, on personal jurisdiction
grounds. In April 2019, the plaintiffs filed an amended complaint, which the defendants moved to dismiss. In February 2020, the court
again dismissed the plaintiffs’ amended complaint against all HSBC entities.
There are many factors that may affect the range of outcomes, and the resulting financial impact of these matters, which could besignificant.

Foreign exchange-related investigations
In January 2018, following the conclusion of the US Department of Justice's ('DoJ') investigation into HSBC’s historical foreign exchange
activities, HSBC Holdings entered into a three-year deferred prosecution agreement with the Criminal Division of the DoJ (the ‘FX DPA’),regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. In January 2021, the FX DPA expired and,in August 2021, the charges deferred by the FX DPA were dismissed.

Other regulatory investigations, reviews and litigation
The Bank and/or certain of its affiliates are subject to a number of other investigations and reviews by various regulators and competitionand law enforcement authorities, as well as litigation, in connection with various matters relating to the firm’s businesses and operations,
including investigations by tax administration, regulatory and law enforcement authorities in India and elsewhere in connection withallegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could besignificant.

38

Ultimate holding company

The ultimate holding company of the Bank is HSBC Holdings plc, which is incorporated in England.
The largest group in which the accounts of the Bank are consolidated is that headed by HSBC Holdings plc. The consolidated accounts of
HSBC Holdings plc are available to the public on the HSBC Group’s website at www.hsbc.com or may be obtained from 8 Canada
Square, London E14 5HQ, United Kingdom.

130

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

39

Events after the balance sheet date

The following recently announced acquisitions form part of our strategy to grow our insurance business, helping to deliver on our
strategic priority to become a market leader in Asian wealth management.
• On 11 February 2022, following the completion of all regulatory approvals, HSBC Insurance (Asia-Pacific) Holdings Ltd, a whollyowned subsidiary of the group, acquired 100% of the issued share capital of AXA Insurance Pte Limited for HK$4.1bn, subject toadjustment for closing items. This will be reflected in our 2022 results by which time determination of the initial acquisition accounting
will have been completed.
• On 30 December 2021, HSBC Insurance (Asia) Limited, a wholly-owned subsidiary of the group, received approval from the China
Banking and Insurance Regulatory Commission to acquire the remaining 50% equity interest in HSBC Life Insurance Company Limited(HSBC Life China). Completion is expected to occur during the first half of 2022. Headquartered in Shanghai, HSBC Life China offers acomprehensive range of insurance solutions covering annuity, whole life, critical illness and unit-linked insurance products and in
2021 reported gross written premiums of approximately HK$3.0bn (2020: HK$2.2bn).
• On 28 January 2022, HSBC Insurance (Asia–Pacific) Holdings Limited notified the shareholders of Canara HSBC Oriental Bank ofCommerce Life Insurance Company Limited ('CHOICe') of its intention to increase its shareholding in CHOICe up to 49%. The groupcurrently has a 26% shareholding which is accounted for as an associate. Any increase in shareholding is subject to agreement withother shareholders in CHOICe, as well as internal and regulatory approvals. Established in 2008, CHOICe is a life insurance company
based in India with reported gross written premiums of approximately HK$5.4bn for the year to 31 March 2021 (31 March 2020:
HK$4.1bn).

40

Approval of financial statements

The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on 22 February 2022.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2021

131

The Hongkong and Shanghai Banking Corporation Limited
HSBC Main Building
1 Queen's Road Central, Hong Kong
Telephone: (852) 2822 1111
www.hsbc.com.hk