The Hongkong and Shanghai
Banking Corporation Limited
Annual Report and Accounts 2023

Contents
1
1
1
2
3
10
19
25
77
78

Certain defined terms
Cautionary statement regarding forward-looking statements
Chinese translation
Financial Highlights
Report of the Directors
Task Force on Climate-related Financial Disclosures
Financial Review
Risk
Statement of Directors’ Responsibilities
Independent Auditor’s Report

Consolidated Financial
Statements
83
84
85
86
88

Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated statement of cash flows

Notes on the Consolidated
Financial Statements
89
99
102
108
111
112
113
113
116

1
2
3
4
5
6
7
8
9

116
117
117
118
119
122
122
123
124
124
124
124
125

10
11
12
13
14
15
16
17
18
19
20
21
22

125
126
126
126
129

23
24
25
26
27

130

28

130
130
132
133
136
142

29
30
31
32
33
34

Basis of preparation and material accounting policies
Operating profit
Insurance business
Employee compensation and benefits
Tax
Dividends
Trading assets
Derivatives
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss
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 andprovisions
Subordinated liabilities
Share capital
Other equity instruments
Maturity analysis of assets and liabilities
Analysis of cash flows payable under financial liabilities byremaining contractual maturities
Contingent liabilities, contractual commitments andguarantees
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

143
143
145
147
150
151
151
151
151
152

35 Interest rate benchmark reform
36 Structured entities
37 Bank balance sheet and statement of changes in equity
38 Effects of adoption of HKFRS 17
39 Business disposals and acquisitions
40 Legal proceedings and regulatory matters
41 Ultimate holding company
42 Events after the balance sheet date
43 Approval of financial statements
Additional information

Certain defined terms
This document comprises the Annual Report and Accounts 2023 for
The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’)
and its subsidiaries (together ‘the group’). References to ‘HSBC’, ‘theGroup’ or ‘the HSBC Group’ within this document mean HSBC
Holdings plc together with its subsidiaries. Within this document theHong Kong Special Administrative Region of the People’s Republic ofChina 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
forward-looking statements
This Annual Report and Accounts 2023 contains certain forwardlooking statements with respect to the financial condition,
environmental, social and governance (‘ESG’) related matters, resultsof operations and business of the group, including the strategic
priorities; financial investment and capital targets; and the group's
ability to contribute to the Group's ESG targets, commitments andambitions described herein.
Statements that are not historical facts, including statements about
the group’s beliefs and expectations, are forward-looking statements.
Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’,‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, variations ofthese words and similar expressions are intended to identify forwardlooking statements. These statements are based on current plans,estimates and projections, and therefore no undue reliance should beplaced on them. Forward-looking statements apply only as of the datethey are made. The group makes no commitment to revise or update
any forward-looking statements to reflect events or circumstances
occurring or existing after the date of any forward-looking statement.
Forward-looking statements involve inherent risks and uncertainties.
Readers are cautioned that a number of factors, including ESG related
factors, could cause actual results to differ, in some instancesmaterially, from those anticipated or implied in any forward-looking
statement.
Please see pages 152-153 for the additional cautionary statement
regarding ESG and climate-related data, metrics and forward-looking
statements.

Chinese translation
A Chinese translation of the Annual Report and Accounts 2023 isavailable upon request from: Communications (Asia), Level 32, HSBC
Main Building, 1 Queen’s Road Central, Hong Kong. The report is alsoavailable, in English and Chinese, on the Bank’s website atwww.hsbc.com.hk.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

1

Financial Highlights | Report of the Directors

Financial Highlights
For the year
Net operating income before change in expected credit losses and other credit impairment charges
Profit before tax
Profit attributable to shareholders
At the year-end
Total shareholders’ equity
Total equity
Total capital2
Customer accounts
Total assets
RatiosReturn on average ordinary shareholders’ equity
Return on tangible equity (‘ROTE’)3
Post-tax return on average total assets
Cost efficiency ratio
Net interest margin
Advances-to-deposits ratio
Capital ratios
Common Equity Tier 1 ('CET1') capital
Tier 1 capital
Total capital

2023

20221

HK$m

HK$m

249,679
121,443
90,747200,803
96,68776,401

812,726
872,586
631,701
6,261,051
10,500,393

807,552
864,380
607,312
6,113,709
10,197,843

%

%

11.3
13.5
0.9
44.1
1.81
56.8

9.9
11.7
0.8
53.1
1.54
60.4

15.8
17.5
19.7

15.3
16.9
18.8

1 From 1 January 2023, we adopted HKFRS 17 'Insurance Contracts', which replaced HKFRS 4 'Insurance Contracts'. Comparative data presented in
Financial Highlights, Financial Review, Risk and Financial Statements sections have been restated. For further details on our adoption of HKFRS 17,
see Note 1 'Basis of preparation and material accounting policies' on page 89 to 99 and Note 38 'Effects of adoption of HKFRS 17' on page 147 to150.
2 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.
3 The group's ROTE is calculated as part of the Group ROTE framework and is based on IFRS financials.

Established in Hong Kong and Shanghai in 1865, The Hongkong and Shanghai Banking Corporation Limited is the founding member of the
HSBC Group – one of the world’s largest banking and financial services organisations. It is the largest bank incorporated in Hong Kong and oneof 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 2023

Report of the Directors

David Yi Chien LIAO

Principal Activities

Co-Chief Executive Officer (since June 2021)

The group provides a comprehensive range of domestic andinternational banking and related financial services, principally in theAsia–Pacific region.

Asia Strategy
The Asia region has strong and sustained underlying fundamentals of
economic growth, trade, and wealth creation. HSBC’s strategy in Asia
builds on 158 years of experience in the region. Our strategy isaligned to the biggest opportunities to create further shareholder
value. Our ambition is to be the leading international wealth,
corporate and institutional bank across Asia. We are well positioned
to further extend the strengths of our leading Hong Kong franchise
into other key growth markets, including mainland China, India andSoutheast Asian markets. We have invested in our people andtechnology. We aspire to grow our Asia Wealth business, andstrengthen our distinctive position as the leading international bankfor corporate and institutional clients across Asia. We remain focusedon connecting Asian markets to each other and the world through
HSBC’s global network, supporting the transition to a low-carbon
economy through sustainable finance solutions, improving customer
experience, while continually streamlining our organisation to realise
greater operating efficiencies through technology.

Consolidated Financial Statements
The consolidated financial statements of the group are set out on
pages 83 to 151.

Subordinated Liabilities, Share Capital andOther 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 the
consolidated financial statements.

Dividends
The interim dividends paid in respect of 2023 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 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, a Doctor of Laws, honoris causa, from the Hang Seng
University of Hong Kong and a Doctor of Business Administration,
honoris causa, from Lingnan University.
Before his retirement as a 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 (since June 2021)
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 a HSBC employee in 2005, he was an executive
Director, Chief Executive Officer and Chairman of the Bank. He was also
non-executive Chairman of Hang Seng Bank Limited and a Director of
HSBC Holdings plc. He was non-executive Chairman of HSBC Bank
Middle East Limited from 2011 to 2021. He was non-executive Chairman
and a Director of Octopus Holdings Limited, Octopus Cards Limited andOctopus Cards Client Funds Limited from 2016 to 2022.

He is also a member of the Group Executive Committee of HSBC
Holdings plc and a non-executive Director of Hang Seng Bank Limited
and Bank of Communications Co., Ltd. He holds a Bachelor of Arts
(major in Japanese 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 June 2021)
He is also a member of the Group Executive Committee of HSBC
Holdings plc and an executive Director of HSBC Bank Malaysia Berhad.
He holds a Bachelor of Commerce from Sydenham College ofCommerce & Economics, Bombay University and a Master of Business
Administration from 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.

Paul Jeremy BROUGH
Independent non-executive Director (since June 2023)
He is also an independent non-executive Director of Guoco Group
Limited and Vitasoy International Holdings Limited. He holds a Bachelorof Arts (Hons) in Business Studies from Nottingham Trent University,and is an Associate of the Institute of Chartered Accountants in Englandand Wales and the Hong Kong Institute of Certified Public Accountants.
He was previously an independent non-executive Director of Habib Bank
Zurich (Hong Kong) Limited from 2013 to February 2023. He worked at
KPMG Hong Kong for around 30 years and left the firm in 2012 as Senior
Regional Partner.

Edward Wai Sun CHENG, GBS, JP
Independent non-executive Director (since May 2023)
He is also Deputy Chairman and Chief Executive of Wing Tai Properties
Limited and Chairman of Lanson Place Hospitality Management Limited.
He holds a Bachelor of Arts (Economics and Politics) from Cornell
University, Ithaca, New York, and a Bachelor of Arts in Jurisprudence anda Master of Arts from the University of Oxford. He is qualified as asolicitor in England and Wales as well as in Hong Kong.
He was previously a non-executive Director of the Securities and Futures
Commission of Hong Kong, and an independent non-executive Directorof Standard Chartered Bank (Hong Kong) Limited. He was also theformer Chairman of the Urban Renewal Authority and the University
Grants Committee of Hong Kong.

Sonia Chi Man CHENG
Independent non-executive Director (since November 2020)
She is also the Chief Executive Officer of Rosewood Hotel Group. She is
the Vice-Chairman and executive Director of Chow Tai Fook Jewellery
Group Limited, an executive Director of New World Development
Company Limited and a Director of New World China Land Limited. She
holds a Bachelor of Arts with a field of concentration in Applied
Mathematics from Harvard University.

Yiu Kwan CHOI
Independent non-executive Director (since October 2017)
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 an independent non-executive Director of HSBC Bank (China)
Company Limited from December 2016 to December 2022. 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 charge ofMonetary 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 2023

3

Report of the Directors

Andrea Lisa DELLA MATTEAKevin Anthony WESTLEY, BBS

Independent non-executive Director (since March 2022)

Independent non-executive Director (since September 2016)

She is also the Asia Pacific President of Microsoft Operations Pte Ltd.
She holds a Bachelor of Engineering and an Honorary Doctor ofEngineering from James Cook University of North Queensland, Australia.
She has previously held senior leadership roles at Insight Enterprises, Incfrom 2007 to 2017, including Asia Pacific Managing Director, and at
Software Spectrum Inc from 1996 to 2006.

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 theInstitute of Chartered Accountants in England and Wales.
He was Chairman (from 1996) and Chief Executive (from 1992) of HSBC
Investment Bank Asia Limited (formerly named Wardley Limited) until his
retirement in 2000 and subsequently acted as an advisor to the Bank and
the Group in Hong Kong. He was an independent non-executive Directorof the Bank from 2013 to 2015 and rejoined the Board in September
2016.

Pam KAUR
Non-executive Director (since November 2023)
She is also the Group Chief Risk and Compliance Officer and a memberof the Group Executive Committee of HSBC Holdings plc. She serves as
an independent non-executive Director of abrdn plc. She holds an MBA
in Finance, and a BCom (Hons) from Panjab University in India, and is a
Fellow member of The Institute of Chartered Accountants in England andWales.
She was previously an independent non-executive Director of Centrica
plc. She joined HSBC in April 2013 and has held the roles of Group Headof Internal Audit and Head of Wholesale Market and Credit Risk. She
previously held senior leadership roles at Deutsche Bank, Royal Bank of
Scotland Group plc, Lloyds TSB and Citigroup.

Rajnish KUMAR
Independent non-executive Director (since August 2021)
He is also non-executive Chairman of Resilient Innovations Pvt. Ltd., nonexecutive Director and Chairman of Mastercard India Services Private
Limited, an independent Director of Larsen and Toubro Limited and
Brookprop Management Services Private Limited, an independent nonexecutive Director of Hero MotoCorp Limited and Ambuja Cements
Limited, a Director of Lighthouse Communities Foundation, andChairman of Board of Governors of Management Development Institutein India. He is also a senior adviser to EQT AB and an advisor to Think &Learn Private Limited. He holds a Master of Science in Physics from
Meerut University and a Post Graduate Certificate in Business
Management from XLRI Jamshedpur in India. He is an Associate of the
Indian Institute of Bankers.
He was previously Chairman of the State Bank of India until he retired in
October 2020.

Beau Khoon Chen KUOK
Independent non-executive Director (since August 2020)
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 a non-executive
Director of Wilmar International Limited.

Irene Yun-lien LEE
Independent non-executive Director (since October 2013)
She is also executive Chairman of Hysan Development Company
Limited. She is also independent non-executive Chairman of Hang Seng
Bank Limited and an independent non-executive Director of Alibaba
Group Holding Limited. She holds a Bachelor of Arts (Distinction) in
History of Art from Smith College, Northampton, Massachusetts, USA.
She is also a member of the Honourable Society of Gray’s Inn, UK and a
Barrister-at-Law in England and Wales.
She was an independent non-executive Director of HSBC Holdings plc
from 2015 to 2022.

Annabelle Yu LONG
Independent non-executive Director (since August 2022)
She is also the Founding and Managing Partner of BAI Capital Fund I,
L.P. and a Group Management Committee Member of Bertelsmann SE& Co. KGaA. She is an independent Director of Tapestry Inc.,
LexinFintech Holdings Ltd., Nio Inc. and Linmon Media Limited. She
holds a Master in Business Administration from Stanford Graduate
School of Business, United States and a Bachelor of Science in ElectricalEngineering from University of Electronic Science and Technology,
China.

4

During the year, Edward Wai Sun Cheng and Paul Jeremy Broughwere appointed independent non-executive Directors with effectfrom 19 May and 20 June 2023 respectively, and Pam Kaur was
appointed a non-executive Director with effect from 23 November
2023. Victor Tzar Kuoi Li retired as a Director with effect from 9 May
2023, being the date of passing the written resolutions of the Bank’s
shareholder in lieu of holding the 2023 Annual General Meeting('AGM'). Save for the above, all the Directors served throughout theyear.
A list of the directors of the Bank’s subsidiary undertakings(consolidated in the financial statements) during the period from
1 January 2023 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 than the
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, the Bank’s ultimate holding
company, HSBC Holdings plc, has maintained directors’ and officers’
liability insurance providing appropriate cover for the directors andofficers 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 materialinterest were entered into by or subsisted with the Bank, 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 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 andthe HSBC International Employee Share Purchase Plan.
Executive Directors of the Bank and HSBC Holdings plc are eligible toreceive an annual incentive award based on the outcome of theperformance measures (financial and non-financial) set out in theirannual performance scorecard. Annual incentive awards are normallydelivered in cash and/or shares, and these generally have a 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 the requirements of thePrudential Regulation Authority (‘PRA’) Remuneration Rules, i.e.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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, their retention period may be kept at six months.
To incentivise sustainable long-term performance and alignment withshareholder interests, Senior Management of Holdings plc including
the Co-Chief Executives of the Bank are eligible to receive Long-Term
Incentive ('LTI') Share Award. These awards which have been madeto executive Directors of Holdings plc are subject to three-year
forward-looking performance measures and a seven-year vesting
period with a one-year post-vesting retention period, which is not
accelerated on departure. The weighted average holding period of an
LTI award within HSBC is therefore six years, in excess of the fiveyear holding period typically implemented by FTSE-listed companies.
When the individual ceases employment, if they are treated as agood leaver under our policy, any LTI awards granted will continue tobe released over a period of up to eight years, subject to the outcomeof performance conditions. For more details on the operation of theplan, please refer to HSBC Holdings plc annual report and accounts.
All unvested deferred awards made under the HSBC Share Plan 2011
are subject to the application of malus, i.e. the cancellation andreduction 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 of award. For Senior
Managers, this may be extended to 10 years in the event of an
ongoing internal or regulatory investigation at the end of the sevenyear 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 and local
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 not entered into any
personal hedging strategies in relation to their holdings 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. 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 entitledto the Matching Shares subject to continued 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 andshares 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 date ofinvitation.
During the year, Surendra Rosha and David Liao acquired or wereawarded shares of HSBC Holdings plc under the terms of the HSBC
Share Plan 2011. Pam Kaur was appointed to the Bank’s Board on
23 November 2023 and the awards of shares of HSBC Holdings plc
during the year were in her capacity as an employee of HSBC GroupManagement Services Ltd.
Apart from these arrangements, at no time during the year was theBank, 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.

Donations
Donations made by the group during the year amounted to HK$318m(2022: HK$439m).

Compliance with the Banking (Disclosure)Rules
The Directors are of the view that the Annual Report and Accounts
2023 and Banking Disclosure Statements 2023 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’) madeunder section 19(1) of the Financial Institutions (Resolution)
Ordinance ('FIRO').

AuditorThe 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 ofLocally Incorporated Authorised Institutions’ ('SPM CG-1') except thatthe membership of the Bank’s Nomination Committee does notcomprise a majority of independent non-executive Directors. The
Bank’s Nomination Committee currently comprises an equal numberof independent non-executive Directors and non-executive Directors.
As a principal subsidiary of the HSBC Group, the Bank operates inaccordance with the Group’s Subsidiary Accountability Framework
including its responsibility for overseeing the implementation of theframework for all of its subsidiaries. The Subsidiary Accountability
Framework, which was refreshed in 2023, sets out high-level
principles to promote effective governance and improve
communications and connectivity between HSBC Holdings plc and its
subsidiaries.

Board of Directors
The Board, led by the Chairman, provides entrepreneurial leadershipof the Bank within a framework of prudent and effective controls
which enables risks to be assessed and managed. The Board iscollectively responsible for the long-term success of the Bank anddelivery of sustainable value to shareholders. The Board sets thestrategy and risk appetite for the group and approves capital andoperating plans presented by management 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; one other nonexecutive Director; and ten independent non-executive Directors.

Independent non-executive Directors
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 in meeting
agreed goals and objectives, and monitor the risk profile and reportingof performance of the Bank. The independent non-executive
Directors bring experience from a number of industries and businesssectors, including the leadership of large complex multinational
enterprises. The Board has determined that there are ten
independent non-executive Directors. In making this determination, it
was agreed that there are no relationships or circumstances likely toaffect the judgement of the independent non-executive Directors,
with any relationships or circumstances that could appear to do so
not considered to be material.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

5

Report of the Directors

Chairman and co-Chief Executive Officers

Executive Committee

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 is aclear division of responsibilities between leading the Board and theexecutive responsibility for running the Bank’s business.

The Executive Committee is responsible for the exercise of all of thepowers, authorities and discretions of the Board in so far as they
concern the management, operations and day-to-day running of thegroup, in accordance with such policies and directions as the Board
may from time to time determine, with power to sub-delegate. A
schedule of items that require the approval of the Board ismaintained.

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 andmanagement. The Chairman’s role includes promoting an open andinclusive culture on the Board to facilitate open and critical discussion
and challenge. The Chairman's role also leads the Board in setting anappropriate ‘tone from the top’ and in the oversight of the Bank’s
corporate culture. The Chairman also leads an annual evaluation of
the performance of the Board, its Committees and individual
Directors. The role also involves maintaining external relationships
with key stakeholders and communicating their views to the Board.
The co-Chief Executive Officers are individually and jointly responsible
for ensuring implementation of the strategy and policies asestablished by the Board and the day-to-day running of operations.
The co-Chief Executive Officers are co-Chairmen of the Executive
Committee. The heads of Global Businesses and Global Functions
and country/territory Chief Executive Officers in Asia-Pacific report tothe co-Chief Executive Officers. For the purposes of section 74 of the
Banking Ordinance, David Liao (co-Chief Executive Officer) is theChief Executive, and Surendranath Rosha (co-Chief Executive
Officer), David Grimme (Chief Operating Officer, Asia-Pacific), Martin
Haythorne (Chief Risk Officer, Asia-Pacific) and Ming Lau (Chief
Financial Officer, Asia-Pacific and Eastern Markets) are Alternate
Chief Executives.
Role profiles for the Chairman and co-Chief Executive Officers wereapproved by the Board in May 2021.

Deputy Chairman
The role of the 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 in ensuring a clear division of
responsibility between the Chairman and co-Chief Executive Officers.
The role also involves maintaining external relationships with key
stakeholders and communicating their views to the Board.
The role profile for the Deputy Chairman was approved by the Board
in April 2021.

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 co-Chairmen of the Executive Committee and the
Chairman of each Board committee that includes independent nonexecutive Directors report to each subsequent Board meeting on therelevant 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.
The Board and each Board committee have terms of reference todocument their responsibilities and governance procedures. The key
roles of the Board committees are described in the paragraphs
below.

6

The Bank’s co-Chief Executive Officers, David Liao and Surendranath
Rosha, are co-Chairmen of the Committee. The current members of
the Committee are: Hitendra Dave (Chief Executive Officer, India);
Philip Fellowes (Chief of Staff, Asia-Pacific); Darren Furnarello (Chief
Compliance Officer, Asia-Pacific); Matthew Ginsburg (Global Co-Headof Capital Financing and Investment Banking Coverage); David
Grimme (Chief Operating Officer, Asia-Pacific); Martin Haythorne(Chief Risk Officer, Asia-Pacific); Gregory Hingston (Chief Executive
Officer, HSBC Global Insurance and Partnerships); Ming Lau (Chief
Financial Officer, Asia-Pacific and Eastern Markets); Luanne Lim(Chief Executive Officer, Hong Kong); Christina Ma (Head of Global
Banking, Asia-Pacific); Amanda Murphy (Head of Commercial
Banking, South and Southeast Asia); Susan Sayers (Regional GeneralCounsel, Asia-Pacific); Antony Shaw (Chief Executive Officer,
Australia); Omar Siddiq (Chief Executive Officer, Malaysia); Monish
Tahilramani (Head of Markets & Securities Services, Asia-Pacific);David Thomas (Head of Human Resources, Asia-Pacific); Mark Wang
(President and Chief Executive Officer, China); Kee Joo Wong (Chief
Executive Officer, Singapore) and Kai Zhang (Head of Wealth andPersonal Banking, South Asia). Paul Stafford (Corporation Secretary)is the Committee Secretary. In attendance are: Astor Law (Head of
Global Internal Audit, Asia-Pacific); Jessica Lee (Regional Head ofCommunications, Asia-Pacific) and Fred Xue (Senior Assistant
Regional Company Secretary, Asia-Pacific). The Committee met ten
times in 2023. In between Committee meetings, there were periodic‘check-in’ sessions held by the Committee co-Chairmen withmembers 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. It is an advisory committee toprovide recommendations and advice to support the Chief Financial
Officer's individual accountability for the efficient management of theBank’s assets, liabilities and capital within the constraints of risk
appetite, regulatory and other limits set for liquidity and funding,capital, and key balance sheet risks such as interest rate risk, nontraded banking book foreign exchange risk and equity risk. The
Committee also has responsibilities for the review of the Bank's
recovery and resolution planning activities, and the oversight andescalation of treasury sustainability related matters in support of theGroup’s sustainability objectives.
The Committee consists of Ming Lau (Chief Financial Officer, AsiaPacific and Eastern Markets), David Liao and Surendranath Rosha (coChief Executive Officers), Martin Haythorne (Chief Risk Officer, AsiaPacific), the Regional Treasurer, Asia-Pacific, the Regional Head of
Liquidity, Asia-Pacific, the Regional Head of Capital Management,
Asia-Pacific, the Head of Markets Treasury, Asia-Pacific, the Regional
Head of Interest Rate Risk in the Banking Book, Asia-Pacific, theRegional Head of Traded and Treasury Risk Management, Asia-Pacificand other senior executives of the Bank most of whom are membersof the Executive Committee. The Committee met ten times in 2023.

Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer. It
is a formal governance forum established to support the Chief Risk
Officer’s individual accountability for the oversight of enterprise risk
and provide recommendations and advice to the Chief Risk Officer onenterprise-wide management of all risks, including key policies andframeworks for the management of risk within the Bank. The Risk
Management Meeting consists of Martin Haythorne (Chief Risk
Officer, Asia-Pacific), David Liao and Surendranath Rosha (co-Chief

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Executive Officers), the Head of Global Internal Audit, Asia-Pacific,
the Chief Executive Officer of Hang Seng Bank Limited, the Head ofWholesale Credit and Market Risk, Asia-Pacific and other senior
executives of the Bank most of whom are members of the Executive
Committee. The Risk Management Meeting met six times in 2023.

Audit Committee
The Audit Committee has non-executive responsibility for oversightof and advice to the Board on matters relating to financial reportingand internal financial controls. The current members of theCommittee are Kevin Westley (Chairman of the Committee), Paul
Brough, Yiu Kwan Choi, David Eldon, Rajnish Kumar and Irene Lee.
Except for David Eldon, who is a non-executive Director, all members
are independent non-executive Directors. The Committee met fourtimes in 2023.
The Audit Committee monitors the integrity of the consolidated
financial statements, banking disclosure statements, and disclosuresrelating to financial performance, the effectiveness of the internal
audit function and the external audit process, and the effectivenessof internal financial control systems. The Committee reviews theadequacy of resources and expertise as well as succession planningfor the finance function. It reviews, and considers changes to, theBank’s accounting policies. The Committee advises the Board on theappointment, re-appointment, or removal of the external auditor andreviews and monitors the external auditor’s independence andobjectivity. The Committee reviews matters escalated for its
attention by subsidiaries’ audit committees and receives minutes ofmeetings of the ALCO.

Risk Committee
The Risk Committee has non-executive responsibility for oversight ofand advice to the Board on risk-related matters impacting the Bankand its subsidiaries, including risk governance and internal control
systems (other than internal controls over financial reporting). The
current members of the Committee are Yiu Kwan Choi (Chairman of
the Committee), Paul Brough, Edward Cheng, Sonia Cheng, David
Eldon, Rajnish Kumar, Irene Lee, Annabelle Long and Kevin Westley.
Except for David Eldon, who is a non-executive Director, all members
are independent non-executive Directors. The Committee met fourtimes in 2023.
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 their assigned
responsibilities. This personal accountability, reinforced by clear andconsistent employee communication on risk that sets the tone fromsenior leadership, the governance structure, mandatory learning andremuneration policy, helps to foster a disciplined and constructive
culture of risk management and control throughout the group.
The Board and the Risk Committee oversee the maintenance anddevelopment of a strong risk management framework by continuallymonitoring the risk environment, top and emerging risks facing thegroup and mitigating actions planned and taken. The Risk Committee
reviews certain Group risk management policies and procedures atleast annually and advises the Board if these are appropriate for thecircumstances of the Bank. It also reviews local risk management
policies at least annually, and approves or recommends 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 and provides
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 theeffectiveness of the Bank’s risk management and internal controls
other than those over financial reporting. Regular reports from the

Risk Management Meeting are also presented at each Risk
Committee meeting to report on the ongoing monitoring, assessmentand management of the risk environment and the effectiveness of
the risk management framework. The Committee reviews mattersescalated for its attention by subsidiaries’ risk committees andreceives 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 for appointment to theBoard and certain senior management roles. Appointments to theBoard and certain senior management roles are subject to theapproval of the HKMA. The Committee considers plans for orderly
succession to the Board and the appropriate balance of skills,
knowledge and experience on the Board, and undertakes an annual
review of the time commitment and any potential conflicts ofinterests of each Director. The Committee also reviews the board
succession plans of certain subsidiaries of the Bank and considers
and endorses appointments to boards of directors of specified
subsidiaries.
The current members of the Committee are Beau Kuok (Chairman of
the Committee), Peter Wong (Chairman of the Board), David Eldon(Deputy Chairman of the Board) and Kevin Westley. Beau Kuok and
Kevin Westley are independent non-executive Directors and Peter
Wong and David Eldon are non-executive Directors. The Committee
met five times in 2023.
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 theBoard composition including the balance of skills, knowledge andexperience, as well as diversity and the role and capabilities required.
In identifying suitable Board candidates, the Committee considers
candidates’ backgrounds, knowledge and experience to promote
diversity of views, and takes into account the required timecommitment 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 to timeor 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 to their priorreview by the full Board, and act exceptionally on urgent matterswithin 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 two times in 2023.

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 theimplementation and operation of the Group’s Remuneration Strategy
and satisfying itself that the remuneration framework complies withlocal laws, rules or regulations; is in line with the risk appetite,business strategy, culture and values, and long-term interests of the
Bank; and is appropriate to attract, retain and motivate employees tosupport the success of the Bank. The current members of theCommittee, all being independent non-executive Directors, are Irene
Lee (Chairman of the Committee), Beau Kuok, Edward Cheng andSonia Cheng.
The Committee met six times in 2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

7

Report of the Directors

The following is a summary of the Committee's key activities during2023:
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 2022/2023 performance year pay review matters– Reviewed remuneration framework effectiveness– Received updates on notable events and regulatory and corporate
governance matters– Reviewed and approved 2023 Material Risk Taker (‘MRT’)
identification approaches and outcomes– Received updates and approval of reward and benefit changes toaddress regulatory updates and to enhance the employee values
proposition in the markets we operate– Approved 2023 remuneration related regulatory submissions* Senior Management includes the Co-Chief Executives of the Bank,
Chief Executive of Hang Seng Bank Limited, Executive Committee
members, Alternate Chief Executives and Managers as registered with
HKMA.

Remuneration Strategy
Our performance and pay framework is underpinned by our Group’s
Remuneration Strategy and Principles, to which it is reviewed
periodically and refreshed in 2023 with a wider employee proposition
centered on our purpose and values.
The refreshed principles and supporting commitments articulate theexperience for employees and provide a clear framework to create adynamic culture where the best talent are motivated to deliver highperformance.
– We will reward you responsibly through fixed pay security andprotection through core benefits, a competitive totalcompensation opportunity, and pay equity with a more inclusive
and sustainable benefits proposition over time.
– We will recognise your success through our performance culture
and routines, including feedback and recognition, pay for
performance, and all employee share ownership opportunities.
– We will support you to grow through our proposition beyond pay,with a focus on future skills and development, your mental,
physical, social and financial well-being, and flexibility in working
practices.
Our aim is to use the framework to deliver an exceptional colleague
experience – strengthening our ability to attract, retain and motivate
the people we need in competitive labour markets, in the context of
evolving employee expectations.
During 2023 we have undertaken significant design work to review
our performance approach and pay structures to simplify, improvetransparency, and foster an environment focused on growth, learningand motivating colleagues to perform at their best. This will be
implemented from 2024.
In addition to performance and pay, work is underway to drive
improvements to our proposition beyond pay, aligned to theprinciples of our reward strategy, building on our strong benefits andwell-being programme, including flexible working, and more inclusive
and sustainable benefits.
More details of the Bank’s remuneration strategy are contained
within the Annual Report and Accounts 2023 of HSBC Holdings plc.
The Bank as an Authorised Institution under the Banking Ordinance isrequired by HKMA Supervisory Policy Manual CG-5 'Guideline on aSound Remuneration System' (the Guideline) to assess whether their
existing remuneration systems and policy are in line with theprinciples in the Guideline, independently of management and at least
annually. The annual review for 2022 was commissioned externally to
Deloitte LLP and the results were approved by the Remuneration
Committee in April 2023. The review confirmed that the Bank’s
remuneration strategy as adopted from the Group is consistent withthe principles set out in the Guideline.
8

Recovery and Resolution Planning
The group is subject to recovery and resolution requirements in manyof the jurisdictions in which it operates. In Hong Kong, the Banking
Ordinance and Financial Institutions (Resolution) Ordinance sets out
requirements for recovery and resolution planning.

Recovery
The group maintains recovery plans designed to outline credible
management actions that could be implemented in the event ofsevere stress in order to restore capital and its business to a stable
and sustainable condition. The Bank typically submits a recovery planon an annual basis to the HKMA and submits local recovery plans toother host regulators where local requirements are in place. The
Bank’s recovery plans are continually re-appraised to meet regulatory
and internal feedback, including through regular stress testing and‘fire drill’ tests.

Resolution
In general terms, resolution refers to the exercise of statutory powers
where a financial institution and/or its parent or other group company
is deemed by its regulators to be failing, or likely to fail and it is notreasonably likely that recovery action could be taken that would resultin the institution recovering.
In view of the HSBC Group’s corporate structure, which comprises agroup of locally regulated operating banks, the preferred resolution
strategy for the HSBC Group, as confirmed by its regulators, is amultiple point of entry (‘MPE’) bail-in strategy. This provides flexibility
for HSBC to be resolved either (i) through a bail-in at the HSBC
Holdings level, which enables the recapitalisation of operating banksubsidiaries in the HSBC Group (as required) while restructuring
actions are undertaken, with the HSBC Group remaining together; or(ii) at a local subsidiary level pursuant to the application of statutory
resolution powers by local resolution authorities.
The group is part of the HSBC Group-wide Resolvability Assessment
Framework (‘RAF’) implementation along with continued bilateralengagement with the HKMA and the other principal Asian regulatorsin addressing any identified impediments to resolvability of the group,
ensuring resolvability capabilities being developed are in line with thelocal requirements and regulatory expectations. The group has put inplace capabilities to enhance the bank’s resolvability, taking into
account the various components of the resolution standards as theycome into effect.
In July 2019, the Bank of England ('BoE') and PRA published final
policies on the RAF which places the onus on firms to demonstrate
their own resolvability. HSBC Group, including the group, wasrequired to have capabilities as of 1 January 2022 to achieve theresolvability outcomes: (i) have adequate resources in resolution; (ii)be able to continue business through resolution and restructuring;and (iii) be able to co-ordinate its resolution and communicate
effectively with stakeholders. The RAF requires HSBC to prepare areport on the HSBC Group's assessment of its resolvability, whichmust be submitted to the BoE on a biennial basis. HSBC Groupsubmitted its first such report to the BoE in October 2021 and thesecond report in October 2023. In June 2024, HSBC will make its
second public disclosure on its resolvability, which will summarise
the key findings from the second RAF Self-assessment. Regular
engagement with the BoE and PRA continues as HSBC prepares forthe public disclosure of the second RAF cycle. HSBC continues toengage with the BoE, PRA, HKMA and its global regulators in otherjurisdictions to ensure that it meets current and future recovery andresolution requirements.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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.

On behalf of the Board

Peter Wong, Chairman
21 February 2024

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

9

Task Force on Climate-related Financial Disclosures

Task Force on Climate-related Financial Disclosures (unaudited)
The Group continues to work to incorporate environmental, social andgovernance ('ESG') principles throughout the organisation, and toembed sustainability into the way the Group operates.

Approach to climate reporting
The information set out in this Task Force on Climate-related Financial
Disclosures ('TCFD'), taken together with other information relating toclimate issues included in the Annual Report and Accounts 2023,
provides key climate information and data relevant to the group’s
operations for the year ended 31 December 2023. The data iscompiled for the financial year 1 January to 31 December 2023
unless otherwise specified. Measurement techniques andcalculations are explained next to data tables where necessary.
The group has considered its ‘comply or explain’ obligation under the
Hong Kong Monetary Authority’s ('HKMA') Supervisory Policy Manual('SPM') GS-1 on Climate Risk Management issued in December
2021. The group has made disclosures consistent with the TCFD
Recommendations and Recommended Disclosures, issued in July
2017 and its updated guidance in October 2021, in this Annual Reportand Accounts save for certain items which are described on pages 14
to 18. Further details have been included in this section and the Risk
Review section on pages 66 to 69. TCFD disclosures are highlighted
with the following symbol: TCFD.

Understanding HSBC's climate reporting
The availability of high quality climate-related data, transparent
reporting standards and consistent methodology will play a vital rolein helping deliver the wholesale economic transformation required tolimit global warming to 1.5°C at the speed and scale it is needed. The
group understands that its existing data, systems, controls andprocesses require enhancements to drive effective change, but thegroup recognises the necessity to balance this with providing earlytransparency on climate disclosures.
The group acknowledges that to achieve the Group's climate
ambition the group needs to be transparent on the opportunities,
challenges, related risks it faces and progress it makes. The group's
reporting must evolve to keep pace with market developments andthe group will aim to work through challenges where possible andseek to improve consistency across different markets. The role ofstandard setters and regulators will be important in achieving
standardisation. The Group has highlighted some of the limitations
and challenges that the organisation, and the wider industry, currently
face with regard to climate reporting. For details, see the Group's
Annual Report and Accounts.
In addition, there is a heightened need for subject matter experts forclimate related topics as well as upskilling of key colleague groups
who are supporting customers through their net zero transition. The
group also needs new sources of data, some of which may bedifficult to assure using traditional verification techniques. Given thisindustry challenge, coupled with diverse external data sources andstructures, this further complicates data consolidation.
The group continues to invest in its climate resources and skills, andto develop its business management processes to integrate climate
impacts. The group's activities are underpinned by efforts to develop
its data and analytics capabilities and to help ensure that it has theappropriate processes, systems, controls and governance in place tosupport the group's transition.
In 2024, the group will continue to review its approach to disclosures,and enhance as appropriate.

How climate is governed TCFD
The Board takes overall responsibility for climate governanceincluding approval for the climate strategy and the oversight ofexecutive management in developing the approach, execution, risk
management and associated reporting. The group’s developments inrelation to its strategies was reviewed through Board discussions atfive meetings in 2023. In addition, Board members received training
on the Group's net zero ambition on its own operations, the Group's
financed emissions and decarbonisation solutions, as part of their
ongoing development. The 2023 annual incentive scorecards of the
Co-CEOs of Asia-Pacific and most of the Executive Committee
10

members include outcomes linked to realisation of different ESG
metrics such as customer satisfaction, employee sentiment, carbon
reduction of the group's own operations and sustainable financemeasures. Management has engaged with the Board throughout
2023 on the key climate issues, such as climate strategy, clienttransition engagement and climate risk management.
Given the wide-ranging remit of climate matters, governanceactivities are managed through a combination of specialist
governance infrastructure and regular meetings and committees,
where appropriate. These include the Board level committees - theRisk Committee, the Audit Committee, the Executive Committee, theRisk Management Meeting; the executive level committees,
including the Sustainability Committee, the Environmental Risk
Oversight Forum and the Disclosure and Controls Committee. The
Risk Committee reviews the effectiveness of the group’s conduct
framework, which is designed to deliver fair outcomes for customers,
and to preserve the orderly and transparent operation of financial
markets. The Risk Committee also oversees and advises the Board
on risk-related matters, including both financial and non-financial risks.
In addition, the Executive Committee reviews the annual financial
plan for sustainable finance and on a quarterly basis an ESG
dashboard including key metrics such as sustainable finance and own
operations emissions.
The group Sustainability Committee is a governance forum
established by the group to support the Group’s climate ambition.
The group Sustainability Committee, chaired by the Co-CEOs of AsiaPacific, oversees the group’s contribution to the Group’s net zerotransition plan. This includes overseeing delivery across Asia-Pacificof the Group’s climate ambition and commitments, including
supporting clients and customers with sustainable finance, andpartnering with organizations and governments in the region. The
group Environmental Risk Oversight Forum is a sub-committee of the
Risk Management Meeting, established to provide oversight of allrisk activities relating to the group’s approach to environmental risk
management. The Disclosure and Controls Committee is to support
the group in discharging its obligations under applicable legislation
and regulations relating to external disclosure obligations.

Transition to net zero TCFD
The Group aims to be net zero by 2050 and is working to achieve a
1.5°C aligned phase-down of its financed emissions from its portfolio.
The Paris Agreement aims to limit the rise in global temperatures towell below 2°C, preferably to 1.5°C, compared with pre-industrial
levels.
The Group’s history means its balance sheet is weighted towards thesectors and regions which matter the most in terms of emissions,and whose transitions are therefore key to the world’s ability to reachnet zero on time. There will be a complex transition, with markets
and sectors at different starting points and moving at different
speeds. However, it also provides the Group with an opportunity towork with its customers to help make an impact – in both theemissions challenge and the financing challenge. The Group’s ability
to transition relies on decarbonisation in the real economy happening
at the necessary pace. It means the Group’s customers and theindustries and markets it serves will need to transition effectively,
supported by strong government policies and regulation, andsubstantially scaled investment. Engagement and collaboration are
therefore key to how the Group responds.

Explaining scope 1, 2 and 3 emissions
To measure and manage the group’s greenhouse gas emissions, thegroup follows the Greenhouse Gas Protocol global framework, which
identifies three scopes of emissions. Scope 1 represents the directemissions the group creates. Scope 2 represents the indirectemissions resulting from the use of electricity and energy to run abusiness. Scope 3 represents indirect emissions attributed to
upstream and downstream activities taking place to provide services
to customers. The group’s upstream activities include business travel
and emissions from its supply chain including transport, distribution
and waste. The group’s downstream activities include those related
to investments and financed emissions.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Under the protocol, scope 3 emissions are broken down into 15
categories. The group provides reporting emissions data in relation tobusiness travel (category 6), an upstream activity. More information in
relation to the group’s greenhouse gas emissions is set out on page12.

Our approach to the transition TCFD
The Group’s net zero transition plan
The Group’s first net zero transition plan, published in January 2024,
provides an overview of the Group’s approach to net zero and theactions it is taking to help meet its ambition. It sets out how theGroup intends to use its strength as an organisation to help deliver abroader impact on decarbonisation, how it is working to embed net
zero across key areas of the organisation, and the principles that it
aims to use to guide the implementation of its approach.

The Group's net zero strengths
The Group aims to rebalance the capital deployment towards
achieving net zero over the coming decades. The Group believes thiscan be done best by promoting change in three key areas that play toits strengths as an organisation: transitioning industry; catalysing the
new economy; and decarbonising trade and supply chains.

The Group's implementation plan
The Group is working to embed net zero across the organisation. This
includes embedding net zero into: the way it supports its customers,
both through customer engagement and the provision of financing
solutions; the way that it operates as an organisation, including risk
management, policies, governance and own operations; and how theGroup partners externally in support of systemic change. It alsomeans focusing first on the sectors and customers with the highest
emissions and transition risks, and evolving and expanding theGroup's efforts over time.

The Group's net zero principles
In implementing its approach to net zero, the Group aims to be
guided by a set of principles which are aligned with its core values:
science-based, transparent and accountable; integrating nature; andjust and inclusive.
For details, see the Group's Net Zero Transition Plan 2024 atwww.hsbc.com/who-we-are/our-climate-strategy/our-net-zerotransition-plan.

Supporting our customers TCFD
The Group recognises that it has an important role to play insupporting the transition to a net zero global economy.
As a global organisation with presence in the regions and sectors
where most significant change is needed, the Group is well placed tohelp transition industry and catalyse the new economy to reach net
zero.
The Group aims to help its customers transition to net zero and asustainable future by providing and facilitating between $750bn and$1tn of sustainable finance and investment by 2030. In 2023, thegroup continued to support its customers through products, services,and partnerships help enable emissions reduction in the real
economy:– increased funding to a sustainable finance scheme to support
businesses of all sizes to transition to low-carbon operations in
China’s Greater Bay Area to US$9bn. Successful loan applicants
are entitled to a range of additional services including training,
subsidised third-party assessments and assistance from a teamwith sustainable financing expertise.
– launched electric vehicles loans in India.
– The Group continued to support the FAST-Infra Initiative, which
the Group helped conceive, working with the International FinanceCorporation ('IFC'), Organisation for Economic Co-operation andDevelopment ('OECD'), the World Bank’s Global Infrastructure
Facility and the Climate Policy Initiative, under the auspices of the
One Planet Lab. In 2023 the initiative invited pilot photovoltaic andwind power projects located around the world to apply for theprovisional FAST-Infra Label.

– Label applicants included a solar photovoltaic project submitted byPentagreen Capital, the Group’s sustainable infrastructure debt
financing partnership with Temasek, a global investment company
owned by the Government of Singapore. The project sponsor was
Citicore Solar Energy Corporation, a subsidiary of the Philippinesfocus renewable energy developer and operator Citicore
Renewable Energy Corporation.
The group continued to be a participant in the Just Energy Transition
Partnerships (‘JETPs’) in Indonesia and Vietnam, aiming to play acatalytic role in mobilising finance to accelerate the energy transition.
In 2023, the Group won three awards at the Environmental Finance
Bond Awards. It also retained the Euromoney award for Best Bankfor Sustainable Finance in Asia for the sixth year in a row. HSBC also
won the global award for Best Bank for Public Sector Clients forinnovation in sustainability and tokenised public-sector bonds.
The group’s sustainable finance and investment progress is set out
below, with detailed definitions available in the Group’s Sustainable
Finance and Investment Data Dictionary 2023 (see www.hsbc.com/
who-we-are/esg-and-responsible-business/esg-reporting-centre).
Continued progress towards achieving the Group’s sustainablefinance and investment ambition is dependent on market demand forthe products and services set out in the Group’s Sustainable Financeand Investment Data Dictionary 2023.
Sustainable finance metrics, taxonomies and best practices lackglobal consistency. As standards develop over time and as theregulatory guidance around them evolves across jurisdictions, theGroup's methodologies, disclosures and targets may need to evolve.
This could lead to differences in year-on-year reporting andrestatements.
The group continues to engage with standard setters in different
markets to support the development of transparent and consistenttaxonomies to best incentivise science-based decarbonisation,
particularly in high transition risk sectors. The group aims to align toenhanced industry standards as they are further developed, andincrease transparency across the different types of green andsustainable finance and investment categories going forward.
Sustainable finance summary1

Balance sheet-related transactions provided
Capital markets/advisory (facilitated)
ESG and sustainable investing (net new flows)2
Total contribution

2023
HK$m

2022
HK$m

168,464
55,048(250)
223,262

126,845
45,301—
172,146

1 This table has been prepared in accordance with the Group’s
Sustainable Finance and Investment Data Dictionary 2023, which
includes green, social and sustainability activities. The amounts
provided and facilitated include: the limits agreed for balance sheetrelated transactions provided, the proportional share of facilitatedcapital markets/advisory activities and the net new flows of sustainable
investments within assets under management.
2 In 2023, the group included the net new flow numbers in the reportingfor the first time. The net total for 2023 was an outflow.

Working with customers
The Group's ambition to become a net zero bank includes an aim toalign its financed emissions to net zero by 2050 or sooner. The Group
has set combined on-balance sheet financed emissions and facilitatedemissions targets for two emissions-intensive sectors: oil and gas,and power and utilities. It also continued to report on-balance sheet
financed emissions and targets for cement, iron, steel and aluminium,
aviation, automotive and in 2023 it added thermal coal mining
financed emissions. Financed emissions link the financing the Group
provides to its customers and their activities in the real economy, andprovides an indication of the associated greenhouse gas emissions.
For details on the Group’s approach to financed emissions including
methodology and exclusions, see the Group's Financed Emissions
and Thermal Coal Exposures Methodology. In 2023, the Group
continued its efforts to design and implement a differentiatedapproach to understand and assess the transition plans and risks of
its corporate customers. These assessments help the group to
identify opportunities, manage climate risks and define areas to drive

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

11

Task Force on Climate-related Financial Disclosures

strategic engagement with each corporate customer. The group is
still at the start of rolling out this process across its corporate
customers. To complete these assessments, the group has gathered
the client’s transition plan data and completed an assessment. Oncecompleted, these assessments can be used to support businessdecisions in relation to the Group’s financed emissions portfolio
management and alignment, and the Group’s climate risk
management efforts. In 2023, the Group has completed assessments
for most customers in scope of HSBC’s thermal coal phase-out
policy. The Group has also completed assessments for customers
that make the most material contribution to its financed emissions in
the oil and gas, and power and utilities sectors.

Embedding net zero into the way we operate TCFD
Net zero in our own operations
Part of the Group’s ambition to be a net zero bank is to achieve net
zero carbon emissions in its operations and supply chain by 2030.
The Group has three elements to its strategy: reduce, replace andremove. The Group plans to first focus on reducing carbon emissions
from consumption, and then subsequently replace remaining
emissions with low-carbon alternatives in line with the Paris
Agreement. The Group plans to remove the remaining emissions thatcannot be reduced or replaced by procuring, in accordance withprevailing regulatory requirements, high-quality offsets at a laterstage.
In October 2020, the Group announced its ambition to reduce energy
consumption by 50% by 2030 against a 2019 baseline. The Group
continues to work to do this by optimising the use of the Group’s realestate portfolio, and strategically reducing office space. The Group is
adopting new technologies and emerging products to make its
spaces more energy efficient.
As part of the Group's ambition to achieve 100% renewableelectricity across its operations by 2030, it continues to look foropportunities to procure green electricity in each of its markets. A key
challenge remains the limited opportunity to pursue power purchaseagreements or green tariffs in key markets due to regulations. For
details of the Group’s renewable electricity procured, see the Group's
ESG Data Pack.

The group reports its emissions following the Greenhouse Gas
Protocol, which incorporates the scope 2 market-based emissions
methodology. The group reports greenhouse gas emissions resulting
from the energy used in its buildings and employees’ business travel.
Due to the nature of the group's primary business, carbon dioxide is
the main type of greenhouse gas applicable to its operations. While
the amount is immaterial, the group's current reporting also
incorporates methane and nitrous oxide for completeness. The
environmental data for the group’s own operations is based on a 12month period to 30 September each year.
In 2023, the group collected data on energy use and business travel
for its own operations in 17 markets across the region, which
accounted for approximately 98% of its full-time equivalent
employees ('FTEs').
Greenhouse gas emissions in tonnes CO2e1,2Scope 1 - direct
Scope 2 - indirect
Scope 3 - indirect (upstream activities - business travel)
Total
Greenhouse gas emissions in tonnes CO2e per FTE

2022
915
104,162
11,120116,197
2.16

1 The data of the group's operations in some countries and territories
where it has operational control and a small presence may have notbeen included due to the data collection challenges.
2 CO2e refers to carbon dioxide equivalent.

Engaging with supply chain
The Group's supply chain is critical to achieving its net zeroambitions, and the Group is partnering with its suppliers on thisjourney. Since 2020, the Group has been encouraging its largest
suppliers to make their own carbon commitments, and to disclose
their emissions via the CDP (formerly Carbon Disclosure Project)supply chain programme. The Group will continue to engage with its
supply chain through CDP, and through direct discussions with its
suppliers on how they can further support the Group’s transition to
net zero.

Business travel
The Group's ambition is to halve travel emissions by 2030, comparedwith pre-pandemic levels. Emissions from business travel, and fromthe use of HSBC owned/leased cars, increased compared to 2022,
due to the easing of pandemic-related travel restrictions which has
resulted in a return to travel. The Group is closely managing thegradual resumption of travel through internal reporting and review of
emissions, internal carbon budgets and the introduction of emissions
information at the point of booking. With hybrid working embedded
across the organisation, the use of virtual working practices has
reduced the need for our colleagues to travel to meet with othercolleagues and customers.

12

2023
1,204
103,272
31,990136,466
2.29

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Managing climate risk and scenario analysis TCFD
Climate risk relates to the financial and non-financial impacts that may
arise as a result of climate change and the move to a net zeroeconomy. The group manages climate risk across all its businesses
and is incorporating climate considerations within its traditional risk
types in line with the Group-wide risk management framework. The
group’s material exposure to climate risk relates to its business with
its wholesale and retail customers financing activity within its banking

Banking
The group manages the climate risk in its banking
portfolios through its risk appetite and policies forfinancial and non-financial risks.

portfolio. The group is also exposed to climate risk in relation to asset
ownership by its insurance and asset management businesses.
The table below sets out the group's duties to its stakeholders in thethree most material roles. For further details of the group's approach
to climate risk, see 'Environmental, social and governance risk' on
page 30 and 'Climate risk' on page 66.

Asset management
Climate risk management is a key feature of HSBC
Asset Management's investment decision making
and portfolio management approach.

Insurance
The group’s insurance operations consider climate
risk in their portfolio of assets.

ê

ê

ê

Climate Risk

êêThis helps enable the group to identify
opportunities to support its customers, while
continuing to meet stakeholder expectations.

ê

HSBC Asset Management also engages withcompanies on topics related to climate change.

Banking
The group’s banking business is well positioned to support its
customers managing their own climate risk through financing. For its
wholesale customers, the group uses the Group's transition
engagement questionnaire to understand clients' climate strategies
and risks. The Group has set out a suite of policies to guide themanagement of climate risk. The group continues to develop its
climate risk appetite and metrics to help manage climate exposuresin its wholesale and retail portfolios. The group also develops anduses climate scenario analysis to gain insights on the long-term
effects of transition and physical risks across its wholesale and retailbanking portfolios. For further details, see page 13.

Asset management
The Group recognises that climate risk may manifest as transition andphysical risks over the short, medium and long term. The impact ofclimate-related risk will vary depending on characteristics such as
asset class, sector, business model and geography. Where applicableand relevant, HSBC Asset Management incorporates climate-related
indicators, such as carbon intensity and management of carbon
emissions, into investment decisions as well as insights from its
climate-related engagement.
HSBC Asset Management continues to integrate ESG and climate
analysis into its actively managed product offerings to help ensure
the climate risks faced by companies are considered when making
investment decisions and to assess ESG risks and opportunities that
could impact investment performance.
HSBC Asset Management also engages with investee companies ona priority list as defined in its global stewardship plan and votes atcompany general meetings, including on the topic of climate change.
It also works with collaborative engagement initiatives such as
Climate Action 100+ and Nature Action 100.

Insurance
In 2023, the Group’s insurance business updated its sustainability
procedures to align with the Group’s updated energy and thermal
coal phase-out policies. The Group’s insurance business alsodelivered ESG product marketing guidelines with insurance examples
and training.

Insights from climate scenario analysis TCFD
Introduction
Scenario analysis supports the group’s strategy by assessing its
potential exposures to risks and vulnerabilities under a range ofclimate scenarios. It helps to build the group’s awareness of climatechange, plan for the future and meet growing regulatory
requirements.

HSBC Life has established an evolving ESG
programme to meet changing external
expectations and customer demands.

including credit and traded market risks, non-financial risks, andpension risk.

Our climate scenarios
In 2023, the Group enhanced its internal climate scenario analysis('ICSA') exercise by focusing efforts on generating more granularinsights for key sectors and regions to support core decision making
processes and to respond to regulatory requirements.
Group created its internal scenarios using external publicly available
climate scenarios as a reference, including those produced by the
Network for Greening the Financial System, the Intergovernmental
Panel on Climate Change and the International Energy Agency. Using
these external scenarios as a template, the Group adapted them byincorporating its unique climate risks and vulnerabilities to which theorganisation and customers across different business sectors andregions are exposed.
The Group’s scenarios were:– the Net Zero scenario, which is consistent with the Paris
Agreement. This assumes that there will be orderly but
considerable climate action, limiting global warming to no morethan 1.5°C by 2100, when compared with pre-industrial levels;– the Current Commitments scenario, which assumes that climate
action is limited to current governmental committed policies,
including already implemented actions, leading to global
temperature rises of 2.4°C by 2100. This slow transition scenario
helps the Group to determine the actions it needs to take to reachits net zero ambition while operating in a world that is not net
zero;– the Delayed Transition Risk scenario, which assumes that climate
action is delayed until 2030 with a late disorderly transition to net
zero but stringent and rapid enough to limit global warming tounder 2°C by 2100. This scenario allows the Group to stress test
severe but plausible transition risk impacts;– the Downside Physical Risk scenario, which assumes climate
action is limited to currently implemented governmental policies,
leading to extreme global warming with global temperatures
increasing by greater than 4°C by 2100. This scenario allows theGroup to assess physical risks associated with climate change;and– the Near Term scenario, which assumes both a sharp increase inpolicies that drive a disorderly transition towards net zero and a
sharp increase in extreme climate events over a five-year period
until 2027. This scenario focused on the Group’s business in Asia.

In climate scenario analysis, the group considers, jointly, both
physical risks and transition risks. The group analyses how theseclimate risks impact principal risk types within the organisation,
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

13

Task Force on Climate-related Financial Disclosures

The Near Term scenario
Designed to meet the HKMA regulatory requirements, the Near Term
scenario allowed the group to explore the combined impacts of adisorderly transition towards net zero and extreme acute eventsoccurring simultaneously.

due to the impacts from tropical cyclone winds and to a lesser extent
coastal inundation. The impact on prospective credit losses remains
low due to stringent building standards and existing measures inplace against flooding and storm surges.

Use of climate scenario analysis outputs

The exercise allowed the group to understand the extent to which astressed scenario exhibiting both high physical and transition risks inthe near term could immediately impact group’s customers across all
its sectors.

Climate scenario analysis plays a crucial role helping the Group to
identify and understand the impact of climate-related risks andpotential opportunities as the Group navigates the transition to net
zero.

In addition to the Near Term scenario analysis mandated by the
HKMA, the group also conducted a regulatory climate stress test for
the Financial Supervisory Commission in Taiwan in 2023.

Scenario analysis results have also been used to support the Group’s
internal capital adequacy assessment process ('ICAAP'). This is aninternal assessment of the capital the Group needs to hold to meetthe risks identified on a current and projected basis, including climate
risk.

Our methodology
The models incorporate a range of climate-specific metrics that will
have an impact on its customers, including expected production
volumes, revenue, costs and capital expenditure. These results feed
into the calculation of group’s risk-weighted assets and expectedcredit loss (‘ECL’) projections. For group’s real estate portfolio
models, these focus on physical risk factors, including property
locations, perils and insurance coverage when assessing the overall
credit risk impact to the portfolio. The results were reviewed bygroup’s sector specialists who, subject to its governance procedures,
make bespoke adjustments to the results based on their expert
judgement when relevant.
There are industry-wide limitations, particularly on data availability,
however, group’s models are designed to produce outputs that can
support group’s assessment of the level of its climate resilience.

How climate change is impacting our portfolios
Within group’s wholesale lending portfolio, customers in higher
emitting sectors continue to be most exposed to larger climaterelated losses. However, their level of exposure to transition risk is
influenced by geographical location given the varied pace ofregulatory changes globally. Overall, continuing from the 2022
disclosure, group’s commercial real estate and retail mortgage
portfolios remain resilient to climate risk. This is also evident in Hong
Kong, a region which also contains material physical risk exposures
Recommendation

From a financial planning perspective, internal climate scenario
analysis results are used to assess whether additional short-termclimate-specific ECL are required within the Group’s financial plan.

TCFD index table TCFD
The table below sets out the 11 TCFD recommendations andsummarises where additional information can be found.
Where the group has not included climate-related financial
disclosures consistent with all the TCFD recommendations andrecommended disclosures, the reasons for non-disclosure and steps
being undertaken are set out accordingly. The group will continue todevelop and refine its reporting and disclosures on climate matters inline with the group's obligations under the HKMA SPM GS-1.
With respect to the group's obligations under HKMA SPM GS-1 aspart of considering what to access and publicly report, the groupperforms an assessment to ascertain the appropriate level of detail tobe included in the TCFD that is set out in its Annual Report andAccounts. The assessment takes into account factors such as thelevel of the group's exposure to climate-related risks andopportunities, the scope and objectives of its climate-related strategy,transitional challenges, and the nature, size and complexity of its
business.

Response

Disclosure
location

Governancea) Describe the Board’s oversight of climate-related risks and opportunities
Process, frequency and training The Board takes overall responsibility for climate governance including approval for the climate strategy
and the oversight of executive management in developing the approach, execution, risk management
and associated reporting. The group’s developments in relation to its strategies was reviewed throughBoard discussions at five meetings in 2023.
Board members received training on the Group's net zero ambition on its own operations, the Group's
financed emissions and decarbonisation solutions, as part of their ongoing development.

Page 10Sub-committee accountability,
processes and frequency

Given the wide-ranging remit of climate matters, governance activities are managed through aPage 10
combination of specialist governance infrastructure and regular meetings and committees, whereappropriate. These include the Board level committees - the Risk Committee, the Audit Committee, theExecutive Committee, the Risk Management Meeting; the executive level committees, including the
Sustainability Committee, the Environmental Risk Oversight Forum and the Disclosure and Controls
Committee.
The Risk Committee reviews the effectiveness of the group’s conduct framework, which is designed todeliver fair outcomes for customers, and to preserve the orderly and transparent operation of financial
markets. The Risk Committee also oversees and advises the Board on risk-related matters, including
both financial and non-financial risks.
The Executive Committee reviews the annual financial plan for sustainable finance and on a quarterly
basis an ESG dashboard including key metrics such as sustainable finance and own operations
emissions.

Examples of the Board andrelevant Board committees
taking climate into accountThe 2023 annual incentive scorecards of the Co-CEOs of Asia-Pacific and most of the Executive
Committee members include outcomes linked to realisation of different ESG metrics such as customer
satisfaction, employee sentiment, carbon reduction of the group's own operations and sustainablefinance measures.

14

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Page 10

TCFD index table TCFD (continued)
Recommendation

Response

Disclosure
locationb) Describe management’s role in assessing and managing climate-related risks and opportunities
Who manages climate-relatedrisks and opportunities

The group Sustainability Committee, chaired by the Co-CEOs of Asia-Pacific, oversees the group’s
Page 10contribution to the Group’s net zero transition plan. This includes overseeing delivery across Asia-Pacificof the Group’s climate ambition and commitments, including supporting clients and customers withsustainable finance, and partnering with organizations and governments in the region.
The group Environmental Risk Oversight Forum is a sub-committee of the Risk Management Meeting,established to provide oversight of all risk activities relating to the group’s approach to environmental
risk management.

How management reports to
the Board

Management has engaged with the Board throughout 2023 on the key climate issues, such as climate
strategy, client transition engagement and climate risk management.

Page 10Processes used to informmanagement

The Executive Committee reviews the annual financial plan for sustainable finance and on a quarterly
basis an ESG dashboard including key metrics such as sustainable finance and own operations
emissions.

Page 10Strategya) Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term
Processes used to determine
Scenario analysis supports the group’s strategy by assessing its potential exposures to risks andPage 13material risks and opportunities vulnerabilities under a range of climate scenarios. It helps to build the group’s awareness of climatechange, plan for the future and meet growing regulatory requirements.
In climate scenario analysis, the group considers, jointly, both physical risks and transition risks. The
group analyses how these climate risks impact principal risk types within the organisation, including
credit and traded market risks, non-financial risks, and pension risk.
In 2023, the Group continued its efforts to design and implement a differentiated approach toPage 11understand and assess the transition plans and risks of its corporate customers. These assessments
help the group to identify opportunities, manage climate risks and define areas to drive strategic
engagement with each corporate customer.
The group's relationship managers engage with their key wholesale clients through a transition andPage 68
physical risk questionnaire and recently introduced an updated questionnaire, the transition engagement
questionnaire. The questionnaire is used to gather information and assess the alignment of thewholesale customers' business models to net zero and their exposure to physical and transition risk.
The Group’s retail credit risk management policy requires each mortgage market to conduct an annual
review of their climate risk management procedures, including perils and data sources, to ensure theyremain fit for purpose. In 2023, the Group introduced a global 'soft trigger' monitoring and review
process for physical risk exposure where a market reaches or exceeds a set threshold, as this ensuresmarkets are actively considering their balance sheet risk exposure to peril events.
The group participates in the Group’s ICSA exercise. In 2023, the Group completed a detailed climate
risk assessment for the retail mortgage portfolio in Australia, Hong Kong and mainland China.
Relevant short, medium, andlong term time horizons

The Group aims to help its customers transition to net zero and a sustainable future by providing andfacilitating between $750bn and $1tn of sustainable finance and investment by 2030.

Page 11

The group aligns with the Group’s definition of short, medium, and long term time horizon: short-term,
medium-term and long-term periods. The Group defines short-term as time periods up to 2025;
medium-term as between 2026 and 2035, and long-term as between 2036 and 2050.
The group participates in the Group’s wider ICSA exercise, which is used as a risk assessment tool toprovide insights on both the short and long-term effects of transition and physical risks across theGroup’s wholesale and retail banking portfolios, as well as the Group’s own operations. For details, see
the Group’s Annual Report and Accounts.

Page 67

Transition or physical climaterelated issues identified

For transition risk, the group has metrics in place to monitor the exposure of its wholesale corporate
lending portfolio to six high transition risk sectors.
Within the group’s mortgage portfolios, properties or areas with potentially heightened physical risk are
identified and assessed locally, and potential exposure is managed through quarterly metrics. In
addition, the group has set risk appetite metrics in four key markets in the region namely Australia,
Hong Kong, mainland China and Singapore.
In 2023, the Group continued its efforts to design and implement a differentiated approach tounderstand and assess the transition plans and risks of its corporate customers.

Page 68

Risks and opportunities bysector and/or geography

For retail mortgage portfolio, the group has set risk appetite metrics in four key markets in the region
namely Australia, Hong Kong, mainland China and Singapore.
The Group aims to help its customers transition to net zero and a sustainable future by providing andfacilitating between $750bn and $1tn of sustainable finance and investment by 2030. For a detailed
breakdown of the Group’s sustainable finance progress, see its ESG Data Pack.

Page 68

Page 11

The group does not currently fully disclose the impacts of transition and physical risk quantitatively by
sector/geography. The group is aiming to develop the appropriate systems, data and processes toprovide these disclosures in future years.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

15

Task Force on Climate-related Financial Disclosures

TCFD index table TCFD (continued)
Disclosure
location

Recommendation

Response

Concentrations of credit
exposure to carbon-related
assets (supplemental guidance
for banks)

For transition risk, the group has metrics in place to monitor the exposure of its wholesale corporate
Page 68
lending portfolio to six high transition risk sectors. These are automotive, chemicals, construction andbuilding materials, metals and mining, oil and gas, and power and utilities. The group internally reports
its exposure to the six high transition risk sectors in the wholesale portfolio, and will further enhance its
disclosure as more data becomes available.
At Group level, as part of its 2023 ICSA, the Group completed a detailed climate risk assessment for theretail mortgage portfolio in Australia, Hong Kong and mainland China. For details of the exposure toflooding, see the Group’s Annual Report and Accounts.

Climate-related risks in lending The group’s material exposure to climate risk relates to its business with its wholesale and retailand other financial intermediary customers financing activity within its banking portfolio. The group is also exposed to climate risk inbusiness activities
relation to asset ownership by its insurance and asset management businesses.
(supplemental guidance forbanks)

Page 13b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial
planning
Impact on strategy, business,and financial planning

The Group’s first net zero transition plan, published in January 2024, provides an overview of the
Page 11
Group’s approach to net zero and the actions it is taking to help meet its ambition. It sets out how theGroup intends to use its strength as an organisation to help deliver a broader impact on decarbonisation,
how it is working to embed net zero across key areas of the organisation, and the principles that it aims
to use to guide the implementation of its approach. For details, see the Group's Net Zero Transition Plan
2024.
Page 14
Within group’s wholesale lending portfolio, customers in higher emitting sectors continue to be most
exposed to larger climate-related losses.
The Group does not fully disclose impacts from climate-related opportunities on financial planning andperformance including on revenue, costs and the balance sheet, quantitative scenario analysis, detailed
climate risk exposures for all sectors and geographies or physical risk metrics. This is due to transitional
challenges in relation to data limitations, although nascent work is ongoing in these areas. The Group
expects these data limitations to be addressed in the medium term as more reliable data becomes
available and technology solutions are implemented.
The group does not currently fully disclose the impacts of climate-related issues on financial planning,and particularly the impact of climate-related issues on its financial performance (for example, revenues
and costs) and financial position (for example, assets and liabilities) or access to capital, in each casedue to lack of data and systems for compiling the relevant financial impacts. In 2023, the group
incorporated certain aspects of sustainable finance and financed emissions within its financial planning
process. This will be further enhanced as more data becomes available.

Impact on products andservices

The Group aims to help its customers transition to net zero and a sustainable future by providing andfacilitating between US$750bn and US$1tn of sustainable finance and investment by 2030.

Page 11

Impact on supply chain and/or
value chain

Since 2020, the Group has been encouraging its largest suppliers to make their own carbon
commitments, and to disclose their emissions via the CDP (formerly Carbon Disclosure Project) supply
chain programme. The Group will continue to engage with its supply chain through CDP, and throughdirect discussions with its suppliers on how they can further support the Group’s transition to net zero.

Page 12The Group aims to rebalance the capital deployment towards achieving net zero over the coming
decades. The Group believes this can be done best by promoting change in three key areas that play toits strengths as an organisation: transitioning industry; catalysing the new economy; and decarbonisingtrade and supply chains.

Page 11

Impact on operations

Enterprise Risk Management function is responsible for overseeing the identification and assessment
Page 69of physical and transition climate risks that may impact on the organisation's operational and resiliencecapabilities.
The Group has three elements to its strategy: reduce, replace and remove. The Group plans to first
Page 12
focus on reducing carbon emissions from consumption, and then subsequently replace remaining
emissions with low-carbon alternatives in line with the Paris Agreement. The Group plans to remove theremaining emissions that cannot be reduced or replaced by procuring, in accordance with prevailingregulatory requirements, high-quality offsets at a later stage.

Impact on adaptation andmitigation activities

In October 2020, the Group announced its ambition to reduce energy consumption by 50% by 2030
against a 2019 baseline. The Group continues to work to do this by optimising the use of the Group’s
real estate portfolio, and strategically reducing office space. The Group is adopting new technologies
and emerging products to make its spaces more energy efficient.

Impact on investment inresearch and development

Throughout 2023, the Group published regular ESG and sustainability-related market insights andregular updates to help clients better understand the implications for their investments, such as#WhyESGMatters, Learning about ESG and sustainability insights.
The Group has updated its merger and acquisition process to consider potential climate andsustainability-related targets, net zero transition plans and climate strategy, and how this relates to
HSBC.
The Group considered the impact of climate-related issues on its businesses, strategy, and financial
planning. The Group’s access to capital may be impacted by reputational concerns as a result of climate
action or inaction. If the Group is perceived to mislead stakeholders on its business activities or if theGroup fail to achieve its stated net zero ambitions, the Group could face reputational damage, impacting
its revenue generating ability and potentially its access to capital markets. This will be further enhanced
as more data becomes available.

Impact on acquisitions anddivestments
Impact on access to capital

16

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Page 12

TCFD index table TCFD (continued)
Recommendation

Response

Transition plan to a low-carbon
economy

The Group’s first net zero transition plan, published in January 2024, provides an overview of theGroup’s approach to net zero and the actions it is taking to help meet its ambition.

Disclosure
location
Page 11c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower
scenario
Embedding climate into
scenario analysis

In 2023, the Group enhanced its ICSA exercise by focusing efforts on generating more granular insights Page 13
for key sectors and regions to support core decision making processes and to respond to regulatory
requirements.

Key drivers of performance and In climate scenario analysis, the group considers, jointly, both physical risks and transition risks. The
how these have been taken
group analyses how these climate risks impact principal risk types within the organisation, including
into accountcredit and traded market risks, non-financial risks, and pension risk.

Page 13

Scenarios used and how theyGroup created its internal scenarios using external publicly available climate scenarios as a reference,
Page 13
factored in government policies including those produced by the Network for Greening the Financial System, the Intergovernmental
Panel on Climate Change and the International Energy Agency. Using these external scenarios as atemplate, the Group adapted them by incorporating its unique climate risks and vulnerabilities to which
the organisation and customers across different business sectors and regions are exposed.
How our strategies may
Page 14
Climate scenario analysis plays a crucial role helping the Group to identify and understand thechange and adapt
impact of climate-related risks and potential opportunities as the Group navigates the transition to

net zero.

Risk managementa) Describe the organisation’s processes for identifying and assessing climate-related risks
Process

The Group’s climate risk approach aims to effectively manage the material climate risks that could
impact the Group operations, financial performance, stability and reputation.
Scenario analysis results have also been used to support the Group’s internal capital adequacy
assessment process ('ICAAP'). This is an internal assessment of the capital the Group needs to hold tomeet the risks identified on a current and projected basis, including climate risk.

Page 66
Page 14

From a financial planning perspective, internal climate scenario analysis results are used to assess
whether additional short-term climate-specific ECL are required within the Group’s financial plan.
Integration into policies andprocedures

The Group is integrating climate risk into policies, processes and controls across many areas of its
organisation, and the Group will continue to update these as its climate risk management capabilities
mature over time.

Page 67

Consider climate-related risks
in traditional banking industry
risk categories (supplementary
guidance for banks)

The group provides further details of how it has embedded the management of climate risk across key
risk types, including wholesale credit risk, retail credit risk, treasury risk, traded risk, reputational risk,
regulatory compliance risk, resilience risk and model risk.

Page 68b) Describe the organisation’s processes for managing climate-related risks
Process and how we makedecisions

The group is following a materiality based approach in developing its climate risk capabilities across its
businesses by prioritising sectors, portfolios and counterparties with the highest impacts.
The group Risk Management Meeting and the group Risk Committee receive regular updates on its
climate risk profile and progress of its climate risk programme.

Page 66
Page 67c) Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s
overall risk management framework
How we have aligned andintegrated our approach

The Group’s climate risk approach is aligned to the Group-wide risk management framework and threelines of defence model.

Page 66

How we take into accountinterconnections between
entities, functions

The Group’s climate risk approach is aligned to the Group-wide risk management framework and threelines of defence model, which sets out how the group identifies, assesses and manages its risks.

Page 66

Metrics and targetsa) Disclose the metrics used by the organisation to assess climate-related risk and opportunities in line with its strategy andrisk management process
Metrics used to assess theimpact of climate-related risks
on our loan portfolio

For transition risk, the group has metrics in place to monitor the exposure of its wholesale corporate
lending portfolio to six high transition risk sectors.
The group Risk Management Meeting and the group Risk Committee receive regular updates on its
climate risk profile and progress of its climate risk programme.

Page 68
Page 67

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17

Task Force on Climate-related Financial Disclosures

TCFD index table TCFD (continued)
Disclosure
location

Recommendation

Response

Metrics used to assess
progress against opportunities

The Group tracks its net zero progress using multiple metrics, tailoring methodologies to the specificmeasures. The group contributes to the Group’s other ambitions such as land use, waste management,
energy consumption and percentage of renewable electricity sourced. For details of the Group’s
ambitions, please see the Group’s Annual Report and Accounts and ESG Data Pack.
Page 11
The Group aims to help its customers transition to net zero and a sustainable future by providing andfacilitating between US$750bn and US$1tn of sustainable finance and investment by 2030.
The group does not currently fully disclose the proportion of revenue or proportion of assets, capital
deployment or other business activities aligned with climate-related opportunities, including revenue
from products and services, forward-looking metrics consistent with its business or strategic planning
time horizons. In relation to sustainable finance revenue and assets, the Group is disclosing certain
elements. The group expects climate related metrics to be further integrated into financial planning andforecasting as data and system limitations are addressed.
The group does not currently fully disclose the impacts of climate-related issues on financial planning,and particularly the impact of climate-related issues on its financial performance (for example, revenues
and costs) and financial position (for example, assets and liabilities) or access to capital, in each casedue to lack of data and systems for compiling the relevant financial impacts. In 2023, the group
incorporated certain aspects of sustainable finance and financed emissions within its financial planning
process. This will be further enhanced as more data becomes available.

Board or senior management
incentives

The 2023 annual incentive scorecards of the Co-CEOs of Asia-Pacific and most of the Executive
Committee members include outcomes linked to realisation of different ESG metrics such as customer
satisfaction, employee sentiment, carbon reduction of the group's own operations and sustainablefinance measures.

Internal carbon price

The Group does not currently disclose internal carbon prices due to transitional challenges such as data
challenges. But the Group considered carbon prices as an input for its climate scenario analysis
exercise. The Group expects to further enhance the disclosure in the medium term.

Metrics used to assess theimpact of climate risk on
lending and financial
intermediary business(supplemental guidance forbanks)The group does not fully disclose metrics used to assess the impact of climate-related physical (acute,chronic) and transitions (policy and legal, technology, market, reputational) risks on retail lending,wholesale lending and other financial intermediary business activities (specifically credit exposure,equity and debt holdings, or trading positions, each broken down by industry, geography, credit quality,
average tenor). This is due to data and system limitations which the group is working to address.

Page 10b) Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas emissions and the related risks
Our own operations

The group reported its scope 1, 2 and part of scope 3 greenhouse gas emissions resulting from thePage 12energy used in its buildings and employees’ business travel. At Group level, it disclosed scope 3 supply
chain emissions.
GHG emissions for lending and In relation to financed emissions, the Group publishes on-balance sheet financed emissions for afinancial intermediary business number of sectors. The Group also publishes facilitated emissions for oil and gas and power and utilities(supplemental guidance for
sectors. Future disclosure on financed emissions, and related risks is reliant on the Group’s customers
Banks)
publicly disclosing their carbon emissions and related risks. The Group recognises the need to providing
transparency on climate disclosures but seek to balance this with the recognition that existing data andreporting processes require significant enhancements.
The Group's approach to disclosure of financed emissions can be found at www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre.
c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against
targets
Details of targets set andwhether they are absolute or
intensity based

The Group's ambition is to achieve net zero financed emissions by 2050, and has set interim 2030
targets for on-balance sheet financed or combined on balance sheet financed and facilitated emissions
for certain sectors.
The Group aims to help its customers transition to net zero and a sustainable future by providing andfacilitating between US$750bn and US$1tn of sustainable finance and investment by 2030.

Page 11

Part of the Group’s ambition to be a net zero bank is to achieve net zero carbon emissions in its
Page 12
operations and supply chain by 2030.
The group does not currently disclose its targets used to measure and manage physical and transition
risk, capital deployment, or climate-related opportunities due to transitional challenges and such as dataand system limitations which the group is working to address.
The group does not currently disclose internal carbon pricing target due to transitional challenges suchas developing the appropriate systems and processes, but the group considered carbon prices as an
input for its climate scenario analysis exercise. The group expects to further enhance the disclosure in
the medium term as more data becomes available.
Taking into account the nature of its business, the group does not consider water usage to be a material
target for its business and, therefore, the group has not included a target in this year’s disclosure.

18

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Financial Review
Changes to presentation from 1 January 2023
(Unaudited)HKFRS 17 ‘Insurance Contracts’
On 1 January 2023, the group adopted HKFRS 17 ‘Insurance Contracts’. As required by the standard, the group applied the requirements
retrospectively with comparative data previously published under HKFRS 4 ‘Insurance Contracts’ restated from the 1 January 2022 transition
date. Under HKFRS 17 there is no present value of in-force long-term insurance business (‘PVIF’) asset recognised up front. Instead themeasurement of the insurance contract liability takes into account fulfilment cash flows and a contractual service margin (‘CSM’) representing
the unearned profit. In contrast to the group’s previous HKFRS 4 accounting where profits are recognised up front, under HKFRS 17 they aredeferred and systematically recognised in revenue as services are provided over the life of the contract. The CSM also includes attributablecost, which had previously been expensed as incurred and which is now incorporated within the insurance liability measurement andrecognised over the life of the contract.
In conjunction with the implementation of HKFRS 17, the group has made use of the option to re-designate to fair value through profit or loss
assets that were previously held at amortised cost totalling HK$429,016m, and assets previously held at fair value through othercomprehensive income totalling HK$6,366m. The re-designation of amortised cost assets generated a net increase to assets of HK$38,072m
because the new fair value measurement on transition was higher than the previous amortised cost carrying amount.
The impact of the transition was a reduction of HK$4,889m on the group’s full-year 2022 reported revenue and a reduction of HK$924m on the
full-year 2022 reported profit before tax. The group’s total equity reduced by HK$75.4bn to HK$848.1bn on the transition at 1 January 2022. For
further details, see Note 1 'Basis of preparation and material accounting policies' and Note 38 ‘Effects of adoption of HKFRS 17’.

Results for 2023
(Unaudited)
Profit before tax for 2023 reported by The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries (together ‘thegroup’) increased by HK$24,756m, or 26%, to HK$121,443m.
Consolidated income statement by reportable segments1(Audited)
Wealth andPersonal Commercial
Banking2
Banking2,3Year ended 31 Dec 2023
Net interest income/(expense)
Net fee income/(expense)
Net income from financial instruments measured at fairvalue through profit or loss
Gains less losses from financial investments
Insurance finance expense
Insurance service result
Other operating income/(expense)
Net operating income/(expense) before change in
expected credit losses and other credit impairment
charges– of which: externalinter-segment
Change in expected credit losses and other credit
impairment charges
Net operating income/(expense)
Operating expenses
Operating profit/(loss)
Share of profit in associates and joint ventures
Impairment of interest in associate
Profit/(loss) before tax
Balance sheet data at 31 Dec 2023
Loans and advances to customers (net)Customer accounts

GlobalBanking3

Markets
andSecurities
Services

Corporate
Centre4

Other(GBMother)5

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

79,737
19,42660,964
10,66424,299
5,038

6,411
2,652

(42,064)
270

1,433
(7)

130,780
38,04354,1904,604

164

23,88840,432

376

123,654(1,978)(48,798)
6,589
526(1,102)
—
—
107

—
—
—
467

—
—
—
1,693

—
—
(31)
1,366

(711)
—
—
(926)

(3,791)(48,798)
6,558
3,233

109,692

75,23729,96834,644(27)

165

249,679

60,744
48,94880,293(5,056)40,051(10,083)

66,318(31,674)(19,895)
19,86822,168(22,003)249,679—(2,113)(9,378)(1,360)

(26)

2

32

(12,843)

107,579(50,664)
56,915390—

65,859(22,205)
43,654——28,608(10,825)
17,783——

34,618(15,653)
18,965——(25)(8,382)(8,407)
18,165(23,955)

197(2,264)(2,067)——

236,836(109,993)
126,843
18,555(23,955)

57,30543,654

17,783

18,965(14,197)(2,067)

121,443

1,567,893
3,618,894

1,154,648
1,685,876

791,061
740,881

37,366
209,511

1,178
30

4,930
5,859

3,557,076
6,261,051

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

19

Financial Review

Consolidated income statement by reportable segments1 (continued)

Year ended 31 Dec 2022
Net interest income/(expense)
Net fee income/(expense)
Net income/(expense) from financial instruments measured
at fair value through profit or loss
Gains less losses from financial investments
Insurance finance income
Insurance service result
Other operating income/(expense)
Net operating income/(expense) before change in expectedcredit losses and other credit impairment charges– of which: externalinter-segment
Change in expected credit losses and other credit
impairment charges
Net operating income/(expense)
Operating expenses
Operating profit/(loss)
Share of profit in associates and joint ventures
Impairment of interest in associate
Profit/(loss) before tax
Balance sheet data at 31 Dec 2022
Loans and advances to customers (net)Customer accounts

1
2
3
4
5

Corporate
Centre4

Other(GBMother)5

Total

HK$m

Markets
andSecurities
Services
HK$m

HK$m

HK$m

HK$m

41,723
10,081

18,703
5,086

4,370
3,701

(12,617)
247

2,013
(56)

109,878
38,565(91,905)

3,918

(110)

22,372

11,079345(54,301)(29)
97,167
4,977
2,649

64
—
—
155

—
—
—
369

—
—
—
1,208

—
20
—
315

17
—
—
(251)

52
97,187
4,977
4,445

88,051

55,941

24,04831,651

(956)

2,068

200,803

72,095
15,95658,981(3,040)26,413(2,365)40,870(9,219)(8,896)
7,940

11,340(9,272)200,803—

Wealth andPersonal
Banking2

Commercial
Banking2,3GlobalBanking3

HK$m

HK$m

55,686
19,506(1,337)(11,947)(3,070)

22

1

(39)

(16,370)

86,714(48,978)
37,736140—
37,87643,994(20,711)23,283——23,283

20,978(10,513)
10,465——
10,46531,673(13,897)
17,776——
17,776(955)(9,607)(10,562)
18,652
—
8,090

2,029
(2,832)
(803)
—
—
(803)

184,433(106,538)
77,895
18,792—
96,687

1,526,965
3,443,694

1,231,590
1,665,463

880,581805,600

40,563
195,775

1,403
11

13,966
3,166

3,695,068
6,113,709

From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.
From 1 January 2023, all balances within in the scope of HKFRS 17 of Hong Kong insurance manufacturing entities distributed by Commercial
Banking ('CMB') are reported under Wealth and Personal Banking ('WPB'). Comparative data have been re-presented accordingly.
From 1 January 2023, we have transferred our portfolio of Global Banking ('GB') customers within Australia and Indonesia from GB to CMB forreporting purposes. Comparative data have not been re-presented.
Includes inter-segment elimination.
Mainly comprises other business activities which are jointly managed by GB and Markets and Securities Services ('MSS').

Financial Review(Unaudited)
The commentary in this financial review compares the group's
financial performance for the year ended 31 December 2023 with theyear ended 31 December 2022. On 1 January 2023, the group
adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4'Insurance Contracts'. Financial performance for the year ended
31 December 2022 has been restated.

Results Commentary(Unaudited)
The group reported profit before tax of HK$121,443m, an increase of
HK$24,756m, or 26%. Net operating income before change in
expected credit losses and other credit impairment charges increased
by HK$48,876m, or 24%, primarily driven by higher net income fromfinancial instruments held for trading or managed on a fair value basisand higher net interest income. The results include a charge relating
to an impairment in interest in associate of HK$23,955m, relating to
the Bank of Communications Co., Ltd (‘BoCom’).
Net interest income increased by HK$20,902m, or 19%. Excluding
the unfavourable foreign exchange impact, net interest income
increased by HK$22,332m, or 21%, driven by a 27 basis point (‘bp’)
improvement in net interest margin and higher average interestearning assets. In Hong Kong, net interest margin improved fromhigher customer deposit spreads and higher reinvestment yields asmarket interest rates increased. Net interest income in Malaysia,
India and Singapore also increased, reflecting the favourable impact
from higher interest rates.
Net fee income decreased by HK$522m, or 1%. Excluding theunfavourable foreign exchange impact, net fee income decreased by
HK$86m, mainly in Hong Kong, as securities brokerage income fell
20

due to lower equities turnover in the broader market and lower funds
under management income. These were largely offset by an increasein unit trust income as client activities recovered, and higher net card
services income in Hong Kong, in line with a recovery in retail sales.
Net income from financial instruments measured at fair value
through profit or loss increased by HK$177,955m, or 328%.
Net income from assets and liabilities of insurance businesses,
including related derivatives, measured at fair value through profit orloss increased by HK$143,873m, or 152% primarily in Hong Kong andSingapore reflecting fair value gains on financial assets measured atfair value through profit or loss which back insurance and investment
contracts. An offsetting impact related to the associated insurance
liabilities is reported in ‘Insurance finance income/(expense)’.
Net income from financial instruments held for trading or managed ona fair value basis increased by HK$33,159m, or 80%, most notably inHong Kong due to higher gains on derivatives trading benefiting fromrising interest rates and favourable foreign exchange movements.
There was also an increase in Singapore from dealing profits ontreasury bills and debt securities.
Gains less losses from financial investments decreased by
HK$3,843m driven by the loss on disposal of treasury bonds in Hong
Kong, of which HK$3,695m was transferred from financial assets atfair value through other comprehensive income (‘FVOCI’) reserve.
Insurance finance income/(expense) decreased by HK$145,985m,
or 150%, reflecting the extent to which the investment income
earned on underlying assets supporting insurance contracts is sharedwith the policyholders.
Insurance service result increased by HK$1,581m, or 32% reflecting
an increase to the release of CSM of HK$1,363m as a result of a

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

higher closing CSM balance driven by an increase in new businesswritten during the year, updates to actuarial assumptions, as well as
the impact of interest rates on the CSM duration profile. A reduction
in losses from onerous contracts also contributed to the increase.
Other operating income decreased by HK$1,212m, or 27%, andincludes a HK$2,043m loss from updates to valuation estimates,
partly offset by gains from reinsurance contracts in Hong Kong.
Change in expected credit losses and other credit impairment
charges decreased by HK$3,527m, or 22%. The reduction wasconcentrated in CMB and GB, mainly reflecting reduced charges inrespect of the mainland China commercial real estate (‘CRE’) portfolio
booked in Hong Kong.

expenses increased by HK$4,530m, or 4%, primarily reflecting ourcontinued investment in technology and people to support businessgrowth, which were partly offset by lower third party related costs.
Share of profit in associates and joint ventures decreased by
HK$237m, or 1%. Excluding the unfavourable foreign exchange
impact, the share of profit in associates and joint ventures increased
by HK$726m, or 4%, primarily from BoCom's reported profit growth.
Impairment of interest in associate of HK$23,955m (nil in 2022)
related to BoCom. Further details can be found in Note 14 ‘Interests
in associates and joint ventures’.

Total operating expenses increased by HK$3,455m, or 3%.
Excluding the favourable foreign exchange impact, operating

Analysis by country / territory(Unaudited)
Profit before tax by country/territory

Hong Kong
Mainland China2
India
Singapore
Australia
Malaysia
TaiwanIndonesia
Other
Total

2023
HK$m

20221
HK$m

78,765
1,800
9,003
8,474
4,431
3,560
2,788
1,626
10,996
121,443

42,34925,392
7,186
5,854
3,503
2,898
1,572
1,303
6,630
96,687

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.
2 The 2023 balance includes an impairment of HK$24.0bn (2022: nil) on the group's investment in BoCom.

Net interest income(Unaudited)
2023
HK$m

20221
HK$m

Net interest income
Average interest-earning assets

130,780
7,220,536

109,878
7,123,129%%

Net interest spread
Contribution from net free funds
Net interest margin

1.64
0.17
1.81

1.47
0.07
1.54

1

From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

Net interest income (‘NII’) increased by HK$20,902m, or 19%.
Excluding the unfavourable foreign exchange impact, net interest
income increased by HK$22,332m, or 21%, driven by a 27 bp
improvement in net interest margin and higher average interestearning assets. In Hong Kong, net interest margin improved fromhigher customer deposit spreads and higher reinvestment yields asmarket interest rates increased. Net interest income in Malaysia,
India and Singapore also increased, reflecting the favourable impact
from higher interest rates.

Average interest-earning assets increased by HK$97bn, or 1%,
driven by Hong Kong from growth in financial investments. To alesser extent, average interest-earning assets in Singapore andAustralia also increased.
Net interest margin ('NIM') increased by 27 bps, with increases
noted across the region with higher market interest rates comparedto the prior year. As a result, the NIM at the Bank's operations inHong Kong increased by 13 bps to 1.22%, and at Hang Seng Bank,
the NIM increased by 55 bps to 2.30%.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

21

Financial Review

Insurance manufacturing(Unaudited)
The following table shows the results of our insurance manufacturing operations by income statement line item.
Results of insurance manufacturing operations

Insurance manufacturing operations1
Net interest income
Net fee income/(expense)
Other income
Insurance service result– release of contractual service margin– risk adjustment release– experience variance and other– gain/(loss) from onerous contracts
Net investment returns (excluding net interest income)– insurance finance income/(expense)– other investment income/(expense)
Other operating income
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 of insurance business operations
Annualised new business premiums of insurance manufacturing operations

2023

20222

HK$m

HK$m

545
171
6,715
6,870
6,831
180
9
(150)
(473)
(48,802)48,329
318
7,431
19
7,450
(3,828)
3,622
392
4,014
27,512

727
93
6,930
5,157
5,507
197
370
(917)
394
97,187(96,793)
1,379
7,750
(42)
7,708
(3,971)
3,737
139
3,876
15,420

1 The results presented for insurance manufacturing operations are shown before elimination of intercompany transactions with the group's
non-insurance operations.
2 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

Profit before tax of insurance business operations increased by HK$138m, or 4%, compared with 2022. This was primarily driven by theincrease in the insurance service result of HK$1,713m, reflecting an increase to the release of CSM of HK$1,324m as a result of a higher
closing CSM balance driven by an increase in new business written during the year, updates to actuarial assumptions, as well as the impact ofinterest rates on the CSM duration profile. A reduction in losses from onerous contracts also contributed to the increase.
Net investment returns (excluding net interest income) decreased by HK$867m, compared with 2022. This reflected losses in mainland China
of HK$667m due to reducing interest rates in 2023 compared to 2022, as well as offsetting gains and losses in Hong Kong and Singapore
respectively from the impact of reinsurance risk mitigation treaties.
Other operating income decreased by HK$1,061m, or 77%, and includes a HK$2,043m loss from updates to valuation estimates, partly offset
by gains from reinsurance contracts in Hong Kong.
Annualised new business premiums (‘ANP’) is used to assess new insurance premium generated by the business. It is calculated as 100% of
annualised first year regular premiums and 10% of single premiums, before reinsurance cede. ANP increased by HK$12,092m, or 78% in 2023,
primarily from strong new business sales in Hong Kong and a shift in product mix from single to multi-premium products.

Interest in associate(Unaudited)
We maintain a 19.03% interest in BoCom. Since our investment in
2004, BoCom has grown its business significantly to the extent that it
has recently been designated as a global systemically important bank(‘G-SIB’).
For accounting purposes, the balance sheet carrying value attributed
to BoCom represents our share of its net assets. We perform
quarterly impairment tests incorporating a value in use calculation,
recognising the gap between this carrying value and the fair value(based on the listed share price). We have previously disclosed thatthe excess of the value in use calculation over its carrying value has
been marginal in recent years, and that reasonably possible changes
in assumptions could generate an impairment.
Recent macroeconomic, policy and industry factors resulted in a
wider range of reasonably possible value in use outcomes for our
BoCom valuation. At 31 December 2023, the group performed an

22

impairment test on the carrying value, which resulted in an
impairment of HK$24.0bn, as the recoverable amount as determinedby a value in use calculation was lower than the carrying value. Our
value in use calculation uses both historical experience and market
participant views to estimate future cash flows, relevant discountrates and associated capital assumptions.
This impairment will have no material impact on the group’s capital,
capital ratios or distribution capacity. The insignificant impact on thegroup’s capital and CET1 ratio is due to the compensating release ofregulatory capital deductions to offset the impairment charge.
Further details can be found in Note 14 ‘Interests in associates andjoint ventures’.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Balance sheet commentary compared with 31 December 2022
(Unaudited)
The consolidated balance sheet as at 31 December 2023 is set out inthe consolidated financial statements.

0.40%), reflecting reduced charges on the mainland China CRE
portfolio.

Gross loans and advances to customers decreased by HK$139bn,
or 3.7%. Excluding the unfavourable foreign exchange translation
effects of HK$9bn, gross loans and advances to customers
decreased by HK$130bn. This was driven by a decrease in corporate
and commercial lending of HK$159bn, primarily in Hong Kong andmainland China, partly offset by increases in Australia and India. The
residential mortgage book increased by HK$46bn, mainly in Hong
Kong and Australia.

Customer deposits increased by HK$147bn, or 2.4%, toHK$6,261bn. Excluding the unfavourable foreign exchange translation
effects of HK$8bn, customer deposits increased by HK$155bn. The
advances-to-deposits ratio was 56.8% at the end of the year (2022:
60.4%).

Total gross impaired loans and advances as a percentage of grossloans and advances stood at 1.75% at the end of 2023 (2022:
1.69%). The change in expected credit losses as a percentage of
average gross customer advances was 0.36% for 2023 (2022:

Shareholders’ equity grew by HK$5bn to HK$813bn at
31 December 2023, mainly reflecting the current year’s profit, net of
dividend payments and favourable movements from financial
instruments designated as hold-to-collect-and-sell. These were partly
offset by a decrease in foreign exchange reserves due to depreciationof various foreign currencies against the Hong Kong dollar.

Loans and advances, deposits by currency

HK$m
Loans and advances to customers
Customer accounts

HKD

At
31 Dec 2023
USD

Others1,663,563
2,376,789

605,656
1,869,813

1,287,857
2,014,449

31 Dec 2022
HK$m
Loans and advances to customers
Customer accounts

HKD

USD

Others1,722,906
2,422,893

707,295
1,805,737

1,264,867
1,885,079

Information by business and key countries(Unaudited)
Wealth and Personal Banking

Revenue2– of which: Hong Kong
Mainland China
Singapore
India
Profit before tax– of which: Hong Kong
Singapore
India
Loans and advances to customers– of which: Hong Kong
Mainland China
Customer accounts– of which: Hong Kong
Mainland China

2023

20221

HK$m

HK$m

109,692
84,522
4,337
7,166
1,774
57,30553,0331,826
181,567,893
1,085,238
64,1093,618,894
2,838,115
137,756

88,05164,430
4,299
7,137
1,557
37,87634,531
1,703
235
1,526,965
1,038,982
79,2193,443,694
2,759,814
119,189

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

23

Financial Review

Commercial Banking
2023
Revenue2– of which: Hong Kong
Mainland China
Singapore
India
Australia
Malaysia
Profit before tax– of which: Hong Kong
Mainland China
Singapore
India
Loans and advances to customers– of which: Hong Kong
Mainland China
Customer accounts– of which: Hong Kong
Mainland China

20221

HK$m

HK$m

75,23743,564
6,312
5,034
4,288
3,598
1,867
43,65423,242
2,650
3,411
3,120
1,154,648
614,145
152,514
1,685,876
1,049,481
148,363

55,94131,099
6,666
3,439
3,589
2,100
1,481
23,283
10,182
2,368
2,002
2,373
1,231,590
716,869
174,244
1,665,463
1,069,637
157,256

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.
2 Revenue (defined as ‘Net operating income before change in expected credit losses and other impairment charges') is attributable to countries basedon the location of the principal operations of the branch, subsidiary, associate or joint venture.

24

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Risk
Our approach to risk
(Unaudited)

Our risk appetite
We recognise the importance of a strong culture, which refers to ourshared attitudes, beliefs, values and standards that shape behaviours
including those related to risk awareness, risk taking and risk
management. All our people are responsible for the management ofrisk, with the ultimate accountability residing with the Board. Our risk
appetite defines the level and types of risk that we are willing to take,while informing the financial planning process and guiding strategic
decision making.

– compliance with applicable laws and regulations;

The following principles guide the group’s overarching appetite forrisk and determine how our businesses and risks are managed.

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 ourrisk appetite helps ensure that we agree a suitable level of risk for our
strategy. In this way, risk appetite informs our financial planning
process and helps senior management to allocate capital to businessactivities, services and products.

Financial position– We aim to maintain a strong capital position, defined by regulatory
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 no appetite for deliberately or knowingly causing
detriment to consumers, or incurring a breach of the letter or spiritof 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.
– We consider and, where appropriate, mitigate reputational riskthat may arise from our business activities and decisions.
– We monitor non-financial risk exposure against risk appetite,
including exposure related to inadequate or failed internal
processes, people and systems, or events that impact ourcustomers or can lead to sub-optimal returns to shareholders,censure, or reputational damage.

Enterprise-wide application
Our risk appetite encapsulates the consideration of financial and nonfinancial risks. We define financial risk as the risk of a financial loss asa result of business activities. We actively take these types of risks tomaximise 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 or from external events.
Our risk appetite is expressed in both quantitative and qualitative
terms and applied at the global business level and to material banking
entities. It continues to evolve and expand its scope as part of ourregular review process.
The Board reviews and approves the group’s risk appetite regularly tomake sure it remains fit for purpose. The group’s risk appetite isconsidered, developed and enhanced through:– an alignment with our strategy, purpose, values and customer
needs;– trends highlighted in other group risk reports;– communication with risk stewards on the developing risklandscape;– effectiveness of the applicable control environment to mitigate
risk, informed by risk ratings from risk control assessments;– functionality, capacity and resilience of available systems to
manage risk; and– the level of available staff with the required competencies tomanage risks.

The RAS is applied to the development of business line strategies,
strategic and business planning, 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 insight and discussion on breaches of risk appetite
and any associated mitigating 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 material banking entities are required tohave their own RAS, which is monitored to help ensure it remainsaligned with the group’s RAS. Each RAS and business activity is
guided and underpinned by qualitative principles and/or quantitative
metrics.

Risk management
We recognise that the primary role of risk management is to help
protect 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 27.
The implementation of our business strategy 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 our continued
effective operation.
We aim to use a comprehensive risk management approach acrossthe 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 and practices that we employ
in managing material risks, both financial 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 a consistent
approach to identifying, assessing, managing and reporting the risks
we accept and incur in our activities, with clear accountabilities. We
actively review and enhance our risk management framework and ourapproach to managing risk, through our activities with regard topeople and capabilities, 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.

– strength of our capital, liquidity and balance sheet;
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25

Risk

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 theenterprise-wide management of all risks, including key policies andframeworks for the 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 and Compliance function helps
ensure the necessary balance in risk/return decisions.

Risk governance

Roles and
responsibilities

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

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

Policies and procedures

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

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 processes that support the identification,
capture and exchange of information to support risk management
activities.

Internal controls

Risk governance
The Board has ultimate responsibility for the effective managementof risk and approves our risk appetite. It is advised on risk-related
matters by the RC. The RC reviews the effectiveness of the group’s
risk management framework and internal controls systems (otherthan internal financial controls overseen by the group Audit
Committee) and oversees the group’s approach to conduct, fairness
and prevention of financial crime. Through review and independent
challenge of reports presented by management at RC meetings, thecommittee oversees the effectiveness of monitoring, assessmentand management of the risk environment as well as the risk
management framework.
The group's Chief Risk Officer, supported by members of the RMM,
holds executive accountability for the ongoing monitoring,assessment and management of the risk environment and theeffectiveness 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-wide risk oversight responsibilities, through the RMM.
Day-to-day responsibility for risk management is delegated to senior
managers with individual accountability for decision making. All our
people have a role to play in risk management. These roles aredefined using the three lines of defence model, which takes into
account the group’s business and functional structures as describedin the following commentary, 'Our responsibilities’.
We use a defined executive risk governance structure to help ensure
there is appropriate oversight and accountability of risk, whichfacilitates reporting and escalation to the RMM. This structure issummarised in the following table.

Governance structure for the management of risk
Authority

Membership

Risk Management
Meeting of thegroup

group Chief Risk Officergroup General Counsel
group Co-Chief Executive Officers
group Chief Financial Officergroup Chief Compliance Officergroup Head of Internal Audit
Chief Executive Officer of Hang Seng Bank
LimitedAll other group Executive Committee members

Global business/
Market risk
management
meetings

Responsibilities include:– 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/Market Chief Risk and– Supporting the group Chief Risk Officer in exercising Board-delegated risk
Compliance Officer/Market Chief Risk Officer
management authority.
Global business/Market Chief Executive– Forward-looking assessment of the risk environment, analysing thepossible risk impact and taking appropriate action.
Global business/Market Chief Financial Officer
Global business/Market heads of global functions – 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 andcontrols.

The Board committees with responsibility for oversight of risk-related matters are set out on page 6.
26

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Our responsibilities
All our people are responsible for identifying and managing risk within
the scope of their roles. Roles are defined using the three lines ofdefence model, which takes into account our business and functional
structures as described below.

Three lines of defence
To create a robust control environment to manage risks, we use an
activity-based three lines of defence model. This model delineates
management accountabilities and responsibilities for risk
management and the control environment.
The model underpins our approach to risk management by clarifying
responsibility 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 line withrisk 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 and guidance inrelation 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 and operating effectively.

Risk and Compliance function
The group’s Risk sub-function, headed by the group’s Chief Risk
Officer, is responsible for the group’s risk management framework.
This responsibility includes establishing and monitoring of risk
profiles, and identifying and managing forward-looking risk. The
group’s Risk sub-function is made up of sub-functions covering all
risks to our business. Forming part of the second line of defence, thegroup's Risk sub-function is independent from the global businesses,
including sales and trading functions, to provide challenge,
appropriate oversight and balance in risk/return decisions.
Responsibility for minimising both financial and non-financial risk lies
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 and the collective accountability held by our
Chief Risk Officers at markets and global businesses.
We have continued to strengthen the control environment and ourapproach to the management of non-financial risk, as set out in ourrisk management framework. The management of non-financial risk
focuses on governance and risk appetite, and provides a single viewof the non-financial risks that matter the most and the associatedcontrols. It incorporates a risk management system designed toenable the active management of non-financial risk. Our ongoing
focus is on simplifying our approach to non-financial risk
management, while driving more effective oversight and better endto-end identification and management of non-financial risks. This isoverseen by the Enterprise Risk sub-function, headed by the group
Head of Enterprise Risk Management.

Stress testing and recovery planning
Our stress testing programme assesses our capital and liquidity
strength through a rigorous examination of our resilience to external
shocks, which forms part of our risk management and capital andliquidity planning. 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 mitigating actions.The
outcome of a 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.

Internal stress tests
Our internal capital assessment uses a range of stress scenarios that
explore risks identified by management. They include potential
adverse macroeconomic, geopolitical, climate and operational risk
events, as well as other potential events that are specific to thegroup.
The selection of stress scenarios is based upon the output of ouridentified top and emerging risks and our risk appetite. Stress testing
analysis helps management understand the nature and extent ofvulnerabilities to which the group is exposed. Using this information,
management decides whether risks can or should be mitigatedthrough management actions or, if they were to crystallise, beabsorbed through capital and liquidity. This in turn informs decisions
about preferred capital and liquidity levels and allocations.
During 2023, we completed a Group-wide Internal Stress Test
alongside testing of the bank’s strategy, otherwise known as the
Corporate Plan to test and inform our strategy and assumptions. The
stress scenario explored the potential impact of interest rate shocks
and a deep recession. Under this scenario, inflation re-intensifies as
accentuated geo-political tensions lead to severe global supply-chain
disruptions and a rise in energy prices.
In addition to the group-wide stress testing scenarios, each major
subsidiary conducts regular macroeconomic and event-driven
scenario analysis specific to its region. They also participate, as
required, in the regulatory stress testing programmes of thejurisdictions in which they operate, such as stress tests required by
the Monetary Authority of Singapore, the Australian Prudential
Regulation Authority and those required by 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 understand potential
extreme conditions that would make our business model non-viable.
Reverse stress testing identifies potential stresses and vulnerabilities
we might face, and helps inform early warning triggers, management
actions and contingency plans designed to mitigate 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 outcomesof adverse business or economic conditions and in the identificationof appropriate risk mitigating actions.

Ibor transition
Interbank offered rates (‘Ibors’) were previously used extensively to
set interest rates on different types of financial transactions and forvaluation purposes, risk measurement and performancebenchmarking.
The publication of sterling, Swiss franc, euro, Japanese yen and US
dollar Libor interest rate benchmarks, as well as the Euro OvernightIndex Average (‘Eonia’) and other local interbank interest rates
regionally has ceased following regulatory announcements andindustry initiatives. To support any remaining contracts referencing
sterling and US dollar Libor benchmarks, the UK’s Financial Conduct
Authority (‘FCA') has compelled the ICE Benchmark Administration
Limited to publish the three-month sterling Libor setting using analternative ‘synthetic’ methodology until 31 March 2024, and onemonth, three-month and six-month US dollar Libor settings until
30 September 2024. We continue to support our customers in thetransition of the limited number of outstanding contracts relying on‘synthetic’ Libor benchmarks in line with these dates.
There are approximately 70 of these contracts remaining, which are
predominantly syndicated lending contracts, where Commercial or
Global Banking customers have required additional time to enablerefinancing or restructuring, with transition expected prior to
30 September 2024. Additionally, there are a small number of debt
securities and retail mortgages that are contingent on demised Ibors,

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

27

Risk

after the end of their fixed interest rate periods. HSBC remains
committed to seeking to remediate and/or mitigate relevant risks
relating to IBOR demise, as appropriate, for these contracts. HSBC
expects to be able to remediate and/or mitigate these risks by therelevant calculation dates, which may occur post cessation of therelevant IBOR. All other contracts referencing benchmarks that are nolonger published, where the group has contractual responsibility,
have been transitioned in line with client and investor discussions.
We also have exposures referencing regional rates that are scheduled
to demise at future dates. We are approaching transition of such
exposures in a manner that is tailored to the risks and counterparty
types involved.
While we continue to track the transition of remaining contracts toalternative interest rate benchmarks our regulatory compliance,
conduct and legal risks have materially diminished. We will remain
vigilant until all contracts are fully transitioned.

Key developments in 2023
We actively managed the risks related to macroeconomic andgeopolitical uncertainties, as well as other key risks described in thissection.
In addition, we sought to enhance our risk management in thefollowing areas:– We implemented two revised risk appetite frameworks to better
manage and strengthen our controls with respect to concentration
risks. These relate to concentration risks arising from exposures tocountries and to single customer groups.
– We enhanced our processes, framework and reporting capabilities
to improve the control and oversight of our material third parties,
and to help maintain our operational resilience and meet new andevolving regulatory requirements.
– We continued to make progress with our comprehensive
regulatory reporting programme to strengthen our global
processes, improve consistency, and enhance controls acrossregulatory reports.
– Through our climate risk programme, we continued to embedclimate considerations throughout the organisation, including
through risk policy updates and the completion of our annual
climate risk materiality assessment. We also developed risk
metrics to monitor and manage exposures, and further enhanced
our internal climate scenario analysis.
– We deployed industry-leading technology and advanced analytics
capabilities into new markets to improve our ability to identify
suspicious activities and prevent financial crime.
– We continued to develop and enhance our electronic
communication policies and standards, to help ensured we acted
on our most substantive issues.
– We are embedding our suite of regulatory management systems
following the Group-wide roll-out of regulatory horizon scanningcapabilities and enhanced regulation mapping tooling.
– We continued to increase the stabilisation of our net interest
income (‘NII’) as interest rate expectations fluctuated, driven by
central bank rate increases and a reassessment of the trajectoryof inflation in major economies.

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 execution of
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 and global
businesses, for any risks that may require global escalation. We
update our top and emerging risks as necessary.

28

Our current top and emerging risks are as follows:

Externally driven
Geopolitical and macroeconomic risks
The US-China relationship remains complex. To date, the US, the UK,
the EU and other countries have imposed various sanctions and trade
restrictions on Chinese persons and companies and the countries’
respective approaches to strategic competition with China continue
to develop. Although sanctions and trade restrictions are difficult topredict, increases in diplomatic tensions between China and the US
and other countries could result in further sanctions and trade
restrictions that could negatively impact the group, its customers andthe markets in which the group operates. For example, there is a riskof additional sanctions and trade restrictions being imposed by the
US and other governments in relation to human rights, technology,
and other issues which could create a more complex operating
environment for the group and its customers.
China has in turn announced a number of its own sanctions and trade
restrictions that target, or provide authority to target, foreign
individuals and companies. These, as well as law enforcement
measures, have been imposed against certain Western consulting
and data intelligence firms, defense companies, and public officials
associated with the implementation of foreign sanctions against
China.
The Russia-Ukraine war continues to have far-reaching geopoliticaland economic implications beyond those two countries borders.
There is also uncertainty about the scope, duration and potential
escalation of the Israel-Hamas war. The group is monitoring theimpacts of these wars. Additionally, recent attacks on shipping in the
Red Sea and resulting counter-measures have disrupted supply
chains.
The group continues to respond to evolving economic sanctions andtrade restrictions, in particular significant sanctions and trade
restrictions imposed against Russia by the UK, the US and the EU, as
well as other countries. Such sanctions and restrictions have targetedcertain Russian government officials, politically exposed persons,business people, Russian oil imports, energy products, financial
institutions, and other major Russian companies and sanctions
evasion networks. More generally applicable investment, export, andimport bans and restrictions have also been implemented. In addition,
US authorities have been granted significant and broad discretion to
impose secondary sanctions on non-US banks engaged in certaintransactions or services involving Russia’s military-industrial base. In
response to such sanctions and trade restrictions, as well as asset
flight, Russia has implemented certain countermeasures including the
expropriation of foreign assets.
Further sanctions, counter-sanctions, and trade restrictions across themarkets in which the group operates may adversely affect the group,
its customers and the markets by creating regulatory, reputationaland market risks.
A fall in global energy prices from the highs of 2022 facilitated asustained disinflation process across most key economies over thecourse of 2023. Global commodity markets were impacted byheightened geopolitical risks – including the Russia-Ukraine war andIsrael-Hamas war – which fuelled concerns about supply disruptions,although weaker economic activity in China and Europe dampened
demand growth. As of January 2024, geopolitical turmoil in the
Middle East has not led to a sustained increase in energy prices. The
Israel-Hamas war has not disrupted energy supply, while producers
not from the Organisation of the Petroleum Exporting Countries('OPEC'), including the US, increase output through the fourth quarterof 2023.
Mainland China commercial real estate conditions remain distressed
as offshore financing conditions and buyer demand remain subdued.
Signs of a material or sustained recovery are yet to emerge, withmarket data still reflecting reduced investment and weak homebuyer
sales and sentiment. The Chinese government is expected tocontinue to expand fiscal and monetary support to the economy toboost growth and lending in 2024, including specific measures tosupport developers and stimulate housing demand but the risk of aslow and protracted recovery remains significant. The business and

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

financial performance of corporates operating in this sector has been
weak, and refinancing risks are likely to continue in 2024. State
owned enterprises continue to outperform privately owned
enterprises in general with above market average sales performance,
market share gains and greater access to funding. The challenges inthis sector could create further pressure on our customers. We
continue to closely monitor and take actions to proactively risk
manage our portfolio.
The reduction in global inflation rates prompted developed market
central banks to pause monetary policy tightening, from the third
quarter of 2023. A decrease in inflation trend is now visible acrossmost major economies and interest rates are forecast to fall through2024, although they are expected to remain materially higher than inrecent years. 2024 will mark the biggest election year in history withmore than half the world's population across more than 76 countries
going to the polls. This has the potential to present policy continuity
in some markets and significant political change in others.
Budget deficits are set to remain large for many economies as
governments try to meet a range of spending demands. Alongside
this, higher bond yields will increase interest payment burdens formany counterparties. We continue to monitor our risk profile closelyin the context of uncertainty over global macroeconomic policies.
Higher inflation and interest rates, alongside lower growth have had
an impact on expected credit losses and other credit impairment
charges (‘ECL’). The pressure on real disposable income ofhouseholds and business costs may have impacted the ability of ourcustomers to repay debt.
Our Central scenario, which has the highest probability weighting in
our HKFRS 9 ‘Financial Instruments’ calculations of ECL, assumes
that GDP growth will fall below trend through 2024. Inflation is
forecast to remain above central bank targets, but continues to fall.
Interest rates also decline but remain materially higher than in recent
years. Forecasts remain uncertain, however, and changing economic
conditions and the materialisation of key risks could reduce theaccuracy of the Central scenario forecast. In particular, forecasts inrecent years have been sensitive to commodity price changes,
changing supply chain conditions, monetary policy adjustments andinflation expectations. There is also uncertainty with respect to therelationship between the economic drivers and the historical loss
experience, which has required adjustments to modelled ECL incases where we determined that the model was unable to capture
the material underlying risks.
Despite these risks, forecast stability and reduced forecast dispersion
in our main markets, ensured that the Central scenario for impairment
was assigned the same likelihood of occurrence across our key
markets.
For further details of our Central and other scenarios, see‘Measurement uncertainty and sensitivity analysis of ECL estimates’
on page 42.
Global tensions over trade, technology and ideology are manifestingthemselves in divergent regulatory standards and complianceregimes, presenting long-term strategic challenges for multinational
businesses.
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 objectives ofthat jurisdiction over another, creating additional compliance,
reputational and political risks for the group. We maintain dialogue
with our regulators in various jurisdictions on the impact of legal andregulatory obligations on our business and customers.
While it is the group's policy to comply with all applicable laws andregulations of all jurisdictions in which it operates, geopoliticaltensions, and potential ambiguities in the group’s complianceobligations will continue to present challenges and risks for the groupand could have a material adverse impact on the group‘s business,financial condition, results of operations, prospects, strategy andreputation, as well as on the group’s customers.
Expanding data privacy, national security and cybersecurity laws in a
number of markets could pose potential challenges to intra-groupdata sharing. These developments could increase financial

institutions’ compliance obligations in respect of cross-bordertransfers of personal information, which may affect our ability to
manage financial crime risk across markets.

Mitigating actions– We closely monitor geopolitical and economic developments in
key markets and sectors, and undertake scenario analysis whereappropriate. This helps us to take actions to manage our portfolios
where necessary, including through 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 being taken to rebalance exposures and manage risk
appetite where necessary.
– We regularly review key portfolios to help ensure that individual
customer or portfolio risks are understood and that our ability to
manage the level of facilities offered through any downturn isappropriate.
– We continue to manage sanctions and trade restrictions throughthe use of, testing and auditing of, and enhancements to, ourexisting controls.
– We have taken steps, where necessary, to enhance physicalsecurity in geographical areas deemed to be at high risk fromterrorism and military conflicts.
– We continue to closely monitor, and take actions to proactively
mange our commercial real estate portfolios against risk.

Technology and cyber security risk
Together with other organisations, we operate in an extensive andcomplex technology landscape, which needs to remain resilient inorder to support customers, our organisation and financial markets
globally. Risks arise where, for example, technology is notunderstood, maintained, or developed appropriately. We also
continue to operate in an increasingly hostile cyber threat
environment globally. These threats include potential unauthorised
access to customer accounts and attacks on our and our suppliers'systems. These threats require ongoing investment in business andtechnical controls to defend against.

Mitigating actions– We continue to invest in transforming how software solutions aredeveloped, delivered and maintained to improve system
resilience, minimising the impact to customers, as well as
continuing to build security into our software development
lifecycle and improve our testing processes and tools.
– We continue to upgrade many of our IT systems, simplify ourservice provision and replace older IT infrastructure andapplications.
– Our cyber intelligence and threat analysis team continually
evaluate threat levels for the most prevalent cyber-attack types
and their potential outcomes. We continue to strengthen ourcontrols to help reduce the likelihood and impact of advanced
malware, data leakage, exposure through third parties and security
vulnerabilities.
– We continue to enhance our cybersecurity capabilities, including
Cloud security, identity and access management, metrics and data
analytics, and supplier security reviews.
– We regularly report and review cyber risk and control
effectiveness at executive level across global businesses,
functions and markets, and at non-executive Board level to help
ensure there is appropriate visibility and governance of the risk
and its mitigating actions.
– We continue to invest in mitigating the potential threats ofemerging technologies, such as the use of Artificial Intelligence('AI').
– The Group participates globally in industry bodies and working
groups to collaborate on tactics employed by cyber-crime groups
and to work together to seek to prevent, detect and defend
against cyber-attacks on financial organisations globally.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

29

Risk

– We, like other financial institutions, experience numerous
attempts to compromise our cybersecurity. We respond to thesein accordance with our cybersecurity framework which adheres toapplicable laws, rules and regulations. To date, none of these
attacks have had a material impact.

Financial crime risk
Financial institutions remain under considerable regulatory scrutiny
regarding their ability to detect and prevent financial crime. Theserisks were in 2023 exacerbated by rising geopolitical tensions andongoing macroeconomic factors. These challenges include managing
conflicting laws and approaches to legal and regulatory regimes, andimplementing increasingly complex and less predictable sanctions
and trade restrictions.
Amid high levels of inflation and increasing cost of living pressures,
we face increasing regulatory expectations with respect to managing
internal and external fraud and protecting vulnerable customers. In
addition, the accessibility and increasing sophistication of generative
AI brings financial crime risks. While there is potential for thetechnology to support financial crime detection, there is also material
risk that criminals use generative AI to perpetrate fraud, particularly
scams.
The digitisation of financial services continues to have an impact on
the payments ecosystem, with an increasing number of new market
entrants and payment mechanisms, not all of which are subject tothe same level of regulatory scrutiny or regulations as banks.
Developments around digital assets and currencies have continued atpace, with an increasing regulatory and enforcement focus on thefinancial crimes linked to these types of assets.
Expectations continue to increase with respect to the intersection ofenvironmental, social and governance ('ESG') issues and financial
crime, as our organisation, customers and suppliers transition to net
zero. These are particularly focused on potential ‘greenwashing’,
human rights issues and environmental crimes. In addition, climatechange itself could heighten risks linked to vulnerable migrant
populations in countries where financial crime is already moreprevalent.
We also continue to face increasing challenges presented by national
data privacy requirements, which may affect our ability to manage
financial crime risks across markets.

Mitigating actions– We continue to manage sanctions and trade restrictions throughthe use of, and enhancements to, our existing controls.
– We continue to develop our fraud controls, and invest incapabilities to fight financial crime through the application ofadvanced analytics and AI, while monitoring technologicaldevelopments and engaging third parties.
– We are looking at the impact of a rapidly changing payments
ecosystem, as well as risks associated with direct and indirect
exposure to digital assets and currencies, in an effort to maintainappropriate financial crime controls.
– We regularly review our existing policies and control frameworkso that developments relating to ESG are considered and the risks
mitigated to the extent possible.
– We engage with regulators, policymakers and relevantinternational bodies, seeking to address data privacy challenges
through international standards, guidance, and legislation.

Environmental, social and governance risk
We are subject to financial and non-financial risks associated with
ESG-related matters. Our current areas of focus include climate risks,nature-related risks and human rights risks. These can impact us both
directly and indirectly through our business activities andrelationships. For details of how climate risk is governed, see page10.
Our assessment of climate risks covers three distinct time periods,
comprising: short term, which in this context is up to 2025; medium
term, which is between 2026 and 2035; and long term, which is
between 2036 and 2050.
30

We may face credit losses if our customers business models fail toalign to a net zero economy or if our customers face disruption totheir operations or deterioration to their assets as a result of extreme
weather.
We may face trading losses if we fail to accurately reflect the risks
associated with climate risk within our trading book assets.
We may face impacts from physical risk on our own operations,owing to the increase in frequency and severity of weather eventsand chronic shifts in weather patterns, which could affect our ability
to conduct our day-to-day operations.
We may face increased reputational, legal and regulatory risk if wefail to make sufficient progress towards the Group's net zeroambition, if we fail to meet evolving regulatory expectations andrequirements on climate risk management, or if we knowingly or
unknowingly make inaccurate, unclear, misleading, or
unsubstantiated claims regarding sustainability to stakeholders.
We may face financial reporting risk in relation to our climate
disclosures, as any data, methodologies and standards we have used
may evolve over time in line with market practice, regulation ordevelopments in climate science. We may also face the risk ofmaking reporting errors due to data, system, process and control
challenges. Any changes could result in revisions to our internalframeworks and reported data and could mean that reported figures
are not reconcilable or comparable year on year. We may also have tore-evaluate our progress towards our climate-related targets in future
and this could result in reputational, legal and regulatory risks.
We may face model risk, as the uncertain impacts of climate change
and data and methodology limitations present challenges to creating
reliable and accurate model outputs.
We may face climate related litigation risks, either directly if
stakeholders feel we are not adequately managing climate risks orindirectly if our clients and customers are themselves the subject of
litigation, potentially resulting in the revaluation of client assets.
We may also be exposed to nature-related risks beyond climatechange. These risks arise when the provision of natural capital - suchas water availability, air quality, and soil quality - is compromised byhuman activity/actions. Nature risk can manifest throughmacroeconomic, market, credit, reputational, legal and regulatory
risks, for both the group and our customers.
Regulation and disclosure requirements in relation to human rights,
and to modern slavery in particular, are increasing. Businesses are
expected to be transparent about their efforts to identify and respondto the risk of negative human rights impacts arising from theirbusiness activities and relationships.

Mitigating actions– A dedicated Environmental Risk Oversight Forum is responsible
for overseeing risk activities relating to environmental risk
management, including the transition and physical risks fromclimate change. For further details of the group’s climate
governance is structured, see page 10.
– The group climate risk programme continues to support thedevelopment of our climate risk management capabilities acrossfour key pillars: governance and risk appetite, risk management,
stress testing and scenario analysis, and disclosures. We continue
to enhance our approach and mitigation to the risk ofgreenwashing.
– In January 2024, the Group updated our energy policy covering
the broader energy system including upstream oil and gas, oil andgas power generation, coal, hydrogen, renewables andhydropower, nuclear, biomass and energy from waste. We also
updated our thermal coal phase-out policy, in which wecommitted to not provide new finance or advisory services for the
specific purposes of new metallurgical coal mines.
– In 2023, we provided practical guidance and training, where
relevant, to our colleagues across the group on human rights,
covering fundamental human rights concepts and international
standards, our public commitments and foundational principles forresponding to human rights risks.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

– The scope of financial reporting risk was expanded to explicitly
include oversight over accuracy and completeness of ESG andclimate reporting. In 2023, we updated the risk appetite statement
to reference our ESG and climate-related disclosures. We also
updated our risk taxonomy and control library to incorporate
requirements for addressing the risk of misstatement in ESG andclimate reporting. To support this, the Group has developed aframework to guide control implementation over ESG and climate
reporting disclosures, which includes areas such as process anddata governance, and risk assessment.
– 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 Climate-related
Financial Disclosures and CDP (formerly the Carbon Disclosure
Project) to help drive best practice for climate risk management.
For further details on our approach to climate risk management, see‘Climate Risk’ on page 66.
For further details on ESG risk management, see ‘Financial crime risk
environment‘ on page 30.
Our TCFD disclosures can be found on page 10.

Digitalisation and technological advances risk
Developments in technology and changes to regulations are enabling
new entrants to the industry, particularly with respect to payments.
This challenges the group to continue innovating to address evolving
customer requirements, drive efficiency and adapt our products to
attract and retain customers. As a result, we may need to increase
our investment in our business to adapt or develop products andservices to respond to our customers' evolving needs. We also needto ensure that new digital capabilities do not weaken our resilience or
wider risk management capabilities.
New technologies such as generative AI, large language models,
blockchain and quantum computing offer both business opportunities
and potential risks for HSBC. As with all use of technologies, we aim
to maximise their potential while seeking to ensure a robust control
environment is in place to help manage the inherent risks, such as
the impact on encryption algorithms.

Mitigating actions– We monitor people risks that could arise due to organisational
restructuring, helping to ensure we manage redundancies
sensitively and support impacted employees. We encourage ourpeople 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 skills that will help toenable employees and the group to be successful in the future.
– We develop succession plans for key management roles, withoversight from the group Executive Committee.

Risks arising from the receipt of services from third
parties(Unaudited)
We use third parties to provide a range of goods and services. It is
critical that we ensure we have appropriate risk management
policies, processes and practices over the selection, governance andoversight of third parties and their supply chain, particularly for key
activities that could affect our operational resilience. Any deficiency inthe management of risks associated with our third parties could
affect our ability to support our customers and meet regulatory
expectations.

Mitigating actions– We continue to monitor the effectiveness of the controls operated
by our third-party providers and request third-party control reports,
where required.
– We continue to enhance the effective management of our intraGroup arrangements using the same control standards as we havefor external third-party arrangements.
– We have strengthened the way third party risk is overseen andmanaged across all non-financial risks and have enhanced our
processes, framework and reporting capabilities to improve thevisibility of risk and enable more robust management of ourmaterial third parties by our global businesses, functions andmarkets.
– We are implementing the changes required by new regulations as
set by our regulators.

Model risk

– We continue to monitor this emerging risk and advances intechnology, as well as changes in customer behaviours tounderstand how these may impact our business.
– We assess new technologies to help develop appropriate controls
and maintain resilience.
– We closely monitor and assess financial crime risk and the impact
on payment transparency and architecture.

Internally driven
Risks associated with workforce capability, capacity andenvironmental factors with potential impact on growth
Our global businesses and functions in all of our markets are exposed
to risks associated with workforce capacity challenges, including
challenges to retain, develop and attract high-performing employees
in key labour markets, and compliance with employment laws andregulations. Failure to manage these risks may impact our delivery of
our strategic objectives or lead to regulatory sanctions or legal claims.

Mitigating actions– We seek to promote a diverse and inclusive workforce andprovide health and well-being support. We continue to build ourspeak-up culture through active campaigns.
– We monitor hiring activities and levels of employee attrition, witheach business and function putting in place plans to help ensure
they have effective workforce forecasting to meet businessdemands.

Model risk arises whenever business decision making includes
reliance on models. We use models in both financial and non-financial
contexts, as well as in a range of business applications such as
customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
Assessing model performance is a continuous undertaking. Models
can need redevelopment as market conditions change. Significant
increases in global inflation and interest rates have impacted thereliability and accuracy of both credit and market risk models.
We continued to prioritise the redevelopment of internal ratingsbased (‘IRB’) and internal model methods (‘IMM’) models, in relation
to counterparty credit, as part of the IRB repair and Basel III
programmes with a key focus on enhancing the quality of data used
as model inputs. Some models have been approved and a number
are pending approval decisions from the UK’s Prudential Regulation
Authority (‘PRA’), the Hong Kong Monetary Authority ('HKMA') andother key regulators for feedback. Some IMM and internal model
approach (‘IMA’) models have been approved for use, and feedback
has been received for some IRB models. Climate risk modelling is a
key focus for the group as HSBC’s commitment to ESG has becomea key part of the group’s strategy. Focus is also on AI and machinelearning where the pace of technological advances is driving
significant changes n modelling techniques.
Model risk remains a key area of focus, with local regulatory exams
taking place in many jurisdictions, new model risk guidance from the
PRA (SS1/23) due to come into force in 2024, and further
developments in policy expected from other regulators, including the
HKMA.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

31

Risk

Mitigating actions

Mitigating actions– We have continued to embed the enhanced monitoring, review
and challenge of expected credit loss model performance throughour Model Risk Management sub-function as part of a broader
quarterly process to determine loss levels. The Model Risk
Management team aims to provide effective review and challengeof any future redevelopment of these models.

– Through our global data management framework, we monitor thequality, availability and security of data that supports ourcustomers and internal processes. We work towards resolving
any identified data issues in a timely manner.

– Model Risk Governance forums at the group, business andfunctional levels continue to provide oversight of model risk.

– We continue to make improvements to our data policies and to
our control framework - which includes trusted sources, dataflows, and data quality - in order to enhance the end-to-end
management of data risk.

– A full review of the firm's model landscape is being undertaken
across the firm to ensure models are being deployed in line with
global business strategy.

– The Group has established a global data management utility, andcontinue to simplify and unify data management activities acrossthe Group.

– Model Risk Management works closely with businesses to ensurethat IRB/IMM/IMA models in development meet risk
management, pricing and capital management needs. Global
Internal Audit provides assurance over the risk management
framework for models.

– We seek to protect customer data through our data privacy
framework, which establishes practices, design principles andguidelines that enable us to demonstrate compliance with data
privacy laws and regulations.

– Additional assurance work is performed by the model risk
governance teams, which act as second lines of defence. The
teams test whether controls implemented by model users comply
with model risk policy and if model risk standards are adequate.
– Models using AI or generative AI techniques are validated andmonitored to help ensure that risks that are determined by thealgorithms have adequate oversight and review. A framework to
manage the range of risks that are generated by these advanced
techniques, and to recognise the multi-disciplinary nature of theserisks, is being developed.

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

– We continue to modernise our data and analytics infrastructure
through investments in Cloud technology, data visualisation,
machine learning and AI.
– We continue to educate our employees on data risk and data
management. We have delivered regular global mandatory training
on how to protect and manage data appropriately.

Change execution risk
The needs of our customers are evolving faster than ever, particularly
with regard to technological advancements and the global transition
to a low-carbon economy. The resulting scale, complexity and pace ofstrategic and regulatory change has elevated the level of risk for
executing such changes safely and efficiently.

Mitigating actions– Change execution risk is part of our risk taxonomy and control
library, so that it is defined, assessed, managed, reported andoverseen in the same way as our other material risks.
– The Group Change Framework provides colleagues across alllevels of the Group who deliver on strategic and organisational
initiatives with a common and consistent understanding of theirrole in achieving value and outcomes.
– The Group Change Prioritisation and Oversight Committee
oversees the prioritisation, strategic alignment and managementof execution risk for all strategic change portfolios and initiatives.

32

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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

Arising from

Measurement, monitoring and management of risk

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

Credit risk is:– measured as the amount that could be lost if a customer or counterparty
fails to make repayments;– monitored using various internal risk management measures and within
limits approved by individuals within a framework of delegated authorities;and– managed through a robust risk control framework, which outlines clear andconsistent policies, principles and guidance for risk managers, and by
setting limits and appetite across geographical markets, portfolios or
sectors.

Credit risk
Credit risk is the risk of financial loss
if a customer or counterparty fails tomeet 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 ofadverse impact on earnings or capital
due to structural and transactional
foreign exchange exposures andchanges in market interest rates,
together with pension and insurance
risk.

Treasury risk arises from changes Treasury risk is:to the respective resources and– measured through risk appetite and more granular limits, set to provide anrisk profiles driven by customer
early warning of increasing risk, minimum ratios of relevant regulatory
behaviour, management
metrics, and metrics to monitor the key risk drivers impacting treasury
decisions, or the external
resources;
environment.
– monitored and projected against appetites and by using operating plans
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.

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

Market risk arises from bothtrading portfolios and non-trading
portfolios.
Market risk for non-trading
portfolios is discussed in the
Treasury risk section on page 58.
Market risk exposures arisingfrom our insurance operations are
discussed on page 73.

Market risk is:– measured using sensitivities, value at risk (‘VaR’) and stress testing, giving
a detailed picture of potential gains and losses for a range of market
movements and scenarios, as well as tail risks over specified time
horizons;– monitored using VaR, stress testing and other measures; and– managed using risk limits approved by the Board for the group and thevarious global businesses.

Climate risk is likely to materialisethrough:– physical risk, which arises
from the increased frequency
and severity of weather
events;– transition risk, which arises
from the process of moving toa low-carbon economy;– net zero alignment risk, whicharises from failing to meet theGroup's net zerocommitments or to meetexternal expectations related
to net zero because of
inadequate ambition and/orplans, poor execution, or
inability to adapt to changes inthe external environment; and– the risk of greenwashing,which arises from the act ofknowingly or unknowingly
making inaccurate, unclear,
misleading or unsubstantiatedclaims regarding sustainability
to stakeholders.

Climate risk is:– measured using risk metrics and stress testing;– monitored against risk appetite statements; and– managed through adherence to risk appetite thresholds, through specificpolicies, and through enhancements to processes and development oftools and the development of portfolio steering capabilities to contribute to
the Group's net zero targets.

Climate risk
Climate risk relates to the financial
and non-financial impacts that may
arise as a result of climate change
and the move to a net zeroeconomy.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

33

Risk

Description of risks – banking operations (continued)
Risks

Arising from

Measurement, monitoring and management of risk

Resilience risk arises fromfailures or inadequacies inprocesses, people, systems orexternal 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 andstrategic change programmes; and– managed by continual monitoring and thematic reviews.

Resilience risk
Resilience risk is the risk ofsustained and significant businessdisruption from execution, delivery or
physical security or safety events,
causing the inability to provide criticalservices to our customers, affiliates
and counterparties.

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

Regulatory compliance risk arises Regulatory compliance risk is:from the failure to observe the– measured by reference to risk appetite, identified metrics, incident
relevant laws, codes, rules andassessments, regulatory feedback and the judgement and assessment ofregulations and can manifest
our regulatory compliance teams;
itself in poor market or customer– monitored against the first line of defence risk and control assessments,
outcomes and lead to fines,
the results of the monitoring and control assurance activities of the second
penalties and reputationalline of defence functions, and the results of internal and external audits anddamage to our business.
regulatory inspections; and– managed by establishing and communicating appropriate policies andprocedures, training employees in them, and monitoring activity to help
ensure their observance. Proactive risk control and/or remediation work isundertaken where required.

Financial crime risk
Financial crime risk is the risk that
HSBC’s products and services will
be exploited for criminal activity. This
includes fraud, bribery andcorruption, tax evasion, sanctions
and export control violations, money
laundering, terrorist financing andproliferation financing.

Financial crime risk arises from
Financial crime risk is:
day-to-day banking operations– measured by reference to risk appetite, identified metrics, incident
involving customers, third parties
assessments, regulatory feedback and the judgement and assessment ofand employees.
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 secondline of defence functions, and the results of internal and external audits andregulatory inspections; and– managed by establishing and communicating appropriate policies andprocedures, training employees in them and monitoring activity to help
ensure their observance. Proactive risk control and/or remediation work isundertaken where required.

Model risk
Model risk is the potential foradverse consequences from model
errors or the inappropriate use ofmodelled outputs to inform businessdecisions.

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

Our insurance manufacturing subsidiaries have additional regulations
than those of our banking operations. Risks in the insurance entities
are managed using methodologies and processes that are subject tooversight at group level. Our insurance operations are also subject to34

many of the same risks as our banking operations, and these arecovered by the group's risk management processes. However, there
are specific risks inherent to the insurance operations as noted
below.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Description of risks – insurance manufacturing operations
Risks
Financial risk

Arising from

Measurement, monitoring and management of 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.

Exposure to financial risk 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 topolicyholders 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 makerepayments; (ii) for market risk, in terms of economic capital,
internal metrics and fluctuations in key financial variables; and (iii)for liquidity risk, in terms of internal metrics including stressed
operational cash flow projections;– monitored through a framework of approved limits and 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.

Insurance risk
Insurance risk is the risk that, overtime, the cost of insurance policies
written, including claims and benefits,
may exceed the total amount ofpremiums and investment income
received.

The cost of claims and benefits can be Insurance risk is:
influenced by many factors, including– measured in terms of life insurance liabilities and economic capitalmortality and morbidity experience, as
allocated to insurance underwriting risk;
well as lapse and surrender rates.
– 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 andclaims-handling procedures.

Credit risk
Overview

Credit risk sub-function(Audited)(Audited)

Key developments in 2023

Credit approval authorities are delegated by the Board to the group
Co-Chief Executives together with the authority to sub-delegate
them. The Credit Risk sub-function in Global Risk and Compliance 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 of credit
risk, and monitoring performance and management of portfolios.

(Unaudited)

The principal objectives of our credit risk management are:

There were no material changes to the policies and practices for the
management of credit risk in 2023. We continued to apply therequirements of HKFRS 9 ‘Financial Instruments’ within the Credit
Risk sub-function. For our wholesale portfolios, we introduced new
policies for the management of country risk and subordinated debt
assessments. Implementation of these polices did not have amaterial impact on our wholesale portfolios.

– to maintain 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; and– to ensure there is independent, expert scrutiny of credit risks,
their costs and their mitigation.

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, butalso from other products, such as guarantees and credit derivatives.

Credit risk management

We actively managed the risks related to macroeconomic
uncertainties, including interest rates, inflation, fiscal and monetary
policy, broader geopolitical uncertainties and conflicts.

Key risk management processes
HKFRS 9 'Financial Instruments' process

Governance and structure(Unaudited)(Unaudited)

The HKFRS 9 process comprises three main areas: modelling anddata; implementation; and governance.

We have established credit risk management and related HKFRS 9
processes. We continue to assess the impact of economic
developments in key markets on specific customers, customer
segments or portfolios. As credit conditions change, we takemitigating actions, including the revision of risk appetites or limits andtenors, as appropriate. In addition, we continue to evaluate the terms
under which we provide credit facilities within the context ofindividual customer requirements, the quality of the relationship, local
regulatory requirements, market practices and our local market
position.

Modelling and data
(Unaudited)
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.
We have a centralised process at the Group for generating unbiased
and independent global economic scenarios. Scenarios are subject toa process of review and challenge by a dedicated team at Group, as
well as regional groupings. Each quarter, the scenarios and probability
weights are reviewed and checked for consistency with theeconomic conjuncture and current economic and financial risks.
These are subject to final review and approval by senior management
in a Forward Economic Guidance Global Business Impairment
Committee.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

35

Risk

Implementation(Unaudited)
A centralised impairment engine performs the expected credit losses
calculation using data, which is subject to a number of validation
checks and enhancements, from a variety of client, finance and risk
systems. Where possible, these checks and processes are
performed in a globally consistent and centralised manner.
Governance(Unaudited)Management review forums are established in key sites and at grouplevel in order to review and approve the impairment results.
Management review forums have representatives from Credit Risk
and Finance. The key site and group approvals at the group
Impairment Committee are subsequently reported to the global
business impairment committee for final approval of the Group’s ECL
for the period.
Required members of the group Impairment Committee are thegroup's Chief Risk Officer, Chief Credit Officer, Wealth and Personal
Banking Chief Risk Officer, as well as the group's Chief Financial
Officer and Financial Controller.
The group Risk Committee reviews and provides independent
challenge on the risk management report that may include
impairment results presented at each Risk Committee meeting, andother reports on impairment results that are presented to the Risk
Committee from time to time, to assess the risk profile of the Bankand how the risks arising from the Bank’s businesses are controlled,
monitored and mitigated.

Concentration of exposure(Audited)
Concentrations of credit risk arise when a number of counterparties
or exposures have comparable economic characteristics, or suchcounterparties, are engaged in similar activities or operate in thesame geographical areas or industry sectors so that their collective
ability to meet contractual obligations is uniformly affected bychanges in economic, political or other conditions. We use a numberof controls and measures to minimise undue concentration of
exposure in our portfolios across industries, countries and global
businesses. These include portfolio and counterparty limits, approval
and review controls, and stress testing.

Credit quality of financial instruments(Audited)
Our risk rating system facilitates the internal ratings-based approach
under the Basel framework adopted by the group to support thecalculation of our minimum credit regulatory capital requirement. The
five credit quality classifications encompass a range of granularinternal credit rating grades assigned to wholesale and retailcustomers, and the external ratings attributed by external agencies todebt 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.

Wholesale lending(Unaudited)
A CRR 10-grade scale summarises a more granular underlying 23grade scale of obligor probability of default (‘PD’). All corporate
customers are rated using the 10 or 23-grade scale, depending on the
degree of sophistication of the Basel approach adopted for the
exposure.
Each CRR band is associated with an external rating grade byreference to long-run default rates for that grade, represented by theaverage of issuer-weighted historical default rates. This mapping
between internal and external ratings is indicative and may vary overtime.

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

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-monthBaselprobability ofdefault %BBB and above
BBB- to BB
BB- to B andunratedB- to C
Default

A- and above
BBB+ to BBBBB+ to B andunratedCRR 1 to CRR 2
CRR 3

0 – 0.169
0.170 – 0.740

Band 1 and 2Band 3

CRR 4 to CRR 5

0.741 – 4.914

Band 4 and 5

1.501 – 20.000

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

Internal credit
rating

12 monthprobabilityweighted PD %0.000 – 0.500
0.501 – 1.500

Customer risk rating (‘CRR’).
12-month Point-in-time ('PIT') Probability of Default ('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.

36

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Forborne loans and advances(Audited)
Forbearance measures consist of concessions towards an obligor
that is experiencing or is about to experience difficulties in meetingits financial commitments.

pronounced in unsecured retail lending requiring further
segmentation. For wholesale lending, forborne loans are typicallyassessed individually. Credit risk ratings are intrinsic to theimpairment assessments. The individual impairment assessment
takes into account the higher risk of the future non-payment inherent
in forborne loans.

We continue to class loans as forborne when we modify thecontractual payment terms due to having significant concerns about
the borrowers’ ability to meet contractual payments when they weredue. Our definition of forborne captures non-payment-related
concessions, such as covenant waivers.

Impairment assessment

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

Write-off of loans and advances

Credit quality of forborne loans(Unaudited)
For wholesale lending, where payment-related forbearance measuresresult in a diminished financial obligation, or if there are otherindicators of impairment, the loan will be classified as credit impaired
if it is not already so classified. All facilities with a customer, includingloans that have not been modified, are considered credit impaired
following the identification of a payment-related forborne loan. For
retail lending, where a material payment-related concession has been
granted, the loan will be classified as credit impaired. In isolation,
non-payment forbearance measures may not result in the loan beingclassified as credit impaired unless combined with other indicators ofcredit impairment. These are classed as performing forborne loans forboth wholesale and retail lending.
Wholesale and retail lending forborne loans are classified as creditimpaired until there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future cash flows, observed
over a minimum one-year period, and there are no other indicators of
impairment. Any forborne loans not considered credit impaired willremain forborne for a minimum of two years from the date that credit
impairment no longer applies. For wholesale and retail lending, any
forbearance measures granted on a loan already classed as forborne
results in the customer being classed as credit impaired.

Forborne loans and recognition of expected credit losses(Audited)
Forborne loans expected credit loss assessments reflect the higher
rates of losses typically experienced with these types of loans suchthat they are in stage 2 and stage 3. The higher rates are more

(Audited)
For details of our impairment policies on loans and advances andfinancial investments, see Note 1.2(i) on the financial statements.
(Audited)
For details of our policy on the write-off of loans and advances, seeNote 1.2(i) on the financial statements.
Under the HKFRS9 standard, write-off should occur when there is no
reasonable expectation of recovering further cash flows from thefinancial asset.
This principle does not prohibit early write-off which is defined in local
policies to ensure effectiveness in the management of customers in
the collections process.
Unsecured personal facilities, including credit cards, are generally
written off at between 150 and 210 days past due. The standard
period runs until the end of the month in which the account becomes
180 days contractually delinquent. However, in exceptional
circumstances to avoid unfair customer outcomes, deliver customer
duty or meet regulatory expectations, the period may be extended
further.
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. Where these assets aremaintained on the balance sheet beyond 60 months of consecutive
delinquency-driven default, the prospect of recovery is re-assessed.
Recovery activity, on both secured and unsecured assets, may
continue after write-off.
Any unsecured exposures which are not written off at 180 days pastdue, and any secured exposures which are in ‘default’ status for 60
months or greater but are not written off, are subject to additional
monitoring via the appropriate governance forums.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

37

Risk

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 ECL.
Summary of financial instruments to which the impairment requirements in HKFRS 9 are applied(Audited)
20225

2023
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

Allowance
for
ECL1

Gross
carrying/
nominalamountAllowance for
ECL1

HK$m

HK$m

HK$m

HK$m

3,595,929
563,852
2,309,109
232,988
22,049328,304
831,186
618,995
275,587
131,0716,599,961
1,978,328
46,3252,024,653
8,624,614(38,853)
(51)
(393)
(1)
—
—
—
(57)
(335)
—
(39,297)
(841)
(54)
(895)
(40,192)

3,734,987
515,890
2,303,654
232,748
28,557341,354927,976
509,811
263,208
129,341
6,683,872
1,892,401
35,646
1,928,047
8,611,919(39,919)
(43)
(262)
(8)
—
—
—
(46)
(208)
—
(40,224)
(864)
(63)
(927)
(41,151)

Fair value

Allowance
for ECL

Fair value

Allowance
for ECL

HK$m

HK$m

HK$m

HK$m

1,404,323(93)

1,232,817(329)

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 85, 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.
5 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

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 isrecognised.
– 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 a lifetime
ECL is recognised.

38

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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

Loans andadvances tocustomers– personal– corporate2– financial
institutions3
Loans andadvances tobanks
Other financial
assetsLoans andother creditrelated
commitments– personal– corporate2– financial
institutions3
Financialguarantee– personal– corporate2– financial
institutions3
At 31 Dec
2023

Gross carrying/nominal amount1
Stage
Stage
Stage
1
2
3 POCI
HK$m

HK$m

HK$m HK$m

3,180,483

352,477

62,6791,495,142
1,405,747

60,473
280,699

7,406
54,613

279,594

11,305563,647

Total

Stage
1

Allowance for ECLStage Stage
2
3 POCIECL coverage %Stage Stage Stage
Total
1
2
3 POCI

HK$m

HK$m

HK$m

HK$m

%

%

%

%

%

290

3,595,929(2,681)(8,575) (27,433)(164) (38,853)

0.1

2.4

43.8

56.6

1.1

—
290

1,563,021
1,741,349(1,285)(1,187)(3,142) (1,265)(5,396) (25,839)—(5,692)(164) (32,586)

0.1
0.1

5.2
1.9

17.1
47.3

—
56.6

0.4
1.9

660

—

291,559

(209)

(37)

(329)

—

(575)

0.1

0.3

49.8

—

0.2

205

—

—

563,852

(50)

(1)

—

—

(51)

0.0

0.5

—

—

0.0

2,296,216

12,497396—

2,309,109

(277)

(11)

(105)

—

(393)

0.0

0.1

26.5

—

0.0

1,929,040

47,1752,113—

1,978,328

(455)

(285)

(101)

—

(841)

0.0

0.6

4.8

—

0.0

1,416,939
381,803

19,362
25,661

1,742
371

—
—

1,438,043
407,835

(25)
(399)

(1)
(273)

—
(101)

—
—

(26)
(773)

0.0
0.1

0.0
1.1

—
27.2

—
—

0.0
0.2

130,298

2,152

—

—

132,450

(31)

(11)

—

—

(42)

0.0

0.5

—

—

0.0

42,828

3,244

253

—

46,325

(20)

(10)

(24)

—

(54)

0.0

0.3

9.5

—

0.1

4,654
33,169

6
3,131

—
253

—
—

4,660
36,553

—
(19)

—
(10)

—
(24)

—
—

—
(53)

—
0.1

—
0.3

—
9.5

—
—

—
0.1

5,005

107

—

—

5,112

(1)

—

—

—

(1)

—

—

—

—

0.02

8,012,214415,598

65,441290

8,493,543(3,483)(164) (40,192)

0.0

2.1

42.3

56.6

0.5

HK$m HK$m(8,882) (27,663)

Total

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, analysed
between less than 30 DPD and greater than 30 DPD, and therefore presents those amounts classified as stage 2 due to ageing (30 DPD) andthose identified at an earlier stage (less than 30 DPD).
Stage 2 days past due analysis for loans and advances to customers(Audited)

At 31 Dec 2023
Loans and advances tocustomers at amortised cost
– personal– corporate and commercial– non-bank financial
institutions

Gross carrying amountofofofwhich:
which:
which:
Stage
Up-to1 to 29 30 and >2
date
DPD1,2
DPD1,2
HK$m
HK$m
HK$m
HK$m

Allowance for ECLofofofwhich: which:which:
Stage Up-to- 1 to 29 30 and >2
date
DPD1,2
DPD1,2
HK$m
HK$m
HK$m
HK$m

352,477

341,171

7,436

3,870

(8,575)(7,844)(299)

60,473
280,699

50,725279,144

6,289
1,146

3,459
409

(3,142)(5,396)(2,507)(5,300)

(220)
(79)

11,305

11,302

1

2

(37)

(37)

—

Stage
2

ECL coverage %ofofofwhich: which:which:
Up-to- 1 to 29 30 and >
date
DPD
DPD

%

%

%

%

(432)

2.4

2.3

4.0

11.2

(415)
(17)

5.2
1.9

4.9
1.9

3.5
6.9

12.0
4.2

—

0.3

0.3

—

—

1 Days past due ('DPD').
2 The DPD 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 2023

39

Risk

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector(continued) 4(Audited)
Gross carrying/nominal amount1
Stage
Stage 1 Stage 2
3 POCI
HK$m
HK$m HK$m HK$m
Loans andadvances tocustomers– personal– corporate2– financial
institutions3
Loans andadvances to
banks
Other
financialassetsLoans andother creditrelated
commitments– personal– corporate2– financial
institutions3
Financialguarantee– personal– corporate2– financial
institutions3
At 31 Dec
2022

Stage
Total
1
HK$m HK$m

Allowance for ECLStage Stage
2
3 POCI
HK$m HK$m HK$m

Total
HK$m

Stage
1

ECL coverage %Stage Stage
2
3 POCI

Total

%

%

%

%

%

3,209,940

461,665

62,760622

3,734,987(2,727) (11,186) (25,815)(191)(39,919)

0.1

2.4

41.1

30.5

1.1

1,447,851
1,484,030

67,809369,973

8,705
53,141—620

1,524,365
1,907,764(1,076)(1,390)—(189)(5,354)(33,969)

0.1
0.1

4.2
2.2

16.7
45.8

—
30.5

0.4
1.8

278,059

23,883914

2302,858

(261)

(325)

(8)

(2)

(596)

0.1

1.4

0.9

100.0

0.2

514,442

1,448

—

—

515,890

(38)

(5)

—

—

(43)

0.0

0.3

—

—

0.0

2,288,775

14,414464

12,303,654

(163)

(40)

(59)

—

(262)

0.0

0.3

12.7

—

0.0

1,821,355

65,2885,758—

1,892,401

(427)

(397)

(40)

—

(864)

0.0

0.6

0.7

—

0.0

1,321,908
383,717

22,72139,191

4,940
818

—
—

1,349,569
423,726

(18)
(394)

(1)
(389)

—
(40)

—
—

(19)
(823)

0.0
0.1

0.0
1.0

—
4.8

—
—

0.0
0.2

115,730

3,376

—

—

119,106

(15)

(7)

—

—

(22)

0.0

0.2

—

—

0.0

30,738

4,840

68

—

35,646

(18)

(17)

(28)

—

(63)

0.1

0.4

41.2

—

0.2

4,176
24,093

6
4,483

1
67

—
—

4,183
28,643

—
(18)

—
(17)

—
(28)

—
—

—
(63)

—
0.1

—
0.4

—
41.2

—
—

—
0.2

2,469

351

—

—

2,820

—

—

—

—

—

—

—

—

—

—

7,865,250

547,655

69,050623

8,482,578(3,373) (11,645) (25,942)(191)(41,151)

0.0

2.1

37.6

30.4

0.5

(2,822) (1,456)(8,039) (24,351)

The above table does not include balances due from Group companies.
1
2
3
4

Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
Includes corporate and commercial.
Includes non-bank financial institutions.
From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

Stage 2 days past due analysis for loans and advances to customers (continued)3(Audited)
Gross carrying amountAt 31 Dec 2022
Loans and advances to customers at
amortised cost
– personal– corporate and commercial– non-bank financial institutions

Allowance for ECL

ECL coverage %ofwhich:
Up-toStage 2
date

of
of
which:
which:
1 to 29 30 and >DPD1,2
DPD1,2 Stage 2ofwhich:
Up-todateofofofwhich:
which:
which:
1 to 29
30 andUp-toDPD1,2 > DPD1,2 Stage 2
date

HK$m HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

%

461,665 449,786

8,806

3,073

(11,186) (10,635)

(196)

(355)

67,809 58,005
369,973 368,023
23,883 23,758

7,192
1,491
123

2,612
459
2

(2,822)(8,039)
(325)

(170)
(26)
—

(348)
(7)
—

(2,304)(8,006)(325)ofwhich:
1 to 29
DPD

ofwhich:
30 and
> DPD

%

%

%

2.4

2.4

2.2

11.6

4.2
2.2
1.4

4.0
2.2
1.4

2.4
1.7
—

13.3
1.5
—

1 Days past due ('DPD').
2 The DPD amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.
3 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

40

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Credit exposure(Audited)

Maximum exposure to credit riskThis section provides information on the maximum exposure to credit risk associated with balance sheet items as well as loan and other creditrelated 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 (unlesssuch enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net
exposure to credit risk, and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet,the maximum exposure to credit risk equals their carrying amount and is net of allowance for ECL. For financial guarantees and other guarantees
granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related
commitments, it is generally the full amount of the committed facilities.

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 residential properties, collateral held in theform of financial instruments that are not held on the balance sheet
and short positions 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 54-57.

Maximum exposure to credit risk before collateral held or other credit enhancements

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

2023

20221

HK$m

HK$m

232,987
22,049328,304
565,660
409,253484,593
831,186
563,801
3,557,076
2,023,263
158,592
275,917
9,452,681
3,845,103
434,030
3,411,073
13,297,784

232,740
28,557341,354435,358
502,877
466,312927,976
515,847
3,695,068
1,742,582
140,487
260,616
9,289,774
3,587,491
396,491
3,191,000
12,877,265

Total exposure to credit risk remained broadly unchanged in 2023 with loans and advances continuing to be the largest element.
1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

Credit deterioration of financial instruments
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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

41

Risk

Measurement uncertainty and sensitivity analysis of ECL estimates(Audited)
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 tocredit risk models to estimate future credit losses, and probabilityweight the results to determine an unbiased ECL estimate.
Management assessed the current economic environment, reviewed
the latest economic forecasts and discussed key risks before
selecting the economic scenarios and their weightings.
Scenarios were constructed to reflect the latest geopolitical risks andmacroeconomic developments, including the Israel-Hamas war andsubsequent disruptions in the Red Sea, and current Inflation andmonetary policy expectations.
Management judgemental adjustments are used where modelled
ECL does not fully reflect the identified risks and related uncertainty,
or to capture significant late breaking events.
At 31 December 2023, there was an overall reduction in management
judgemental adjustments compared with 31 December 2022.

Methodology

Description of economic scenarios
The economic assumptions presented in this section have been
formed by HSBC with reference to external forecasts and estimates,
specifically for the purpose of calculating ECL.
Forecasts remain subject to uncertainty and variability. Outer
scenarios are constructed so that they capture risks that could alter
the trajectory of the economy and are designed to encompass thepotential crystallisation of number of key macro-financial risks.
In our key markets, Central scenario forecasts remained broadly
stable in the fourth quarter of 2023. The key exception was withregard to monetary policy, where expectations for interest rate cuts
were brought forward. There continues to be expectations that 2024
will be a period of below trend growth, with inflation remaining above
central bank targets.
At the end of 2023, risks to the economic outlook included a numberof significant geopolitical issues. Within our downside scenarios, theeconomic consequences from the crystallisation of those risks arecaptured by higher commodity and goods prices, the re-accelerationof inflation, a further rise in interest rates and a global recession.

At 31 December 2023, four scenarios were used to capture the latest
economic expectations and to articulate management’s view of therange of risks and potential outcomes. Each scenario is updated withthe latest economic forecasts and estimates every quarter.

The scenarios used to calculate ECL in the Annual Report andAccounts 2023 are described below.

Three scenarios, the Upside, Central and Downside are drawn fromexternal consensus forecasts, market data and distributional
estimates of the entire range of economic outcomes. The fourth
scenario, the Downside 2, represents management’s view of severe
downside risks.

HSBC’s Central scenario reflects expectations for a low growth andhigh interest rate environment across many of our key markets,
where GDP growth is expected to be lower in 2024, than in theprevious year.

The Central scenario is deemed the ‘most likely’ scenario, and usuallyattracts the largest probability weighting. It is created using
consensus forecasts, which is the average of a panel of external
forecasts.
The outer scenarios represent the tails of the distribution and are lesslikely to occur. The Consensus Upside and Downside scenarios are
created with reference to distributions for select markets that capture
forecasters’ views of the entire range of economic outcomes. In thelater years of those scenarios, projections revert to long-term
consensus trend expectations. Reversion to trend expectations isdone with reference to historically observed quarterly changes in thevalues of macroeconomic variables.
The fourth scenario, the Downside 2, is designed to represent
management’s view of severe downside risks. It is a globallyconsistent, narrative-driven scenario that explores a more extreme
economic outcome than those captured by the consensus scenarios.
In this scenario, variables do not, by design, revert to long-term trend
expectations and may instead explore alternative states of
equilibrium, where economic activity moves permanently away frompast trends.
The consensus Downside and the consensus Upside scenarios areeach constructed to be consistent with a 10% probability. The
Downside 2 is constructed to a 5% probability. The Central scenario
is assigned the remaining 75% probability. This weighting scheme isdeemed appropriate for the unbiased estimation of ECL in mostcircumstances. However, management may depart from thisprobability-based scenario weighting approach when the economic
outlook and forecasts are determined to be particularly uncertain andrisks are elevated.
At 31 December 2023, the standard approach to scenario weightings
was applied as key uncertainty and risk metrics were aligned to their
historical averages. Economic forecasts for the Central scenario haveremained stable and the dispersion within consensus forecast panels
has remained low, even as the Israel-Hamas war escalated. Risks,
including the economic consequences of a broader war in the Middle
East, are reflected in downside scenarios.
Scenarios produced to calculate ECL are aligned to HSBC’s top andemerging risks.
42

The consensus Central scenario

In mainland China and Hong Kong, growth is also expected to bemoderately slower in 2024 relative to 2023. The economic boost frompost-pandemic re-opening has faded and slower global growth andlow trade volumes are expected to moderate activity. In mainland
China, the continued fall in investment in the property sector is
expected to act as a further brake on the economy, while in Hong
Kong, higher interest rates drive a further decline in property
valuations. Despite these headwinds, a steeper downturn is expected
to be avoided as authorities in mainland China are increasing fiscal
and monetary support to the economy. Fiscal expansion is anticipatedfor 2024, alongside additional credit easing.
Global GDP is expected to grow by 2.2% in 2024 in the Central
scenario, and the average rate of global GDP growth is forecast to be
2.6% over the five-year forecast period. This is below the average
growth rate over the five-year period prior to the onset of thepandemic of 2.9%.
The key features of our Central scenario are:
– GDP growth rates in our key markets are expected to slow downin 2024, followed by a moderate recovery in 2025. The key driverof weaker growth is high interest rates, which act to deter
consumption and investment. Lower trade volumes are also key
driver of weaker growth in Asia.
– In most markets, unemployment is expected rise moderately as
economic activity slows, although it remains low by historicalstandards.
– Inflation is expected to continue to fall as commodity prices
decline, supply disruptions abate, and wage growth moderates. In
mainland China, weak consumption and excess supply has caused
inflation to drop sharply, but deflation is not projected to persist.
– Weak conditions in housing markets are expected to persist
through 2024 and 2025, with high interest rates weighing on
prices in Hong Kong and subdued confidence dampening demandin mainland China.
– Challenging conditions are also forecast to continue in thecommercial property sector in a number of our key markets.
Structural changes to demand in the office segment in particularhave driven lower valuations.
– The Brent crude oil price is forecast to average around $75 perbarrel over the projection period.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

The Central scenario was created with forecasts available in lateNovember, and reviewed continually until end-December 2023. In
accordance with HSBC’s scenario framework, a probability weight of
75% has been assigned to the Central scenario across all major
markets.
The following table describes key macroeconomic variables in theconsensus Central scenario.

conditions; and de-escalation in geopolitical tensions, as the IsraelHamas and Russia-Ukraine wars move towards conclusions, and the
US-China relationship improves.
The following table describes key macroeconomic variables in theconsensus Upside scenario.
Consensus Upside scenario 2024-2028 (as at 4Q23)

Central scenario 2024-2028 (as at 4Q23)

Hong Kong
Hong
Kong

Mainland
China

%

%

2.6
2.7
2.6
2.6
2.6
2.6

4.5
4.4
4.3
3.8
3.9
4.2

3.0
3.0
3.2
3.2
3.2
3.1

5.2
5.1
5.1
5.1
5.1
5.1

2024
2025
2026
2027
2028
5 year average1
Inflation rate (annual average growth rate)
2024
2025
2026
2027
2028
5 year average1
Central bank policy rate (annual average, %)

(6.6)
(0.7)
2.6
2.8
3.0
0.2

(0.6)
1.1
2.6
4.0
4.5
2.3

2.1
2.1
2.2
2.4
2.4
2.2

1.8
2.0
2.1
2.0
2.0
2.0

2024
2025
2026
2027
2028
5 year average1

5.4
4.4
4.1
4.1
4.1
4.4

4.1
4.2
4.4
4.6
4.8
4.4

GDP growth (annual average rate)
2024
2025
2026
2027
2028
5 year average1
Unemployment rate
2024
2025
2026
2027
2028
5 year average1
House price growth (annual average rate)

1 The five-year average is calculated over a projected period of 20
quarters from 1Q24 to 4Q28.

GDP level (%, start-to-peak)1
Unemployment rate (%, min)2
House price index (%, start-to-peak)1
Inflation rate (YoY % change, min)3
Central bank policy rate (%, Min)2

Mainland
China

%

%

21.8 (4Q28)
2.4 (3Q24)
17.9 (4Q28)
0.3 (4Q24)
4.1 (1Q27)

30.4 (4Q28)
4.8 (4Q25)
19.7 (4Q28)
0.6 (3Q24)
4.0 (2Q24)

1 Cumulative change to the highest level of the series during the
20-quarter projection.
2 The lowest projected unemployment or policy rate in the scenario.
3 The lowest projected year-on-year percentage change in inflation in the
scenario.

Downside scenarios
Downside scenarios explore the intensification and crystallisation of anumber of key economic and financial risks. These include an
escalation of geopolitical tensions escalate, which disrupt key
commodity and goods markets, causing inflation and interest rates torise, and creating a global recession.
As the geopolitical environment remains volatile and complex, risks
include:– a broader and more prolonged conflict in the Middle East that
undermines confidence, drives an increase in global energy costs
and reduces trade and investment;– a potential escalation in the Russia-Ukraine war, which expands
beyond Ukraine’s borders, and further disrupts energy, fertiliser
and food supplies; and– continued differences between the US and China, which could
affect economic confidence, the global goods trade and supply
chains for critical technologies.
High inflation and higher interest rates also remain key risks. Should
geopolitical tensions escalate, energy and food prices could rise andincrease pressure on household budgets and firms’ costs.
A wage-price spiral, triggered by higher inflation and labour supply
shortages could put sustained upward pressure on wages andservices prices, aggravating cost pressures and increasing thesqueeze on household real incomes and corporate margins. In turn, it
raises the risk of a more forceful policy response from central banks,a steeper trajectory for interest rates, significantly higher defaults
and, ultimately, a deep economic recession.

The consensus Upside scenario

The consensus Downside scenario

Compared with the Central scenario, the consensus Upside scenario
features stronger economic activity in the near term, before
converging to long-run trend expectations. It also incorporates afaster fall in the rate of inflation than incorporated in the Central
scenario.

In the consensus Downside scenario, economic activity is weakercompared with the Central scenario. In this scenario, GDP declines,
unemployment rates rise, and asset prices fall. The scenario features
an escalation of geopolitical tensions, which causes a rise in inflation,
as supply chain constraints intensify and energy prices rise. The
scenario also features a temporary increase in interest rates above
the Central scenario, before the effects of weaker consumption
demand begin to dominate and commodity prices and inflation fall
again.

The scenario is consistent with a number of key upside risk themes.
These include a faster fall in the rate of inflation that allows central
banks to reduce interest rates more quickly; an easing in financial

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

43

Risk

The following table describes key macroeconomic variables in theconsensus Downside scenario.

consensus Downside scenario is assigned 10%. The Downside 2 isassigned 5% weighting.

Consensus Downside scenario 2024-2028 (as at 4Q23)

In support of the decision, it was noted that in mainland China recent
policy announcements suggest fiscal and monetary stimulus will
increase significantly through 2024. This suggests that there will be
increased official support to economic headwinds, which would
reduce the uncertainty attached to current forecasts.

Hong Kong
GDP level (%, start-to-trough)1
Unemployment rate (%, max)2House price index (%, start-to-trough)1
Inflation rate (YoY % change, max)3Central bank policy rate (%, Max)2

Mainland
China

%

%

(1.6) (3Q25)
4.7 (4Q25)(9.6) (4Q24)
3.8 (3Q24)
6.0 (1Q24)(1.5) (1Q24)
6.9 (4Q25)(7.1) (3Q25)
3.5 (4Q24)
4.1 (3Q24)

1 Cumulative change to the lowest level of the series during the 20quarter projection.
2 The highest projected unemployment or policy rate in the scenario.
3 The highest projected year-on-year percentage change in inflation in
the scenario.

The Downside 2 scenario features a deep global recession andreflects management’s view of the tail of the economic distribution. It
incorporates the crystallisation of a number of risks simultaneously,
including a further escalation of geopolitical crises globally, which
creates severe supply disruptions to goods and energy markets. In
the scenario, as inflation surges and central banks tighten monetary
policy further, confidence evaporates. However, this impulse is
expected to prove short-lived, as recession takes hold, causing
commodity prices to correct sharply and global price inflation to fall.
The following table describes key macroeconomic variables in the
Downside 2 scenario.

Standard
weights

Hong
Kong

Mainland
China

10.0
75.0
10.0
5.0

10.0
75.0
10.0
5.0

10.0
75.0
10.0
5.0

At 31 December 2023, the consensus Upside and Central scenarios
for all markets had a combined weighting of 85%.

Critical estimates and judgements
The calculation of ECL under HKFRS 9 involves significant
judgements, assumptions and estimates at 31 December 2023.
These included:– the selection of weights to apply to the economic scenarios given
the rapidly changing economic conditions and the inherent
uncertainty of the underlying forecast under each scenario;– the selection of scenarios to consider given the changing nature ofmacroeconomic and geopolitical risks that the Bank and wider
economy faces; andDownside 2 scenario 2024-2028 (as at 4Q23)

GDP level (%, start-to-trough)1
Unemployment rate (%, max)2House price index (%, start-to-trough)1
Inflation rate (YoY % change, max)3Central bank policy rate (%, Max)2

Scenario weightings, %4Q23
UpsideCentralDownside
Downside 2

Downside 2 scenario

Hong Kong

The following table describes the probabilities assigned in eachscenario.

Mainland
China

%

%

(8.2) (1Q25)
6.4 (4Q24)(32.8) (3Q26)
4.1 (3Q24)
6.4 (1Q24)(6.4) (1Q25)
7.0 (4Q25)(25.5) (4Q25)
4.1 (4Q24)
4.8 (3Q24)

1 Cumulative change to the lowest level of the series during the 20quarter projection.
2 The highest projected unemployment/policy rate in the scenario.
3 The highest projected year-on-year percentage change in inflation in
the scenario.

Scenario weighting
In reviewing the economic environment, the level of risk anduncertainty, management has considered both global and countryspecific factors.
Key considerations around uncertainty attached to the Central
scenario projections in the fourth quarter of 2023 focused on:– the risk that the Israel-Hamas war escalates and affects economic
expectations;– the lagged impact of elevated interest rates on household
finances and businesses and the implications of recent changes tomonetary policy expectations on growth and employment; and– the outlook for real estate in our key markets, namely Hong Kongand mainland China.

– estimating the economic effects of those scenarios on ECL,
particularly sector and portfolio specific risks and the uncertainty
of default and recovery experience under all scenarios.

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 2023, and management
judgemental adjustments were still required to support modelled
outcomes.
We have developed globally consistent methodologies for theapplication of forward economic guidance into the calculation of ECL
for wholesale and retail credit risk. These standard approaches aredescribed below, followed by the management judgemental
adjustments made, including those to reflect the circumstances
experienced in 2023.
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 particular industry ina country. For LGD calculations we consider the correlation of
forward economic guidance to collateral values and realisation rates
for a particular country and industry. PDs and LGDs are estimated forthe entire term structure of each instrument.

Although these risk factors remain significant, management assessedthat they were adequately reflected in scenarios, at the standard
weighting. It was noted that despite the escalation of geopolitical riskin the Middle East, economic forecasts had remained stable, anddispersion of forecasts around the consensus were either stable, or
have moved lower. Financial market measures of volatility also
remained low through the fourth quarter of 2023.

For impaired loans, ECL estimates are derived based on discounted
cash flow (‘DCF’) calculations for internal forward-looking scenarios
specific to individual company circumstances [see page 96].
Probability-weighted outcomes are applied, and depending onmateriality and status of the borrower, the number of scenarios
considered will change. Where relevant for the case being assessed,
forward economic guidance is incorporated as part of thesescenarios. LGD-driven proxy and modelled estimates are used forcertain less material cases.

This has led management to assign scenario probabilities that arealigned to the standard scenario framework. This entailed assigning a
75% probability weighting to the Central scenario in our major
markets. The consensus Upside is assigned a 10% weighting and theFor our retail portfolios, the models are predominantly based on
historical observations and correlations with default rates andcollateral values. For PD, the impact of economic scenarios ismodelled for each portfolio, leveraging historical relationships

44

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

between default rates and macro-economic variables. These areincluded within HKFRS 9 ECL estimates using either economic
response models or models which contain internal, external andmacro-economic variables. The macro-economic impact on PD ismodelled over the period equal to the remaining maturity of theunderlying assets. For LGD, the impact is modelled for mortgage
portfolios by forecasting future loan-to-value profiles for the remaining
maturity of the asset, leveraging national level house price index
forecast and applying the corresponding LGD expectation relative tothe updated forecast collateral values. Management judgemental
adjustments are described below.

Management judgemental adjustments
In the context of HKFRS 9, management judgemental adjustments
are typically short-term increases or decreases to the modelled ECL
at either a customer, segment or portfolio level where management
believes ECL results do not sufficiently reflect the credit risk/
expected credit losses at the reporting date. These can relate to risks
or uncertainties which are not reflected in the models and/or to anylate breaking events with significant uncertainty, subject tomanagement review and challenge.
This includes refining model inputs and outputs and using
adjustments to ECL based on management judgement andquantitative analysis for impacts that are difficult to model.
The effects of management judgmental adjustments are considered
for both balances and ECL when determining whether or not asignificant increase in credit risk has occurred and is allocated to astage where appropriate. This is in accordance with the internal
adjustments framework.
Management judgmental adjustments are reviewed under thegovernance process for HKFRS 9 (as detailed in the section 'Credit
risk management' on page 35). Review and challenge focuses on therationale and quantum of the adjustments with a further review
carried out by the second line of defence where significant. For somemanagement judgemental adjustments, internal frameworks
establish the conditions under which these adjustments should nolonger be required and as such are considered as part of thegovernance process. This internal governance process allows
management judgemental adjustments to be reviewed regularly and,
where possible, to reduce the reliance on these through model
recalibration or redevelopment, as appropriate.
The drivers of management judgemental adjustments continue to
evolve with the economic environment, and as new risks emerge.
In addition to management judgemental adjustments there are also
‘Other adjustments’ which are made to address process limitations
and data/model deficiencies.
‘Management judgemental adjustments’ and ‘Other adjustments’constitute the total value of adjustments to modelled ECL.
At 31 December 2023, management judgement adjustments reduced
by HK$1.7bn compared with 31 December 2022. For the wholesale
portfolios this was due to modelled outcomes better reflecting the
key risks at 31 December 2023. For retail there was an increase inother credit judgements due to the potential delayed impact of
economic scenarios on unsecured portfolio defaults.
Management judgemental adjustments made in estimating the
scenario-weighted reported ECL at 31 December 2023 are set out inthe following table.
Management judgemental adjustments to ECL as at
31 December 20231

4.9

RetailWholesale2

Total

HK$bn

HK$bn

HK$bn

Modelled ECL (A)3
Banks, sovereigns, government entities
and low-risk counterparties

5.3

8.1

13.4

—

0.2

0.2

Corporate lending adjustments
Inflation related adjustments
Other credit judgements
Total management judgemental
adjustments (B)4Other adjustments (C)5
Final ECL (A + B + C)6

—
—
0.5

2.1
—
—

2.1
—
0.5

0.5

2.3

0.1
5.9

1.0
11.4

2.8
1.1
17.3

1 Management judgemental adjustments presented in the table reflectincreases or (decreases) to ECL, respectively.
2 The wholesale portfolio corresponds to adjustments to the performing
portfolio (stage 1 and stage 2).
3 (A) refers to probability-weighted allowance for ECL before any
adjustments are applied.
4 (B) refers to adjustments that are applied where management believes
allowance for ECL does not sufficiently reflect the credit risk/ expectedcredit losses of any given portfolio at the reporting date. These canrelate to risks or uncertainties that are not reflected in the model and/or to any late breaking events.
5 (C) refers to adjustments made to allowance for ECL to address
process limitations and data / model deficiencies.
6 As presented within our internal credit risk governance (see page 36).

Management judgemental adjustments at 31 December 2023 were adecrease of ECL of HK$2.0bn for the wholesale portfolio and anincrease to ECL of HK$0.3bn for the retail portfolio.
At 31 December 2023, wholesale management judgemental
adjustments were an ECL increase of HK$0.3bn (31 December 2022:
HK$2.3bn increase).
Management judgmental adjustments to corporate exposuresincreased ECL by HK$0.3bn at 31 December 2023 (31 December
2022: HK$2.1bn increase) mostly due to management judgements toreflect heightened uncertainty in specific sectors and geographies,
including adjustments to exposures to the real estate sector inmainland China. The decrease in adjustments to ECL compared with
31 December 2022 is attributed to a crystallisation of existing risks atthat date through downgrades, and an improved reflection of
emerging risks in macroeconomic scenarios and modelled outcomes.
At 31 December 2023, retail management judgemental adjustments
increased ECL by HK$0.8bn (31 December 2022: HK$0.5bn increase).
The increase in adjustments to ECL compared with 31 December
2022 were primarily due to the increase in management judgemental
adjustments in other credit judgements (detailed below).
– Management judgemental adjustments in relation to other credit
judgements increased ECL by HK$0.74bn (31 December 2022:
HK$0.5bn). These adjustments were primarily in relation tocountry-specific risks related to future macroeconomic conditions.
– Management judgemental adjustments in relation to inflation
increased ECL by HK$0.04bn (31 December 2022: HK$0.05bn).
These adjustments addressed where increasing inflation andinterest rates result in affordability risks that were not fully
captured by the modelled output.

Economic scenarios sensitivity analysis of ECL estimates

Retail Wholesale2
$bn
HK$bn
Modelled ECL (A)3
Banks, sovereigns, government entities
and low-risk counterparties
Corporate lending adjustments
Inflation related adjustments
Other credit judgements
Total management judgemental
adjustments (B)4Other adjustments (C)5
Final ECL (A + B + C)6

Management judgemental adjustments to ECL as at
31 December 20221

7.7

Total
HK$bn
12.6

—

—

—

—
—
0.8

0.3
—
—

0.3
—
0.8

0.8

0.3

1.1

—
5.7

(0.1)
7.9

(0.1)
13.6

Management considered the sensitivity of the ECL outcome against
the economic forecasts as part of the ECL governance process byrecalculating the ECL under each scenario described above forselected portfolios, applying a 100% weighting to each scenario in
turn. The weighting is reflected in both the determination of asignificant increase in credit risk and the measurement of theresulting ECL. The ECL calculated for the Upside and Downside
scenarios should not be taken to represent the upper and lower limitsof possible ECL outcomes. The impact of defaults that might occur inthe future under different economic scenarios is captured byrecalculating ECL for loans at the balance sheet date.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

45

Risk

There is a particularly high degree of estimation uncertainty innumbers representing tail risk scenarios when assigned a 100%weighting.

HKFRS 9 ECL sensitivity to future economic conditions1

For wholesale credit risk exposures, the sensitivity analysis excludes
ECL and financial instruments related to defaulted (stage 3) obligors.
The measurement of stage 3 ECL is relatively more sensitive to credit
factors specific to the obligor than future economic scenarios, andtherefore the effect of macroeconomic factors are not necessarily the
key consideration when performing individual assessments of ECL
for obligors in default. Loans to defaulted obligors are a small portionof the overall wholesale lending exposure, even if representing the
majority of the allowance for ECL. Due to the range and specificity of
the credit factors to which the ECL is sensitive, it is not possible toprovide a meaningful alternative sensitivity analysis for a consistent
set of risks across all defaulted obligors.

ECL coverage of financial instruments subject
to significant measurement uncertainty at
31 December 20222
Reported ECL
Consensus scenarios
Central scenario
Upside scenario
Downside scenario
Alternative scenarios

For retail mortgage 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 to macroeconomic variables.

Wholesale and retail sensitivity
The wholesale and retail sensitivity tables present the 100%weighted results. These exclude portfolios held by the insurance
business and small portfolios, and as such cannot be directlycompared with personal and wholesale lending presented in othercredit risk tables. In both the wholesale and retail analysis, thecomparative period results for Downside 2 scenarios are also notdirectly comparable with the current period, because they reflect
different risks relative to the consensus scenarios for the period end.
The wholesale and retail sensitivity analysis is stated inclusive ofmanagement judgemental adjustments, as appropriate to eachscenario.
For both retail and wholesale portfolios, the gross carrying amount offinancial instruments are the same under each scenario. For
exposures with similar risk profile and product characteristics, thesensitivity impact is therefore largely the result of changes inmacroeconomic assumptions.

Wholesale analysis

Hong Kong

Mainland
China

HK$m

HK$m

7,211

2,302

6,386
4,616
10,252
16,852

1,887
1,123
3,235
9,572

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.

Compared with 31 December 2022, the Downside 2 ECL impact was
lower in Hong Kong and mainland China, mostly due to the
crystallisation of defaults for certain high-risk exposures and decreaseof the associated downside uncertainty.

Retail analysis
HKFRS 9 ECL sensitivity to future economic conditions1

Reported Central
Upside Downside
ECL Scenario Scenario Scenario
ECL
coverage ofloans andadvances tocustomers

HK$m

HK$m

HK$m

HK$m

HK$m

At 31
December
20232
Hong Kong

3,115

2,658

2,370

4,079

8,973

HKFRS 9 ECL sensitivity to future economic conditions1

1

HKFRS 9 ECL sensitivity to future economic conditions

ECL coverage of financial instruments
subject to significant measurement
uncertainty at 31 December 20232
Reported ECL
Consensus scenarios ECL
Central scenario
Upside scenario
Downside scenario
Alternative (Downside 2) scenario ECL

Hong Kong

Mainland
China

HK$m

HK$m

4,758

2,018

4,422
3,378
6,304
10,881

Alternative(Downside2) scenario
ECL

1,697
1,106
3,237
7,384

Upside Downside
Scenario
Scenario

Alternative(Downside2) scenario
ECL

Reported
ECL

CentralScenario

ECL coverageof loans andadvances tocustomers

HK$m

HK$m

HK$m

HK$m

HK$m

At 31
December
20222
Hong Kong

2,702

2,406

1,985

4,037

6,014

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

At 31 December 2023, the most significant level of ECL sensitivity
was observed in Hong Kong driven by the relative size of the portfolio
in retail.

46

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Reconciliation of changes in gross carrying/nominal amount and allowances for loans andadvances to banks and customers, including loan commitments and financial guarantees(Unaudited)
The following disclosure provides a reconciliation by stage of thegroup’s gross carrying/nominal amount and allowances for loans andadvances to banks and customers, including loan commitments andfinancial guarantees.

example, 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.

Movements are calculated on a quarterly basis and therefore fully
capture stage movements between quarters. If movements were
calculated on a year-to-date basis they would reflect only the opening
and closing position of the financial instrument.

Changes in 'Net new and further lending/repayments' represents theimpact from volume movements within the Group’s lending portfolio
and includes ‘New financial assets originated or purchased’, ‘assets
derecognised (including final repayments)’ and ‘changes to risk
parameters – further lending/repayment’.

The transfers of financial instruments represent the impact of stagetransfers upon the gross carrying/nominal amount and associatedallowance for ECL.
The net remeasurement of ECL arising from stage transfers
represents the increase or decrease due to these transfers, for

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 1

Stage 2

Stage 3

POCI

Total

Gross
Gross
Gross
Gross
carrying/
carrying/
carrying/
carrying/
nominal Allowance nominal Allowance nominal Allowance nominal Allowanceamountfor ECL amountfor ECL amountfor ECL amountfor ECLAt 1 Jan 2023
Transfers of financial
instruments:– transfers from stage 1 tostage 2
– transfers from stage 2 tostage 1– transfers to stage 3– transfers from stage 3
Net remeasurement of ECL
arising from transfer of stage
Net new and further lending/repayments
Changes in risk parameters –credit quality
Changes to model used for
ECL calculation
Assets written off
Credit-related modifications
that resulted in
derecognition
Foreign exchange
OthersAt 31 Dec 2023
ECL income statement
charge for the year
Recoveries
Modification losses oncontractual cash flows that
did not result inderecognitionGrosscarrying/
nominal Allowanceamountfor ECL

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

5,574,139(3,212)533,242(11,605)

68,585(25,881)

623

(191)

6,176,589(40,889)(64,485)(1,974)38,388

6,944

26,097(4,970)

—

—

—

—

(422,711)

888

422,711

(888)

—

—

—

—

—

—

361,014(2,808)(361,014)

2,808

—

—

—

—

—

—

(4,009)
1,221

85
(139)

(24,460)
1,151

5,289
(265)

28,469(2,372)(5,374)
404

—
—

—
—

—
—

—
—

—

1,147

—

(1,175)

—

(218)

—

—

—

(246)

213,347(222)(166,049)

2,286(15,378)

3,604

(332)

15

31,588

5,683

—

1,143

—

(5,451)—(14,174)

—

208

—

(18,274)

—

(121)

—

109

—

43

—

—

—

31

—

—

—

—

(13,856)

13,856(2)

2(13,858)

13,858

—

—

—

—

—

—

—

—

—

—

(4,522)(5,800)5,712,679

21
10(3,208)(2,366)(116)
403,09912
9(8,871)(341)(57)
65,050173
10(27,557)

—
—
289

—
(197)
(163)

(7,229)(5,973)6,181,117

206
(168)
(39,799)(12,806)864(6)

OthersTotal ECL income
statement charge for theyear(1,118)(13,066)

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

47

Risk

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)
At 31 Dec 2023
Year ended 31 Dec 2023
Gross carrying/nominal amount Allowance for ECL
ECL charge
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
Summary of financial instruments to which the impairment requirements in
HKFRS 9 are applied/Summary consolidated income statement

6,181,117
2,309,109
3,317
N/A
131,071(39,799)
(393)
—
N/A
—

(13,066)
(44)
—
(106)
—

8,624,614(40,192)(13,216)

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

1,404,323
N/A(93)(40,285)373(12,843)

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)1(Audited)Stage 1

At 1 Jan 2022
Transfers of financial– transfers from stage 1 tostage 2
– transfers from stage 2 tostage 1– transfers to stage 3– transfers from stage 3
Net remeasurement of ECL
arising from transfer of stage
Net new and further lending/repayment
Changes in risk parameters –credit quality
Changes to model used for
ECL calculation
Assets written off
Credit-related modifications
that resulted in
derecognition
Foreign exchange
OthersAt 31 Dec 2022
ECL income statement
charge for the year
Recoveries
OthersTotal ECL income statement
charge for the year

Stage 2Grosscarrying/
nominalamountAllowance
for ECL

Stage 3Grosscarrying/
nominalamountAllowance
for ECLGross
carrying/
nominalamount

POCI

Total

Allowance
for ECLGross
carrying/
nominalamountAllowance
for ECLGross
carrying/
nominal Allowanceamountfor ECL

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

5,575,693(246,161)(2,857)(1,866)

528,888
203,391(9,721)
7,011

41,64042,770(19,689)(5,145)

1,558
—

(334)
—

6,147,779—(32,601)—(724,574)

1,067

724,574(1,067)

—

—

—

—

—

—

483,362(2,721)(483,362)

2,721

—

—

—

—

—

—

(7,041)
2,092

10
(222)

(39,496)
1,675

5,589
(232)

46,537(3,767)(5,599)
454

—
—

—
—

—
—

—
—

—

1,353

—

(1,601)

—

(373)

—

—

—

(621)

371,013(907)(176,230)

1,341(7,372)

1,981

(858)

2

186,553

2,417

—

1,074

—

(8,831)—(10,412)

—

214

—

(17,955)

—

(31)

—

11

—

(12)

—

—

—

(32)

—

—

—

—

(7,191)

7,191

(78)

78

(7,269)

7,269

—

—

—

—

(241)

60

—

—

(241)

60

(126,629)
223
5,574,139

32(10)(3,212)(22,807)—533,242180
5(11,605)(1,024)
3
68,585526(8)(25,881)

1
—
623

(1)
(150)
(191)

(150,459)
226
6,176,589

737
(163)
(40,889)(16,191)
879(563)(15,875)

At 31 Dec 2022
Year ended 31 Dec 2022
Gross carrying/nominal amount
Allowance for ECL
ECL charge
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
Summary of financial instruments to which the impairment requirements in HKFRS 9
are applied/Summary consolidated income statement

6,176,589
2,303,654
2,335
N/A
129,341(40,889)
(262)
—
N/A
—

(15,875)
(83)
—
(81)
—

8,611,919(41,151)(16,039)

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

1,232,817
N/A

(329)
(41,480)(332)(16,371)

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

48

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Credit quality
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 is apoint-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 for the
majority of portfolios. Accordingly, for non-credit-impaired financial
instruments, there is no direct relationship between the credit quality

assessment and stage 1 and 2, although typically the lower credit
quality bands exhibit a higher proportion in stage 2.
The five credit quality classifications provided below each encompass
a range of granular internal credit rating grades assigned to wholesale
and personal lending businesses and the external ratings attributedby external agencies to debt securities, as shown in the table on page36.

Distribution of financial instruments by credit quality at 31 December 2023
(Audited)

In-scope for HKFRS 9 impairment
Loans and advances to customers held at
amortised cost
– personal– corporate and commercial– non-bank financial institutions
Loans and advances to banks
Cash and balances at central banks
Items in the course of collection from otherbanks
Hong Kong Government certificates ofindebtedness
Reverse repurchase agreements – non-trading
Financial investments held at amortised cost
Prepayments, accrued income and otherassetsDebt instruments measured at fair value
through other comprehensive income1
Out-of-scope for HKFRS 9 impairment
Trading assets
Other financial assets designated andotherwise mandatorily measured at fair value
through profit or loss
Derivatives
Total gross carrying amount on-balance
sheet
Percentage of total credit quality
Loans and other credit related commitments
Financial guarantee and similar contracts
Total nominal off-balance sheet amount

StrongGross carrying/notional amount
SubCredit
Good Satisfactory
standard
impaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

2,074,847

688,167

698,123

71,82362,9693,595,929(38,853)

3,557,076

1,336,990
571,741
166,116
553,184
227,259

128,108
499,10960,9507,768
5,607

85,097549,653
63,373
758
122

5,420
65,943
460
2,142
—

7,406
54,903660——

1,563,021
1,741,349
291,559
563,852
232,988(5,692)(32,586)
(575)
(51)
(1)

1,557,329
1,708,763
290,984
563,801
232,987

22,049————22,049—22,049328,304

—

—

—

—

328,304—

328,304

478,404
586,404

138,719
29,796

214,004
2,792

59
3

—
—

831,186
618,995—(57)

831,186
618,938

169,10365,36539,6101,113

396

275,587(335)

275,252

1,317,382

69,91826,535462

39

1,414,336—(93)

1,414,243—

464,264

69,24030,605529

1,022

565,660—

565,660

385,170

79,763

14,34639

49479,367—

479,367

247,40938,615

9,865

358

—

296,247—

296,247

6,853,779

1,192,958

1,036,760

76,52864,4759,224,500(39,390)

9,185,110

74%
2,059,689
186,6292,246,318

13%
793,540
142,828
936,36811%
525,376
72,758598,134

1%
29,092
3,339
32,431

1%
3,295
883
4,178

100%
3,410,992
406,437
3,817,429

(841)
(405)
(1,246)3,410,151
406,032
3,816,183

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 2023

49

Risk

Distribution of financial instruments by credit quality at 31 December 2022 (continued)2(Audited)

In-scope for HKFRS 9 impairment
Loans and advances to customers held at
amortised cost
– personal– corporate and commercial– non-bank financial institutions
Loans and advances to banks
Cash and balances at central banks
Items in the course of collection from otherbanks
Hong Kong Government certificates ofindebtedness
Reverse repurchase agreements – non-trading
Financial investments held at amortised cost
Prepayments, accrued income and other assets
Debt instruments measured at fair value
through other comprehensive income1
Out-of-scope for HKFRS 9 impairment
Trading assets
Other financial assets designated andotherwise mandatorily measured at fair value
through profit or loss
Derivatives
Total gross carrying amount on-balance sheet
Percentage of total credit quality
Loans and other credit related commitments
Financial guarantee and similar contracts
Total nominal off-balance sheet amount

StrongGross carrying/notional amount2
SubCredit
Good Satisfactory
standard
impaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

2,092,001

767,388734,536

77,68063,382

3,734,987(39,919)

3,695,068

1,290,516
640,240
161,245
502,021
226,479

143,934
539,936
83,5189,013
6,047

75,910602,436
56,190
1,368
222

5,300
71,391
989
3,488
—

8,705
53,761916——

1,524,365
1,907,764
302,858
515,890
232,748(5,354)(33,969)
(596)
(43)
(8)

1,519,011
1,873,795
302,262
515,847
232,740

28,557————28,557—28,557341,354

—

—

—

—

341,354—341,354503,956
482,378
168,757

132,390
24,12359,634

291,608
3,308
33,578

—
2
796

22
—
443

927,976
509,811
263,208

—
(46)
(208)

927,976
509,765
263,000

1,188,399

51,597

15,2811,030

391,256,346—(329)

1,256,017—

335,477

65,18832,910788

999

435,362—435,362

367,285

82,98011,46126

3461,755—

461,755

270,028
6,506,692
72%
1,924,469
171,761
2,096,230

52,4671,250,827
14%
744,111
133,701
877,812

11,351
1,135,623
12%
484,054
62,022546,076

823
84,633
1%
29,892
5,459
35,351

5
64,893
1%
7,934
553
8,487

334,674
9,042,668
100%
3,190,460
373,496
3,563,956—(40,553)334,674
9,002,115

(864)
(293)
(1,157)3,189,596
373,2033,562,799

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.
2 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

50

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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

Loans and advances to banks– stage 1– stage 2– stage 3– POCI
Loans and advances to customers at amortised cost– stage 1– stage 2– stage 3– POCI
Other financial assets measured at amortised cost– stage 1– stage 2– stage 3– POCI
Loans and other credit-related commitments– stage 1– stage 2– stage 3– POCI
Financial guarantees– stage 1– stage 2– stage 3– POCIAt 31 Dec 2023
Debt instruments at FVOCI1– stage 1– stage 2– stage 3– POCIAt 31 Dec 2023

StrongGross carrying/notional amount
SubCredit
Good Satisfactory standard impaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

553,184
7,768
553,088
7,737
96
31
—
—
—
—
2,074,847
688,167
2,051,644
624,138
23,20364,029————1,811,523
239,487
1,810,577
233,634
946
5,853
—
—
—
—
1,498,322
320,777
1,495,419
303,188
2,903
17,589————23,19012,72323,132
11,992
58
731
—
—
—
—
5,961,066 1,268,922

758
758
—
—
—
698,123498,644
199,479——
256,528
251,694
4,834——
150,205
126,282
23,923
—
—
9,532
7,493
2,039
—
—
1,115,146

2,142
2,064
78
—
—
71,823
6,057
65,766
—
—
1,175
311
864
—
—
6,911
4,151
2,760
—
—
627
211
416
—
—
82,678—————62,969——62,679
290
396
—
—
396
—
2,113
—
—
2,113
—
253
—
—
253
—
65,731

563,852
563,647205——
3,595,929
3,180,483
352,477
62,679290
2,309,109
2,296,216
12,497396—
1,978,328
1,929,040
47,1752,113—
46,32542,8283,244
253—
8,493,543

(51)
(50)
(1)
—
—
(38,853)(2,681)(8,575)(27,433)
(164)
(393)
(277)
(11)
(105)
—
(841)
(455)
(285)
(101)
—
(54)
(20)
(10)
(24)
—
(40,192)

563,801
563,597204——
3,557,076
3,177,802
343,90235,246126
2,308,716
2,295,939
12,486291—
1,977,487
1,928,585
46,8902,012—
46,27142,8083,234
229—
8,453,351

26,535———26,535

—
462
—
—
462

—
—
39
—
39

1,413,835
462
39—
1,414,336

(66)
(16)
(11)
—
(93)

1,413,769
446
28—
1,414,243

1,317,382———
1,317,382

69,918———69,918The 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 2023

51

Risk

Distribution of financial instruments to which the impairment requirements in HKFRS 9 are applied, by credit quality and stage
allocation (continued) 2(Audited)

Loans and advances to banks– stage 1– stage 2– stage 3– POCI
Loans and advances to customers at amortised cost– stage 1– stage 2– stage 3– POCI
Other financial assets measured at amortised cost– stage 1– stage 2– stage 3– POCI
Loans and other credit-related commitments– stage 1– stage 2– stage 3– POCI
Financial guarantees– stage 1– stage 2– stage 3– POCIAt 31 Dec 2022
Debt instruments at FVOCI1– stage 1– stage 2– stage 3– POCIAt 31 Dec 2022

StrongGross carrying/notional amount2
SubCredit
Good Satisfactory standard impaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

502,021501,130891——
2,092,001
2,061,021
30,980——1,751,481
1,749,522
1,959——
1,421,125
1,414,708
6,417——
14,274
13,938336——
5,780,902

9,013
8,731
282
—
—
767,388
650,576
116,812——222,194
216,767
5,427——
312,185284,689
27,496——
11,643
9,994
1,649
—
—
1,322,423

1,368
1,338
30
—
—
734,536
487,558
246,978——
328,716
322,244
6,472——
142,824
116,144
26,680
—
—
8,649
6,627
2,022
—
—
1,216,093

3,488
3,243
245
—
—
77,68010,78566,895
—
—
798
242
556
—
—
10,509
5,814
4,695
—
—
1,012
179
833
—
—
93,487—————
63,382——
62,760
622
465
—
—
464
1
5,758
—
—
5,758
—
68
—
—
68
—
69,673515,890
514,4421,448——
3,734,987
3,209,940
461,665
62,760622
2,303,654
2,288,775
14,414464
11,892,401
1,821,355
65,2885,758—
35,64630,7384,840
68—
8,482,578

(43)
(38)
(5)
—
—
(39,919)(2,727)(11,186)(25,815)
(191)
(262)
(163)
(40)
(59)
—
(864)
(427)
(397)
(40)
—
(63)
(18)
(17)
(28)
—
(41,151)

515,847
514,404
1,443——
3,695,068
3,207,213
450,479
36,945431
2,303,392
2,288,612
14,374405
11,891,537
1,820,928
64,891
5,718—
35,58330,7204,823
40—8,441,427

1,188,399———
1,188,399

51,597———51,597

15,281———
15,281

—
1,030
—
—
1,030

—
—
39
—
39

1,255,277
1,030
39
—
1,256,346

(60)
(269)
—
—
(329)

1,255,217
761
39—
1,256,017

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.
2 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

52

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Mainland China commercial real estate
The following table presents the group's exposure to borrowers
classified in the CRE sector where the ultimate parent is based inmainland China, as well as all CRE exposures booked on mainland

China balance sheets. The exposures at 31 December 2023 are split
by country/territory and credit quality including allowances for ECL bystage.

Mainland China CRE exposure(Audited)
Hong Kong
Loans and advances to customers1
Guarantees issued and others2
Total mainland China CRE exposure
Distribution of mainland China CRE exposure bycredit quality– Strong– Good– Satisfactory– Sub-standard– Credit Impaired
Allowance for ECL by credit quality– Strong– Good– Satisfactory– Sub-standard– Credit Impaired
Allowance for ECLECL Stage 1
ECL Stage 2
ECL Stage 3
ECL coverage %At 31 Dec 2023
Mainland China Rest of Asia-Pacific

Total

HK$m

HK$m

HK$m

HK$m

47,133
1,993
49,126

38,410518
38,928

3,518
86
3,604

89,061
2,597
91,658

6,100
4,719
5,308
10,14222,857
49,126

13,458
7,445
13,3132,557
2,155
38,928

57
3,283
84
180
—
3,604

19,615
15,447
18,705
12,87925,01291,658

—
(2)
(21)
(518)
(13,484)(14,025)

(27)
(39)
(212)
(682)
(977)
(1,937)

—
(8)
—
(45)
—
(53)

(27)
(49)
(233)
(1,245)(14,461)(16,015)(4)(537)(13,484)(14,025)
28.5

(77)
(883)
(977)
(1,937)
5.0

(8)
(45)
—
(53)
1.5

(89)
(1,465)(14,461)(16,015)
17.5

Hong Kong
HK$m

Mainland China
HK$m

Rest of Asia-Pacific
HK$m

Total
HK$m

71,148
1,957
73,10544,8435,884
50,727

3,570
268
3,838

119,561
8,109
127,670

11,1055,431
9,896
22,50924,164
73,105

16,5108,475
17,521
6,072
2,149
50,727

638
2,543
168
349
140
3,838

28,253
16,44927,58528,93026,453
127,670

—
(2)
(153)
(3,570)(9,884)(13,609)

(39)
(60)
(637)
(326)
(816)
(1,878)

—
(5)
(3)
(14)
0
(22)

(39)
(67)
(793)
(3,910)(10,700)(15,509)(6)(3,719)(9,884)(13,609)
18.6

(69)
(993)
(816)
(1,878)
3.7

(4)
(18)
—
(22)
0.6

(79)
(4,730)(10,700)(15,509)12.1

At 31 Dec 2022

Loans and advances to customers1
Guarantees issued and others2
Total mainland China CRE exposure
Distribution of mainland China CRE exposure by credit
quality– Strong– Good– Satisfactory– Sub-standard– Credit Impaired
Allowance for ECL by credit quality– Strong– Good– Satisfactory– Sub-standard– Credit Impaired
Allowance for ECLECL Stage 1
ECL Stage 2
ECL Stage 3
ECL coverage %1 Amounts represent gross carrying amount.
2 Amounts represent nominal amount for guarantees and other contingent liabilities.

(Unaudited)
Commercial real estate financing refers to lending that focuses oncommercial development and investment in real estate and covers
commercial, residential and industrial assets. The exposures in thetable are related to companies whose primary activities are focusedon these activities. Lending is generally focused on tier 1 and 2 cities.
The table also includes financing provided to a corporate or financial

entity for the purchase or financing of a property which supports theoverall operations of the business. Such exposures are outside of ournormal definition of Commercial Real Estate, as applied elsewhere inthis report, but are provided here for a more comprehensive view ofour mainland property exposure.
The table above shows 59% (HK$54bn) of total exposure with acredit quality of 'satisfactory' or above, which was slightly higher in

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

53

Risk

proportion compared with 31 December 2022 (57%, HK$72bn). Total‘credit impaired’ exposures increased to 27% (HK$25bn) (31
December 2022: 21%, HK$26bn), reflecting sustained stress in the
China commercial real estate market, including weakness in bothproperty market fundamentals and financing conditions for borrowers
operating in this sector.
Allowances for ECL are substantially against unsecured exposures.
For secured exposures, allowances for ECL are minimal, reflecting
the nature and value of the security held.
Facilities booked in Hong Kong continued to represent the largest
proportion of mainland China commercial real estate exposures,
although total exposures reduced to HK$49bn, down HK$24bn since
31 December 2022, as a result of de-risking measures, repayments
and write-offs. This portfolio remains relatively higher risk, with 33%(31 December 2022: 36%) of exposure booked with a credit quality of‘satisfactory’ or above and 47% ‘credit impaired’ (31 December 2022:33%). At 31 December 2023, the group had allowances for ECL of
HK$14bn (31 December 2022: HK$14bn) held against mainland China
commercial real estate exposures booked in Hong Kong. ECL
coverage increased to 29% (31 December 2022: 19%), reflecting afurther credit deterioration during the year.
Approximately half of the unimpaired exposure in the Hong Kong
portfolio is lending to state-owned enterprises and relatively strong
private-owned enterprises. This is reflected in the relatively low ECL
allowance in this part of the portfolio.
Market conditions are likely to remain subdued with a protracted
recovery as sentiment and domestic residential demand remain
weak, with ongoing refinancing and liquidity risk for corporates
operating in this market. The divergence between Privately Owned
Enterprises (POE) and State Owned Enterprises (SOE) is likely tocontinue, with SOEs achieving above market sales performance andbenefitting from market share gains and better access to funding.
The group has additional exposures to mainland China commercial
real estate as a result of lending to multinational corporates booked
outside of mainland China. These are not incorporated in the table
above.

Credit-impaired loans(Audited)

Depending on its form, collateral can have a significant financial effectin mitigating our exposure to credit risk. Where there is sufficientcollateral, an expected credit loss is not recognised. This is the casefor reverse repurchase agreements and for certain loans andadvances to customers where the loan to value (‘LTV’) is very low.
Mitigants may include a charge on borrowers’ specific assets, suchas real estate or financial instruments. Other credit risk mitigants
include short positions in securities and financial assets held as partof linked insurance/investment contracts where the risk is
predominantly borne by the policyholder.
Additionally, risk may be managed by employing other types ofcollateral and credit risk enhancements, such as second charges,
other liens and unsupported guarantees. Guarantees are normallytaken from corporates and export credit agencies. Corporates would
normally provide guarantees as part of a parent/subsidiary relationshipand span 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 and utilisations,maturity profiles and risk quality are monitored and managed
proactively. This process is key to the setting of risk appetite forthese larger, more complex, geographically distributed customer
groups. While the principal form of risk management continues to beat the point of exposure origination, through the lending decisionmaking process, Global Banking also utilises loan sales and credit
default swap (‘CDS’) hedges to manage concentrations and reducerisk. These transactions are the responsibility 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 areentered into directly with a central clearing house counterparty.
Otherwise, our exposure to CDS protection providers is diversified
among mainly banking counterparties with strong credit ratings.
CDS mitigants are held at portfolio level and are not included in the
expected credit loss calculations. CDS mitigants are not reported in
the presentation below.

We determine that a financial instrument is credit impaired and instage 3 by considering relevant objective evidence, primarily whether:

Collateral on loans and advances– contractual payments of either principal or interest are past due
for more than 90 days;

The collateral measured in the following tables consists of fixed firstcharges on real estate, and charges over cash and marketablefinancial instruments. The values in the tables represent the expectedmarket value on an open market basis; no adjustment has been madeto the collateral for any expected costs of recovery. Marketablesecurities are measured at their fair value.

– there are other indications that the borrower is unlikely to pay,such as when a concession has been granted to the borrower for
economic or legal reasons relating to the borrower’s financial
condition; and– the loan is otherwise considered to be in default. If such
unlikeliness to pay is not identified at an earlier stage, it is deemed
to occur when an exposure is 90 days past due, even where
regulatory rules permit default to be defined based on 180 days
past due. Therefore, the definitions of credit impaired and default
are aligned as far as possible so that stage 3 represents all loansthat are considered defaulted or otherwise credit impaired.

Collateral and other credit enhancements(Audited)
Although collateral can be an important mitigant of credit risk, it is thegroup’s practice to lend on the basis of the customer’s ability to meettheir obligations out of cash flow resources rather than placing
primary reliance on collateral and other credit risk enhancements.
Depending on the customer’s standing and the type of product,
facilities may be provided without any collateral or other credit
enhancements. For other lending, a charge over collateral is obtained
and considered in determining the credit decision and pricing. In theevent of default, the bank may utilise the collateral as a source of
repayment.

54(Audited)

Other types of collateral such as unsupported guarantees and floating
charges over the assets of a customer’s business are not measured
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 for disclosure
purposes.
The LTV ratios presented are calculated by directly associating loans
and advances with the collateral that individually and uniquely
supports each facility. When collateral assets are shared by multipleloans and advances, whether specifically or, more generally, by wayof an all monies charge, the collateral value is pro-rated across theloans and advances protected by the collateral.
For credit-impaired loans, the collateral values cannot be directlycompared with impairment allowances recognised. The LTV figuresuse open market values with no adjustments.
Impairment allowances are calculated on a different basis, byconsidering other cash flows and adjusting collateral values for costsof realising collateral.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Personal lending(Unaudited)
The following table provides a quantification of the value of fixedcharges we hold over specific assets where we have a history of
enforcing, and are able to enforce, collateral in satisfying a debt in theevent of the borrower failing to meet its contractual obligations, andwhere the collateral is cash or can be realised by sale in an
established market.

The collateral valuation excludes any adjustments for obtaining andselling the collateral and, in particular, loans shown as notcollateralised or partially collateralised may also benefit from otherforms of credit mitigants.

Residential mortgages including loan commitments by level of collateral(Audited)

2022

2023

Stage 1
Fully collateralised
LTV ratio:– less than 70%– 71% to 90%– 91% to 100%
Partially collateralised (A):– collateral value on A
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

ECL
coverageGrosscarrying/
nominalamountECL
coverage

HK$m

%

HK$m

%

1,182,015

0.0

1,147,024

0.0

909,167
175,712
97,136
70,126
66,696
1,252,141

0.0
0.0
0.0
0.0

0.0
0.0
0.0
0.0

0.0

918,527
147,785
80,71250,31748,0091,197,341

25,573

0.3

33,972

0.2

17,326
7,438
809
703
660
26,276

0.2
0.5
0.6
1.3

0.1
0.4
0.5
0.7

0.3

24,401
8,730
841
425
401
34,397

4,555

4.0

5,696

4.3

3,477
942
136
105
93
4,660
1,283,077

3.5
5.1
11.0
21.9

3,935
1,270
491
113
95
5,809
1,237,547

3.6
5.6
6.3
40.7

Gross
carrying/
nominalamount4.4
0.0

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

0.0

0.2

5.0
0.0

55

Risk

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 physical inspections.
For commercial real estate, where the facility exceeds regulatory threshold requirements, group policy requires an independent review of thevaluation at least every three years, or more frequently as the need arises. In Hong Kong, market practice is typically for lending to major
property companies to be either secured by guarantees or unsecured.
Commercial real estate loans and advances including loan commitments by level of collateral1(Audited)
2022

2023

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

ECL
coverageGrosscarrying/
nominalamountECL
coverage

HK$m

%

HK$m

%

217,922206,940
33,90921,536
458,771

0.0
0.1
0.1

239,954
262,850
13,898
7,292
516,702

0.0
0.1
0.1

27,67981,164
7,487
5,558
116,330

4.8
2.8
1.4

50,93585,421
7,941
4,692
144,297

7.7
1.9
2.0

17,904
10,034508
355
28,446

77.7
8.7
21.1

16,725
8,724
982
697
26,431

57.2
11.1
36.2

—
—
117
65
117
603,664

—
—
—

—
—
145
65
145
687,575

—
—
—

Gross
carrying
nominalamount

0.0

3.2

52.4

—
3.1

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

56

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

0.1

4.0

41.2

—
2.5

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 inother 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 collateral1(Audited)

2022

2023
Gross
carrying/
nominalamount ECL coverage
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

Grosscarrying/
nominalamount

ECL coverage

HK$m

%

HK$m

%

2,260,409
348,895
260,554
96,2262,869,858

0.1
0.1
0.0

2,155,095
371,035
246,654
97,0582,772,784

0.1
0.1
0.1

297,925
83,62939,33815,892420,892

0.3
1.3
0.4

314,107
128,648
55,80422,737498,559

0.5
1.0
0.6

12,895
7,736
7,675
3,618
28,306

65.1
8.8
33.7

14,373
5,689
8,956
4,480
29,018

68.2
7.2
37.0

—
173
—
—
173
3,319,229

—
94.8
—

138
183
156
125
477
3,300,838

1.4
92.9
12.2

0.1

0.5

41.2

94.8
0.5

0.1

0.6

46.6

40.0
0.6

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

57

Risk

Other credit risk exposures

Treasury risk management(Unaudited)

Key developments in 2023

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:(Unaudited)– Some securities issued by governments, banks and other financial
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 of financial assets. Credit risk
associated with ABSs is reduced through the purchase of credit
default swap (‘CDS’) protection.
– 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 thearrangement, we may use additional credit mitigation if aguarantee is called upon or a loan commitment is drawn andsubsequently defaults.

Derivatives(Unaudited)
We participate in transactions exposing us to counterparty credit risk.
Counterparty credit risk is the risk of financial loss if the counterparty
to a transaction defaults before satisfactorily settling it. It arises
principally from over-the-counter (‘OTC’) derivatives and securities
financing transactions and is calculated in both the trading and nontrading books. Transactions vary in value by reference to a market
factor such as an interest rate, exchange rate or asset price.
The counterparty risk from derivative transactions is taken into
account when reporting the fair value of derivative positions. The
adjustment to the fair value is known as the credit value adjustment(‘CVA’).

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 on earnings orcapital due to structural or transactional 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.

Approach and policy
Our objective in the management of treasury risk is to maintainappropriate levels of capital, liquidity, funding, foreign exchange andmarket risk to support our business strategy, and meet our regulatory
and stress testing-related requirements.
Our approach to treasury management is driven by our strategic andorganisational requirements, taking into account the regulatory,
economic and commercial environment. We aim to maintain a strong
capital and liquidity base to support the risks inherent in our businessand invest in accordance with our strategy, meeting bothconsolidated and local regulatory requirements at all times.

– The roll out of our second line of defence capabilities, providing
independent oversight of treasury activities across capital risk,
liquidity and funding risk, interest rate risk in the banking book('IRRBB') in Asia-Pacific sites have been completed during 2023.
– The implementation of hold-to-collect business model wascompleted for Asia-Pacific sites. Compared to previous years ourportfolio of hold-to-collect assets now forms a larger part of theliquid asset buffer as well as a hedge to our structural interest raterisk. This allows us more flexibility in managing the hold-to-collectand-sell portfolio to optimise returns from market movements
while safeguarding the group capital and future earnings.
– Following high-profile US and Swiss banking failures in the firstquarter of 2023, the existing risk management practices including
stress testing and limit setting were validated. Additionally,liquidity monitoring and metric assumptions as part of the internalliquidity adequacy assessment process ('ILAAP') cycle werereviewed to ensure they continued to cover observed andemerging risks.
– Continued to improve our analysis and understanding of thedrivers of capital volatility and the underlying sensitivities, ensuring
these are actively considered in our risk appetite and limit setting
processes.
– Continued to increase the stabilisation of our net interest income(‘NII’) as interest rate expectations fluctuated, driven by central
bank rate increases and a reassessment of the trajectory of
inflation in major economies.

Governance and structure(Unaudited)
The Board approves the policy and risk appetite for capital risk,
liquidity and funding risk, and IRRBB. It is supported and advised by
the RC.
The Global Treasury sub-function manages capital, liquidity andfunding risk and structural foreign exchange risk on an on-going basis
and provides support to the Asset and Liability Management
Committee (‘ALCO’), and is overseen by the Treasury Risk
Management sub-function ('TRM') and the RMM.
The Global Treasury sub-function also manages interest rate risk inthe banking book, maintaining the transfer pricing framework andinforming the regional and local ALCOs of the group and site’s overallbanking book interest rate exposure. Banking book interest rate
positions may be transferred to be managed by the Global Treasury
sub-function, within the market risk limits approved by the RMM.
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 is chaired by
the Regional Head of Traded and Treasury Risk Management.
The Treasury Risk Management sub-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.

Our policy is underpinned by our risk management framework. The
risk management framework incorporates a number of measuresaligned to our assessment of risks for both internal and regulatory
purposes. These risks include credit, market, operational, pensions,structural and transactional foreign exchange risk, and interest raterisk in the banking book.

58

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Capital risk

Regulatory capital requirements

Overview(Audited)(Audited)

The Hong Kong Monetary Authority (‘HKMA’) supervises the groupon both a consolidated and solo-consolidated basis and therefore
receives information on the capital adequacy of, and sets capitalrequirements for, the group as a whole and on a solo-consolidated
basis. Individual banking subsidiaries and branches are directly
regulated by their local banking supervisors, who set and monitor
their capital adequacy requirements. In most jurisdictions, nonbanking financial subsidiaries are also subject to the supervision andcapital requirements of local regulatory authorities.

Our approach to capital management is driven by our strategic andorganisational requirements, taking into account the regulatory,
economic and commercial environment in which we operate.
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 as part of theirindividual and the group’s capital management processes.

Framework(Audited)
Our capital management policy is underpinned by a capitalmanagement framework. The framework sets out our approach todetermining key capital risk appetites for CET1, Tier1, Total capital,
Loss Absorbing Capacity ('LAC') and the Leverage Ratio, whichenables us to manage our capital in a consistent manner. Regulatory
capital and economic capital are the two primary measures used forthe management and control of capital.
Capital measures:– 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 tosupport risks to which we are exposed and forms a core part ofthe internal capital adequacy assessment process ('ICAAP').
Our 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, performanceand planning, and the findings arising from stress testing. Ourassessment of capital adequacy is driven by an assessment of risks.
These risks include credit, market, operational, pensions, insurance,
structural foreign exchange and interest rate risk in the banking book.
Climate risk is also considered as part of the ICAAP, and we arecontinuing to develop our approach for climate risk management.
The group’s ICAAP supports the determination of the capital risk
appetite and target ratios, as well as enables the assessment anddetermination of capital requirements by regulators. Banking
subsidiaries prepare ICAAPs in line with global guidance, whileconsidering their local regulatory regimes to determine their own risk
appetites and ratios.
Our capital management process is articulated in our annual capitalplan which is approved by the Board. The plan is designed with theobjective of maintaining both an appropriate amount of capital and an
optimal mix between the different components of capital. Capital and
Risk-Weighted Assets ('RWAs') are monitored and managed against
the plan, with capital forecasts reported to relevant governancecommittees. 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 our capital management objectives, capital
generated by subsidiaries in excess of planned requirements isreturned to the Bank, normally by way of dividends.
The Bank is the primary provider of capital to its subsidiaries andthese investments are substantially funded by the Bank’s own capitalissuance and profit retention. As part of its capital management
process, the Bank seeks to maintain a prudent balance between thecomposition of its capital and that of its investment in subsidiaries.

The group uses the advanced internal ratings-based approach to
calculate its credit risk for the majority of its non-securitisation
exposures. For collective investment scheme exposures, the groupuses the look-through approach and mandate-based approach to
calculate the risk-weighted amount. For securitisation exposures, thegroup uses the securitisation internal ratings-based approach,securitisation external ratings-based approach or securitisation
standardised approach to determine credit risk for its banking booksecuritisation exposures. For counterparty credit risk, the group uses
both the standardised (counterparty credit risk) approach and theinternal models (counterparty credit risk) approach to calculate its
default risk exposures for derivatives, and the comprehensive
approach for securities financing transactions. For market risk, thegroup uses an internal models method approach ('IMM') to calculate
its general market risk for the risk categories of interest rate andforeign exchange (including gold) exposures, and equity exposures.
The group also uses an IMM approach to calculate its market risk inrespect of specific risk for interest rate exposures and equity
exposures. The group uses the standardised (market risk) approachfor calculating other market risk positions, as well as trading booksecuritisation exposures, and the standardised (operational risk)
approach to calculate its operational risk.
During the year, the group complied with all the capital requirementsof HKMA on both a consolidated and solo-consolidated basis.

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 2023, the capital buffers applicable to the group include
the Capital Conservation Buffer (‘CCB’), the Countercyclical Capital
Buffer (‘CCyB’) and the Higher Loss Absorbency (‘HLA’) requirementfor Domestic Systemically Important Banks (‘D-SIB’). The CCB is2.5% and is designed to ensure banks build up capital outside periodsof stress. The CCyB is set on an individual country/territory basis andis built up during periods of excess credit growth to protect against
future losses. The CCyB for Hong Kong and the list of D-SIB are
regularly reviewed and last announced by the HKMA on 03
November 2023 and 29 December 2023 respectively. In its latest
announcement, the HKMA maintained the CCyB for Hong Kong at
1.0% and 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 andthe internal LAC leverage ratio at or above specified minimums.

The principal forms of capital are included in the following balanceson the consolidated balance sheet: share capital, other equity
instruments, retained earnings, other reserves and subordinatedliabilities.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

59

Risk

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 measure calculated
as Tier 1 capital divided by total exposures (both on-balance sheet
and off-balance sheet).
At

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

31 Dec2023

31 Dec
2022

%

%

5.8

5.9

HK$m

HK$m

562,454
9,672,960

545,572
9,301,363

The decrease in the leverage ratio from 31 December 2022 to
31 December 2023 was mainly due to the rise in the exposure
measure, partly offset by the increase in Tier 1 capital.
Further details regarding the group’s leverage position can be viewed
in the Banking Disclosure Statement at 31 December 2023, which
will be available in the Regulatory Disclosure Section of our website:www.hsbc.com.hk.

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 scheduled for implementation by the HKMA on
1 January 2025. We continue to monitor progress on theimplementation. Based on the results of the final HKMA rules, weforesee a positive impact on our capital ratios on initial application.
The standardized risk-weighted asset ('RWA') output floor under the
Basel III Reforms will be phased in over five years from initial
implementation. Any impact from the output floor would be towards
the end of the phase in period.
Capital ratios(Unaudited)At
31 Dec2023
Common Equity Tier 1 (‘CET1’) capital ratio
Tier 1 capital ratio
Total capital ratio

The following tables show the capital ratios, RWAs and capital baseas contained in the ‘Capital Adequacy Ratio’ return submitted to the
HKMA on a consolidated basis under the requirements of section
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 information on
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 2023. Subsidiaries not includedin the group's consolidation for regulatory purposes are primarily
securities and insurance companies. The capital invested by thegroup in these companies is deducted from regulatory capital, subject
to threshold.
The Bank and its banking subsidiaries maintain regulatory reserves tosatisfy the provisions of the Banking Ordinance and local regulatory
requirements for prudential supervision purposes.
At 31 December 2023, the effect of this regulatory reserve
requirement is to reduce the amount of reserves which can be
distributed to shareholders by HK$19,045m (31 December 2022:
HK$16,413m).

60

%

%

15.8
17.5
19.7

15.3
16.9
18.8

Risk-weighted assets by risk type
(Unaudited)At
31 Dec2023
HK$m

Capital adequacy at 31 December 2023
(Unaudited)

31 Dec2022

Credit risk
Counterparty credit risk
Market risk
Operational risk
Sovereign concentration risk
Total

2,536,239
136,866
158,707
380,575—
3,212,387

31 Dec2022
HK$m
2,589,633
133,290
160,533
337,004
1,708
3,222,168

Risk-weighted assets by reportable segments(Unaudited)At
31 Dec2023
HK$m
Wealth and Personal Banking
Commercial Banking
Global Banking
Markets and Securities Services
Corporate Centre
Other (GBM-other)Total

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

624,746
1,222,999
569,199
339,307342,277
113,859
3,212,387

31 Dec2022
HK$m
640,626
1,209,888
562,404
410,401
338,254
60,595
3,222,168

Capital base(Unaudited)
The following table sets out the composition of the group’s capital base under Basel III at 31 December 2023.
Capital base(Unaudited)

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– defined benefit pension fund assets– significant Loss-absorbing Capacity (‘LAC’) investments in unconsolidated financial sector entities– property revaluation reserves1– regulatory reserve
Total CET1 capital
Additional Tier 1 (‘AT1’) capital
Total AT1 capital before regulatory deductions– perpetual subordinated loans– allowable non-controlling interests in AT1 capital
Regulatory deductions to AT1 capital– significant LAC investments in unconsolidated financial sector entities
Total AT1 capital
Total Tier 1 capital
Tier 2 capital
Total Tier 2 capital before regulatory deductions– term subordinated debt
– property revaluation reserves1– impairment allowances and regulatory reserve eligible for inclusion in Tier 2 capital– allowable non-controlling interests in Tier 2 capital
Regulatory deductions to Tier 2 capital– significant LAC investments in unconsolidated financial sector entities
Total Tier 2 capital
Total capitalAt
31 Dec2023
HK$m

31 Dec2022
HK$m

733,940
812,726(1,454)(52,465)(24,867)
28,33059,860(2,437)(29,093)(253,666)(2,291)(33,949)(3,754)(2,018)2,264(50)(127,173)(67,650)(19,045)
508,604

727,880
807,552(1,454)(52,386)(25,832)
30,10656,828(2,250)(24,472)(266,424)(2,376)(32,064)(3,688)233(3,494)(27)(140,987)(67,608)(16,413)491,562

53,85052,465
1,385——
53,850562,454

54,01952,386
1,633
(9)
(9)
54,010545,572

72,391
26,06031,097
14,260974

68,11819,50531,07816,008
1,527(3,144)(3,144)
69,247
631,701(6,378)(6,378)61,740607,312

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.

The impairment of BoCom has an insignificant impact on the group’s total capital and CET1 capital due to the compensating release ofregulatory capital deduction to offset the impairment charge.
A detailed breakdown of the group’s CET1 capital, AT1 capital, Tier 2 capital and regulatory deductions can be viewed in the Banking DisclosureStatement 2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

61

Risk

Non-trading book foreign exchange exposuresfunding risk at an operating entity level to make sure that obligations
can be met in the jurisdiction where they fall due, generally without
reliance on other parts of the group.

Structural foreign exchange exposures(Unaudited)
Structural foreign exchange exposures arise from net assets orcapital investments in foreign operations together with any
associated hedging. A foreign operation is defined as a subsidiary,associate, joint arrangement or branch, where the activities are
conducted in a currency other than that of the reporting entity. An
entity's functional reporting currency is normally that of the primaryeconomic environment in which the entity operates.
Exchange differences on structural exposures are recognised in othercomprehensive income ('OCI’). We use Hong Kong dollar as ourpresentation currency in our consolidated financial statements.
Therefore, our consolidated balance sheet is affected by exchange
differences between Hong Kong dollar and all the non-Hong Kong
dollar functional currencies of underlying foreign operations.
Our structural foreign exchange exposures are managed with theprimary objective of ensuring, where practical, that our consolidated
capital ratios and the capital ratios of individual banking subsidiaries
and foreign branches subject to minimum regulatory capitalrequirements are largely protected from the effect of changes inexchange rates.
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 the group’s foreign currency
investments.
The group had the following net structural foreign currency exposuresthat were greater than 10% of the total net structural foreign
currency exposures:
Local Currency (m)Equivalent (HK$m)

232,642
11,176

255,961
87,314

240,745
10,891

272,269
84,902

At 31 Dec 2023
Renminbi
US dollars
At 31 Dec 20221
Renminbi
US dollars

1 From 1 January 2023, we adopted HKFRS 17 'Insurance Contracts',
which replaced HKFRS 4 'Insurance Contracts'. Comparatives data havebeen restated accordingly.

Transactional foreign exchange exposures(Unaudited)
Transactional foreign exchange exposures arise from transactions in
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 forother reasons. Transactional foreign exchange exposure generated
through OCI reserves is managed by the Global Treasury sub-function
within an agreed limit framework.

Operating entities are required to meet internal and applicableregulatory requirements at all times. These requirements areassessed through the ILAAP, which ensures that operating entities
have robust strategies, processes and systems for the identification,measurement, management and monitoring of liquidity and funding
risk over an appropriate set of time horizons, including intra-day. The
ILAAP supports determination of liquidity and funding risk appetite
and also assesses the capability to manage liquidity and funding
effectively in each major entity. Liquidity and funding risk metrics are
set and managed locally but are subject to global review andchallenge to ensure consistency of approach and application of theGroup’s policies and controls.

Framework(Unaudited)
The Global Treasury sub-function is responsible for the application ofpolicies and controls at a local operating entity level. The elements ofliquidity and funding risk management framework are underpinned bya robust governance framework, with the two major elements being:– Asset and Liability Management Committees (‘ALCOs’) at thegroup and entity level; and– annual ILAAP support determination of risk appetite.
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.
Liquidity and Funding Risk management processes include:– maintaining compliance with relevant regulatory requirements of
the operating entity;– 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 within pre­determined limits;– maintaining debt financing plans;– monitoring of depositor concentration in order to avoid undue
reliance on large individual depositors and ensuring a satisfactory
overall funding mix; and– maintaining liquidity and funding contingency plans. These plans
identify early indicators of stress conditions and describe actions
to be taken during stress, while minimising adverse long-term
implications for the business.

Management of liquidity and funding risk
(Audited)

Overview

Funding and liquidity plans form part of the financial resource planthat is approved by the Board. The Board-level risk appetite measures
are the LCR, ILM and NSFR. An appropriate funding and liquidity
profile is managed through a wider set of measures:(Audited)– a minimum LCR requirement;

Liquidity Risk is the risk that an entity does not have sufficient
resources to meet its financial obligations when they fall due, or can
only secure them at excessive cost. This may cause potential
breaches in regulatory or internal metrics such as the Liquidity
Coverage Ratio ('LCR') or the Internal Liquidity Metrics ('ILM').
Funding Risk is the risk that an entity does not have sufficiently stableand diverse sources of funding or the funding structure is inefficient.
This may cause potential breaches in regulatory or internal metrics
such as the Net Stable Funding Ratio ('NSFR').

– a minimum NSFR requirement or other appropriate metric;

The group has comprehensive policies, metrics and controls tomanage liquidity and funding risk. The group manages liquidity and– forward-looking funding assessments.

Liquidity and funding risk

62

– an ILM requirement;– a legal entity depositor concentration limit;– cumulative term funding maturity concentrations limit;– liquidity metrics to monitor minimum requirement by currency;– intra-day liquidity;– the application of liquidity funds transfer pricing; andThe Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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

Sources of funding(Unaudited)
Our primary sources of funding are customer current accounts,
customer savings deposits payable on demand or at short notice andterm deposits. We issue wholesale securities (secured andunsecured) to supplement our customer deposits and change thecurrency mix, maturity profile or location of our liabilities.
Currency mismatch(Unaudited)Group policy requires all operating entities to manage currency
mismatch risks for material currencies. 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 International Swaps and Derivatives Association('ISDA') compliant credit support annex ('CSA') contracts), theadditional collateral required to post in the event of one-notch andtwo-notch downgrade in credit ratings is immaterial.

Interest Rate Risk in the Banking Book
(Unaudited)

Assessment and risk appetite
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 not held for trading intent
or in order to hedge positions held with trading intent. Interest raterisk that can be economically hedged may be transferred to the
Global Treasury sub-function. Hedging is generally executed throughinterest rate derivatives or fixed-rate government bonds. Any interest
rate risk that Global Treasury sub-function cannot economically hedge
is not transferred and will remain within the global business where
the risks originate.
The Global Treasury sub-function uses a number of measures tomonitor and control interest rate risk in the banking book, including:– net interest income sensitivity; and– economic value of equity sensitivity; andLiquidity and funding risk in 2023

– hold-to-collect-and-sell value at risk (’VaR‘) and(Unaudited)– hold-to-collect-and-sell present value of a basis point (‘PVBP‘)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%.

Net interest income sensitivity

The average LCR of the group for the period are as follows:
Quarter ended
31 Dec31 DecAverage LCR

2023
%

2022
%

168.9

157.8

The 3-month average LCR increased by 11.1 percentage points from
157.8% for the quarter ended 31 December 2022 to 168.9% for thequarter ended 31 December 2023, mainly as a result of an increase incustomer deposits.
The majority of high quality liquid assets ('HQLA') included in the LCR
are Level 1 assets as defined in the BLR, which consist mainly of
government debt securities.
The total weighted amount of HQLA of the group for the period are
as follows:
Weighted amount(average value) at quarter
ended

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

31 Dec2023
HK$m

31 Dec2022
HK$m

1,789,314
87,633
61,953
1,938,900

1,744,471
80,34861,184
1,886,003

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

Net stable funding ratio

31 Dec2023%

31 Dec
2022
%

156.0

152.3

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 monitoringis undertaken at an entity level, where entities calculate both oneyear and five-year NII sensitivities across a range of interest ratescenarios.
As at 31 December 2023, the 12 month sensitivity of our NII basedon the HKMA reporting methodology is an adverse impact ofHK$11.4bn to the HKMA’s ‘Parallel Up’ scenario and a positive
impact of HK$11.6bn to the HKMA’s ‘Parallel Down’ scenario. NII
sensitivity figures represent the effect of pro forma movements inprojected 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, early
prepayment of mortgages. These sensitivity calculations do notincorporate actions that would be taken by Global Treasury subfunction or in the business that originates the risk to mitigate theeffect 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-specificinterest rate floors are recognised where applicable.

Economic value of equity sensitivity
Economic value of equity (‘EVE’) represents the present value of the
future banking book cash flows that could be distributed to equity
holders under a managed run-off scenario. This equates to thecurrent book value of equity plus the present value of future NII inthis scenario. EVE can be used to assess the economic capitalrequired to support interest rate risk in the banking book. An EVE
sensitivity represents the expected movement in EVE due to prespecified interest rate shocks, where all other economic variables areheld constant. Operating entities are required to monitor EVE
sensitivities as a percentage of capital resources.
Further details of HSBC’s risk management of interest rate risk in thebanking book can be found in the Pillar 3 Disclosures at 31 December
2023.

The NSFR increased by 3.7 percentage points from 152.3% for thequarter ended 31 December 2022 to 156.0% for the quarter ended
31 December 2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

63

Risk

Pension Risk

Governance and structure(Unaudited)(Unaudited)

Our global pensions strategy is to move from defined benefit todefined contribution plans, where local law allows and it is considered
competitive to do so.

The following diagram summarises the main business areas wheretrading market risks reside and the market risk measures used tomonitor and limit exposures.

In defined contribution pension plans, the contributions that HSBC isrequired to make are known, while the ultimate pension benefit will
vary, typically with investment returns achieved by investment
choices made by the employee. While the market risk to HSBC of
defined contribution plans is low, the group is still exposed tooperational and reputational risk.

Trading risk

Risk types– Foreign exchange and commodities– Interest rates– Credit spreads– Equities

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:Global business GBM– investments delivering a return below that required to provide theprojected plan benefits;

The objective of our risk management policies and measurement
techniques is to manage and control market risk exposures tooptimise return on risk while maintaining a market profile consistent
with our established risk appetite.

– the prevailing economic environment leading to corporate failures,
thus triggering write-downs in asset values (both equity and debt);– a change in interest rate expectations, causing an increase in thevalue of plan liabilities; and– plan members living longer than expected (known as longevityrisk).
Pension risk is assessed using an economic capital model that takes
into account potential variations in these factors. The impact of thesevariations on both pension assets and pension liabilities is assessedusing a 1-in-200-year stress test. Scenario analysis and other stresstests are also used to support pension risk management, including
the review of de-risking opportunities. To fund the benefits
associated with defined benefit plans, sponsoring group companies
make regular contributions in accordance with advice from actuaries
and in consultation with the plans’ fiduciaries where relevant. These
contributions are normally set to ensure that there are sufficient
funds to meet the cost of the accruing benefits for the future serviceof active members. However, higher contributions are required whenplan 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, such as
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.

Risk measure

Value at risk | Sensitivity | Stress Testing.

Market risk is managed and controlled through limits approved by thegroup's Board of Directors. These limits are allocated across businesslines and to the group’s legal entities. The group has an independent
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 isrequired to assess the market risks arising in its business and totransfer them either to its local Markets and Securities Services orMarket Treasury unit for management, or to separate books managed
under the supervision of the local ALCO. The Traded Risk subfunction enforces the controls around trading in permissible
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 expertise and control systems.

Key risk management processes
Monitoring and limiting market risk exposures(Audited)
Our objective is to manage and control market risk exposures while
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, value at risk (‘VaR’) and stress testing.

Sensitivity analysis(Unaudited)

Market Risk

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

Overview

Value at risk

(Unaudited)(Audited)Market risk is the risk of an adverse financial impact on trading
activities arising from changes in market parameters such as interest
rates, foreign exchange rates, asset prices, volatilities, correlations
and credit spreads.

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 use of VaR isintegrated into market risk management and calculated for all trading
positions regardless of how we capitalise them. Where we do not
calculate VaR explicitly, we use alternative tools as summarised inthe ‘Stress testing’ section below.

Market risk management
Key developments in 2023
(Unaudited)
There were no material changes to our policies and practices for the
management of market risk in 2023.

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 todata from the past two years; and64

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

– 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 that anincrease in observed market volatility will lead to an increase in VaR
without any changes in the underlying positions.

VaR model limitations

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)(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. As the model iscalibrated on the last 500 business days, it does not adjust
instantaneously to a change in the market regime.
– the use of a one-day holding period for risk management purposesof trading books assumes that this short period is sufficient tohedge 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 of confidence.
– 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 stress test
approach within the RNIV framework. While VaR-based RNIVs arecalculated 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 the overall
VaR calculation but excluded from the VaR measure used forregulatory back-testing. Stress-type RNIVs include a deal contingent
derivatives capital charge to capture risk for these transactions.

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 ormovements in a set of financial variables. In such scenarios, losses
can be much greater than those predicted by VaR modelling. Stresstesting and reverse stress testing provide senior managementwith insights regarding the ‘tail risk’ beyond VaR.
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 market risk stress testing incorporates
both historical and hypothetical events. Market risk reverse stresstests are designed to identify vulnerabilities in our portfolios bylooking for scenarios that lead to loss levels considered severe for the
relevant portfolio. These scenarios may be local or idiosyncratic innature and complement the systematic top-down stress testing.

We routinely validate the accuracy of our VaR models by back-testing
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
hypothetical profit and loss reflects the profit and loss that would be
realised if positions were held constant from the end of one trading
day to the end of the next.
The number of hypothetical loss back-testing exceptions, together
with a number of other indicators, are used to assess model
performance and to consider whether enhanced internal monitoringof a VaR model is required. We back-test our VaR at set levels of ourgroup entity hierarchy.

Market risk in 2023
(Unaudited)
During 2023, global financial markets were mainly driven by the
inflation outlook, interest rates expectations and recession risks,
coupled with banking distress in March and rising geopoliticaltensions in the Middle East from October. Major central banks
maintained restrictive monetary policies and bond markets
experienced a volatile year. After rising significantly in the second andthird quarter, US treasury bond yields fell during 4Q23, as lower
inflation pressures led markets to expect that key rates would be cut
in 2024. The interest rates outlook was also a major driver of global
equity markets performance, alongside resilient corporate earnings
and positive sentiment in the technology sector. Developed markets
equities advanced significantly amid low volatility, while emerging
markets performance was more subdued. In foreign exchange
markets, the US dollar fluctuated against other major currencies,
mostly in line with the Federal Reserve policy and bond yields
expectations. Investor sentiment remained resilient in credit markets.
High-yield and investment-grade credit spreads narrow in general, as
fears of contagion in the banking sector in 1Q23 abated andeconomic growth remained resilient throughout 2023.
We continued to manage market risk prudently during 2023.
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 set ofrisk measures and limits, including stress testing and scenario
analysis.

Trading portfolios(Audited)

Value at risk of the trading portfolios
Trading VaR was predominantly generated by the Markets andSecurities Services business. Trading VaR was higher as at
31 December 2023 compared to 31 December 2022, mainly driven
by increase in VaR exposed to interest rate risk and equity risk,
partially offset by reduction in VaR from foreign exchange risk andcredit spread risk.

The risk appetite around potential stress losses for the group is set
and monitored against limits.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

65

Risk

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

EquityCreditPortfolio
spread diversification2

Total3

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2023
Year end
Average
Maximum

70
67
118

206
223
311

70
110
201

15
24
36

(114)

247
266
444

At 31 Dec 2022
Year end
Average
Maximum

95
55
99

195
172
272

48
55
98

18
24
42

(154)

202
208
357

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 notmeaningful to calculate a portfolio diversification benefit for these measures.
3 The total VaR is non-additive across risk types due to diversification effects.

Climate risk (unaudited) TCFD
Overview

The Group's climate risk approach is aligned to the frameworkoutlined by the Financial Stability Board’s Task Force on Climaterelated Financial Disclosures (‘TCFD’), which identifies two primary
drivers of climate risk:– physical risk, which arises from the increased frequency andseverity of extreme weather events, such as typhoons and floods(acute risk), or shifts in weather patterns or rises in sea level; and– transition risk, which arises from the process of moving to a net
zero economy, including changes in government policy andlegislation, technology, market demand, and reputational
implications triggered by a change in stakeholder expectations,actions or inaction.
In addition to these primary drivers of climate risk, the Group has
identified the following thematic issues related to climate risk which
are most likely to materialise in the form of reputational, regulatorycompliance and litigation risks:– net zero alignment risk, which arises from the risk of HSBC failingto meet its net zero commitments or failing to meet external
expectations related to net zero, because of inadequate ambition
and/or plans, poor execution, or inability to adapt to changes inexternal environment.
– the risk of greenwashing, which arises from the act of knowingly
or unknowingly making inaccurate, unclear, misleading or
unsubstantiated claims regarding sustainability to the group's
stakeholders.

Approach
The group recognises that the physical impacts of climate change andthe transition to net zero economy can create significant financial
risks for the companies, investors and the financial system. The
group may be affected by the financial or non-financial impacts ofclimate risks either directly or indirectly through its relationships withcustomers.

66

The Group’s climate risk approach aims to effectively manage thematerial climate risks that could impact the Group operations,financial performance, stability and reputation. The approach isinformed by the evolving expectations of the Group's regulators.
Climate considerations and the thematic issues of net zero alignment
risk and the risk of greenwashing are incorporated within the group's
traditional risk types in line with the Group-wide risk management
framework.
The Group’s climate risk approach is aligned to the Group-wide risk
management framework and three lines of defence model, whichsets out how the group identifies, assesses and manages its risks.
For further details of the three lines of defence framework, see page27.
The Group aims to regularly review its approach to increase coverageand incorporate maturing data, climate analytics capabilities,
frameworks and tools, as well as respond to emerging industry bestpractice and climate risk regulations.
This includes updating the approach to reflect how the risks
associated with climate change continue to evolve in the real world,and maturing how the Group embeds climate risk factors into
strategic planning, transactions and decision-making across its
businesses.
The group is following a materiality based approach in developing its
climate risk capabilities across its businesses by prioritising sectors,
portfolios and counterparties with the highest impacts.
The group continues to make progress in enhancing its climate risk
capabilities and recognise it is a long-term iterative process.
The tables below provide an overview of the climate risk drivers
considered with the Group's climate risk approach. Primary risk
drivers refer to risk drivers aligned to the TCFD, which sets aframework to help public companies and other organisations disclose
climate-related risks and opportunities.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Climate risk – primary risk
drivers
Physical

Acute
Chronic

Transition

Policy and legal

Technology
End-demand(market)Reputational

Details

Potential Impacts– Decreased real estate values or
stranded assets– Decreased household income
Longer-term shifts in climate patterns (e.g. sustained higher
and wealthtemperatures, sea level rise, shifting monsoons or chronic heatwaves).
– Increased costs of legal andcompliance
Mandates on, and regulation of products and services and/or
policy support for low carbon alternatives. Litigation from– Increased public scrutiny
parties who have suffered loss and damage from climate– Decreased profitability
impacts.
– Lower asset performance
Replacement of existing products with lower emissions and/or
lower options.

Time horizons

Increased frequency and severity of weather events causing
disruption to business operations.

Short term
Medium termLong term

Changing consumer demand from individuals and corporates.
Increased scrutiny following a change in stakeholder
perceptions of climate-related action or inaction.

In 2023, the Group updated its climate risk materiality assessment, tounderstand how climate risk may impact across HSBC's risktaxonomy. The assessment focused on a 12-month time horizon, as
well as time horizons for the short-term, medium-term and long-term
periods. The Group defines short-term as time periods up to 2025;
medium-term as between 2026 and 2035, and long-term as between
2036 and 2050. The assessment is refreshed annually, and theresults may change as the Group's understanding of climate risk andhow it impacts HSBC evolves (for further details, see the Group's
Annual Report and Accounts). In addition to these assessments, thegroup also considers climate risk in its emerging risk reporting andscenario analysis, which consider potential impacts across longer
time horizons (for further details, see 'Top and emerging risks' on
page 28 and 'Insights from climate scenario analysis' on page 13).

Governance and structure

Climate risk management

Risk appetite

Key developments in 2023

The group's climate risk appetite forms part of the Group's risk
appetite statement and supports the business in delivering thegroup's climate strategy effectively and sustainably.

The group’s climate risk programme continues to support thedevelopment of its climate risk management capabilities. The
following outlines key developments in 2023:– The Group updated its climate risk approach to incorporate net
zero alignment risk and developed guidance on how climate risk
should be managed for non-financial risk types.
– The group provided climate-related training for Board and senior
management, and sponsored nominated staff to take climate risk
related professional certifications.
– The group has expanded the climate risk metrics beyond Hong
Kong to assess the impact of physical risk on the group’s retailmortgage portfolio in Australia, mainland China and Singapore.
While the group has made progress in enhancing its climate risk
management capabilities, further work remains. This includes theneed to develop additional metrics and tools to measure the group's
exposures to climate-related risks and to incorporate these tools
within decision making.

The Board takes overall responsibility for the group’s climate strategy,
overseeing executive management in developing the approach,execution and associated reporting.
The group Chief Risk Officer is responsible for the management ofclimate-related risks, including governance, risk management, stresstesting and scenario analysis. The group's Environmental Risk
Oversight Forum oversees risk activities relating to environmental risk
management, including the transition and physical risks from climatechange.
The group Risk Management Meeting and the group Risk Committee
receive regular updates on its climate risk profile and progress of its
climate risk programme.

The group's climate risk appetite statement is approved and overseenby the group Board. It is supported by risk appetite metrics andtolerance thresholds. The group has also defined additional key risk
management information metrics. Both the risk appetite statement
and key risk management information metrics are reported foroversight by the group Risk Management Meeting and the group Risk
Committee.

Policies, processes and controls
The Group is integrating climate risk into policies, processes andcontrols across many areas of its organisation, and the Group willcontinue to update these as its climate risk management capabilities
mature over time. For further details of how the group manages
climate risk across its global businesses, see page 13.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

67

Risk

Embedding the group's climate risk approach
The table below provides further details on how the group has embedded the management of climate risk across key risk types. For details of
its internal scenario analysis, see 'Insights from climate scenario analysis' on page 13.
Risk type

Details

Wholesale
Credit Risk

The group has metrics in place to monitor the exposure of its wholesale corporate lending portfolio to six high transition risk sectors.
The group's relationship managers engage with their key wholesale customers through a transition and physical risk questionnaire
and recently introduced an updated questionnaire, the transition engagement questionnaire. The questionnaire is used to gather
information and assess the alignment of the wholesale customers' business models to net zero and their exposure to physical andtransition risk. The group uses the responses to the questionnaire to create a climate risk score for its key wholesale customers.
The Group's credit policies require that relationship managers comment on climate risk factors in credit applications for new money
requests and annual credit reviews. The policies also require manual credit risk rating overrides if climate is deemed to have amaterial impact on credit risk under 12 months if not already captured under the original credit risk rating.
Key developments to the group's framework in 2023 include expanding the scope of its questionnaire to capture new countries,
territories and sectors.
Key challenges for further embedding climate risk into credit risk management relate to the availability of adequate physical risk datato assess impacts to the group's wholesale customers.

Retail Credit
Risk

The Group has implemented policies and tools to manage climate risk across all its retail mortgage markets.
Within the group’s mortgage portfolios, properties or areas with potentially heightened physical risk are identified and assessed
locally and potential exposure is managed through quarterly metrics. In addition, the group has set risk appetite metrics in four key
markets in the region namely Australia, Hong Kong, mainland China and Singapore.
The Group’s retail credit risk management policy requires each mortgage market to conduct an annual review of their climate risk
management procedures, including perils and data sources, to ensure they remain fit for purpose. In 2023, the Group introduced aglobal 'soft trigger' monitoring and review process for physical risk exposure where a market reaches or exceeds a set threshold, as
this ensures markets are actively considering their balance sheet risk exposure to peril events.

Treasury Risk

From a Capital perspective, climate risk has been considered as part of the ICAAP in 2023, and the group is continuing to develop its
approach for climate risk management. As part of the ILAAP, an initial analysis has been conducted to identify the potential climate
risk exposures across key liquidity risk drivers.
The Group updated the Treasury Risk policies to ensure that the impact of climate risk is considered when assessing applicabletreasury risks. The Group regularly discusses climate-related topics that may impact Global Treasury through climate-relevant
governance forums, including the Treasury Risk Management Climate Risk Oversight Forum and the Group Treasury Sustainability
Committee.
Treasury portfolios are included within scope of the ICSA and the Hong Kong Monetary Authority’s CRST, with potential quantitative
impacts on relevant hold-to-collect-and-sell positions estimated.
Pension Risk
The Group conducts an annual exercise to monitor the exposure of its largest pension plans to climate risk. The Group has also
updated its pension policies to explicitly reflect climate considerations.
Insurance Risk
The Group has an evolving programme to support the identification and management of climate risk. In 2023, the sustainability
procedures were updated to align with the Group’s updated energy and thermal coal-phase out policies.

Traded Risk

In 2023, the Group implemented metrics and thresholds to monitor exposure to high physical and transition risk sectors for thedifferent asset classes in the Markets and Securities Services (‘MSS‘) business. The metrics utilise a risk taxonomy which
categorises countries and sectors into high, medium and low risk, for which the group has set corresponding thresholds. In addition,
the group has identified key business lines that contribute the most to the total MSS high-climate sensitive exposures and developed
reports to monitor trends and pockets of risks.
The Group has developed tools to provide a better understanding of key profit and loss drivers under different climate scenarios along
different dimensions (e.g. risk factor, business line, desk etc.). These reports are available to traded risk managers to help monitor
and understand how climate sensitive exposures are impacted under different scenarios. Stress testing results have been presented
to senior management for oversight during dedicated review and challenge sessions to provide awareness on impact to MSS
portfolio and underlying business lines.

68

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Risk type

Details

Reputational
Risk

The group manages the reputational impact of climate risk through its broader reputational risk framework, supported by its
sustainability risk policies and metrics.
The Group's sustainability risk policies set out its appetite for financing activities in certain sectors. The Group's thermal coal phaseout and energy policies aim to drive down greenhouse gas emissions while supporting a just transition.
The group's global and regional network of sustainability risk managers provides local policy guidance to relationship managers forthe oversight of policy compliance and in support of implementation across the group's wholesale banking activities.

Regulatorycompliancerisk

The Group’s policies set the standards that are required to manage the risk of breaches of regulatory duty to customers, including
those related to climate risk, ensuring fair customer outcomes are achieved. To make sure responsibilities are met in this regard, theGroup’s policies are subject to continuous review and enhancement. There is also focus on the ongoing development andimprovement of monitoring capabilities, ensuring appropriate alignment to the broader focus on regulatory compliance risks.
Regulatory Compliance is particularly focused on mitigating climate risks inherent to the product lifecycle. To support this, the Grouphas enhanced a number of processes including:– ensuring Regulatory Compliance provides risk oversight and review of new product marketing materials with any reference toclimate, sustainability and ESG;
– developing the Group’s product marketing controls to ensure climate claims are robustly evidenced and substantiated within
product marketing materials; and– clarifying and improving product marketing framework, procedures and associated guidance, to ensure product-related marketing
materials comply with both internal and external standards, and are subject to robust governance.
Regulatory Compliance operates an ESG and Climate Risk Working Group to track and monitor the integration and embedding ofclimate risk management into the functions’ activities, while monitoring regulatory and legislative changes across the ESG andclimate risk agenda. In Asia-Pacific, a dedicated working group continues to coordinate the regional implementation of climate riskrelated enhancements within the Regulatory Compliance function. Regulatory Compliance also continues to be an active member of
the Group’s and the group’s Environmental Risk Oversight Forums.

Resilience Risk Enterprise Risk Management function is responsible for overseeing the identification and assessment of physical and transition

climate risks that may impact on the organisation's operational and resilience capabilities.
The Group has developed metrics to assess how physical risk may impact the Group's critical properties. In 2023, the Group also
developed an energy and travel risk appetite metric for its own operations to establish and monitors progress against the Group's net
zero ambitions.
Resilience risk policies are subject to continuous improvement to remain relevant to evolving climate risks. New developments
relevant to the Group's own operations are reviewed to ensure climate risk considerations are effectively captured.

Model Risk

Group Model Risk published a new climate risk and ESG model category standard which sets out minimum control requirements for
identifying, measuring and managing model risk for climate-related models.
The group completed independent model validation for a number of models used for climate scenario analysis using both qualitativeand quantitative assessments of modelling decisions and outputs.

Challenges
While the group continued to develop its climate risk framework, its remaining challenges include:– the diverse range of internal and external data sources and data structures needed for climate related reporting, which introduces data
accuracy and reliability risks;– data limitations on customer assets and supply chains, and methodology gaps, which hinder the group's ability to assess physical risks
accurately;– industry-wide data gaps on customer emissions and transition plan and methodology gaps, which limit its ability to assess transition risks
accurately; and– limitations in the management of net zero alignment risk, which is undertaken at a Group level and supported by actions within Asia, is due
to known and unknown factors, including the limited accuracy and reliability of data, merging methodologies, and the need to develop new
tools to better inform decision making.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

69

Risk

Resilience risk

Regulatory compliance risk

(Unaudited)(Unaudited)

Overview

Overview

Resilience risk is the risk of sustained and significant businessdisruption from execution, delivery, physical security or safety events,
causing the inability to provide critical services to our customers,
affiliates, and counterparties. Resilience risk arises from failures orinadequacies in processes, people, systems or external events.

Regulatory compliance risk is the risk associated with breaching our
duty to clients and other counterparties, inappropriate market conduct(including unauthorised trading) and breaching related financial
services regulatory standards. Regulatory compliance risk arises fromthe failure to observe relevant laws, codes, rules and regulations andcan manifest itself in poor market or customer outcomes and lead tofines, penalties and reputational damage to our business.

Resilience risk management
Key developments in 2023
During the year, we carried out several initiatives to keep pace withgeopolitical, regulatory and technology changes and strengthened the
management of resilience risk:– We focused on enhancing our understanding of our risk andcontrol environment, by updating our risk taxonomy and control
libraries, and refreshing risk and control assessments.
– We continued to monitor markets affected by the Russia-Ukraine
and Israel-Hamas wars, as well as other geopolitical events, forany potential impact they may have on our colleagues andoperations.
– We strengthened the way third party risk is overseen andmanaged across all non-financial risks, and enhanced theprocesses, framework and reporting capabilities used by our
global businesses, functions and regions.
– We provided analysis and easy-to-access risk and control
information and metrics to enable management to focus on nonfinancial risks in their decision-making and appetite setting.
– We further strengthened our non-financial risk governance andsenior leadership, and improved our coverage and risk steward
oversight for data risk and change execution.
We prioritise our efforts on material risks and areas undergoingstrategic growth, aligning our location strategy to this need.

Governance and structure
The Enterprise Risk Management target operating model provides a
globally consistent view across resilience risks, strengthening our risk
management oversight while operating effectively as part of asimplified non-financial risk structure.
We view resilience risk across seven sub-risk types related to: third
party risk; technology and cyber security risk; transaction processing
risk; business interruption and incident risk; data risk; change
execution risk; and facilities availability, safety and security risk. Risk
appetite and key escalations for resilience risk are reported to thegroup Risk Management Meeting, chaired by the group Chief Risk
Officer, with an escalation path to the Group Non-Financial Risk
Management Board ('NFRMB'), chaired by the Group Chief Risk andCompliance Officer.

Key risk management processes
Operational resilience is our ability to anticipate, prevent, adapt,
respond to, recover and learn from operational disruption while
minimising customer, firm and market impact. Resilience isdetermined by assessing whether we can continue to provide ourimportant business services, within an agreed impact tolerance. Thisis achieved via day-to-day oversight and periodic and ongoingassurance, such as deep dive reviews and controls testing, which
may result in challenges being raised to the business by risk
stewards. Further challenge is also raised in the form of quarterly risk
steward opinion papers to formal governance. We accept we will not
be able to prevent all disruption but we must prioritise investment tocontinually improve the response and recovery strategies for ourimportant business services to meet regulatory expectations.

70

Regulatory compliance risk management
Key developments in 2023
The dedicated programme to embed our updated purpose-led
conduct approach has concluded. Work to map applicable regulations
to our risks and controls continued in 2023, alongside the adoption of
new tooling to support enterprise-wide horizon scanning for new
regulatory obligations and supporting wider work on regulatory
reporting enhancements. Climate risk has been integrated into
regulatory compliance policies and processes, with enhancements
made to the product governance framework and controls to ensure
the effective consideration of climate – and in particular the risk ofgreenwashing – risks.

Governance and structure
The Compliance function has now been restructured and integrated
into a combined Risk and Compliance function with the appointmentof a Group Head of Regulatory Compliance reporting directly into theGroup Chief Risk and Compliance Officer. The group Chief
Compliance Officer is also the group Head of Regulatory Compliance.
Regulatory Compliance and Financial Crime teams work together andwith relevant stakeholders to achieve good conduct outcomes, andprovide enterprise-wide support on the compliance risk agenda inclose collaboration with colleagues from the Group Risk andCompliance function.

Key risk management processes
The Global Regulatory Compliance capability is responsible for setting
global policies, standards and risk appetite to guide the Group’s
management of regulatory compliance risk. It also devises therequired frameworks, support processes and tooling to protect
against regulatory compliance risks. The Group capability provides
oversight, review and challenge of the global market, regional and lineof business teams to help them identify, assess and mitigate
regulatory compliance risks, where required. The Group’s regulatorycompliance risk policies are regularly reviewed. Global policies andprocedures require the identification and escalation of any actual or
potential regulatory breaches, and relevant events and issues are
escalated to group Risk Management Meeting and group Risk
Committee, as appropriate. The group Chief Compliance Officer Cochairs with the group Chief Risk Officer the group Risk andCompliance Executive Committee and is a member of the group Risk
Management Meeting and an attendee to the group Risk Committee.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Financial crime risk
(Unaudited)

Overview
Financial crime risk is the risk that HSBC’s products and services will
be exploited for criminal activity. This includes fraud, bribery andcorruption, tax evasion, sanctions and export control violations,money laundering, terrorist financing and proliferation financing.
Financial crime risk arises from day-to-day banking operations
involving customers, third parties and employees.

Financial crime risk management
Key developments in 2023
We regularly review the effectiveness of our financial crime risk
management framework, which includes continued consideration of
the complex and dynamic nature of sanctions compliance and export
control risk. We continued to respond to the various financial
sanctions and trade restrictions, including methods used to limit
sanctions evasion.
We continued to make progress with several key financial crime risk
management initiatives, including:– We deployed our intelligence-led, dynamic risk assessment
transaction monitoring capability for customer account monitoringin Hong Kong and Singapore, improving effectiveness in detecting
financial crime risk. This capability will continue to be
implemented in 2024 across further key markets in Asia.
– We successfully introduced the required changes to ourtransaction screening capability to accommodate the globalchange to payment systems formatting under ISO 20022
requirements.
– We made enhancements in response to the rapidly evolving andcomplex global payments landscape and refined our digital assets
and currencies strategy.

Governance and structure
The structure of the Financial Crime function remained substantively
unchanged in 2023, although we continued to review theeffectiveness of our governance framework to manage financial
crime risk. The group Head of Financial Crime reports to the Group
Head of Financial Crime while remaining accountable to the group
Chief Compliance Officer, and the group Risk Committee retains
oversight of matters relating to financial crime.

Key risk management processes
We will not tolerate knowingly conducting business with individuals
or entities believed to be engaged in criminal activity. We require
everybody in HSBC to play their role in maintaining effective systems
and controls to prevent and detect financial crime. Where we believe
we have identified suspected criminal activity or vulnerabilities in ourcontrol framework, we will take appropriate mitigating action.
We manage financial crime risk because it is the right thing to do toprotect our customers, shareholders, staff, the communities in which
we operate, as well as the integrity of the financial system on which
we all rely. We operate in a highly regulated industry in which thesesame policy goals are codified in law and regulation.
We are committed to complying with the laws and regulations of all
the markets in which we operate and applying a consistently highfinancial crime standard globally.
We continue to assess the effectiveness of our end-to-end financial
crime risk management framework and invest in enhancing ouroperational control capabilities and technology solutions to deter anddetect criminal activity. We have simplified our framework andconsolidated previously separate, financial crime policies into a single
global financial crime policy to drive consistency and provide a more
holistic assessment of financial crime risk. We further strengthened
our financial crime risk taxonomy and control libraries and ourmonitoring capabilities through technology deployments. We
developed more targeted metrics and continued to seek to enhance
our governance and reporting.

We are committed to working in partnership with the wider industry
and the public sector in managing financial crime risk and weparticipate in numerous public-private partnerships and information
sharing initiatives around the world. In 2023, our focus remained on
measures to improve the overall effectiveness of the global financial
crime framework, notably by providing input into legislative andregulatory reform activities. We did this by contributing to thedevelopment of responses to consultation papers focused on how
financial crime risk management frameworks can deliver more
effective outcomes in detecting and deterring criminal activity.
Through our work with the Wolfsberg Group and the Institute ofInternational Finance, we supported the efforts of the global standard
setter, the Financial Action Task Force. In addition, we participated inseveral public events related to enhancing public private partnerships,
payment transparency, asset recovery, tackling forestry crimes,
wildlife trafficking and human trafficking.
.

Model Risk
(Unaudited)

Overview
Model risk is the potential for adverse consequences from model
errors or the inappropriate use of modelled outputs to informbusiness decisions.
Model risk arises in both financial and non-financial contexts
whenever business decision making includes reliance on models.

Key developments in 2023
In 2023, we continued to make improvements in our model risk
management processes amid regulatory changes in model
requirements.
Initiatives during the year included:– Received regulatory feedback on a number of our submissions
across internal ratings-based (‘IRB’) models for credit risk, internal
model method (‘IMM’) for counterparty credit risk and internal
model approach (‘IMA’) for market risk. Approved models for IMM
and IMA have been implemented. A programme of work has been
initiated to address feedback from the PRA and HKMA on the IRB
models for Wholesale and Retail Credit.
– Made changes to the Value at Risk (‘VaR’) model in response to
the interest rate changes by central banks across major markets
to curb inflationary pressures.
– Following the changes to address gaps in the control frameworkthat emerged as a result of increases in adjustments and overlays
during the Covid-19 pandemic; the dependency on adjustments
and overlays being applied to model outputs has reduced
significantly as global economies stabilised.
– Models play an important role under HKFRS 17 implementationfor our insurance business. Model developments to address
related financial reporting risk has been progressing. In themeantime, we continue to monitor and manage any potential
material adverse consequences in relation to both financial andcapital reporting.
– The PRA published Supervisory Statement (SS1/23) which setsout guiding principles for how model risks should be managed
across the industry. The principles set out the core disciplines
necessary for a robust Model Risk Management (‘MRM’)
framework to manage model risk effectively. A programme ofwork with representation from Businesses and Functions,
including Internal Audit, has been initiated to uplift our MRM
Framework to meet the enhanced model risk management
requirements.
– Enhanced our frameworks and controls as more Climate Risk andArtificial Intelligence ('AI') and Machine Learning ('ML') models arebeing embedded in business processes. Focused also on

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

71

Risk

Generative AI due to the pace of technological changes whereapplicable model risks need to be managed.
– Continued to carry out regular review on model inventory
completeness and accuracy, and increased awareness of model
landscape and model limitations across the Region.
– Conducted model risk refresher sessions across the Region tostrengthen the business ownership and management of model
risk and the connection between model risk role holders andmodel developing areas.

Governance
The group's Model Risk Committee (‘MRC’) provides oversight ofmodels used in the group and focuses on local delivery andrequirements. The Committees is chaired by the group Chief Risk
Officer and the Regional Heads of Businesses, senior executives
from Risk, Finance and Compliance participate in these meetings.
Authorised sub-forums operating under the remit of the group MRC,
oversee model risk management activities based on associatedmodel categories.

Key risk management processes
A variety of modelling approaches, including regression, simulation,
sampling, machine learning and judgemental scorecards for a rangeof business applications were used. These activities include customer
selection, product pricing, financial crime transaction monitoring,creditworthiness evaluation and financial reporting.
Our model risk management policies and procedures were regularly
reviewed, and required the First Line of Defence to demonstratecomprehensive and effective controls based on a library of model risk
controls provided by Model Risk Management.
Model Risk Management also reports on model risk to senior
management and the Board Risk Committee on a regular basis
through the use of the risk map, risk appetite and regular key
updates.
The effectiveness of these processes, including the Regional model
oversight structure, were regularly reviewed to ensure clarity inauthority, coverage and escalations and that appropriate
understanding and ownership of model risk continued to beembedded in the Businesses and Functions.

Insurance manufacturing operations
risk
Overview(Unaudited)
The key risks for our insurance manufacturing operations are market
risks, in particular interest rate and equity, credit risks and insurance
underwriting. These have a direct impact on the financial results andcapital positions of the insurance operations. Liquidity risk, whilst
significant in other parts of the group, is less material for our
insurance operations.

HSBC’s Insurance business(Unaudited)
We sell insurance products through a range of channels including ourbranches, insurance sales forces, direct channels and third-party
distributors. The majority of sales are through an integrated
bancassurance model that provides insurance products principally forcustomers with whom we have a banking relationship, although theproportion of sales through other sources such as independent
financial advisers, tied agents and digital platforms is increasing.

We have life insurance manufacturing operations in Hong Kong,
Singapore and mainland China. We also hold an interest in a life
insurance manufacturing associate in India.
Where we do not have the risk appetite or operational scale to be aneffective insurance manufacturer, we engage with a small number ofleading external insurance companies in order to provide insurance
products to our customers. These arrangements are generally
structured with our exclusive strategic partners and earn the group a
combination of commissions, fees and a share of profits.
Insurance products are sold predominantly by WPB and CMB throughour branches and direct channels.

Insurance manufacturing operations risk
management
Key developments in 2023
(Unaudited)
The insurance manufacturing subsidiaries follow the group’s risk
management framework. In addition, there are specific policies andpractices relating to the risk management of insurance contracts,
which did not change materially over 2023. During the year there has
been continued market volatility observed over 2023 across interest
rates, equity markets and foreign exchange rates. This has been
predominantly driven by geopolitical factors and wider inflationary
concerns. One key area of risk management focus during 2023 was
the implementation of the new accounting standard, HKFRS 17
Insurance Contracts. Given the fundamental change the accounting
standard represented in insurance accounting and the complexity of
the new standard, this change presented additional financial reportingand model risks for the group, which were managed via the HKFRS
17 implementation project. Other areas of focus have been theongoing integration of the insurance business that was acquired, AXA
Insurance Pte Limited (‘AXA Singapore’), and controls supportingHKFRS 17 implementation.

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 is carriedout by insurance risk teams. The Bank’s risk stewardship subfunctions support the insurance risk teams in their respective areas ofexpertise.

Stress and scenario testing(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 actionplans to mitigate these risks are considered in the group ICAAP and
the entities’ regulatory Own Risk and Solvency Assessments which
are produced by all material entities.

For the insurance products we manufacture, the majority of sales areof savings, universal life and protection 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 partof the underwriting profit and investment income within the group.

72

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Key risk management processes

Capital and liquidity risk

Market risk

(Audited)(Audited)

Capital risk for our insurance manufacturing subsidiaries is assessedin the ICAAP based on their financial capacity to support the risks towhich they are exposed. Capital adequacy is assessed on both thegroup’s economic capital basis, and the relevant local insurance
regulatory basis.

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 risk thatthey may retain. They manage market risk by using, among others,some or all of the techniques listed below, depending on the natureof the contracts written:– We are able to adjust bonus rates to manage the liabilities topolicyholders for products with participating features. The effect isthat a significant portion of the market risk is borne by thepolicyholder;– 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 the effect of a rangeof future scenarios on the values of financial assets andassociated liabilities, and ALCOs employ the outcomes indetermining how best to structure asset holdings to support
liabilities;– We use derivatives to protect against adverse market
movements; and– We design new products to mitigate market risk, such aschanging the investment return sharing portion between
policyholders and the shareholder.

Credit risk
(Audited)
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 performance of
their investment portfolios. Our assessment of the creditworthinessof issuers and counterparties is based primarily upon internationallyrecognised credit ratings and other publicly available information.
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 of investments withcurrent credit concerns, primarily investments that may be at risk of
future impairment or where high concentrations to counterparties arepresent in the investment portfolio. Sensitivities to credit spread risk
are assessed and monitored regularly.

Risk appetite buffers are set to ensure that the operations are able toremain solvent, 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 investmentswith deep and liquid markets, monitoring investment concentrations
and restricting them where appropriate, establishing committed
contingency borrowing facilities and stress testing to understand theimpact on liquidity in the event of a mass lapse.
Insurance manufacturing subsidiaries also complete quarterly liquidity
risk reports and an annual review of the liquidity risks to which they
are exposed.

Insurance underwriting risk
(Unaudited)
Our insurance manufacturing subsidiaries primarily use the following
frameworks and processes to manage and mitigate insurance
underwriting risks:– a formal approval process for launching new products or making
changes to products;– a product pricing and profitability framework which requires initialand ongoing assessment of the adequacy of premiums charged
on new insurance contracts to meet the risks associated withthem;
– a framework for customer underwriting;– reinsurance, which cedes risks to third party reinsurers to keep
risks within risk appetite, reduce volatility and improve capitalefficiency; and– oversight by financial reporting committees in each of our entitiesof the methodology and assumptions that underpin HKFRS 17
reporting.

Insurance manufacturing operations risk in
2023
Measurement(Unaudited)
The tables below show the composition of assets and liabilities bycontract type. 88% (2022: 89%) of both assets and liabilities arederived from Hong Kong.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

73

Risk

Balance sheet of insurance manufacturing subsidiaries by type of contract5(Audited)
Life direct
participatingandinvestment
DPF
contracts2

Life
other
contracts3

Other
contracts4

Shareholders'assets andliabilities

Total

HK$m

HK$m

HK$m

HK$m

HK$m

675,860

26,482

34,02140,415

776,778

649,932

25,34821,426580

697,286

1,099
8,388

76
523

3
8,996

—
37,106

1,178
55,013

At 31 Dec 2023
Financial assets– financial assets designated and otherwise mandatorily measured at fairvalue
– derivatives– financial investments measured at amortised cost
– financial investments measured at fair value through othercomprehensive income– other financial assets5
Insurance contract assets
Reinsurance contract assets
Other assets and investment properties
Total assets at 31 Dec 2023
Liabilities under investment contracts designated at fair value
Insurance contract liabilities
Reinsurance contract liabilities
Deferred tax
Other liabilities
Total liabilities
Total equity
Total equity and liabilities at 31 Dec 2023
At 31 Dec 20226
Financial assets– financial assets designated and otherwise mandatorily measured at fairvalue
– derivatives– financial investments measured at amortised cost
– financial investments measured at fair value through othercomprehensive income– other financial assets5
Insurance contract assets
Reinsurance contract assets
Other assets and investment properties
Total assets at 31 Dec 20226
Liabilities under investment contracts designated at fair value
Insurance contract liabilities
Reinsurance contract liabilities
Deferred tax
Other liabilities
Total liabilities
Total equity
Total equity and liabilities at 31 Dec 20226

—

—

36

—

36

16,441
98—
14,258690,216—
700,691———
700,691—
700,691

535
798
36,633524
64,437—25,5056,079
9—31,593—31,593

3,560
—
—
275
34,29629,885————29,885—29,885

2,729——
11,48751,902————31,30631,30647,376
78,682

23,265896
36,633
26,544
840,851
29,885726,1966,079
931,306
793,475
47,376
840,851

608,004

30,17040,806

39,717

718,697588,743

26,71428,0761,569

645,102

1,189
4,736

75
1,395

162
9,487

12
36,125

1,438
51,743

—

—

—

—

—

13,33635—
12,214620,253—
626,424—
179—
626,603—626,603

1,986
301
33,274326
64,071—
24,982
5,518——
30,500—30,500

3,081
—
—
244
41,05033,031————33,031—33,031

2,011——
11,07950,796———17
40,87740,89445,142
86,036

20,414336
33,27423,863776,170
33,031
651,406
5,518
196
40,877731,028
45,142776,170

1 Balance sheet of insurance manufacturing operations is shown before elimination of inter-company transactions with HSBC non-insurance operations.
2 ‘Life direct participating and investment DPF’ contracts are substantially measured under the variable fee approach measurement model.
3 ‘Life other’ contracts are measured under the general measurement model and mainly includes protection insurance contracts as well as reinsurance
contracts. The reinsurance contracts primarily provide diversification benefits over the life participating and investment discretionary participation
feature (’DPF’) contracts.
4 ‘Other contracts’ includes investment contracts for which HSBC does not bear significant insurance risk.
5 'Other financial assets' comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
6 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4 ‘Insurance Contracts’. Comparative data have been
restated accordingly.

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 and growth
assets, credit spreads and foreign exchange rates.
Our exposure varies depending on the type of contract issued. Our
most significant life insurance products are contracts withparticipating features. These products typically include some form of74

capital guarantee or guaranteed return on the sums invested by thepolicyholders, 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 otherasset classes to provide customers with the potential for enhanced
returns.
Participating products expose the group to the risk of variation in
asset returns, which will impact our participation in the investment
performance.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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.
Sensitivities(Unaudited)
The following table provides the impacts on the CSM, profit after tax
and equity of our insurance manufacturing subsidiaries fromreasonably possible effects of changes in selected interest rate,credit spreads, equity price, growth assets and foreign exchange ratescenarios for the year. These sensitivities are prepared in accordancewith current HKFRSs and are based on changing one assumption at atime with other variables being held constant which in practice could
be correlated.
Due in part to the impact of the cost of guarantees and hedging
strategies, which may be in place, the relationship between the CSM,

profit after tax and total equity and the risk factors is non-linear.
Therefore, the results disclosed should not be extrapolated tomeasure sensitivities to different levels of stress. For the same
reason, the impact of the stress is not necessarily symmetrical on theupside and downside. The sensitivities are stated before allowance
for management actions, which may mitigate the effect of changes in
the market environment.
The method used for deriving sensitivity information and significant
market risk factors remain consistent between 2022 and 2023.In
2022, due to a lower CSM level, some portfolios generated onerous
contracts in the 100bps up scenarios for interest rate and credit
spread sensitivities, generating income statement losses and equity
reductions in those scenarios. This was less prevalent in 2023 as thebase CSMs were higher from changing market conditions andchanges in lapse rate assumptions.

Sensitivity of the group’s insurance manufacturing subsidiaries to market risk factors1(Audited)
Effect on Effect on profit
total equity
after tax

20222
Effect on
CSM

Effect on
total equity

Effect on
profit after tax

2023
Effect on
CSM

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

453
459
(6)
(964)
(908)
(56)
(48)
(48)
—
772
772
—
289
272
17
(338)
(317)
(21)

(779)
(779)
—
(2,413)(2,413)—(6,564)(6,564)
—
5,931
5,931
—
2,762
2,762
—
(3,325)(3,325)
—

453
459
(6)
(964)
(908)
(56)
(48)
(48)
—
772
772
—
289
272
17
(338)
(317)
(21)

(1,702)(1,734)
32
(243)
(171)
(72)
(2,497)(2,497)
—
880
880
—
284
258
26
(360)
(331)
(29)

(912)
(912)
—
586
586
—
(6,295)(6,295)
—
8,294
8,294
—
2,389
2,389
—
(3,629)(3,629)—(1,702)(1,734)
32
(243)
(171)
(72)
(2,497)(2,497)
—
880
880
—
284
258
26
(359)
(330)
(29)

905

3,045

905

741

2,124

741

211
694

3,045
—

211
694

157
584

2,124
—

157
584

(905)

(3,045)

(905)

(741)

(2,124)

(741)

(211)
(694)

(3,045)
—

(211)
(694)

(157)
(584)

(2,124)
—

(157)
(584)

+100 basis point parallel shift in yield curves– Insurance and reinsurance contracts– Financial instruments–100 basis point parallel shift in yield curves– Insurance and reinsurance contracts– Financial instruments+100 basis point shift in credit spreads– Insurance and reinsurance contracts– Financial instruments–100 basis point shift in credit spreads– Insurance and reinsurance contracts– Financial instruments
10% increase in growth assets3– Insurance and reinsurance contracts– Financial instruments
10% decrease in growth assets3– Insurance and reinsurance contracts– Financial instruments
10% appreciation in US dollar exchange rate against local
functional currency– Insurance and reinsurance contracts– Financial instruments
10% depreciation in US dollar exchange rate against local
functional currency– Insurance and reinsurance contracts– Financial instruments

1 Sensitivities presented for ‘Insurance and reinsurance contracts’ includes the impact of the sensitivity stress on underlying assets held to support
insurance and reinsurance contracts. Sensitivities presented for ‘Financial Instruments’ includes the impact of the sensitivity stress on other financial
instruments, primarily shareholder assets.
2 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4 ‘Insurance Contracts’. Comparative data have been
restated accordingly.
3 'Growth assets' primarily comprise equity securities and investment properties. Variability in growth asset fair value constitutes a market risk to
HSBC insurance manufacturing subsidiaries.

Credit risk

contracts is assessed as ‘strong’ or ‘good’ (as defined on page 36),
with 100% of the exposure being neither past due nor impaired(2022: 100%).

(Audited)
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:– risk associated with credit spread volatility and default by debt
security counterparties after investing premiums to generate areturn for policyholders and shareholders; and– risk of default by reinsurance counterparties and nonreimbursement for claims made after ceding insurance risk.

Credit risk on assets supporting unit-linked liabilities is predominantly
borne by the policyholders. Therefore our exposure is primarily
related to liabilities under non-linked insurance and investment
contracts and shareholders’ funds. The credit quality of insurance
financial assets is included in the table on page 49. The risk
associated with credit spread volatility is to a large extent mitigatedby holding debt securities to maturity, and sharing a degree of credit
spread experience with policyholders.

The amounts outstanding at the balance sheet date in respect ofthese items are shown in the table on page 74.
The credit quality of the reinsurers’ share of liabilities under insurance
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

75

Risk

Liquidity risk

its obligations when they fall due, or can secure them only at
excessive cost. Liquidity risk may be able to be shared with
policyholders for products with participating features.

(Audited)
Description and exposure

The remaining maturity of insurance contract liabilities is included in
Note 3 on page 107.

Liquidity risk is the risk that an insurance operation, though solvent,either does not have sufficient financial resources available to meet

The amounts of insurance contract liabilities that are payable on demand are set out by the product grouping below:
Amounts Payable on Demand(Audited)

20221
Amounts
Carrying
Payable on Amount for these
DemandContracts
HK$m
HK$m

2023
Amounts Carrying Amount
Payable on
for these
DemandContracts
HK$m
HK$m
Life direct participating and investment DPF contracts
Life other contracts
At 31 Dec

654,981
20,021
675,002587,973
20,239608,212700,691
25,505726,196626,424
24,982
651,406

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4 ‘Insurance Contracts’. Comparative data have been
restated accordingly.

Insurance underwriting risk

HKFRS 17 ‘Insurance Contracts’, effective from 1 January 2023.
Further information about the adoption of HKFRS 17 is provided on
page 89-99 and 147-150.

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. Lapse risk
exposure on products with premium financing has increased over theyear as rising interest rates have led to an increase in the cost offinancing for customers.
The principal risk we face is that, over time, the cost of the contract,
including claims and benefits may exceed the total amount ofpremiums and investment income received.
The table on page 74 analyses our life insurance underwriting risk
exposures by type of contract.
The insurance underwriting risk profile and related exposures remain
largely consistent with those observed at 31 December 2022.
Sensitivities

Mortality and morbidity risk is typically associated with life insurance
contracts. The effect on profit of an increase in mortality or morbidity
depends on the type of business being written.
Sensitivity to lapse rates depends on the type of contracts being
written. An increase in lapse rates typically has a negative effect on
CSM (and therefore expected future profits) due to the loss of future
income on the lapsed policies. However, some contract lapses have apositive effect on profit due to the existence of policy surrendercharges.
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 because these entities have smaller portfolios over which tospread costs.
The impact of changing insurance underwriting risk factors is
primarily absorbed within the CSM, unless contracts are onerous inwhich case the impact is directly to profits. The impact of changes to
the CSM is released to profits over the life of the related insurance
contracts.

(Audited)
The table below shows the sensitivity of the CSM, profit and total
equity to reasonably foreseeable changes in non-economic
assumptions across all our insurance manufacturing subsidiaries.
These sensitivities are prepared in accordance with current HKFRS
Accounting Standards, which have changed following the adoption of

Sensitivity of the group’s insurance manufacturing subsidiaries to insurance underwriting risk factors(Audited)

At 31 Dec 2023
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
At 31 Dec 20223
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

Effect on CSM(gross)1
HK$m

Effect on profit
after tax (gross)1
HK$m

Effect on profit
after tax (net)2
HK$m

Effect on total
equity (gross)1
HK$m

Effect on total
equity (net)2
HK$m(2,361)
2,677(1,753)
1,929
(237)
242

(259)
111
(156)
98
(25)
36

(138)
163
(100)
119
(26)
37

(259)
111
(156)
98
(25)
36

(138)
163
(100)
119
(26)
37

(2,059)2,170(1,160)
1,181
(169)
178

(125)
108
(123)
127
(24)
21

(124)
104
(119)
112
(28)
17

(125)
108
(123)
127
(24)
21

(124)
104
(119)
112
(28)
17

1 The ‘gross’ sensitivities impacts are provided before considering the impacts of reinsurance contracts held as risk mitigation.
2 The ‘net’ sensitivities impacts are provided after considering the impacts of reinsurance contracts held as risk mitigation.
3 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4 ‘Insurance Contracts’. Comparative data have been
restated accordingly.

76

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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 report on
pages 78-82, 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 ‘the group’), 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 for thegroup 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 this Annual
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 applicable set ofaccounting 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 andperformance of the business and the position of the group, together with a description of the principal risks and uncertainties that the groupfaces.

On behalf of the Board

Peter Wong
Chairman
21 February 2024

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

77

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 83 to 151, comprise:– the consolidated balance sheet as at 31 December 2023;– 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, comprising material 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 2023, 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 2023, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with
Hong Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants (‘HKICPA’) and havebeen 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 underthose standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of ourreport.
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 awhole, 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., Ltd (‘BoCom’)– Insurance contract liabilities

78

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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 2023, the group recorded allowances for expected credit
losses (‘ECL’) on loans and advances to customers of HK$38.9bn.
The determination of the ECL on non-credit-impaired loans and advances
to customers requires the use of complex credit risk methodologies thatare applied in models using the group’s historic experience of thecorrelations 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 used for ECL that we focused on for noncredit-impaired loans and advances to customers included those withgreater levels of management judgement and for which variations have themost 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.
Impacts related to the mainland China commercial real estate sector, thegeopolitical landscape and other current macroeconomic conditions effectthe inherent risk and estimation uncertainty involved in determining the
ECL on loans and advances to customers. Management judgemental
adjustments to ECL on non-credit-impaired loans and advances tocustomers therefore continue to be made.
The above ongoing conditions continue to result in significant creditimpaired corporate exposures related to the unsecured offshore mainland
China commercial real estate sector. The assumptions with the mostsignificant impact here are those applied in estimating the recoverability ofthese exposures.

We tested controls in place relating to the methodologies, their application,
significant assumptions and data used to determine the ECL on loans andadvances to customers. These included controls relating to:– 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 methodologies and related models.
We further performed the following to assess the significant assumptions
and data:– We challenged the appropriateness of the significant assumptions andobtained corroborating evidence;– We involved our economic experts in assessing the reasonableness ofthe severity and likelihood of certain economic scenarios;– We tested a sample of customer risk ratings assigned to wholesale
exposures; and– We tested a sample of critical data used to determine ECL.
For a sample of management judgemental adjustments and a sample ofcredit-impaired wholesale exposures, we challenged the appropriatenessMatters discussed with the Audit Committeeof these and assessed the ECL determined.
We discussed the appropriateness of the methodologies, their application,
We further considered whether the judgements made in selecting thesignificant assumptions and related disclosures with the Audit Committee,
significant assumptions, as well as determining the management
giving consideration to the current macroeconomic conditions. Thisjudgemental adjustments and credit-impaired wholesale exposures, would
included economic scenarios and their likelihood, management
give rise to indicators of possible management bias.
judgemental adjustments made to derive the ECL on loans and advances
to customers, and future recoverability of certain significant credit-impaired We assessed the adequacy of the disclosures in relation to ECL on loans
and advances to customers made in the consolidated financial statements
wholesale exposures.
in the 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 35-58
Note 1.2 (i) on the consolidated financial statements: Basis of preparation and material accounting policies – Summary of material accounting policies Impairment of amortised cost and FVOCI financial assets, page 94-96
Note 2 (e) on the consolidated financial statements: Operating profit – Change in expected credit losses and other credit impairment charges, page 101
Note 10 on the consolidated financial statements: Loans and advances to customers, page 116-117

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

79

Independent Auditor’s Report

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

How our audit addressed the Key Audit Matter

At 31 December 2023, the fair value of the investment in BoCom, basedon the share price, was lower than the carrying value. This is an indicatorof potential impairment. An impairment test was performed bymanagement, with supporting sensitivity analysis, using a value in use('VIU') model. On this basis, the group impaired the value of theinvestment in BoCom by HK$24.0bn. The carrying value of the investment
in BoCom after impairment amounted to HK$166.2bn at 31 December
2023.
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
combination of management’s judgement, analysts’ forecasts, market dataor other relevant 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 significant
assumptions included the discount rate, operating income growth rate,loans and advances to customers growth rate, long-term profit and asset
growth rates, cost-income ratio, expected credit losses as a percentage ofloans and advances to customers, long-term effective tax rate, capitalrequirements – capital adequacy ratio, capital requirements – tier 1 capital
adequacy ratio and risk-weighted assets as a percentage of total assets.

We tested controls in place relating to significant assumptions, themethodology and its application used to determine the VIU. We assessed
the appropriateness of the methodology used and its application. 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 which as relevant included past experience, externalmarket information, third-party sources including analyst reports,
information from BoCom management and historical publicly available
BoCom financial information;– Determined a reasonable range for the discount rate assumption, withthe assistance of our valuation experts, and compared it to the discountrate used by management; and– Assessed whether the judgements made in selecting the significant
assumptions would give rise to indicators of possible management bias.
We observed meetings between management and BoCom management
to identify facts and circumstances impacting significant assumptions
relevant to the determination of the VIU.
Representations were obtained from the Bank that assumptions usedwere consistent with information currently available to the Bank.
We assessed the adequacy of the disclosures in relation to BoCom madein 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.

Relevant references in the consolidated financial statements
Note 1.2 (a) on the consolidated financial statements: Basis of preparation and material accounting policies – Summary of material accounting policies –Consolidation and related policies, page 91
Note 14 on the consolidated financial statements: Interests in associates and joint ventures, page 119-122

80

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Insurance contract liabilities
Nature of the Key Audit Matter

How our audit addressed the Key Audit Matter

The group has adopted HKFRS 17 ‘Insurance contracts’. The standard sets
out the requirements that an entity should apply in accounting for insurance
contracts it issues, reinsurance contracts it holds and investment contracts
with discretionary participating features it issues.
At 31 December 2023, the group recorded insurance contract liabilities of
HK$730.8bn.
Insurance contract liabilities under HKFRS 17 are measured as the total of
fulfilment cash flows and contractual service margin, the determination ofwhich requires judgement and interpretation. This includes the selection of
accounting policies and the use of complex methodologies that are appliedin models. The selection and application of appropriate methodology
requires significant professional judgement. It also requires thedetermination of assumptions which involve estimation uncertainty.

We tested certain controls in place relating to accounting policies,
methodologies, their application, significant assumptions and data used indetermining insurance contract liabilities, these included controls relatingto:– Selection and approval of the accounting policies;– Policy data reconciliations from the policyholder administration systems
to the actuarial valuation models;– Assumption setting; and– Review and determination of methodologies used, and their applicationin the models.
With the assistance of our actuarial professionals, we performed thefollowing substantive audit procedures to assess the accounting policies,
methodologies, their application, significant assumptions, data anddisclosures:– We assessed the adherence of the accounting policies with therequirements in HKFRS 17;– We assessed the appropriateness of the methodologies used and theirapplication in models;– We challenged the appropriateness of the judgements made in
selecting significant assumptions and, where relevant, theirinterrelationships. We have assessed these significant assumptions andobtained relevant corroborating evidence. We further considered
whether the judgements made in selecting the significant assumptions
would give risk to indicators of susceptibility to management bias;– We performed substantive audit procedures over a sample of critical
data used to ensure these are relevant and reliable; and– We assessed the adequacy of the relevant disclosures in the context of
the applicable financial reporting framework.

Matters discussed with the Audit Committee
We discussed the appropriateness of the accounting policies,
methodologies, their application, significant assumptions and related
disclosures with the Audit Committee. Perspectives were also shared on
the control environment related to accounting for insurance contract
liabilities.

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),
page 72-76
Note 1.1 (a) on the consolidated financial statements: Basis of preparation and material accounting policies – Basis of preparation – Compliance with
Hong Kong Financial Reporting Standards, page 89-90
Note 1.2 (j) on the consolidated financial statements: Basis of preparation and material accounting policies – Summary of material accounting policies –Insurance contracts, page 97-98
Note 3 on the consolidated financial statements: Insurance business, page 102-107
Note 38 on the consolidated financial statements: Effects of adoption of HKFRS 17, page 147-150

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 2023, Banking Disclosure Statement at 31 December 2023 and List of the directors of the Bank's subsidiary
undertakings (during the period from 1 January 2023 to 21 February 2024) other than the consolidated financial statements and our auditor’sreport thereon. We have obtained some of the other information including Certain defined terms, Cautionary statement regarding forwardlooking statements, Chinese translation, Financial Highlights, Report of the Directors, Task Force on Climate-related Financial Disclosures,
Financial Review, Risk, Statement of Directors' Responsibilities and Additional information sections of the Annual Report and Accounts 2023
prior to the date of this auditor’s report. The remaining other information, including Banking Disclosure Statement at 31 December 2023 andList of the directors of the Bank's subsidiary undertakings (during the period from 1 January 2023 to 21 February 2024), is expected to be madeavailable 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 the consolidated 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 form ofassurance 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 this regard.
When we read the remaining other information, if we conclude that there is a material misstatement therein, we are required to communicate
the matter to the Audit Committee and take appropriate action considering our legal rights and obligations.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

81

Independent Auditor’s Report

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 tofraud 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.

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 to you, as abody, 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 of assurance, but is not aguarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements canarise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence theeconomic 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 the audit.
We also:– Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design andperform 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 to continue as agoing concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related
disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are basedon the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group to cease tocontinue as a going concern.
– Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
– 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 the groupaudit. 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, andto communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and whereapplicable, 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 theconsolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’sreport unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that amatter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweighthe 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, 21 February 2024

82

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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

Net interest income– interest income– interest expense
Net fee income– fee income– fee expense
Net income from financial instruments held for trading or managed on a fair value basis
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fairvalue through profit or loss
Changes in fair value of designated debts issued and related derivatives
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
Gains less losses from financial investments
Insurance finance income/(expense)
Insurance service result– Insurance revenue– Insurance service expense
Other operating income
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
Impairment of interest in associate
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

2023

2022

Notes

HK$m

HK$m
(restated)12a2c

130,780
295,212(164,432)
38,04351,025(12,982)
74,435

109,878
163,124(53,246)
38,56550,053(11,488)
41,2762c

48,959(94,914)2c

8
252(3,791)(48,798)
6,558
13,007(6,449)3,233
249,679(12,843)
236,836(38,547)(54,538)(9,724)(7,184)(109,993)
126,843
18,555(23,955)
121,443(23,916)
97,527(703)
40
52
97,187
4,977
10,723(5,746)
4,445
200,803(16,370)
184,433(38,322)(53,097)(9,096)(6,023)(106,538)
77,895
18,792—
96,687(15,996)
80,69187,191
3,556
6,780
97,52773,662
2,739
4,290
80,691

2b

2c

3

2d

2e

4
2f
2g

14
14

5

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

83

Consolidated Financial Statements

Consolidated statement of comprehensive income
for the year ended 31 December

Profit for the year
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Debt instruments at fair value through other comprehensive income– fair value gains/(losses)– fair value (gains)/losses transferred to the income statement– expected credit (recoveries)/losses recognised in the income statement– income taxes
Cash flow hedges– fair value gains– fair value gains reclassified to the income statement– income taxes
Share of other comprehensive income/(expense) of associates and joint ventures
Exchange differences
Items that will not be reclassified subsequently to profit or loss:
Property revaluation– fair value gains– income taxes
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/(expense) 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

2023

2022

HK$m

HK$m
(restated)1

97,52780,691

7,953
6,256
3,799
(372)
(1,730)3,605
7,581(3,282)(694)
736(9,043)(13,705)(17,121)
(124)
331
3,209
(1,965)
5,851(8,228)412(1,964)(32,040)

4,496
5,330
(834)
(899)
(895)
(4)
(5,410)(6,457)
1,047
21
26
(5)
1,459
98,986

3,863
4,683
(820)
865
868
(3)
4,588
5,461
(873)
185
232
(47)
(40,173)
40,51888,2893,556
7,141
98,98634,497
2,739
3,282
40,518

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.

84

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Consolidated balance sheet
at 31 December
Notes

AssetsCash 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 and otherwise mandatorily measured at fair value through profit or loss
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers
Financial investments
Amounts due from Group companies
Interests in associates and joint ventures
Goodwill and intangible assets
Property, plant and equipment
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
Insurance contract liabilities
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

7
8
9

10
11
32
14
15
16
5
17

18
19
8
20
21
4
32
22
3

5
23

24
25

31 Dec 2023

31 Dec 2022

1 Jan 2022

HK$m

HK$m
(restated)1

HK$m(restated)1

232,987
22,049328,304
941,250
409,253
707,573
831,186
563,801
3,557,076
2,029,212
158,592
170,206
38,923
129,675
9,315
370,991
10,500,393

232,740
28,557341,354699,805
502,877
653,030
927,976
515,847
3,695,068
1,749,707
140,485
185,898
36,863130,926
7,582
349,128
10,197,843

276,857
21,632332,044
777,450
365,167
675,853803,775
427,8113,830,956
1,630,612
112,621
188,485
31,416
129,8277,444
266,466
9,878,416

328,304
27,536
521,984
182,146
6,261,051
103,050
450,216
170,728
87,745
1,362
465,476
258,113730,829
15,34423,923—9,627,807

341,354
33,073351,093
198,908
6,113,709
142,453
551,729
167,743
100,909
1,655
398,261
246,614654,922
6,009
21,912
3,119
9,333,463

332,044
25,701
255,374
280,310
6,177,182
92,723355,791
138,965
67,364
1,890
356,277
227,245
690,991
2,385
22,043
4,053
9,030,338

180,181
52,465
117,214462,866
812,726
59,860872,586
10,500,393

180,181
52,386
108,837
466,148807,552
56,828864,380
10,197,843

172,335
44,615
151,510422,462
790,92257,156
848,078
9,878,416

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. We have restated 2022
comparative data and the HKFRS 17 transition impact on the balance sheet at 1 January 2022.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

85

Consolidated Financial Statements

Consolidated statement of changes in equity
for the year ended 31 December

At 1 Jan 2023
Profit for the year
Other comprehensive
income/(expense) (net oftax)– debt instruments at fairvalue through othercomprehensive income– equity instruments
designated at fair value
through othercomprehensive income– cash flow hedges– changes in fair value offinancial liabilities
designated at fair value
upon initial recognition
arising from changes in
own credit risk
– property revaluation– remeasurement ofdefined benefit asset/
liability– share of othercomprehensive income/(expense) of associates
and joint ventures– exchange differences
Total comprehensive
income/(expense) for theyear
Other equity instruments
issued2
Other equity instruments
redeemed3
Dividends to shareholders5
Movement in respect ofshare-based payment
arrangements
Transfers and othermovements6
At 31 Dec 2023

86

Other reserves
Financial
Cash
Total
Other
Property assets atflow
ForeignshareNonShareequity Retained revaluation
FVOCI
hedge exchange
holders’ controlling
1
4
capital instruments earnings
reserve
reserve reserve
reserve Other
equityinterests

Total
equity
HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

180,181—

52,386—466,148
90,747

65,148—(11,186)—(1,487)—(38,470) 94,832——

807,552
90,74756,828 864,380
6,780
97,527——(5,415)

4,186

7,840

3,342

(8,698)

(157)

1,098

361

1,459

—

—

—

—

7,784

—

—

—

7,784

169

7,953

—
—

—
—

—
—

—
—

(689)
—

—
3,334

—
—

—
—

(689)
3,334

(210)
271

(899)
3,605

—
—

—
—

(5,413)
—

—
4,186

—
—

—
—

—
—

—
—

(5,413)
4,186

3
310

(5,410)
4,496

—

—

(7)

—

—

—

—

—

(7)

28

21

—
—

—
—

5
—

—
—

888
(143)

—
8

—
(8,698)

(157)
—

736
(8,833)

—
(210)

736
(9,043)——85,332

4,186

7,840

3,342

(8,698)(157)

91,845

7,141

98,986

—

7,850

—

—

—

—

—

—

7,850

—

7,850

—
—

(7,771)
—

(406)

—

—

—

—

—

(8,177)—(8,177)(86,356)

—

—

—

—

—

(86,356)

—

—

(99)

—

—

—

—

(208)

(307)

(731)

6,062

319

(47,899) 100,529

812,726——(1,753)(4,055)800(4)180,181

52,465462,866

65,279(2,546)

1,851

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(3,843) (90,199)

12

(295)

(278)

41

59,860 872,586

Consolidated statement of changes in equity (continued)
7

for the year ended 31 December (restated )Other reserves
Other
Share
equity Retained
1
capital instruments earnings
At 31 Dec 2021
Impact on transition to
HKFRS 178
At 1 Jan 2022
Profit for the year
Other comprehensive
income/(expense) (net oftax)– debt instruments at fairvalue through othercomprehensive income– equity instruments
designated at fair value
through othercomprehensive income– cash flow hedges– changes in fair value offinancial liabilities
designated at fair value
upon initial recognition
arising from changes in
own credit risk
– property revaluation– remeasurement ofdefined benefit asset/
liability– share of othercomprehensive income ofassociates and joint
ventures– exchange differences
Total comprehensive
income/(expense) for theyear
Shares issued1
Other equity instruments
issued2
Dividends to shareholders5
Movement in respect ofshare-based payment
arrangements
Transfers and othermovements6
At 31 Dec 2022

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cashflow
Foreignhedge exchange
reserve
reserve

Other

HK$m

(7,130) 89,922

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

172,335

44,615

488,055

64,990

3,869

153

—

—

(65,593)

—

(294)

—

172,335—

44,615—422,462
76,40164,990
—

3,575
—

153
—

—

—

4,772

3,646

(14,804)

—

—

—

—

(13,394)

—

—

—

—

—

—

—

—

—

—

4,590

—

—

—

—

—

191

—

—

—

—

HK$m

—

4

Total
shareholders’equityNoncontrollinginterests

Total
equity

HK$m

HK$m

HK$m

856,80966,702 923,511—(65,887)(9,546) (75,433)(7,130) 89,922——

790,922
76,401

57,156 848,078
4,290
80,691(1,639)(31,340)200(39,165)(1,008) (40,173)

—

—

—

(13,394)(311) (13,705)

745

—

—

—

745

120

865

—

(1,639)——(1,639)(326)(1,965)

—

—

—

—

—

4,590

(2)

4,588

3,646

—

—

—

—

3,646

217

3,863

—

—

—

—

—

191

(6)

185

(9)

—

(2,155)——200(1,964)—(1,964)

—

—

—

—

(31,340)—(31,340)(700) (32,040)——

81,173

3,646(14,804)(1,639)(31,340)200

37,236

3,282

40,518

7,846

—

—

—

—

—

—

—

7,846

—

7,846

—

7,771

—

—

—

—

—

—

7,771

—

7,771

—

—

(34,821)

—

—

—

—

—

(34,821)

—

—

135

—

—

—

—

(137)

(2)

—

4,847

(1,400)(38,470) 94,832

807,552——(2,801)(3,488)43(1)

180,181

52,386466,148

65,148(11,186)(1,487)(2,845) (37,666)
13

11

(778)

(2,178)56,828 864,380

1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous
years. During 2022, 3,138.4m new ordinary shares were issued at an issue price of HK$2.5 each.
2 During 2023, an additional tier 1 capital instrument amounting to US$1,000m was issued for which there were no issuance costs.
During 2022, an additional tier 1 capital instrument amounting to US$1,000m was issued for which there were US$10m issuance costs.
3 During 2023, an additional tier 1 capital instrument was redeemed at fair value US$(1,041)m.
4 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 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.
5 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
6 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.
7 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been
restated accordingly.
8 The impact of HKFRS 17 on previously reported total equity was HK$(76,883)m at 31 December 2022.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

87Consolidated Financial Statements

Consolidated statement of cash flows
for the year ended 31 December
HK$m

2022
HK$m
(restated)1

121,443

96,687

16,908
4,247(18,555)
23,955(4)—
13,707369
976(26,335)(3,505)

15,119123(18,792)
—
(4)
(665)
17,249592
837(2,366)45,970(288,737)
76,08455,259(51,239)(77,121)130,580
170,891(13,164)
2,985
149,791
5,878(628)(15,725)
278,060(3,563,846)
3,270,020(2,176)36
967(9,641)
4,869—(299,771)
7,850
(159)
(8,177)
66,521(74,277)(90,199)(98,441)(120,152)
1,121,695(4,905)
996,638

185,30976,805(166,542)
50,565(70,588)(144,875)
95,71933,54526,028
3,669
6,003
(345)
(11,463)
238,580(3,278,568)
3,140,253(2,802)
73
1,449(11,771)—(4,166)(155,532)
15,617(1,548)—81,014(22,367)(37,666)
35,050118,098
1,055,084(51,487)
1,121,695

232,987
22,049355,725
55,053
223,563
134,797(27,536)996,638

232,740
28,557368,946
58,473
286,100
179,952(33,073)
1,121,695

2023

Profit before tax
Adjustments for non-cash items:
Depreciation and amortisation
Net loss from investing activities
Share of profit in associates and joint ventures
Impairment of interest in associate
Gain on disposal of businesses and associate
Gain on acquisition of subsidiary
Change in expected credit losses gross of recoveries and other credit impairment charges
Provisions
Share-based payment expense
Other non-cash items included in profit before tax
Elimination of exchange differences
Changes in operating assets and liabilities
Change in net trading securities and derivatives
Change in loans and advances to banks and customers
Change in reverse repurchase agreements – non-trading
Change in financial assets designated and otherwise mandatorily measured at fair value through profit or loss
Change in other assets
Change in deposits by banks and customer accounts
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 from disposal of businesses and associate
Net cash outflow on purchase of subsidiaries
Net cash from investing activities
Issue of ordinary share capital and other equity instruments
Purchase of non-controlling interest
Redemption of other equity instruments
Subordinated loan capital issued2
Subordinated loan capital repaid2
Dividends paid to shareholders of the parent company and non-controlling interests
Net cash from financing activities
Net increase/(decrease) 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 Dec3
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 Dec3

Interest received was HK$294,111m (2022: HK$180,879m), interest paid was HK$157,280m (2022: HK$50,873m) and dividends received were
HK$8,261m (2022: HK$6,971m).
1 Comparatives have been restated reflecting the implementation of HKFRS 17. In addition, certain debt instruments have been voluntarily re-presented
in the comparative year, between investing and operating activities, to better align with other HSBC Group entities. This re-presentation does not
impact the net change in cash and cash equivalents during the reporting periods.
2 Changes in subordinated loan capital (including those issued to Group companies) during the year included amounts from issuance and repayments aspresented above, and non-cash changes from foreign exchange loss of HK$216m in 2023 (2022: exchange loss of HK$1,991m) and fair value gain
after hedging of HK$9,899m in 2023 (2022: HK$25,579m loss). These balances are presented under ‘Amounts due to Group companies’ in the
consolidated balance sheet.
3 At 31 December 2023, HK$150,537m (2022: HK$161,252m) was not available for use by the group due to a range of restrictions, including currency
exchange and other restrictions.

88

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Notes on the Consolidated Financial Statements
1

Basis of preparation and material 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 the Hong Kong Instituteof 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 are applicable to the preparation of the financial
statements.

Standards adopted during the year ended 31 December 2023
HKFRS 17 ‘Insurance Contracts’
On 1 January 2023, the group adopted the requirements of HKFRS 17 ‘Insurance Contracts’ retrospectively with comparatives restated from thetransition date, 1 January 2022. These include comparative data presented in the primary financial statements, Note 2 (a to g) ‘Operating profit’,Note 3 ‘Insurance business’, Note 4 ‘Employee compensation and benefits’, Note 5 ‘Tax’, Note 8 ‘Derivatives’, Note 9 ‘Financial assets
designated and otherwise mandatorily measured at fair value through profit or loss’, Note 10 ‘Loans and advances to customers’, Note 11‘Financial investments’, Note 13 ‘Investments in subsidiaries’, Note 15 ‘Goodwill and intangible assets’, Note 16 ‘Property, plant andequipment’, Note 17 ‘Prepayments, accrued income and other assets’, Note 22 ‘Accruals and deferred income, other liabilities and provisions’,
Note 26 ‘Maturity analysis of assets and liabilities’, Note 27 ‘Analysis of cash flows payable under financial liabilities by remaining contractual
maturities’, Note 30 ‘Offsetting of financial assets and financial liabilities’, Note 31 ‘Segmental analysis’, Note 32 (a) ‘Related party transactions’,
Note 33 ‘Fair values of financial instruments carried at fair value’ and Note 34 ‘Fair values of financial instruments not carried at fair value’. At
transition, the group’s total equity reduced by HK$75,433m. For further details, see Note 38 ‘Effects of adoption of HKFRS 17’.
On adoption of HKFRS 17, balances based on HKFRS 4, including the present value of in-force long-term insurance business (‘PVIF’) asset inrelation to the upfront recognition of future profits of in-force insurance contracts, were derecognised. Insurance contract liabilities have beenremeasured under HKFRS 17 based on groups of insurance contracts, which include the fulfilment cash flows comprising the best estimate of
the present value of the future cash flows (for example premiums and payouts for claims, benefits, and expenses), together with a risk
adjustment for non-financial risk, as well as the contractual service margin (‘CSM’). The CSM represents the unearned profits that will be
released and systematically recognised in Insurance revenue as services are provided over the expected coverage period.
In addition, the group has made use of the option under the standard to re-designate certain eligible financial assets held to support insurance
contract liabilities, which were predominantly measured at amortised cost, as financial assets measured at fair value through profit or loss, withcomparatives restated from the transition date.
The key differences between HKFRS 4 and HKFRS 17 are summarised in the following table:HKFRS 4HKFRS 17

Balance sheet– Insurance contract liabilities for non-linked life insurance – Insurance contract liabilities are measured for groups ofcontracts are calculated by local actuarial principles.
insurance contracts at current value, comprising the fulfilment
Liabilities under unit-linked life insurance contracts are at
cash flows and the CSM.
least equivalent to the surrender or transfer value, by– The fulfilment cash flows comprise the best estimate of thereference to the value of the relevant underlying funds orpresent value of the future cash flows, together with a risk
indices. Grouping requirements follow local regulations.
adjustment for non-financial risk.
– An intangible asset for the PVIF is recognised,– The CSM represents the unearned profit.
representing the upfront recognition of future profits
associated with in-force insurance contracts.

Profit emergence /recognition– The value of new business is reported as revenue on Day – The CSM is systematically recognised in revenue as services
1 as an increase in PVIF.
are provided over the expected coverage period of the group ofcontracts (i.e. no Day 1 profit).
– The impact of the majority of assumption changes isrecognised immediately in the income statement.
– Contracts are measured using the general measurement model('GMM') or the variable fee approach ('VFA') model for– Variances between actual and expected cash flows are
insurance contracts with direct participation features uponrecognised in the period they arise.
meeting the eligibility criteria. Under the VFA model, thegroup's share of the investment experience and assumptionchanges are absorbed by the CSM and released over time toprofit or loss. For contracts measured under GMM, the group's
share of the investment volatility is recorded in profit or loss as
it arises.
– Losses from onerous contracts are recognised in the income
statement immediately.

Investment returnassumptions(discount rate)– PVIF is calculated based on long-term investment returnassumptions based on assets held. It therefore includes
investment margins expected to be earned in future.

– Under the market consistent approach, expected future
investment spreads are not included in the investment returnassumption. Instead, the discount rate includes an illiquidity
premium that reflects the nature of the associated insurance
contract liabilities.

Expenses– Total expenses to acquire and maintain the contract over
its lifetime are included in the PVIF calculation.
– Expenses are recognised across operating expenses andfee expense as incurred and the allowances for those
expenses are released from the PVIF simultaneously.

– Projected lifetime expenses that are directly attributable costs
are included in the insurance contract liabilities and recognisedin the insurance service result.
– Non-attributable costs are reported in operating expenses.

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Notes on the Consolidated Financial Statements

Transition
In applying HKFRS 17 for insurance contracts retrospectively, the full retrospective approach (‘FRA’) has been used unless it was impracticable.
When the FRA is impracticable such as when there is a lack of sufficient and reliable data, an entity has an accounting policy choice to use
either the modified retrospective approach (‘MRA’) or the fair value approach (‘FVA’). The group has applied the FRA for new business from2018 at the earliest, subject to practicability, and the FVA for contracts for which the FRA is impracticable.
Under the FVA, the valuation of insurance liabilities on transition is based on the applicable requirements of HKFRS 13 ‘Fair Value
Measurement’. This requires consideration of the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date (an exit price). The CSM is calculated as the difference between what amarket participant would demand for assuming the unexpired risk associated with insurance contracts, including required profit, and thefulfilment cash flows that are determined using HKFRS 17 principles.
In determining the fair value, the group considered the estimated profit margin that a market participant would demand in return for assuming
the insurance liabilities with the consideration of the level of capital that a market participant would be required to hold, and the discount ratewith an allowance for an illiquidity premium that takes into account the level of ‘matching’ between the group’s assets and related liabilities.
These assumptions were set taking into account the assumptions that a hypothetical market participant operating in each local jurisdiction would
consider.

Amendments to HKAS 12 ‘International Tax Reform — Pillar Two Model Rules’
In July 2023, the HKICPA issued amendments to Hong Kong Accounting Standard ('HKAS') 12 ‘International Tax Reform – Pillar Two Model
Rules’, which became effective immediately. On 20 June 2023, legislation was substantively enacted in the UK (the jurisdiction of the group's
ultimate parent entity) to introduce the Organisation for Economic Cooperation and Development (‘OECD’)’s Pillar Two global minimum tax rules
and a UK qualified domestic minimum top-up tax, with effect from 1 January 2024. The Hong Kong Qualified Domestic Minimum Top-up Tax is
expected to be effective from 1 January 2025. Information about the group's exposure to Pillar Two income taxes is described in Note 5.
There were no other new standards or amendments to standards that had an effect on these financial statements.

(b)

Future accounting developments

Minor amendments to HKFRSs
The HKICPA has published a number of minor amendments to HKFRSs that are effective from 1 January 2024 and 1 January 2025. The group is
continuing to assess the impact of Lack of Exchangeability (Amendments to HKAS 21). The group expects the remainder will have an
insignificant effect, when adopted, on the consolidated financial statements.

(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 denominated inforeign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured athistorical 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 are recognised in OCI. On
disposal of a foreign operation, exchange differences previously recognised in OCI are reclassified to the income statement.

(d)Presentation of information

Certain disclosures required by HKFRSs have been included in the sections marked as ('Audited') in this Annual Report and Accounts as follows:– Consolidated income statement and balance sheet data by reportable segments are included in the 'Financial Review' on page 19 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
35 to 66 and pages 72 to 76 as specified as ‘Audited’.
– Capital disclosures are included in the ‘Treasury Risk’ section on pages 58 to 59 as specified as ‘Audited’.
In accordance with the group’s policy to provide disclosures that help stakeholders understand the group’s performance, financial position andchanges to them, the information provided in the Risk section goes beyond the minimum levels required by accounting standards, statutory andregulatory requirements. In addition, the group assesses good practice recommendations issued from time to time by relevant regulators andstandard setters and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.

(e)

Critical 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 estimates andjudgements 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 by management 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 of judgement and estimation uncertainty involved.
Management has considered the impact of climate-related risks on the group's financial position and performance. While the effects of climatechange are a source of uncertainty, as at 31 December 2023 management did not consider there to be a material impact on our criticaljudgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular, management
has considered the known and observable potential impacts of climate-related risks of associated judgements and estimates in our value in use('VIU') calculations.

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(f)Going concern

The consolidated financial statements are prepared on a going concern basis, as the Directors are satisfied that the group has the resources tocontinue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating
to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources.
These considerations include stressed scenarios that reflect the uncertainty in the macroeconomic environment following disrupted supply
chains, slower economic activity and ongoing geopolitical tensions. They also considered other top and emerging risks, including climatechange, as well as the related impacts on profitability, capital and liquidity.

1.2 Summary of material accounting policies(a)Consolidation and related policies

Investments in subsidiaries
Where an entity is governed by voting rights, the group consolidates when it holds, directly or indirectly, the necessary voting rights to passresolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors,
including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal.
Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value orat the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made for each businesscombination.
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 at which
goodwill is monitored for internal management purposes. Impairment testing is performed at least once a year, or whenever there is anindication 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, asassociates.
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, by comparing the recoverable amount of the relevant investment to its carrying amount. Goodwill on acquisitions of interests inassociates is not tested separately for impairment, but is assessed as part of the carrying amount of the investment. Previously recognised
impairments are assessed for reversal when there are indicators that they may no longer exist or have decreased. Any reversal, which may arise
only from changes in estimates used to determine the prior impairment loss, is recognised to the extent that it does not increase the carrying
amount above that had no impairment loss been previously recognised.

Critical estimates and judgements
The most significant critical 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 value in use 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.
– Key assumptions are used in estimating BoCom’s value in use and the sensitivityof the value in use calculations to different assumptions are described in Note 14.

(b)

Income and expense

Operating income
Interest income and expense
Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value, 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 anaccounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.
Interest on credit-impaired financial assets is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amountof the asset less allowance for expected credit losses (‘ECL’)).
Non-interest income and expense
The group generates fee income from services provided over time, such as account service and card fees, or when the group delivers a specifictransaction at a point in time such as broking services and import/export services. With the exception of certain fund management andperformance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the sizeof 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 a significant financing component.
The group acts as principal in the majority of contracts with customers, with the exception of broking services. For brokerage trades where thegroup 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 the customer.
Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement.
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Notes on the Consolidated Financial Statements

Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in accountservice packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performanceobligations, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, andusually the date when shareholders approve the dividend for unlisted equity securities.
Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:– ‘Net income from financial instruments held for trading or managed on a fair value basis’: This comprises net trading income, which includes
all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments
managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in thecredit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that aremanaged in conjunction with financial assets and liabilities measured at fair value through profit or loss.
– ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit
or loss’: This includes all gains and losses from changes in the fair value, together with related interest income, expense and dividends inrespect of financial assets and liabilities measured at fair value through profit or loss, and those derivatives managed in conjunction with theabove 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 service result and insurance finance income/(expenses) are disclosed in Note 1.2(j).

(c)

Valuation of financial instruments

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initialrecognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference
between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or avaluation technique that uses only data from observable markets, the group recognises the difference as a trading gain or loss at inception (‘aday 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 thetransaction until the transaction matures, is closed out, the valuation inputs become observable or the group enters into an offsetting
transaction.
The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a group offinancial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured
on a net basis but the underlying financial assets and liabilities are presented separately in the consolidated financial statements, unless theysatisfy the HKFRSs offsetting criteria.

Critical estimates and judgements
The majority of valuation techniques employ only observable market data, which is assumed to include the potential effects of a variety of factors
including climate-related risks. However, certain financial instruments are classified on the basis of valuation techniques that feature one or moresignificant 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 thesensitivity of their valuation to the effect of applying reasonably
instrument’s inception profit or greater than 5% of the instrument’s valuation ispossible alternative assumptions in determining their fair value
driven by 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 forregular way amortised cost financial instruments using trade date accounting. The carrying amount of these financial assets at initial recognition
includes any directly attributable transactions costs.
The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending
commitment is expected to be sold shortly after origination, the commitment to lend is recorded as a derivative. When the group intends to holdthe loan, the loan commitment is included in the impairment calculations set out below.

Non-trading reverse repurchase, repurchase and similar agreements
When debt securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on the balance
sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (‘reverse repos’) are
not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos aremeasured at amortised cost. The difference between the sale and repurchase price, or between the purchase and resale price, is treated asinterest 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.
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(e)Financial assets measured at fair value through other comprehensive income (‘FVOCI’)

Financial assets managed within 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 trade date when the group enters into contractual arrangements to purchaseand are generally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value with changes therein(except for those relating to impairment, interest income and foreign currency exchange gains and losses) recognised 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 theincome 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 the groupholds the investments other than to generate a capital return. Dividends from such investments are recognised in the income statement. Gainsor losses on the derecognition of these equity securities are not transferred to the income statement. Otherwise, equity securities aremeasured at fair value through profit or loss.

(g)

Financial instruments designated at fair value through profit or loss

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below andare 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, inaccordance 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 arenormally 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. Subsequentchanges in fair values are recognised in the income statement in ‘Net income from financial instruments held for trading or managed on a fairvalue basis’ or ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value
through profit or loss’ or ‘Changes in fair value of designated debt and related derivatives’ except for the effect of changes in the liabilities' credit
risk which is presented in OCI, unless that treatment would create or enlarge an accounting mismatch in profit or loss.
Under the above criteria, the main classes of financial instruments designated by the group are:– Debt instruments for funding purposes that are designated to reduce an accounting mismatch: The interest and/or foreign exchange
exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps
as part of a documented risk management strategy.
– Financial assets and financial liabilities under unit-linked and non-linked investment contracts: A contract under which the group does not
accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts withdiscretionary participation features (‘DPF’), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked
investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds or by avaluation method. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation atfair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in
the same line.
– Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance
evaluated on a fair value basis.

(h)Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices.
Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as assets when
their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities which arebifurcated 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 where doing so reduces anaccounting mismatch, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt.

Hedge accounting
When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge
accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses these derivatives or,where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign
operations as appropriate to the risk being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results inrecognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in
the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and thecumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate,unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments is recognised in OCI and the ineffective portion of the change in fair value ofderivative 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 and losses recognised in OCI arereclassified 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
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Notes on the Consolidated Financial Statements

recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative 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 not applied.

(i)

Impairment of amortised cost and FVOCI financial assets

Expected credit losses are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, otherfinancial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts.
At initial recognition, an allowance (or provision in the case of some loan commitments and financial guarantees) is recognised for ECL resulting
from possible default events within the next 12 months or less, where the remaining life is less than 12 months (’12-month ECL’). In the eventof a significant increase in credit risk, an allowance (or provision) is recognised for ECL resulting from all possible default events over the
expected life of the financial instrument (‘lifetime ECL’). Financial assets where 12-month ECL is recognised are considered to be ‘stage 1’;
financial assets which are considered to have experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there
is objective evidence of impairment, and so are considered to be in default or otherwise credit-impaired are in ‘stage 3’. Purchased or originatedcredit-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 that a concession has been granted to the borrower for economic or legal reasons relating to the borrower’s financial condition, or
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. Therefore, thedefinitions of credit-impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted orotherwise credit-impaired.
Interest income is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amount less allowance for ECL).

Write-off
Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect ofrecovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where thenet realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

Forbearance
Loans are identified as forborne and classified as either performing or non-performing when the group modifies the contractual terms due tofinancial difficulty of the borrower. Non-performing forborne loans are stage 3 and classified as non-performing until they meet the cure criteria,
as specified by applicable credit risk policy (for example, when the loan is no longer in default and no other indicators of default have beenpresent for at least 12 months). Any amount written off as a result of any modification of contractual terms upon entering forbearance would not
be reversed.
The group applies the EBA Guidelines on the application of definition of default for our retail portfolios, which affect credit risk policies and ourreporting in respect of the status of loans as credit impaired principally due to forbearance (or curing thereof). Further details are provided under‘Forborne loans and advances’ on page 37.
Performing forborne loans are initially stage 2 and remain classified as forborne until they meet applicable cure criteria (for example, they
continue to not be in default and no other indicators of default are present for a period of at least 24 months). At this point, the loan is either
stage 1 or stage 2 as determined 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).
A forborne loan is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms, or if theterms of an existing agreement are modified such that the forborne loan is a substantially different financial instrument. Any new loans that arise
following derecognition events in these circumstances would generally be classified as POCI and will continue to be disclosed as forborne.

Loan modifications other than forborne loans
Loan modifications that are not identified as forborne are considered to be commercial restructurings. 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 at market rates and no payment-related
concession has been provided. Modifications of certain higher credit risk wholesale loans are assessed for derecognition having regard tochanges in contractual terms that either individually or in combination are judged to result in a substantially different financial instrument.
Mandatory and general offer loan modifications that are not borrower specific, for example market-wide customer relief programmes, generally
do not result in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL
impairment policy. Changes made to these financial instruments that are economically equivalent and required by interest rate benchmark
reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest
rate to be updated to reflect the change of the interest rate benchmark.

Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering thechange in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares therisk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable
information, including information about past events, current conditions and future economic conditions. The assessment is unbiased,probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The
analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors
depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is notpossible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will
differ for different types of lending, particularly between retail and wholesale.
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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, andincluded 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 awide range of information including the obligor’s customer risk rating ('CRR'), macroeconomic condition forecasts and credit transition
probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term
estimated at origination with the equivalent estimation at the reporting date.
The quantitative measure of significance 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 PDs and through-the-cycle migration probabilities, consistent with the instrument’s underlying
modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration
based thresholds as set out in the table below:

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 36.
For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporate all available
information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12 months and isconsidered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogenous 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 therefore identifies loans with a PD higher thanwould be expected from loans that are performing as originally expected and higher than that which would have been acceptable at origination.
It therefore approximates a comparison of origination to reporting date PDs.
As additional data becomes available, the retail transfer criteria approach continues to be refined to utilise a more relative approach for certain
portfolios. These enhancements take advantage of the increase in origination related data in the assessment of significant increases in credit
risk by comparing remaining lifetime PD to the comparable remaining term lifetime PD at origination based on portfolio-specific origination
segments.

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 new financial instruments recognised in most cases following the derecognition of forborne loans. The amount of change inlifetime ECL for a POCI loan is recognised in profit or loss until the POCI loan is derecognised, even if the lifetime ECL are less than the amountof 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 sinceinitial 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. In the case of non-performing forborne loans, such financial instruments aretransferred out of stage 3 when they no longer exhibit any evidence of credit impairment and meet the curing criteria as described above.

Measurement of ECL
The assessment of credit risk, and the estimation of ECL, are unbiased and probability-weighted, and incorporate all available information whichis relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future
events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money andconsiders other factors such as climate-related risks.
In general, the group calculates ECL using three main components, a PD, 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.
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95

Notes on the Consolidated Financial Statements

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 theevent of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised andthe time value of money.
The group makes use of the regulatory internal ratings-based (‘IRB’) framework where possible, with recalibration to meet the differing HKFRS 9
requirements as set out in the following table:
Model
PD
EAD

LGD

Regulatory capitalHKFRS 9– Through the cycle (represents long-run average PD throughout
a full economic cycle).
– The definition of default includes a backstop of 90+ days pastdue.
– Cannot be lower than current balance.
– Downturn LGD (consistent losses expected to be sufferedduring 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.

– Point in time (based on current conditions, adjusted to take into
account estimates of future conditions that will impact PD).
– Default backstop of 90+ days past due for all portfolios.

Other– Amortisation captured for term products.
– Expected LGD (based on estimate of loss given default
including the expected impact of future economic conditions
such as changes in value of collateral).
– No floors.
– Discounted using the original effective interest rate of the loan.
– Only costs associated with obtaining/selling collateral included.
– Discounted back from point of default to balance sheet date.

While 12-month PDs are recalibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD using aterm 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 primarily on an individual basis using a discounted cash flow (‘DCF’) methodology. The expected
future cash flows are based on estimates as of the reporting date, reflecting reasonable and supportable assumptions and projections of future
recoveries and expected future receipts of interest.
Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on its
estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral.
The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under up to
four different scenarios are probability-weighted by reference to the status of the borrower, economic scenarios applied more generally by thegroup and judgement in relation to the likelihood of the work-out strategy succeeding or receivership being required. For less significant cases
where an individual assessment is undertaken, the effect of different economic scenarios and work-out strategies results in an ECL calculation
based on a most likely outcome which is adjusted to capture losses resulting from less likely but possible outcomes. For certain less significant
cases, the group may use a LGD-based modelled approach to ECL assessment, which factors in a range of economic scenarios.

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-month or
lifetime ECL) is the maximum contractual period over which the group is exposed to credit risk. However, where the financial instrument
includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does
not serve to limit the group’s exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum
period considered. Instead, ECL is measured over the period 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 the period is the average time taken for stage 2 exposures todefault or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for thesefacilities 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. For wholesale overdraft facilities, credit risk management actions are taken no lessfrequently than on an annual basis.

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 credit losses inmost economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios oradjustments, 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 42 to 46.

Critical 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 mostsignificant 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 tocurrent and future economic conditions.
– Selecting model inputs and economic forecasts, including determining whether sufficientand appropriately weighted economic forecasts are incorporated to calculate unbiased
expected credit losses.
– Making management adjustments to account for late breaking events, model and data
limitations and deficiencies, and expert credit judgements.
– Selecting applicable recovery strategies for certain wholesale credit-impaired loans.

– The section ‘Measurement uncertainty andsensitivity analysis of ECL estimates’ marked asaudited from pages 42 to 46, set out theassumptions used in determining ECL and provides
an indication of the sensitivity of the result to theapplication of different weightings being applied todifferent economic assumptions.

96

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(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 if it is adversely affected by a specified uncertain future event. An insurance contract may also transfer financial risk, but
is accounted for as an insurance contract if the insurance risk is significant. In addition, the group issues investment contracts with DPF, which
are also accounted under HKFRS 17 ’Insurance Contracts’.

Aggregation of insurance contracts
Individual insurance contracts that are managed together and subject to similar risks are identified as a portfolio. Contracts that are managed
together usually belong to the same product group, and have similar characteristics such as being subject to a similar pricing framework orsimilar product management, and are issued by the same legal entity. If a contract is exposed to more than one risk, the dominant risk of thecontract is used to assess whether the contract features similar risks. Each portfolio is further separated by the contract’s expected profitability.
The portfolios are split by their profitability into: (i) contracts that are onerous at initial recognition; (ii) contracts that at initial recognition have nosignificant possibility of becoming onerous subsequently; and (iii) the remaining contracts. These profitability groups are then divided by issue
date, with contracts the group issues after the transition date being grouped into calendar quarter cohorts. For multi-currency groups ofcontracts, the group considers its groups of contracts as being denominated in a single currency.
The measurement of the insurance contract liability is based on groups of insurance contracts as established at initial recognition, and will
include fulfilment cash flows as well as the CSM representing the unearned profit. The group has elected to update the estimates used in themeasurement on a year-to-date basis.

Fulfilment cash flows
The fulfilment cash flows comprise the following:
Best estimates of future cash flows
The cash flows within the contract boundary of each contract in the group include amounts expected to be collected from premiums andpayouts for claims, benefits and expenses, and are projected using a range of scenarios and assumptions in an unbiased way based on thegroup’s demographic and operating experience along with external mortality data where the group’s own experience data is not sufficiently
large in size to be credible.
Adjustment for the time value of money and financial risks associated with the future cash flows
The estimates of future cash flows are adjusted to reflect the time value of money (i.e. discounting) and the financial risks to derive an expected
present value. The group generally makes use of stochastic modelling techniques in the estimation for products with options and guarantees.
A bottom-up approach is used to determine the discount rate to be applied to a given set of expected future cash flows. This is derived as thesum of the risk-free yield and an illiquidity premium. The risk-free yield is determined based on observable market data, where such markets are
considered to be deep, liquid and transparent. When information is not available, management judgement is applied to determine theappropriate risk-free yield. Illiquidity premiums reflect the liquidity characteristics of the associated insurance contracts.
Risk adjustment for non-financial risk
The risk adjustment reflects the compensation required for bearing the uncertainty about the amount and timing of future cash flows that arises
from non-financial risk. It is calculated as a 75th percentile level of stress over a one-year period. The level of the stress is determined withreference to external regulatory stresses and internal economic capital stresses.
For the main insurance manufacturing entity in the group, the one-year 75th percentile level of stress corresponds to 60th percentile (2022: 59th
percentile) based on an ultimate view of risk over all future years.
The group does not disaggregate changes in the risk adjustment between insurance service result (comprising insurance revenue and insurance
service expense) and insurance finance income or expenses. All changes are included in the insurance service result.

Measurement models
The variable fee approach (‘VFA’) measurement model is used for most of the contracts issued by the group, which is mandatory upon meetingthe following eligibility criteria at inception:a. the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;b. the group expects to pay to the policyholder a substantial share of the fair value returns on the underlying items. The group considers that asubstantial share is a majority of returns; andc. the group expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value ofthe underlying items. The group considers that a substantial proportion is a majority proportion of change on a present value probabilityweighted average of all scenarios.
The risk mitigation option is used for a number of economic offsets against the instruments that meet specific requirements.
The remaining contracts issued and the reinsurance contracts held are accounted for under the general measurement model (‘GMM’).

CSM and coverage units
The CSM represents the unearned profit and results in no income or expense at initial recognition when the group of contracts is profitable. The
CSM is adjusted at each subsequent reporting period for changes in fulfilment cash flows relating to future service (e.g. changes in noneconomic assumptions, including mortality and morbidity rates). For initial recognition of onerous groups of contracts and when groups ofcontracts become onerous subsequently, losses are recognised in insurance service expense immediately.
For groups of contracts measured using the VFA, changes in the group’s share of the underlying items, and economic experience and economic
assumption changes adjust the CSM, whereas these changes do not adjust the CSM under the GMM, but are recognised in profit or loss as
they arise. However, under the risk mitigation option for VFA contracts, the changes in the fulfilment cash flows and the changes in the group’s
share in the fair value return on underlying items that the instruments mitigate are not adjusted in CSM but recognised in profit or loss. The risk
mitigating instruments are primarily reinsurance contracts held.
The CSM is systematically recognised in insurance revenue to reflect the insurance contract services provided, based on the coverage units ofthe group of contracts. Coverage units are determined by the quantity of benefits and the expected coverage period of the contracts.
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

97

Notes on the Consolidated Financial Statements

The group identifies the quantity of the benefits provided as follows:– Insurance coverage: This is based on the expected net policyholder insurance benefit at each period after allowance for decrements, wherenet policyholder insurance benefit refers to the amount of sum assured less the fund value or surrender value.
– Investment services (including both investment-return service and investment-related service): This is based on a constant measure basis
which reflects the provision of access for the policyholder to the facility.
For contracts that provide both insurance coverage and investment services, coverage units are weighted according to the expected present
value of the future cash outflows for each service.

Insurance service result
Insurance revenue reflects the consideration to which the group expects to be entitled in exchange for the provision of coverage and otherinsurance contract services (excluding any investment components). Insurance service expenses comprise the incurred claims and otherincurred insurance service expenses (excluding any investment components), and losses on onerous groups of contracts and reversals of suchlosses.

Insurance finance income and expenses
Insurance finance income or expenses comprise the change in the carrying amount of the group of insurance contracts arising from the effectsof the time value of money, financial risk and changes therein. For VFA contracts, changes in the fair value of underlying items (excluding
additions and withdrawals) are recognised in insurance finance income or expenses.

Critical estimates and judgements
The measurement of insurance contract liabilities under HKFRS 17 involves significant judgements that are set out below:

Judgements

Estimates– The VFA measurement model is used for most of the contracts issued by the group. In
applying the VFA eligibility criteria as described above under the accounting policies for
insurance contracts, the group determined that for criterion (b) a substantial share is amajority of the returns, and for criterion (c) a substantial proportion is a majority proportionof the change on a present value probability-weighted average of all scenarios.
– The CSM is systematically recognised in insurance revenue based on the coverage units ofthe group of contracts. The group determined that the coverage unit basis that best reflects
the provision of investment services is the availability of the facility over time, and therefore
the quantity of benefit selected is a constant measure. The coverage units are reviewed andupdated at each reporting date.

(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 subsequentaccumulated 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 the extent of any
deficits arising on revaluation previously charged to the income statement in respect of the same land and buildings, and are thereafter taken tothe ‘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 the income statement.
Leasehold land and buildings are depreciated on a straight-line basis over the shorter of the unexpired terms of the leases or the remaining
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, 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 excluding interestand 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 the plan.

(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 toitems 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 of previous years.
The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.
98

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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.
In assessing the probability and sufficiency of future taxable profit, management considers the availability of evidence to support the recognitionof deferred tax assets, taking into account the inherent risks in long-term forecasting, including climate change-related, and drivers of recent
history of tax losses where applicable. Management also considers the future reversal of existing taxable temporary differences and tax
planning strategies, including corporate reorganisations.
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 or constructive
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 tolegal proceedings or regulatory matters, are not recognised in the consolidated financial statements but are disclosed unless the probability ofsettlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is
generally the fee received or present value of the fee receivable.

(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 is indication of
impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition,
impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be theprincipal 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 of the fairvalue less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying amount of its assets and liabilities,
including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistentbasis. 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 andqualified 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 the higher of
their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU.
Impairment losses recognised in prior periods for non-financial assets are 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 notexceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in priorperiods.

2

Operating profit(a) Net interest income
Net interest income includes:

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 FVOCIInterest expense on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise
mandatorily measured at fair value1

2023
HK$m

2022
HK$m

1,753
247,908
47,431821
141,816
21,326(149,496)(47,525)

1 Includes interest expenses on lease liabilities of HK$272m (2022: HK$265m).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

99

Notes on the Consolidated Financial Statements(b) Net fee income
Net fee income by reportable segments
Wealth andPersonal
Banking2

Commercial
Banking2,3GlobalBanking3

Markets andSecurities
Services

Corporate
Centre1

Other (GBMother)

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Account services
Funds under management
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 2023

809
4,741
9,055
310
2,650
—
4,831
1
265
814
1,510
3,242
28,228(8,802)
19,426

1,092
459
313
1,360
46
2,326
78
1
1,959
40
117
3,237
11,028(364)
10,664

351
16
56
1,173
—
790
5
384
755
41
—
2,644
6,215
(1,177)
5,038

75
1,765
—
24
601
2
—
262
4
2,979
—
4,024
9,736
(7,084)
2,652

—
—
—
—
—
—
—
—
—
—
—
(3,601)(3,601)
3,871
270

—
—
—
—
—
—
—
—
—
—
—
(581)
(581)
574
(7)

2,327
6,981
9,424
2,867
3,297
3,118
4,914
648
2,983
3,874
1,627
8,965
51,025(12,982)
38,043

Account services
Funds under management
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 2022

807
4,894
7,826
332
3,515
—
4,534
—
264
858
1,434
2,502
26,966(7,460)19,506

979
592
257
1,303
53
2,465
112
—
1,902
39
107
2,752
10,561(480)
10,081

366
16
52
1,186
—
667
2
325
723
32
5
2,322
5,696
(610)
5,086

75
1,824
—
25
737
—
—
237
3
3,174
—
3,240
9,315
(5,614)
3,701

—
—
—
—
—
—
—
—
—
—
—
(2,269)(2,269)
2,516
247

—
—
—
—
—
—
—
—
—
—
—
(216)
(216)
160
(56)

2,227
7,326
8,135
2,846
4,305
3,132
4,648
562
2,892
4,103
1,546
8,331
50,053(11,488)
38,565

1 Includes inter-segment elimination.
2 From 1 January 2023, all balances within in the scope of HKFRS 17 of Hong Kong insurance manufacturing entities distributed by Commercial Banking('CMB') are reported under Wealth and Personal Banking ('WPB'). Comparative data have been re-presented accordingly.
3 From 1 January 2023, we have transferred our portfolio of Global Banking ('GB') customers within Australia and Indonesia from GB to CMB forreporting purposes. Comparative data have not been re-presented.

Net fee income includes:
2022
HK$m

2023
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)– fee income– fee expense
Fee earned on trust and other fiduciary activities– fee income– fee expense

9,110

9,286

15,927(6,817)
8,861
10,374(1,513)

14,867(5,581)
9,372
11,290(1,918)(c) Net income from financial instruments measured at fair value through profit or loss

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
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured atfair value through profit or loss
Change 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

2023
HK$m

2022
HK$m

80,700(6,265)74,43549,907(948)

42,740(1,464)
41,276(98,716)
3,802

48,959(94,914)8
252
123,654(703)
40(54,301)

1 Includes debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting mismatch.

100

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(d) Other operating income
Gain on acquisition of subsidiary1
Losses on investment properties
Losses on disposal of property, plant and equipment and assets held for sale
Gain on disposal of businesses and associate
Rental income from investment properties
Dividend income
Other2,3
Year ended 31 Dec

2023
HK$m

2022
HK$m

—
(35)
(421)
4
502
283
2,900
3,233

665
(133)
(42)
4
437
233
3,281
4,445

2023
HK$m

2022
HK$m

13,163
14,021
(864)
6
9
(329)
12,843

15,546
16,425
(879)
—
410
414
16,370

1 Represents a gain of HK$665m from the acquisition of AXA Insurance Pte Limited in 2022.
2 Includes the gain on disposal of loans and receivables of HK$40m (2022: HK$84m).
3 Includes the recovery of operating expenses from other Group companies.

(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:

Loans and advances to banks and customers– new allowances net of allowance releases– recoveries of amounts previously written off– modification losses and other movements
Loan commitments and guarantees
Other financial assets
Year ended 31 Dec

Change in expected credit losses as a percentage of average gross customer advances was 0.36% for 2023 (2022: 0.40%).

(f) General and administrative expenses
Premises and equipment
Marketing and advertising expenses
Other administrative expenses1
Year ended 31 Dec

2023

2022

HK$m

HK$m

2,358
2,226
49,95454,5382,590
2,407
48,10053,097

1 Includes recharges from fellow group entities. Further details are set out in Note 32.

Included in operating expenses were direct operating expenses of HK$60m (2022: HK$47m) arising from investment properties that generated
rental income in the year. Direct operating expenses arising from investment properties that did not generate rental income amounted to
HK$8m (2022: HK$9m).

(g) Depreciation and impairment of property, plant and equipment
Owned property, plant and equipment
Other right-of-use assets
Year ended 31 Dec

2023
HK$m

2022
HK$m

7,361
2,363
9,724

6,550
2,546
9,096

(h) Auditors’ remuneration
Auditors’ remuneration amounted to HK$199m (2022: HK$172m).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

101

Notes on the Consolidated Financial Statements

3

Insurance businessInsurance Service result
Year ended 31 Dec 2022

Year ended 31 Dec 2023

Total

Life direct
participating andInvestment DPF
contracts1

Life othercontracts2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

10,167
6,772
108
3,289
(2)
867
11,034

1,669
398
43
1,228
—
304
1,973

11,836
7,170
151
4,517
(2)
1,171
13,007

8,798
5,285
118
3,001
394
161
8,959

1,613
522
43
1,048
—
151
1,764

10,411
5,807
161
4,049
394
312
10,723(3,274)
(173)
(867)
(8)
(4,322)
6,712(1,305)
(515)
(304)
(3)
(2,127)(154)(4,579)(688)(1,171)(11)(6,449)6,558(2,825)
(698)
(161)
(27)
(3,711)
5,248(1,219)
(645)
(151)
(20)
(2,035)(271)(4,044)(1,343)(312)(47)(5,746)
4,977

Life direct
participating andInvestment DPF
contracts1

Life othercontracts2

HK$m
Insurance revenue
Amounts relating to changes in liabilities for remaining coverage– Contractual service margin recognised for services provided– Change in risk adjustment for non-financial risk for risk expired– Expected incurred claims and other insurance service expenses– Other
Recovery of insurance acquisition cash flows
Total insurance revenue
Insurance service expenses
Incurred claims and other insurance service expenses
Losses and reversal of losses on onerous contracts
Amortisation of insurance acquisition cash flows
Adjustments to liabilities for incurred claims
Total insurance service expenses
Total insurance service results

1 'Life direct participating and investment DPF contracts' are substantially measured under the variable fee approach measurement model.
2 'Life other contracts' are measured under the general measurement model and excludes reinsurance contracts.

Net investment return1
Year ended 31 Dec 2022

Year ended 31 Dec 2023

Total investment return2
Net finance income/(expense)
Changes in fair value of underlying items of direct participating contracts
Effect of risk mitigation option
Interest accreted
Effect of changes in interest rates and other financial assumptions
Effect of measuring changes in estimates at current rates and adjusting the
CSM at rates on initial recognition
Total net finance income/(expenses) from insurance contracts
Total net investment results

TotalLife direct
participating
andInvestment
DPF contracts

Life othercontracts

Total

HK$m

HK$m

HK$m

HK$m

HK$m

46,474

1,318

47,792(95,039)(1,327)(96,366)(46,491)
(271)
—
(96)

—
—
(981)
(944)

(46,491)
(271)
(981)
(1,040)95,198
765
—
—

—
—
(649)
1,844

95,198
765
(649)
1,844

Life direct
participating
andInvestment
DPF contracts

Life othercontracts

HK$m

—

(15)

(15)

—

29

29

(46,858)(384)(1,940)(622)(48,798)(1,006)

95,963
924

1,224
(103)

97,187821

1 All items are recognised in the income statement.
2 Investment returns of HK$47,792m gain (2022: $96,366m loss) on underlying assets supporting insurance liabilities are reported in ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’.

102

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Movements in carrying amounts of insurance contracts - Analysis by remaining coverage and incurred claims
Year ended 31 Dec 2023
Life direct participating and Investment DPF
Life other contracts
contracts
Liabilities for remaining
Liabilities for remaining
coverage:coverage:
ExcludingExcludingloss
Loss
Incurredloss
Loss
Incurredcomponent component
claimsTotal component component
claimsOpening assets
Opening liabilities
Net opening balance at 1 Jan 2023
Changes in the statement of profit orloss and other comprehensive
income2
Insurance revenue
Contracts under the fair value approach
Other contracts1
Total insurance revenue
Insurance service expenses
Incurred claims and other insurance
service expenses
Amortisation of insurance acquisition
cash flows
Losses and reversal of losses on
onerous contracts
Adjustments to liabilities for incurredclaimsTotal insurance service expenses
Investment components
Insurance service result
Net finance (income)/expense frominsurance contracts
Other movements recognised in thestatement of profit or loss
Effect of movements in exchange rates
Total changes in the statement of
profit or loss and othercomprehensive income
Cash flows
Premiums received
Claims and other insurance service
expenses paid, including investment
components, and other cash flows
Insurance acquisition cash flows
Total cash flows
Other movements
Net closing balance at 31 Dec 2023
Closing assets
Closing liabilities
Net closing balance at 31 Dec 2023

Total

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

(35)
626,367
626,332

—
812
812

—
2,949
2,949

(35)
630,128
630,093(480)
23,44322,963

163
757
920

7
594
601

(310)
24,79424,484(345)
654,922654,577(3,105)(7,929)(11,034)

—
—
—

—
—
—

(3,105)(7,929)(11,034)(369)(1,159)(1,528)

—
—
—

—
—
—

(369)
(1,159)(1,528)(3,474)(9,088)(12,562)

—

(43)

3,317

3,274

—

(178)

1,077

899

4,173

867

—

—

867

295

—

—

295

1,162

—

173

—

173

—

508

—

508

681

—

—

8

8

—

—

3

3

11

867
(44,797)(54,964)

130
—
130

3,325
44,797
48,122

4,322—(6,712)295(5,824)(7,057)

330
—
330

1,080
5,824
6,904

1,705
—
177

6,027
—
(6,535)46,858——46,858

1,917

23

—

1,940

48,798

3,899

7

(610)

3,296

(18)

5

(88)

(101)

3,195

948

—

(255)

693

(9)

(12)

5

(16)

677

(3,259)137

47,257

44,135(5,167)

346

6,821

2,000

46,13582,050——82,050

6,188

—

—

6,188

88,238374—(47,087)(46,713)

4—(6,891)(6,887)(53,600)(3,919)78,505
96
701,674(109)
701,783
701,674

—
—
(96)
853
5
848
853

—
(47,087)
—
3,119
6
3,113
3,119

(3,919)31,418—705,646(98)
705,744705,646(1,693)
4,499
60
22,355(874)
23,22922,355

—
—
(60)
1,206
(159)
1,365
1,206

—
(6,891)
—
531
40
491
531

(1,693)(2,392)—24,092(993)
25,08524,092(5,612)
29,026—
729,738(1,091)
730,829
729,738

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

103

Notes on the Consolidated Financial Statements

Movements in carrying amounts of insurance contracts - Analysis by remaining coverage and incurred claims (continued)
Year ended 31 Dec 2022
Life direct participating and Investment DPF
Life other contracts
contracts
Liabilities for remaining
Liabilities for remaining
coverage:coverage:
ExcludingExcludingloss
Loss Incurred
loss
Loss
Incurredcomponent component
claimsTotal component component
claimsOpening assets
Opening liabilities
Net opening balance at 1 Jan 2022
Changes in the statement of profit or loss
and other comprehensive income2
Insurance revenue
Contracts under the fair value approach
Other contracts1
Total insurance revenue
Insurance service expenses
Incurred claims and other insurance service
expenses
Amortisation of insurance acquisition cash
flows
Losses and reversal of losses on onerous
contracts
Adjustments to liabilities for incurred claims
Total insurance service expenses
Investment components
Insurance service result
Net finance (income)/expense frominsurance contracts
Effect of movements in exchange rates
Total changes in the statement of profit orloss and other comprehensive income
Cash flows
Premiums received
Claims and other insurance service
expenses paid, including investment
components, and other cash flows
Insurance acquisition cash flows
Total cash flows
Acquisition of subsidiaries and othermovements
Net closing balance at 31 Dec 2022
Closing assets
Closing liabilities
Net closing balance at 31 Dec 2022

Total

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

—
661,137
661,137

—
679
679

—
1,741
1,741

—
663,557
663,557(187)
26,78826,601

51
478
529

6
168
174

(130)
27,43427,304(130)
690,991
690,861(3,828)(5,131)(8,959)

—
—
—

—
—
—

(3,828)(5,131)(8,959)

(666)
(652)
(1,318)

—
—
—

—
—
—

(666)
(652)
(1,318)(4,494)(5,783)(10,277)

—

(36)

2,861

2,825

—

(70)

861

791

3,616

161

—

—

161

151

—

—

151

312

—

698

—

698

—

639

—

639

1,337

—
161
(26,648)(35,446)

—
662
—
662

27
2,888
26,64829,53627
3,711—(5,248)—151(3,715)(4,882)

—
569
—
569

11
872
3,715
4,587

11
1,592
—
274

38
5,303
—
(4,974)(95,963)——(95,963)(1,241)12—(1,229)(97,192)(1,502)(40)

2(1,540)

(565)

(15)

42

(538)

(2,078)(132,911)

622

29,538(102,751)(6,688)

566

4,629

82,670——82,670

3,861

1

—

3,862

86,532(1,493) (104,244)

371—(28,122)(27,751)—(1)(4,212)(4,213)(31,964)(3,180)79,861———(28,122)(3,180)51,739

(910)
2,951

—
—

—
(4,212)(910)(1,261)(4,090)50,47818,245

(489)

(208)

17,548

99

(175)

10

(66)

17,482

626,332(35)
626,367
626,332

812
—
812
812

2,949
—
2,949
2,949

630,093(35)
630,128
630,093

22,963(480)
23,44322,963

920
163
757
920

601
7
594
601

24,484(310)
24,79424,484

654,577(345)
654,922654,577

1 'Other contracts' are those contracts measured by applying HKFRS 17 from inception of the contracts. These include contracts measured under thefull retrospective approach at transition and contracts incepted after transition.
2 'Changes in the statement of profit or loss and other comprehensive income' do not include income and expenses with HSBC Group entities.

104

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Movements in carrying amounts of insurance contracts - Analysis by measurement component
Year ended 31 Dec 2023
Life direct participating and investment
discretionary participating contracts
Contractual service
marginEstimatesof present
value offuture cash Contracts
flows and under therisk fair value
Other
adjustment approach contracts1
Opening assets
Opening liabilities
Net opening balance at 1 Jan 2023
Changes in the statement of profit or loss
and other comprehensive income2
Changes that relate to current services
Contractual service margin recognised forservices provided
Change in risk adjustment for non-financial
risk expired
Experience adjustments
Changes that relate to future services
Contracts initially recognised in the year
Changes in estimates that adjust contractual
service margin
Changes in estimates that result in losses
and reversal of losses on onerous contracts
Changes that relate to past services
Adjustments to liabilities for incurred claims
Other movements recognised in insurance
service result
Insurance service result
Net finance (income)/expenses frominsurance contract
Other movements recognised in thestatement of profit or loss
Effect of movements in exchange rates
Total changes in the statement of profit
or loss and other comprehensive income
Cash flows
Premiums received
Claims, other insurance service expenses
paid (including investment components) andother cash flows
Insurance acquisition cash flows
Total cash flows
Other movements
Net closing balance at 31 Dec 2023
Closing assets
Closing liabilities
Net closing balance at 31 Dec 2023

Life other contracts
Contractual service
marginEstimatesof present
value offuture cash Contracts
flows and under therisk fair value
Other
Total adjustment approach contracts1

Total

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

(137)
569,705
569,568

26
33,13833,16476
27,28527,361(35)
630,128
630,093(875)
22,631
21,756

413
1,429
1,842

152
734
886

(310)
24,79424,484(345)
654,922654,577—(1,351)(5,421)(6,772)

—

(154)

(227)

(381)

(7,153)

(108)

—

—

(108)

(28)

—

—

(28)

(136)

(15)

—

—

(15)

75

—

—

75

60

(11,966)—

12,062

96

(638)

—

891

253

349

(7,206)

2,954

4,252

—

273

(1)

(272)

—

—

77

—

—

77

256

—

—

256

333

8

—

—

8

2

—

—

2

10

2

—

—

2

—

—

—

—

2

(19,208)

1,603

10,893(6,712)

(60)

(155)

392

177

(6,535)46,858——46,858

1,869

40

31

1,940

48,798

2,007

1,146

143

3,296

(164)

57

6

(101)

3,195

433

67

193

693

(25)

10

(1)

(16)

677

30,0902,816

11,22944,135

1,620

(48)

428

2,000

46,13582,050——82,050

6,188

—

—

6,188

88,238(46,713)——(46,713)(6,887)——(6,887)(53,600)(3,919)31,418—631,076(233)
631,309
631,076———
35,98025
35,95535,980———38,590110
38,48038,590(3,919)31,418—705,646(98)
705,744705,646(1,693)(2,392)—
20,984(924)
21,90820,984

—
—
(2)
1,792
62
1,730
1,792

—
—
2
1,316
(131)
1,447
1,316

(1,693)(2,392)—24,092(993)
25,08524,092(5,612)
29,026—
729,738(1,091)
730,829
729,738

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

105

Notes on the Consolidated Financial Statements

Movements in carrying amounts of insurance contracts - Analysis by measurement component (continued)
Year ended 31 Dec 2022
Life direct participating and investment
discretionary participating contracts
Contractual service
marginOpening assets
Opening liabilities
Net opening balance at 1 Jan 2022
Changes in the statement of profit or loss
and other comprehensive income2
Changes that relate to current services
Contractual service margin recognised forservices provided
Change in risk adjustment for non-financial
risk expired
Experience adjustments
Changes that relate to future services
Contracts initially recognised in the year
Changes in estimates that adjust contractual
service margin
Changes in estimates that result in losses
and reversal of losses on onerous contracts
Changes that relate to past services
Adjustments to liabilities for incurred claims
Other movements recognised in insurance
service result
Insurance service result
Net finance (income)/expense frominsurance contracts
Effect of movements in exchange rates
Total changes in the statement of profit orloss and other comprehensive income
Cash flows
Premiums received
Claims, other insurance service expenses
paid (including investment components) andother cash flows
Insurance acquisition cash flows
Total cash flows
Acquisition of subsidiaries and othermovements
Net closing balance at 31 Dec 2022
Closing assets
Closing liabilities
Net closing balance at 31 Dec 2022

Estimatesof present
value offuture cash
flows andrisk
adjustment

Contracts
under thefair value
approach

Other
contracts1

HK$m

HK$m

—
598,776598,776

Life Other contracts
Contractual service
marginTotal

Estimatesof present
value offuture cash
flows andrisk
adjustment

Contracts
under thefair value
approach

Other
contracts1

Total

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

—
44,34744,347—
20,434
20,434—
663,557
663,557(225)
25,281
25,056

45
1,548
1,593

50
605
655

(130)
27,43427,304(130)
690,991
690,861—(1,862)(3,423)(5,285)

—

(298)

(216)

(514)

(5,799)

(118)

—

—

(118)

(22)

—

—

(22)

(140)

(176)

—

—

(176)

160

—

—

160

(16)

(8,028)

—

8,091

63

(514)

—

527

13

76

8,345

(10,682)

2,337

—

31

62

(93)

—

—

635

—

—

635

626

—

—

626

1,261

27

—

—

27

11

—

—

11

38

(394)

—

—

(394)

—

—

—

—

(394)

291

(12,544)

7,005(5,248)

292

(236)

218

274

(4,974)(95,953)—(10)(95,963)(1,272)29

14(1,229)(97,192)(1,462)

(10)

(68)

(1,540)

(536)

(1)

(1)

(538)

(2,078)(97,124)(12,554)

6,927(102,751)(1,516)

(208)

231

(1,493) (104,244)

82,670——82,670

3,862

—

—

3,862

86,532(27,751)——(27,751)(4,213)——(4,213)(31,964)(3,180)51,739————(3,180)51,739(910)(1,261)

—
—

—
—

(910)
(1,261)(4,090)50,47816,177

1,371—

17,548

(523)

457

—

(66)

17,482569,568(137)
569,705
569,568

33,16426
33,13833,16427,361
76
27,28527,361

630,093(35)
630,128
630,093

21,756(875)
22,631
21,756

1,842
413
1,429
1,842

886
152
734
886

24,484(310)
24,79424,484

654,577(345)
654,922654,577

1 'Other contracts' are those contracts measured by applying HKFRS 17 from inception of the contracts. These include contracts measured under thefull retrospective approach at transition and contracts incepted after transition.
2 'Changes in the statement of profit or loss and other comprehensive income' do not include income and expenses with HSBC Group entities.

106

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Effect of contracts initially recognised in the year
Year ended 31 Dec 2022

Year ended 31 Dec 2023

Life direct participating and investment DPF contracts
Estimates of present value of cash outflows– Insurance acquisition cash flows– Claims and other insurance service expenses payable
Estimates of present value of cash inflows
Risk adjustment for non-financial risk
Contractual service margin
Losses recognised on initial recognition
Life other contracts
Estimates of present value of cash outflows– Insurance acquisition cash flows– Claims and other insurance service expenses payable
Estimates of present value of cash inflows
Risk adjustment for non-financial risk
Contractual service margin
Losses recognised on initial recognition

HK$m

Profitable
contracts
issuedHK$m

Onerouscontracts
issued
HK$m

HK$m

1,532
165
1,367
(1,447)11—(96)

84,431
4,768
79,663(96,638)241
12,062(96)

62,8393,073
59,766(71,112)
182
8,091
—

834
133
701
(781)
10
—
(63)

63,673
3,206
60,467(71,893)
192
8,091
(63)

3,529
388
3,141
(3,314)
38
—
(253)

9,921
1,150
8,771
(10,701)
142
891
(253)

3,154
446
2,708
(3,767)
86
527
—

642
69
573
(632)
3
—
(13)

3,796
515
3,281
(4,399)
89
527
(13)

Profitable
contracts
issuedHK$m

Onerouscontracts
issuedHK$m

82,8994,603
78,296(95,191)230
12,062
—
6,392
762
5,630
(7,387)
104
891
—

Total

Total

Present value of expected future cash flows of insurance contract liabilities and contractual service margin

Insurance liability future cash flows
Life direct participating and investment DPF contracts
Life other contracts
Insurance liability future cash flows at 31 Dec 2023
Remaining contractual service margin
Life direct participating and investment DPF contracts
Life other contracts
Remaining contractual service margin at 31 Dec 2023
Insurance liability future cash flows
Life direct participating and investment DPF contracts
Life other contracts
Insurance liability future cash flows at 31 Dec 2022
Remaining contractual service margin
Life direct participating and investment DPF contracts
Life other contracts
Remaining contractual service margin at 31 Dec 2022

less than
1 year

1-2
years

2-3
years

3-4
years

4-5
years

5-10
years

10-20 Over 20
years
years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

(26,475) (10,266)
6,507
1,862
(19,968)(8,404)

11,783(420)
11,363

12,531(387)
12,14420,017530
20,54770,271503
70,774

181,383576
181,959

368,698
12,374
381,072

627,942
21,545649,487

6,404
706
7,110

5,915
406
6,321

5,458
289
5,747

5,032
274
5,306

4,640
234
4,874

18,102400
18,502

18,556503
19,05910,463296
10,75974,5703,10877,678(41,859)
4,076(37,783)(17,921)
6,145(11,776)(1,908)
3,200
1,292

7,793
14
7,807

10,053393
10,44664,781
1,474
66,255234,585
1,100
235,685

312,3326,130
318,462

567,856
22,532590,388

4,966
356
5,322

4,612
282
4,894

4,270
251
4,521

3,941
225
4,166

3,650
201
3,851

14,529632
15,161

15,351483
15,834

9,206
298
9,504

60,525
2,728
63,253

Discount rates
The discount rates applied to expected future cash flows are determined through a bottom-up approach as set out in Note 1.2(j) ‘Summary ofmaterial accounting policies – Insurance contracts’ on page 97. The blended average of discount rates used within our most material
manufacturing entities are as follows:
HSBC Life (International) Ltd
At 31 December 2023
10 year discount rate (%)
20 year discount rate (%)
At 31 December 2022
10 year discount rate (%)
20 year discount rate (%)

Hang Seng Insurance Co Ltd

HK$

US$

HK$

US$

4.02
4.21

4.47
4.91

4.16
4.34

4.62
5.06

4.56
4.63

4.59
4.96

4.70
4.76

4.80
5.17

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

107

Notes on the Consolidated Financial Statements

4

Employee compensation and benefits

Wages and salaries1
Social security costs
Post-employment benefits– defined contribution pension plans– defined benefit pension plans
Year ended 31 Dec

2023

2022

HK$m

HK$m

35,021
1,352
2,174
1,748
426
38,54734,760
1,379
2,183
1,716
467
38,322

1 'Wages and salaries’ includes the effect of share-based payments arrangements of HK$1,101m (2022: HK$882m).

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, of which thelargest 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 the discounted
value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable throughreduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, thegroup 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

At 1 Jan 2023
Service cost
– current service cost
– past service cost and gains 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 2023
Retirement benefit liabilities recognised on the balance sheet
Retirement benefit assets recognised on the balance sheet (within ‘Prepayments, accrued income
and other assets’)
At 1 Jan 2022
Service cost
– current service cost
– past service cost and gains 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 gains
Contributions by the group
Benefits paid
Exchange differences and other movements
At 31 Dec 2022
Retirement benefit liabilities recognised on the balance sheet
Retirement benefit assets recognised on the balance sheet (within ‘Prepayments, accrued income andother assets’)108

Fair value ofplan assets
HK$m

Present value of
defined benefit
obligations
HK$m

8,266
—
—
—
292
243
243
—
628
(1,053)(43)
8,333(9,889)
(362)
(360)
(2)
(349)
(217)
—
(217)
—
1,132
43
(9,642)

Net defined
benefit liability
HK$m(1,623)
(362)
(360)
(2)
(57)
26
243
(217)
628
79
—
(1,309)(1,362)
53

10,075
—
—
—
162
(841)
(841)
—
345
(1,414)(61)
8,266

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(11,945)
(429)
(434)
5
(197)
1,073
—
1,073
—
1,487
122
(9,889)(1,870)
(429)
(434)
5
(35)
232
(841)
1,073
345
73
61
(1,623)(1,655)32

Fair value of plan assets by asset classes
At 31 Dec 2023
Quoted market
price in active
ValuemarketFair value of plan assets– equities– bonds– alternative investments– other1

At 31 Dec 2022
Quoted market
price in active
ValuemarketThereof HSBC

Thereof HSBC

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

8,333
1,187
4,458
2,268
420

8,333
1,187
4,458
2,268
420

177
—
—
—
177

8,266
1,078
4,622
2,112
454

8,266
1,078
4,622
2,112
454

195
—
—
—
195

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, the Principal Plan, covers employees of the group and
HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the group set up in Hong Kong as part of the recovery
and resolution planning to provide functional support services to the group, as well as certain other local employees of 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 adefined contribution scheme. The latter was established on 1 January 1999 for new employees, and the 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 the defined
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 abenchmark applicable to their respective asset class. The actuarial funding valuation of the Principal Plan is conducted 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 the Group.
As agreed between the group and ServCo, the net defined benefit cost of the defined benefit scheme of the Principal Plan shall be charged
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
Present
value of
Fair value
definedof planbenefit
assets obligations

Included within ServCo

Present
Netvalue ofdefined Fair value
definedbenefitof planbenefitliability
assets obligationsNet
definedbenefitliability

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 1 Jan 2023
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 2023
Retirement benefit liabilities recognised on the balance sheet

3,585
—
—
118
50
50
—
173
(406)
(29)
3,491

(3,902)
(128)
(128)
(131)
(170)
—
(170)
—
406
31
(3,894)

(317)
(128)
(128)
(13)
(120)
50
(170)
173
—
2
(403)
(403)

3,170
—
—
110
41
41
—
114
(422)
26
3,039

(3,265)
(110)
(110)
(111)
(123)
—
(123)
—
422
(31)
(3,218)

(95)
(110)
(110)
(1)
(82)
41
(123)
114
—
(5)
(179)
(179)

At 1 Jan 2022
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 2022
Retirement benefit liabilities recognised on the balance sheet

4,424
—
—
56
(409)
(409)
—
191
(737)
60
3,585

(4,915)
(162)
(162)
(61)
566
—
566
—
737
(67)
(3,902)

(491)
(162)
(162)
(5)
157
(409)
566
191
—
(7)
(317)
(317)

3,945
—
—
50
(364)
(364)
—
123
(515)
(69)
3,170

(4,191)
(141)
(141)
(52)
537
—
537
—
515
67
(3,265)

(246)
(141)
(141)
(2)
173
(364)
537
123
—
(2)
(95)
(95)

The group expects to make HK$168m of contributions to the defined benefit scheme of the Principal Plan during 2024 (during 2023: HK$180m)
and ServCo expects to make HK$105m contributions to the defined benefit scheme of the Principal Plan during 2024 (during 2023: HK$116m).
These expected contributions are determined separately by the group and ServCo by reference to the actuarial funding valuation carried out by
the Principal Plan's local actuary.
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

109

Notes on the Consolidated Financial Statements

Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate for the five
years thereafter, are as follows:
Benefits expected to be paid from the defined benefit scheme of the Principal Plan1
Within one
year

One to twoyears

Two to three
years

Three to four
years

Four to five
years

Five to ten
years

As at 31 December 2023 as reported by:

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

– The group– ServCo
As at 31 December 2022 as reported by:– The group– ServCo

275
244

376
322

363
255

408
308

374
331

2,002
1,809

292
187

373
299

382
340

371
271

396
338

1,892
1,825

At 31 Dec 2022
Quoted market
price in active
ValuemarketThereof HSBC

1 The duration of the defined benefit obligation is six years for the Principal Plan under the disclosed assumptions (2022: six years).

Fair value of plan assets of the defined benefit scheme of the Principal Plan by asset classes
At 31 Dec 2023
Quoted market
price in active
ValuemarketFair value of plan assets– equities– bonds– alternative investments– other1

Thereof HSBC

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

6,530
1,691
3,467
1,313
59

6,530
1,691
3,467
1,313
59

59
—
—
—
59

6,755
1,581
3,725
1,398
51

6,755
1,581
3,725
1,398
51

51
—
—
—
51

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, withmaturities 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 the year, andused 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 2023

2.95

At 31 Dec 2022

3.50

3.00
3.50% p.a. for 2023 and3.00% p.a. thereafterActuarial assumption sensitivities
The discount rate and rate of pay increase are sensitive to changes in market conditions arising during the reporting period. The following tableshows 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%
Rate of pay increase – increase/decrease of 0.25%

Financial impact of decrease

2023

2022

2023

2022

HK$m

HK$m

HK$m

HK$m

(106)
109

(111)
115

108
(107)

114
(112)

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$115m (2022: HK$111m). This comprises fees (which represent the aggregate emoluments paid to or
receivable by directors in respect of their services as a director) of HK$37m (2022: HK$37m) and other emoluments of HK$78m (2022: HK$74m)
which includes contributions to pension schemes of HK$3m (2022: HK$3m). Non-cash benefits which are included in other emoluments mainly
relate to share-based payment awards, and the provision of housing and furnishings.
Details on loans to directors are set out in Note 32.

110

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

5

Tax

The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2022: 16.5%) on the profits for theyear assessable in Hong Kong. Overseas branches and subsidiaries have similarly provided for tax in the countries in which they operate at theappropriate rates of tax in force in 2023. Deferred taxation is provided for in accordance with the group’s accounting policy in Note 1.2(m)‘Summary of material accounting policies – Tax’ on page 98-99.
Tax expense

Current tax– Hong Kong taxation – on current year profit– Hong Kong taxation – adjustments in respect of prior years– overseas taxation – on current year profit– overseas taxation – adjustments in respect of prior years
Deferred tax– origination and reversal of temporary differences– adjustments in respect of prior years
Year ended 31 Dec

2023
HK$m

2022
HK$m

25,764
11,157(37)
14,59648(1,848)(1,631)(217)
23,916

14,8395,072(492)
10,692
(433)
1,157
643
514
15,996

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
Effects of impairment of interest in associate
Non-taxable income and gains
Local taxes and overseas withholding taxes
Permanent disallowables
OthersYear ended 31 Dec

2023

2022

HK$m

HK$m

121,443
24,403(3,072)
3,953(5,059)
2,336
836
519
23,916

96,687
20,369(3,100)—(3,525)
1,856
740
(344)
15,996

On 20 June 2023, legislation was substantively enacted in the UK, the jurisdiction of the Bank’s ultimate parent entity, HSBC Holdings plc, tointroduce the ‘Pillar Two’ global minimum tax model rules of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (‘BEPS’), witheffect from 1 January 2024. Legislation has been enacted in Mauritius and Vietnam to implement a Qualified Domestic Minimum Top-up Tax(‘QDMTT’). Additionally, in the Asia-Pacific region the governments of Australia, Hong Kong, Indonesia, Japan, Malaysia and Singapore, haveannounced their intention to introduce Pillar Two legislation and a QDMTT.
Under these rules, a top-up tax liability arises where the effective tax rate of the group’s operations in a jurisdiction, calculated based onprinciples set out in the OECD’s Pillar Two model rules, is below 15%. Any additional tax arising in relation to jurisdictions in which a QDMTT
applies will be payable to the tax authority in that jurisdiction. Where there is no QDMTT, any resulting tax is payable by HSBC Holdings plc,
being the group’s ultimate parent, to the UK tax authority.
Based on the Group’s forecasts, no material top-up tax liability is expected to arise in Mauritius or Vietnam. For those jurisdictions that haveannounced their intention to introduce Pillar Two legislation and a QDMTT, a top-up tax liability is expected to arise in Hong Kong due to the low
effective tax rate, driven primarily by income from tax-exempt instruments. The Hong Kong QDMTT is expected to be effective from 1 January
2025. The application of the Pillar Two global minimum tax rules and the introduction of QDMTT, if enacted, is expected to increase the annual
effective tax rate of the group by approximately 0.5%. However, the impact is dependent upon the ongoing evolution of rules and guidance inthe UK and other jurisdictions.
Movements of deferred tax assets and liabilities

AssetsLiabilities
At 1 Jan 2023
Exchange and other adjustments
Charge/(credit) to income statement
Charge/(credit) to othercomprehensive income
At 31 Dec 2023
Assets1
Liabilities1

Impairment
allowance on
Expensefinancialprovisions
instruments

Accelerated
capitalallowances

Insurancebusiness

HK$m

HK$m

HK$m

112
(467)
(355)
1
(22)

4,059
(189)
3,870
111
1,802

1,192
(30)
1,162
(31)
167

Revaluationof properties

Other2

Total

HK$m

HK$m

HK$m

HK$m

3,289
—
3,289
(26)
(519)

—
(14,823)(14,823)
38
830

1,004
(8,477)(7,473)
(36)
(410)

9,656
(23,986)(14,330)
57
1,848

—

—

—

133

(830)

(1,486)(2,183)

(376)
115
(491)

5,783
5,783
—

1,298
1,329
(31)

2,877
2,877
—

(14,785)—(14,785)(9,405)2,880(12,285)(14,608)
12,984(27,592)

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

111

Notes on the Consolidated Financial Statements

Movements of deferred tax assets and liabilities (continued)

Expenseprovisions

Impairment
allowance on
financial
instruments

Revaluationof properties

Other2

HK$m

HK$m

HK$m

HK$m

HK$m

Total
HK$m

4,236
(100)
4,136
(186)
(80)

1,557
(19)
1,538
(157)
(229)

2,597
—
2,597
(318)
1,010

—
(14,992)(14,992)
222
759

827
(8,391)(7,564)(95)(2,585)

9,362(23,961)(14,599)(549)(1,157)

Accelerated
capitalallowances

Insurancebusiness

HK$m
145
(459)
(314)
(15)
(32)

AssetsLiabilities
At 1 Jan 2022
Exchange and other adjustments
Charge/(credit) to income statement
Charge/(credit) to othercomprehensive income
At 31 Dec 2022
Assets1
Liabilities1

6

—

10

—

(812)

2,771

1,975

(355)
112
(467)

3,870
4,059
(189)

1,162
1,192
(30)

3,289
3,289
—

(14,823)—(14,823)(7,473)
1,004(8,477)(14,330)
9,656(23,986)

1 After netting off balances within countries, the balances as disclosed in the consolidated financial statements are as follows: deferred tax assets
HK$9,315m (2022: HK$7,582m); and deferred tax liabilities HK$23,923m (2022: HK$21,912m).
2 Other includes deferred tax liability of HK$6,402m (2022: HK$5,847m) provided in respect of distributable reserves or post-acquisition reserves ofassociates that, on distribution, would attract withholding tax.

The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$4,898m (2022: HK$4,537m). Of thisamount, HK$1,906m (2022: HK$1,536m) has no expiry date and the remaining will expire within 10 years.
Deferred tax is not recognised in respect of the group‘s investments in subsidiaries and branches where remittance or other realisation is notprobable, 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
2022

2023
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
– special dividend paid
– third interim dividend paid
Total
Distributions on other equity instruments
Dividends to shareholders

HK$ per share

HK$m

HK$ per share

HK$m

0.27

13,5000.23

10,584

0.44
0.43
0.16
0.36
1.66

22,00021,5007,800
18,00082,8003,556
86,356

0.17
0.12
—
0.16
0.68

7,761
5,887
—
7,850
32,082
2,739
34,821On 19 February 2024, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2023 of HK$0.41 perordinary share (HK$20,300m) (2022: HK$0.27 per ordinary share (HK$13,500m)).
Total coupons on other equity instruments

US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.510%)
US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.030%)
US$1,000m Fixed rate perpetual subordinated loan (interest rate fixed at 6.090%)
US$1,200m Fixed rate perpetual subordinated loan (interest rate fixed at 6.172%)
US$600m Fixed rate perpetual subordinated loan (interest rate fixed at 5.910%)
US$1,100m Fixed rate perpetual subordinated loan (interest rate fixed at 6.000%)
US$1,000m Floating rate perpetual subordinated loan (interest rate at compounded SOFR plus 5.090%)1
US$1,000m Fixed rate perpetual subordinated loan (interest rate fixed at 8.000%)2
Total

1 This subordinated loan was early repaid in the first half of 2023 and distributions were made on repayment.
2 This subordinated loan was issued in March 2023.

112

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

2023
HK$m

2022
HK$m

459
425
478
581
277
516
545
275
3,556

460
426
477
580
278
518
—
—
2,739

7

Trading assets

Treasury and other eligible bills
Debt securities
Equity securities
Reverse repurchase agreements and other similar secured lending
Other1
At 31 Dec

2023

2022

HK$m

HK$m

132,659
351,734
375,590
62,71018,557941,250

132,737
231,601
264,447
59,398
11,622
699,805

1 'Other' includes term lending and other accounts with customers and banks.

8

Derivatives

Notional contract amounts and fair values of derivatives by product contract type
Notional contract amount
Trading
Hedging

Fair value – Assets
Trading
Hedging

Total

Fair value – Liabilities
Trading
Hedging

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Foreign ExchangeInterest rate
EquityCreditCommodity and other
Gross total
OffsetAt 31 Dec 2023

20,216,483
32,976,189
879,049446,998
179,41754,698,136

166,680
452,160———
618,840

201,790
401,534
16,4642,277
3,011
625,076

6,640
12,898———19,538208,430
414,432
16,4642,277
3,011
644,614(235,361)
409,253

218,927
438,882
15,2462,889
4,091
680,035

1,382
4,160
—
—
—
5,542

220,309443,042
15,246
2,889
4,091
685,577(235,361)
450,216

Foreign ExchangeInterest rate
EquityCreditCommodity and other
Gross total
OffsetAt 31 Dec 2022

19,574,143
32,534,469
785,281462,180
159,242
53,515,315

34,877456,741———
491,618

263,237
529,41118,3632,386
3,230
816,6273,226
12,416———
15,642

266,463541,827
18,3632,386
3,230
832,269(329,392)
502,877

281,461
575,656
14,017
2,708
3,939
877,781

14
3,326
—
—
—
3,340

281,475
578,982
14,0172,708
3,939
881,121(329,392)
551,729

The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate thenominal 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 arisingfrom 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 the qualifying 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 toensure 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 marketmaking and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating
revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with theprincipal 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 thecontract or until the instrument is redeemed, transferred or sold or the fair value becomes observable. All derivatives that are part of qualifying
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 interest rate and foreign exchange risk. The group uses derivatives (principally interest rate andcurrency swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables thegroup 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 Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

113

Notes on the Consolidated Financial Statements

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.

Hedged risk components
The group designates a portion of cash flows of a financial instrument or a group of financial instruments for a specific interest rate or foreign
currency risk component in a fair value or cash flow hedge. The designated risks and portions are either contractually specified or otherwise
separately identifiable components of the financial instrument that are reliably measurable. Risk-free or benchmark interest rates generally are
regarded as being both separately identifiable and reliably measurable, except for the Ibor reform transition where the group designates
alternative benchmark rates as the hedged risk which may not have been separately identifiable upon initial designation, provided the groupreasonably expects it will meet the requirement within 24 months from the first designation date. The designated risk component accounts for asignificant portion of the overall changes in fair value or cash flows of the hedged item(s).

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 in market
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.
HSBC hedging instrument by hedged risk
Hedging instrument
Carrying amount
Assets

Notional amount1,3

Liabilities

Balance sheet Change in fair value2
presentation
HK$m

Hedged risk

HK$m

HK$m

HK$m

Interest rate
At 31 Dec 2023

240,001
240,001

9,293
9,293

3,700
3,700

Derivatives(3,259)(3,259)Interest rate
At 31 Dec 2022

309,450
309,450

11,761
11,761

2,281
2,281

Derivatives

6,130
6,130

1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions
outstanding at the balance sheet date. They do not represent amounts at risk.
2 Used in effectiveness testing, which uses the full fair value change of the hedging instrument not excluding any component.
3 The notional amount of non-dynamic fair value hedges is equal to US$4,500m (2022: US$4,500m), of which the weighted-average maturity date is
December 2030 and the weighted-average swap rate is 2.67% (2022: 2.67%).

HSBC hedged item by hedged risk

Carrying amount
Hedged risk

Interest rate

At 31 Dec 2023

Interest rate

At 31 Dec 2022

AssetsHK$m

Liabilities
HK$m

Hedged item
Accumulated fair value hedge adjustments
included in carrying amount2
AssetsHK$m

190,469(4,791)

6,449

(210)

196,918—
32,48432,484(5,001)

257,126(10,312)

5,755

(435)

262,881

1,161
33,11334,274(10,747)

Liabilities
HK$m

Balance sheet
presentation
Financial investments
measured at fair value
through othercomprehensive income—(1,898)(1,898)Loans and advances tocustomers
Debt securities in issue
Subordinated liabilities3

Financial investments
measured at fair value throughother comprehensive income
Loans and advances tocustomers—
Debt securities in issue(2,260)Subordinated liabilities3(2,260)IneffectivenessChange infair value1

Recognised
in profit
and loss

HK$m

HK$m

3,135
242
—
(363)
3,014

Net income from(245) financial instruments
held for trading or
managed on a fairvalue basis(245)(10,716)
(351)
8
4,692
(6,367)

Profit and loss
presentation(237)

Net income fromfinancial instruments
held for trading or
managed on a fairvalue basis(237)

1 Used in effectiveness testing, which comprise an amount attributable to the designated hedged risk that can be a risk component.
2 The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted
for hedging gains and losses were liabilities of HK$396m (2022: assets of HK$143m) for FVOCI assets, and assets of HK$1,067m (2022: HK$1,243m)
for subordinated liabilities.
3 Represents Loss Absorbing Capacity (‘LAC’) instruments issued by the Bank to HSBC Asia Holdings Limited, the balance of which is included in‘amounts due to Group companies’.

Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fair value ofderivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items and hedging
instruments.
The interest rate risk of the group's fixed rate debt securities issued is managed in a non-dynamic risk management strategy.

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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 thevariability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreigncurrency basis.
The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuances of
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 the basis of theircontractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing bothprincipal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. 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 in foreignexchange market rates with cross-currency swaps; these are considered dynamic hedges.
Hedging instrument by hedged risk
Hedging instrument
Carrying amount

Hedged item

IneffectivenessChange infair value2
HK$m

Change in fairvalue3

Recognised
in profit and
loss

HK$m

Balancesheet
presentation

HK$m

HK$m

1,382

Derivatives

5,422

5,422

—

3,605

460

Derivatives

1,834

1,803

31

10,245

1,842

7,256

7,225

31

5,461

5,461

—

(448)

(448)

—

5,013

5,013

—

Notional
amount1

AssetsLiabilities

Hedged risk

HK$m

HK$m

Foreign currency

166,6806,640Interest rate

212,159

At 31 Dec 2023

378,839

Foreign currency

34,8773,226

14

Derivatives

Interest rate147,291

655

1,045

Derivatives

At 31 Dec 2022

182,168

3,881

1,059

Profit and loss
presentation
Net income fromfinancial instruments
held for trading or
managed on a fairvalue basis

Net income fromfinancial instruments
held for trading or
managed on a fairvalue basis

1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions
outstanding at the balance sheet date. They do not represent amounts at risk.
2 Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.
3 Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to timing differences between the hedged items andhedging instruments, and hedges using instruments with a non-zero fair value.
Reconciliation of equity and analysis of other comprehensive income by risk typeInterest rate
HK$m

Foreign currency
HK$m

Cash flow hedging reserve at 1 Jan 2023
Fair value gains
Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:Hedged items that have affected profit or loss1
Income taxes
OthersCash flow hedging reserve at 31 Dec 2023

(338)
1,803

(1,149)
5,422

856
(423)
—
1,898

(4,107)
(217)
5
(46)

Cash flow hedging reserve at 1 Jan 2022
Fair value gains/(losses)
Fair value (gains) reclassified from the cash flow hedge reserve to the income statement in respect of:Hedged items that have affected profit or loss1
Income taxes
OthersCash flow hedging reserve at 31 Dec 2022

108
(448)

45
5,461

(109)
112
(1)
(338)

(6,891)236—(1,149)1 Hedged items that have affected profit or loss are primarily recorded within interest income.

Interest rate benchmark reform
At 31 December 2023, HK$33,127m (2022: HK$157,460m) of the notional amounts of interest rate derivatives designated in hedge accounting
relationships are expected to be directly affected by market-wide Ibors reform and in scope of HKFRS Interest Rate Benchmark Reform Phase 1
amendments. They do not represent the extent of the risk exposure managed by the group.
At 31 December 2022, the Hong Kong interbank offered rate (‘HIBOR’) was included given that the reform of this benchmark was considered
possible. At 31 December 2023, HIBOR is no longer expected to be directly affected by ibors reform following the successful transition of all
major LIBOR settings and the HKMA affirmation that there were no plans to discontinue HIBOR.

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115

Notes on the Consolidated Financial Statements

9

Financial assets designated and otherwise mandatorily measured at fairvalue through profit or loss
2023
Mandatorily
Designated measured at
at fair value
fair value

Treasury and other eligible bills
Debt securities
Equity securities
Reverse repurchase agreements and other similar secured
lending
Other1
At 31 Dec

2022

Total

Designatedat fair value

Mandatorily
measured atfair value

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

2
12,128—5,565
444,653
222,980

5,567
456,781
222,980—
18,882—

6,777
418,571
186,718

6,777
437,453
186,718

—

514

514

—

1,764

1,764

2,900
15,03018,831
692,543

21,731
707,573—
18,882

20,318634,148

20,318653,030

1 ‘Other’ includes term lending to customers and banks, and default fund contribution.

10 Loans and advances to customers
Gross loans and advances to customers
Expected credit loss allowances
At 31 Dec

2023
HK$m

2022
HK$m

3,595,929(38,853)
3,557,076

3,734,987(39,919)
3,695,068

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 & Construction
Wholesale and retail trade
Manufacturing
Transportation and storage
Other
Total corporate and commercial
Non-bank financial institutions
At 31 Dec
By geography1
Hong Kong
Mainland China
Australia
Singapore
India
Taiwan
Malaysia
Indonesia
Other

2023
HK$m

2022
HK$m

1,224,325
101,257
237,440
1,563,022
537,393
350,492
359,91496,789396,760
1,741,348
291,5593,595,929

1,177,615
92,023
254,729
1,524,367
616,517377,326
371,718
104,933
437,269
1,907,763
302,857
3,734,987

2,211,592
349,116
294,502
238,537
143,657
90,39681,89830,141
156,090

2,322,684
396,989
269,937
240,590
116,840
88,73884,931
29,528
184,750

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.

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The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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

Amounts receivable– within one year
– one to two years– two to three years– three to four years– four to five years– after five years

Present
value

Total future
minimum
payments

2022
Unearnedfinance
incomePresent
value

HK$m

HK$m

HK$m

HK$m

HK$m

(963)
(876)
(828)
(782)
(736)
(5,725)(9,910)

1,432
1,434
1,532
1,503
1,398
20,01527,314(274)
27,040

2,971
2,538
2,287
2,226
2,172
24,58536,779

(783)
(724)
(677)
(644)
(619)
(4,729)(8,176)

2,188
1,814
1,610
1,582
1,553
19,85628,603(309)
28,294

Total future
minimum
payments

2023
Unearnedfinance
income

HK$m
2,395
2,310
2,360
2,285
2,134
25,74037,224

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

2023

2022

HK$m

HK$m

1,410,271
700,863
703,459
5,949
618,941
52,758566,183
2,029,212

1,239,941
612,990
619,8267,125
509,766
129,174
380,592
1,749,707

Equity instruments measured at fair value through other comprehensive income
2022

2023
Fair value

Dividends
recognised

Fair value

Dividends
recognised

Type of equity instruments

HK$m

HK$m

HK$m

HK$m

Business facilitation
Investments required by central institutions
OthersAt 31 Dec

5,435
400
114
5,949

267
5
—
272

6,615
404
106
7,125

217
3
—
220

2023
HK$m

2022
HK$m

119,861
3,019
17,710343,226
78,246
118,633
680,695
514,795

121,131
4,372
22,512
149,687
34,388129,025
461,115354,146

12 Assets pledged, assets transferred and collateral received
Assets pledged
Financial assets pledged to secure liabilities

Treasury bills and other eligible securities
Loans and advances to banks
Loans and advances to customers
Debt securities
Equity securities
Cash collateral included in other assets
Assets pledged at 31 Dec
Amount of liabilities secured

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 derivative transactions.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

117

Notes on the Consolidated Financial Statements

Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates ofindebtedness are held.
Financial assets pledged as collateral which the counterparty has the right to sell or repledge was HK$373,138m (2022: HK$193,461m).

Assets transferred
Transferred financial assets not qualifying for full derecognition and associated financial liabilities
2022

2023
Carrying amount of:Transferred
Associatedassetsliabilities
Repurchase agreements
Securities lending agreements

Carrying amount of:Transferred
Associatedassetsliabilities

HK$m

HK$m

HK$m

HK$m

364,50287,227451,729

330,0731,187
331,260

167,260
70,036237,296

151,677
3,644
155,321

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 be recognised in full while a related
liability, reflecting the group’s obligation to repurchase the assets for a fixed price at a future date, is also 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 thetransaction, 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 andcustomary 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

2023
HK$m

2022
HK$m

1,307,234
482,415

1,337,822
520,756

13 Investments in subsidiaries
Main subsidiaries of the Bank

Place of incorporation

Principal activity

Hang Seng Bank Limited1
HSBC Bank (China) Company Limited
HSBC Bank Malaysia Berhad
HSBC Bank Australia Limited2
HSBC Bank (Taiwan) Limited2
HSBC Bank (Singapore) Limited

Hong Kong
mainland China
Malaysia
Australia
TaiwanSingapore

HSBC Life (International) Limited2

BermudaBanking
Banking
Banking
Banking
Banking
Banking
Retirement benefits andlife insurance

The group’s interest inissued share capital/
registered or charter
capital62.14%
100%
100%
100%
100%
100%
100%

1 In addition to the strategic holding disclosed above, the group held 0.09% (2022: 0.07%) shareholding as part of its trading books.
2 Held indirectly.

All of the above subsidiaries are included in the group’s consolidated financial statements. 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 mainlyin 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 maintain certain
minimum levels of capital and liquid assets to support their operations. The effect of these regulatory requirements is to limit the extent towhich the subsidiaries may transfer funds to the Bank in the form of repayment of shareholder loans or cash dividends.

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The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Subsidiary with significant non-controlling interest

Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests (%)1
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, net of tax– total comprehensive income for the year

2023

2022

HK$m

HK$m

37.86
6,730
59,115
3,836

37.86
4,264
56,121
2,823

1,692,094
1,523,910
40,78917,8381,215
19,053

1,854,446
1,694,448
34,291
11,272(2,316)
8,956

2023
HK$m

2022
HK$m

190,479
3,713(23,986)
170,206

182,1373,815(54)
185,898

1 Includes the group's shareholding held 0.09% (2022: 0.07%) as part of its trading books.

14 Interests in associates and joint ventures
Associates and joint ventures
Share of net assets
Goodwill originally arising on acquisition
Impairment
At 31 Dec

As 31 December 2023, the group’s interests in associates amounted to HK$170,196m (2022: HK$185,888m).

Principal associate
Place of incorporation
Bank of Communications Co., Ltd

The group’s interest in issued share capital

mainland 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$68,841m at 31 December 2023 (2022: HK$63,469m).

Bank of Communications Co., Ltd. (‘BoCom’)
We maintain a 19.03% interest in BoCom. The group’s investment in BoCom is classified as an associate. Significant influence in BoCom wasestablished with consideration of all relevant factors, including representation on BoCom’s Board of Directors and participation in a resource andexperience sharing agreement (‘RES’). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom’s financial andoperating 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 associate’s net assets.
An impairment test is required if there is any indication of impairment.

Impairment testing
The fair value of the group’s investment in BoCom had been below the carrying value for approximately twelve years. We have previously
disclosed that the excess of the value in use ('VIU') calculation over its balance sheet value has been marginal in recent years, and thatreasonably possible changes in assumptions could generate an impairment.
Recent macroeconomic, policy and industry-wide factors resulted in a wider range of possible VIU calculation outcomes, and our VIU calculation
uses both historical experience and market participant views to estimate future cash flows, relevant discount rates and associated capitalassumptions.
At 31 December 2023, the group performed an impairment test on the carrying value, which resulted in an impairment of HK$24.0bn, as therecoverable amount as determined by a VIU calculation was lower than the carrying value.
At

BoCom

VIU
HK$bn

31 Dec 2023
Carrying
value
HK$bn

Fair
value
HK$bn

166.2

166.2

68.8

VIU
HK$bn

31 Dec 2022
Carrying
value
HK$bn

Fair
value
HK$bn

183.0

182.3

63.5

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119

Notes on the Consolidated Financial Statements

The impairment test will be updated in future periods, reflecting updated assumptions in the VIU impairment calculation. Going forward, thecarrying value will be aligned to the updated VIU calculation and capped at carrying value that would have been determined had no impairment
loss been recognised, rather than at cost and adjusted thereafter for the post-acquisition change in the group’s share of associate’s net assets,
and therefore there is a risk of reversals or further impairments in future periods.
The VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are described below and are
based on factors observed at period-end. The factors that could result in increases or reductions in the VIU include changes in BoCom’s shortterm performance, a change in regulatory capital requirements or revisions to the forecast of BoCom’s future profitability.
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 value.
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. Forecast
earnings growth over the short to medium term is lower than recent (within the last five years) actual growth and reflects the impact of recent
macroeconomic, policy and industry factors in mainland China. As a result of management's intent to continue to retain its investment, earnings
beyond the short to medium term are then extrapolated into perpetuity using a long-term growth rate to derive a terminal value, which
comprises the majority of the VIU. The second component is the capital maintenance charge (‘CMC’), which is management’s forecast of theearnings that need to be withheld in order for BoCom to meet capital requirements over the forecast period, meaning that CMC is deductedwhen arriving at management’s estimate of future earnings available to ordinary shareholders. The CMC reflects the revised capitalrequirements arising from revisions of the ratio of risk-weighted assets to total assets assumption. The principal inputs to the CMC calculation
include estimates of asset growth, the ratio of risk-weighted 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 ensurethat 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% (2022: 3%) for periods after 2027, which does not exceed forecast GDP growth in mainland China and issimilar to forecasts by external analysts.
– Long-term asset growth rate: 3% (2022: 3%) for periods after 2027, which is the rate that assets are expected to grow to achieve long-term
profit growth of 3%.
– Discount rate: 9.00% (2022: 10.04%), which is based on a capital asset pricing model (‘CAPM’), using market data. The discount rate used iswithin the range of 7.9% to 9.7% (2022: 8.4% to 10.4%) indicated by the CAPM, and decreased as a consequence of a market driven
reduction in beta. While the CAPM range sits at the lower end of the range adopted by selected external analysts of 8.8% to 13.5% (2022:
8.8% to 13.5%), we continue to regard the CAPM range as the most appropriate basis for determining this assumption.
– Expected credit losses ('ECL') as a percentage of loans and advances to customers: ranges from 0.80% to 0.97% (2022: 0.99% to 1.05%) in
the short to medium term, reflecting reported credit experience in mainland China. For periods after 2027, the ratio is 0.97% (2022: 0.97%),
which is higher than BoCom’s average ECL as a percentage of loans and advances to customers in recent years prior to the pandemic.
– Risk-weighted assets as a percentage of total assets: ranges from 62.0% to 63.7% (2022: 61.0% to 64.4%) in the short to medium term,reflecting higher risk-weights in the short term followed by an expected reversion to recent historical levels. For periods after 2027, the ratio
is 62.0% (2022: 61.0%), which is similar to BoCom’s actual results in recent years.
– Loans and advances to customers growth rate: ranges from 9.0% to 10.0% (2022: 7.1% to 11.0%) in the short to medium term, reflecting
higher growth rate in loans and advances to customers as a result of recent macroeconomic, policy and industry factors in mainland China.
Increases in the forecast growth rate of loans and advances to customers results in higher forecast ECL.
– Operating income growth rate: ranges from -0.4% to 9.7% (2022: 1.9% to 7.7%) in the short to medium term, which is lower than BoCom’s
actual results in recent years, and is impacted by projections of net interest income in the short term as a consequence of recent
macroeconomic, policy and industry factors in mainland China.
– Cost-income ratio: ranges from 35.5% to 39.8% (2022: 35.5% to 36.3%) in the short to medium term. These ratios are higher than BoCom's
actual results in recent years and forecasts disclosed by external analysts.
– Effective tax rate (‘ETR’): ranges from 5.3% to 15.0% (2022: 4.4% to 15.0%) 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 2027, the rate is 15.0% (2022:
15.0%), which is higher than the recent historical average, and aligned to the minimum tax rate as proposed by the OECD/Group of 20('G20') Inclusive Framework on Base Erosion and Profit Shifting.
– Capital requirements: capital adequacy ratio of 12.5% (2022: 12.5%) and tier 1 capital adequacy ratio of 9.5% (2022: 9.5%), based on
BoCom’s capital risk appetite and capital requirements respectively.
The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of the
VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur at the sametime. Loans and advances to customers growth rate has been added to the list of key assumptions detailed in the table to reflect the greater
potential variability associated with the assumption as a result of recent macroeconomic, policy and industry factors in mainland China. The
selected rates of reasonably possible changes to key assumptions are based on external analysts’ forecasts, statutory requirements and otherrelevant external data sources, which can change period to period. Unless specified, favourable and unfavourable changes are consistently
applied throughout short-to-medium and long term forecast years, based on a straight-line average of the base case assumption.

120

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Sensitivity of VIU to reasonably possible changes in key assumptions
Favourable change
Increase in
VIU
At 31 December 2023
Long-term profit growth rate1
Long-term asset growth rate1
Discount rate
Expected credit losses as a percentage of loans and advances
to customers
Risk-weighted assets as a percentage of total assets
Loans and advances to customers growth rate
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 2022
Long-term profit growth rate1
Long-term asset growth rate1
Discount rate
Expected credit losses as a percentage of loans and advances
to customers
Risk-weighted assets as a percentage of total assets
Loans and advances to customers growth rate
Operating income growth rate
Cost-income ratio
Long-term effective tax rate
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio

VIU

Unfavourable change
Decreasein VIU

VIU

bps

HK$bn

HK$bn

bps

HK$bn

HK$bn

58
(79)
(110)
2023 to 2027: 78
2028 onwards: 91
(150)
(213)
57
(212)
(426)
—
—

25.2
34.9
34.5

191.4
201.1
200.7

(27.3)(31.7)(48.4)

138.9
134.5
117.8

22.1

188.3

(34.8)

131.4

6.2
24.6
19.7
5.3
12.0
—
—

172.4
190.8
185.9
171.5
178.2
166.2
166.2

(79)
58
280
2023 to 2027: 120
2028 onwards: 104
216
207
(81)
99
1,000
215
248

(12.8)(23.4)(20.7)(23.4)(28.1)(59.5)(29.2)

153.4
142.8
145.5
142.8
138.1
106.7
137.0

75
(71)
(164)
2022 to 2026: 95
2027 onwards: 91
(118)
(75)
44
(122)
(426)
—
—

28.1
24.2
54.3

211.1
207.2
237.3

(21.1)(31.8)(28.7)

161.9
151.2
154.3

14.9

197.9

(22.5)

160.5

0.6
8.9
10.5
8.1
11.8
—
—

183.6
191.9
193.5
191.1
194.8
183.0
183.0

(71)
75
136
2022 to 2026: 120
2027 onwards: 104
239
295
(83)
174
1,000
191
266

(17.5)(24.7)(19.3)(16.5)(27.7)(48.8)(24.8)

165.5
158.3
163.7
166.5
155.3
134.2
158.2

1 The favourable and unfavourable 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.

Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is
HK$102.3bn to HK$225.2bn (2022: HK$131.9bn to HK$223.9bn), acknowledging that the fair value of the group’s investment has ranged from
HK$52.6bn to HK$90.9bn over the last five years as at the date of the impairment tests. The possible range of VIU is based on impacts set out
in the table 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 loans and advances to customers and a 50bps increase/decrease in the discount rate. 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 2023, the group included the associate’s
results on the basis of financial statements made up for the 12 months to 30 September 2023, but taking into account the financial effect ofknown significant transactions or events in the period from 1 October 2023 to 31 December 2023.
Selected balance sheet information of BoCom

Cash and balances with central banks
Due from and placements with banks and other financial institutions
Loans and advances to customers
Other financial assets
Other assets
Total assets
Due to and placements from banks and other financial institutions
Deposits from customers
Other financial liabilities
Other liabilities
Total liabilities
Total equity

At 30 Sep
2023
HK$m

At 31 Dec
2022
HK$m

881,237
784,860
8,496,811
4,593,262
465,521
15,221,691
2,281,718
9,504,593
1,962,818
287,310
14,036,439
1,185,252

911,654780,826
8,069,782
4,551,920
383,391
14,697,573
2,301,346
8,989,936
1,942,935
289,638
13,523,855
1,173,718

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

121

Notes on the Consolidated Financial Statements

Reconciliation of BoCom’s net assets to carrying amount in the group’s consolidated financial statements
At 30 Sep

The group’s share of ordinary shareholders' equity
Goodwill originally arising on acquisition
Impairment
Carrying amount

2023
HK$m

2022
HK$m

186,578
3,626(23,955)
166,249

178,526
3,728—
182,254

Selected income statement information of BoCom
For the 9 months ended 30 Sep
2023
2022
Net interest income
Net fee and commission income
Credit and impairment losses
Depreciation and amortisation
Tax expense– profit for the year
– other comprehensive income/(expense)
Total comprehensive income
Dividends received from BoCom

HK$m

HK$m

137,151
37,695(53,514)(15,474)(4,321)
76,993
4,942
81,935
5,762

148,81440,572(59,834)(13,975)(3,415)
79,102(292)
78,8105,881

Using the latest period for which BoCom has disclosed this information (at 30 June 2023), the group's share of associate's contingent liabilities was
HK$463,564m (2022: HK$442,884m).

15 Goodwill and intangible assets
Goodwill and intangible assets include goodwill arising on business combinations and other intangible assets.

Goodwill
Other intangible assets1
At 31 Dec

2023
HK$m

2022
HK$m

6,817
32,10638,923

6,795
30,06836,863

1 Included within other intangible assets is internally generated software with a net carrying value of HK$29,370m (2022: HK$27,209m). During the year,
capitalisation of internally generated software was HK$9,391m (2022: HK$11,570m), the amortisation charge was HK$6,922m (2022: HK$5,495m) andthe impairment charge was HK$122m (2022: HK$332m).

16 Property, plant and equipment
Owned property, plant and equipment1
Other right-of-use assets
At 31 Dec

2023
HK$m

2022
HK$m

123,301
6,374
129,675

123,491
7,435
130,926

1 Included leasehold land and buildings of HK$112,308m (2022: HK$112,591m) for which the right of use are considered sufficient to constitute control.
They are therefore presented as owned assets.

122

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Movement in owned property, plant and equipment
2022

2023
Total

Land andbuildings

Equipment

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

101,427
(326)
674
(22)
—

16,199(13)57——

16,659(52)
1,705(1,087)—

134,285(391)
2,436(1,109)—102,367
(797)
3,183
(55)
—

13,4658324——

15,747
(661)
2,253
(680)
—

131,579(1,450)
5,760
(735)
—

(5,723)——(5,723)(5,105)——(5,105)5,330(89)
101,271(35)
3
16,211—(10)
17,215

5,295(96)
134,697

4,683(2,849)101,427

(133)
2,535
16,199——16,6594,550(314)
134,285

91
(5)
5,876
(6)
—

—
—
—
—
—

10,703
(29)
1,485
(996)
—

10,794(34)
7,361(1,002)
—

87
(42)
5,151
—
—

—
—
—
—
—

10,420
(496)
1,399
(620)
—

10,507
(538)
6,550
(620)
—

(5,723)——(5,723)(5,105)——(5,105)

233
101,038—
16,211

11,163
6,052

11,396
123,30191
101,336—
16,19910,703
5,956

10,794
123,491

Land and Investmentbuildings properties Equipment
Cost or valuation
At 1 Jan
Exchange and other adjustments
Additions
Disposals
Transfers
Elimination of accumulated depreciation onrevalued land and buildings
Surplus/(deficit) on revaluation
Reclassifications
At 31 Dec
Accumulated depreciation
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

Investment
properties

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

2023
HK$m

2022
HK$m

18,297

18,584

Valuation of land and buildings and investment properties
The group’s land and buildings and investment properties were revalued as at 31 December 2023. The basis of valuation for land and buildings
and investment properties was open market value. The resultant values are Level 3 in the fair value hierarchy. The fair values for land andbuildings 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 thecharacteristics of the properties (unobservable inputs) which include the location, size, shape, view, floor level, year of completion and otherfactors 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 their present values. The net book valueof ‘Land and buildings’ includes HK$7,253m (2022: HK$6,839m) in respect of properties which were valued 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 ofSurveyors. This represents 93% by value of the group’s properties subject to valuation. Other properties were valued by different independent
professionally qualified valuers.

17 Prepayments, accrued income and other assets
Prepayments and accrued income
BullionAcceptances and endorsements
Insurance contract assets
Reinsurance contract assets
Current tax assets
Settlement accounts
Cash collateral and margin receivables
Other assets
At 31 Dec

2023
HK$m

2022
HK$m

42,61352,54453,389
1,092
36,2142,145
54,75678,19450,044
370,991

32,31450,253
57,118345
32,863
2,144
38,607
94,847
40,637349,128

Prepayments, accrued income and other assets included HK$275,917m (2022: HK$260,616m) of financial assets, the majority of which were
measured at amortised cost.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

123

Notes on the Consolidated Financial Statements

18 Customer accounts
Customer accounts by country/territory

Hong Kong
Singapore
Mainland China
Australia
India
Malaysia
TaiwanIndonesia
Other
At 31 Dec

2023
HK$m

2022
HK$m

4,246,041
574,574
437,542
250,550
190,439
123,487
132,41043,744
262,264
6,261,051

4,229,531
479,241
443,954
222,222
176,466
124,792
119,400
45,529272,574
6,113,709

2023
HK$m

2022
HK$m

70,59232,36098
103,050

80,564
61,404
485
142,453

19 Trading liabilities
Net short positions in securities
Repurchase agreements and other similar secured lending
Customer accounts
At 31 Dec

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

2023

2022

HK$m

HK$m

89,604
51,23929,885
170,728

89,25845,45433,031
167,743

The carrying amount of financial liabilities designated at fair value was HK$456m higher than the contractual amount at maturity(2022: HK$370m lower). The cumulative gain in fair value attributable to changes in credit risk was HK$45m (2022: HK$138m gain).

21 Debt securities in issue

Bonds and medium-term notes
Other debt securities in issue
Total debt securities in issue
Included within:– financial liabilities designated at fair value (Note 20)
At 31 Dec

124

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

2023

2022

HK$m

HK$m

83,90355,081
138,984

78,537
67,826
146,363(51,239)
87,745(45,454)
100,909

22 Accruals and deferred income, other liabilities and provisions
Accruals and deferred income
Acceptances and endorsements
Settlement accounts
Cash collateral and margin payables
Reinsurance contract liabilities
Share-based payment liability to HSBC Holdings plc
Lease liabilities
Other liabilities1
Provisions for liabilities and charges
At 31 Dec

2023

2022

HK$m

HK$m

49,17653,441
32,95150,461
6,079
1,883
6,830
55,2592,033
258,11334,69857,21033,55258,964
5,518
1,564
7,850
45,347
1,911
246,6141 Mainly includes marginal deposit on letter of credit and credit card settlement account.

Accruals and deferred income, other liabilities and provisions included HK$239,779m (2022: HK$228,240m) of financial liabilities which were
measured at amortised cost.
Movement in provisions
Restructuring
costs

Other

Total

HK$m

HK$m

HK$m

At 31 Dec 2022
Additions
Amounts utilised
Unused amounts reversed
Exchange and other movements
At 31 Dec 2023
Contractual commitments1
At 31 Dec 2022
Net change in expected credit loss provision and other movements
At 31 Dec 2023
Total Provisions at 31 Dec 2023

271
204
(188)
(102)
1
186

481
298
(148)
(31)
(2)
598

752
502
(336)
(133)
(1)
784

At 31 Dec 2021
Additions
Amounts utilised
Unused amounts reversed
Exchange and other movements
At 31 Dec 2022
Contractual commitments1
At 31 Dec 2021
Net change in expected credit loss provision and other movements
At 31 Dec 2022
Total Provisions at 31 Dec 2022

148
468
(307)
(35)
(3)
271

Provisions (excluding contractual commitments)

1,159
90
1,249
2,033
466
243
(174)
(84)
30
481

614
711
(481)
(119)
27
752
785
374
1,159
1,911

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.

1

23 Subordinated liabilities
US$400m
At 31 Dec

1
2

Undated floating rate primary capital notes2

2023
HK$m

2022
HK$m

—
—

3,119
3,119

Subordinated liabilities to Group entities are not included in the above table.
The undated floating rate primary capital notes were called in July 2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

125

Notes on the Consolidated Financial Statements

24 Share capital

Paid up share capital in HK$
Paid up share capital in US$1
At 31 Dec

2023
HK$m

2022
HK$m

123,949
56,232
180,181

123,949
56,232
180,181

Ordinary shares issued and fully paid
2022

2023
At 1 Jan
Shares issued during the year
At 31 Dec

HK$m

Number

HK$m

Number180,181—180,181

49,579,391,798—
49,579,391,798

172,335
7,846
180,181

46,440,991,798
3,138,400,000
49,579,391,798

1 Paid up share capital in US$ represents preference shares which were redeemed or bought back via payment out of distributable profits and for which
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 during 2023 (2022: 3,138.4m). 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 meetingsof the Bank.

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
US$1,000m Floating rate perpetual subordinated loan, callable from May 20277
US$1,000m Fixed rate perpetual subordinated loan, callable from Mar 20288
At 31 Dec

1
2
3
4
5
6
7
8

2023

2022

HK$m

HK$m

7,834
7,063
5,467
3,905
4,685
7,044
8,617
—
7,850
52,465

7,834
7,063
5,467
3,905
4,685
7,044
8,617
7,771
—
52,386

Interest 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%.
This subordinated loan was early repaid in the first half of 2023.
Interest rate fixed at 8.000%.

The additional tier 1 capital instruments above are held by HSBC Asia Holdings Limited. These 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-viabilityon 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 included in 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’ time bucket.
Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled togive. Where there is no contractual notice period, undated or perpetual contracts are included in the ‘Due over 5 years’ time bucket.
– Financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual
maturity of the underlying instruments and not on the basis of the disposal transaction.
– Non-financial assets and liabilities with no contractual maturity are included in the ‘Due over 5 years’ time bucket.
– Insurance contract liabilities included in ‘non-financial liabilities’ are, irrespective of contractual maturity, included in the ‘Due over 5 years’time bucket in the maturity table provided below. An analysis of the expected maturity of insurance contract liabilities based on discounted
cash flows is provided on page 107. 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 surrender andtransfer options by the policyholders.

126

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Maturity analysis of assets and liabilities

Due notmorethan
1 monthFinancial assets
Cash and balances at central banks
Items in the course of collection from otherbanks
Hong Kong Government certificates ofindebtedness
Trading assets
Derivatives
Financial assets designated and otherwise
mandatorily measured at fair value throughprofit or loss
Reverse repurchase agreements – nontrading
Loans and advances to banks
Loans and advances to customers
Financial investments
Amounts due from Group companies
Accrued income and other financial assets
Financial assets at 31 Dec 2023
Non-financial assets
Total assets at 31 Dec 2023
Financial liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to otherbanks
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 2023
Non-financial liabilities
Total liabilities at 31 Dec 2023

Due over Due over Due over Due over Due over
1 month 3 months 6 months 9 months
1 yearbut notbut notbut notbut not
but
more
more
more
more not more
than
than
than
than
than 23 months 6 months 9 months
1 yearyears

Due over2 yearsbut
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

232,987

—

—

—

—

—

—

—

232,987

22,049

—

—

—

—

—

—

—

22,049328,304

—

—

—

—

—

—

—

328,304

936,087
401,888

4,606
995

246
1,030

311
528

—
243

—
2,135

—
1,592

—
842

941,250
409,253

10,922

4,784

4,567

3,532

3,942

34,44290,413554,971

707,573

535,819

160,830

76,52023,052

9,977

24,755

233—

831,186

326,805
532,822
252,730
68,894203,3633,852,670—
3,852,670

135,883
334,021411,275
35,48639,5201,127,400—
1,127,400

33,392
279,076
278,0736,440
23,853
703,197—
703,197

19,308212,426
87,712
3,395
2,990
353,254—353,254

20,237
160,823
91,225
3,674
3,119
293,240—
293,240

19,192389,969
236,575
25,877709
733,654—733,654

8,984
540,929
488,372
2,350
918
1,133,791—
1,133,791

328,304

—

—

—

—

—

—

—

—
563,801
1,107,010
3,557,076
183,250
2,029,212
1
146,117
1,445
275,917
1,847,519 10,044,725
455,668
455,668
2,303,187 10,500,393
328,304

27,536

—

—

—

—

—

—

—

27,536494,630
165,535
4,768,955
100,324
448,51747,717
5,244
186,851
140,199—
6,713,812—
6,713,812

18,078954
805,337
2,726
60
30,532
4,824
17,17150,862—
930,544—930,544

5,392
14,988467,986—
50
20,425
19,662
1,653
28,258—558,414—
558,4142,344
537
92,664—
66
8,748
11,492
77
5,046—
120,974—
120,974

1,540
132
59,839
—
278
7,702
5,897
174
4,256
—
79,818—79,818——37,514—267
16,845
16,443
9,666
3,924
—
84,659—84,659——28,749—488
8,781
20,668
117,754
5,475—
181,915—
181,915

—
—
7
—
490
29,9783,515
131,907
1,759—
167,656
790,015
957,671

521,984
182,146
6,261,051
103,050
450,216
170,728
87,745465,253
239,779—
8,837,792
790,015
9,627,807

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

127

Notes on the Consolidated Financial Statements

Maturity analysis of assets and liabilities (continued)1
Due over Due over Due over Due over Due over Due overDue not
1 month 3 months 6 months 9 months 1 year but
2 yearsmore
but notbut notbut notbut not not more
but not
than1 more than more than more than more than
than 2 more thanmonth 3 months 6 months 9 months
1 yearyears
5 years
Financial assets
Cash and balances at central banks
Items in the course of collection from otherbanks
Hong Kong Government certificates ofindebtedness
Trading assets
Derivatives
Financial assets designated and otherwise
mandatorily measured at fair value throughprofit or loss
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers
Financial investments
Amounts due from Group companies
Accrued income and other financial assets
Financial assets at 31 Dec 2022
Non-financial assets
Total assets at 31 Dec 2022
Financial liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to otherbanks
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
Financial liabilities at 31 Dec 2022
Non-financial liabilities
Total liabilities at 31 Dec 2022

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

232,740

—

—

—

—

—

—

—

232,740

28,557

—

—

—

—

—

—

—

28,557341,354

—

—

—

—

—

—

—

341,354691,744495,891

1,764
691

3,089
205

—
142

163
474

3,045
1,840

—
2,556

—
1,078

699,805
502,877

503,215653,030

9,876

5,486

10,123

4,922

4,251

13,597

101,560

585,333
321,798
567,448309,588
101,287
191,474
3,877,090—
3,877,090

256,887
99,242
370,158
511,786
4,646
38,366
1,289,026—
1,289,026

54,03939,386
300,760
128,596
4,356
21,515562,069—
562,069

7,679
5,973
151,447
67,945
716
3,864
242,688—242,688

7,172
13,563
146,744
69,4232,419
3,573
247,782—
247,782

13,402
16,445441,127
208,325
10,236
767
708,784—
708,784

3,464
19,440631,192
302,114
7,729
675
1,068,730—
1,068,730

341,354

—

—

—

—

—

—

—

—
927,976—
515,847
1,086,192 3,695,068
151,930 1,749,707
19
131,408382
260,616
1,742,816 9,738,985
458,858
458,858
2,201,674 10,197,843
341,354

33,073

—

—

—

—

—

—

—

33,073

335,467
193,147
5,050,054
142,432
550,725
35,661
13,723
129,641
139,464—
6,964,741—
6,964,741

2,173
1,249
540,61121
435,22913,266
12,841
43,325—648,719—
648,719

2,557
3,513
304,705—62
12,142
24,251808
22,513—
370,551—
370,551—
811
81,349—60
10,593
13,388272
5,099—
111,572—
111,572

5,027
176
85,465
—
157
8,957
1,054
304
6,601
—
107,741—
107,741

5,869
12
22,028—175
20,585
9,674
70,332
4,904—
133,579—
133,579——
29,490—489
11,43622,382
49,935
5,228—
118,960—
118,960——
7—
57
33,1403,171
133,987
1,106
3,119
174,587
703,013877,600

351,093
198,908
6,113,709
142,453
551,729
167,743
100,909398,120
228,240
3,1198,630,450
703,0139,333,463

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.

128

Due over5 years

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

27 Analysis of cash flows payable under financial liabilities by remaining
contractual maturities

At 31 Dec 2023
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
At 31 Dec 2022
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

Due not
more than 1
month

Due over 1
month butnot morethan 3monthsDuebetween 3
and12 months

Duebetween 1
and 5 years

Due after
5 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

328,304
27,536495,424
166,594
4,782,131
103,050
448,542
48,616
5,285
187,263132,291—
6,725,036
3,411,371
53,483
10,189,890
81%——
18,281
955
817,944—46
31,052
5,541
20,55342,012—
936,384——
936,384
8%

—
—
9,496
15,681
635,862—37
37,55538,62010,42430,108—
777,783545—
778,328
6%————
72,290—705
27,00740,717174,035
7,581—
322,335——
322,335
3%

—
—
—
—
48
—
530
30,013
3,813
182,676
1,729—
218,809——
218,8092%

328,304
27,536523,201
183,230
6,308,275
103,050449,860
174,243
93,976574,951
213,721—8,980,347
3,411,916
53,483
12,445,746

341,354
33,073335,951
193,748
5,053,321
142,453
551,079
37,062
13,917
129,728
137,987—
6,969,673
3,191,864
41,991
10,203,528
85%

—
—
2,194
1,250
552,623—
67
36,31014,305
14,50940,15736
661,451——
661,451
6%

—
—
7,708
4,542
481,006—253
32,404
40,63011,19830,306
108608,155——
608,155
5%

—
—
5,877
14
55,739—603
33,19834,698155,038
9,306
577
295,050——
295,050
2%

—
—
—
—
16
—
60
33,1703,400
170,299
1,126
4,561
212,632——
212,6322%

341,354
33,073351,730
199,554
6,142,705
142,453552,062
172,144
106,950
480,772
218,882
5,282
8,746,961
3,191,864
41,991
11,980,816

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 periods of 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 the options to surrender or transfer at
any time, and are reported in the ‘Due after 5 years’ time bucket. A maturity analysis prepared on the basis 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 under loan 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 2023

129

Notes on the Consolidated Financial Statements

28 Contingent liabilities, contractual commitments and guarantees
Guarantees and contingent liabilities:– financial guarantees1– performance and other guarantees2– other contingent liabilities
At 31 Dec
Commitments3:– documentary credits and short-term trade-related transactions– forward asset purchases and forward forward deposits placed– undrawn formal standby facilities, credit lines and other commitments to lend
At 31 Dec

2023

2022

HK$m

HK$m

53,483
380,953
1,161
435,597

41,991
354,794
1,222
398,007

26,90871,7083,313,300
3,411,916

26,324
48,5603,116,980
3,191,864

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 other transactionrelated guarantees.
3 Includes HK$1,978,328m of commitments at 31 December 2023 (2022: HK$1,892,401m) 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. As a significant
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 2023 included amounts in relation to legal and regulatory matters as set out in Note 40.

29 Other commitments
Capital commitments
At 31 December 2023, capital commitments, mainly related to the commitment for purchase of properties, were HK$3,907m (2022:
HK$3,834m).

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 tooffset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously (‘theoffset 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 onlyin the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and– cash and non-cash collateral (debt securities and equities) has been received/pledged for derivatives and reverse repurchase/repurchase,stock borrowing/lending and similar agreements to cover net exposure in the event of default or other predetermined events.
The effect of over-collateralisation is excluded.
‘Amounts not subject to enforceable netting agreements’ include contracts executed in jurisdictions where the rights of set off may not be
upheld under the local bankruptcy laws, and transactions where a legal opinion evidencing enforceability of the right of offset may not have beensought, or may have been unable to obtain.
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.

130

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Offsetting of financial assets and financial liabilities
Amounts subject to enforceable netting arrangements
Amounts not offset in thebalance sheet
Netamounts
Financialreported in instruments,
theincludingGross Amounts
balancenon-cashCashamounts
offsetsheet
collateral collateral
At 31 Dec 2023
Financial assets2
Derivatives
Reverse repos, stock borrowing and similar
agreements classified as:– trading assets– third party– amounts due from Group companies– reverse repurchase agreements - non-trading– third party– amounts due from Group companies– financial assets designated and otherwise
mandatorily measured at fair value through profit
or loss– third party
Financial liabilities3
Derivatives
Repos, stock lending and similar agreements
classified as:– trading liabilities– third party– amounts due to Group companies– repurchase agreements - non-trading– third party– amounts due to Group companies
At 31 Dec 2022
Financial assets2
Derivatives
Reverse repos, stock borrowing and similar
agreements classified as:– trading assets– third party– amounts due from Group companies– reverse repurchase agreements - non-trading– third party– amounts due from Group companies– financial assets designated and otherwise
mandatorily measured at fair value through profit
or loss– third party
Financial liabilities3
Derivatives
Repos, stock lending and similar agreements
classified as:– trading liabilities– third party– amounts due to Group companies– repurchase agreements - non-trading– third party– amounts due to Group companies

Amounts
not subject
toenforceablenettingNet
arrangeamountments1

Balance
sheet
total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

620,134(235,361)

384,773(332,456)(28,217)

24,10024,480409,253

66,86551,886
14,979887,389
835,167
52,222———(48,798)(46,423)(2,375)66,86551,886
14,979838,591
788,744
49,847(64,526)(51,620)(12,906)(838,533)(788,688)(49,845)(2,323)(266)(2,057)
(6)
(6)
—

16
—
16
52
50
2

10,824
10,824—42,44242,442—

77,68962,71014,979881,033
831,186
49,847514
1,574,902—(284,159)514
1,290,743(514)(1,236,029)—(30,546)—
24,168—77,746514
1,368,489

658,545(235,361)

423,184(331,004)(52,842)

39,33827,032450,216

32,42932,36069
630,963495,057
135,906
1,321,937———(48,798)(46,423)(2,375)(284,159)

32,42932,36069
582,165448,634
133,5311,037,778(31,959)(31,890)(69)(581,584)(448,071)(133,513)(944,547)

—
—
—
(10)
(10)
—
(52,852)

470
470
—
571
553
18
40,379———73,35073,350—100,382

32,42932,36069
655,515
521,984
133,531
1,138,160

795,934(329,392)

466,542(397,121)(39,022)

30,39936,335502,877

57,50555,221
2,284
932,272
891,131
41,141———(29,470)(26,186)(3,284)57,50555,221
2,284
902,802864,945
37,857(57,273)(54,994)(2,279)(901,205)(863,840)(37,365)

(227)
(227)
—
(1,597)(1,105)
(492)

5
—
5
—
—
—

4,177
4,177
—
63,031
63,031—

61,68259,3982,284
965,833
927,976
37,857

1,764
1,787,475—(358,862)

1,764
1,428,613(1,764)(1,357,363)—(40,846)—
30,404—
103,543

1,764
1,532,156

849,566(329,392)

520,174(390,421)(70,825)

58,92831,555551,729

61,437
61,38255
403,019
340,21562,804
1,314,022———(29,470)(26,186)(3,284)(358,862)

61,437
61,382
55
373,549
314,029
59,520955,160(61,436)(61,381)(55)(373,126)(313,747)(59,379)(824,983)

(1)
(1)
—
(352)
(256)
(96)
(71,178)

—
—
—
71
26
45
58,99922
22—37,06437,064—
68,641

61,45961,40455
410,613351,093
59,5201,023,801

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 Include balances due from Group companies of HK$202,680m (2022: HK$208,343m).
3 Include balances due to Group companies of HK$275,775m (2022: HK$213,726m).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

131

Notes on the Consolidated Financial Statements

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 are allocatedby 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 andexpenses. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully
attributed to operational business lines and geographical regions. While such allocations have been made on a systematic and consistent basis,
they necessarily involve a degree of subjectivity. Costs which are not allocated to other operating segments are included in the ‘Corporate
Centre’.
Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and interbusiness line transactions. All such transactions are undertaken on arm’s length terms. The intra-group elimination items for the operating
segments are presented in the Corporate Centre.

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: Wealth andPersonal Banking (‘WPB’), Commercial Banking (‘CMB’) and Global Banking and Markets ('GBM'). The products and services offered tocustomers 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 and personal loans, credit
cards, debit cards and local and international payment services. We also provide wealth management services, including insurance andinvestment products, global asset management services, investment management and Private Wealth Solutions for customers with moresophisticated and international requirements.
– CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sizedenterprises, 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) 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 incredit, 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.
– Other (GBM-other) mainly comprises other business activities which are jointly managed by GB and MSS.
Performance by reportable segments is presented in the ‘Financial Review’ on page 19 as specified as 'Audited'.
Information by geographical region

For the year ended 31 Dec 2023
Net operating income before change in expected credit losses and other credit
impairment charges
Profit before tax
At 31 Dec 2023
Total assets
Total liabilities
Credit commitments and contingent liabilities (contract amounts)
For the year ended 31 Dec 2022
Net operating income before change in expected credit losses and other credit
impairment charges
Profit before tax
At 31 Dec 2022
Total assets
Total liabilities
Credit commitments and contingent liabilities (contract amounts)

132

Hong Kong

Rest of
Asia-PacificIntra-segment
elimination

Total

HK$m

HK$m

HK$m

HK$m

156,171

93,546(38)

249,679

78,76542,678—

121,443

7,485,995
7,059,770
1,977,725

3,977,785
3,531,424
1,869,788(963,387)(963,387)—

10,500,393
9,627,807
3,847,513

117,535

82,358910

200,80342,34954,338—96,687

7,332,182
6,908,027
1,894,046

3,889,906
3,449,681
1,695,824(1,024,245)(1,024,245)—

10,197,843
9,333,463
3,589,870

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Information by country/territory
Revenue1

Non-current assets2

For the year ended 31 Dec
2023
2022
Hong Kong
Mainland China
Australia
India
Indonesia
Malaysia
Singapore
TaiwanOther
Total

At 31 Dec
2023

2022

HK$m

HK$m

HK$m

HK$m

156,171
19,934
8,886
13,773
3,609
6,708
18,275
5,038
17,285
249,679

117,535
20,847
7,815
11,7083,188
5,790
15,193
3,823
14,904200,803

140,646
180,166
1,659
2,711
3,253
1,833
3,331
2,429
2,775
338,803138,717
196,844
1,691
2,426
3,289
1,981
3,433
2,473
2,833
353,687

1 Revenue (defined as ‘Net operating income before change in expected credit losses and other impairment charges') is attributable to countries basedon 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 and certain
other assets.

32 Related party transactions
The group’s related parties include the parent, fellow subsidiaries, associates, joint ventures, post-employment benefit plans for the group’s
employees, Key Management Personnel (‘KMP’) as defined by HKAS 24, close family members of KMP and entities that are controlled 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 inEngland).
The group entered into transactions with its fellow subsidiaries in the normal course of business, including the acceptance and placement ofinterbank deposits, correspondent banking transactions and off-balance sheet transactions. The Bank also acted as agent for the distribution ofretail 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 are reported
under ‘General and administrative expenses – other administrative expenses' in the income statement.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

133

Notes on the Consolidated Financial Statements

The balances of amounts due to and from the relevant parties at the year end were as follows:
2022

2023

At 31 Dec
Assets– trading assets1,5– derivative assets– other assets1,4,6
Liabilities– trading liabilities1,7– financial liabilities designated at fair value1,2– derivative liabilities– other liabilities1,4,8– insurance contract liabilities1– subordinated liabilities1,3,4
Guarantees
Commitments

Immediate
holdingcompany
HK$m

Ultimateholdingcompany
HK$m

5
—
—
5
262,111—224,073
—
2,811
—

2,655
48
2
2,605
2,772
36
—
2,609
127
—

35,227—————

Fellow
subsidiaries
HK$m

Immediate
holdingcompany
HK$m

Ultimateholdingcompany
HK$m

Fellow
subsidiaries
HK$m

293,786
14,995
137,852
140,939
342,76872
6
139,566
203,022102—
27,997
925

24
—
—
24
256,031—
183,760—
1,842—
70,429
—
—

3,403
33
2
3,368
3,804
—
—
3,677
64
—
63
—
—

305,260
2,300
168,200
134,760
292,57755
6
150,474
141,947
95—
23,2891,405

1 These balances are presented under ‘Amounts due from/to Group companies’ in the consolidated balance sheet.
2 The balance at 31 December 2023 included capital and loss-absorbing capacity ('LAC') instruments of HK$224,073m (2022: HK$183,760m). During theyear, there were repayment of HK$36,128m (2022: HK$21,512m) and issuance of HK$66,521m (2022: HK$51,579m). The carrying amount of financial
liabilities designated at fair value was HK$3,121m lower than the contractual amount at maturity (2022: HK$13,593m lower). The cumulative loss infair value attributable to changes in credit risk was HK$2,917m (2022: HK$3,456m gain). The balances are under Level 2.
3 The balance at 31 December 2023 included subordinated liabilities of HK$35,227m to meet TLAC requirements (2022: HK$70,429m). During the year,
there were repayment of HK$34,962m (2022: no repayment) and no issuance (2022: HK$29,435m).
4 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.
5 Includes trading reverse repo agreements and other similar secured lending of HK$14,979m (2022: HK$2,284m).
6 Includes non-trading reverse repo agreements and other similar secured lending of HK$49,847m (2022: HK$37,857m).
7 Includes trading repurchase agreements and other similar secured lending of HK$69m (2022: HK$55m).
8 Includes non-trading repurchase agreements and other similar secured lending of HK$133,531m (2022: HK$59,520m).

The group routinely enters into related party transactions with other entities in the Group. These include transactions to facilitate third-party
transactions with customers, transactions for internal risk management, and other transactions relevant to Group processes. These transactions
and the above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates andsecurity, as for comparable transactions with third-party counterparties.

(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 the ultimate
holding company in respect of share options is treated as a capital contribution and is recorded within ‘Other reserves’. In respect of shareawards, the group recognises a liability to the ultimate holding company over the vesting period. This liability is measured at the fair value of theshares at each reporting date, with changes since the award dates adjusted through the capital contribution account within ‘Other reserves’. Thebalances of the capital contribution and the liability at 31 December 2023 amounted to HK$3,091m and HK$1,883m respectively (2022:
HK$3,299m and HK$1,564m respectively).

134

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(c) Post-employment benefit plans
At 31 December 2023, HK$7.4bn (2022: HK$7.7bn) of the group’s post-employment plan assets were under management by group companies,
earning management fees of HK$58m in 2023 (2022: HK$59m). At 31 December 2023, the group’s post-employment benefit plans had placed
deposits of HK$736m (2022: HK$735m) with its banking subsidiaries, earning interest payable to the schemes of HK$8.8m (2022: HK$1.1m).
The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates andsecurity, 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 non-interest
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
2023
Highestbalance during
Balance at
the year
31 December
Amounts due from associates – unsubordinated
Amounts due to associates
Amounts due to joint ventures
Fair value of derivative assets with associates
Fair value of derivative liabilities with associates
Guarantees and Commitments

2022
Highestbalance during
Balance at
the year
31 December

HK$m

HK$m

HK$m

HK$m

61,76923,45042
11,82634,281
1,569

46,173
13,03314
6,212
23,142377

57,513
19,86240
9,394
33,673
1,769

51,402
10,09916
6,559
28,440287

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates andsecurity, 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 the activitiesof the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Board of Directors andGroup 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

2023
HK$m

2022
HK$m

362
11
—
126
499

320
12
2
87
421

2023
HK$m

2022
HK$m

78,447
74,273
3,372

97,366
81,323
1,858

3,842
9,147

12,007
12,186

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

1 The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during the year.

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 the ordinary
course of business and on substantially the same terms, including interest rates and security, as comparable transactions with persons orcompanies of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of
repayment or present other unfavourable features. Change in expected credit losses recognised for the year, and expected credit loss
allowances against balances outstanding at the end of the year, in respect of Key Management Personnel were insignificant (2022: 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% to 2.625%. 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 during the financial year. In October 2023, CK Hutchison Group Telecom Finance S.A.
redeemed one of Senior Note tranches for EUR1.5bn.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

135

Notes on the Consolidated Financial Statements(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 outstandingat 31 Dec

By the Bank
By subsidiaries

Maximum aggregate amountoutstanding during the year

2023
HK$m

2022
HK$m

2023
HK$m

2022
HK$m

2,530
1
2,531

1,483
12
1,495

2,631
13
2,644

2,769
14
2,783

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 independent of therisk 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 functionsof 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 and ensuring fair values arein compliance with accounting standards. The fair values are reviewed by the group's relevant Valuation Committees, which consist of
independent support functions and consider all material subjective valuations. 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.

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 areeither based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market forsimilar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to the group'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 eachreporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities issued by the Group. Then,
using discounted cash flow, each security is valued using an appropriate market 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 are measured
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, recorded in other comprehensive income, reverse
over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.

Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:– Level 1 – valuation technique using quoted market price. These are financial instruments with quoted prices for identical instruments inactive markets that the group can access at the measurement date.
– Level 2 – valuation technique using observable inputs. These are financial instruments with quoted prices for similar instruments in active
markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all
significant inputs are observable.
– Level 3 – valuation technique with significant unobservable inputs. These are financial instruments valued using valuation techniques where
one or more significant inputs are unobservable.

136

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Financial instruments carried at fair value and bases of valuation
Fair Value Hierarchy

At 31 Dec 2023
AssetsTrading assets1
Derivatives
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss
Financial investments
Liabilities
Trading liabilities1
Derivatives
Financial liabilities designated at fair value1
At 31 Dec 2022
AssetsTrading assets1
Derivatives
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss
Financial investments
Liabilities
Trading liabilities1
Derivatives
Financial liabilities designated at fair value1

Level 1

Level 2

Level 3

Third-party
totalIntercompany2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

637,806
938

294,184
268,318

9,260
2,143

941,250
271,399—
137,854941,250
409,253

182,874

402,113

122,586

707,573—

707,573

1,077,040

329,689

3,542

1,410,271—

1,410,271

66,6852,048—

36,363
303,584
142,071

2
2,409
28,657103,050
308,041
170,728—
142,175—

103,050
450,216
170,728

486,547
1,018

203,975
330,356

9,283
3,301

699,805
334,675—
168,202699,805
502,877

155,276395,935

101,819

653,030—

653,030

959,318

276,315

4,308

1,239,941—

1,239,941

74,201
2,422—

68,246393,444
133,009

6
1,712
34,734142,453
397,578
167,743—
154,151—

142,453
551,729
167,743

1 These balances exclude HK$15,043m Level 2 assets (2022: HK$2,333m) and HK$224,187m Level 2 liabilities (2022: HK$183,821m) held with HSBC
Group entities.
2 Derivatives balances with HSBC Group entities are largely under ‘Level 2’.

Transfers between Level 1 and Level 2 fair values
AssetsLiabilities

Financialinvestments

Trading
assetsDesignatedandotherwise
mandatorily
measured atfair value

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2023
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1

94,47569,55260,546
40,626

13,386
19,403

—
—

296
1,591

—
—

—
—

At 31 Dec 2022
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1

29,781
60,104

23,312
36,02520,02026,053

—
—

132
1,443

—
—

—
—

Derivatives

Trading
liabilities

Designatedat fair value

Derivatives

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarter. Transfers into and out of levels of the fairvalue hierarchy are primarily attributable to changes in observability of valuation inputs and price transparency.

Fair value adjustments
We adopt the use of fair value adjustments when we take into consideration additional factors not incorporated within the valuation model thatwould otherwise be considered by a market participant. We classify fair value adjustments as either ‘risk-related’ or ‘model-related’. The majorityof these adjustments relate to MSS. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits orlosses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fairvalue adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.

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

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

137

Notes on the Consolidated Financial Statements

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 the group
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 notnetted across group entities.
The group calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of the group, to thegroup’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, thegroup calculates the DVA by applying the PD of the group, conditional on the non-default of the counterparty, to the expected positive exposureof the counterparty to the group and multiplying the result by the loss expected in the event of default. Both calculations are performed over thelife of the potential exposure.
For most products the group uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, tocalculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting
agreements and collateral agreements with the counterparty.
The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk is an adverse correlation between the counterparty’s
probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the currencyof the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specific approach is applied toreflect 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, where available 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 current and futurematerial 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.

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

Financialinvestments
Private equity and related
investments
Structured notes
OthersAt 31 Dec 2023
Private equity and related
investments
Structured notes
OthersAt 31 Dec 2022

AssetsDesignatedandotherwise
mandatorily
measured
at fair value
through
profit or
Trading
loss Derivatives
assetsLiabilities

Total

Trading
liabilities

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

2,886

48

108,278—

111,212

—
656
3,542

—
9,212
9,260

23
14,285
122,586

—
2,143
2,143

23
26,296
137,5313,742

16

90,773—

94,531

—
566
4,308

—
9,267
9,283

—
11,046
101,819

—
3,301
3,301

—
24,180118,711

Designatedat fair
value Derivatives

Total

HK$m

HK$m

HK$m

1

—

—

1

—
1
2

28,657—28,657

—
2,409
2,409

28,6572,410
31,068

6

—

—

6

—
—
6

34,734—34,734

—
1,712
1,712

34,734
1,712
36,452

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 which similar
companies have changed ownership; or from published net asset values (‘NAVs’) received. If necessary, adjustments are made to the NAV offunds to obtain the best estimate of fair value.

138

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Structured notes
The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded
derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes
issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.
Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreignexchange rates.

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

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
AssetsFinancialinvestments
HK$m
At 1 Jan 2023
Total gains or losses recognised in profit or loss
– net income or losses from financial instruments held
for trading or managed on a fair value basis– changes in fair value of financial instruments
mandatorily measured at fair value through profit or
loss2
Total gains or losses recognised in othercomprehensive income (‘OCI’)– financial investments: fair value gains or losses– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 Dec 2023
Unrealised gains or losses recognised in profit or loss
relating to assets and liabilities held at 31 Dec 2023
– net income or losses from financial instruments held
for trading or managed on a fair value basis– changes in fair value of other financial instruments
mandatorily measured at fair value through profit orloss

Liabilities

Designatedandotherwise
mandatorily
measured atfair value
through
Trading
profit or
assetsloss Derivatives
HK$m
HK$m
HK$m

Trading
liabilities
HK$m

Designatedat fair
value1 Derivatives
HK$m
HK$m

4,308
—

9,283
(441)

101,819
7,105

3,301
(1,411)6(9)

34,734
(218)

1,712
488

—

(441)

—

(1,411)

(9)

(218)

488

—

—

7,105

—

—

—

—

(664)

(90)

120

14

—

(154)

(7)

(618)
(46)
2,112
—
(212)
(2,004)
(696)
698
3,542

—
(90)
6,169
—
(2,278)(5,501)(1,505)
3,623
9,260

—
120
24,749—(4,249)(10,657)—
3,699
122,586

—
14
—
—
—
10
(370)
599
2,143

—
—
—
—
—
1
(6)
10
2

11
(165)
—
6,360
—
(5,249)(8,367)
1,551
28,657

—
(7)
—
—
—
(322)
(266)
804
2,409

—

(1,183)

1,428

837

—

(21)

(591)

—

(1,183)

—

837

—

—

(591)

—

—

1,428

—

—

(21)

—

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

139

Notes on the Consolidated Financial Statements

Movement in Level 3 financial instruments (continued)
AssetsFinancialinvestments
At 31 Dec 2021
Impact on transition to HKFRS17
At 1 Jan 2022
Total gains or losses recognised in profit or loss
– net income or losses from financial instruments held for
trading or managed on a fair value basis– changes in fair value of financial instruments mandatorily
measured at fair value through profit or loss2
Total gains or losses recognised in other comprehensive
income (‘OCI’)– financial investments: fair value gains or losses– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 Dec 2022
Unrealised gains or losses recognised in profit or loss
relating to assets and liabilities held at 31 Dec 2022
– net income or losses from financial instruments held for
trading or managed on a fair value basis– changes in fair value of other financial instruments
mandatorily measured at fair value through profit or loss

Liabilities

Designatedandotherwise
mandatorily
measured
at fair value
through
Trading
profit or
assetsloss

Derivatives

Trading Designatedliabilities at fair value

Derivatives

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

3,674

3,246

3,294

—

20,449

2,130

3,674
—

3,246
(952)

74,652
11,35286,004
1,337

3,294
669

—
3

20,449
(851)

2,130
214

—

(952)

—

669

3

—

214

—

—

1,337

—

—

(851)

—

676

(81)

(39)

(25)

—

(1,001)

(83)

812
(136)
1,670
—
(71)
(1,641)
—
—
4,308

—
(81)
6,480
—
(644)
(4,742)
(772)
6,748
9,283

—
(39)
28,923—(214)(14,003)(289)
100
101,819

—
(25)
—
—
—
(557)
(394)
314
3,301

—
—
—
—
—
—
—
3
6

(5)
(996)
—
5,936
—
12,130(2,671)742
34,734

—
(83)
—
—
—
(553)
(190)
194
1,712

—

(734)

(1,691)

2,631

—

(19)

(78)

—

(734)

—

2,631

—

—

(78)

—

—

(1,691)

—

—

(19)

—

1 Includes structured deposits where the settlement balance represents the net of matured and new deposits.
2 Includes net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit orloss of HK$6,780m (2022: HK$1,065m).

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

Effect of changes in significant unobservable assumptions to reasonably possible
alternatives
Sensitivity of fair values to reasonably possible alternative assumptions
2023
2022
Reflected in profit orloss
Reflected in OCI
Reflected in profit or loss
Reflected in OCI
UnUnUnUnFavourable favourable Favourable favourable Favourable favourable Favourable favourable
changeschangeschangeschangeschangeschangeschangeschanges
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

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

284

(345)

—

—

242

(308)

—

—

6,163

(6,163)

—

—

5,101

(5,101)

—

—

—
6,447

—
(6,508)

170
170

(170)
(170)

—
5,343

—
(5,409)

187
187

(187)
(187)

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

The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies takeaccount of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the mostfavourable or the most unfavourable change from varying the assumptions individually.

140

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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 2023.
Quantitative information about significant unobservable inputs in Level 3 valuations
Fair value

Private equity and related investments
Structured notes– equity-linked notes– FX-linked notes– other
Others1
At 31 Dec 2023

Assets Liabilities Key valuation
HK$m
HK$m techniques

Key unobservable
inputs111,21223

See below

23——
26,296
137,531

1 See below
28,657
Model – Option model
10,021Model – Option model
13,424 Model – Option model
5,212
2,410
31,068Equity volatility
Equity correlation
FX volatility

2023
Full range
of inputs
Lower Higher

6%
34%
3%

71%
98%
34%

2022
Full range
of inputs
Lower

Higher

6%
38%
4%

142%
98%
37%

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. The key
unobservable inputs would be price and correlation. The valuation approach includes using a range of inputs that include company specificfinancials, traded comparable companies multiples, published net asset values and qualitative assumptions, which are not directly comparable orquantifiable.

Volatility
Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike andmaturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The
range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price.

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 isused. 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, proxycorrelations 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 becorrelated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events.
Furthermore, the effect of changing market variables on the group's portfolio will depend on the group’s net risk position in respect of eachvariable.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

141

Notes on the Consolidated Financial Statements

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
QuotedCarrying market priceamountLevel 1
At 31 Dec 2023
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
At 31 Dec 2022
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

Observable
inputsLevel 2Significant
unobservable
inputsLevel 3

Total

HK$m

HK$m

HK$m

HK$m

HK$m

831,186
563,801
3,557,076
618,941———
523,921831,199554,61396,74987,610—9,093
3,410,874—

831,199563,706
3,507,623
611,531521,984
182,146
6,261,051
87,745
—

—
—
—
—
—

521,850
182,135
6,261,771
88,050
—

—
—
—
—
—

521,850
182,135
6,261,771
88,050—927,976
515,847
3,695,068
509,766———
404,442

927,190
511,173
56,30793,420—4,452
3,619,294
780

927,190515,625
3,675,601
498,642

351,093
198,908
6,113,709
100,909
3,119

—
—
—
—
—

349,133
198,905
6,114,290
101,414
2,191

—
—
—
—
—

349,133
198,905
6,114,290
101,414
2,191

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 the maturity
or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values given the size ofthe portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to the group 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 ofcollection 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 no observable 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 of similar
characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimatedusing valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers
reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment
rates, using assumptions that the group believes are consistent with those that would be used by market participants in valuing such loans; newbusiness rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades.
From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans.
The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants’ expectations of credit
losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit impaired loans,fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

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

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The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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 Interest rate benchmark reform
Financial instruments yet to transition to alternative benchmarks, by main
benchmark
USD Libor
JPY Libor
Sibor
THBFIX
SOR
Others1
HK$m
HK$m
HK$m
HK$m
HK$m
HK$m

At 31 Dec 2023
Non-derivative financial assets2
Non-derivative financial liabilities
Derivative notional contract amountAt 31 Dec 2022
Non-derivative financial assets2
Non-derivative financial liabilities
Derivative notional contract amount

9,805
93,634
974

—
4,426
—

14,607——

182—
59,541——
34,4682,723
73—

172,370
120,096
8,506,925

—
9,192
—

30,338——

1,036—
215,868799—
159,9233,577
264
59,472

1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (GBP Libor, Mumbai
Interbank Forward Offer Rate ('MIFOR'), Canadian dollar offered rate (‘CDOR’) and Mexican Interbank equilibrium interest rate (‘TIIE’)).
2 Gross carrying amount excluding allowances for expected credit losses.

The amounts in the above table relate to the group's main operating entities where the group has material exposures impacted by Ibor reform
including Hong Kong, Singapore, Thailand, Australia, India and Japan. The amounts 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.

36 Structured entities
The group is involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets, conduits andinvestment funds, established either by the group or a third party.

Consolidated structured entities
The group primarily uses consolidated structured entities to securitise customer loans and advances it originates to diversify its sources offunding 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 withthese 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 into transactions withunconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

143

Notes on the Consolidated Financial Statements

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 2023
Total assets in relation to the group's interests in the unconsolidated
structured entities– trading assets– financial assets designated and otherwise mandatorily measured atfair value through profit or loss
– derivatives– loans and advances to customers– 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 2023

Total asset values of the entities (HK$bn)
0–4
4–15
15–39
39–196196+
Number of entities at 31 Dec 2022
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– 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 2022

Securitisations

HSBC
managedfunds

Non-HSBC
managed
funds

Other

Total

91
3
—
—
—
94

106
41
12
3
1
163

244
200
101
71
3
619

28
—
—
—
—
28

469
244
113
74
4
904

HK$m

HK$m

HK$m

HK$m

HK$m

23,90744,309121,399

7,868

197,483

—

3,970

—

7

3,977

—

40,339121,399—

161,738—
23,907
—

—
—
—

—
—
—

1
7,785
75

1
31,692
75

—

—

—

274

274

—
22
23,929—14,96959,278—33,263
154,662274
6,888
14,482274
55,142
252,351

Securitisations

HSBC
managedfunds

Non-HSBC
managed
funds

Other

Total

55
7
—
—
—
62

92
42
12
3
1
150

271
173
98
59
11
612

27
—
—
—
—
27

445
222
110
62
12
851

HK$m

HK$m

HK$m

HK$m

HK$m

17,56434,071

109,351

5,245

166,231

—

2,527

—

82

2,609

—

31,544

109,351—

140,895—
17,564
—

—
—
—

—
—
—

10
5,070
83

10
22,634
83

—

—

—

223

223

—
1,395
18,959—11,75345,824—30,862140,213223
11,342
16,364223
55,352
221,360

The maximum exposure to loss from the group’s interests in unconsolidated structured entities represents the maximum loss it could incur as aresult 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 with investment
opportunities. The group, as fund manager, may be entitled to receive management and performance fees based on the assets undermanagement. 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.

144

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Other
The group has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide
finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to the interest disclosed
above, the group enters into derivative contracts, reverse repos and stock borrowing transactions with structured entities. These interests arisein 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 2023 and 2022 were not significant.

37 Bank balance sheet and statement of changes in equity
Bank balance sheet at 31 December 2023

AssetsCash 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 and otherwise mandatorily measured at fair value through profit or loss
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers
Financial investments
Amounts due from Group companies
Investments in subsidiaries
Interests in associates and joint ventures
Goodwill and intangible assets
Property, plant and equipment
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

2023

2022

HK$m

HK$m

186,468
18,186328,304
797,026
394,366
4,184
480,579
368,246
1,903,294
1,229,117
528,903
112,544
39,83025,28871,4651,019
228,0316,716,850

169,595
22,886341,354587,760
481,979
5,431
468,799
298,225
1,951,155
947,830
720,765
109,21139,83023,65971,555
1,304
214,624
6,455,962

328,304
22,201
433,902
127,980
3,942,813
66,851
432,976
52,12033,434
993
632,493
146,633
10,36810,700—6,241,768

341,354
26,601
307,661
155,4233,740,697
95,097532,325
49,396
26,584898
563,368
132,141
3,537
9,267
3,119
5,987,468

180,181
52,465
12,578229,858
475,082
6,716,850

180,181
52,386
3,143
232,784
468,494
6,455,962

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

145

Notes on the Consolidated Financial Statements

Bank statement of changes in equity for the year ended 31 December 2023
Other reserves
Other
Property
Share
equity Retained revaluation
1
capital instruments earnings
reserve

Financialassets at
FVOCI
reserve

Cashflow
Foreignhedge exchange
reserve
reserve

Other4

Total
equity

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 1 Jan 2023
Profit for the year
Other comprehensive income/(expense)(net of tax)
– debt instruments at fair value throughother comprehensive income– equity instruments designated at fairvalue through other comprehensive
income– cash flow hedges– changes in fair value of financial
liabilities designated at fair value upon
initial recognition arising from changes
in own credit risk
– property revaluation– remeasurement of defined benefit
asset/liability– exchange differences
Total comprehensive income/(expense) for the year
Other equity instruments issued2
Other equity instruments redeemed3
Dividends to shareholders5
Movement in respect of share-based
payment arrangements
Transfers and other movements6
At 31 Dec 2023

180,181—

52,386—

232,784
86,73437,768—(9,303)—(930)—(20,368)—(4,024)—

468,494
86,734——(5,421)

3,766

6,388

2,913

(811)

—

6,835

—

—

—

—

6,860

—

—

—

6,860

—
—

—
—

—
—

—
—

(346)
—

—
2,904

—
—

—
—

(346)
2,904

—
—

—
—

(5,354)
—

—
3,766

—
—

—
—

—
—

—
—

(5,354)
3,766

—

—

(67)

—

—

—

—

—

(67)

—

—

—

—

(126)

9

(811)

—

(928)

—

—

81,313

3,766

6,388

2,913

(811)

—

93,569

—
—
—

7,850
(7,771)——(406)(86,356)

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

7,850
(8,177)(86,356)

—

—

(105)

—

—

—

—

(157)

(262)

—
180,181—
52,465

2,628
229,858(2,665)38,869404(2,511)

2
1,985

(405)
(21,584)—(4,181)(36)
475,082

At 1 Jan 2022
Profit for the year
Other comprehensive income/(expense)(net of tax)
– debt instruments at fair value throughother comprehensive income– equity instruments designated at fairvalue through other comprehensive
income– cash flow hedges– changes in fair value of financial
liabilities designated at fair value upon
initial recognition arising from changes
in own credit risk
– property revaluation– remeasurement of defined benefit
asset/liability– exchange differences
Total comprehensive income/(expense)
for the year
Shares issued1
Other equity instruments issued2
Dividends to shareholders5
Movement in respect of share-based
payment arrangements
Transfers and other movements6
At 31 Dec 2022

172,335—

44,615—

205,791
54,98736,900
—

1,524
—

63
—

(15,369)—(3,900)—441,959
54,987

—

—

4,600

2,948

(10,829)(993)(4,999)—(9,273)

—

—

—

—

(11,369)———(11,369)

—

—

—

—

540

—

—

—

540

—

—

—

—

—

(993)

—

—

(993)

—

—

4,432

—

—

—

—

—

4,432

—

—

—

2,948

—

—

—

—

2,948

—

—

168

—

—

—

—

—

168

—

—

—

—

—

—

(4,999)—(4,999)——59,587

2,948(10,829)(993)(4,999)—45,714

7,846
—
—

—
7,771
—

—
—
(34,821)

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

7,846
7,771
(34,821)

—

—

127

—

—

—

—

(127)

—

—
180,181—
52,386

2,100
232,784(2,080)37,7682(9,303)—(930)—(20,368)3(4,024)25
468,494

1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous
years. During 2022, 3,138.4m new ordinary shares were issued at an issue price of HK$2.5 each.
2 During 2023, an additional tier 1 capital instrument amounting to US$1,000m was issued for which there were no issuance costs.
During 2022, an additional tier 1 capital instrument amounting to US$1,000m was issued for which there were US$10m issuancecosts.
3 During 2023, an additional tier 1 capital instrument was redeemed at fair value US$(1,041)m.
4 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 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.
5 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
6 The movements include transfers from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.

146

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

38 Effects of adoption of HKFRS 17
On 1 January 2023 the group adopted HKFRS 17 ‘Insurance
Contracts’ and as required by the standard applied the requirements
retrospectively with comparatives restated from the transition date,
1 January 2022. The tables below provide the transition restatement
impact on the group’s consolidated balance sheet as at 1 January2022, as well as the group consolidated income statement and thegroup consolidated statement of comprehensive income for the year
ended 31 December 2022.
Further information about the effect of adoption of HKFRS 17 isprovided in Note 1 Basis of preparation and material accounting
policies on page 89 to 99.

HKFRS 17 transition impact on the group consolidated balance sheet at 1 January 2022

AssetsFinancial assets designated andotherwise mandatorily measured at fairvalue through profit or loss
Loans and advances to banks
Loans and advances to customers
Financial investments
Goodwill and intangible assets
Deferred tax assets
All other assets
Total assets
Liabilities and equity
Liabilities
Insurance contract liabilities
Deferred tax liabilities
All other liabilities
Total liabilities
Total shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity

RemeasureRecognition
ment effect Recognition of HKFRS 17
of HKFRS 9 of HKFRS 17 contractual
refulfilment
service
Under
Total
designations
cash flows
margin Tax effect HKFRS 17 movements

Under
HKFRS 4

Removal of
PVIF andHKFRS 4balances

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

202,399————

473,454

—
—
—
—
—
—

—
—
—
—
—
—

—
—
—
—
—

675,853

473,454

31,21331,213

(316)
(316)

427,8113,830,956
1,630,612
31,416
7,444
3,274,324
9,878,416(4,436)(9,983)(420,963)(63,765)
4,091(3,375)(24,977)

624,056—

66,935—

7,908
631,964(548,755)(51,996)(600,751)
31,213(250)
66,685(58,262)(8,739)(67,001)(316)

690,991
22,043
8,317,304
9,030,338
790,92257,156
848,078
9,878,416

52,846(10,479)
8,089
50,456(65,887)(9,546)(75,433)(24,977)

432,247
3,840,939
2,051,575
95,181
3,353
3,277,699
9,903,393

638,145
32,5228,309,215
8,979,882
856,80966,702
923,511
9,903,393(63,765)—(34,272)(98,037)(4,436)(9,983)(420,963)———(638,145)—
431(637,714)
492,823
46,854
539,677(98,037)

38,072————35,612
2,460
38,072
38,072

4,091
—
4,091

—
(10,479)—(10,479)
12,695
1,875
14,5704,091

Transition drivers
Removal of PVIF and HKFRS 4 balances

Recognition of HKFRS 17 fulfilment cash flows

The PVIF intangible asset of HK$63,765m previously reported underHKFRS 4 within ‘Goodwill and intangible assets’ arose from theupfront recognition of future profits associated with in-force insurance
contracts. The PVIF intangible asset is no longer reported following
the transition to HKFRS 17, as future profits are deferred within the
CSM. Other HKFRS 4 insurance contract assets (shown above within‘All other assets’) and insurance contract liabilities are removed ontransition, to be replaced with HKFRS 17 balances.

The measurement of the insurance contracts liabilities under HKFRS
17 is based on groups of insurance contracts and includes a liability
for fulfilling the insurance contract, such as premiums, expenses,
insurance benefits and claims including policyholder returns and thecost of guarantees. These are recorded within the fulfilment cash
flow component of the insurance contract liability, together with therisk adjustment for non-financial risk.

Remeasurement effect of HKFRS 9 re-designations
Loans and advances and debt securities supporting associatedinsurance liabilities of HK$429,016m were re-designated from anamortised cost classification to fair value through profit and loss, andHK$6,366m from fair value through other comprehensive income tofair value through profit or loss. The re-designations were made inorder to more closely align the asset accounting with the valuation of
the associated insurance liabilities. The re-designation of amortised
cost assets generated a net increase to assets of HK$38,072m
because the fair value measurement on transition was higher than theprevious amortised cost carrying amount.

Recognition of the HKFRS 17 contractual service margin
The CSM is a component of the insurance contract liability andrepresents the future unearned profit associated with insurance
contracts that will be released to the profit and loss over the expected
coverage period.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

147

Notes on the Consolidated Financial Statements

Tax effect
The removal of deferred tax liabilities primarily results from the removal of the associated PVIF intangible asset, and new deferred tax assets arereported, where appropriate, on temporary differences between the new HKFRS 17 accounting balances and their associated tax bases.
HKFRS 17 transition impact on the reported group consolidated income statement for the year ended 31 December 2022
Removal Remeasureof PVIF
ment effect Insurance Contracandof HKFRS 9
financetual
Experience
Under HKFRS 4
re- income/ service Onerous
varianceHKFRS 4 balances designations (expense) margin contracts and other
Net interest income
Net fee income
Net income from financial
instruments held for trading or
managed on a fair value basis
Net expense from assets andliabilities of insurance
businesses, including related
derivatives, measured at fairvalue through profit or loss
Changes in fair value ofdesignated debts issued andrelated derivatives
Changes in fair value of otherfinancial instruments
mandatorily measured at fairvalue through profit or loss
Gains less losses from financial
investments
Net insurance premium income
Insurance finance income/(expense)
Insurance service result– insurance revenue– insurance service expense
Other operating income/(loss)
Total operating income
Net insurance claims andbenefits paid and movement inliabilities to policyholders
Net operating income beforechange 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 andjoint ventures
Profit before tax
Tax expense
Profit for the year

148

Attributable
expenses

Tax
Under
effect HKFRS 17

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

126,852
36,600——(16,974)
—

—
—

—
—

—
—

—
—

—
1,965

—
—

109,878
38,56541,674

—

(398)

—

—

—

—

—

—

41,276(13,194)—(81,720)

—

—

—

—

—

—

(94,914)

(703)

—

—

—

—

—

—

—

—

(703)

34

—

6

—

—

—

—

—

—

40

47

—

5

—

—

—

—

—

—

52

80,415(80,415)

—

—

—

—

—

—

—

—

—

—

—

97,187

—

—

—

—

—

97,187———
3,781
275,506———
707(79,708)————(99,081)———274
97,461

5,968
5,968
—
—
5,968

(1,343)—(1,343)—(1,343)352
4,755(4,403)
(317)
35

—
—
—
—
1,965

—
—
—
—
—

4,977
10,723(5,746)
4,445
200,803(69,814)

69,814

—

—

—

—

—

—

—

—

205,692(9,894)(99,081)

97,461

5,968(1,343)

35

1,965

—

200,803(16,365)

—

(5)

—

—

—

—

—

—

(16,370)

189,327(110,508)
78,819(9,894)—(9,894)(99,086)—(99,086)

97,461—
97,461

5,968
—
5,968

(1,343)—(1,343)

35
—
35

1,965
3,970
5,935

—
—
—

184,433(106,538)
77,895

18,792

—

—

—

—

—

—

—

—

18,792

97,611(15,507)82,104(9,894)—(9,894)(99,086)—(99,086)

97,461—
97,461

5,968
—
5,968

(1,343)—(1,343)

35
—
35

5,935
—
5,935

—
(489)
(489)

96,687(15,996)
80,691The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Transition drivers
Removal of PVIF and HKFRS 4 balances
As a result of the removal of the PVIF intangible asset, the associatedrevenue of HK$256m in 2022 that was previously reported within'Other operating income' is no longer reported under HKFRS 17. This
includes the removal of the value of new business and changes to
PVIF intangible asset from valuation adjustments and experiencevariances.
On the implementation of HKFRS 17 new income statement line
items associated with insurance contract accounting were introduced.
Consequently, the previously reported HKFRS 4 line items ‘Net
insurance premium income’, and ‘Net insurance claims and benefits
paid and movement in liabilities to policyholders’ were also removed.

Remeasurement effect of HKFRS 9 re-designations
Following the re-designation of financial assets supporting associatedinsurance liabilities to fair value through profit or loss classification,
the related income statement reporting also changed. Under our
previous HKFRS 4 based reporting convention, these assets
generated interest income of HK$16,974m in 2022, which is nolonger reported in 'Net interest income' under HKFRS 17. To theextent that this interest income was shared with policyholders, thecorresponding policyholder sharing obligation was previously included
within the ‘Net insurance claims and benefits paid and movement inliabilities to policyholders’ line.
Following re-designation to fair value through profit or loss, gains andlosses from changes in the fair value of underlying assets, together
with interest income earned, are both reported within ‘Net expensefrom assets and liabilities of insurance businesses, including related
derivatives, measured at fair value through profit or loss’. Similar to an
HKFRS 4 basis, HKFRS 17 accounting provides for an offset. While
this offset was reported within the claims line under HKFRS 4, underHKFRS 17 it is reported within the ‘Insurance finance income/(expense)’ line described below.

Introduction of HKFRS 17 income statement
Insurance finance income/(expense)'Insurance finance income' of HK$97,187m in 2022 represents thechange in the carrying amount of insurance contracts arising from theeffect of, and changes in, the time value of money and financial risk.
For VFA contracts, which represent more than 97%

of insurance contracts, the 'insurance finance income/(expense)'
includes the changes in the fair value of underlying items (excluding
additions and withdrawals). It therefore has an offsetting impact toinvestment income earned on underlying assets supporting insurance
contracts. This includes an offsetting impact to the gains and losses
on assets re-designated on transition to fair value through profit orloss, and which is now included in ‘Net expense from assets andliabilities of insurance businesses, including related derivatives,
measured at fair value through profit or loss’.

Contractual service margin
Revenue is recognised for the release of the CSM associated with the
in-force business, which was allocated at a rate of approximately
8.4% during 2022. The CSM release is largely impacted by theconstant measure allocation approach for investment services, but
may vary over time primarily due to changes in the total amount of
CSM reported on the balance sheet from factors such as new
business written, changes to levels of actual returns earned onunderlying assets, or changes to assumptions.

Onerous contracts
Losses on onerous contracts are taken to the income statement asincurred.

Experience variance and other
Experience variance and other represents the expected expenses,
claims and recovery of acquisition cash flows which are reported aspart of the insurance service revenue. This is offset with the actual
expenses and claims incurred in the year and amortisation of
acquisition cash flows which are reported as part of insurance service
expense.

Attributable expenses
Directly attributable expenses are the costs associated withoriginating and fulfilling an identified portfolio of insurance contracts.
These costs include distribution fees paid to third parties as part oforiginating insurance contracts together with appropriate allocationsof fixed and variable overheads which are included within thefulfilment cash flows and are no longer shown on the operating
expenses line.

HKFRS 17 transition impact on the group consolidated statement of comprehensive income
2022
Under
HKFRS 17
HK$m

2022
Under
HKFRS 4
HK$m

Total equity at 1 Janof which:– Retained earnings– Financial assets at FVOCI reserve

848,078

923,511422,462
3,575

488,055
3,869

Profit for the year
Debt instruments at fair value through other comprehensive income
Equity instruments designated at fair value through other comprehensive income
Other comprehensive expense for the year, net of tax
Total comprehensive income for the year
Other movements
Total equity at 31 Dec

80,691(13,705)865(27,333)
40,518(24,216)
864,380

82,104(13,675)865(27,344)
41,950(24,198)
941,263

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

149

Notes on the Consolidated Financial Statements

The group's consolidated balance sheet at transition date and at 31 December 2022

AssetsCash 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 and otherwise mandatorily measured at fair value through profit or loss
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers
Financial investments
Amounts due from Group companies
Interests in associates and joint ventures
Goodwill and intangible assets
Property, plant and equipment
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
Insurance contract liabilities
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

Under HKFRS 17

Under HKFRS 4

31 Dec
2022

1 Jan
2022

31 Dec2022

31 Dec
2021

HK$m

HK$m

HK$m

HK$m

232,740
28,557341,354699,805
502,877
653,030
927,976
515,847
3,695,068
1,749,707
140,485
185,898
36,863130,926
7,582
349,128
10,197,843

276,857
21,632332,044
777,450
365,167
675,853803,775
427,8113,830,956
1,630,612
112,621
188,485
31,416
129,8277,444
266,466
9,878,416

232,740
28,557341,354699,805
502,771
226,451
927,976
519,024
3,705,149
2,221,361
140,546
185,898
102,419
130,926
3,856
355,319
10,324,152

276,857
21,632332,044
777,450
365,167
202,399803,775
432,247
3,840,939
2,051,575
112,719
188,485
95,181
129,8273,353
269,743
9,903,393

341,354
33,073351,093
198,908
6,113,709
142,453
551,729
167,743
100,909
1,655
398,261
246,614654,922
6,009
21,912
3,119
9,333,463

332,044
25,701
255,374
280,310
6,177,182
92,723355,791
138,965
67,364
1,890
356,277
227,245
690,991
2,385
22,043
4,053
9,030,338

341,354
33,073351,093
198,908
6,113,709
142,453
551,745
167,743
100,909
1,655
398,705
238,726
700,758
6,002
32,937
3,119
9,382,889

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

180,181
52,386
108,837
466,148807,552
56,828864,380
10,197,843

172,335
44,615
151,510422,462
790,92257,156
848,078
9,878,416

180,181
52,386109,235
533,518
875,320
65,943
941,263
10,324,152

172,335
44,615
151,804
488,055
856,80966,702
923,511
9,903,393

39 Business disposals and acquisitions
Business disposals
Our New Zealand loan portfolio
In August 2023, the Hongkong and Shanghai Banking Corporation Limited (acting through its New Zealand Branch) entered into an agreementwith Pepper New Zealand Limited, a wholly-owned subsidiary of Pepper Money Limited, to sell its New Zealand retail mortgage loan portfolio.
The sale was classified as held for sale in the third quarter of 2023 and was completed on 1 December 2023.

Our retail business in Mauritius
In November 2023, the Hongkong and Shanghai Banking Corporation Limited (acting through its Mauritius Branch) entered into an agreementwith ABSA Bank (Mauritius) Limited, a wholly-owned subsidiary of ABSA Bank Group Limited, to sell its Wealth and Personal Banking business.
The sale is expected to complete in the second half of 2024 subject to regulatory approvals.

150

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Business acquisitions
Acquisition of Citibank China’s wealth management portfolio
In October 2023, HSBC Bank (China) Company Limited, a wholly-owned subsidiary of the Hongkong and Shanghai Banking Corporation Limited,
entered into an agreement to acquire Citibank China’s retail wealth management portfolio in mainland China. The portfolio comprises assets
under management and deposits, and the associated wealth customers. Upon completion, the acquired business will be integrated into HSBCBank China’s Wealth and Personal Banking operations. The transaction is expected to complete in the first half of 2024.

Acquisition of Silkroad Property Partners Singapore
In October 2023, HSBC Global Asset Management Singapore Limited entered into an agreement to acquire 100% of the shares of Silkroad
Property Partners Pte Ltd (‘Silkroad’). Silkroad is a Singapore headquartered Asia-Pacific-focused, real estate investment manager. The
acquisition was completed on 31 January 2024.

40 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. Apartfrom the matters described below, the group considers that none of these matters are material. The recognition of provisions is determined inaccordance with the accounting policies set out in Note 1.2(n) of the Annual Report and Accounts 2023. 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 2023. Any provision recognised does not constitute an admission ofwrongdoing 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.
Tax-related investigations
Various tax administration, regulatory and law enforcement authorities around the world are conducting investigations in connection withallegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation. The Bank continues to cooperate withthese investigations.
Based on the facts currently known, it is not practicable at this time for the Bank to predict the resolution of these matters, including the timing
or any possible impact on the Bank, which could be significant.
Korean short selling investigation
In December 2023, the Korean Securities and Futures Commission issued a decision to impose a fine on the Bank in connection with trades inbreach of Korean short selling rules and to refer the case to the Korean Prosecutors' Office for investigation.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of this matter, which could be significant.
Other regulatory investigations, reviews and litigation
The Bank and/or certain of its affiliates are subject to a number of enquiries and examinations, requests for information, investigations andreviews by various regulators and competition and law enforcement authorities, as well as legal proceedings including litigation, arbitration andother contentious proceedings, in connection with various matters arising out of their ordinary course of businesses and operations.
At the present time, the Bank does not expect the ultimate resolution of any of these matters to be material to the Group’s financial position;
however, given the uncertainties involved in legal proceedings and regulatory matters, there can be no assurance regarding the eventual
outcome of a particular matter or matters.

41 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.

42 Events after the balance sheet date
On 31 January 2024, HSBC Global Asset Management Singapore Limited completed the acquisition of the Asia-Pacific-focused, real estate
investment manager, Silkroad Property Partners Pte Ltd.

43 Approval of financial statements
The consolidated financial statements were approved and authorised for issue by the Board of Directors on 21 February 2024.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

151

Additional Information

Additional cautionary statement regarding ESG and climate-related data,
metrics and forward-looking statements
The Annual Report and Accounts 2023 contains a number of forwardlooking statements (as defined above) with respect to the Group’s(including the group’s) ESG targets, commitments, ambitions, climaterelated pathways, processes and plans, and the methodologies andscenarios the Group (including the group) uses, or intends to use, toassess the Group’s (including the group's) progress in relation tothese ('ESG-related forward-looking statements').
In preparing the ESG-related information contained in the Annual
Report and Accounts 2023, the group has relied on a number of key
judgements, estimations and assumptions of the Group and theprocesses and issues involved are complex. The Group has used ESG(including climate) data, models and methodologies that it considers,
as of the date on which they were used, to be appropriate andsuitable to understand and assess climate change risk and its impact,
to analyse financed emissions - and operational and supply chain
emissions, to set ESG-related targets and to evaluate theclassification of sustainable finance and investments. However, these
data, models and methodologies are often new, are rapidly evolving
and are not of the same standard as those available in the context ofother financial information, nor are they subject to the same orequivalent disclosure standards, historical reference points,
benchmarks or globally accepted accounting principles. In particular, it
is not possible to rely on historical data as a strong indicator of future
trajectories in the case of climate change and its evolution. Outputs ofmodels, processed data and methodologies are also likely to beaffected by underlying data quality, which can be hard to assess andthe Group expects industry guidance, market practice, and regulationsin this field to continue to change. The Group (including the group)also face challenges in relation to its ability to access data on a timely
basis, lack of consistency and comparability between data that isavailable and its ability to collect and process relevant data.
Consequently, the ESG-related forward-looking statements and ESG
metrics disclosed in the Annual Report and Accounts 2023 carry an
additional degree of inherent risk and uncertainty.
Due to the unpredictable evolution of climate change and its future
impact and the uncertainty of future policy and market response to
ESG-related issues and the effectiveness of any such response, theGroup (including the group) may have to re-evaluate its progress
towards its ESG ambitions, commitments and targets in the future,
update the methodologies it uses or alter its approach to ESG(including climate) analysis and may be required to amend, update andrecalculate its ESG disclosures and assessments in the future, as
market practice and data quality and availability develop.
No assurance can be given by or on behalf of the group as to thelikelihood of the achievement or reasonableness of any projections,estimates, forecasts, targets, commitments, ambitions, prospects orreturns contained herein. Readers are cautioned that a number offactors, both external and those specific to the Group (including thegroup), could cause actual achievements, results, performance orother future events or conditions of the group to differ, in some cases
materially, from those stated, implied and/or reflected in any ESGrelated forward-looking statement or metric due to a variety of risks,
uncertainties and other factors (including without limitation thosereferred to below):– Climate change projection risk: this includes, for example, theevolution of climate change and its impacts, changes in thescientific assessment of climate change impacts, transition
pathways and future risk exposure and limitations of climate
scenario forecasts;– ESG projection risk: ESG metrics are complex and are still subject
to development. In addition, the scenarios employed in relation tothem, and the models that analyse them have limitations that are
sensitive to key assumptions and parameters, which arethemselves subject to some uncertainty, and cannot fully capture
all of the potential effects of climate, policy and technology-driven
outcomes;

152– Changes in the ESG regulatory landscape: this involves changes ingovernment approach and regulatory treatment in relation to ESG
disclosures and reporting requirements, and the current lack of asingle standardised regulatory approach to ESG across all sectors
and markets;– Variation in reporting standards: ESG reporting standards are stilldeveloping and are not standardised or comparable across all
sectors and markets, new reporting standards in relation todifferent ESG metrics are still emerging;– Data availability, accuracy, verifiability and data gaps: the Group’s(including the group’s) disclosures are limited by the availability ofhigh-quality data in some areas and the Group’s (including thegroup’s) own ability to timely collect and process such data as
required. Where data is not available for all sectors or consistently
year on year, there may be an impact to the Group’s (including thegroup’s) data quality scores. While the Group (including the group)
expects its data quality scores to improve over time, as companies
continue to expand their disclosures to meet growing regulatory
and stakeholder expectations, there may be unexpectedfluctuations within sectors year on year, and/or differences
between the data quality scores between sectors. Any suchchanges in the availability and quality of data over time, or theGroup’s (including the group’s) ability to collect and process suchdata, could result in revisions to reported data going forward,
including on financed emissions, meaning that such data may not
be reconcilable or comparable year-on year;– Developing methodologies and scenarios: the methodologies andscenarios the Group (including the group) uses to assess financed
emissions and set ESG-related targets may develop over time inline with market practice, regulation and/or developments inscience, where applicable. Such developments could result inrevisions to reported data, including on financed emissions or theclassification of sustainable finance and investments, meaning thatdata outputs may not be reconcilable or comparable year-on year;
and– Risk management capabilities: global actions, including theGroup’s (and the group’s) own actions, may not be effective intransitioning to net zero and in managing relevant ESG risks,
including in particular climate, nature-related and human rights
risks, each of which can impact the Group (including the group)
both directly and indirectly through its customers, and which may
result in potential financial and non-financial impacts to the Group(including the group). In particular:– the Group (including the group) may not be able to achieve its
ESG targets, commitments and ambitions (including withrespect to the positions set forth in the Group’s thermal coalphase-out policy and its energy policy, and its targets to reduce
its on-balance sheet financed emissions and, where applicable,facilitated emissions in its portfolio of selected high-emitting
sectors), which may result in the Group’s (including thegroup's) failure to achieve some or all of the expected benefitsof its strategic priorities; and– the Group (including the group) may not be able to develop
sustainable finance and ESG-related products consistent withthe evolving expectations of its regulators, and its capacity tomeasure the environmental and social impacts from its
financing activity may diminish (including as a result of data andmodel limitations and changes in methodologies), which may
affect its ability to achieve its ESG targets, commitments andambitions, including its net zero ambition, its targets to reduce
its on-balance sheet financed emissions and, where applicable,facilitated emissions in its portfolio of selected high-emitting
sectors and the positions set forth in its thermal coal phase-out
policy and energy policy, and increase the risk of greenwashing.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Any forward-looking statements made by or on behalf of the Group(including the group) speak only as of the date they are made. The
Group (including the group) expressly disclaims any obligation torevise or update these ESG forward-looking statements, other than as
expressly required by applicable law.
Written and/or oral ESG-related forward-looking statements may also
be made in the Group’s (including the group’s) periodic reports to its
regulators, public offering or disclosure documents, press releases
and other written materials, and in oral statements made by theGroup’s (including the group’s) Directors, officers or employees tothird parties, including financial analysts.
The Group’s data dictionaries and methodologies for preparing theabove ESG-related metrics and third-party limited assurance reports
can be found on: www.hsbc.com/who-we-are/esg-and-responsiblebusiness/esg-reporting-centre.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

153

© The Hongkong and Shanghai Banking
Corporation Limited 2024

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The Hongkong and Shanghai Banking Corporation Limited
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1 Queen's Road Central, Hong Kong
Telephone: (852) 2822 1111
www.hsbc.com.hk