The Hongkong and Shanghai
Banking Corporation Limited
Annual Report and Accounts 2022

Contents

Certain defined terms

Certain defined terms
Cautionary statement regarding forward-looking statements
Chinese translation
Financial Highlights
Report of the Directors
Environmental, Social and Governance Review
Financial Review
Risk
Statement of Directors’ Responsibilities
Independent Auditor’s Report

Page
1
1
1
2
3
9
16
20
73
74

Consolidated Financial Statements
Consolidated income statement
Consolidated statement of comprehensive income

79
80

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

81
82
83

Notes on the Consolidated Financial
Statements
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

Basis of preparation and significant accounting policies
Operating profit
Insurance business
Employee compensation and benefits
Tax
Dividends
Trading assets
Derivatives

85
95
97
98
101
102
103
103

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

106

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

106
107
108
109
109
112
113
114
115
115
115
115
115
116
116
117
117

Analysis of cash flows payable under financial liabilities byremaining contractual maturities

120

28
29
30

Contingent liabilities, contractual commitments and guarantees
Other commitments
Offsetting of financial assets and financial liabilities

121
121
121

31
32

Segmental analysis
Related party transactions

123
124

33 Fair values of financial instruments carried at fair value
34 Fair values of financial instruments not carried at fair value
35 Structured entities
36 Bank balance sheet and statement of changes in equity
37 Business acquisitions
38 Legal proceedings and regulatory matters
39 Ultimate holding company
40 Events after the balance sheet date
41 Approval of financial statements
Additional information

This document comprises the Annual Report and Accounts 2022
for The Hongkong and Shanghai Banking Corporation Limited (‘theBank’) and its subsidiaries (together ‘the group’). References to‘HSBC’, ‘the Group’ or ‘the HSBC Group’ within this document
mean HSBC Holdings plc together with its subsidiaries. Within thisdocument the Hong Kong Special Administrative Region of thePeople’s Republic of China is referred to as ‘Hong Kong’. The
abbreviations ‘HK$m’ and ‘HK$bn’ represent millions and billions(thousands of millions) of Hong Kong dollars respectively.

Cautionary statement regarding forwardlooking statements
This Annual Report and Accounts contains certain forward-looking
statements with respect to the financial condition, results ofoperations and business of the group.
Statements that are not historical facts, including statements
about the Bank’s beliefs and expectations, are forward-looking
statements. Words such as ‘expects’, ‘anticipates’, ‘intends’,‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably
possible’, variations of these words and similar expressions areintended to identify forward-looking statements. These statements
are based on current plans, estimates and projections, andtherefore undue reliance should not be placed on them. Forwardlooking statements speak only as of the date they are made, and it
should not be assumed that they have been revised or updated in
the light of new information or future events.
Forward-looking statements involve inherent risks anduncertainties. Readers are cautioned that a number of factors
could cause actual results to differ, in some instances materially,
from those anticipated or implied in any forward-looking
statement.
Please see page 140 for the additional cautionary statement
regarding environmental, social and governance, as well asclimate-related data, metrics and forward-looking statements.

Chinese translation
A Chinese translation of the Annual Report and Accounts 2022 isavailable upon request from: Communications (Asia), Level 32,
HSBC Main Building, 1 Queen’s Road Central, Hong Kong. The
report is also available, in English and Chinese, on the Bank’s
website at www.hsbc.com.hk.

127
133
134
136
138
138
139
139
139
140

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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 capital1
Customer accounts
Total assets
RatiosReturn on average ordinary shareholders’ equity
Post-tax return on average total assets
Cost efficiency ratio
Net interest margin
Advances-to-deposits ratio
Capital ratios
Common equity tier 1 capital
Tier 1 capital
Total capital

2022

2021

HK$m

HK$m

205,692
97,611
78,245

178,658
86,56367,348875,320
941,263
607,312
6,113,709
10,324,152

856,809923,511590,478
6,177,182
9,903,393

%

%

9.3
0.8

8.0
0.7

53.7
1.67
60.6

58.7
1.37
62.2

15.3
16.9
18.8

15.4
16.8
18.7

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

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

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

2

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

Asia Strategy
Asia’s growth story remains at the heart of HSBC’s future. Basedon the region’s strong and sustained underlying fundamentals of
economic growth, trade, and wealth creation, HSBC’s strategy inthe region remains aligned to the biggest opportunities to create
further shareholder value. We are well positioned to further extend
the strengths of our leading Hong Kong franchise across theGreater Bay Area, and in other key growth markets, including India
and Southeast Asian markets. By increasing investment in ourpeople and technology, we will further grow our top tier Asia
Wealth Management business, while maintaining our distinct
position as the leading international bank for our corporate andcommercial clients. We remain focused on connecting Asianmarkets to each other and the world through HSBC’s global
network, supporting the ongoing transition to a low-carbon
economy with Sustainable Finance, continually streamlining ourorganisation to realise greater operating efficiencies, andimproving service for our domestic, regional, and global clients
through our technology, talent, and 157 years of experience in theregion.

Consolidated Financial Statements
The consolidated financial statements of the group are set out on
pages 79 to 139.

David Yi Chien LIAO
Co-Chief Executive Officer (since June 2021)
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 ofCommunications Co., Ltd. He holds a Bachelor of Arts (major in Japaneseand 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 of Commerce &Economics, Bombay University and a Master of Business Administrationfrom the Indian Institute of Management, Ahmedabad.
He has previously held a number of senior positions within the Group,
including the Chief Executive Officer of HSBC India and Regional Head ofFinancial Institutions Group, Asia-Pacific.

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

The interim dividends paid in respect of 2022 are set out in Note 6
on the Consolidated Financial Statements.

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 Instituteof 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 of Monetary
Policy and Reserves Management from June 2005 to August 2007 andheld various senior positions in the HKMA including Executive Director(Banking Supervision), Head of Administration, and Head of Banking
Policy from 1993 to 2005.

Directors

Andrea Lisa DELLA MATTEAThe Directors at the date of this report are set out below:

Independent non-executive Director (since 11 March 2022)
She is also the Asia Pacific President of Microsoft Operations Pte Ltd. She
holds a Bachelor of Engineering and an Honorary Doctor of Engineeringfrom 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.

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

Dividends

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.
Before his retirement as an HSBC employee in June 2021, he was an
executive Director, Chief Executive and Deputy Chairman of the Bank. He
was also a non-executive Director of Hang Seng Bank Limited.

David Gordon ELDON, GBS, CBE, JP
Non-executive Deputy Chairman (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 an 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 until the end of 2022.

Rajnish KUMAR
Independent non-executive Director (since August 2021)
He is also non-executive Chairman of Resilient Innovations Pvt. Ltd., an
independent non-executive Director of Larsen & Toubro Infotech Limitedand Ambuja Cements Limited, an advisor to Kotak Investment Advisors
Ltd., a Director of Lighthouse Communities Foundation, and a member ofthe Board of Governors of the Management Development Institute inIndia. He is also a senior advisor to Baring Private Equity Asia Pte Ltd. in
Singapore. He holds a Master of Science in Physics from Meerut
University and a Post Graduate Certificate in Business Management fromXLRI Jamshedpur in India. He is an Associate of the Indian Institute ofBankers.
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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 20223

Report of the Directors

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 amember of the Honourable Society of Gray’s Inn, UK and a Barrister-atLaw in England and Wales.
She was an independent non-executive Director of HSBC Holdings plc
from 2015 to 2022.

Victor Tzar Kuoi LI
Non-executive Director (since May 1992)
He is also Chairman and Managing Director of CK Asset Holdings Limited,
Chairman and a Group Co-Managing Director of CK Hutchison Holdings
Limited, Chairman of CK Infrastructure Holdings Limited and CK Life
Sciences Int’l., (Holdings) Inc., a non-executive Director of Power Assets
Holdings Limited and HK Electric Investments Manager Limited, and a
non-executive Director and Deputy Chairman of HK Electric Investments
Limited. He is also Deputy Chairman of Li Ka Shing Foundation Limited, Li
Ka Shing (Global) Foundation and Member Deputy Chairman of Li Ka
Shing (Canada) Foundation. He holds a Bachelor of Science in Civil
Engineering and a Master of Science in Civil Engineering, both received
from Stanford University; and a Doctor of Laws, honoris causa (LL.D.)
from The University of Western Ontario.

Annabelle Yu LONG
Independent non-executive Director (since 17 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 inBusiness Administration from Stanford Graduate School of Business,
United States and a Bachelor of Science in Electrical Engineering from
University of Electronic Science and Technology, China.

Kevin Anthony WESTLEY, BBS
Independent non-executive Director (since September 2016)
He is also an independent non-executive Director of Fu Tak Iam
Foundation Limited and a member of the investment committee of theWest Kowloon Cultural District Authority. He holds a Bachelor of Arts
(Hons) from the University of London (LSE) and is a Fellow of the Instituteof Chartered Accountants in England and Wales.
He was Chairman (from 1996) and Chief Executive (from 1992) of HSBC
Investment Bank Asia Limited (formerly named 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.

During the year, Andrea Lisa Della Mattea and Annabelle Yu Long
were appointed independent non-executive Directors with effectfrom 11 March and 17 August 2022 respectively. At theconclusion of the 2022 Annual General Meeting (‘AGM’) held on
1 June 2022, Graham John Bradley, Christopher Wai Chee Cheng
and Francis Sock Ping Yeoh stepped down as Directors. Ewen
James Stevenson stepped down as Director with effect from25 October 2022. Save for the above, all the Directors served
throughout the year.
A list of the directors of the Bank’s subsidiary undertakings(consolidated in the financial statements) during the period from
1 January 2022 to the date of this report will be available on the
Bank’s website www.hsbc.com.hk/legal/regulatory-disclosures/.

Secretary
Paul Stafford is the Corporation Secretary.

Permitted Indemnity Provision
The Bank’s Articles of Association provide that the Directors andother officers of the Bank shall be indemnified out of the Bank’s
assets against any liability incurred by them or any of them as theholder of any such office or appointment to a person other thanthe Bank or an associated company of the Bank in connection
with any negligence, default, breach of duty or breach of trust in
relation to the Bank or associated company. In addition, theBank’s ultimate holding company, HSBC Holdings plc, has
4maintained directors’ and officers’ liability insurance providing
appropriate cover for the directors and officers within the Group,
including the Directors of the Bank and its subsidiaries.

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

Directors’ Rights to Acquire Shares or Debentures
To help align the interests of employees with shareholders,
executive Directors of the Bank and HSBC Holdings plc are eligible
to be granted conditional awards over ordinary shares in HSBC
Holdings plc by that company (being the ultimate holding
company) under the HSBC Share Plan 2011 and the HSBCInternational Employee Share Purchase Plan.
Executive Directors of the Bank and HSBC Holdings plc are eligible
to receive an annual incentive award based on the outcome of theperformance measures (financial and non-financial) set out in theirannual performance scorecard. Annual incentive awards arenormally delivered in cash and/or shares, and these generally havea deferral rate of 60% or 40% if the annual incentive award is
below GBP500,000. The period over which annual incentive
awards would be deferred is determined in accordance with therequirements of the Prudential Regulation Authority (‘PRA’)
Remuneration Rules, i.e. seven years for Senior Managers(individuals in PRA and Financial Conduct Authority (‘FCA’)designated Senior Management Functions), five years for Risk
Managers, and four years for other Material Risk Takers (‘MRTs’).
From January 2017 onwards, all share awards granted to MRTs
are subject to a minimum retention period of one year as opposed
to six months previously. However, for certain individuals whose
variable pay awards will be deferred for at least five years and who
are not considered to be members of senior management, theirretention period may be kept at six months.
From 2022 to incentivise sustainable long-term performance andalignment with shareholder interests, Senior Management of
Holdings plc including the Co-Chief Executives of the Bank are
eligible to receive Long-Term Incentive (LTI) Share Award. Theseawards which have been made to executive Directors of Holdings
plc are subject to three-year forward-looking performancemeasures and a seven-year vesting period with a one-year postvesting 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 five-year holding period
typically implemented by FTSE-listed companies. When theindividual ceases employment, if they are treated as a good leaver
under our policy, any LTI awards granted will continue to bereleased over a period of up to eight years, subject to the outcomeof performance conditions. For more details on the operation of
the plan, please refer to HSBC Holdings plc annual report andaccounts.
All unvested deferred awards made under the HSBC Share Plan
2011 are subject to the application of malus, i.e. the cancellation
and reduction of unvested deferred awards. All paid or vested
variable pay awards made to identified staff and MRTs will be
subject to clawback for a period of seven years from the date ofaward. For Senior Managers, this may be extended to 10 years in
the event of an ongoing internal or regulatory investigation at theend of the seven-year period.
Executive Directors and other senior executives of HSBC Holdings
plc are subject to Group minimum shareholding requirements.
Individuals are given five years from 2014 or (if later) their
appointment to build up the recommended levels of shareholding.
HSBC operates an anti-hedging policy for Group, sectorial andlocal MRTs including executive Directors in accordance with the
PRA Rules, who are required to certify each year via the Bank's

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Global Personal Account Dealing system that they have notentered into any personal hedging strategies in relation to theirholdings of HSBC shares as part of the Global Personal Account
Dealing Certification.
The HSBC International Employee Share Purchase Plan is an
employee share purchase plan offered to employees in Hong Kong
since 2013 and has been extended to further countries in the
HSBC Group from 2014. For every three shares in HSBC Holdings
plc purchased by an employee (‘Investment Shares’), a conditional
award to acquire one share is granted (‘Matching Shares’). The
employee becomes entitled to the Matching Shares subject tocontinued employment with HSBC and retention of the Investment
Shares until the third anniversary of the start of the relevant plan
year. HSBC Holdings Savings-Related Share Option Plan (UK) is an
all employee share plan under which eligible employees may be
granted options to acquire HSBC Holdings ordinary shares.
Employees may make monthly contributions, up to a maximum
defined limit, over a period of three or five years and shares are
exercisable within six months following either the third or fifth
anniversary of the commencement. The exercise price is set at a
20% discount to the market value immediately preceding the dateof invitation.
During the year, Ewen Stevenson, Surendra Rosha and David Liaoacquired or were awarded shares of HSBC Holdings plc under theterms of the HSBC Share Plan 2011. Peter Wong in his former
capacity as executive Director in 2021 received a 2021
performance year variable pay award in March 2022 to which partof the award was made in share-linked instruments of HSBC
Holding plc.
Apart from these arrangements, at no time during the year was
the Bank, its holding companies, its subsidiaries or any fellow
subsidiaries a party to any arrangements to enable the Directors toacquire benefits by means of the acquisition of shares in ordebentures of the Bank or any other body corporate.

Donations
Donations made by the Bank and its subsidiaries during the year
amounted to HK$439m (2021: HK$380m).

Compliance with the Banking (Disclosure) Rules
The Directors are of the view that the Annual Report and Accounts
2022 and Banking Disclosure Statements 2022 fully comply with
the Banking (Disclosure) Rules made under section 60A of the
Banking Ordinance and the Financial Institutions (Resolution)(Loss-absorbing Capacity Requirements – Banking Sector) Rules(‘LAC Rules’) made under section 19(1) of the Financial Institutions(Resolution) Ordinance ('FIRO').

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

Corporate Governance
The Bank is committed to high standards of corporate governance.
As an Authorised Institution, the Bank is subject to and complies
with the HKMA Supervisory Policy Manual CG-1 ‘Corporate
Governance of Locally Incorporated Authorised Institutions’ ('SPM
CG-1') except that the membership of the Bank’s Nomination
Committee does not comprise a majority of independent nonexecutive Directors. The Bank’s Nomination Committee currently
comprises an equal number of 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
the framework for all Group companies in Asia-Pacific. The
Subsidiary Accountability Framework, which was refreshed in
2022, set out high-level principles to promote effective governanceand improve communications and connectivity between HSBC
Holding plc and its subsidiaries.

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

Directors
The Bank has a unitary Board. The authority of each Director is
exercised in Board meetings where the Board acts collectively. As
at the date of this report, the Board comprises: the non-executive
Chairman; the non-executive Deputy Chairman; two executive
Directors who are the co-Chief Executive Officers; one other nonexecutive Director; and eight 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 inmeeting agreed goals and objectives, and monitor the risk profileand reporting of performance of the Bank. The independent nonexecutive Directors bring experience from a number of industries
and business sectors, including the leadership of large complex
multinational enterprises. The Board has determined that there areeight independent non-executive Directors. In making thisdetermination, it was agreed that there are no relationships orcircumstances likely to affect the judgement of the independent
non-executive Directors, with any relationships or circumstancesthat could appear to do so not considered to be material.

Chairman and co-Chief Executive Officers
The roles of the Chairman and co-Chief Executive Officers are
separate and held respectively by an experienced non-executive
Director and two full-time employees of the HSBC Group. There isa clear division of responsibilities between leading the Board andthe executive responsibility for running the Bank’s business.
The Chairman provides leadership to the Board in promoting theoverall effectiveness of the Bank, in particular the development ofstrategy and monitoring of the execution and delivery of Board
approved strategies and plans by the co-Chief Executive Officers
and management. The Chairman’s role includes promoting an
open and inclusive culture on the Board to facilitate open andcritical discussion and challenge and leading the Board in setting
an appropriate ‘tone from the top’ and in the oversight of theBank’s corporate culture. The Chairman also leads an annual
evaluation of the performance of the Board, its Committees andindividual Directors. The role also involves maintaining external
relationships with key stakeholders and communicating theirviews to the Board.
The co-Chief Executive Officers are responsible for ensuring
implementation of the strategy and policies as established by the
Board and the day-to-day running of operations. The co-Chief
Executive Officers are co-Chairmen of the Executive Committee.
The heads of Global Businesses and Global Functions and country/
territory Chief Executive Officers in Asia-Pacific report to the coChief Executive Officers.
Role profiles for the Chairman and co-Chief Executive Officers
were approved 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 whennecessary 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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 20225

Report of the Directors

Executive Officers. The role also involves maintaining external
relationships with key stakeholders and communicating theirviews 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
non-executive Directors report to each subsequent Board meetingon the relevant committee’s proceedings.
The Board has also established an Asset, Liability and CapitalManagement Committee and a Risk Management Meeting. The
Executive Committee has the delegated authority to approve anychanges in the membership and terms of reference of the Asset,
Liability and Capital Management Committee and the Risk
Management Meeting.
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.

Executive Committee
The Executive Committee is responsible for the exercise of all of
the powers, authorities and discretions of the Board in so far as
they concern the management, operations and day-to-day runningof the group, in accordance with such policies and directions as
the Board may from time to time determine, with power to subdelegate. A schedule of items that require the approval of theBoard is maintained.
The Bank’s co-Chief Executive Officers, David Liao andSurendranath Rosha, are co-Chairmen of the Committee. The
current members of the Committee are: Justin Chan (Head ofMarkets & Securities Services, Greater China); Hitendra Dave
(Chief Executive Officer, India); Philip Fellowes (Chief of Staff,
Asia-Pacific); Darren Furnarello (Chief Compliance Officer, AsiaPacific); David Grimme (Chief Operating Officer, Asia-Pacific);
Martin Haythorne (Chief Risk Officer, Asia-Pacific); Gregory
Hingston (Chief Executive Officer, HSBC Global Insurance andPartnerships and Interim Head of Wealth and Personal Banking,South Asia); Ming Lau (Chief Financial Officer, Asia-Pacific andGlobal Commercial Banking); Stuart Lea (Head of Global Banking,South-Asia); Luanne Lim (Chief Executive Officer, Hong Kong);
Amanda Murphy (Head of Commercial Banking, Southeast Asia
and South Asia); Susan Sayers (Regional General Counsel, AsiaPacific); Antony Shaw (Chief Executive Officer, Australia); Omar
Siddiq (Chief Executive Officer, Malaysia); Monish Tahilramani(Global Head of Markets & Securities Services Emerging Markets,
Japan, Australia); David Thomas (Regional Head of Human
Resources, Asia-Pacific); Mark Wang (President and Chief
Executive Officer China) and Kee Joo Wong (Chief Executive
Officer, Singapore). Paul Stafford (Corporation Secretary) is theCommittee Secretary. In attendance are: Astor Law (Head of
Global Internal Audit, Asia-Pacific) and Jessica Lee (Regional Headof Communications, Asia-Pacific). The Committee met ten times in2022. 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 and is an advisorycommittee to provide recommendations and advice to support theChief Financial Officer's individual accountability for the efficientmanagement of the Bank’s assets, liabilities and capital within theconstraints of liquidity and funding ratios, capital ratios, and key
balance sheet risks such as interest rate risk, market risk and6equity risk. The Committee also has responsibilities for the Bank's
recovery and resolution planning activities, and the oversight oftreasury sustainability related matters in support of the Group’s
sustainability objectives.
The Committee consists of Ming Lau (Chief Financial Officer, AsiaPacific and Global Commercial Banking), David Liao andSurendranath Rosha (co-Chief Executive Officers), the Regional
Treasurer, Asia Pacific, the Regional Head of Asset and Liability
Management, Asia-Pacific, the Regional Head of CapitalManagement, Asia-Pacific, the Head of Markets Treasury, AsiaPacific, and other senior executives of the Bank most of whom aremembers of the Executive Committee. The Committee met ten
times in 2022.

Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer
and is a formal governance forum established to support the Chief
Risk Officer’s individual accountability for the oversight ofenterprise risk and provide recommendations and advice to theChief Risk Officer on enterprise-wide management of all risks,
including key policies and frameworks for the management of risk
within the Bank. The Risk Management Meeting consists of Martin
Haythorne (Chief Risk Officer, Asia-Pacific), David Liao andSurendranath Rosha (co-Chief Executive Officers), the Head of
Global Internal Audit, Asia-Pacific, the Chief Executive Officer ofHang Seng Bank Limited, the Head of Wholesale Credit andMarket 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 2022.

Audit Committee
The Audit Committee has non-executive responsibility foroversight of and advice to the Board on matters relating tofinancial reporting and internal financial controls. The current
members of the Committee are Kevin Westley (Chairman of theCommittee), Yiu Kwan Choi, David Eldon, Rajnish Kumar and Irene
Lee. Except for David Eldon, who is a non-executive Director, allmembers are independent non-executive Directors. The
Committee met four times in 2022.
The Audit Committee monitors the integrity of the Consolidated
Financial Statements, banking disclosure statements, anddisclosures relating to financial performance, the effectiveness of
the internal audit function and the external audit process, and theeffectiveness of internal financial control systems. The Committee
reviews the adequacy of resources and expertise as well as
succession planning for the finance function. It reviews, andconsiders changes to, the Bank’s accounting policies. The
Committee advises the Board on the appointment, reappointment, or removal of the external auditor and reviews andmonitors the external auditor’s independence and objectivity. The
Committee reviews matters escalated for its attention bysubsidiaries’ audit committees and receives minutes of meetingsof the ALCO.

Risk Committee
The Risk Committee has non-executive responsibility for oversightof and advice to the Board on risk-related matters impacting the
Bank and its subsidiaries, including risk governance and internal
control systems (other than internal controls over financial
reporting). The current members of the Committee are Yiu Kwan
Choi (Chairman of the Committee), Sonia Cheng, David Eldon,
Rajnish Kumar, Irene Lee, Annabelle Long and Kevin Westley.
Except for David Eldon, who is a non-executive Director, allmembers are independent non-executive Directors. The
Committee met four times in 2022.
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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

assigned responsibilities. This personal accountability, reinforced
by clear and consistent employee communication on risk that sets
the tone from senior leadership, the governance structure,
mandatory learning and remuneration policy, helps to foster adisciplined and constructive culture of risk management andcontrol throughout the group.
The Board and the Risk Committee oversee the maintenance anddevelopment of a strong risk management framework bycontinually monitoring the risk environment, top and emerging
risks facing the group and mitigating actions planned and taken.
The Risk Committee reviews certain Group risk management
policies and procedures at least annually and advises the Board ifthese are appropriate for the circumstances of the Bank. It also
reviews local risk management policies at least annually, andapproves 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 andprovides scrutiny of management’s proposed mitigating actions.
The Committee monitors the risk profiles for all of the risk
categories within the group’s business. The Committee also
monitors the effectiveness of the Bank’s risk management andinternal controls other than those over financial reporting. Regular
reports from the Risk Management Meeting are also presented ateach Risk Committee meeting to report on the ongoing
monitoring, assessment and management of the risk environment
and the effectiveness of the risk management framework. The
Committee reviews matters escalated for its attention bysubsidiaries’ risk committees and receives minutes of meetings of
the Risk Management Meeting.

Nomination Committee
The Nomination Committee is responsible for leading the process
for Board appointments and for identifying and approving, or
nominating for the approval of the Board, candidates forappointment to the Board and certain senior management roles.
Appointments to the Board and certain senior management roles
are subject to the approval of the HKMA. The Committee
considers plans for orderly succession to the Board and theappropriate balance of skills, knowledge and experience on the
Board, and undertakes an annual review of the time commitment
and any potential conflicts of interests 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 (Chairmanof 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 seven times in 2022.
A rigorous selection process, overseen by the Nomination
Committee and based upon agreed requirements using an external
search consultancy when appropriate, is followed in relation to theappointment of non-executive Directors. Before recommending an
appointment of a Director to the Board, the Committee evaluates
the Board composition including the balance of skills, knowledge
and experience, as well as diversity and the role and capabilities
required. In identifying suitable Board candidates, the Committee
considers candidates’ backgrounds, knowledge and experience topromote diversity of views, and takes into account the required
time commitment and any potential conflicts of interest.

Chairman’s Committee

The 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 2022.

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, whichis adopted by the Bank. The Remuneration Committee of the Bankis responsible for the oversight of matters related to remuneration
impacting the Bank and its subsidiaries, in particular, overseeing
the implementation and operation of the Group’s Remuneration
Strategy and satisfying itself that the remuneration frameworkcomplies with local laws, rules or regulations; is in line with therisk appetite, business strategy, culture and values, and long-term
interests of the Bank; and is appropriate to attract, retain andmotivate employees to support the success of the Bank. The
current members of the Committee, all being independent nonexecutive Directors, are Irene Lee (Chairman of the Committee),Beau Kuok and Sonia Cheng.
The Committee met six times in 2022. The following is a summaryof the Committee's key activities during 2022:
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 2021/2022 performance year pay review matters• Reviewed remuneration framework effectiveness• Received updates on notable events and regulatory and corporate
governance matters• Reviewed and approved 2022 Material Risk Taker (‘MRT’) identification
approaches and outcomes• Reviewed attrition data and plans to address area of concerns• Approved 2022 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 registeredwith HKMA.

Remuneration Strategy
Our performance and pay framework is underpinned by ourGroup’s Remuneration Strategy and principles aims tocompetitively reward long-term sustainable performance. Our goal
is to attract, motivate and retain the very best people, regardlessof gender, ethnicity, age, disability or any other factor unrelated toperformance or experience. This supports the long-term interestsof our stakeholders, which includes the customers and thecommunities we serve, our shareholders and our regulators.
Our approach to performance and pay in 2022 for the broader
workforce was underpinned by the below principles designed tosupport a fair and appropriate pay and performance approach,whilst recognizing the need for flexibility in a hybrid workplace.
These include:• Ensuring that the decisions made are fair, appropriate and freefrom bias towards an individual’s ethnicity, gender, age, or any
other characteristic and making sure employees are fairly
rewarded and recognized. Managers are encouraged tochallenge their assessment by questioning whether they were
objective and based on facts;

The Chairman’s Committee acts on behalf of the Board either inaccordance with authority delegated by the Board from time totime or as specifically set out within its terms of reference. The
Committee meets with such frequency and at such times as it may
determine and can implement previously agreed strategic
decisions by the full Board, approve specified matters subject totheir prior review by the full Board, and act exceptionally on urgent
matters within its terms of reference.
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

7

Report of the Directors• Rewarding and recognizing our people for sustainable
performance and values aligned behavior. As such, subject tolocal law, employee receive a behavior rating as well as aperformance rating. Analytical reviews were also completed toensure there is a clear differentiation across both performanceand behavior ratings;• Supporting a culture of continuous feedback through manager
and employee empowerment. Focusing to obtain feedback
from colleagues to learn what was going well, learn andimprove from experience and discover the skills and behavior
colleagues need to grow; and• Delivering a balanced, simple and transparent total reward
package that supports employee well-being.
More details of the Bank’s remuneration strategy are contained
within the Annual Report and Accounts 2022 of HSBC Holdingsplc.
The Bank as an Authorised Institution under the Banking
Ordinance is required by HKMA Supervisory Policy Manual CG-5
'Guideline on a Sound Remuneration System' (the Guideline) toassess whether their existing remuneration systems and policy arein line with the principles in the Guideline, independently of
management and at least annually. The annual review for 2021
was commissioned externally to Deloitte LLP and the results wereapproved by the Remuneration Committee in April 2022. The
review confirmed that the Bank’s remuneration strategy as
adopted from the Group is consistent with the principles set out in
the Guideline.

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

Recovery
The group maintains recovery plans that are designed to outline
credible actions that could be implemented in the event of stressin order to restore capital and its business to a stable andsustainable condition. The Bank typically submits recovery plan on
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, and this involves stress testingand ‘fire drill’ tests.

Termination Rights – Banking Sector) Rules (‘Stay Rules’) andLiquidity and Funding in Resolution (‘LFIR-1’) within the regulatory
timeline.
As part of the RAF issued by the Bank of England ('BoE') and
Prudential Regulation Authority (‘PRA’) which places the onus onfirms to demonstrate their own resolvability, HSBC Group,
including the group was required to have capabilities as of
1 January 2022 to achieve the resolvability outcomes: (i) haveadequate resources in resolution; (ii) be able to continue businessthrough resolution and restructuring; and (iii) be able to coordinate its resolution and communicate effectively withstakeholders. The RAF requires HSBC Group to prepare a report on
the assessment of its preparedness for resolution, which must be
submitted to the PRA on a biennial basis. HSBC Group submitted
its first such report to the BoE in October 2021 summarising the
progress in terms of BoE’s RAF, followed by an additional
addendum in February 2022. On 10 June 2022 HSBC Group madeits first public disclosure on its resolvability, which summarised
the key findings from its RAF self-assessment. Alongside thisreport, the BoE publicly disclosed its own assessment of HSBC
Group’s resolvability. Certain shortcomings and areas of further
enhancement were identified under the first RAF cycle and HSBC
Group, including the group is currently addressing these to ensure
it meets the objectives of the RAF. Regular engagement with the
BoE and PRA will continue as HSBC Group prepares for thesecond RAF cycle, whereby the Group’s next Self-assessment isdue in 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 Holdingsplc.

On behalf of the Board

Peter Wong, Chairman
21 February 2023

Resolution
In general terms, resolution refers to the exercise of statutory
powers where a financial institution and/or its parent or othergroup company is deemed by its regulators to be failing, or likely
to fail and it is not reasonably likely that recovery action could betaken that would result in the institution recovering.
In view of 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 multiple point of entry (‘MPE’) bail-in strategy. This
provides flexibility for HSBC Group to be resolved either (i) througha bail-in at the HSBC Holdings plc level, which enables therecapitalisation of operating bank subsidiaries in the HSBC Group(as required) while restructuring actions are undertaken, with the
HSBC Group remaining together; or (ii) at a local subsidiary levelpursuant 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 efforts to work bilaterally with the HKMA and the otherprincipal Asian regulators in addressing any identified
impediments to resolvability of the group, ensuring resolvability
capabilities being developed are in line with the local requirements
and regulatory expectations. The group is already compliant with
HKMA issued Financial Institutions (Resolution) (Loss-absorbing
Capacity Requirements – Banking Sector) Rules (‘LAC Rules’), andin the process to comply with new policies on Operational
Continuity in Resolution (‘OCIR-1’), Financial Institutions(Resolution) (Contractual Recognition of Suspension of
8

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Environmental, Social and Governance(unaudited)
The Group is on a journey to incorporate environmental, social andgovernance ('ESG') principles throughout the organisation, andhas taken significant steps to embed sustainability into its purpose
and corporate strategy.

Approach to ESG Reporting
The information set out in the ESG Review, taken together withother information relating to ESG issues included in the Annual
Report and Accounts 2022, provides key ESG information and data
relevant to the group’s operations for the year ended 31 December
2022. The data is compiled for the financial year 1 January to
31 December 2022 unless otherwise specified. Measurement
techniques and calculations are explained next to data tables
where necessary. The group is guided by the Group’s
consideration of material ESG topics. For Group’s material ESG
topics and how they decide what to measure, see the Group’s
Annual Report and Accounts 2022.
The group has considered its ‘comply or explain’ obligation underthe 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 Task Force on Climate-related Financial Disclosures ('TCFD')
Recommendations and Recommended Disclosures, issued in July
2017 and its updated guidance in October 2021, in this Annual
Report and Accounts save for certain items, which are describedon pages 12 to 15. Further details have been included in thissection and the Risk Review section on pages 61 to 64. Our TCFD
disclosures are highlighted with the following symbol: TCFD

How ESG is governed TCFD
The Board takes overall responsibility for ESG and approved theclimate strategy in 2022, overseeing executive management indeveloping the approach, execution and associated reporting. The
group’s developments in relation to its strategies was reviewed
through Board discussions at six meetings in 2022. In addition,
Board members received a training on global and regional
developments in climate and sustainability, as part of their
ongoing development. The 2022 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 and sustainable finance measures. Governancestructures exist to ensure executive oversight of the group’s
progress in ESG performance, including involvement of the group
Risk Committee (‘RC’). The RC reviews the effectiveness of thegroup’s conduct framework, which is designed to deliver fairoutcomes for customers, and to preserve the orderly andtransparent operation of financial markets, as well as to oversee
and advise the Board on risk-related matters, including bothfinancial and non-financial risks. In addition, the Executive
Committee reviews an ESG dashboard including key metrics suchas sustainable finance and own operations emissions on aquarterly basis.
The group Sustainability Committee and the group Climate Risk
Oversight Forum ('CROF') are governance forums established in
Asia-Pacific to support the Group’s climate ambition. The group
Sustainability Committee, chaired by the Co-CEOs of Asia-Pacific,
oversees the group’s contribution to the Group’s climate plan,
which was announced in October 2020. This includes overseeing
delivery across Asia-Pacific of the Group’s ambition to provide andfacilitate a share of the global target of between US$750bn andUS$1tn of sustainable finance and investment for its customers in
Asia-Pacific in their transition to net zero and a sustainable future
by 2030. The group CROF is a sub-committee of the Risk
Management Meeting. These committees, forums and meetings
govern the group's performance in Asia-Pacific and provide
oversight of all risk activities relating to the group’s approach toclimate and nature related risk management.
The group’s ESG governance approach is expected to continue todevelop, in line with its evolving approach to ESG matters andstakeholder expectations.

Environmental - Transition to net zero TCFD
One of the Group’s strategic pillars is to support the transition to a
net zero global economy. The Group’s ambition is to align its
financed emissions to the Paris Agreement goal to achieve net
zero by 2050 or sooner. The Paris Agreement aims to limit the risein global temperatures to well below 2°C, preferably to 1.5°C,
above pre-industrial levels.
The transition to net zero is one of the biggest challenges for our
generation. Success will require governments, customers andfinance providers to work together. The Group’s global footprintmeans that many of its clients operate in high-emitting sectors andregions that face the greatest challenge in reducing emissions.
This means that the Group's transition will be challenging but is an
opportunity to make an impact.
The Group recognises that to achieve its climate ambition it needs
to be transparent on the opportunities, challenges, related risks
and progress it makes. To deliver on the ambition, it requires
enhanced processes and controls, and new sources of data. The
Group continues to invest in climate resources and skills, anddevelop its business management process to integrate climate
impacts. Until systems, processes, controls and governance areenhanced, certain aspects of the Group’s reporting will rely on
manual sourcing and categorisation of data. In 2023, the Groupwill continue to review its approach to disclosures. Reporting willneed to evolve to keep pace with market developments.

Explaining scope 1, 2 and 3 emissions
To measure and manage the group’s greenhouse gas emissions,the group follows the Greenhouse Gas Protocol global framework,
which identifies three scopes of emissions. Scope 1 represents the
direct emissions 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 includingtransport, distribution and waste. The group’s downstream
activities include those related to investments and financed
emissions.
Under the protocol, scope 3 emissions are broken down into 15
categories. The group provides reporting emissions data in relation
to business travel (category 6), an upstream activity. Moreinformation in relation to the group’s greenhouse gas emissions is
set out on page 10.

Supporting customers through net zero transition TCFD
The group’s ability to steer financing for the transformation ofbusinesses and infrastructure will be key in helping to enable thetransition to a net zero global economy. The group, as a financial
institution, has a critical role to play in facilitating the transition to
net zero. The most significant contribution the group can make isby mobilising finance to support its customers to enabledecarbonisation in the real economy.
Given the Group’s global presence and relationships with clients
across industries and client groups, it recognises the role it canplay to encourage the global transition to net zero. The Board
endorsed a climate strategy, which includes the ‘transition to net
zero’ strategic pillar and key enablers to support its
implementation, also highlights the Board’s continued role inoverseeing the implementation of the Group’s strategic climate
objectives in Asia-Pacific. For details of the Group’s climate
strategy, please refer to https://www.hsbc.com/who-we-are/ourclimate-strategy.

Mobilising sustainable finance and investments
The group’s sustainable finance ambition has contributed tosustainable infrastructure and energy systems, promoted
decarbonisation efforts across the real economy, and enhanced
investor capital through sustainable investment. The group
continues to identify financing and investing opportunities andprioritizes the themes necessary to support the net-zero transition.
These opportunities look to direct capital, financing solutions andresource allocation towards the themes which will maximize

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

9

Environmental, Social and Governanceclimate and commercial impact at scale. They are designed tosupport clients in their transition journey and to address financing
needs to accelerate the infrastructure, technologies, and new
business models critical for industries to transition to net zero. The
group offers a broad suite of sustainable finance capabilities
across its global businesses, enabling customers to manage risk
and pursue ESG-related opportunities.
In 2022, the group continued to expand the horizons ofsustainable finance, channeling capital to enable emissions
reduction in the real economy. An example is the US$5bn Greater
Bay Area ('GBA') Sustainable Finance Scheme to support businessof all sizes, including manufacturing and real estate, to transition
to low carbon operations in the GBA. In addition, the group
initiated green mortgage offerings to retail customers in mainland
China, Hong Kong and India.
The Group was recognised by Euromoney as the Best Bank for
Sustainable Finance in Asia for the fifth time in 2022. It also
secured the Asia-Pacific Triple A: Sustainable InfrastructureAwards 2022 for Export Credit Agency Coordinator Bank of theYear, Asia-Pacific Loan Market Association for Green andSustainability advisor of the year, and FinanceAsia for Best
Sustainable Bank in Hong Kong.
The group’s sustainable finance and investment progress is set out
below, with detailed definitions available in the Group’s
Sustainable Finance and Investment Data Dictionary (seewww.hsbc.com/who-we-are/esg-and-responsible-business/esgreporting-centre). Green finance taxonomies are not consistentglobally, and evolving taxonomies and practices could result inrevisions in the Group's sustainable finance reporting going
forward. The Group recognises that there can be differing views ofexternal stakeholders in relation to these evolving taxonomies, andwill seek to align to enhanced industry standards as they arefurther developed.
Sustainable finance summary – Asia-Pacific1
2022
HK$m

Balance sheet-related transactions provided
Capital markets/advisory (facilitated)
Total contribution

126,845
45,301
172,146

1 This table has been prepared in accordance with the Group’s
Sustainable Finance and Investment Data Dictionary 2022, 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.

Working with customers
The Group’s net zero ambition is underpinned by its relationships
with customers. The Group is setting targets on a sector by sector
basis that are consistent with net zero outcomes by 2050. In
assessing financed emissions, the Group focuses on those parts ofthe sector that are most material in terms of greenhouse gas
emissions, and where it believes engagement and climate action
have the greatest potential to effect change, taking into accountindustry and scientific guidance. In 2021, the Group definedtargets for the oil and gas, and power and utilities sectors to beachieved by 2030. The group will continue to request and assess
relevant client transition plans, and to unlock transition solutions
for its portfolio of customers. The group considers reporting andemissions disclosure, level of ambition and targets set, detail ofplans to achieve targets and evidence of activities to achieve
objectives.

Our approach to our own operations TCFD
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
or earlier.

Finally, 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 reduceenergy consumption by 50% by 2030 against a 2019 baseline. This
will be achieved by optimising the utilisation of the Group’s realestate portfolio, and strategically reducing office space and data
centres. In addition, the Group is adopting new technologies andemerging products to make its spaces more energy efficient.
As part of the Group's ambition to achieve 100% renewable power
across its operations by 2030, it continues to look for opportunities
to procure green energy in each of its markets. A key challenge
remains the limited opportunity to pursue power purchaseagreements or green tariffs in key markets.

Business travel and employee commuting
The group’s travel emissions were relatively low in 2022, withinternational travel restrictions in key markets limiting businesstravel. The Group is closely managing the gradual resumption of
travel through internal reporting and review of emissions, andthrough the introduction of internal carbon budgets, in line with its
aim to halve travel emissions by 2030, compared with prepandemic levels. With hybrid working embedded across thegroup, technology has reduced to some extent the need to travel
to meet with colleagues and customers face to face.
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 forcompleteness. The group does not report employee home working
emissions in its scope 1 and 2 performance data. The
environmental data for the group’s own operations is based on a
12-month period to 30 September each year.
In 2022, the group collected data on energy use and businesstravel for its own operations in 12 markets across the region,
which accounted for approximately 87% of its full-time equivalent
employees ('FTEs').
Greenhouse gas emissions in tonnes CO2e1,22022

Scope 1 - direct
Scope 2 - indirect
Scope 3 - indirect (upstream activities - business travel)
Total
Greenhouse gas emissions in tonnes CO2e per FTE

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
As the majority of the Group’s emissions are within its supply
chain, it is recognised that it cannot achieve the net zero goal
without its suppliers joining the journey. In 2020, the Group began
a three-year process of encouraging its largest suppliers to maketheir 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 direct supplier discussions on how they
can further support the Group’s transition to net zero.

The Group has three elements to its strategy: reduce, replace andremove. The first focus is to reduce carbon emissions fromconsumption, and then subsequently replace remaining emissions
with low-carbon alternatives in line with the Paris Agreement.
10915
104,162
11,120116,197
2.16

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Approach to climate risk TCFD

framework. The group’s most material exposure to climate risk
relates to corporate and retail client financing activity within its
banking portfolio, and in its responsibilities in relation to asset
ownership by its insurance and asset management businesses.

Managing risk for stakeholders
Climate risk relates to the financial and non-financial impacts that
may arise from climate change and the move to a greener
economy. The group manages climate risk across all its
businesses and is taking into account climate considerations in its
risk taxonomy in line with the Group-wide risk management

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

In the table below, the group sets out its duties to its stakeholders
in the three most material roles. For further details of the group's
approach to climate risk, see Climate risks on page 61.

Asset management
The group’s asset management operations’investment solutions are increasingly consideringboth physical and transition risks.

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

êêClimate Risk

êThis helps the group to identify opportunities tosupport its customers, while continuing to meetstakeholder expectations.

êê

A key approach to managing climate risk is byengaging with investees on topics related to climatechange.

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

Banking
The group’s banking business is well positioned to support its
customers to manage their own climate risk through financing. For
wholesale customers, the group uses a transition and physical riskquestionnaire as part of its transition and physical risk framework
to understand their climate strategies and risk. The Group has set
out a suite of policies to guide the management of climate risk,
including the recently updated energy policy and thermal coalphase-out policy (see page 62). Climate scenario analysis is used
as a risk assessment tool to provide insights on the long-term
effects of transition and physical risks across the Group’s
corporate and retail banking portfolios, as well as its own
operations.

Asset management
When assessing the impact of climate-related risk to its portfolios,
the group’s asset management operations are increasingly
considering both physical and transition risks. As a result, ESG andclimate analysis is integrated into the group's assessment of therisks faced by investees throughout the investment decisionmaking process. Investment teams use portfolio management
tools to assess, examine and determine the level of potential ESG
risks that could impact the current and future value of issuers.
In September 2022, the Group's asset management operations
published their thermal coal phase-out policy, which will not holdlisted securities of issuers with more than de minimis revenue
exposure to thermal coal in its actively managed portfolios beyond
2030 for EU and OECD markets, and 2040 for all other markets.
One of the key approaches for the group’s asset management
operations to manage climate risk is to engage with thecompanies in which they invest. The HSBC Asset Management
Stewardship Plan outlines their approach to engaging with issuers,
including on the topic of climate change.

Insurance
The group’s insurance operations updated their sustainability
policy in 2022 to align with the Group’s thermal coal phase-out
policy. An ESG policy on corporate underwriting was also
introduced. Risk appetite was reviewed with respect to ESG risks,and ESG standards were embedded into insurance productdevelopment processes and operational capabilities.

regulators in Asia-Pacific including the Monetary Authority ofSingapore in 2022.
The Group's scenario analysis considers separately:• transition risk arising from the process of moving to a net zeroeconomy, including changes in policy, technology, customer
behaviour and stakeholder perception, which could each
impact borrowers’ operating income, financing requirements
and asset values; and• physical risk arising from the increased frequency and severityof weather events, such as hurricanes and floods, or chronic
shifts in weather patterns, which could impact property values
and repair costs and lead to business interruptions.
The Group will continue to enhance its climate scenario analysis toenable a more comprehensive understanding of climate
headwinds, risks and opportunities that will support its strategicplanning and actions.

Our climate scenarios
In 2022, the Group undertook its internal climate scenario analysis
exercise using four bespoke scenarios that were designed to
articulate a view of the range of potential outcomes for global
climate change between the 2022 and 2050-time period.
These internal scenarios were formed with reference to external
publicly available climate scenarios, including those produced by
the Network for Greening the Financial System, theIntergovernmental Panel on Climate Change and the International
Energy Agency. The Group adapted these scenarios byincorporating its unique climate risks and vulnerabilities to which
the organisation and customers across different global businesses
and geographies are exposed. This resulted in the following four
scenarios:• Net Zero scenario, which aligns with the Group's net zerostrategy and is consistent with the Paris Agreement;• Current Commitments scenario, which assumes that climate
action is limited to the current governmental commitments andpledges;• Downside Transition Risk scenario, which assumes that climate
action is delayed until 2030, but will be rapid enough to limit
global temperature by the end of the century; andIntroduction• Downside Physical Risk scenario, which assumes climate
action is limited to current governmental policies, leading to
extreme global warming.

Scenario analysis supports the Group’s strategy by assessing its
position under a range of climate scenarios. This helps to build theGroup’s awareness of climate change and future planningincluding in the context of evolving regulatory requirements.

The group follows the Group's four scenarios, which reflect
different levels of physical and transition risks, underpinned byvarious assumptions of governmental climate policy changes,
macroeconomic factors and technological developments.

Following the first Group-wide climate change scenario analysis
and the pilot climate risk stress test for Hong Kong Monetary
Authority, the Group has performed stress tests for a number ofDevelopments in climate science, data, methodology, andscenario analysis techniques will help further enhance theInsights from scenario analysis TCFD

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

11

Environmental, Social and Governanceapproach in the future. Consequentially, the view of risk is
expected to change over time.

Analysing the outputs of the climate scenario analysis
Climate scenario analysis allows the Group to model how different
potential climate pathways may affect its customers andportfolios, particularly in respect of credit losses. Climate-related
losses could be expected within sectors with higher carbon
emitting activities due to the possibility of carbon reduction
policies. These carbon reduction policies will help to dictate thepace of the transition to net zero and will vary by geography andsector. Customers' climate transition plans will help to mitigate thegroup's climate and credit risks.
In terms of physical risk, the Group assessed perils that could
impact the value of properties in selected entities, including
tropical cyclones and related storm surges. The defaults within theretail mortgage portfolio are expected to remain low through to2050 in Hong Kong due to buildings being designed to withstandhigh wind speeds and investment into sea defences. Similarly,
losses in Singapore were low in all the scenarios due to its
geographical location and strong sea defences.
The analysis generated insights of the underlying drivers of risk
and how the group can navigate through this complex andevolving landscape. The group explored strategic responses to theresults of the climate scenario analysis, which allow it to identify
and prioritise the sectors and sub-sectors that require the greatest
support to transition. This also allows the group to test the impactof actions that can support customers’ transition and its net zeroambition.

Use of outputs and next steps
Climate scenario analysis informs the Group's strategy andsupports how opportunities are captured while minimising risks,and enabling the Group to navigate through the climate transition.
The Group will continue to enhance its capabilities in relation toclimate scenario analysis and use the results for decision making,particularly in respect of strategy, client engagement and risk
appetite.

Social matters
The Group aims to play an active role in opening up a world ofopportunity for its customers, colleagues and communities as it
brings the benefits of connectivity and the global economy tomore people around the world.
Recommendation

To achieve its purpose and deliver its strategy in a way that issustainable, the Group is guided by its values: we value difference;
we succeed together; we take responsibility; and we get it done.

Human rights
Details of the Group’s commitment to respecting human rights are
set out in the Group's Statement on Human Rights, which isavailable on www.hsbc.com/our-approach/measuring-our-impact.

Anti-bribery and corruption policy
The Group requires compliance with all applicable anti-bribery andcorruption laws in all markets and jurisdictions in which it
operates. These include, but are not limited to, the UK Bribery Act,
the US Foreign Corrupt Practices Act, the Hong Kong Preventionof Bribery Ordinance and France's 'Sapin II' law. The Group has a
global anti-bribery and corruption policy, which gives practicaleffect to these laws and regulations, but also requires compliancewith the spirit of laws and regulations to demonstrate its
commitment to ethical behaviours and conduct as part of theenvironmental, social and corporate governance approach.

Task Force on Climate-related Financial Disclosures(‘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 of the TCFD recommendations andrecommended disclosures, the reasons for this and steps being
undertaken are set out accordingly. The group will continue todevelop and refine its reporting and disclosures on ESG 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 measure and publicly report, the groupperforms an assessment to ascertain the appropriate level of detailto be 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 andcomplexity 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 ESG. The group’s developments in relation to its strategies wasreviewed through Board discussions at six meetings in 2022. In addition, Board members received a
training on global and regional developments in climate and sustainability, as part of their ongoingdevelopment.

Page 9The Board is updated on wider topics in relation to the evolving climate agenda as appropriate.
Sub-committee accountability,
processes and frequency

The group RC receives regular updates on the climate risk profile, top and emerging climate risks, andclimate risk programme.

Page 62

Examples of the Board andrelevant Board committees
taking climate into account

The Board approved the climate strategy in 2022, overseeing executive management in developing theapproach, execution, financial planning and associated reporting.

Page 62

The 2022 annual incentive scorecards of the Co-CEOs of Asia-Pacific and of most of the Executive
Committee members include outcomes linked to the realisation of different ESG metrics such as customer
satisfaction, employee sentiment, carbon reduction and sustainable finance measures.

b) Describe management’s role in assessing and managing climate-related risks and opportunities

12

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Page 9

Task Force on Climate-related Financial Disclosures ‘TCFD’ (continued)
Recommendation

Response

Who manages climate-relatedrisks and opportunities

The group Sustainability Committee, chaired by the Co-CEOs of Asia-Pacific, oversees the delivery of theGroup’s climate plan announced in October 2020 in Asia-Pacific.

Disclosure
location

Page 9The group CROF oversees all risk activities relating to climate risk management and escalation of climate
risks.
How management reports to
the Board

The Co-CEOs of Asia-Pacific reported to the Board six times on ESG and climate matters during 2022.

Page 9Processes used to informmanagement

The Executive Committee reviews an ESG dashboard including key metrics such as sustainable financeand own operations emissions on a quarterly basis.

Page 9Strategya) Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term
Processes used to determinematerial risks and opportunities

For wholesale customers in the six high climate transition risk sectors, the group rolled out the transitionand physical risk questionnaire to assess and improve its understanding of the impact of climate changes
on certain customers' business models. Relationship managers worked with customers to record
questionnaire responses, which also help to identify potential business opportunities to support
customers’ transition.
The Group completed a detailed asset-level analysis of the retail mortgage business in Hong Kong,
Singapore and Australia which represent three of the group’s largest residential mortgage portfolios in
Asia-Pacific.

Relevant short, medium, andlong term time horizons

The group continues to contribute to the Group’s ambitions to achieve net zero in its financed emissions
by 2050, in its own operations and supply chain by 2030, and to provide and facilitate a share of the
global target of between US$750bn and US$1tn of sustainable finance and investment for its customers
in Asia-Pacific in their transition to net zero and a sustainable future by 2030.

Page 62

Page 63

Page 10The group aligns with the Group’s definition of short, medium, and long term time horizon: short term up
to 2025; medium term between 2026 to 2035; and long term between 2036 to 2050.

Transition or physical climaterelated issues identified

The group is part of the Group’s climate scenario analysis exercise and formed part of the Group’s resultof the expected credit losses and physical risk impacts on the Group’s premises between the 2022 and2050 time period. For details, see the Group’s Annual Report and Account 2022.

Page 11

Transition or physical climate-related risk, together with greenwashing risk exist across the Group’s risktaxonomy.

Page 61

The group is supporting its customers in their transition through its sustainable finance and investment
ambition. The Group's sustainable finance and investment data dictionary includes a detailed definition ofcontributing activities.
Risks and opportunities bysector and/or geography

Page 10

Scenario analysis supports the group’s risks and opportunities under a range of climate scenarios. It helps Page 11
to build the group’s awareness of the impact of climate change and future planning.
The Group completed a detailed asset-level analysis of the retail mortgage business in Hong Kong,
Singapore and Australia, which represent three of the group’s largest residential mortgage portfolios in
Asia-Pacific.

page 63

The group does not currently fully disclose the impacts of transition and physical risk quantitatively by
sector/geography, due to transitional challenges including data limitations and evolving science andmethodologies. The group is working to address these challenges in the medium term.
Concentrations of credit
exposure to carbon-related
assets (supplemental guidance
for banks)

The Group has identified six sectors where wholesale credit customers have the highest climate risk,
Page 62
based on their carbon emissions. These are automotive, chemicals, construction and building 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.

Climate-related risks in lending The group’s material exposure to climate risk relates to corporate and retail client financing activity within
and other financial intermediary its banking portfolio, and in its responsibilities in relation to asset ownership by its insurance and asset
management businesses.
business activities(supplemental guidance forbanks)

Page 11b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planningImpact on strategy, business,and financial planning

Transition to net zero represents one of the Group's four strategic pillars. The Group aims to be net zero in Page 9
its operations and supply chain by 2030 and in financed emissions by 2050.
The group does not currently fully disclose the impacts of climate-related issues on financial planning, andparticularly the impact of climate-related issues on its financial performance (for example, revenues andcosts) and financial position (for example, assets and liabilities), acquisitions/divestments or access tocapital, in each case due to lack of data and systems for compiling the relevant financial impacts. In 2022,
the group incorporated certain aspects of sustainable finance and financed emissions within its financial
planning process. This will be further enhanced in the medium term as more data is available.

Impact on products andservices

The group supports the Group's ambition in helping its customers’ transition to net zero and a sustainable
future through providing and facilitating a share of the global target of between US$750bn and US$1tn ofsustainable finance and investment for its customers in Asia-Pacific by 2030.

Page 9Impact on supply chain and/or
value chain

The group has started working with its largest suppliers to encourage them to make their own carbon
commitments, and to disclose their emissions. The Group’s third-party risk management processincorporates climate-related risks.

Page 10Impact on operations

The group is developing a deeper understanding of the risks to which its properties are subject, andnecessary mitigants to ensure ongoing operational resilience.

Page 63

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

13

Environmental, Social and Governance

Task Force on Climate-related Financial Disclosures ‘TCFD’ (continued)
Disclosure
location

Recommendation

Response

Impact on adaptation andmitigation activities

The Group announced its ambition to achieve 100% renewable power across its operations by 2030, andPage 10continues to look for opportunities to procure green energy. The Group regularly reviews and enhances its
building selection process and global engineering standards to help ensure they reflect the potential
impacts of climate change.

Impact on operations

The group is developing a deeper understanding of the risks to which its properties are subject, andnecessary mitigants to ensure ongoing operational resilience.

Impact on investment inresearch and development

The Group is working with the World Resources Institute and World Wide Fund For Nature, focusing its
collective efforts on climate-related innovation, nature-based solutions and energy efficiency initiatives in
Asia-Pacific.

Transition plan to a low-carbon
economy

The Group has committed to publish its own climate transition plan in 2023. The plan will outline, in one
place, not only the Group's commitments, targets and approach to net zero across the sectors andmarkets that it serves, but also how the Group is transforming to embed net zero and help finance thetransition. The group will be guided by this transition plan once published.

Page 63c) 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 2022, the Group enhanced the approach to analysing climate scenarios and delivered the internal
Page 11
climate scenario analysis ('ICSA') exercise applying four bespoke climate scenarios: Net Zero, Current
Commitments, Downside Transition Risk, and Downside Physical Risk. The four scenarios used in theGroup’s ICSA exercise were designed to articulate the Group’s view of the range of potential outcomes for
global climate change between the 2022 and 2050- time period. The relevant assumptions are detailed inGroup Annual Report and Accounts 2022.

Key drivers of performance and The ICSA scenarios reflect different levels of physical and transition risk and, underpinned by various
how these have been taken into assumptions of governmental climate policy changes, macroeconomic factors and technologicalaccount
developments.

Page 11

Scenarios used and how theyfactored in government policies

Page 11The ICSA scenarios reflect external publicly available climate scenarios, including those produced by the
Network for Greening the Financial System, the Intergovernmental Panel on Climate Change and theInternational Energy Agency.

How our strategies may change The Group will continue to enhance its capabilities for climate scenario analysis and use the results forand adaptdecision making, particularly in respect of strategy, client engagement and risk appetite.

Page 12

Risk managementa) Describe the organisation’s processes for identifying and assessing climate-related risks
Traditional banking risk types
considered

The Group's approach to identifying and assessing climate-related risks is initially focused onunderstanding physical and transition impacts across five priority risk types: wholesale credit risk, retailcredit risk, resilience risk, regulatory compliance risk and reputational risk.

Page 61

Process

For wholesale customers, the group uses a transition and physical risk questionnaire as part of its
transition and physical risk framework to understand their climate strategies and risk. Climate scenario
analysis is used as a risk assessment tool to provide insights on the long-term effects of transition andphysical risks across the Group’s corporate and retail banking portfolios, as well as its own operations.

Page 11

The group does not currently fully disclose the detailed impacts of transition and physical risk, due totransitional challenges including data limitations and evolving science and methodologies.
Integration into policies andprocedures

The Group is integrating climate risk into the policies, processes and controls across many of its global
businesses and functions, and will continue to enhance these as its climate risk management capabilities
mature. In 2022, the Group has published its updated energy policy, covering oil and gas, power andutilities, hydrogen, renewables, nuclear and biomass sectors, as well as updating its thermal coal phaseout policy after its initial publication in 2021.

Page 62

Consider climate-related risks in In 2022, the Group broadened its climate risk approach to include all risk types (including treasury risk and Page 64
traditional banking industry risk traded risk) in its risk taxonomy.
categories (supplementary
guidance for banks)b) Describe the organisation’s processes for managing climate-related risks
Process and how we makedecisions

The group Risk Management Meeting and group RC receive regular updates on the climate risk profile,and the top and emerging climate risks.

Page 62

The group’s initial risk appetite has focused on the oversight and management of climate risks across thefive priority risk types, including exposure to high transition risk sectors in its wholesale portfolio andphysical risk exposures in retail portfolio. These metrics have been implemented at group level and locallywhere appropriate.
The group continues to review its risk appetite regularly to capture the material climate risks and will
enhance its metrics over time.
c) 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 approach to climate risk management is aligned to the Group-wide risk management
framework and three lines of defence model.

Page 61

How we take into accountinterconnections between
entities, functions

The group’s dedicated climate risk programme drives the development of its climate risk management
capabilities, taking into account relevant interconnections within the group's businesses, functions andentities.

Page 62

Metrics and targetsa) Disclose the metrics used by the organisation to assess climate-related risk and opportunities in line with its strategy and risk management process

14

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Task Force on Climate-related Financial Disclosures ‘TCFD’ (continued)
Recommendation

Response

Metrics used to assess theimpact of climate-related risks
on our loan portfolio

The group monitors wholesale loan exposure to the Group's six highest climate risk sectors. In 2022, thegroup developed new climate risk metrics to assess the impact of physical risk on its retail mortgage
portfolio in Hong Kong, as detailed on page 63.

Disclosure
location

Page 62

The group’s climate risk management information dashboard incorporates key climate risk metrics, and isreported to the group CROF.
Metrics used to assess progress The Group tracks its net zero progress using multiple metrics, tailoring methodologies to the specificagainst opportunities
measures. The group contributes to the Group’s energy consumption, water consumption, waste
management, and land use. For details, see the Group’s Annual Report and Account 2022 and ESG Data
Pack.

Page 9The group disclosed its contribution in 2022 to the Group’s sustainable finance ambition of providing andfacilitating a share of the global target of between US$750bn to US$1tn for its customers in Asia-Pacific.
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 fromproducts and services, internal carbon prices, forward-looking metrics consistent with its business or
strategic planning time horizons. In relation to sustainable finance revenue and assets, the Group isdisclosing certain elements. The group expects climate related metrics to be further integrated into
financial planning and forecasting as data and system limitations are addressed.
Board or senior management
incentives

The 2022 annual incentive scorecards of the Co-CEOs of Asia-Pacific and most of the Executive
Page 9Committee members include outcomes linked to the realisation of different ESG metrics such as customer
satisfaction, employee sentiment, carbon reduction and sustainable finance measures.

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 physical and transition climaterelated risks on retail lending, wholesale lending and other 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.

b) Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas emissions and the related risks
GHG emissions for lending andfinancial intermediary business(supplemental guidance forBanks)In relation to financed emissions, the Group has disclosed on-balance sheet financed emissions for certain
sectors. The Group does not fully disclose financed emissions data. Further disclosure on scope 3
financed emissions and related risks in relation to customers is reliant on the Group’s customers publicly
disclosing their carbon emissions and related risks.
The Group's approach to disclosure of financed emissions can be found on: 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 or sooner, and has set interim
2030 targets for on-balance sheet financed emissions for certain sectors. The Group aims to support its
customers’ transition to net zero through providing and facilitating a share of the global target of between
US$750bn and US$1tn of sustainable finance and investment for its customers in Asia-Pacific by 2030. In
addition, the Group targets to achieve net zero carbon emissions in its operations and supply chain by
2030 or sooner. In addition to the above mentioned, 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 Group’s ambitions, please refer to the Group’s Annual Report and Accounts 2022.
The group does not currently disclose its targets used to measure and manage physical and transition
risk, or capital deployment, or climate-related opportunities due to transitional challenges such as dataand system limitations which the group is working to address in the medium term.
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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

15

Financial Review

Financial Review
Results for 2022
(Unaudited)

Profit before tax for 2022 reported by The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries(together ‘the group’) increased by HK$11,048m, or 13%, to HK$97,611m.
(Audited)
Wealth andPersonal
Banking

Commercial
BankingGlobalBanking

Markets andSecurities
Services

Corporate
Centre1

Other (GBMother)

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Year ended 31 Dec 2022
Net interest income/(expense)
Net fee income/(expense)

71,397
17,89543,087
9,727

18,703
5,086

4,370
3,701

(12,718)
247

2,013
(56)

126,852
36,600Net income/(expense) from financial instruments measured atfair value through profit or loss

(9,603)

3,728

(110)

22,372

11,079345

27,811(34)
76,8482,329
158,832

64
3,997
(189)
60,414——369
24,048——1,208
31,651—(430)
315(1,507)

17
—
(251)
2,068

47
80,415
3,781
275,506(66,206)(3,968)

—

—

360

—

(69,814)

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

92,62656,44624,04831,651(1,147)

2,068

205,692– of which: externalinter-segment
Change in expected credit losses and other credit impairment
charges

76,344
16,282

58,916(2,470)26,413(2,365)40,870(9,219)(8,191)
7,044

11,340(9,272)

205,692—(1,326)(11,953)(3,070)

22

1

(39)

(16,365)

Net operating income/(expense)
Operating expenses
Operating profit/(loss)
Share of profit in associates and joint ventures
Profit/(loss) before tax
Balance sheet data at 31 Dec 2022
Loans and advances to customers (net)Customer accounts

91,300(52,773)
38,527140
38,66744,493(20,972)
23,521—
23,521

20,978(10,513)
10,465—
10,46531,673(13,897)
17,776—
17,776(1,146)(9,521)(10,667)
18,652
7,985

2,029(2,832)
(803)
—
(803)

189,327(110,508)
78,81918,792
97,611

1,536,664
3,443,694

1,231,972
1,665,463

880,581805,600

40,563
195,775

1,403
11

13,966
3,166

3,705,149
6,113,709

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

50,632
23,827

29,106
9,828

15,070
5,746

3,497
5,730

(2,640)
243

2,448
(78)

98,11345,296

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

22,1953,551

39

19,363214

513

45,875956
58,645
202
156,457

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

343
—
(157)
3,069

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

—

—

353

—

(76,048)

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

83,79942,64821,092

29,703(1,653)

3,069

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

80,5703,229

43,398(750)

20,539553

29,64459(2,284)631

6,791(3,722)

178,658—(1,224)(3,295)(2,013)

(10)

(6)

9

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

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

19,079(10,152)
8,927
—
8,927

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

3,078(2,495)583—
583

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

1,544,449
3,407,789

1,315,961
1,659,464

927,542891,994

49,887
211,621

1,540
28

1,560
6,286

3,840,939
6,177,182

1 Includes inter-segment elimination.

16

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Financial Review
The commentary in this financial review compares the group's
financial performance for the year ended 31 December 2022 withthe year ended 31 December 2021.

Results Commentary(Unaudited)

The group reported profit before tax of HK$97,611m, an increaseof HK$11,048m, or 13%. Net operating income before change in
expected credit losses and other credit impairment charges
increased by HK$27,034m, or 15%, primarily driven by higher net
interest income. Operating expenses increased by HK$5,632m, or
5%, from investment in technology.
Net interest income increased by HK$28,739m, or 29%.
Excluding the unfavourable foreign exchange impact, net interest
income increased by HK$30,715m, or 32%, primarily driven by
Hong Kong with wider customer deposit spreads and higher
reinvestment yields as market interest rates increased, coupledwith balance sheet growth. Net interest income in Singapore also
increased, reflecting the favourable impact of the higher market
interest rates.
Net fee income decreased by HK$8,696m, or 19%. Excluding theunfavourable foreign exchange impact, net fee income decreased
by HK$7,928m, or 18%, driven by Wealth and Personal Banking('WPB') in Hong Kong with lower transaction volumes resulting indecreases in unit trust income and brokerage income, coupledwith lower funds under management fees reflecting theunfavourable market performance. To a lesser extent, net fee
income in Markets and Securities Services ('MSS') also decreased,
mainly from lower global custody and securities brokerage fees
coupled with a drop in underwriting fees.
Net income from financial instruments measured at fairvalue through profit or loss decreased by HK$18,064m, or
39%.
Net income from assets and liabilities of insurance businesses,
including related derivatives, measured at fair value through profit
or loss decreased by HK$31,374m, mainly in Hong Kong anddriven from losses on the equity portfolio held to support
insurance and investment contracts, due to unfavourable equity
market performance. To the extent that these losses are
attributable to policyholders, there is an offsetting movement
reported under ‘Net insurance claims and benefits paid andmovement in liabilities to policyholders’.

Net insurance premium income increased by HK$18,693m, or30%, driven from higher sales volumes mainly in Hong Kong, andin Singapore with the acquisition of AXA Insurance Pte Limited('AXA Singapore') during 2022.
Other operating income increased by HK$1,748m, or 86%,
driven by the favourable movement in the present value of in-force
long-term insurance business ('PVIF') of HK$1,038m, reflecting
increases in Hong Kong from the value of new business written
and the one-off gain from a pricing update for policyholder funds
held on deposit to reflect the cost of provision of these services.
This was partly offset by adverse assumption changes andexperience variances in Hong Kong and Singapore, primarily due
to interest rates movements.
The net movement in PVIF was partly offset by a corresponding
movement in ‘Net insurance claims and benefits paid andmovement in liabilities to policyholders’ to the extent gains orlosses are attributable to the policy holders.
The overall increase also included a gain of HK$665m oncompletion of our acquisition of AXA Singapore.
Net insurance claims and benefits paid and movement inliabilities to policyholders decreased by HK$6,234m, or 8%,
primarily due to a decline in returns on financial assets supporting
contracts where the policyholder is subject to part or all of theinvestment risk, mainly in Hong Kong. This decrease was partially
offset by higher sales volumes in Hong Kong.
Change in expected credit losses and other credit
impairment charges increased by HK$9,826m, or 150%, notably
in Commercial Banking ('CMB') and to a lesser extent in Global
Banking ('GB'), mainly reflecting increases in allowances relating
to exposures to the mainland China commercial real estate ('CRE')
sector.
Total operating expenses increased by HK$5,632m, or 5%.
Excluding the favourable foreign exchange impact, operating
expenses increased by HK$7,459m, or 7%, reflecting an increase
in investment in technology, including our digital capabilities tosupport business growth. Employee compensation and benefits
also increased, mainly from higher performance-related pay andwage inflation.
Share of profit in associates and joint ventures decreased by
HK$528m, or 3%. Excluding the unfavourable foreign exchange
impact, the share of profit in associates and joint ventures
increased by HK$32m, mainly from Bank of Communications Co.,
Limited.

Net income from financial instruments held for trading or
managed on a fair value basis increased by HK$13,315m, or 47%,
most notably in Hong Kong from higher gains on derivatives
principally benefitting from rising interest rates, partly offset bylower equity trading income attributable to unfavourable market
conditions. Mainland China also increased due to the favourable
movement on foreign currency position held locally.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

17

Financial Review

Net interest income(Unaudited)
2022

2021

HK$m

HK$m

Net interest income
Average interest-earning assets

126,852
7,589,538

98,113
7,173,973%%

Net interest spread
Contribution from net free funds
Net interest margin

1.55
0.12
1.67

1.32
0.05
1.37

Net interest income (‘NII’) increased by HK$28,739m, or 29%.
Excluding the unfavourable foreign exchange impact, net interest
income increased by HK$30,715m, or 32%, primarily driven by
Hong Kong with wider customer deposit spreads and higher
reinvestment yields as market interest rates increased, coupledwith balance sheet growth. Net interest income in Singapore also
increased, reflecting the favourable impact of the higher market
interest rates.

Net interest margin ('NIM') increased by 30 basis points ('bps'),with increases noted across the region, including Hong Kong,
Singapore and Malaysia with higher market interest rates
compared to the prior year.
As a result, the NIM at the Bank's operations in Hong Kong
increased by 34 bps to 1.09%, and at Hang Seng Bank, the NIM
increased by 30 bps to 1.89%.

Average interest-earning assets increased by HK$416bn, or
6%, driven by Hong Kong, from growth in financial investments
and reverse repurchase agreements.

Insurance manufacturing(Unaudited)

The following table shows the results of our insurance manufacturing operations by income statement line item, and separately the
insurance distribution income earned by the group's bank channels.
Results of insurance manufacturing operations and insurance distribution income earned by the group's bank channels
2022

2021

HK$m

HK$m

17,701(4,272)(14,599)
80,839(256)887
80,300(70,170)
10,130(36)
10,094(5,798)
4,296
139
4,435
15,4204,437

16,527(3,617)
18,036
62,135(1,294)719
92,506(76,361)
16,145(216)
15,929(3,464)
12,465137
12,602
19,1364,135

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

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

Insurance manufacturing
Profit before tax from insurance manufacturing operations
decreased by HK$8,167m, or 65%, driven by unfavourable equity
markets in the year compared to favourable markets in 2021,
partially offset by higher new business volumes.
NII increased by 7% from growth in invested funds, reflecting net
new business and renewal premium inflows on life insurance
contracts.
Net income from financial instruments measured at fair value
decreased, mainly from losses on the equity portfolio held to
support insurance and investment contracts in Hong Kong, due tothe unfavourable equity markets.
Net insurance premium income increased from higher sales
volumes mainly in Hong Kong which included a higher proportionof single premium business in its product mix, and in Singapore
following the acquisition of AXA Singapore during 2022.
The favourable movement of HK$1,038m in PVIF compared to2021 reflected increases in Hong Kong from the value of new
18

business written and the one-off gain from a pricing update forpolicyholder funds held on deposit to reflect the cost of provisionof these services. This was partly offset by the adverse assumptionchanges and experience variances in Hong Kong and Singapore,
primarily due to interest rates movements.
To the extent losses are attributable to policyholders, there is anoffsetting movement reported under ‘Net insurance claims andbenefits paid and movement in liabilities to policyholders'.
Net insurance claims and benefits paid and movement in liabilities
to policyholders decreased by HK$6,191m, or 8%, primarily due toa decline in returns on financial assets supporting contracts where
the policyholder is subject to part or all of the investment risk,
mainly in Hong Kong. This was partially offset by higher new
business volumes in Hong Kong.
Annualised new business premiums ('ANP') decreased by
HK$3,716m, or 19%, mainly in Hong Kong due to a change inproduct mix towards single premium new business, partially offset
by higher ANP from business growth in mainland China and theinclusion of the results of AXA Singapore.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Balance sheet commentary compared with
31 December 2021
(Unaudited)

The consolidated balance sheet as at 31 December 2022 is set out
in the Consolidated Financial Statements.
Gross loans and advances to customers decreased by
HK$128bn, or 3%. Excluding the unfavourable foreign exchangetranslation effects of HK$90bn, gross loans and advances tocustomers decreased by HK$38bn. This was driven by a decreasein corporate and commercial lending of HK$88bn, primarily inHong Kong, partly offset by increases in Australia, Japan andmainland China. The residential mortgage book increased by
HK$35bn, mainly in Hong Kong and Australia, coupled withincreases in lending to non-bank financial institutions of HK$29bn
mainly in Korea, Hong Kong and India.
Total gross impaired loans and advances as a percentage of grossloans and advances stood at 1.69% at the end of 2022 (2021:
1.11%). The change in expected credit losses as a percentage of
average gross customer advances was 0.40% for 2022 (2021:
0.18%), reflecting the impact of the deterioration in quality in themainland China CRE portfolio.

Interests in associates and joint ventures
At 31 December 2022, an impairment review on the group’s
investment in Bank of Communications Co., Ltd (‘BoCom’) was
carried out and it was concluded that the investment was not
impaired based on our value-in-use calculation (see Note 14 on theConsolidated Financial Statements for further details). As set out inthat note, in future periods, the value in use may increase or
decrease depending on the effect of changes to model inputs. It is
expected that the carrying amount will continue to increase due toretained profits earned by BoCom. Impairment, if determined,
would be recognised in the income statement. The impact ongroup’s common equity tier 1 ratio is expected to be minimal in
the event of an impairment, as the adverse impact on common
equity tier 1 capital from the impairment would be partly offset by
the favourable impact from a lower carrying amount. The groupwould continue to recognise its share of BoCom’s profit or loss,
but the carrying amount would be reduced to equal the value in
use, with a corresponding reduction in the income statement. An
impairment review would continue to be performed at eachsubsequent reporting period, with the carrying amount andincome adjusted accordingly.
Customer deposits decreased by HK$63bn, or 1%, toHK$6,114bn. Excluding the unfavourable foreign exchangetranslation effects of HK$110bn, customer deposits increased by
HK$47bn. The advances-to-deposits ratio was 60.6% at the end of
the year (2021: 62.2%).
Shareholders’ equity grew by HK$19bn to HK$875bn at
31 December 2022, mainly reflecting the current year’s profit, netof dividend payments, coupled with the issuance of new ordinary
shares and additional tier 1 capital instruments. These were partly
offset by a decrease in foreign exchange reserves due todepreciation of various foreign currencies against the Hong Kong
dollar.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

19

Risk

• an alignment with our strategy, purpose, values and customer
needs;

Risk• trends highlighted in other group risk reports;

Our approach to risk
(Unaudited)

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

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

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

Business practice• We have no appetite for deliberately or knowingly causing
detriment to consumers, or incurring a breach of the letter or
spirit of regulatory requirements.
• We have no appetite for inappropriate market conduct by any
member of staff or by any group business.
• We are committed to managing the climate risks that have an
impact on our financial position, and delivering on our net zeroambition.
• 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 inadequate or failed internal processes, people andsystems, or events that impact our customers or can lead to
sub-optimal returns to shareholders, censure, or reputational
damage.

Enterprise-wide application
Our risk appetite encapsulates the consideration of financial andnon-financial risks. We define financial risk as the risk of afinancial loss as a result of business activities. We actively takethese types of risks to maximise shareholder value and profits.
Non-financial risk is the risk to achieving our strategy or objectives
as the result of failed internal processes, people and systems orfrom external events.
Our risk appetite is expressed in both quantitative and qualitative
terms and applied at the global business level and to materialbanking entities. It continues to evolve and expand its scope aspart of our regular review process.
The Board reviews and approves the group’s risk appetite regularly
to make sure it remains fit for purpose. The group’s risk appetite isconsidered, developed and enhanced through:20• communication with risk stewards on the developing risklandscape;• strength of our capital, liquidity and balance sheet;• compliance with applicable laws and regulations;• 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.
We formally articulate our risk appetite through our risk appetitestatement (‘RAS’), which is approved by the Board on therecommendation of the group Risk Committee ('RC'). Setting out
our risk appetite ensures that we agree a suitable level of risk forour strategy. In this way, risk appetite informs our financial
planning process and helps senior management to allocate capitalto business activities, services and products.
The RAS is applied to the development of business line strategies,
strategic and business planning, and remuneration. At a grouplevel, 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
to have their own RAS, which is monitored to help ensure it
remains aligned with the group’s RAS. Each RAS and businessactivity is guided and underpinned by qualitative principles and/or
quantitative metrics.

Risk management
We recognise that the primary role of risk management is toprotect our customers, business, colleagues, shareholders and thecommunities that we serve, while ensuring we are able to support
our strategy and provide sustainable growth. This is supported
through our three lines of defence model described on page 22.
The implementation of our business strategy remains a key focus.
As we implement change initiatives, we actively manage theexecution 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 approachacross the organisation and across all risk types, underpinned by
the group's culture and values. This is outlined in our risk
management framework, including the key principles andpractices that we employ in managing material risks, bothfinancial and non-financial.
The framework fosters continual monitoring, promotes risk
awareness and encourages a sound operational and strategic
decision making and escalation process. It also supports aconsistent approach to identifying, assessing, managing andreporting the risks we accept and incur in our activities, with clear
accountabilities. We actively review and enhance our risk
management framework and our approach to managing risk,
through our activities with regard to people 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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

Non-executive risk governance

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

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

Three lines of defence model

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

Risk governance

Roles and
responsibilities

Risk appetite
Enterprise-wide risk management tools
Processes and tools

Active risk management:
identification/assessment,
monitoring, management and reporting

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

Policies and proceduresInternal controls

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

Control activities

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

Systems and infrastructure

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

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

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

Governance structure for the management of risk
Authority

MembershipResponsibilities include:

Risk Management
Meeting of the group

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

Global business/Siterisk management
meetings

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

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

21

Risk

Our responsibilities

Stress testing and recovery planning

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

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

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

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

22

Our stress testing programme assesses our capital and liquidity
strength through a rigorous examination of our resilience toexternal shocks. As well as undertaking regulatory-driven stresstests, we conduct our own internal stress tests in order tounderstand the nature and level of all material risks, quantify the
impact of such risks and develop plausible business-as-usual
mitigating actions.

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

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Key developments in 2022

Our current top and emerging risks are as follows:

We actively manage the risks related to macroeconomic
uncertainties including inflation, fiscal and monetary policy, theRussia-Ukraine war, broader geopolitical uncertainties, thecontinued risks resulting from the Covid-19 pandemic, as well asother key risks described in this section.

Externally driven

In addition, we enhanced our risk management in the following
areas:• We continued to improve our risk governance decision making,particularly with regard to the governance of treasury risk toensure senior executives have appropriate oversight andvisibility of macroeconomic trends around inflation and interest
rates.
• We adapted our interest rate risk management strategy asmarket and official interest rates increased in reaction to
inflationary pressures.
• We began a process of enhancement of our country credit risk
management framework in order to strengthen our control ofrisk tolerance and appetite at a country level.
• We continued to develop our approach to emerging risk
identification and management, including the use of forwardlooking indicators to support our analysis.
• We enhanced our enterprise risk reporting processes to place agreater focus on our emerging risks, including by capturing themateriality, oversight and individual monitoring of these risks.
• We further strengthened our third-party risk policy andprocesses to improve control and oversight of our material third
parties to maintain our operational resilience, and to meet newand evolving regulatory requirements.
• We made progress with our comprehensive regulatory
reporting programme to strengthen our global processes,
improve consistency, and enhance controls.
• We have progressed with the simplification and reshaping of
initiatives to ensure the we have a sustainable cost base, aresilient control environment and the skills and capabilities tosupport the global businesses.
• We continued to embed, the governance and oversight aroundmodel adjustments and related processes for HKFRS 9 models
and Sarbanes-Oxley controls.
• We commenced a programme to enhance our framework for
managing the risks associated with machine learning andartificial intelligence (‘AI’).
• Through our dedicated climate risk programme, we continued
to embed climate considerations throughout the organisation,
including updating the scope of our programme to cover all risk
types, expanding the scope of climate related training anddeveloping new climate risk metrics to monitor and manage
exposures, and the development of our internal climate
scenario exercise.
• We continued to improve the effectiveness of our financial
crime controls, deploying advanced analytics capabilities into
new markets. We are refreshing our financial crime policies,
ensuring they remain up-to-date and address changing andemerging risks. We continue to monitor regulatory changes.

Top and emerging risks(Unaudited)

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

Geopolitical and macroeconomic risks(Unaudited)

The Russia-Ukraine war has had far-reaching geopolitical andeconomic implications. The group is monitoring the impacts of the
war and continues to respond to the extensive sanctions and trade
restrictions that have been imposed, noting the challenges thatarise in implementing the complex, novel and ambiguous aspectsof certain of these sanctions. Sanctions were targeted against
numerous Russian government officials and politically exposed
individuals. Russia has implemented certain countermeasures in
response. Further sanctions and counter sanctions in connection
with Russia may adversely affect the group, its customers and themarkets in which the group operates by creating regulatory,
reputational and market risks.
Global commodity markets have been significantly impacted by
the Russia-Ukraine war and localised Covid-19 outbreaks, leading
to continued supply chain disruptions. This has resulted in productshortages appearing across several regions, and increased prices
for both energy and non-energy commodities, such as food. We
do not expect these to ease significantly in the near term. In turn,this has had a significant impact on global inflation.
Rising global inflation has prompted central banks to tightenmonetary policy. The combined pressure of inflation and interest
rate rises may lead to pressures on customers and their ability to
repay debt. During 2022, the US Federal Reserve Board (‘FRB’)delivered a cumulative 425 basis points (‘bps’) increase in theFederal Funds rate. The Hong Kong dollar ('HKD') exchange rate
peg against the US dollar means that HKD interest rates are
expected to rise in line with respective US rates, yet HKD
interbank rates lagged increases in US dollar interest rates during2022 as the supply of local currency remained strong. The spread
between the two is expected to narrow as the Hong Kong
Aggregate Balance, a gauge of local interbank liquidity, fell below
the HKD 100 billion mark. Interest-rate futures suggest an
expectation that the FRB will ease monetary policy slightly beyond
the six-month horizon. However, should central banks remain on a
trajectory of continued monetary tightening, a realignment ofmarket expectations could cause turbulence in financial asset
prices.
We continue to monitor our risk profile closely in the context ofuncertainty over global macroeconomic policies. Higher inflationand interest rate expectations around the world, and the resulting
economic uncertainty, have had an impact on ECL. Our Central
scenario used to calculate credit impairment assumes low growth
and a higher inflation environment across many of our key
markets. However, there is a high degree of risk and uncertainty
associated with economic forecasts in the current environment.
The degree of uncertainty varies by market, depending on
exposure to commodity price increases, supply chain constraints,
the monetary policy response to inflation and the public healthpolicy response to the Covid-19 pandemic. As a result, our Central
scenario for impairment has not been assigned an equal likelihoodof 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 37.
Global tensions over trade, technology and ideology are
manifesting themselves in divergent regulatory standards andcompliance regimes, presenting long-term strategic challenges for
multinational businesses.
The US-China relationship remains complex, with divisions over anumber of critical issues. The US, the UK, the EU, Canada andother countries have imposed various sanctions and trade
restrictions on Chinese persons and companies. These include thefreezing of assets of government officials, and the implementationof investment and import/export restrictions targeting certain
Chinese companies.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

23

Risk

There is a continued risk of additional sanctions being imposed by
the US and other governments in relation to human rights andother issues with China, and this could create a more complex
operating environment for the group and its customers.
China has in turn announced a number of its own sanctions andtrade restrictions that target, or provide authority to target, foreign
individuals and companies. China has also promulgated laws thatprovide a legal framework for imposing further sanctions andexport restrictions.
These and any future measures and countermeasures that may betaken by the US, China and other countries may affect the group,
its customers, and the markets in which we operate.
As the geopolitical landscape evolves, compliance by multinational
corporations with their legal or regulatory obligations in one
jurisdiction may be seen as supporting the law or policy objectivesof that jurisdiction over another, creating additional compliance,
reputational and political risks for the group. We maintain dialogue
with our regulators in various jurisdictions on the impact of legal
and regulatory obligations on our business and customers.
Expanding data privacy, national security and cybersecurity laws
in a number of markets could pose potential challenges to intragroup data sharing. These developments could increase financial
institutions’ compliance burdens in respect of cross-bordertransfers of personal information, and degrade our enterprise-wide
financial crime risk management capabilities.

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

Technology and cyber security risk
(Unaudited)

We operate an extensive and complex technology landscape,which must remain resilient in order to support customers, thegroup and markets in the region. Risks arise where technology is
not understood, maintained, or developed appropriately. Together
with other organisations, we continue to operate in an increasingly
hostile cyber threat environment. These threats include potential
unauthorised access to customer accounts, attacks on oursystems or those of our third-party suppliers and require ongoinginvestment in business and technical controls to defend againstthem.

Mitigating actions• We continue to invest in transforming how software solutions
are developed, delivered and maintained. We invest both toimprove system resilience and test service continuity. We
continue to ensure security is built into our softwaredevelopment life cycle and improve our testing processes andtools.
• We continue to upgrade our IT systems, simplify our service
provision and replace older IT infrastructure and publications.
• We continually evaluate threat levels for the most prevalentcyber-attack types and their potential outcomes. To further
24

protect the group and our customers and help ensure the safe
expansion of our global businesses, we continue to strengthen
our controls to reduce the likelihood and impact of advanced
malware, data leakage, exposure through third parties andsecurity vulnerabilities.
• We continue to enhance our cybersecurity capabilities,
including Cloud security, identity and access management,
metrics and data analytics, and third-party security reviews. An
important part of our defence strategy is ensuring ourcolleagues remain aware of cybersecurity issues and know how
to report incidents.
• We report and review cyber risk and control effectiveness at
executive and non-executive Board level. We also report acrossour global businesses, functions and markets to help ensure
appropriate visibility and governance of the risk and mitigating
actions.
• The Group participates globally in industry bodies and working
groups to collaborate on tactics employed by cyber-crimegroups and to collaborate in defending, detecting andpreventing cyber-attacks on financial organisations.

Financial crime risk
(Unaudited)

Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime which continues to evolve. Challenges include managing
conflicting laws and approaches to legal and regulatory regimes,
and implementing the unprecedented volume and diverse set of
sanctions notably as a result of the Russia-Ukraine war.
Amid rising inflation and increasing cost of living pressures, weface increasing regulatory expectations with respect to increases
in internal and external fraud and the abuse of vulnerable
customers.
The digitisation of financial services continues to have an impact
on the payments ecosystem, including new market entrants andpayment mechanisms, not all of which are subject to the samelevel of regulatory scrutiny or regulations as financial institutions.
This presents ongoing challenges in terms of maintaining required
levels of payment transparency, notably where financial
institutions serve as intermediaries. Developments around digitalassets and currencies have continued at pace, with an increasing
regulatory and enforcement focus.
Expectations with respect to the intersection of ESG issues andfinancial crime as our organisation, customers and suppliers
transition to net zero, continue to increase, focused on potential‘greenwashing’, human rights issues and environmental crimes. In
addition, climate change itself could heighten risks linked tovulnerable migrant populations in countries where financial crimeis already more prevalent.
We also continue to face increasing challenges presented bynational data privacy requirements, which may affect our ability to
manage financial crime risks holistically and effectively.

Mitigating actions• We continue to manage sanctions and trade restrictions
through the use of, and enhancements to, our existing controls.
• We are strengthening our fraud controls, and investing in next
generation capabilities to fight financial crime through theapplication of advanced analytics and artificial intelligence.
• 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 ensure
our financial crime controls remain appropriate.
• We are assessing our existing policies and control frameworkin an effort to ensure that developments in the ESG space areconsidered and the risks mitigated.
• We work with jurisdictions and relevant international bodies toaddress data privacy challenges through international
standards, guidance, and legislation.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Ibor transition(Unaudited)

Interbank offered rates (‘Ibors’) have previously been used
extensively to set interest rates on different types of financialtransactions and for valuation purposes, risk measurement andperformance benchmarking.
The publication of sterling, Swiss franc, euro and Japanese yen(JPY) London interbank offered rate ('Libor') interest ratebenchmarks, as well as Euro Overnight Index Average (‘Eonia’),ceased from the end of 2021. Our Ibor transition programme,
which is tasked with the development of near risk-free
replacement rate (‘RFR’) products and the transition of legacy Iborproducts, has continued to support the transition of a limited
number of remaining contracts in sterling and JPY Libor, whichwere published using a ‘synthetic’ interest rate methodology
during 2022. Following the publication of ‘synthetic’ JPY Liborafter 31 December 2022, and the announcements by the Financial
Conduct Authority ('FCA') in September and November 2022 that‘synthetic’ sterling Libor rates will cease to be published on
31 March 2023 or 31 March 2024, depending on setting, we haveor are prepared to transition or remediate the remaining few
contracts outstanding as at 31 December 2022 in advance of
these dates.
For the cessation of the publication of US dollar Libor and otherregional rates demising at dates ('demising regional rates') from30 June 2023, we have implemented the majority of required
processes, technology and RFR product capabilities in preparation
for upcoming market events, and continue to transition
outstanding legacy contracts through the first half of 2023. We
have completed the transition of the majority of our uncommitted
lending facilities and continue to make steady progress with thetransition of the outstanding legacy committed lending facilities.
Transition of our derivatives portfolio is progressing well with mostclients reliant on industry mechanisms to transition to RFRs. For
the limited number of bilateral derivatives trades where analternative transition path is required, client engagement is
continuing. For certain products and contracts, including bonds
and syndicated loans, we remain reliant on the continued supportof agents and third parties, but we continue to progress thosecontracts requiring transition. We will continue to monitor
contracts that may be potentially more challenging to transitionand need to rely upon legislative solutions. Additionally, following
the FCA’s consultation in November 2022 proposing that US dollar
Libor is to be published using a 'synthetic' methodology for adefined period, we will continue to work with our clients to
support them through the transition of their products if transition
is not completed by 30 June 2023.
For the group’s own debt securities issuances, we continue tohave non-capital loss absorbing capacity ('LAC') instruments in US
dollar and JPY where the terms provide for an Ibor benchmark to
be used to reset the coupon rate if the group chooses not toredeem them on their call dates, the earliest of which is July 2023.
We remain mindful of the various factors that impact on the Iborremediation strategy for our non-capital LAC instruments,
including but not limited to timescales for cessation of relevant
Ibor rates, constraints relating to the governing law of outstanding
instruments, the potential relevance of legislative solutions andindustry best practice guidance.
For US dollar Libor, demising regional rates and other demising
Ibors, we continue to be exposed to, and actively monitor, risks
including:• regulatory compliance and conduct risks, as the transition of
legacy contracts to RFRs or alternative rates, or sales of
products referencing RFRs, may not deliver fair client
outcomes;• resilience and operational risks, as changes to manual andautomated processes, made in support of new RFR
methodologies, and the transition of large volumes of Ibor
contracts may lead to operational issues;• legal risks, as issues arising from the use of legislative solutions
and from legacy contracts that the group is unable to transition
may result in unintended or unfavourable outcomes for clientsand market participants, which could potentially increase therisk of disputes;• model risk, as there is a risk that changes to our models to
replace Ibor-related data, adversely affect the accuracy ofmodel outputs; and• market risk, because as a result of differences in Libor andRFRs interest rates, we are exposed to basis risk resulting fromthe asymmetric adoption of rates across assets, liabilities andproducts.
We will monitor these risks through the remainder of the transitionof legacy contracts, with a focus on fair client outcomes. The levelof risk is diminishing in line with our process implementation andcontinued transition of contracts. Throughout 2023, we continue
to be committed to engaging with our clients and investors tocomplete an orderly transition of contracts that reference theremaining demising Ibors.

Mitigating actions• The Group's global Ibor transition programme, which isoverseen by the Group Chief Risk and Compliance Officer, willcontinue to deliver IT and operational processes to meet its
objectives.
• We carry out extensive training, communication and client
engagement to facilitate appropriate selection of new rates andproducts.
• We have dedicated teams in place to support the transition.
• We have actively transitioned legacy contracts and ceased newissuance of Libor and demising regional rate based contracts,
other than those allowed under regulatory exemptions, with
implementation of associated monitoring and controls.
• We assess, monitor and dynamically manage risks arising from
Ibor transition, and implement specific mitigating controls
when required.
• We continue to actively engage with regulatory and industry
bodies to mitigate risks relating to 'tough legacy' contracts.

Financial instruments impacted by Ibor reform(Audited)

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

25

Risk

Financial instruments yet to transition to alternative benchmarks, by main
benchmark(Audited)

At 31 Dec 2022
Non-derivative financial assets2
Non-derivative financial liabilities
Derivative notional contract amountAt 31 Dec 2021
Non-derivative financial assets2
Non-derivative financial liabilities
Derivative notional contract amount

Others1

USD Libor

JPY Libor

Sibor

GBP Libor

HK$m

HK$m

HK$m

HK$m

HK$m

172,370
120,096
8,506,925

—
9,192
—

30,338
—
—

938
—
—

4,474
264
435,263

206,508
147,198
8,547,665

2,846
10,930798,92156,291——

22,197—
88,2184,779—
715,439

1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (Euro Libor, Swiss franc
Libor, Mumbai Interbank Forward Offer Rate ('MIFOR'), SGD Swap Offer Rate ('SOR') and Thai baht Interest Rate Fixing ('THBFIX')).
Announcements were made by regulators during 2022 on the cessation of the Canadian dollar offered rate (‘CDOR’) and Mexican Interbank
equilibrium interest rate (‘TIIE’), which will eventually transition to the Canadian overnight repo rate average (‘CORRA’) and a new Mexican
overnight fall-back rate respectively. Therefore, CDOR and TIIE are included in the current period.
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 thegroup'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.

Environmental, social and governance risk
(Unaudited)

We are subject to financial and non-financial risks associated withenvironmental, social and governance ('ESG') related matters. Ourcurrent areas of focus are climate risk, nature-related risks andhuman rights risks. These can impact us both directly andindirectly through our business activities and relationships. For
details on how we govern ESG, see page 9.
Focus on climate-related risk continued to increase during 2022,
owing to the pace and volume of policy and regulatory changes
globally, particularly on climate risk management, stress testingand scenario analysis and disclosures. If we fail to meet evolving
regulatory expectations or requirements on climate risk
management, this could have regulatory compliance andreputational impacts.
We could face direct impact, owing to the increase in frequency
and severity of weather events and chronic shifts in weather
patterns, which could affect our ability to conduct our day-to-day
operations.
Our customers may find that their business models fail to align toa net zero economy or face disruption to their operations or
deterioration to their assets as a result of extreme weather.
We face increased reputational, legal and regulatory risk as we
make progress towards our net zero ambition, with stakeholders
likely to place greater focus on our actions such as thedevelopment of climate-related policies, our disclosures andfinancing and investment decisions relating to our ambition.
We will face additional risks if we are perceived to mislead
stakeholders in respect of our climate strategy, the climate impactof a product or service, or the commitments of our customers.
Climate risk may also impact model risk, as the uncertain impactsof climate change and data and methodology limitations present
challenges to creating reliable and accurate model outputs.
We also face 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 or owing
to developments in climate science. The use of inaccurate/incomplete data and models could result in sub optimal decision
making. 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 to reevaluate our progress towards our climate-related
targets in future and this could result in reputational, legal andregulatory risks.
26

There is increasing evidence that a number of nature-related risks
beyond climate change, which include risks that can be
represented more broadly by impact and dependence on nature,
can and will have significant economic impact. These risks arise
when the provision of natural services, such as water availability,
air quality, and soil quality, is compromised by overpopulation,
urban development, natural habitat and ecosystem loss,
ecosystem degradation arising from economic activity and otherenvironmental stresses beyond climate change. They can show
themselves in various ways, including through macroeconomic,
market, credit, reputational, legal and regulatory risks, for both thegroup and our customers. We continue to engage with investors,
regulators and customers on nature-related risks to evolve ourapproach and understand best practice risk mitigation.
Regulation and disclosure requirements in relation to humanrights, and to modern slavery in particular, are increasing.
Businesses are expected to be transparent about their efforts to
identify and respond to the risk of negative human rights impacts
arising from their business activities and relationships.

Mitigating actions• We continue to deepen our understanding of the drivers ofclimate risk. A dedicated Climate Risk Oversight Forum is
responsible for shaping and overseeing our approach andproviding support in managing climate risk. For further details
on the group’s ESG governance structure, see page 9.
• The Group climate risk programme continues to support thedevelopment of our climate risk management capabilities
across four key pillars – governance and risk appetite, risk
management, stress testing and scenario analysis, anddisclosures. We are also enhancing our approach togreenwashing risk management.
• In December, the Group published our updated energy policy,
covering the oil and gas, power and utilities and hydrogensectors, as well as expanded our thermal coal phase-out policy,
in which we committed to not provide new finance or advisory
services specifically for the conversion of existing coal-to-gasfired power plants, or new metallurgical coal mines (see page11).
• Climate stress tests and scenarios are being used to further
improve our understanding of our risk exposures for use in risk
management and business decision making.
• In 2022, building on an earlier review which had identified
modern slavery and discrimination as priority human rights
issues, the Group conducted the first comprehensive review torefresh our salient human rights issues, which are the human

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

rights at risk of the most severe negative impact through ourbusiness activities and relationships. The review identified fivesalient human rights issues, including the right to decent workand the right to equality and freedom from discrimination,
amongst others. The Group incorporated additional humanrights elements into our existing procurement processes andsupplier code of conduct, and will continue to develop our inhouse capability on human rights. For further details refer to
ESG review on page 9.
• In 2021, the Group joined several industry working groups
dedicated to helping assess and manage nature-related risks,such as the Taskforce on Nature-Related Financial Disclosure(‘TNFD’). In 2022, the Group's asset management business also
published its biodiversity policy to publicly explain how theGroup's analysts address nature-related issues.
• We continue to engage with our customers and regulators
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 drive best practice for climate risk management.

• We monitor people risks that could arise due to organisational
restructuring, helping to ensure we manage redundancies
sensitively and support impacted employees. We encourage
our people leaders to focus on talent retention at all levels, with
an empathetic mindset and approach, while ensuring the whole
proposition of working at HSBC is well understood.
• Our Future Skills curriculum helps provide critical skills that will
enable employees and the group to be successful in the future.
• We continue to develop succession plans for key management
roles, with actions agreed and reviewed on a regular basis by
the group Executive Committee.

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

For further details on ESG risk management, see ‘Financial crime risk
environment‘ on page 24 .

We use third parties to provide a range of goods and services.
Risks arising from the use of third party providers and their supply
chain may be harder to identify. It is critical that we ensure wehave appropriate risk management policies, processes andpractices over the selection, governance and oversight of third
parties and their supply chain, particularly for key activities that
could affect our operational resilience. Any deficiency in the
management of risks associated with our third parties could affectour ability to support our customers and meet regulatory
expectations.

Our ESG review can be found on page 9.

Mitigating actions

Digitalisation and technological advances• We continue to monitor the effectiveness of the controls
operated by our third-party through obtaining third-party
control reports. We have made further enhancements to ourframework to ensure risks associated with these arrangements
are understood and managed effectively by our global
businesses, global functions and regions.

For further details on our approach to climate risk management, see ‘Climate
Risk’ on page 61.

(Unaudited)

Developments in technology and changes to regulations areenabling new entrants to the industry. This challenges the group
to continue innovating and taking advantage of new digital
capabilities so that we improve how we serve our customers, drive
efficiency and adapt our products to attract and retain customers.
As a result, we may need to increase our investment in ourbusiness to adapt or develop products and services to respond to
our customer evolving needs. We also need to ensure that new
digital capabilities do not weaken our resilience.

• We continue to enhance the effective management of our intragroup arrangements as we have for external third-party
arrangements using the same control standards.
• We are implementing the changes required by the new
regulations as defined by our regulators.

Mitigating actions

Model risk

• We continue to monitor this emerging risk, as well as theadvances in technology, and changes in customer behaviours
to understand how these changes may impact our business.

(Unaudited)• We assess new technologies to develop appropriate controls
and maintain resilience.
• We closely monitor and assess financial crime and the impact
on payment transparency and architecture.

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

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 and regulations. Changed working
arrangements, and the residual impact of local Covid-19
restrictions and health concerns during the pandemic have also
affected employee mental health and well-being.

Mitigating actions• We promote a diverse and inclusive workforce and provide
active health and well-being support. We continue to build ourspeak-up culture through active campaigns.
• We monitor the size and shape of our workforce and levels of
employee attrition, and each business and function haveworkforce plans in place to ensure effective hiring andforecasting to meet business demands.

Model risk arises whenever business decision making includes
reliance on models. We use models in both financial and nonfinancial contexts, as well as in a range of business applications
such as customer selection, product pricing, financial crimetransaction 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 andinterest rates have impacted the reliability and accuracy of bothcredit and traded risk models, such as the value at risk model and
HKFRS 17 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 BaselIII programmes with a key focus on enhancing the quality of data
used as model inputs. A number of these models have been
submitted to the UK’s Prudential Regulation Authority (‘PRA’), theHong Kong Monetary Authority ('HKMA') and other key regulatorsfor feedback and approval is in progress. Some IMM and internal
model approach (‘IMA’) models have been approved for use, andfeedback has been received for some IRB models. Climate risk
modelling is a key focus for the group as HSBC’s commitment tosustainability has become a critical part of the group’s strategy.
Model risk remains a key area of focus as regulatory scrutiny inthis space remains strong with local regulatory exams taking placein many jurisdictions and further developments in policy expectedfrom many regulators, including the PRA and HKMA.

Mitigating actions• We have continued to embed the enhanced monitoring, review
and challenge of loss model performance through our Model

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

27

Risk

Risk Management sub-function as part of a broader quarterly
process to determine loss levels. The Model Risk Management
team aims to provide strong and effective review and challengeof any future redevelopment of these models.
• Model Risk Management works closely with businesses toensure that 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.
• 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 areadequate.
• The group engagement strategy was rolled out to enhance theunderstanding of model inventory, model limitations and risk
controls across the region. Targeted briefing sessions wereconducted to strengthen the awareness of models used and theengagement between the model user community and model
developing areas.
• Models using advanced machine learning techniques arevalidated and monitored to ensure that risks that are
determined by the algorithms have adequate oversight andreview. A framework to manage the range of risks that are
generated by these advanced techniques is being developedthat recognises the multi-disciplinary nature of these risks.

Data risk(Unaudited)

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, we need to meet external regulatory obligations andlaws 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’).

Mitigating actions• Through our global data management framework, we
proactively monitor the quality, availability and security of datathat supports our customers and internal processes. We work
towards resolving any identified data issues in a timely manner.
• We have made improvements to our data policies. We are
implementing an updated control framework (including trusted
sources, data flows, and data quality) to enhance the end-toend management of data risk.
• The Group has established a global data utility and continue tosimplify and unify data management activities across theGroup.
• We protect customer data through our data privacy framework,
which establishes practices, design principles and guidelinesthat enable us to demonstrate compliance with data privacy
laws and regulations.
• We continue to modernise our data and analytics infrastructure
through investments in Cloud technology, data visualisation,
machine learning and AI.
• We educate our employees on data risk and data management.
We delivered regular global mandatory training on how toprotect and manage data appropriately.

28

Change execution risk
(Unaudited)

We have continued investment in strategic change to support thedelivery of our strategic priorities and regulatory commitments.
This requires change to be executed safely and efficiently.

Mitigating actions• In 2022, we added change execution risk to our risk taxonomy
and control library, so that it could be defined, managed,
reported and overseen in the same way as our other material
risks.
• The Group Transformation Oversight Executive Committee
oversees the prioritisation, strategic alignment andmanagement of execution risk for all change portfolios andinitiatives.

Areas of special interest(Unaudited)

During 2022, a number of areas were identified and considered aspart of our top and emerging risks because of the effect they may
have on the group. While considered under the themes captured
under top and emerging risks, in this section we have placed aparticular focus on the Covid-19 pandemic and macroeconomic
outlook.

Risks related to Covid-19
Covid-19 remains a risk to our customers and organisation.
However, the policy for broad lockdowns and public healthrestrictions has been eased following successful vaccine rollouts,
and as societies have adapted. Countries continue to differ to adegree in their approach, although China has recently reversed
many restrictions on activity and mobility.
In most countries, high vaccination rates and acquired population
immunity have reduced the public health risks and the need for
restrictions. In mainland China and Hong Kong, however,adherence to more stringent public health restrictions had adverse
economic implications through much of 2022. Government
imposed lockdowns of major cities in mainland China andrestrictions on travel, adversely affected global tourism and supply
chains.
With the relaxation of restrictions in December 2022, the prospectof a sustained recovery has emerged, given the opportunity for thepersistent disruptions to activity to abate and for travel andtourism to resume. Such a recovery would have global
implications given the size of the Chinese economy. Recovery in
China raises the prospect of stronger global growth, although that
could also lead to renewed inflationary pressures as demand forcommodities and other goods rises. There are still short term risks,
however, as the recent surge in infections may dampen
confidence and activity, while there are also fears that the surge in
infections risks giving opportunity for the emergence of a newvariant of the virus.
We continue to monitor the situation closely, and given thecontinuing uncertainties related to the post-pandemic landscape,additional mitigating actions may be required.

Mainland China real estate sector
The policy measures issued in the latter part of 2022 haveincreased liquidity and the supply of credit to the mainland China
real estate sector. Recovery in the underlying domestic residential
demand and improved customer sentiment will be necessary tosupport the ongoing health of the sector. We continue to monitor
the situation closely, notably the risk of further idiosyncratic realestate defaults and associated impact on market, investor andconsumer sentiment.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Our material banking risks(Unaudited)

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

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

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

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

Arising from

Measurement, monitoring and management of risk

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

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

Treasury risk arises from changes tothe respective resources and risk
profiles driven by customer
behaviour, management decisions, orthe external environment.

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

Exposure to market risk is separated
into two portfolios: trading portfolios
and non-trading portfolios.
Market risk for non-trading portfolios
is discussed in the Treasury risk
section on page 53.
Market risk exposures arising from
our insurance operations are
discussed on page 67.

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 ofmarket 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 andthe various global businesses.

Climate risk is likely to materialisethrough:• physical risk, which arises from theincreased frequency and severity of
weather events;• transition risk, which arises fromthe process of moving to a lowcarbon economy; and• greenwashing risk, which arises
from the act of knowingly or
unknowingly misleading
stakeholders regarding our strategy
relating to climate, the climate
impact/benefit of a produce orservice, or the climate
commitments or performance ofour customers.

Climate risk is:• measured using a variety of risk appetite metrics and Key
Management Indicators, which assess the impact of climate risk
across the risk taxonomy;• monitored using stress testing; and• managed through adherence to risk appetite thresholds and via
specific policies.

Climate risk
Climate risk relates to the financial andnon-financial impacts that may arise as aresult of climate change and the move toa greener economy.

Resilience risk
Resilience risk is the risk of sustained and Resilience risk arises from failures orsignificant business disruption, execution, inadequacies in processes, people,
delivery or physical security or safetysystems or external events.
events, causing the inability to provide
critical services to our customers,
affiliates and counterparties.

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

29

Risk

Description of risks – banking operations (continued)(Audited)
Risks

Arising from

Measurement, monitoring and management of risk

Regulatory compliance risk arises
from the failure to observe therelevant laws, codes, rules andregulations and can manifest itself inpoor market or customer outcomes
and lead to fines, penalties andreputational damage to our business.

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

Financial crime risk arises from dayto-day banking operations involving
customers, third parties andemployees.

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

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

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 and corruption, tax
evasion, sanctions and export control
violations, money laundering, terrorist
financing and proliferation financing.

Model risk
Model risk is the risk of inappropriate orincorrect business decisions arising fromthe use of models that have been
inadequately designed, implemented orused, or that the model does not perform
in line with expectations and predictions.

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

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

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

Description of risks – insurance manufacturing operations
Risks

Arising from

Measurement, monitoring and management of risk

Exposure to financial 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 to policyholders
as they fall due.

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

The cost of claims and benefits can be
influenced by many factors, including
mortality and morbidity experience, as
well as lapse and surrender rates.

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

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

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

30

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Key risk management processes

Credit risk

HKFRS 9 'Financial Instruments' process

Overview(Unaudited)(Audited)

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

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

Key developments in 2022

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

(Unaudited)

Implementation

We made need based changes to the policies and practices for the
management of credit risk in 2022 to manage evolving situations.
We continued to apply the requirements of HKFRS 9 'Financial
Instruments' within the Credit Risk sub-function. For certain retail
portfolios we enhanced the significant increase in credit risk(‘SICR’) approach to capture relative movements in PD sinceorigination.

(Unaudited)

Credit risk management

For our retail portfolios, we adopted the European Banking
Authority ‘Guidelines on the application of definition of default’during 2022 and, for our wholesale portfolios, these guidelines
were adopted during 2021. Adoption of these guidelines did nothave a material impact on our portfolios and comparative
disclosures have not been restated.
We actively managed the risks related to macroeconomic
uncertainties, including inflation, fiscal and monetary policy, theRussia-Ukraine war, broader geopolitical uncertainties, and thecontinued risks resulting from the Covid-19 pandemic anddevelopments in the mainland China CRE sector.

Governance and structure(Unaudited)

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

Credit risk sub-function(Audited)

Credit approval authorities are delegated by the Board to thegroup Co-Chief Executives together with the authority to subdelegate them. The Credit Risk sub-function in Global Risk andCompliance 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 andobjective assessment of credit risk, and monitoring performanceand management of portfolios.
The principal objectives of our credit risk management are:• 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; andA centralised impairment engine performs the expected credit
losses ('ECL') calculation using data, which is subject to a numberof validation checks and enhancements, from a variety of client,finance and risk systems. Where possible, these checks andprocesses are performed in a globally consistent and centralisedmanner.
Governance(Unaudited)Management review forums are established in key sites and atgroup level in order to review and approve the impairment results.
Management review forums have representatives from Credit Risk
and Finance. 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 andPersonal Banking Chief Risk Officer, as well as the group's Chief
Financial Officer and Financial Controller.

Concentration of exposure(Audited)

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

Credit quality of financial instruments(Audited)

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

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

31

Risk

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.

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

Retail lending(Unaudited)

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

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

Quality classification1, 2StrongGood
SatisfactorySub-standard
Credit impaired

1
2

Other debt
securities
and bills

Wholesale lending
and derivatives

Retail lending

External credit
ratingExternal credit
ratingInternal credit
rating12-month Baselprobability ofdefault %BBB and above
BBB- to BB
BB- to B andunrated

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

0 – 0.169
0.170 – 0.740

Band 1 and 2Band 3BB+ to B andunratedCRR 4 to CRR 5

0.741 – 4.914

Band 4 and 5

1.501 – 20.000

B- to C
Default

B- to C
Default

CRR 6 to CRR 8
CRR 9 to CRR 10

4.915 – 99.999
100

Band 6
Band 720.001 – 99.999
100

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.

Forborne loans and forbearance(Audited)

Forbearance measures consist of concessions towards an obligor
that is experiencing or is about to experience difficulties inmeeting its financial commitments.
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 were due.

flows, observed over a minimum one-year period, and there are noother indicators of impairment. Any forborne loans not consideredcredit impaired will remain 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 beingclassed as credit impaired.

Forborne loans and recognition of expected credit losses(Audited)

Credit quality of forborne loans

Forborne loans expected credit loss assessments reflect the higher
rates of losses typically experienced with these types of loans
such that they are in stage 2 and stage 3. The higher rates are
more 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.

(Unaudited)

Impairment assessment

For wholesale lending, where payment-related forbearance
measures result in a diminished financial obligation, or if there areother indicators of impairment, the loan will be classified as credit
impaired if it is not already so classified. All facilities with acustomer, including loans that have not been modified, areconsidered credit impaired following the identification of apayment-related forborne loan. For retail lending, where a material
concession has been granted, the loan will be classified as credit
impaired. In isolation, non-payment forbearance measures may
not result in the loan being classified as credit impaired unlesscombined with other indicators of credit impairment. These areclassed as performing forborne loans for both wholesale and retaillending.

(Audited)

In 2022, we expanded our definition of forborne to capture nonpayment-related concessions, such as covenant waivers. For ourwholesale portfolio, we began identifying non-payment-related
concessions in 2021 when our internal policies were changed. For
our retail portfolios, we began identifying them during 2022.
For details of our policy on derecognised renegotiated loans, seeNote 1.2(i) on the financial statements.

Wholesale and retail lending forborne loans are classified as
credit-impaired until there is sufficient evidence to demonstrate asignificant reduction in the risk of non-payment of future cash
32

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

Write-off of loans and advances(Audited)

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

collateral, receipt of proceeds via settlement, or determination thatrecovery of the collateral will not be pursued.
Any secured assets maintained on the balance sheet beyond 60
months of consecutive delinquency-driven default require
additional monitoring and review to assess the prospect ofrecovery.

There are exceptions in a few countries and territories where local
regulation or legislation constrains earlier write-off, or where therealisation of collateral for secured real estate lending takes moretime. Write-off, either partially or in full, may be earlier when there
is no reasonable expectation of further recovery, for example, inthe event of a bankruptcy or equivalent legal proceedings.
Collection procedures may continue after write-off.

Summary of credit risk
The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in
HKFRS 9 are applied and the associated allowance for expected credit losses ('ECL').
Summary of financial instruments to which the impairment requirements in HKFRS 9 are applied(Audited)
2022
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

2021

Allowance for
ECL1

Gross
carrying/
nominalamountAllowance for
ECL1

HK$m

HK$m

HK$m

HK$m

3,745,113
519,068
2,768,171
232,748
28,557(39,964)
(44)
(681)
(8)
—

3,872,956
432,286
2,114,301
276,857
21,632(32,017)
(39)
(639)
—
—

341,354927,976
975,174
262,362
129,357
7,161,709
1,892,401
35,646
1,928,047
9,089,756

—
—
(465)
(208)
—
(40,689)
(864)
(63)
(927)
(41,616)

332,044803,775
502,997
176,996
99,604
6,519,147
1,826,335
34,302
1,860,637
8,379,784

—
—
(433)
(206)
—
(32,695)
(580)
(44)
(624)
(33,319)

Fair value

Allowance for
ECL

Fair value

Allowance for
ECL

HK$m

HK$m

HK$m

HK$m

1,239,527(344)

1,541,909(121)

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 81, which includes both financial and non-financial assets.
3 Represents the maximum amount at risk should the contracts be fully drawn upon and client defaults.
4 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL isrecognised in 'Change in expected credit losses and other credit impairment charges' in the consolidated income statement.

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

33

Risk

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

Allowance for ECL

ECL coverage %Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

%

Loans andadvances tocustomers

3,219,645

462,083

62,763622

3,745,113(2,755) (11,200) (25,818)(191) (39,964)

0.1

2.4

41.1

30.7

1.1

– personal– corporate2

1,448,675
1,492,792

68,001
370,199

8,708
53,141—620

1,525,384
1,916,752(1,080)(1,414)—(5,369)(189) (33,999)

0.1
0.1

4.2
2.2

16.8
45.8

—
30.5

0.4
1.8

– financial
institutions3

278,178

23,883914

2302,977

(261)

(325)

(8)

(2)

(596)

0.1

1.4

0.9

100.0

0.2

Loans andadvances tobanks

516,934

2,134

—

—

519,068

(39)

(5)

—

—

(44)

0.0

0.2

—

—

0.0

2,739,060

28,646464

12,768,171

(391)

(231)

(59)

—

(681)

0.0

0.8

12.7

—

0.0

Other
financialassetsLoan andother creditrelated
commitments– personal– corporate2(2,830) (1,459)(8,045) (24,351)

1,821,355

65,2885,758—

1,892,401

(427)

(397)

(40)

—

(864)

0.0

0.6

0.7

—

0.0

1,321,908

22,721

4,940—

1,349,569

(18)

(1)

—

—

(19)

0.0

0.0

—

—

0.0

383,717

39,191

818—

423,726

(394)

(389)

(40)

—

(823)

0.1

1.0

4.9

—

0.2

– financial
institutions3

115,730

3,376

—

—

119,106

(15)

(7)

—

—

(22)

0.0

0.2

—

—

0.0

Financialguarantee

30,738

4,840

68

—

35,646

(18)

(17)

(28)

—

(63)

0.1

0.4

41.2

—

0.2

– personal– corporate2

4,176
24,093

6
4,483

1
67

—
—

4,183
28,643

—
(18)

—
(17)

—
(28)

—
—

—
(63)

—
0.1

—
0.4

—
41.8

—
—

—
0.2

– financial
institutions3

2,469

351

—

—

2,820

—

—

—

—

—

—

—

—

—

—

8,327,732

562,991

69,053623

8,960,399(191) (41,616)

0.0

2.1

37.6

30.7

0.5

At 31 Dec
2022

(3,630) (11,850) (25,945)

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 transferredfrom stage 1 to stage 2. The following disclosure presents theageing of stage 2 financial assets by those less than 30 and
greater than 30 days past due and therefore presents thoseamounts classified as stage 2 due to ageing (30 DPD) and those
identified at an earlier stage (less than 30 DPD).

Stage 2 days past due analysis for loans and advances to customers(Audited)
Gross carrying amount

Allowance for ECL

ofwhich:

ofwhich:

ofwhich:

Stage 2

Up-todate

1 to 29
DPD1,230 and >DPD1,2

HK$m

HK$m

HK$m

HK$m

Loans and advances tocustomers at amortised cost

462,083

450,189– personal– corporate and commercial– non-bank financial institutions

68,001
370,199
23,88358,182368,249
23,758ECL coverage %ofwhich:

ofwhich:

ofwhich:

ofwhich:

ofwhich:

ofwhich:

Stage 2

Up-todate

1 to 29
DPD1,230 and >DPD1,2

Stage 2

Up-todate

1 to 29DPD

30 and
> DPD

HK$m

HK$m

HK$m

HK$m

%

%

%

%

8,816

3,078 (11,200) (10,645)

(198)

7,202
1,491
123

2,617
459
2

(172)
(26)
—

(357)

2.4

2.4

2.2

11.6

(350)
(7)
—

4.2
2.2
1.4

4.0
2.2
1.4

2.4
1.7
—

13.4
1.5
—

At 31 Dec 2022

(2,830)(8,045)(325)(2,308)(8,012)(325)

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.

34

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

Loans andadvances tocustomers

Allowance for ECL

ECL coverage %Stage 1

Stage 2

Stage 3

POCI

Total Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

%

3,349,434

480,632

41,332

1,558

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

0.1

2.0

47.6

21.4

0.8

– personal– corporate2

1,461,358

60,795

10,158—1,532,311(1,236)(2,965)(1,765)—(5,966)

0.1

4.9

17.4

—

0.4

1,626,514

398,273

31,0681,556

2,057,411(1,131)(6,384) (17,859)(332)(25,706)

0.1

1.6

57.5

21.3

1.2

– financial
institutions3

261,562

21,564106

2283,234

(236)

(77)

(30)

(2)

(345)

0.1

0.4

28.3

100.0

0.1

Loans andadvances tobanks

431,079

1,207

—

—

432,286

(36)

(3)

—

—

(39)

0.0

0.2

—

—

0.0

Other financial
assets289

12,114,301

(482)

(140)

(17)

—

(639)

0.0

0.7

5.9

—

0.0

2,092,847

21,164

Loan andother creditrelated
commitments

1,782,353

43,711271—

1,826,335

(260)

(295)

(25)

—

(580)

0.0

0.7

9.2

—

0.0

– personal– corporate2

1,245,694
417,349

6,976
30,978

154
117

—
—

1,252,824
448,444

—
(247)

—
(288)

—
(25)

—
—

—
(560)

—
0.1

—
0.9

—
21.4

—
—

—
0.1

– financial
institutions3

119,310

5,757

—

—

125,067

(13)

(7)

—

—

(20)

0.0

0.1

—

—

0.0

Financialguarantee

30,214

4,048

40

—

34,302

(14)

(14)

(16)

—

(44)

0.0

0.3

40.0

—

0.1

– personal– corporate2

4,000
22,995

—
4,011

1
39

—
—

4,001
27,045

(1)
(13)

—
(14)

(1)
(15)

—
—

(2)
(42)

0.0
0.1

—
0.3

100.0
38.5

—
—

0.0
0.2

– financial
institutions3

3,219

37

—

—

3,256

—

—

—

—

—

—

—

—

—

—

7,685,927

550,762

41,932

1,559

8,280,180(3,395)(9,878) (19,712)(334)(33,319)

0.0

1.8

47.0

21.4

0.4

At 31 Dec
2021

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.

Stage 2 days past due analysis for loans and advances to customers (continued)(Audited)
Gross carrying amount

Allowance for ECL

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

Stage 2

Up-todate

1 to 29
DPD1,230 and >DPD1,2

Stage 2

Up-todate

1 to 29
DPD1,230 and >DPD1,2

Stage 2

Up-todate

1 to 29DPD

30 and >
DPD

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

Loans and advances to customers at
amortised cost

480,632

471,298

6,788

2,546

(9,426)(8,862)

(226)

(338)

2.0

1.9

3.3

13.3

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

60,795398,273
21,56453,316396,420
21,562

5,048
1,738
2

2,431
115
—

(2,965)(6,384)(77)(2,460)(6,325)
(77)

(173)
(53)
—

(332)
(6)
—

4.9
1.6
0.4

4.6
1.6
0.4

3.4
3.0
—

13.7
5.2
—

At 31 Dec 2021

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 2022

35

Risk

Credit exposure
Maximum exposure to credit risk
(Audited)

This section provides information on the maximum exposure to credit risk associated with balance sheet items as well as loan and othercredit-related commitments.
‘Maximum exposure to credit risk’ table
The following table presents our maximum exposure to credit risk before taking account of any collateral held or other credit enhancements (unless suchenhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net
exposure to credit risk, and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, themaximum exposure to credit risk equals their carrying amount 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 isgenerally 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 the form of financial instruments that are notheld 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 thepolicyholder.
Collateral available to mitigate credit risk is disclosed in the
Collateral section on pages 49-52.

Maximum exposure to credit risk before collateral held or other credit enhancements(Audited)

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

2022

2021

HK$m

HK$m

232,739
28,557341,354435,358
502,771
39,495927,976
519,024
3,705,149
2,214,236
140,546
267,972
9,355,177
3,587,491
396,491
3,191,000
12,942,668

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

Total exposure to credit risk remained broadly unchanged in 2022 with loans and advances continuing to be the largest element.

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

36

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Measurement uncertainty and sensitivity analysis
of ECL estimates(Audited)

Amid a deterioration in the economic and geopoliticalenvironment, management judgements and estimates continued
to be subject to a high degree of uncertainty in relation toassessing economic scenarios for impairment allowances in 2022.
Inflation, economic contraction and high interest rates combinedwith an unstable geopolitical environment and the effects of global
supply chain disruption contributed to elevated levels of
uncertainty during the year.
At 31 December 2022, as a result of this uncertainty, additional
stage 1 and 2 allowances have been recognised; while
management judgement and estimates continue to reflect a
degree of caution both in the selection of economic scenarios andtheir weightings, and in the use of management judgemental
adjustments, described in more detail below.
The recognition and measurement of ECL involve the use ofsignificant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions
to credit risk models to estimate future credit losses, andprobability-weight the results to determine an unbiased ECL
estimate. Management judgemental adjustments are used toaddress late-breaking events, data and model limitations, model
deficiencies and expert credit judgements.

Methodology
Four global economic scenarios are used to capture the current
economic environment and to articulate management’s view of
the range of potential outcomes. Scenarios produced to calculate
ECL are aligned to HSBC’s top and emerging risks.
Three of the scenarios are drawn from consensus forecasts anddistributional estimates. The Central scenario is deemed the ‘most
likely’ scenario, and usually attracts the largest probability
weighting, while the outer scenarios represent the tails of the
distribution, which are less likely to occur. The Central scenario iscreated using the average of a panel of external forecasters.
Consensus Upside and Downside scenarios are created withreference to distributions for select markets that capture
forecasters’ views of the entire range of outcomes. In the later
years of the scenarios, projections revert to long-term consensus
trend expectations. In the consensus outer scenarios, reversion totrend expectations is done mechanically with reference tohistorically observed quarterly changes in the values ofmacroeconomic variables.
The fourth scenario, Downside 2, is designed to represent
management’s view of severe downside risks. It is a globallyconsistent narrative-driven scenario that explores more extreme
economic outcomes than those captured by the consensus
scenarios. In this scenario, variables do not, by design, revert tolong-term trend expectations. They may instead explore alternative
states of equilibrium, where economic activity moves permanently
away from past trends.
The consensus Downside and the consensus Upside scenarios areeach constructed to be consistent with a 10% probability. The
Downside 2 is constructed with a 5% probability. The Central
scenario is assigned the remaining 75%. This weighting scheme isdeemed appropriate for the unbiased estimation of ECL in mostcircumstances. However, management may depart from thisprobability-based scenario weighting approach when theeconomic outlook is determined to be particularly uncertain andrisks are elevated.
In light of ongoing risks, management deviated from thisprobability weighting in all markets in the fourth quarter of 2022.

Description of economic scenarios
The economic assumptions presented in this section have been
formed by HSBC with reference to external forecasts andestimates, specifically for the purpose of calculating ECL.
Global economic growth is slowing and economic forecasts forour main markets deteriorated in the fourth quarter. In North
America and Europe, high inflation and rising interest rates are
reducing real household incomes and raising business costs,
dampening consumption and investment and lowering growth
expectations. The effects of higher interest rate expectations andlower growth are also evident in asset price expectations andhouse prices forecasts, in particular, have been loweredsignificantly.
In Asia, economic forecasts have also been lowered, withexpectations for Hong Kong and mainland China trimmed
following weaker than expected third quarter GDP growth andmainland China’s adherence to stringent pandemic-related publichealth policy response. That policy saw an abrupt reversal during
December, but amid a very high degree of uncertainty, to both theupside and downside, forecasts are slow to adjust. The increased
uncertainty caused by the lifting of restrictions has been reflected
in management’s assessment of scenario probabilities.
Economic forecasts remain subject to a high degree of
uncertainty. In the fourth quarter, risks to the economic outlook
included the persistence of inflation and the consequences thathas for monetary policy. Rapid changes to public policy also
increased forecast uncertainty. In Asia, the removal of Chinese
public health restrictions is a key source of potential upside risk,
but with significant near term uncertainty relating to the surge of
infection. This policy change could also have global implications.
Geopolitical risks also remain significant and include the possibilityof a prolonged and escalating Russia-Ukraine war, and continued
differences between the US and other countries with China over arange of economic and strategic issues.
The scenarios used to calculate ECL in the Annual Report andAccounts 2022 are described below.

The consensus Central scenario
HSBC’s Central scenario reflects a low growth and higher inflation
environment across many of our key markets. The scenario
features an initial period of below-trend GDP growth in most of
our main markets as higher inflation and tighter monetary policy
causes a squeeze on business margins and households’ realdisposable income. Growth returns to its long term expected trend
in later years as central banks bring inflation back to target.
There are two exceptions: in Hong Kong and mainland China, GDP
growth is expected to be stronger in 2023 relative to 2022
following several quarters of negative GDP growth and thesuspension of Covid-19 restrictions.
Our Central scenario assumes that inflation peaked in most of our
key markets at the end of 2022 but remains high through 2023
before moderating as energy prices stabilise and supply chain
disruptions abate. Central banks are expected to keep raisinginterest rates until midway through 2023. Inflation is forecast to
revert to target in most markets, by early 2024.
Global GDP is expected to grow by 1.6% in 2023 in the Central
scenario and the average rate of global GDP growth is 2.5% overthe five-year forecast period. This is below the average growthrate over the five-year period prior to the onset of the pandemic.
The key features of our Central scenario are:
• Economic activity in European and North American markets
continues to weaken. Most major economies are forecast to
grow in 2023, but at very low rates. Hong Kong and mainland
China are expected to see a recovery in activity from 2022 as
Covid19 restrictions are lifted.
• In most markets, unemployment rises moderately from historiclows as economic activity slows. Labour markets remain fairly
tight across our key markets.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

37

Risk

• Inflation is expected to remain elevated across many of our key
markets driven by energy and food prices. Inflation issubsequently expected to converge back towards central banks
target rate over the next two years of the forecast.
• Policy interest rates in key markets will continue to rise in thenear term but at a slower pace. Interest rates will stay elevatedbut start to ease as inflation returns to target.
• The West Texas Intermediate oil price is forecast to average$72 per barrel over the projection period.
The Central scenario was first created with forecasts available inNovember, and reviewed continuously until late December.
Probability weights assigned to the Central scenario vary from
55% to 70% and reflect relative differences in risk and uncertainty
across markets.
The following table describes key macroeconomic variables andthe probabilities assigned in the consensus Central scenario.
Central scenario 2023-2027
Hong Kong Mainland China

GDP growth rate (annual average rate)
2023
2024
2025
5 Year average
Unemployment rate (annual averagerate)High inflation and a stronger monetary policy response havebecome key concerns for global growth. In the downside
scenarios, supply chain disruptions intensify, exacerbated by anescalation in the spread of Covid-19 and rising geopoliticaltensions drive inflation higher.
There also remains a risk that energy and food prices rise further
due to the Russia-Ukraine war, exacerbating global inflation andfurther pressuring household budgets and firm costs.
The risk of inflation expectations becoming detached from Central
bank targets also remains a risk. A wage-price spiral triggered byhigher inflation and pandemic related labour supply shortages
across could put sustained upward pressure on wages,
aggravating cost pressures and the squeeze on household real
incomes and corporate margins. In turn, it raises the risk of a moreforceful policy response from central banks, a steeper trajectoryfor interest rates and ultimately, deep economic recession.

%

%

2.7
3.0
2.7
2.7

4.6
4.8
4.7
4.6

3.7
3.5
3.4
3.4

5.2
5.1
5.0
5.0

• a prolonged Russia-Ukraine war with escalation beyond
Ukraine’s borders; and(10.0)
(3.0)
1.7
(1.0)

(0.1)
2.9
3.5
2.9

The consensus Downside scenario

2.1
2.1
2.0
2.1
55.0

2.4
2.2
2.2
2.2
55.0

The risks relating to Covid-19 are centred on the emergence of a
new variant with greater vaccine resistance that necessitates theimposition of stringent public health policies. In Asia, despite there-opening of China in December, management of Covid-19
remains a key source of uncertainty, with the rapid spread of thevirus posing a heightened risk of a new variant emerging.

• continued differences between the US and other countries with
China, which could affect sentiment and restrict global
economic activity.
In the consensus Downside scenario, economic activity is
considerably weaker compared with the Central scenario. In this
scenario, GDP growth weakens below the Central scenario,
unemployment rates rise and asset prices fall. The scenario
features a temporary supply side shock that keeps inflation higher
than the baseline, before the effects of weaker demand begin todominate leading to a fall in commodity prices and to lower
inflation.
The following table describes key macroeconomic variables andthe probabilities assigned in the consensus Downside scenario.

The consensus Upside 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 a faster pace of disinflation than incorporated in theCentral scenario.
The scenario is consistent with a number of key upside risk
themes. These include faster resolution of supply chain issues; arapid conclusion to the Russia-Ukraine war; de-escalation oftensions between the US and China; and relaxation of Covid-19
policies in Asia.
The following table describes key macroeconomic variables andthe probabilities assigned in the consensus Upside scenario.
Consensus Upside scenario ‘best outcome’Hong Kong Mainland China%%

9.0 (3Q23)
3.0 (4Q23)
1.4 (4Q24)(0.1) (4Q23)
20.0

10.3 (2Q23)
4.7 (3Q24)
6.9 (4Q24)
0.8 (4Q23)
20.0

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

38

Downside scenarios explore the intensification and crystallisationof a number of key economic and financial risks.

The geopolitical environment also present risks, including:

2023
2024
2025
5 Year average
House price growth (annual average
rate)
2023
2024
2025
5 Year average
Inflation rate (annual average rate)
2023
2024
2025
5 Year average
Probability

GDP growth rate (annual average rate)
Unemployment rate (annual average rate)
House price growth (annual average rate)
Inflation rate (annual average rate)
Probability

Downside scenarios

Consensus Downside scenario ‘worst outcome’Hong Kong

GDP growth rate (annual average rate)
Unemployment rate (annual average rate)
House price growth (annual average rate)
Inflation rate (annual average rate) (min)Inflation rate (annual average rate) (max)Probability

Mainland China%%(2.2) (4Q23)
5.2 (3Q24)(14.9) (2Q23)
0.3 (4Q24)
3.7 (4Q23)
20.0(1.2) (4Q23)
5.9 (4Q23)(1.9) (1Q23)
0.7 (4Q24)
4.0 (4Q23)
20.0

Note: Extreme point in the consensus Downside is ‘worst outcome‘ inthe scenario, for example lowest GDP growth and the highest
unemployment rate, in the first two years of the scenario. Due to thenature of the shock to inflation in the downside scenarios, both thelowest and the highest point is shown in the tables.

Downside 2 scenario
The Downside 2 scenario features a deep global recession andreflects managements view of the tail of the economic
distribution. It incorporates the crystallisation of a number of risks
simultaneously, including further escalation of the Russia-Ukraine
war, worsening of supply chain disruptions and the emergence ofa vaccine-resistant Covid-19 variant that necessitates a stringent
public health policy response globally.
This scenario features an initial supply-side shock that pushes up
inflation and interest rates higher. This impulse is expected to

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

judgemental adjustments were still required to support modelled
outcomes.

prove short lived as a large downside demand pressures causes
commodity prices to correct sharply and global price inflation tofall as a severe and prolonged recession takes hold.

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 are described below, followed by the management
judgemental adjustments approach.

The following table describes key macroeconomic variables andthe probabilities assigned in the Downside 2 scenario.
Downside 2 scenario ‘worst outcome’GDP growth rate (annual average rate)
Unemployment rate (annual average rate)
House price growth (annual average rate)
Inflation rate (annual average rate) (min)Inflation rate (annual average rate) (max)Probability

Hong Kong

Mainland China%%(9.2) (4Q23)
5.8 (1Q24)(18.2) (1Q24)
0.6 (4Q24)
4.3 (4Q23)
5.0(6.9) (4Q23)
6.8 (4Q24)(18.5) (4Q23)
1.0 (4Q24)
4.6 (4Q23)
5.0

Note: Extreme point in the Downside 2 is ‘worst outcome‘ in the
scenario, for example lowest GDP growth and the highest
unemployment rate, in the first two years of the scenario. Due to thenature of the shock to inflation in the downside scenarios, both thelowest and the highest point is shown in the tables.

Scenario weighting
In reviewing the economic conjuncture, the level of risk anduncertainty, management has considered both global and countryspecific factors. This has led management to assign scenario
probabilities that are tailored to its view of uncertainty in individual
markets.
Key consideration in the fourth quarter around uncertainty
attached to the Central scenario projections focused on:• the progression of the Covid-19 pandemic in Asian countries
and announcement of removal of Covid-19 measures and travel
restrictions in mainland China and Hong Kong;• further tightening of monetary policy and impact on borrowing
costs in interest rate sensitive sectors, such as housing;• the risks to gas supply security in Europe and subsequent
impact on inflation and commodity prices and growth; and• The ongoing risks to global supply chains.
In mainland China and Hong Kong, the announcement ofrelaxation of Covid-19 measures and travel restrictions has led toincreased uncertainty around the Central scenario projection. It
was managements view that easing of policy could increase risks
to the upside in the form of increased spending and travel.
However, the continuing risks to the downside were also
acknowledged given the incipient surge in Covid-19 infections andthe potential for a new variant. This led management to assign a
combined weighting of 75% to the consensus Upside and Central
scenarios in both markets.

Critical accounting estimates and judgements
The calculation of ECL under HKFRS 9 involves significant
judgements, assumptions and estimates. The level of estimation
uncertainty and judgement has remained elevated since 31
December 2021, including judgements relating to:• the selection and weighting of economic scenarios, given
rapidly changing economic conditions and a wide distributionof economic forecasts. There is judgement in making
assumptions about the effects of inflation and interest, global
growth, supply chain disruption; and• estimating the economic effects of those scenarios on ECL,
particularly as the historical relationship between
macroeconomic variables and defaults might not reflect the
dynamics of current macroeconomic conditions.

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 2022, and management

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

Management judgemental adjustments
In the context of HKFRS 9, management judgemental adjustments
are short-term increases or decreases to the ECL at either acustomer, segment or portfolio level to account for late-breaking
events, model and data limitations and deficiencies, and expert
credit judgement applied following management review andchallenge.
This includes refining model inputs and outputs and using
adjustments to ECL based on management judgement and higherlevel quantitative analysis for impacts that are difficult to model.
The effect of management judgmental adjustments are considered
for balances and ECL when determining whether or not asignificant increase in credit risk has occurred and are attributed or
allocated to a stage as appropriate. This is in accordance with theinternal adjustments framework.
Management judgmental adjustments are reviewed under thegovernance process for HKFRS 9 (as detailed in the section 'Credit
risk management' on page 31). Review and challenge focuses on
the rationale and quantum of the adjustments with further review
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 throughmodel recalibration or redevelopment, as appropriate.
The drivers of management judgemental adjustments continue to
evolve with the economic environment, and as new risks emerge.
At 31 December 2022, management judgement adjustments
reduced by HK$1bn compared with 31 December 2021.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

39

Risk

Adjustments related to Covid-19 and for sector specific risks werereduced as scenarios and modelled outcomes better reflected
management expectations at 31 December 2022.

At 31 December 2022, retail management judgemental
adjustments were an ECL increase of HK$0.6bn (31 December
2021: HK$1.0bn increase):

Management judgemental adjustments made in estimating the
scenario-weighted reported ECL at 31 December 2022 are set out
in the following table.

• Retail lending Inflation-related adjustments increased ECL by
HK$0.1bn (31 December 2021: HK$0.0bn). These adjustments
addressed where increasing inflation and interest rates were
not fully captured by the modelled output.

Management judgemental adjustments to ECL
as at 31 December 20221

Banks, sovereigns government entities
and low-risk counterparties2

RetailWholesale

Total

HK$bn

HK$bn

HK$bn

(0.2)

0.2

—

3.1

3.1

Corporate lending adjustments
Retail lending Inflation-related
adjustments

0.1

0.1

Other macroeconomic-related
adjustments

0.4

0.4

—

—

Pandemic-related economic recovery
adjustments
Other retail lending adjustments
Total

0.3
0.6

0.3
3.9

3.3

Management judgemental adjustments to ECL
as at 31 December 20211

Banks, sovereigns, government entities
and low-risk counterparties)2

RetailWholesale

Total

HK$bn

HK$bn

HK$bn

0.1

(0.2)

(0.1)

4.1

4.1

Corporate lending adjustments
Retail lending inflation-related
adjustments——

Other macroeconomic-related
adjustments3

(0.4)

(0.4)

Pandemic-related economic recovery
adjustments

0.6

0.6

Other retail lending adjustments3
Total

0.7
1.0

3.9

0.7
4.9

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

Management judgemental adjustments at 31 December 2022
were an increase of ECL of HK$3.3bn for the wholesale portfolio
and an increase to ECL of HK$0.6bn for the retail portfolio.
At 31 December 2022, wholesale management judgemental
adjustments were an ECL increase of HK$3.3bn (31 December
2021: HK$3.9bn increase).
• Adjustments to corporate exposures increased ECL by
HK$3.1bn (31 December 2021: HK$4.1bn increase). These
principally reflected the outcome of management judgements
for high-risk and vulnerable sectors in some of our key markets.
This was supported by credit experts’ input, portfolio risk
metrics, short- to medium-term risks under each scenario,
model performance, quantitative analyses and benchmarks.
Considerations include risk of individual exposures under
different macroeconomic scenarios and sub-sector analyses.
The largest increase in ECL was observed in the real estate
sector, including material adjustments to reflect the uncertaintyof the higher-risk Chinese commercial real estate exposures,booked in Hong Kong.

40• Other macroeconomic-related adjustments increased ECL by
HK$0.4bn (31 December 2021: HK$0.4bn decrease). These
adjustments were primarily in relation to country-specific risks
related to future macroeconomic conditions.
• Other retail lending adjustments increased ECL by HK$0.3bn(31 December 2021: $0.7bn increase), reflecting all other data
and model and judgemental adjustments.
• Material pandemic-related economic recovery adjustments
were removed during the year as scenarios stabilized.

Economic scenarios sensitivity analysis of ECL
estimates
Management considered the sensitivity of the ECL outcome
against the economic forecasts as part of the ECL governanceprocess by recalculating the ECL under each scenario describedabove for selected portfolios, applying a 100% weighting to eachscenario in turn. The weighting is reflected in both thedetermination of a significant increase in credit risk and themeasurement of the resulting ECL.
The ECL calculated for the Upside and Downside scenarios should
not be taken to represent the lower and upper limits of possible
ECL outcomes. The impact of defaults that might occur in the
future under different economic scenarios is captured byrecalculating ECL for loans at the balance sheet date.
There is a particularly high degree of estimation uncertainty innumbers representing more severe risk scenarios when assigned a
100% weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted (stage3) obligors. It is generally impracticable to separate the effect ofmacroeconomic factors in individual assessments of obligors indefault. The measurement of stage 3 ECL is relatively moresensitive to credit factors specific to the obligor than future
economic scenarios, and loans to defaulted obligors are a small
portion of the overall wholesale lending exposure, even if
representing the majority of the allowance for ECL. Therefore, thesensitivity analysis to macroeconomic scenarios does not capture
the residual estimation risk arising from wholesale stage 3
exposures.
For retail credit risk exposures, the sensitivity analysis includes
ECL for loans and advances to customers related to defaulted
obligors. This is because the retail ECL for secured mortgage
portfolios including loans in all stages is sensitive tomacroeconomic variables.

Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated inclusive ofmanagement judgemental adjustments, as appropriate to eachscenario. The results tables exclude portfolios held by the
insurance business and small portfolios, and as such cannot bedirectly compared to personal and wholesale lending presented inother credit risk tables. In both the wholesale and retail analysis,
the comparative period results for additional and alternative
Downside scenarios are not directly comparable to the current
period, because they reflect different risks relative with theconsensus scenarios for the period end.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Wholesale analysis

Retail analysis

HKFRS 9 ECL sensitivity to future economic conditions1

HKFRS 9 ECL sensitivity to future economic conditions1

ECL coverage of financial instruments
subject to significant measurement
uncertainty at 31 December 20222
Reported ECL
Consensus scenarios ECL
Central scenario
Upside scenario
Downside scenario
Alternative (Downside 2) scenario ECL

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

Reported
ECL

ECL coverage ofloans andadvances tocustomers

Alternative(Downside
CentralUpside Downside 2) scenario
Scenario Scenario
Scenario
ECL

HK$m

HK$m

HK$m

HK$m

HK$m

2,702

2,406

1,985

4,037

6,014

At 31 December
20222
Hong KongHKFRS 9 ECL sensitivity to future economic conditions1
HKFRS 9 ECL sensitivity to future economic conditions1

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

Mainland
China

HK$m

HK$m

5,981

1,162

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

881
281
1,684
6,286

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

At 31 December 2022, the most significant level of ECL sensitivity
related to the judgements over the mainland China offshore
commercial real estate portfolio booked in Hong Kong.

ECL coverage ofloans and advances
to customers

Reported
ECL

CentralScenario

UpsideScenario

Downside
Scenario

Alternative(Downside2) scenario
ECL

HK$m

HK$m

HK$m

HK$m

HK$m

2,554

2,395

1,884

2,802

4,198

At 31 December
20212
Hong Kong

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

At 31 December 2022, Hong Kong mortgages had low levels ofreported ECL due to the credit quality of the portfolio. Credit cards
and other unsecured lending are more sensitive to economic
forecasts, and therefore reflected the highest level of ECL
sensitivity during 2022.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

41

Risk

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

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

(Unaudited)

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

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

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

Allowance
for ECLGross
carrying/
nominalamountStage 3

Allowance
for ECLGross
carrying/
nominalamount

POCI

Allowance
for ECL

Total

Gross
carrying/
nominalamountAllowance
for ECLGross
carrying/
nominalamountAllowance
for ECL

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 1 Jan 2022
Transfers of financial instruments:– transfers from stage 1 to stage 2– transfers from stage 2 to stage 1– transfers to stage 3– transfers from stage 3

5,589,480(246,807)(725,814)
483,955(7,041)
2,093(2,916)(1,899)1,072(2,759)10(222)

529,597
204,008
725,814(483,955)(39,526)
1,675(9,737)
7,046(1,072)
2,759
5,591
(232)

41,63942,799——46,567(3,768)(19,693)(5,147)——(5,601)
454

1,558
—
—
—
—
—

(334)
—
—
—
—
—

6,162,274
—
—
—
—
—

(32,680)—————

Net remeasurement of ECL arisingfrom transfer of stage

—

1,391

—

(1,645)

—

(400)

—

—

—

(654)

New financial assets originated andpurchased

1,854,004(1,209)

—

—

—

—

200

(18)

1,854,204(1,227)

Assets derecognised (including final
repayments)(1,180,100)

224(186,273)

653(6,023)

1,220

(764)

—

(1,373,160)

2,097

Changes to risk parameters –further lending/repayment(303,451)

80

9,824

701

(1,357)

768

(294)

20

(295,278)

1,569

Changes in risk parameters – credit
quality

—

1,099

—

(8,822)—(10,412)

—

214

—

(17,921)

Changes to model used for ECL
calculation

—

(31)

—

11

—

(12)

—

—

—

(32)

Assets written off

—

—

—

—

(7,215)

7,215

(78)

78

(7,293)

7,293

Credit-related modifications that
resulted in derecognition
Foreign exchange
OthersAt 31 Dec 2022

—

—

—

—

(241)

60

—

—

(241)

60

(126,786)
45,586,344

32(13)(3,242)(22,811)—534,345180(5)(11,618)(1,024)
3
68,581526(9)(25,884)

1
—
623

(1)
(150)
(191)

(150,620)
7
6,189,893

737
(177)
(40,935)

ECL income statement charge forthe year(16,168)

Recoveries
Others880(543)

Total ECL income statement
charge for the year

(15,831)
At 31 Dec 2022

Year ended 31 Dec 2022

Gross carrying/nominal amount

Allowance for ECL

HK$m

HK$m

HK$m

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

6,189,893
2,768,171
2,335
N/A
129,357(40,935)
(681)
—
N/A
—

(15,831)
(110)
—
(81)
—

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

9,089,756(41,616)(16,022)

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

1,239,527
N/A

(344)
(41,960)(343)(16,365)

42

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

ECL charge

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

Allowance
for ECLGross
carrying/
nominalamountStage 3

Allowance
for ECLGross
carrying/
nominalamount

POCI

Total

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

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

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

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

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

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

855
—
—
—
—
—

(362)
—
—
—
—
—

5,858,689
—
—
—
—
—

(29,860)—————

Net remeasurement of ECL arisingfrom transfer of stage

—

1,686

—

(2,347)

—

(107)

—

—

—

(768)

New financial assets originated andpurchased

1,621,239(1,183)

—

—

—

—

973

—

1,622,212(1,183)

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

314(120,885)

674(5,745)

1,165

(9)

—

(1,213,625)

2,153

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

1,078

19,54087(2,332)

998

(263)

25

(76,521)2,188

Changes in risk parameters – credit
quality

—

2,078

—

(4,768)—(6,612)—49—(9,253)

Changes to model used for ECL
calculation

—

(126)

—

(377)

—

7

—

—

—

(496)

Assets written off

—

—

—

—

(4,531)

4,531

—

—

(4,531)

4,531

Credit-related modifications that
resulted in derecognition
Foreign exchange
OthersAt 31 Dec 2021
ECL income statement charge forthe year

—

—

—

—

(973)

—

—

—

(973)

—

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

2
—
1,558

(1)
(45)
(334)

(23,023)46
6,162,274

54(46)(32,680)(7,359)Recoveries
Others

1,011
(169)

Total ECL income statement charge
for the year

(6,517)

At 31 Dec 2021

Year ended 31 Dec 2021

Gross carrying/nominal
amountAllowance for ECL

HK$m

HK$m

HK$m

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

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

(6,517)
(184)
—
145
—

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

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

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

1,541,909
N/A

(121)
(33,440)

17(6,539)The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

ECL charge

43

Risk

Credit quality(Audited)

Accordingly, for non-credit-impaired financial instruments, there isno direct relationship between the credit quality assessment andstages 1 and 2, though typically the lower credit quality bands
exhibit a higher proportion in stage 2.

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

The five credit quality classifications each encompass a range of
granular internal credit rating grades assigned to wholesale andretail lending businesses and the external ratings attributed byexternal agencies to debt securities, as shown in the table on page
32.

Credit quality of financial instruments

Distribution of financial instruments by credit quality at 31 December 2022
(Audited)
Gross carrying/notional amount
StrongGood

Satisfactory

Substandard

Creditimpaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Loans and advances to customers held at
amortised cost

2,093,077

773,808

737,137

77,706

63,385

3,745,113(39,964)

3,705,149– personal– corporate and commercial– non-bank financial institutions
Loans and advances to banks
Cash and balances at central banks

1,290,517
641,317161,243504,751
226,479

144,757
545,533
83,5189,461
6,047

76,102604,724
56,311
1,368
222

5,300
71,417
989
3,488
—

8,708
53,761916——

1,525,384
1,916,752
302,977
519,068
232,748(5,369)(33,999)
(596)
(44)
(8)

1,520,015
1,882,753
302,381
519,024
232,740

28,557————28,557—28,557In-scope for HKFRS 9 impairment

Items in the course of collection from otherbanks
Hong Kong Government certificates ofindebtedness341,354

—

—

—

—

341,354—341,354

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

503,956
856,621
169,517

132,390
109,105
57,958291,608
9,446
33,648

—
2
796

22
—
443

927,976
975,174
262,362

—
(465)
(208)

927,976
974,709262,154

Debt instruments measured at fair value throughother comprehensive income1

1,192,017

52,361

17,2341,030

39

1,262,681—(344)

1,262,337—

335,477

65,18832,910788

999

435,362—435,362

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

30,724

3,166

1,050

—

—

34,940—34,940Derivatives

269,923

52,467

11,351823

5334,569—

334,569

Total gross carrying amount on-balance
sheet

6,552,453

1,261,951

1,135,974

84,63364,8939,099,904(41,033)

9,058,871

Percentage of total credit quality
Loan and other credit related commitments
Financial guarantee and similar contracts
Total nominal off-balance sheet amount72%
1,924,469
171,761
2,096,230

14%744,111
133,701
877,81212%484,054
62,022546,076

1%
29,892
5,459
35,351

1%
7,934
553
8,487

100%
3,190,460
373,496
3,563,956

(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.

44

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

Satisfactory

Substandard

Creditimpaired

Total

Allowance for
ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Loans and advances to customers held at
amortised cost

2,076,114

876,388

838,222

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

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

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

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

3,008
36,117217
86—

10,15832,624108——

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

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

21,632————

21,632—

21,632In-scope for HKFRS 9 impairment

Items in the course of collection from otherbanks
Hong Kong Government certificates ofindebtedness

332,044

—

—

—

—

332,044—

332,044

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

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

128,502
7,644
34,642

—
—
599

—
—
290

803,775
502,997
176,996

—
(433)
(206)

803,775
502,564
176,790

Debt instruments measured at fair value
through other comprehensive income1

1,438,300

72,69730,085——

1,541,082—(121)

Out-of-scope for HKFRS 9 impairment
Trading assets

1,540,961—

389,531

65,272

21,676518

1,033

478,030—

478,030

Other financial assets designated and otherwise
mandatorily measured at fair value throughprofit or loss
Derivatives
Total gross carrying amount on-balance sheet
Percentage of total credit quality
Loan and other credit related commitments
Financial guarantee and similar contracts
Total nominal off-balance sheet amount

25,738

2,386

900

—

—

29,024—29,024

161,471
6,170,785
71%
1,732,590
135,199
1,867,789

49,735
1,358,974
16%
699,474
151,565
851,039

5,222
1,069,590
12%
491,037
64,012555,049

45
40,590—%19,4003,647
23,047—44,213
1%
983
456
1,439

216,4738,684,152
100%
2,943,484
354,879
3,298,363—(32,816)

216,473
8,651,336

(580)
(204)
(784)

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

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 2022

45

Risk

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

Satisfactory

Substandard

Creditimpaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Loans and advances to banks– stage 1– stage 2– stage 3– POCI
Loans and advances to customers at amortised cost– stage 1– stage 2– stage 3– POCI

504,751
503,6221,129——
2,093,077
2,062,100
30,977
—
—

9,461
8,731
730
—
—
773,808
656,962
116,846
—
—

1,368
1,338
30
—
—
737,137
489,798
247,339
—
—

3,488
3,243
245
—
—
77,706
10,78566,921
—
—

—
—
—
—
—
63,385——62,763622

519,068
516,934
2,134——
3,745,113
3,219,645
462,083
62,763622(44)519,024(39)
516,895
(5)
2,129
—
—
—
—
(39,964) 3,705,149(2,755) 3,216,890(11,200)
450,883(25,818)
36,945(191)
431

Other financial assets measured at amortised cost– stage 1– stage 2– stage 3– POCI
Loan 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

2,126,484
2,120,755
5,729——
1,421,125
1,414,708
6,417——
14,274
13,938336——
6,159,711

305,500
289,904
15,596——
312,185284,689
27,496——
11,643
9,994
1,649
—
—
1,412,597

334,924
328,161
6,763——
142,824
116,144
26,680
—
—
8,649
6,627
2,022
—
—
1,224,902

798
240
558
—
—
10,509
5,814
4,695
—
—
1,012
179
833
—
—
93,513

465
—
—
464
1
5,758
—
—
5,758
—
68
—
—
68
—
69,676

2,768,171
2,739,060
28,646464
11,892,401
1,821,355
65,2885,758—
35,64630,7384,840
68—8,960,399

(681)
(391)
(231)
(59)
—
(864)
(427)
(397)
(40)
—
(63)
(18)
(17)
(28)
—
(41,616)

1,191,560
457——
1,192,017

52,146215——
52,361

17,17856——
17,234

—
1,030
—
—
1,030

—
—
39
—
39

1,260,884
1,758
39
—
1,262,681

2,767,490
2,738,669
28,415405
11,891,537
1,820,928
64,891
5,718—
35,58330,7204,823
40—
8,918,783(67) 1,260,817
(277)
1,481
—
39
—
—
(344) 1,262,337

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.

46

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

Satisfactory

Substandard

Creditimpaired

Total

Allowance
for ECL

Net

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Loans and advances to banks– stage 1– stage 2– stage 3– POCI
Loans and advances to customers at amortised cost– stage 1– stage 2– stage 3– POCI

423,839
423,561278——
2,076,114
2,034,725
41,389
—
—

5,750
5,241
509
—
—
876,388732,858
143,530
—
—

2,611
2,244
367
—
—
838,222577,785
260,437
—
—

86
33
53
—
—
39,342
4,066
35,276
—
—

—
—
—
—
—
42,890——41,332
1,558

432,286
431,079
1,207——
3,872,956
3,349,434
480,632
41,332
1,558

(39)
(36)
(3)
—
—
(32,017)(2,603)(9,426)(19,654)(334)

432,247
431,0431,204——
3,840,939
3,346,831
471,206
21,678
1,224

Other financial assets measured at amortised cost– stage 1– stage 2– stage 3– POCI
Loan and other credit-related commitments– stage 1– stage 2– stage 3– POCI
Financial guarantees– stage 1– stage 2– stage 3– POCIAt 31 Dec 2021
Debt instruments at FVOCI1– stage 1– stage 2– stage 3– POCIAt 31 Dec 2021

1,655,792
1,651,199
4,593——
1,347,783
1,344,540
3,243——
11,35011,127223——
5,514,878

286,746
278,3438,403——
311,803297,202
14,601——
12,188
10,8901,298——
1,492,875

170,874
163,190
7,684——
162,448
138,722
23,726
—
—
9,883
8,038
1,845
—
—
1,184,038

599
115
484
—
—
4,030
1,889
2,141
—
—
841
159
682
—
—
44,898

290
—
—
289
1
271
—
—
271
—
40
—
—
40
—
43,491

2,114,301
2,092,847
21,164289
11,826,335
1,782,353
43,711271—
34,30230,2144,048
40—
8,280,180

(639)
(482)
(140)
(17)
—
(580)
(260)
(295)
(25)
—
(44)
(14)
(14)
(16)
—
(33,319)

2,113,662
2,092,365
21,024272
11,825,755
1,782,093
43,416
246—
34,25830,2004,034
24—
8,246,861

1,438,161
139——
1,438,300

72,697———
72,69730,085———30,085

—
—
—
—
—

—
—
—
—
—

1,540,943
139——
1,541,082

(121)
—
—
—
(121)

1,540,822
139——
1,540,961

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

47

Risk

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 2022 are split bycountry/territory and credit quality including allowances for ECL by stage.
Mainland China CRE exposure
At 31 Dec 2022

Loans and advances to customers2
Guarantees issued and others3
Total mainland China CRE exposure

Hong Kong

Mainland China

Rest of Asia-PacificTotal(audited)1(audited)1(unaudited)1(unaudited)1

HK$m

HK$m

HK$m

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)
—
(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

Hong Kong (restated)4Mainland China

Rest of Asia-PacificTotal(audited)1(audited)1(unaudited)1(unaudited)1

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 2021

HK$m

HK$m

HK$m

HK$m

Loans and advances to customers2
Guarantees issued and others3
Total mainland China CRE exposure
Distribution of mainland China CRE exposure bycredit quality

89,646
1,207
90,853

53,116
18,53371,649

658
127
785

143,420
19,867
163,287– Strong– Good– Satisfactory– Sub-standard– Credit Impaired

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

239
—
546
—
—
785

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

(116)
(292)
(849)
(2,320)

(53)
(78)
(154)
(8)

—
—
(15)
—

(169)
(370)
(1,018)(2,328)(794)(4,371)

(86)
(379)

—
(15)

(880)
(4,765)(17)(3,560)(794)(4,371)
4.8

(84)
(209)
(86)
(379)
0.5

(4)
(11)
—
(15)
1.9

(105)
(3,780)(880)(4,765)
2.9

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 Disclosures in respect of mainland China CRE exposures in Hong Kong and mainland China form part of the scope of the audit of the group's
Annual Report. Amounts disclosed for mainland China CRE exposures elsewhere in the group have not been audited but are provided forcompleteness.
2 Amounts represent gross carrying amount.
3 Amounts represent nominal amount for guarantees and other contingent liabilities.
4 Comparative balances have been restated to reflect an exposure re-classification from "guarantees and others" to "loans and advances tocustomers", which better reflects the nature of product.

48

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

(Unaudited)

CRE financing refers to lending that focuses on commercial
development and investment in real estate and covers
commercial, residential and industrial assets. CRE financing canalso be provided to a corporate or financial entity for the purchaseor financing of a property which supports the overall operations of
the business.
The exposures in the table are related to companies whose
primary activities are focused on residential, commercial andmixed-use real estate activities. Lending is generally focused ontier 1 and 2 cities.
The exposures in the table above had 57% (31 December 2021:
89%) of exposure booked with a credit quality of ‘satisfactory’ or
above. This deterioration reflects increased funding risks andweaker sales performance for a number of our customers over theperiod.
Facilities booked in Hong Kong are exposures which represent
relatively higher risk within the mainland China CRE portfolio. This
portfolio had 36% (31 December 2021: 82%) of exposure bookedwith a credit quality of ‘satisfactory’ or above, reflecting sustained
credit deterioration in this book over the course of the year. At
31 December 2022, the group had allowances for ECL of
HK$13,609m (31 December 2021: HK$4,371m) held against
mainland China CRE exposures booked in Hong Kong.
Over one third of the unimpaired exposure in the Hong Kong
portfolio reflects lending to state owned enterprises, and much of
the remaining is to relatively strong privately owned enterprises.
This is reflected in the relatively low ECL allowance in this part ofthe portfolio.
Regulatory and policy developments in the latter part of 2022
appear to have stabilised the sector. Sustained liquidity supportand improved domestic residential demand will be necessary tosupport a recovery.
The group has additional exposures to mainland China CRE as aresult of lending to multinational corporates which is notincorporated in the table above.

Credit-impaired loans

Depending on its form, collateral can have a significant financial
effect in mitigating our exposure to credit risk. Where there issufficient collateral, an expected credit loss is not recognised. Thisis the case for reverse repurchase agreements and for certain
loans and advances to customers where the loan to value (‘LTV’) isvery low.
Mitigants may include a charge on borrowers’ specific assets,such as real estate or financial instruments. Other credit risk
mitigants include short positions in securities and financial assets
held as part of linked insurance/investment contracts where therisk is predominantly borne by the policyholder.
Additionally, risk may be managed by employing other types 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
relationship and 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 andutilisations, maturity profiles and risk quality are monitored andmanaged proactively. This process is key to the setting of risk
appetite for these larger, more complex, geographically distributed
customer groups. While the principal form of risk management
continues to be at the point of exposure origination, through thelending decision-making process, Global Banking also utilises loan
sales and credit default swap (‘CDS’) hedges to manage
concentrations and reduce risk. These transactions are theresponsibility of a dedicated Global Banking portfolio management
team. Hedging activity is carried out within agreed credit
parameters, and is subject to market risk limits and a robust
governance structure. Where applicable, CDSs are entered into
directly with a central clearing house counterparty. Otherwise, ourexposure to CDS protection providers is diversified among mainlybanking counterparties with strong credit ratings.
CDS mitigants are held at portfolio level and are not reported in
the presentation below.

(Audited)

We determine that a financial instrument is credit impaired and instage 3 by considering relevant objective evidence, primarily
whether:• contractual payments of either principal or interest are past due
for more than 90 days;• there are other indications that the borrower is unlikely to pay,such as when a concession has been granted to the borrower
for economic or legal reasons relating to the borrower’s
financial condition; and• the loan is otherwise considered to be in default. If such
unlikeliness to pay is not identified at an earlier stage, it isdeemed to occur when an exposure is 90 days past due, even
where regulatory rules permit default to be defined based on
180 days past due. Therefore, the definitions of credit impaired
and default are aligned as far as possible so that stage 3
represents all loans that are considered defaulted or otherwise
credit impaired.

Collateral and other credit enhancements(Audited)

Although collateral can be an important mitigant of credit risk, it is
the group’s practice to lend on the basis of the customer’s ability
to meet their obligations out of cash flow resources rather thanplacing primary reliance on collateral and other credit riskenhancements. Depending on the customer’s standing and thetype of product, facilities may be provided without any collateralor other credit enhancements. For other lending, a charge overcollateral is obtained and considered in determining the credit
decision and pricing. In the event of default, the bank may utilise
the collateral as a source of repayment.

Collateral on loans and advances(Audited)

The collateral measured in the following tables consists offixed first charges on real estate, and charges over cash andmarketable financial instruments. The values in the tables
represent the expected market value on an open market basis; noadjustment has been made to the collateral for any expected costsof recovery. Marketable securities are measured at their fair value.
Other types of collateral such as unsupported guarantees andfloating charges over the assets of a customer’s business are notmeasured in the following tables. While such mitigants have value,
often providing rights in insolvency, their assignable value is not
sufficiently certain and they are therefore assigned no value fordisclosure purposes.
The LTV ratios presented are calculated by directly associatingloans and advances with the collateral that individually anduniquely supports each facility. When collateral assets are sharedby multiple loans and advances, whether specifically or, moregenerally, by way of an all monies charge, the collateral value is
pro-rated across the loans and advances protected by thecollateral.
For credit-impaired loans, the collateral values cannot be directlycompared with impairment allowances recognised. The LTV
figures use open market values with no adjustments.
Impairment allowances are calculated on a different basis, byconsidering other cash flows and adjusting collateral values forcosts of realising collateral.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

49

Risk

Personal lending(Unaudited)

obligations, and where the collateral is cash or can be realised bysale in an established market.

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
the event of the borrower failing to meet its contractual

The collateral valuation excludes any adjustments for obtaining
and selling 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

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

Gross carrying/nominalamount2021
ECL
coverage

Gross carrying/nominalamountECL
coverage

HK$m

%

HK$m

%

1,147,024

0.0

1,201,044

0.0

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

0.0
0.0
0.0
0.0

0.0
0.0
0.0
0.0

0.0

1,004,531
169,824
26,689256242
1,201,300

0.0

33,9720.2

23,7580.4

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

0.1
0.4
0.5
0.7

0.3
1.0
2.4
3.6

0.2

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

5,696

4.3

5,113

5.2

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

3.6
5.6
6.3
40.7

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

4.5
7.7
14.3
29.8

5.0
0.0

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.

50

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

0.4

5.7
0.0

Commercial real estate loans and advances(Unaudited)

The value of commercial real estate collateral is determined byusing a combination of external and internal valuations andphysical inspections. For commercial real estate, where the facility

exceeds regulatory threshold requirements, group policy requires
an independent review of the valuation at least every three years,
or more frequently as the need arises. In Hong Kong, market
practice is typically for lending to major property companies to beeither secured by guarantees or unsecured.

Commercial real estate loans and advances including loan commitments by level of collateral(Audited)
2022

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

2021

Gross
carrying
nominalamountECL
coverageGrosscarrying/
nominalamountECL
coverage

HK$m

%

HK$m

%

240,133
263,119
13,8987,292
517,150

0.0
0.1
0.1

268,397
315,939
14,2607,790
598,596

0.0
0.1
0.1

51,12885,421
7,941
4,692

7.7
1.9
2.0

68,871
69,438
7,626
3,159

5.8
0.7
2.2

144,490

4.0

145,935

3.2

16,725
8,724
982
697
26,431

57.2
11.1
36.2

1,541
3,085
21
14
4,647

35.8
11.3
33.3

—
—
145
65
145
688,216

—
—
—

—
764
—
—
764
749,942

—
—
—

0.1

41.2

—
2.5

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

0.0

19.5

—
0.8

51

Risk

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

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

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

Other corporate, commercial and non-bank financial institutions loans and advances including loan commitments by level of collateral(Audited)
2022
Gross
carrying/
nominalamount
HK$m2021

ECL coverageGrosscarrying/
nominalamount

ECL coverage

%

HK$m

%

2,155,095
379,471
246,654
97,0582,781,220

0.1
0.1
0.1

2,044,385
431,547
262,118
108,645
2,738,050

0.0
0.1
0.0

314,140
128,648
55,80422,737498,592

0.5
1.0
0.6

314,470
113,991
37,862
15,205466,323

0.4
0.7
0.4

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

68.2
7.2
37.0

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

80.2
17.3
36.8

138
183
156
125
477
3,309,307

1.4
92.9
12.2

351
442
—
—
793
3,232,509

47.6
37.8
—

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

0.1

0.6

46.6

40.0
0.6

0.0

0.4

62.2

42.1
0.6

Other credit risk exposures

Derivatives(Unaudited)(Unaudited)

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

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

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

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

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

52

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Governance and structure

Treasury Risk

(Unaudited)

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 to our earnings orcapital due to structural foreign exchange exposures and changes
in market interest rates, together with pension and insurance 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(Unaudited)

The main objective in the management of treasury risk is tomaintain appropriate levels of capital, liquidity, funding, foreignexchange and market risk to support business strategy, and meet
regulatory and stress testing-related requirements.
The approach to treasury management is driven by our strategicand organisational requirements, taking into account theregulatory, economic and commercial environment. We aim to
maintain a strong capital and liquidity base to support the risks
inherent in our business and invest in accordance with ourstrategy, meeting both consolidated and local regulatory
requirements at all times.
Our policy is underpinned by our risk management framework, ourinternal capital adequacy assessment process (‘ICAAP’) and ourinternal liquidity adequacy assessment process (‘ILAAP’). The risk
framework incorporates a number of measures aligned to ourassessment of risks for both internal and regulatory purposes.

Treasury risk management
Key developments in 2022
(Unaudited)• We continued to build our second line of defence capabilities,
providing independent oversight of treasury activities acrosscapital risk, liquidity and funding risk, interest rate risk in thebanking book ('IRRBB') and recovery and resolution planning in
Asia-Pacific sites during 2022.
• The Board approved risk appetite for IRRBB for the group was
further enhanced in 2022 to include NII sensitivity metric tomonitor impact of 100bps interest rate shock on forecasted
earnings of the Bank over next 1 year against the Board
approved Risk Appetite.
• During the periods of high market volatility in the first half of2022, we enhanced monitoring and forecasting of our capital
positions. The mark-to-market movement in financial
instruments that impacted our capital ratio arose from theportfolio of high-quality liquid assets (‘HQLA’) held by ourMarkets Treasury for liquidity risk management and as
economic hedges of net interest income. This portfolio waslargely accounted for at fair value through other comprehensive
income (‘FVOCI’), together with any hedge derivative held tooffset the duration risk of the assets. During the year, we took
steps to reduce the duration risk of this portfolio to minimise
the capital impact from higher interest rates. As a result of
these measures, the hold-to-collect-and-sell stressed value atrisk (‘VaR’) exposure reduced from -HK$10.bn at the end of2021 to -HK$3.7bn at the end of 2022.
• We implemented a new hold-to-collect business model, which
will involve our portfolio of hold-to-collect assets forming amaterial part of our liquid asset buffer as well as a hedge to our
structural interest rate risk. This will allow more flexibility inmanaging the hold-to-collect-and-sell portfolio to optimise
returns from market movements while safeguarding the group
capital and future earnings.

The Board approves the policy and risk appetite for capital risk,
liquidity and funding risk, and IRRBB. It is supported and advisedby the Risk Committee (‘RC’).
The Global Treasury sub-function manages capital, liquidity andfunding risk and structural foreign exchange risk on an on-goingbasis and provides support to the Asset and Liability Management
Committee (‘ALCO’), and is overseen by the Treasury Risk
Management sub-function ('TRM') and the Risk Management
Meeting (‘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
overall banking book interest rate exposure. Banking book interest
rate positions may be transferred to be managed by the Global
Treasury business, 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 ischaired by the Regional Head of Traded and Treasury Risk
Management.
The Treasury Risk Management sub-function carries out
independent review, challenge and assurance of theappropriateness of the risk management activities undertaken by
Global Treasury. Internal Audit provides independent assurance
that risk is managed effectively.

Capital risk
Capital management(Audited)

Our approach to capital management is driven by our strategicand organisational requirements, taking into account theregulatory, 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 aspart of their individual and the group’s capital management
processes.
The policy on capital management is underpinned by a capitalmanagement framework and our ICAAP. The framework
incorporates key capital risk appetites for CET1, Tier1, Total
Capital, Loss Absorbing Capacity ('LAC') and Leverage Ratio,
which enables us to manage our capital in a consistent manner.
Regulatory capital and economic capital are the two primarymeasures used for the 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
to support risks to which we are exposed and forms a core partof the ICAAP.
ICAAP is an assessment of the group’s capital position, outlining
both regulatory and internal capital resources and requirements
resulting from our business model, strategy, risk profile,performance and planning, and the findings arising from stresstesting. Our assessment of capital adequacy is driven by anassessment of risks that include credit, market, operational,
pension, insurance, structural foreign exchange and interest raterisk in the banking book. Climate risk is also considered as part of
the ICAAP, and we are continuing to develop our approach forclimate risk management.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

53

Risk

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
capital plan which is approved by the Board. The plan is drawn up
with the objective of maintaining both an appropriate amount of
capital and an optimal mix between the different components ofcapital. Capital and Risk-Weighted Assets ('RWAs') are monitored
and managed against the plan, with capital forecasts reported to
relevant governance committees. 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 capitalmanagement objectives, capital generated by subsidiaries inexcess of planned requirements is returned to the Bank, normallyby way of dividends.
The Bank is the primary provider of capital to its subsidiaries andthese investments are substantially funded by the Bank’s own
capital issuance and profit retention. As part of its capitalmanagement process, the Bank seeks to maintain a prudent
balance between the composition of its capital and that of its
investment in subsidiaries.
The principal forms of capital are included in the following
balances on the consolidated balance sheet: share capital, other
equity instruments, retained earnings, other reserves andsubordinated liabilities.

Regulatory capital requirements(Audited)

The Hong Kong Monetary Authority (‘HKMA’) supervises thegroup on both a consolidated and solo-consolidated basis andtherefore receives information on the capital adequacy of, and sets
capital requirements for, the group as a whole and on a soloconsolidated basis. Individual banking subsidiaries and branches
are directly regulated by their local banking supervisors, who set
and monitor their capital adequacy requirements. In mostjurisdictions, non-banking financial subsidiaries are also subject tothe supervision and capital requirements of local regulatory
authorities.
The group uses the advanced internal ratings-based approach to
calculate its credit risk for the majority of its non-securitisation
exposures. For collective investment scheme exposures, the groupuses the look-through approach and mandate-based approach to
calculate the risk-weighted amount. For securitisation exposures,the group uses the securitisation internal ratings-based approach,securitisation external ratings-based approach, securitisation
standardised approach or securitisation fall-back approach todetermine credit risk for its banking book securitisation exposures.
For counterparty credit risk, the group uses both the standardised(counterparty credit risk) approach and the internal models(counterparty credit risk) approach to calculate its default risk
exposures for derivatives, and the comprehensive approach forsecurities financing transactions. For market risk, the group 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 in respect of specific risk for interest rate exposuresand equity exposures. The group uses the standardised (marketrisk) approach for calculating other market risk positions, as wellas trading book securitisation exposures, and the standardised(operational risk) approach to calculate its operational risk.
During the year, the group issued various capital and LAC
instruments in order to operate above required levels, including
buffers.

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 2022, the capital buffers applicable to the group
include the Capital Conservation Buffer (‘CCB’), theCountercyclical Capital Buffer (‘CCyB’) and the Higher Loss
Absorbency (‘HLA’) requirement for Domestic Systemically
Important Banks (‘D-SIB’). The CCB is 2.5% and is designed toensure banks build up capital outside periods of stress. The CCyB
is set on an individual country/territory basis and is 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 8 February 2023
and 30 December 2022 respectively. In its latest announcement,
the HKMA maintained the CCyB for Hong Kong at 1.0% andmaintained the D-SIB designation as well as HLA requirement at
2.5% for the group.
The group is classified as a material subsidiary under the Financial
Institutions (Resolution) (Loss-absorbing Capacity Requirements –Banking Sector) Rules (‘LAC Rules’) and therefore is subject to the
LAC requirements to maintain its internal LAC risk-weighted ratio
and the internal LAC leverage ratio at or above specified
minimums.

Leverage ratio(Unaudited)

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

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

31 Dec31 Dec

2022

2021

%

%

5.9

5.8

HK$m

HK$m

545,572
9,301,363

530,701
9,192,814

The increase in the leverage ratio from 31 December 2021 to
31 December 2022 was mainly due to the increase in Tier 1
capital, partly offset by the rise in the exposure measure.
Further details regarding the group’s leverage position can beviewed in the Banking Disclosure Statement at 31 December
2022, which will be available in the Regulatory Disclosure Sectionof our website: www.hsbc.com.hk.

Capital adequacy at 31 December 2022
(Unaudited)

The following tables show the capital ratios, RWAs and capitalbase as contained in the ‘Capital Adequacy Ratio’ return submitted
to the HKMA on a consolidated basis under the requirements ofsection 3C(1) of the Banking (Capital) Rules.
The basis of consolidation for financial accounting purposes is
described in Note 1 on the Consolidated Financial Statements anddiffers from that used for regulatory purposes. Further informationon the regulatory consolidation basis and a full reconciliation
between the group’s accounting and regulatory balance sheets
can be viewed in the Banking Disclosure Statement 2022.
Subsidiaries not included in the group's consolidation forregulatory purposes are securities and insurance companies andthe capital invested by the group in these subsidiaries is deductedfrom regulatory capital, subject to threshold.
The Bank and its banking subsidiaries maintain regulatory reserves
to satisfy the provisions of the Banking Ordinance and local
regulatory requirements for prudential supervision purposes.

54

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

At 31 December 2022, the effect of this regulatory reserve
requirement is to reduce the amount of reserves which can be
distributed to shareholders by HK$16,413m (31 December 2021:
HK$18,587m).

Risk-weighted assets by risk type
(Unaudited)At

We closely monitor and consider future regulatory change andcontinue to evaluate the impact upon our capital requirements ofregulatory developments. This includes the Basel III Reforms
package, which is currently scheduled for implementation by the
HKMA no earlier than 1 January 2024. We continue to participate
in consultations and monitor progress on the implementation.
Based on the results of the latest HKMA consultations, we foresee
a positive impact on our capital ratios on initial application. The
risk-weighted asset ('RWA') output floor under the Basel III
Reforms will commence once implemented, with an expected fiveyear transitional provision. Any impact from the output floor would
be towards the end of the transition period. We are expecting theissuance of final rules in 2023 which will enable us to better
estimate the impact.

31 DecCredit risk
Counterparty credit risk
Market risk
Operational risk
Sovereign concentration risk
Total

At

Common equity tier 1 (‘CET1’) capital ratio
Tier 1 capital ratio
Total capital ratio

31 Dec31 Dec

2022

2021

%

%

15.3
16.9
18.8

15.4
16.8
18.7

2021

HK$m

HK$m

2,589,633
133,290
160,533
337,004
1,708
3,222,168

2,497,803
148,188
172,831
337,731—
3,156,553

Risk-weighted assets by reportable segments(Unaudited)At
31 DecCapital ratios(Unaudited)

31 Dec2022

Wealth and Personal Banking
Commercial Banking
Global Banking
Markets and Securities Services
Corporate Centre
Other (GBM-other)Total

31 Dec

2022

2021

HK$m

HK$m

640,626
1,209,888
562,404
410,401
338,254
60,595
3,222,168

621,757
1,157,241
566,587
410,599
334,450
65,9193,156,553

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

55

Risk

Capital base(Unaudited)

The following table sets out the composition of the group’s capital base under Basel III at 31 December 2022.
Capital base(Unaudited)At
31 DecCommon 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– perpetual subordinated debt2– 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 capital

31 Dec

2022

2021

HK$m

HK$m

727,880
875,320(1,454)(52,386)(93,600)
30,10665,943(11,365)(24,472)(266,424)(2,376)(32,064)(3,688)233(3,494)(27)(140,987)(67,608)(16,413)491,562

714,139856,809(1,454)(44,615)(96,601)
28,73066,702(11,800)(26,172)(258,215)(1,834)(28,883)(3,353)
(60)
1,322
(18)
(139,239)(67,563)(18,587)484,654

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

46,07344,615
1,458
(26)
(26)
46,047530,701

68,118—19,50531,07816,0081,527

67,802
3,119
14,972
31,057
17,471
1,183(6,378)(6,378)61,740607,312(8,025)(8,025)59,777590,478

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

A detailed breakdown of the group’s CET1 capital, AT1 capital, Tier 2 capital and regulatory deductions can be viewed in the Banking
Disclosure Statement 2022.

56

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

A Structural foreign exchange exposure arises from the capital
invested or net assets in a foreign operation together with any
associated hedging. A foreign operation is defined as a subsidiary,associate, joint arrangement or branch, the activities of which areconducted in a currency other than that of the reporting entity. An
entity's functional reporting currency is normally that of the
primary economic environment in which the entity operates.
Exchange differences on structural exposures are recognised inother comprehensive income ('OCI’). The group uses Hong Kong
dollar as our presentation currency in our consolidated financial
statements. Therefore, our consolidated balance sheet is affectedby exchange differences between Hong Kong dollar and all the
non-Hong Kong dollar functional currencies of foreign operation.
Our structural foreign exchange exposures are managed with theprimary objective of ensuring, where practical, that ourconsolidated capital ratios and the capital ratios of individual
banking subsidiaries are largely protected from the effect ofchanges in exchange rates.
We hedge structural foreign exchange positions where it is capitalefficient to do so, and subject to approved limits. Hedging
positions are monitored and rebalanced periodically to manage
RWA or downside risks associated with group’s foreign currency
investments.
The group had the following net structural foreign currency
exposures that were greater than 10% of the total net structuralforeign currency exposures:
Local Currency (m)HK$ equivalent (m)241,134
10,891

272,70984,902

221,207
10,224271,42179,731

At 31 Dec 2022
Renminbi
US dollars
At 31 Dec 2021
Renminbi
US dollars

Transactional foreign exchange exposures(Unaudited)

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

Liquidity and funding risk
Overview(Audited)

Liquidity risk is the risk that we do not have sufficient financial
resources to meet our obligations as they fall due. Liquidity riskarises from mismatches in the timing of cash flows. Funding risk is
the risk that we cannot raise funding or can only do so atexcessive cost.
The group has comprehensive policies, metrics and controls,
which aim to allow us to withstand severe but plausible liquidity
stresses. The group manages liquidity and funding risk at an
operating entity level to make sure that obligations can be met in
the jurisdiction where they fall due, generally without reliance onother parts of the group.
Operating entities are required to meet internal minimum
requirements and any applicable regulatory requirements at all
times. These requirements are assessed through the Internal
Liquidity Adequacy Assessment Process ('ILAAP'), which ensuresthat operating entities have robust strategies, policies, processes
and systems for the identification, measurement, management
and monitoring of liquidity and funding risk. The ILAAP informs
the validation of risk tolerance and the setting of risk appetite. It
also assesses the capability to manage liquidity and funding
effectively in each operating entity. Liquidity and funding risk
metrics are set and managed locally but are subject to robust
global review and challenge to ensure consistency of approachand application of the Group’s policies and controls.

Framework(Unaudited)

Global Treasury sub-function is responsible for the application ofpolicies and controls at a local operating entity level. The elementsof liquidity and funding risk management framework areunderpinned by a robust governance framework, with the two
major elements being:• Asset and Liability Management Committees (‘ALCOs’) at thegroup and entity level; and• annual ILAAP used to validate risk tolerance and set 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 requirementsof 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 withinpre­determined limits;• maintaining debt financing plans;• monitoring of depositor concentration in order to avoid undue
reliance on large individual depositors and ensuring asatisfactory overall funding mix; and• maintaining liquidity and funding contingency plans. These
plans identify early indicators of stress conditions and describe
actions to be taken in the event of difficulties arising fromsystemic or other crises, while minimising adverse long-term
implications for the business.

Management of liquidity and funding risk
(Audited)

Funding and liquidity plans form part of the financial resource planthat is approved by the Board. The Board-level risk appetite
measures are the liquidity coverage ratio (‘LCR’) and net stable
funding ratio (‘NSFR’). An internal liquidity metric ('ILM') is used tosupplement these regulatory metrics. An appropriate funding andliquidity profile is managed through a wider set of measures:• a minimum LCR requirement;• a minimum NSFR requirement or other appropriate metric;• 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; and• forward-looking funding assessments.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

57

Risk

Sources of funding

Interest Rate Risk in the Banking Book

(Unaudited)(Unaudited)

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

Assessment and risk appetite

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

Under the terms of our current collateral obligations of derivative
contracts (which are International Swaps and Derivatives
Association ('ISDA') compliant credit support annex ('CSA')
contracts), the additional collateral required to post in the event of
one-notch and two-notch downgrade in credit ratings isimmaterial.
Liquidity and funding risk in 2022
(Unaudited)

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

Average LCR

31 Dec31 Dec

2022

2021

%

%

157.8

154.3

The average LCR increased by 3.5 percentage points from 154.3%
for the quarter ended 31 December 2021 to 157.8% for the quarter
ended 31 December 2022.
The majority of high quality liquid assets ('HQLA') included in the
LCR are Level 1 assets as defined in the BLR, which consist mainlyof government debt securities.
The total weighted amount of HQLA of the group for the period
are as follows:

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

31 Dec

2022

2021

HK$m

HK$m

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

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

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

Net stable funding ratio

31 Dec31 Dec

2022

2021

%

%

152.3

151.9

The NSFR increased by 0.4 percentage points from 151.9% for thequarter ended 31 December 2021 to 152.3% for the quarter ended
31 December 2022.
Interdependent assets and liabilities included in the group's NSFR
are certificates of indebtedness held and legal tender notes issued.

58• net interest income sensitivity; and• economic value of equity sensitivity; and• hold-to-collect-and-sell value at risk.

Net interest income sensitivity
A principal part of our management of non-traded interest rate risk
is to monitor the sensitivity of expected net interest income (‘NII’)
under varying interest rate scenarios (i.e. simulation modelling),
where all other economic variables are held constant. This
monitoring is undertaken at an entity level, where entities
calculate both one-year and five-year NII sensitivities across a
range of interest rate scenarios.
NII sensitivity figures represent the effect of pro forma movements
in projected yield curves based on a static balance sheet size andstructure. The exception to this is where the size of the balances or
repricing is deemed interest rate sensitive, for example, early
prepayment of mortgages. These sensitivity calculations do notincorporate actions that would be taken by Markets Treasury or in
the business that originates the risk to mitigate the effect ofinterest rate movements.
The NII sensitivity calculations assume that interest rates of all
maturities move by the same amount in the ‘up-shock’ scenario.
The sensitivity calculations in the ‘down-shock’ scenarios reflect
no floors to the shocked market rates. However, customer
product-specific interest rate floors are recognised whereapplicable.

Economic value of equity sensitivity

Weighted amount (averagevalue) at quarter ended
31 DecInterest rate risk in the banking book is the risk of an adverse
impact to earnings or capital due to changes in market interest
rates. It is generated by our non-traded assets and liabilities,
specifically loans, deposits and financial instruments that are notheld for trading intent or in order to hedge positions held withtrading intent. Interest rate risk that can be economically hedged
may be transferred to the Global Treasury sub-function. Hedging is
generally executed through interest rate derivatives or fixed-rate
government bonds. Any interest rate risk that Global Treasury subfunction cannot economically hedge is not transferred and willremain 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:

Economic value of equity (‘EVE’) represents the present value ofthe future banking book cash flows that could be distributed toequity holders under a managed run-off scenario. This equates tothe current book value of equity plus the present value of future
NII in this scenario. EVE can be used to assess the economic
capital required to support interest rate risk in the banking book.
An EVE sensitivity represents the expected movement in EVE due
to pre-specified interest rate shocks, where all other economic
variables are held constant. Operating entities are required tomonitor EVE sensitivities as a percentage of capital resources.
Further details of HSBC’s risk management of interest rate risk inthe banking book can be found in the Pillar 3 Disclosures at
31 December 2022.

Pension Risk
(Unaudited)

Our global pensions strategy is to move from defined benefit todefined contribution plans, where local law allows and it isconsidered competitive to do so.
In defined contribution pension plans, the contributions that HSBC
is required to make are known, while the ultimate pension benefit
will vary, typically with investment returns achieved by investment
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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

Market risk is managed and controlled through limits approved by
the group's Board of Directors. These limits are allocated acrossbusiness lines and to the group’s legal entities. The group has anindependent market risk management and control sub-function,
which is responsible for measuring, monitoring and reporting
market risk exposures against limits on a daily basis. Each
operating entity is required to assess the market risks arising in its
business and to transfer them either to its local Markets andSecurities Services or Market Treasury for management, or toseparate books managed under the supervision of the local ALCO.
The Traded Risk sub-function enforces the controls around tradingin permissible instruments approved for each site as well aschanges 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 productexpertise and robust control systems.

Key risk management processes
Monitoring and limiting market risk exposures(Audited)

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

Sensitivity analysis(Unaudited)

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

Value at risk

Market Risk

(Audited)

Overview(Unaudited)

Market risk is the risk of 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 management(Unaudited)

There were no material changes to our policies and practices forthe management of market risk in 2022.

• historical market rates and prices, which are calculated withreference to foreign exchange rates, commodity prices, interest
rates, equity prices and the associated volatilities;• potential market movements that are calculated with reference
to data from the past two years; andGovernance and structure(Unaudited)

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

VaR is a technique for estimating potential losses on risk positions
as a result of movements in market rates and prices over a
specified time horizon and to a given level of confidence. The useof VaR is integrated into market risk management and calculated
for all trading positions regardless of how we capitalise them.
Where we do not calculate VaR explicitly, we use alternative tools
as summarised in the ‘Stress testing’ section below.
Our models are predominantly based on historical simulation thatincorporates the following features:

Key developments in 2022

Risk types

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.

Foreign exchange and commodities
Interest rates
Credit spreads
Equities

Global business

GBM

Risk measure

Value at risk | Sensitivity | Stress Testing• calculations to a 99% confidence level and using a one-day
holding period.
The models also incorporate the effect of option features on theunderlying exposures. The nature of the VaR models means thatan increase in observed market volatility will lead to an increase in
VaR without any changes in the underlying positions.

.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

59

Risk

VaR model limitations

Trading portfolios(Audited)(Audited)

Although a valuable guide to risk, VaR is used with awareness of
its limitations. For example:

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.

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

Risk not in VaR framework(Unaudited)

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

Stress testing(Unaudited)

Stress testing is an important procedure that is integrated into ourmarket risk management framework to evaluate the potential
impact on portfolio values of more extreme, although plausible,
events or movements in a set of financial variables. In such
scenarios, losses can be much greater than those predicted by
VaR modelling.
Stress testing is implemented at legal entity, regional and overall
Group levels. A set of scenarios is used consistently across all
regions within the Group. The risk appetite around potential stresslosses for the group is set and monitored against a referral limit.
Market risk reverse stress tests are designed to identify
vulnerabilities in our portfolios by looking for scenarios that lead toloss levels considered severe for the relevant portfolio. These
scenarios may be quite local or idiosyncratic in nature, andcomplement the systematic top-down stress testing.

Back-testing(Audited)

We routinely validate the accuracy of our VaR models by backtesting the VaR metric against both actual and hypothetical profit
and loss. Hypothetical profit and loss excludes non-modelled items
such as fees, commissions and revenue of intra-day transactions.
The number of hypothetical loss back-testing exceptions, together
with a number of other indicators, are used to assess model
performance and to consider whether enhanced internalmonitoring of a VaR model is required.
We back-test our VaR at set levels of our group entity hierarchy.

Market risk in 2022
(Unaudited)

During 2022, financial markets were driven by concerns over highinflation and recession risks, against the backdrop of the RussiaUkraine conflict and continued Covid-19 pandemic restrictions in
Asia. Throughout the year, major central banks tightened theirmonetary policies at a faster pace than previously anticipated inorder to counter rising inflation. As a result, bond markets sold off
sharply and bond yields rose to multi-year highs. Equity valuations
saw pronounced volatility and fell across most market sectors due
to recession risks and tighter liquidity conditions. Foreignexchange markets were largely dominated by a strong US dollar,
as a result of global geopolitical instability and the relatively fast
pace of monetary tightening by the US Federal Reserve. Investors
sentiment remained fragile in credit markets, with credit spreads
in investment-grade and high-yield debt benchmarks reaching
their widest levels since the start of the Covid-19 pandemic. The
Chinese property sector was underperforming in 2022, continuing
the wave of defaults and debt restructuring from 2021.
We continued to manage market risk prudently during 2022.
Sensitivity exposures and VaR remained within appetite as thebusiness pursued its core market-making activity in support of ourcustomers. Market risk was managed using a complementary setof risk measures and limits, including stress and scenario analysis.

Trading portfolios(Audited)

Value at risk of the trading portfolios
Trading VaR was predominantly generated by the Markets andSecurities Services business. Trading VaR was higher as at
31 December 2022 compared to 31 December 2021, mainly driven
by increase in VaR exposed to interest rate risk and foreignexchange risk, partially offset by reduction in VaR from equity risk
and credit spread risk.

Stress testing and reverse stress testing provide senior
management with insights regarding the ‘tail risk’ beyond VaR, forwhich our appetite is limited.

60

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

EquityCreditspreadPortfolio
diversification2

Total3

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2022
Year end
Average
Maximum

95
55
99

195
172
272

48
55
98

18
24
42

(154)

202
208
357

At 31 Dec 2021
Year end
Average
Maximum

36
49
78

135
158
218

60
77
108

31
34
62

(74)

188
177
241

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

Climate risk (unaudited) TCFD
Overview
Climate risk relates to the financial and non-financial impacts that
may arise as a result of climate change. Climate risk canmaterialise through:• physical risk, which arises from the increased frequency andseverity of weather events, such as typhoons and floods, orchronic shifts in weather patterns;• transition risk, which arises from the process of moving to a
low-carbon economy, including changes in government or
public policy, technology and end-demand; and• greenwashing risk, which arises from the act of knowingly or
unknowingly misleading stakeholders regarding the group’s
strategy relating to climate, the climate impact/benefits of a
product or service, or the climate commitments or performanceof its customers.

Approach and policy
The group is affected by climate risks either directly or indirectly
through its relationships with its customers, resulting in bothfinancial and non-financial impacts.
The group may face direct exposure to the physical impacts ofclimate change, which could negatively affect its day-to-day
operations. Any detrimental impact to its customers from climate
risk could negatively impact the group either through credit losses
on its loan book or losses on trading assets. The group may also
be impacted by reputational concerns related to the climate action
or inaction of its customers. In addition, if the group is perceived
to mislead stakeholders on its business activities or if it isperceived to fail to achieve its stated net zero ambitions, it could
face greenwashing risk resulting in significant regulatory and legalrisks.
The group has integrated climate risk into its existing risktaxonomy, and incorporated it within the risk management
framework through the policies and controls for existing risks
where appropriate.
The group’s climate risk approach is aligned to the Group-widerisk management framework and three lines of defence model,
which sets out how the group identifies, assesses, and manages
its risks. This approach ensures the group and senior management
have visibility and oversight of the group’s key climate risks.

The first line of defence has ultimate accountability for managing
climate risk in line with risk appetite and owns the related
controls.
The second line of defence sets policies and minimum control
standards, provides subject matter expertise and reviews andchallenges to first line activities to ensure actions relating toclimate are appropriate. Risk Stewards in the existing risktaxonomy are responsible for the oversight of climate risk impacts
on their risk types.
The third line of defence provides independent assurance tomanagement that climate risk management, governance andcontrol processes are designed and operating effectively.
The group’s approach to managing climate risk is currently
focused on understanding physical and transition impacts acrossfive priority risk types: wholesale credit risk, retail credit risk,
resilience risk, regulatory compliance risk and reputational risk.
On climate risk impact assessment, the group rely on the Group's
high-level materiality rating on how climate risk may impact risk
types within the Group’s taxonomy over a 12-month horizon, andhow the level of risk may increase over longer time horizons.
However, the group observes that the pace of transition in AsiaPacific varies market by market.
The group considers greenwashing to be an important risk that is
likely to increase over time, as the group looks to develop
capabilities and products to achieve its net zero ambition, andwork with its clients to help them transition to a low-carbon
economy. To reflect this, the group’s climate risk approach has
been updated to include greenwashing risk, and guidance has
been provided to the first and second lines of defence on the keyrisk indicators, and how it should be managed.
The tables below provide an overview of the climate risk drivers
considered within the Group's climate risk framework. Primary risk
drivers refer to risk drivers aligned to the Financial Stability Board's
TCFD, which sets a framework to help public companies and otherorganisations disclose climate-related risks and opportunities.
Thematic risk drivers are bespoke to the group's internal climate
risk framework.
The following table provides an overview of the physical andtransition climate risk drivers.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

61

Risk

Climate risk – primary risk
drivers

Details

Potential Impacts

Physical

AcuteIncreased frequency and severity of weather events causing
disruption to business operations

Chronic

Longer-term shifts in climate patterns (e.g. sustained higher
temperatures) that may cause sea level rise or chronic heat waves

•
•
•
•
•
•

Transition

Policy and legal Mandates on, and regulation of, existing products and services.
Litigation from parties who have suffered from the effects of climatechangeTechnology

Replacement of existing products with lower emission options

End-demand(market)Changing consumer demand from individuals and corporates

Reputational

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

Decreased real estate values
Decreased household income and wealth
Increased costs of legal and compliance
Increased public scrutiny
Decreased profitability
Lower asset performance

The table below provides an overview of the drivers of greenwashing risk, which is considered to be a thematic risk driver within theGroup's framework.
Climate risk – thematic risk drivers

Details

Greenwashing

Firm

Failure to be accurate and transparent in communicating the group’s progress against its net zero ambition

Product

Not taking steps to ensure the group’s ‘green’ and ‘sustainable’ products are developed and marketed appropriately

ClientFailing to check the group’s products are being used for ‘green’ and ‘sustainable’ business activity and assessing thecredibility of its customers’ climate commitments and/or progress against key performance indicators

Climate risk management (unaudited)

Risk appetite

Key developments in 2022

The group’s climate risk appetite supports the oversight andmanagement of the financial and non-financial risks from climatechange, and supports the business to deliver its climate ambition
in a safe and sustainable way. The group’s initial risk appetite
focuses on the oversight and management of climate risks acrossthe five priority areas, including exposure to high transition risk
sectors in its wholesale portfolio and physical risk exposures in its
retail portfolio. These metrics have been implemented at grouplevel and locally where appropriate. The group continues to review
its risk appetite regularly to capture the most material climate risks
and will enhance its metrics over time.

The group’s dedicated climate risk programme continues tosupport the development of its climate risk management
capabilities. The key developments in 2022 included:• The Board approved the group climate strategy.
• The Group updated its climate risk approach to include all risk
types in its risk taxonomy.
• The group provided a climate-related training for the Board, andexpanded training to employees covering additional rolespecific topics, as well as increasing the availability of training
to the wider workforce.
• The group developed new climate risk metrics to assess theimpact of physical risk on the group’s retail mortgage portfolio
in Hong Kong.
• The Group enhanced its transition and physical riskquestionnaire and scoring tool, which helps the group to assess
and improve its understanding of the impact of transition andphysical risk on its customers' business models, and used themfor certain corporate clients in high climate transition risk
sectors.
• The Group developed its first internal climate scenario exercise,
where it used bespoke scenarios that were designed to
articulate a view of the range of potential outcomes for global
climate change. For further details of the internal climate
scenario analysis, see page 11.

Governance and structure
The Board takes overall responsibility for the group’s climate
strategy, overseeing executive management in developing theexecution and associated reporting.
The group Chief Risk Officer is responsible for the management ofclimate-related risks, including responsibility for governance, risk
management, stress testing and scenario analysis.
The group CROF oversees all risk activities relating to climate risk
management and escalation of climate risks.
The group Risk Management Meeting and the group Risk
Committee receive regular updates on the climate risk profile, top
and emerging climate risks, and progress of the climate risk
programme.
A working group was established to coordinate the regional
implementation of climate risk-related enhancements across theCompliance sub-function.
62

Policies, processes and controls
The group is integrating climate risk into the policies, processes
and controls across many areas of its organisations, and the groupwill continue to update these as its climate risk management
capabilities mature over time.
In 2022, the group incorporated climate considerations into newmoney request processes for its wholesale business. The groupalso continued to enhance its climate risk scoring tool, which will
enable the group to assess its customers' exposures to climate
risk.
The Group also published and updated the energy policy, covering
oil and gas, power and utilities, hydrogen, renewables, nuclear
and biomass sectors and it updated the thermal coal phase-out
policy after its initial publication in 2021.

Wholesale credit risk
Identification and assessment
The Group has identified six sectors where its wholesale credit
customers have the highest climate risk, based on their carbon
emissions. These are automotive, chemicals, construction andbuilding materials, metals and mining, oil and gas, and power andutilities. In these sectors, the Group has a transition and physicalrisk questionnaire to help assess and improve its understanding of
the impact of climate changes on its customers' business models
and any related transition strategies. Relationship managers workwith customers to record questionnaire responses, which also help
to identify potential business opportunities to support customers’transition. The questionnaire is also being completed for theGroup’s largest customers in the agriculture, industrials, realestate and transportation sectors.
The Group intends to continue increasing the scope of thequestionnaire in 2023 by including more customers.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Management
In 2022, the Group updated its credit policy to require relationshipmanagers to comment on climate risk factors in credit applications
for new money requests. The Group continues to use a climate
risk scoring tool, which provides a climate risk score for eachcustomer based on the questionnaire responses. The climate risk
score is used to inform portfolio level management decisions andis made available to relationship management and credit risk
managements teams. The scoring tool will be enhanced andrefined over time as more data becomes available.
In 2023, the Group aims to further embed climate risk
considerations in its credit risk management processes.

Aggregation and reporting
The group internally reports its exposure and RWAs to the six hightransition risk sectors in the wholesale portfolio. The group also
reports the proportion of questionnaire responses that have aboard policy or management plan for transition risk. These areincluded as part of the regular risk profile paper presented at thegroup CROF which is held quarterly.

physical and transition climate risks that may impact on its
operational and resilience capabilities.
The group is developing a deeper understanding of the risks towhich its properties are subject, and assess the mitigants toensure ongoing operational resilience.

Management
Operational and Resilience Risk policies are reviewed andenhanced periodically so they remain relevant to evolving risks,
including those linked to climate change. The capability of ourcolleagues is enhanced through training, periodic communications
and dedicated guidance.

Aggregation and reporting
With its ambition to achieve net zero in its own operations, theGroup is particularly focused on developing measures to facilitate
proactive risk management and assess progress against thisstrategic target.
Operational and Resilience Risk is represented at the group's
CROF.

Retail credit risk

Regulatory compliance risk

Identification and assessment

Identification and assessment

The Group continues to improve its identification and assessmentof climate risk within its retail mortgage portfolio, with increased
investments in physical risk data and enhancements to its internalrisk assessment capabilities. The Group prioritised applying these
improvements to its largest mortgage markets to understand its
physical risk exposure based on centrally available data. The
Group has also started to identify and monitor potential physicalrisk in the remainder of its mortgage markets, using locallyavailable data.

The Compliance sub-function continues to prioritise theidentification and assessment of compliance risks that may arise
from climate risk.

In 2022, the Group undertook a stress test exercise for Singapore
at the behest of the Monetary Authority of Singapore. In addition,a Group-wide internal climate stress testing exercise wasundertaken to further its understanding and assessment of thepotential impact of physical risk to its mortgage portfolios. The
Group completed a detailed asset-level analysis for Hong Kong,
Singapore and Australia which represent three of the group’s
largest residential mortgage portfolios in Asia-Pacific.

Management
The Group continues to review and update its retail credit risk
management policies and processes to further embed climate risk,
whilst also monitoring local regulatory developments to ensurecompliance.

Aggregation and reporting
The Group manages and monitors the integration of climate risk
across Wealth and Personal Banking through the CROF.
The Group assesses the progress of the implementation of its
strategic climate risk plans and ensures that operational processes
and risk management frameworks are updated as its data andunderstanding of climate risk evolves.

How we are starting to measure climate risk
In 2022, the group implemented physical risk exposure
assessment across mortgage portfolios in Asia-Pacific. For Hong
Kong and Singapore, the assessment is based on property level
peril data.
For other markets, locally relevant data sources were used to
identify properties or areas with potentially heightened climate
risk. These climate risk exposure metrics are in the early stages ofdevelopment and the underlying data and methodologies may
require refinement in the future, although they provide anindicative view.

Resilience risk
Identification and assessment
The group’s Operational and Resilience Risk sub-function is
responsible for overseeing the identification and assessment ofThroughout 2022, focus remained on greenwashing, particularly
with regard to the development and ongoing governance of new,changed or withdrawn climate and ESG products and services,and ensuring sales practices and marketing materials were clear,fair and not misleading.
To support the ongoing management and mitigation ofgreenwashing, the Compliance sub-function worked across all
business lines to enhance the group’s product controls. This
improved the group’s ability to identify, assess and manage
product-related greenwashing risks throughout the productgovernance lifecycle. Examples of ongoing enhancements include:• integrating the consideration and mitigation of climate and ESG
risks within the group’s existing product governanceframework;• enhancing the group’s product templates and forms to ensure
climate risk is actively considered and documented by thebusiness within product review and creation; and• clarifying and improving product governance policies,
associated guidance and key governance terms of reference toensure new climate and ESG products, as well as climate- and
ESG-related amendments to existing products, comply withboth internal and external standards, and are subject to robust
governance.

Management
The Group policies continue to set the Group-wide standards thatare required to manage the risk of breaches of its regulatory duty
to customers, including those related to climate risk, ensuring faircustomer outcomes are achieved. The Group’s product andcustomer lifecycle policies have been enhanced to ensure theytake climate into consideration. They are reviewed on a periodic
basis to ensure they remain relevant and up to date.
The Compliance sub-function continues to focus on improving thecapability of colleagues through training, communications anddedicated guidance, with a particular focus on ensuring colleagues
remain up to date with changes in the evolving regulatory
landscape.

Aggregation and reporting
The Compliance sub-function continues to operate an ESG andClimate Risk Working Group at a Group level to track and monitor
the integration and embedding of climate risk within the
management of regulatory compliance risks. The working groupalso continues to monitor ongoing regulatory and legislativechanges across the ESG and climate risk agenda. In Asia-Pacific, a

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

63

Risk

working group was established in February 2022 to coordinate theregional implementation of climate risk-related enhancements
across the Compliance sub-function.
The Group has continued to develop its key climate risk-related
metrics and indicators, aligned to the broader focus on regulatorycompliance risks, to continually improve its risk monitoring
capability. This has included the development of a climate-specificrisk profile, which is produced at a Group level and regularly
disseminated and reviewed at regional level, alongside theintroduction and improvement of existing metrics and indicators.
The Compliance sub-function continues to be represented at theGroup’s and the group's CROF.

Reputational risk
Identification and assessment
The Group implements sustainability risk policies, including theEquator Principles as part of its broader reputational risk
framework. The Group focuses on sensitive sectors that may havea high adverse impact on people or the environment, and in which
the Group has a significant number of customers. A key area of
focus is high-carbon emission sectors, which include oil and gas,
power generation, mining, agricultural commodities and forestry.
In 2022, the Group published an updated energy policy, covering
oil and gas, power and utilities, hydrogen, renewables, nuclear
and biomass. It has also updated its thermal coal phase-out policy
after its initial publication in 2021.

Management
As the primary point of contact for customers, the group’s
relationship managers are responsible for checking that customers
meet policies aimed at reducing carbon emissions. The group's
network in Asia-Pacific of more than 20 sustainability risk
managers provides local policy support and expertise torelationship managers. A regional Sustainability Risk teamprovides a higher level of guidance and is responsible for theoversight of policy compliance and implementation over wholesalebanking activities.

64

Aggregation and reporting
The Sustainability Risk Oversight Forum provides a group-wide
forum for senior members of the group's Risk, Compliance andglobal business management to support the management ofsustainability risks. It also oversees the development andimplementation of sustainability risk policies. Cases involving
complex sustainability risk issues related to customers,
transactions or third parties are managed through the reputationalrisk and client selection governance process. The Group reports
annually on its implementation of the Equator Principles and thecorporate loans, project-related bridge loans and advisory
mandates completed under the principles.
For the latest report, see: www.hsbc.com/who-we-are/our-climatestrategy/sustainability-risk/equator-principles.

Other risks
The following section outlines key developments that the Groupmade to embed climate considerations within other risk types in
its risk taxonomy. All risk taxonomies, including those notreferenced below, are assessed to determine the potential
materiality of the impact of climate risk on their risk framework.

Treasury risk
The Group established a treasury risk-specific climate risk
governance forum to provide oversight over climate-related topics
that may impact Treasury. The plan in 2023 is to update relevant
treasury risk policies to strengthen its climate risk guidance andrequirements pertaining to treasury risk.

Traded risk
The Group established a climate stress testing-focused working
group to coordinate the implementation of climate stress testing,and support the delivery of internal climate scenario analysis.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Resilience risk

Regulatory compliance risk

(Unaudited)(Unaudited)

Overview

Overview

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

Regulatory compliance risk is the risk associated with breaching
our duty to clients and other counterparties, inappropriate market
conduct and breaching related financial services regulatory
standards. Regulatory compliance risk arises from the failure toobserve relevant laws, codes, rules and regulations and canmanifest itself in poor market or customer outcomes and lead tofines, penalties and reputational damage to our business.

Resilience risk management
Key developments in 2022
The Operational and Resilience Risk sub-function provides robust
Risk Steward oversight of the management of resilience risk by
the group businesses, functions and legal entities. This includes
effective and timely independent challenge and expert advice.
During the year, we carried out a number of initiatives to keep
pace with geopolitical, regulatory and technology changes and tostrengthen the management of resilience risk:• We focused on enhancing our understanding of our risk andcontrol environment, by updating our risk taxonomy andcontrol libraries, and refreshing risk and control assessments.
• We implemented heightened monitoring and reporting ofcyber, third party, business continuity and payment/sanctions
risks resulting from the Russia/Ukraine war, and enhanced
controls and key processes where needed.

Regulatory compliance risk management
Key developments in 2022
The dedicated programme to embed our updated purpose-led
conduct approach has concluded. Work to map applicableregulations to our risks and controls continues in 2023 alongside
adoption of new tools to support enterprise-wide horizon scanningfor new regulatory obligations and to manage our regulatory
reporting inventories. Climate risk has been integrated into
regulatory compliance policies and processes, with enhancements
made to the product governance framework and controls in orderto ensure the effective consideration of climate and in particular
Greenwashing risks.

Governance and structure

We prioritise our efforts on material risks and areas undergoingstrategic growth, aligning our location strategy to this need.

The group Chief Compliance Officer reports to the Group Head of
Risk and Compliance and group Co-Chief Executive at an entity
level. They attend the RMM and the Risk Committee. The structureof the Compliance sub-function is substantively unchanged andthe Group Regulatory Conduct capability and Group Financial
Crime capability both continue to work closely with the Country/
Markets Chief Compliance Officers and their respective teams tohelp them identify and manage regulatory and financial crimecompliance risks across the region. They also work together, andwith all relevant stakeholders, to ensure we achieve good conduct
outcomes and provide enterprise-wide support on the Compliancerisk agenda in collaboration with the Risk sub-function.

Governance and structure

Key risk management processes

The Operational and Resilience Risk target operating model
provides a globally consistent view across resilience risks,strengthening our risk management oversight while operating
effectively as part of a simplified non-financial risk structure. Weview resilience risk across nine sub-risk types related to: failure to
manage third parties; technology and cybersecurity; transaction
processing; failure to protect people and places from physicalmalevolent acts; business interruption and incident risk; data risk;change execution risk; building unavailability; and workplacesafety.

The Group Regulatory Conduct 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 tools to protect
against regulatory compliance risks. The Group capability provides
oversight, review and challenge to the local Chief Compliance
Officers and their teams to help them identify, assess and mitigate
regulatory compliance risks, where required. The Group's
regulatory compliance risk policies are regularly reviewed. Global
Policies and Procedures require the prompt identification andescalation of actual or potential regulatory breaches, and relevant
reportable events are escalated to the RMM and the Risk
Committee, as appropriate.

• We provided analysis and easy-to-access risk and control
information and metrics to enable management to focus on
non-financial 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 privacy and change execution.

Risk appetite and key escalations for resilience risk are reported to
the group Risk Management Meeting, chaired by the group Chief
Risk Officer, with an escalation path to the Group Risk NonFinancial Risk Management Board (NFRMB), chaired by the Group
Chief Risk and Compliance Officer.

Financial crime risk

Key risk management processes(Unaudited)

Operational resilience is our ability to anticipate, prevent, adapt,
respond to, recover and learn from operational disruption while
minimising customer and market impact. Resilience is determinedby assessing whether we are able to continue to provide our mostimportant services, within an agreed level. This is achieved via
day-to-day oversight, periodic and ongoing assurance, such as
deep dive reviews and controls testing, which may result inchallenges 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 beable to prevent all disruption but we prioritise investment tocontinually improve the response and recovery strategies for ourmost important business services.

Overview
Financial crime risk is the risk that HSBC’s products and services
will be exploited for criminal activity. This includes fraud, bribery
and corruption, 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 2022
We regularly review the effectiveness of our financial crime risk
management framework, which includes consideration of thecomplex and dynamic nature of sanctions compliance risk. In
2022, we adapted our policies, procedures and controls to respondto the unprecedented volume and diverse set of sanctions and

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

65

Risk

trade restrictions imposed against Russia following its invasion of
Ukraine.
We also continued to make progress with several key financial
crime risk management initiatives, including:• We enhanced our screening and non-screening controls to aid
the identification of potential sanctions risk related to Russia, as
well as risk arising from export control restrictions.
• We deployed a key component of our intelligence-led, dynamic
risk assessment capabilities for customer account monitoring in
Singapore for Wealth and Private Banking (WPB) andCommercial Banking (CMB).
• We reconfigured our transaction screening capability inreadiness for the global change to payment systems formatting
under ISO20022 requirements, and enhanced transaction
screening capabilities by implementing automated alert
discounting.
• We to strengthened the first party lending fraud framework,
reviewed and published an updated fraud policy and associatedcontrol library, and continued to develop fraud detection tools.

Governance and structure
The structure of the Financial Crime sub-function remained
substantively unchanged in 2022, although we continued toreview the effectiveness of our governance framework to manage
financial crime risk. The group Head of Financial Crime and group
Money Laundering Reporting Officer reports to the group Chief
Compliance Officer, while the group Risk Committee retains
oversight of matters relating to fraud, bribery and corruption, tax
evasion, sanctions and export control breaches, money
laundering, terrorist financing and proliferation financing.

Key risk management processes
We will not tolerate knowingly conducting business withindividuals 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 our control framework, we will takeappropriate mitigating action.
We manage financial crime risk because it is the right thing to do
to protect our customers, shareholders, staff, the communities inwhich we operate, as well as the integrity of the financial systemon which we all rely. We operate in a highly regulated industry inwhich these same policy goals are codified in laws andregulations. We are committed to complying with the law andregulation of all the markets in which we operate and applying aconsistently high financial crime standard globally.
We continue to assess the effectiveness of our end-to-end
financial crime risk management framework on an ongoing basis,
and invest in enhancing our operational control capabilities andtechnology solutions to deter and detect criminal activity. We have
simplified our framework by streamlining and de-duplicating policy
requirements. We also strengthened our financial crime risktaxonomy and control libraries, improved our investigative andmonitoring capabilities through technology deployments, as well
as developed more targeted metrics. We have also enhanced
governance and reporting.
We are committed to working in partnership with the wider
industry and the public sector in managing financial crime risk andwe participate in numerous public-private partnerships andinformation-sharing initiatives around the world. In 2022, our focus
remained on measures to improve the overall effectiveness of the
global financial crime framework, notably by providing input into
legislative and regulatory reform activities. We did this bycontributing to the development of responses to consultation
papers focused on how financial crime risk management
frameworks can deliver more effective outcomes in detecting anddeterring criminal activity, including tackling evolving criminal
behaviour such as fraud. Through our work with the Wolfsberg
Group and the Institute of International Finance, we supported theefforts of the global standard setter, the Financial Action Task
66

Force, on the use of technology and data pooling to advance
information sharing, as well as their work to strengthen beneficial
ownership standards. In addition, we participated in a number ofpublic events related to tackling forestry crimes, wildlife trafficking
and human trafficking.

Independent Reviews
In August 2022, the Board of Governors of the Federal Reserve
System terminated the 2012 cease-and-decist order, withimmediate effect. The order was the final regulatory enforcement
action that HSBC entered into in 2012. In June 2021, the UK
Financial Conduct Authority (FCA) had already determined that nofurther Skilled Person work was required under section 166 of the
Financial Services and Markets Act. The Group Risk Committee
retains oversight of matters relating to financial crime, including
any remaining remedial activity not yet completed as part ofprevious recommendations.

Model risk
(Unaudited)

Overview
Model risk is the risk of inappropriate or incorrect businessdecisions arising from the use of models that have been
inadequately designed, implemented or used, or from models that
do not perform in line with expectations and predictions.
Model risk arises in both financial and non-financial contexts
whenever business decision making includes reliance on models.

Key developments in 2022
In 2022, we continued to make improvements in our model risk
management processes amid regulatory changes in model
requirements.
Initiatives during the year included:• Redeveloped, independently validated and submitted ourmodels to the PRA and HKMA in response to regulatory capitalchanges, including the internal ratings-based (‘IRB’) approachfor credit risk, internal model method (‘IMM’) for counterparty
credit risk and internal model approach (‘IMA’) for market risk.
These new models have been built to enhanced standards
using improved data as a result of investment in processes andsystems.
• Redeveloped and validated models impacted by the changes tothe alternative rate setting mechanisms due to the IBOR
transition.
• Embedded changes to our control framework for our SarbanesOxley models. These changes were made to address control
weaknesses that emerged as a result of significant increases inadjustments and overlays that were applied to compensate forthe impact of the Covid-19 pandemic, and the subsequent
volatility due to the effects of the rise in global interest rates on
the ECL models.
• Businesses and Functions continued to be more involved in thedevelopment and management of models, and hiringcolleagues with strong model risk skills. Enhanced focus was
also placed on key model risk drivers such as data quality andmodel methodology.
• Enhanced the reporting that supports the model risk appetite
measures, to support our Businesses and Functions inmanaging model risk more effectively.
• Rolled out our HBAP regional engagement strategy in responseto the growing maturity of model risk management anddemand, and enhanced the awareness of model inventory,model limitations and risk controls across the Region.
• Conducted targeted briefing sessions across the Region tostrengthen the awareness of models used and the engagement
between the model user community and model developing
areas.
• Continued the transformation of the Model Risk Management
team, with further enhancements to the independent model

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

validation processes, including new systems and working
practises.
• Climate Risk, HKFRS 17 Insurance models and models using
advanced analytics and machine learning, have become criticalareas of focus that will grow in importance in 2023 andbeyond. The model risk teams were enhanced with specialist
skills to manage the increased model risk in these areas.

Governance
The group Model Risk Committee (MRC) provides oversight ofmodels used in HBAP and focuses on local delivery andrequirements. The Committee is chaired by the group's 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 HBAP
MRC, oversee model risk management activities based on
associated model categories.

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

Insurance manufacturing operations risk
Overview(Unaudited)

The key risks for our insurance manufacturing operations aremarket risks, in particular interest rate and equity, credit risks andinsurance underwriting. These have a direct impact on thefinancial results and capital positions of the insurance operations.
Liquidity risk, whilst significant in other parts of the group, isrelatively minor for our insurance operations.

HSBC’s Insurance business(Unaudited)

We sell insurance products through a range of channels including
our branches, insurance salesforces, direct channels and thirdparty distributors. The majority of sales are through an integrated
bancassurance model that provides insurance products principallyfor customers with whom we have a banking relationship,
although the proportion of sales through other sources such as
independent financial advisers, tied agents and digital isincreasing.
For the insurance products we manufacture, the majority of sales
are of 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
part of the underwriting profit and investment income within thegroup.

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

Insurance manufacturing operations risk
management
Key developments in 2022
(Unaudited)

The insurance manufacturing subsidiaries follow the group’s risk
management framework. In addition, there are specific policies
and practices relating to the risk management of insurance
contracts, which have not changed materially over 2022. There
has been continued market volatility observed over 2022 acrossinterest rates, equity markets and foreign exchange rates. This has
been predominantly driven by geopolitical factors and wider
inflationary concerns. One area of key risk management focus
over 2022 was the implementation of the new accounting
standard, HKFRS 17 Insurance Contracts. Given the fundamental
nature of the impact of the accounting standard on insurance
accounting, this presents additional financial reporting and modelrisks for the group. Another area of focus has been the acquisition
early in 2022 of an insurance business in Singapore and thesubsequent integration of that business into the group’s risk
management framework.

Governance and structure(Unaudited)

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

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
action plans to mitigate these risks are considered in the group
ICAAP and the entities’ regulatory Own Risk and Solvency
Assessments ('ORSAs') which are produced by all material
entities.

Key risk management processes
Market risk
(Audited)

All our insurance manufacturing subsidiaries have market riskmandates that specify the investment instruments in which they
are permitted to invest and the maximum quantum of market riskthat they may retain. They manage market risk by using, among
others, some or all of the techniques listed below, depending on
the nature of the contracts written:

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

67

Risk

• We are able to adjust bonus rates to manage the liabilities topolicyholders for products with discretionary participating
features (‘DPF’). The effect is that a significant portion of themarket risk is borne by the policyholder;

Risk appetite buffers are set to ensure that the operations are able
to remain solvent, allowing for business-as-usual volatility andextreme but plausible stress events. In certain cases, entities use
reinsurance to manage capital risk.

• We use asset and liability matching where asset portfolios are
structured to support projected liability cash flows. The groupmanages its assets using an approach that considers asset
quality, diversification, cash flow matching, liquidity, volatility
and target investment return. We use models to assess theeffect of a range of future scenarios on the values of financial
assets and associated liabilities, and ALCOs employ theoutcomes in determining how best to structure asset holdings
to support liabilities;

Liquidity risk is relatively minor for the insurance business. It ismanaged by cash flow matching and maintaining sufficient cash
resources, investing in high credit-quality investments with deepand liquid markets, monitoring investment concentrations andrestricting them where appropriate, and establishing committed
contingency borrowing facilities.

• We use derivatives to protect against adverse market
movements; andInsurance underwriting risk

• 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 performanceof their investment portfolios. Our assessment of thecreditworthiness of issuers and counterparties is based primarily
upon internationally recognised credit ratings and other publicly
available information.
Stress testing is performed on investment credit exposures using
credit spread sensitivities and default probabilities.
We use a number of tools to manage and monitor credit risk.
These include a credit report containing a watch-list ofinvestments with current credit concerns, primarily investmentsthat may be at risk of future impairment or where highconcentrations to counterparties are present in the investment
portfolio. Sensitivities to credit spread risk are assessed andmonitored regularly.

Capital and liquidity risk
(Audited)

Insurance manufacturing subsidiaries complete quarterly liquidity
risk reports and an annual review of the liquidity risks to which
they are exposed.
(Unaudited)

Our insurance manufacturing subsidiaries primarily use thefollowing 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
initial and ongoing assessment of the adequacy of premiums
charged on new insurance contracts to meet the risks
associated with them;• a framework for customer underwriting;• reinsurance, which cedes risks to third party reinsurers to keep
risks within risk appetite, reduce volatility and improve capitalefficiency; and• oversight of expense and reserving risks by entity Financial
Reporting Committees.

Insurance manufacturing operations risk in 2022
Measurement(Unaudited)

The tables below show the composition of assets and liabilities bycontract type. 89% (2021: 91%) of both assets and liabilities arederived from Hong Kong.

Capital risk for our insurance manufacturing subsidiaries isassessed in the ICAAP based on their financial capacity to support
the risks to which they are exposed. Capital adequacy is assessedon both the group’s economic capital basis, and the relevant local
insurance regulatory basis.

68

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

At 31 Dec 2022
Financial assets– financial assets designated and otherwise mandatorily measured at fair value through profit orloss

Non-linked

Unit-linked

Shareholders'assetsand liabilities

HK$m

HK$m

HK$m

HK$m

702,897

34,632

43,822

781,351

Total

183,423

33,533

1,569

218,525– derivatives– financial investments measured at amortised cost
– financial investments measured at fair value through other comprehensive income– other financial assets1
Reinsurance assets
PVIF2
Other assets and investment properties

1,322
482,271
5,977
29,90435,320—14,564

—
328
—
771
17
—
9

12
37,177734
4,330—
65,537
6,370

1,334
519,776
6,711
35,00535,33765,537
20,943

Total assets
Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts
Deferred tax3
Other liabilities
Total liabilities
Total equity
Total equity and liabilities

752,781
25,693
679,567559—
705,819—705,819

34,658
7,338
21,299——28,637—28,637

115,729—
10,66538,94249,607
119,105
168,712903,168
33,031
700,866
11,22438,942784,063
119,105
903,168

Non-linked

Unit-linked

Shareholders'assetsand liabilities

Total

HK$m

HK$m

HK$m

HK$m

637,317

37,382

46,971

721,670

160,555

35,906457

196,918

631
432,733
5,780
37,61828,874—
13,626
679,817
28,397
608,5909—
636,996—
636,996

6
479
—
991
6
—
4
37,392
7,030
29,645——36,675—36,675

3
37,734592
8,185—
63,765
5,304
116,040——
10,57935,26945,848
113,730
159,578

640
470,946
6,372
46,79428,88063,76518,934
833,249
35,427638,235
10,58835,269719,519
113,730
833,249

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

At 31 Dec 2021
Financial assets– financial assets designated and otherwise mandatorily measured at fair value through profit orloss– derivatives– financial investments measured at amortised cost
– financial investments measured at fair value through other comprehensive income– other financial assets1
Reinsurance assets
PVIF2
Other assets and investment properties
Total assets
Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts
Deferred tax3
Other liabilities
Total liabilities
Total equity
Total equity and liabilities

1
2
3
4

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

69

Risk

Key risk types
Market risk
(Audited)

Description and exposure
Market risk is the risk of changes in market factors affecting
capital or profit. Market factors include interest rates, equity andgrowth assets and foreign exchange rates.
Our exposure varies depending on the type of contract issued. Our
most significant life insurance products are contracts withdiscretionary participating features (‘DPF’). These products
typically include some form of capital guarantee or guaranteed
return on the sums invested by the policyholders, to which
discretionary bonuses are added if allowed by the overall
performance of the funds. These funds are primarily invested in
fixed interest assets, with a proportion allocated to other asset
classes to provide customers with the potential for enhanced
returns.
DPF products expose the group to the risk of variation in asset
returns, which will impact our participation in the investment
performance. In addition, in some scenarios the asset returns canbecome insufficient to cover the policyholders' financial
guarantees, in which case the shortfall has to be met by the group.
Reserves are held against the cost of such guarantees.
The cost of such guarantees is accounted for as a deduction fromthe present value of in-force 'PVIF' asset, unless the cost of suchguarantees is already explicitly allowed for within the insurance
contracts liabilities.

70

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)

Where appropriate, the effects of the sensitivity tests on profit
after tax and total equity incorporate the impact of the stress on
the PVIF. The relationship between the profit and total equity andthe risk factors is non-linear; therefore the results disclosed should
not be extrapolated to measure sensitivities to different levels ofstress. For the same reason, the impact of the stress is not
symmetrical on the upside and downside. The sensitivities reflect
the established risk sharing mechanism with policyholders forparticipating products, and are stated before allowance formanagement actions which may mitigate the effect of changes in
the market environment. The sensitivities presented allow foradverse changes in policyholders’ behaviour that may arise in
response to changes in market rates.
The following table illustrates the effects of selected interest rate,equity price and foreign exchange rate scenarios on our profit for
the year and the total equity of our insurance manufacturingsubsidiaries.
The differences between the impacts on profit after tax and equity
are driven by the changes in value of the bonds measured at fairvalue through other comprehensive income, which are only
accounted for in equity.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Sensitivity of the group’s insurance manufacturing subsidiaries to market risk factors(Audited)
31 Dec 2022
Effect on profit
after tax

+100 basis points parallel shift in yield curves-100 basis points parallel shift in yield curves
10% increase in equity prices
10% decrease in equity prices
10% increase in USD exchange rate compared to all currencies
10% decrease in USD exchange rate compared to all currencies

31 Dec 2021

Effect on total
equityEffect on profit
after tax

Effect on total
equity

HK$m

HK$m

HK$m

HK$m

(1,079)698
2,438(2,647)767(767)(1,872)
1,490
2,438(2,647)767(767)(1,257)1,201
2,388(2,426)635(635)(2,036)
1,980
2,388(2,426)635(635)

Credit risk

Liquidity risk

(Audited)(Audited)

Description and exposure

Description and exposure

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

Liquidity risk is the risk that an insurance operation, thoughsolvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can securethem only at excessive cost. Liquidity risk may be able to beshared with policyholders for products with DPF.

• risk associated with credit spread volatility and default by debt
security counterparties after investing premiums to generate areturn for policyholders and shareholders; andThe following table shows the expected undiscounted cash flows
for insurance liabilities at 31 December 2022.

• risk of default by reinsurance counterparties and nonreimbursement for claims made after ceding insurance risk.

The profile of the expected maturity of insurance contracts at
31 December 2022 remained comparable with 2021.

The amounts outstanding at the balance sheet date in respect ofthese items are shown in the table on page 69.
The credit quality of the reinsurers’ share of liabilities underinsurance contracts is assessed as ‘strong’ or ‘good’ (as definedon page 32), with 100% of the exposure being neither past due nor
impaired (2021: 100%).

The remaining contractual maturity of investment contract
liabilities is included in the table on page 118.

Credit risk on assets supporting unit-linked liabilities ispredominantly borne by the policyholders. Therefore our exposure
is primarily related to liabilities under non-linked insurance andinvestment contracts and shareholders’ funds. The credit quality of
insurance financial assets is included in the table on page 44. The
risk associated with credit spread volatility is to a large extent
mitigated by holding debt securities to maturity, and sharing a
degree of credit spread experience with policyholders.
Expected maturity of insurance contract liabilities(Audited)
Expected cash flows (undiscounted)

At 31 Dec 2022
Non-linked insurance contracts
Unit-linked

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

Within 1 year

1-5 years

5-15 years

Over 15 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

55,3594,865
60,224

198,209
10,047208,256

348,404
11,978360,382

940,565
4,898
945,463

1,542,537
31,7881,574,325

53,098
8,073
61,171

187,589
14,353201,942

324,654
14,852
339,506

662,058
8,115
670,173

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

71

Risk

Insurance underwriting risk

Sensitivities

Description and exposure(Audited)(Unaudited)

The table below shows the sensitivity of profit and total equity toreasonably possible changes in non-economic assumptions acrossall our insurance manufacturing subsidiaries. Mortality andmorbidity 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.

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 the year as rising interest rates have led to anincrease in the cost of financing for customers.
The principal risk we face is that, over time, the cost of thecontract, including claims and benefits may exceed the total
amount of premiums and investment income received.
The table on page 69 analyses our life insurance risk exposures bytype of contract.
The insurance risk profile and related exposures remain largely
consistent with those observed at 31 December 2021.

Sensitivity to lapse rates depends on the type of contracts being
written. An increase in lapse rates typically has a negative effecton profit due to the loss of future income on the lapsed policies.
However, some contract lapses have a positive effect on profit due
to the existence of policy surrender charges.
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.

Sensitivity analysis(Audited)

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

72

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

2022

2021

HK$m

HK$m

(561)
569
(549)
535
(372)
372

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

Statement of Directors’ Responsibilities
The following statement, which should be read in conjunction with the Auditor’s statement of their responsibilities set out in their reporton pages 74-78, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the Auditor
in relation to the Consolidated Financial Statements.
The Directors of The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) are responsible for the preparation of the Bank’s
Annual Report and Accounts, which contains the Consolidated Financial Statements of the Bank and its subsidiaries (together ‘thegroup’), in accordance with applicable law and regulations.
The Hong Kong Companies Ordinance requires the Directors to prepare for each financial year the consolidated financial statements forthe group and the balance sheet for the Bank.
The Directors are responsible for ensuring adequate accounting records are kept that are sufficient to show and explain the group’stransactions, such that the group’s consolidated financial statements give a true and fair view.
The Directors are responsible for preparing the consolidated financial statements that give a true and fair view and are in accordance with
Hong Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants. The Directors
have elected to prepare the Bank’s balance sheet on the same basis.
The Directors as at the date of this report, whose names and functions are set out in the ‘Report of the Directors’ on pages 3-8 of thisAnnual Report and Accounts, confirm to the best of their knowledge that:• the Consolidated Financial Statements, which have been prepared in accordance with HKFRSs and in accordance with the applicableset of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the group; and• the management report represented by the Financial Review, the Risk and Capital Reports includes a fair review of the development
and performance of the business and the position of the group, together with a description of the principal risks and uncertainties thatthe group faces.

On behalf of the Board

Peter Wong
Chairman
21 February 2023

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202273

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 79 to 139, comprise:• the consolidated balance sheet as at 31 December 2022;• the consolidated income statement for the year then ended;• the consolidated statement of comprehensive income for the year then ended;• the consolidated statement of changes in equity for the year then ended;• the consolidated statement of cash flows for the year then ended; and• the notes1 on the consolidated financial statements, which include significant accounting policies and other explanatory information.
1 Certain required disclosures as described in Note 1.1(d) on the consolidated financial statements have been presented elsewhere in the Annual
Report and Accounts 2022, 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 2022, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordancewith Hong Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants (‘HKICPA’)and have been properly prepared in compliance with the Hong Kong Companies Ordinance.

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

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

Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated
financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matters identified in our audit are summarised as follows:• Allowances for expected credit losses on loans and advances to customers• Impairment assessment of investment in associate – Bank of Communications Co., Limited (‘BoCom’)• The present value of in-force long-term insurance business (‘PVIF’) and liabilities under non-linked life insurance contracts• Disclosure of the impact of adoption of HKFRS 17, Insurance contracts

74

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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 2022, the group recorded allowances for expected credit
losses (‘ECL’) on loans and advances to customers of HK$40.0bn.
The determination of the ECL on non-credit-impaired loans and advances tocustomers requires the use of complex credit risk methodologies that are
applied in models using the group’s historic experience of the correlations
between defaults and losses, borrower creditworthiness, segmentation ofcustomers 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 from the Covid-19 infection rates in Asia, particularly in mainland
China, ongoing developments related to the mainland China commercial realestate sector, the geopolitical landscape and certain other current
macroeconomic conditions impact the inherent risk and estimation
uncertainty involved in determining the ECL on loans and advances tocustomers. Management judgemental adjustments to ECL on non-creditimpaired loans and advances to customers therefore continue to be made.
This includes judgemental adjustments to the ECL for unsecured offshore
mainland China Commercial Real Estate exposures.
The above ongoing developments have also resulted 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 over the methodologies, their application,
significant assumptions and data used to determine the ECL on loans andadvances to customers. These included controls over:• Model development, validation and monitoring;• Approval of economic scenarios;• Approval of the probability weightings assigned to economic scenarios;• Assigning customer risk ratings;• Approval of management judgemental adjustments; and• Review of input and assumptions applied in estimating the recoverabilityof credit-impaired wholesale exposures.
We performed substantive audit procedures over the compliance of ECL
methodologies with the requirements of HKFRS 9. We engaged
professionals with experience in ECL modelling to assess theappropriateness of changes to models during the year, and for a sample ofthose models, independently reperformed the modelling for certain aspectsof the ECL calculation. We also assessed the appropriateness of
methodologies and related models that did not change during the year.
We further performed the following to assess the significant assumptions
and data:• We challenged the appropriateness of the significant assumptions;• We involved our economic experts in assessing the reasonableness of theseverity and likelihood of certain economic scenarios;• We tested a sample of customer risk ratings assigned to wholesale
exposures;• We tested a sample of critical data used to determine ECL; and• We have independently assessed other significant assumptions andobtained corroborating evidence.
For a sample of management judgemental adjustments and credit-impaired
Matters discussed with the Audit Committee
wholesale exposures, we challenged the appropriateness of these andWe discussed the appropriateness of the methodologies, their application,assessed the ECL determined.
significant assumptions and related disclosures with the Audit Committee,
giving consideration to the current macroeconomic conditions. This included We further considered whether the judgements made in selecting thesignificant assumptions, as well as determining the management
economic scenarios and their likelihood, management judgemental
judgemental adjustments and credit-impaired wholesale exposures, would
adjustments made to derive the ECL on loans and advances to customers,
give rise to indicators of possible management bias.
and future recoverability of certain significant credit-impaired wholesale
We assessed the adequacy of the disclosures in relation to ECL on loans andexposures. We further discussed certain controls over the process inadvances to customers made in the consolidated financial statements in thedetermining ECL on loans and advances to customers.
context of the applicable financial reporting framework.
Relevant references in the consolidated financial statements

Risk: Credit Risk, as cross-referenced from the consolidated financial statements (only information identified as audited), page 31-52
Note 1.2 (i) on the consolidated financial statements: Basis of preparation and significant accounting policies – Summary of significant accounting policies- Impairment of amortised cost and FVOCI financial assets, page 90-93
Note 2 (e) on the consolidated financial statements: Operating profit – Change in expected credit losses and other credit impairment charges, page 97
Note 10 on the consolidated financial statements: Loans and advances to customers, page 106-107

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

75

Independent Auditor’s Report

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

How our audit addressed the Key Audit Matter

At 31 December 2022, the fair value of the investment in BoCom, based on
the share price, was HK$118.8bn lower than the carrying value ('CV') of
HK$182.3bn. This is an indicator of potential impairment. An impairment
test was performed by management, with supporting sensitivity analysis,using a value in use ('VIU') model. The VIU was HK$0.7bn in excess of the
CV. On this basis, no impairment was recorded.
The methodology applied in the VIU model is dependent on various
assumptions, both short term and long term in nature. These assumptions,which are subject to estimation uncertainty, are derived from a combinationof management’s judgement, analysts’ forecasts, market data or otherrelevant information.
The assumptions that we focused our audit on were those with greaterlevels of management judgement and subjectivity, and for which variations
had the most significant impact on the VIU. Specifically, these included thediscount rate, operating income growth rate, long-term profit and asset
growth rates, cost-income ratio, expected credit losses as a percentage ofcustomer advances, long-term effective tax rate, capital requirements –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 over significant assumptions, the methodology
and its application used to determine the VIU. We assessed theappropriateness of the methodology used, its application, and themathematical accuracy of the calculations. In respect of the significant
assumptions, we performed the following:• Challenged the appropriateness of the significant assumptions and, where
relevant, their interrelationships;• Obtained corroborating evidence for data supporting significant
assumptions which as relevant included past experience, external market
information, third-party sources including analyst reports, informationfrom BoCom management and historical publicly available BoComfinancial information;• Determined a reasonable range for the discount rate assumption, with theassistance of our valuation experts, and compared it to the discount rateused by management; and• Assessed whether the judgements made in selecting the significant
assumptions would give rise to indicators of possible management bias.
We observed meetings between management and BoCom management,
held specifically to identify facts and circumstances impacting significant
assumptions relevant to the determination of the VIU.
Representations were obtained from the Bank that assumptions used wereconsistent with information currently available to the Bank.
We assessed the adequacy of the disclosures in relation to BoCom made in
the consolidated financial statements in the context of the applicablefinancial reporting framework.

Matters discussed with the Audit Committee

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

Note 1.2 (a) on the consolidated financial statements: Basis of preparation and significant accounting policies – Summary of significant accounting policies- Consolidation and related policies, page 87
Note 14 on the consolidated financial statements: Interests in associates and joint ventures, page 109-112

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

How our audit addressed the Key Audit Matter

At 31 December 2022, the group has recorded an asset for PVIF of
HK$65.5bn and liabilities under non-linked life insurance contracts of
HK$679.5bn.

We tested controls in place over the methodologies, their application,
significant assumptions and data for PVIF asset and the liabilities under nonlinked life insurance contracts. Specifically, these included controls over:• policy data reconciliations from the policyholder administration system to
The determination of these balances requires the use of complex actuarial
the actuarial valuation system;
methodologies that are applied in models and involves judgement about
future outcomes. Specifically, judgement is required in deriving the• assumptions setting;economic and non-economic assumptions. These assumptions are subject to • review and determination of methodologies used, and their application inestimation uncertainty, both for PVIF asset and the liabilities under nonmodels; andlinked life insurance contracts.
• results aggregation and analysis processes.
Matters discussed with the Audit Committee
With the assistance of our actuarial experts, we performed the following
audit procedures to assess the methodologies used, their application,
We discussed the appropriateness of the methodologies, their application,
significant assumptions and related disclosures with the Audit Committee. In significant assumptions, data and disclosures:
relation to assumptions, we focused on those for which variations had the• We assessed the appropriateness of the methodologies used, theirmost significant impact on the valuation of PVIF and liabilities under nonapplication and the mathematical accuracy of the calculations;linked life insurance contracts carrying value.
• We challenged the appropriateness of the judgements made in selecting
significant assumptions and , where relevant, their interrelationships. We
have independently assessed these assumptions and obtained relevant
corroborating evidence. We further considered whether the judgements
made in selecting the significant assumptions would give rise toindicators of possible management bias;• We performed substantive audit procedures over critical data used in thedetermination of these balances to ensure these are relevant and reliable;
and• We assessed the adequacy of the disclosures in relation to the asset for
PVIF and liabilities under non-linked life insurance contracts made in the
consolidated financial statements in the context of the applicable financial
reporting framework.
Relevant references in the consolidated financial statements

Risk: Insurance manufacturing operations risk as cross-referenced from the consolidated financial statements (only information identified as audited), page
67-72
Note 1.2 (j) on the consolidated financial statements: Basis of preparation and significant accounting policies - Summary of significant accounting policies Insurance contracts, page 93-94
Note 3 on the consolidated financial statements: Insurance business, page 97-98
Note 15 on the consolidated financial statements: Goodwill and intangible assets, page 112-113

76

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Disclosure of the impact of adoption of HKFRS 17, Insurance Contracts
Nature of the Key Audit Matter

How our audit addressed the Key Audit Matter

HKFRS 17 ‘Insurance contracts’ 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. The group will adopt the standard retrospectively from 1
January 2023, with comparatives restated from 1 January 2022. As part of
the transition to HKFRS 17, the group intends to apply the option underHKFRS 9 to re-designate holdings of financial assets held to support
insurance liabilities currently measured at amortised cost, to fair value underHKFRS 9. The group has estimated and disclosed that the adoption will
reduce the opening group equity as at 1 January 2022 by HK$75.4bn. In the
consolidated financial statements it is disclosed that this estimate is basedon accounting policies, assumptions, judgements and estimation techniquesthat remain subject to change.

We tested controls in place over accounting policies, methodologies, theirapplication, significant assumptions and data used in determining theestimated reduction of the opening group equity as at 1 January 2022
disclosed. Specifically, these included controls over:• 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 application in
the models, including model development, validation and monitoring.
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, theirapplication in models and overlay adjustments to models and themathematical accuracy of the calculations;• We challenged the appropriateness of the judgements made in selecting
significant assumptions and, where relevant, their interrelationships. We
have independently assessed these assumptions and obtained relevant
corroborating evidence. We further considered whether the judgements
made in selecting the significant assumptions would give risk toindicators of susceptibility to management bias;• We performed substantive audit procedures over critical data used toensure these are relevant and reliable;• We performed substantive audit procedures over the re-designation offinancial assets held to support insurance liabilities; and• We assessed the adequacy of the disclosures in the context of theapplicable financial reporting framework.

This is a new and complex standard and determining the impact as at
1 January 2022 requires judgement and interpretation in its implementation.
This includes the selection of accounting policies and the use of complex
actuarial methodologies that are applied in models and overlay adjustments
to models. The selection and application of appropriate methodology
requires significant professional judgement. It also requires thedetermination of assumptions which involve estimation uncertainty.
Matters discussed with the Audit Committee

Status updates were provided during the year. We discussed theappropriateness of the accounting policies, methodologies, their application,
significant assumptions and the disclosures related to the impact of thecoming adoption of HKFRS 17 with the Audit Committee. Perspectives werealso shared on the control environment over the disclosures of the impact of
adopting HKFRS 17.

Relevant references in the consolidated financial statements

Note 1.1 (b) on the consolidated financial statements: Basis of preparation and significant accounting policies - Basis of preparation - Future accounting
developments, page 85-86

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 2022, Banking Disclosure Statement as at 31 December 2022 and List of the directors of the Bank's
subsidiary undertakings (during the period from 1 January 2022 to 21 February 2023) other than the consolidated financial statements
and our auditor’s report thereon. We have obtained some of the other information including Certain defined terms, Cautionary statement
regarding forward-looking statements, Chinese translation, Financial Highlights, Report of the Directors, Environmental, Social andGovernance Review, Financial Review, Risk, Statement of Directors' Responsibilities and Additional information sections of the Annual
Report and Accounts 2022 prior to the date of this auditor’s report. The remaining other information, including Banking DisclosureStatement as at 31 December 2022 and List of the directors of the Bank's subsidiary undertakings (during the period from 1 January2022 to 21 February 2023), is expected to be made available to us after that date. The other information does not include the specificinformation presented therein that is identified as being an integral part of the consolidated financial statements and, therefore, coveredby our audit opinion on the consolidated financial statements.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any formof assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above
and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our
knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude
that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in thisregard.
When we read the remaining other information, if we conclude that there is a material misstatement therein, we are required tocommunicate the matter to the Audit Committee and take appropriate action considering our legal rights and obligations.

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

77

Independent Auditor’s Report

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

PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 21 February 2023

78

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

2022

2021

Notes

HK$m

HK$m

2a

2c

126,852
180,097(53,245)
36,60050,622(14,022)
41,674

98,113
121,382(23,269)
45,29657,819(12,523)
28,3592c(13,194)

18,180

2c

(703)

(639)

2c

34
47
80,415
3,781
275,506(69,814)205,692(25)
1,667
61,722
2,033
254,706(76,048)
178,658(16,365)
189,327(40,662)(54,549)(9,157)(6,140)(110,508)
78,81918,792
97,611(15,507)82,104(6,539)172,119(39,261)(52,327)(8,891)(4,397)(104,876)
67,243
19,32086,563(14,015)
72,54875,506
2,739
3,859
82,10464,633
2,715
5,200
72,548

2b

3
2d

3

2e

4
2f
2g

5

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

79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 losses– fair value gains 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

80

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

2022

2021

HK$m

HK$m

82,10472,548(13,675)(17,077)
(139)
342
3,199
(1,965)
5,851(8,228)412(1,964)(32,051)(4,009)(3,907)(1,276)
(17)
1,191
(700)
7,038
(7,850)
112
596
3,973

3,863
4,683
(820)
865
868
(3)
4,588
5,461
(873)
185
232
(47)

4,771
5,643
(872)
(3,480)(3,478)
(2)
522
631
(109)
724
885
(161)

(40,154)
41,9502,397
74,94536,3602,739
2,851
41,95067,1482,715
5,082
74,945

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

7
8
9

10
11
32

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

14

Derivatives
Financial liabilities designated at fair value

8

Debt securities in issue
Retirement benefit liabilities
Amounts due to Group companies
Accruals and deferred income, other liabilities and provisions
Liabilities under insurance contracts
Current tax liabilities
Deferred tax liabilities
Subordinated liabilities
Total liabilities
EquityShare capital
Other equity instruments
Other reserves
Retained earnings
Total shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity

15
16
5
17

18
19

20
21
4
32
22
3

5
23

24
25

2022

2021

HK$m

HK$m

232,740
28,557341,354699,805
502,771
226,451
927,976
519,024
3,705,149
2,221,361

276,857
21,632332,044
777,450
365,167
202,399803,775
432,247
3,840,939
2,051,575

140,546
185,898
102,419
130,926
3,856
355,319
10,324,152

112,719
188,485
95,181
129,8273,353
269,743
9,903,393

341,354
33,073351,093
198,908
6,113,709

332,044
25,701
255,374
280,310
6,177,182

142,453
551,745

92,723355,791

167,743
100,909
1,655
398,705
238,726
700,758
6,002
32,937
3,119
9,382,889

138,965
67,364
1,890
356,233
219,206
638,145
2,378
32,522
4,054
8,979,882

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

81

Consolidated Financial Statements

Consolidated statement of cash flows
for the year ended 31 December

Profit before tax
Adjustments for non-cash items:
Depreciation and amortisation
Net (gain)/loss from investing activities
Share of profits in associates and joint ventures
Gain on disposal of subsidiaries, businesses, associates and joint ventures
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 outflow on purchase of subsidiaries
Net cash from investing activities
Issue of ordinary share capital and other equity instruments
Purchase of non-controlling interest
Subordinated loan capital issued1
Subordinated loan capital repaid1
Dividends paid to shareholders of the parent company and non-controlling interests
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 Jan
Exchange differences in respect of cash and cash equivalents
Cash and cash equivalents at 31 Dec2
Cash and cash equivalents comprise– cash and balances at central banks– items in the course of collection from other banks– loans and advances to banks of one month or less– net settlement accounts and cash collateral– reverse repurchase agreements with banks of one month or less– treasury bills, other bills and certificates of deposit less than three months– less: items in the course of transmission to other banks
Cash and cash equivalents at 31 Dec2

2022

2021

HK$m

HK$m

97,611

86,563

15,297
128(18,792)(4)(665)
17,245592
843(1,507)36,982

13,288(1,890)(19,320)
(4)
—
7,549
607
913
5,416
8,024

185,431
77,973(166,542)
4,728(91,989)(144,875)
95,71933,54526,028101,882
6,003(345)(11,463)
263,825(159,767)(172,484)(174,643)(23,439)
43,706
297,468
119,217(12,055)(28,048)
129,7105,525(356)(12,648)
113,332(1,256,919)
1,093,359(2,802)
73
1,449(11,771)(4,166)(180,777)
15,617(1,548)81,014(22,367)(37,666)
35,050118,098
1,055,084(51,487)
1,121,695(1,233,472)
1,193,780(2,718)96
2,267(10,835)(13)(50,895)——
57,764(24,102)(63,523)(29,861)
32,576
1,047,807(25,299)
1,055,084

232,740
28,557368,946
58,473
286,100
179,952(33,073)
1,121,695

276,857
21,632
326,691
34,580306,241
114,784(25,701)
1,055,084

Interest received was HK$181,301m (2021: HK$133,964m), interest paid was HK$50,873m (2021: HK$26,553m) and dividends received
were HK$6,971m (2021: HK$5,592m).
1 Changes in subordinated loan capital (including those issued to group companies) during the year included amounts from issuance andrepayments as presented above, and non-cash changes from foreign exchange loss of HK$1,991m in 2022 (2021: exchange loss of HK$494m)
and fair value loss after hedging of HK$25,579m in 2022 (2021: HK$7,768m loss). These balances are presented under ‘Amounts due to Group
companies’ in the consolidated balance sheet.
2 At 31 December 2022, HK$161,252m (2021: HK$128,756m) was not available for use by the group, of which HK$65,026m (2021: HK$67,340m)
related to mandatory deposits at Central banks.

82

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Consolidated statement of changes in equity
for the year ended 31 December
Other reserves

Sharecapital1

Otherequityinstruments

Retainedearnings

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cash
flow
hedge
reserve

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

172,335—

44,615—

488,055
78,24564,990
—

3,869
—

153
—

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

—

—

4,772

3,646

(14,774)– debt instruments at fair value
through other comprehensive income

—

—

—

—

—
—

—
—

—
—

– property revaluation

—
—

—
—

– remeasurement of defined benefit
asset/liability—

At 1 Jan 2022
Profit for the year

– 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 fromchanges in own credit risk

– share of other comprehensive
income/(expense) of associates andjoint ventures

Foreignexchangereserve

Other

HK$m

3

Total
shareholders’equityNoncontrollinginterests

Total
equity

HK$m

HK$m

HK$m

HK$m

(7,130) 89,922——

856,80978,24566,702
3,859

923,511
82,104(1,639)(31,351)

200(39,146)(1,008)(40,154)(13,364)———(13,364)(311)(13,675)

—
—

745
—

—
(1,639)

—
—

—
—

745
(1,639)

120
(326)

865
(1,965)

4,590
—

—
3,646

—
—

—
—

—
—

—
—

4,590
3,646

(2)
217

4,588
3,863

—

191

—

—

—

—

—

191

(6)

185

– exchange differences
Total comprehensive income/(expense) for the year

—
—

—
—

(9)
—

—
—

(2,155)————(31,351)200—(1,964)(31,351)—(700)(1,964)(32,051)——

83,017

3,646(14,774)(1,639)(31,351)200

39,0992,851

41,950Shares issued1
Other equity instruments issued2
Dividends to shareholders4

7,846
—
—

—
7,771
—

—
—
(34,821)

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

7,846
7,771
(34,821)——(2,845)

7,846
7,771
(37,666)

—

—

135

—

—

—

—

(137)

(2)

13

11

—
180,181—
52,386(2,868)533,518(3,488)65,14843(10,862)(1)(1,487)—
4,932(38,481) 94,917(1,382)875,320

Movement in respect of share-based
payment arrangements
Transfers and other movements5
At 31 Dec 2022

(778)
(2,160)65,943 941,263

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202283

Consolidated Financial Statements

Consolidated statement of changes in equity (continued)
for the year ended 31 December
Other reserves

Sharecapital1

Otherequityinstruments

Retainedearnings

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cash
flow
hedge
reserve

Foreignexchangereserve

Other3

Total
shareholders’equityNoncontrollinginterests

Total
equity

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

172,335—

44,615—478,903
67,34863,793
—

9,883
—

772
—

(10,688)—

85,740—845,353
67,34866,1785,200

911,531
72,548Other comprehensive income/(expense) (net of tax)

—

—

1,160

4,359

(5,992)

(619)

3,558

49

2,515

(118)

2,397

– debt instruments at fair value
through other comprehensive
income————(3,775)———(3,775)(234)(4,009)– equity instruments designated atfair value through othercomprehensive income

—

—

—

—

(2,737)———(2,737)(743)(3,480)– cash flow hedges

—

—

—

—

—

(619)

—

—

(619)

(81)

(700)

– changes in fair value of financial
liabilities designated at fair value
upon initial recognition arisingfrom changes in own credit risk

—

—

521

—

—

—

—

—

521

1

522

– property revaluation

—

—

—

4,359

—

—

—

—

4,359

412

4,771

– remeasurement of defined
benefit asset/liability

—

—

612

—

—

—

—

—

612

112

724

– share of other comprehensive
income of associates and joint
ventures

—

—

27

—

520

—

—

49

596

—

596

– exchange differences

—

—

—

—

—

—

3,558

—

3,558

415

3,973

At 1 Jan 2021
Profit for the year

Total comprehensive income/(expense) for the year——

68,5084,359(5,992)

(619)

3,558

49

69,863

5,082

74,945

Dividends to shareholders4——(59,105)

—

—

—

—

—

(59,105)(4,418)(63,523)

Movement in respect of sharebased payment arrangements
Transfers and other movements5
At 31 Dec 2021

—

—

131

—

—

—

—

(173)

(42)

(2)

(44)

—
172,335—
44,615(382)
488,055(3,162)64,990

(22)
3,869

—
153

—
(7,130)4,306
89,922740
856,809(138)
66,702602
923,511

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 2022, an additional tier 1 capital instrument was issued amounted to US$1,000m on which there were US$10m issue costs.
3 The other reserves mainly comprise share of associates’ other reserves, purchase premium arising from transfer of business from fellow
subsidiaries, property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The sharebased payment reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC
Holdings plc.
4 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
5 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.

84

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Notes on the Consolidated Financial Statements
1

Basis of preparation and significant accounting policies

1.1 Basis of preparation(a)Compliance with Hong Kong Financial Reporting Standards

The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries(together ‘the group’) have been prepared in accordance with Hong Kong Financial Reporting Standards (‘HKFRSs’) as issued by theHong Kong Institute of Certified Public Accountants (‘HKICPA’) and accounting principles generally accepted in Hong Kong. These
consolidated financial statements also comply with the requirements of the Hong Kong Companies Ordinance (Cap. 622) which areapplicable to the preparation of the financial statements.

Standards adopted during the year ended 31 December 2022
There were no new accounting standards or interpretations that had a significant effect on the group in 2022. Accounting policies havebeen consistently applied to all the years presented, unless otherwise stated.

(b)

Future accounting developments

Minor amendments to HKFRSs
The HKICPA has published a number of minor amendments to HKFRSs that are effective from 1 January 2023 and 1 January 2024. The
group expects they will have an insignificant effect, when adopted, on the Consolidated Financial Statements.

New HKFRSs
HKFRS 17 ‘Insurance Contracts’
HKFRS 17 ‘Insurance Contracts’ is effective for annual reporting periods beginning on or after 1 January 2023 and is applied
retrospectively.
HKFRS 17 sets out the requirements that the group will apply in accounting for insurance contracts it issues, reinsurance contracts it
holds, and investment contracts with discretionary participation features.
The group is at an advanced stage in the implementation of HKFRS 17, having put in place accounting policies, data and models, andmade progress with preparing 2022 comparative data. Below are set out our expectations of the impact of HKFRS 17 compared with ourcurrent accounting policy for insurance contracts, which is set out in policy 1.2(j) on page 93.
Under HKFRS 17, no present value of in-force business (‘PVIF’) asset is recognised. Instead, the measurement of the insurance contracts
liability is based on groups of insurance contracts and will include fulfilment cash flows, as well as the contractual service margin(‘CSM’), which represents the unearned profit.
To identify groups of insurance contracts, individual contracts subject to similar dominant risk and managed together are identified as aportfolio of insurance contracts. Each portfolio is further separated by profitability group and issue date into periodic cohorts.
The fulfilment cash flows comprise:• the best estimates of future cash flows, including amounts expected to be collected from premiums and payouts for claims, benefits
and expenses, which are projected using assumptions based on demographic and operating experience;• an adjustment for the time value of money and financial risks associated with the future cash flows; and• an adjustment for non-financial risk that reflects the uncertainty about the amount and timing of future cash flows.
In contrast to the group’s HKFRS 4 accounting where profits are recognised upfront, the CSM will be systematically recognised inrevenue, as services are provided over the expected coverage period of the group of contracts without any change to the overall profit of
the contracts. Losses resulting from the recognition of onerous contracts are recognised in the income statement immediately.
The CSM is adjusted depending on the measurement model of the group of insurance contracts. While the general measurement model(‘GMM’) is the default measurement model under HKFRS 17, the Group expects that the majority of its contracts will be accounted forunder the variable fee approach (‘VFA’), which is mandatory to apply for insurance contracts with direct participation features upon
meeting the eligibility criteria.
HKFRS 17 requires entities to apply HKFRS 17 retrospectively as if HKFRS 17 had always been applied, using the full retrospective
approach ('FRA') unless it is impracticable. When FRA is impracticable such as when there is a lack of sufficient and reliable data, anentity has an accounting policy choice to use either the modified retrospective approach (‘MRA’) or the fair value approach (‘FVA’). The
group will apply the FRA for new business from 2018 at the earliest, subject to practicability, and FVA for the majority of contracts forwhich FRA is impracticable. Where the FVA is used, the measurement takes into account the cost of capital that a market participant
within the jurisdiction would be expected to hold based on the asset and liability positions on the transition date.
The group will make use of the option to re-designate eligible financial assets held to support insurance liabilities currently measured atamortised cost, as financial assets measured at fair value through profit or loss. Following re-designation, interest income earned onthese financial assets will no longer be shown in 'net interest income', and will instead form part of ‘net income/(expense) from assets
and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’ in accordance with thegroup’s income and expense policy set out in Note 1.2(b) on page 87.
The group will also make use of the risk mitigation option for a number of economic offsets between the VFA contracts and reinsurance
contracts held that meet the requirements.
Impact of HKFRS 17
Changes to equity on transition are driven by the elimination of the PVIF asset, the re-designation of certain eligible financial assets in thescope of HKFRS 9, the remeasurement of insurance liabilities and assets under HKFRS 17, and the recognition of the CSM.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

85

Notes on the Consolidated Financial Statements

HKFRS 17 requires the use of current market values for the measurement of insurance liabilities. The shareholder’s share of theinvestment experience and assumption changes will be absorbed by the CSM and released over time to profit or loss under VFA. For
contracts measured under GMM, the shareholder’s share of the investment volatility is recorded in profit or loss as it arises. UnderHKFRS 17, operating expenses will be lower as directly attributable costs will be incorporated in the CSM and recognised in theinsurance service result.
While the profit over the life of an individual contract will be unchanged, its emergence will be later under HKFRS 17.
All of these impacts will be subject to deferred tax.
Estimates of the opening balance sheet as at 1 January 2022 have been calculated and are presented below, showing separately the
impact on the total assets, liabilities and equity of our insurance manufacturing operations and group equity. These estimates are basedon accounting policies, assumptions, judgements and estimation techniques that remain subject to change.
Impact of transition to HKFRS 17, at 1 January 2022

Insurance manufacturing operations

group

AssetsLiabilities

EquityEquity

HK$bn

HK$bn

HK$bn

HK$bn

Balance sheet values at 1 January 2022 under HKFRS 4
Removal of PVIF*

833.2(63.8)

719.5
—

113.7
(63.8)

923.5(63.8)

Replacement of HKFRS 4 liabilities with HKFRS 17– Removal of HKFRS 4 liabilities and recording of HKFRS 17 fulfilment cash
– HKFRS 17 contractual service margin
Remeasurement effect of HKFRS 9 re-designations
Tax effect*
Estimated balance sheet values at 1 January 2022 under HKFRS 17

(3.4)
(3.1)
(0.3)
38.1
3.6
807.7

57.8
(5.7)
63.5
—
(10.5)
766.8(61.2)
2.6(63.8)
38.1
14.1
40.9

(64.3)
2.7(67.0)
38.1
14.6
848.1

*

PVIF of HK$63.8bn less deferred tax of HK$10.5bn constitute the overall estimated reduction in intangible assets, after tax, of HK$53.3bn ontransition to HKFRS 17.

The group's accounting for insurance contracts considers a broader set of cash flows than those arising within the insurance
manufacturing entities. This includes the effect of eliminating intra-group fees associated with distribution of policies through the group's
banking channel and directly attributable costs incurred by other group entities. These factors lead to an increase to the group CSM after
inclusion of distribution activities of approximately HK$3.2bn, with a consequential reduction to group equity of approximately HK$2.6bn
after the inclusion of deferred tax.

(c)

Foreign currencies

Items included in each of the group’s entities are measured using the currency of the primary economic environment in which the entity
operates (the ‘functional currency’). The group’s consolidated financial statements are presented in Hong Kong dollars.
Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominatedin foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured
at historical cost which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in othercomprehensive income (‘OCI’) or in the income statement depending on where the gain or loss on the underlying item is recognised.
In the Consolidated Financial Statements, the assets, liabilities and results of foreign operations whose functional currency is not Hong
Kong dollars are translated into the group’s presentation currency at the rate of exchange at the balance sheet date, while their results
are translated into Hong Kong dollars at the average rates of exchange for the reporting period. Exchange differences arising arerecognised in OCI. On disposal of a foreign operation, exchange differences previously recognised in OCI are reclassified to the income
statement.

(d)Presentation of information

Certain disclosures required by HKFRSs have been included in the sections marked as ('Audited') in this Annual Report and Accounts asfollows:• Consolidated income statement and balance sheet data by reportable segments are included in the 'Financial Review' on page 16 as
specified as ‘Audited’.
• Disclosures on 'Financial instruments impacted by IBOR reform' are included in the 'Top and Emerging Risks' section on page 25 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 31 to 61 and pages 68 to 72 as specified as ‘Audited’.
• Capital disclosures are included in the ‘Treasury Risk’ section on pages 53 to 54 as specified as ‘Audited’.
In accordance with the group’s policy to provide disclosures that help stakeholders understand the group’s performance, financial
position and changes to them, the information provided in the Risk section goes beyond the minimum levels required by accounting
standards, statutory and regulatory requirements. In addition, the group assesses good practice recommendations issued from time totime by relevant regulators and standard setters and will assess the applicability and relevance of such guidance, enhancing disclosures
where appropriate.

(e)

Critical accounting estimates and judgements

The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent
uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted as the critical accounting
estimates and judgements in Note 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which
management’s estimates are based. This could result in materially different estimates and judgements from those reached bymanagement for the purposes of the Consolidated Financial Statements. Management’s selection of the group’s accounting policies that
contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree ofjudgement and estimation uncertainty involved.
Management has considered the impact of climate-related risks on the group's financial position and performance. While the effects ofclimate change are a source of uncertainty, as at 31 December 2022 we do not consider there to be a material impact on our critical86

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particularmanagement has considered the known and observable potential impact of climate-related risks of associated judgements and estimatesin our value in use calculations.

(f)Segmental analysis

The group’s chief operating decision-maker is the Executive Committee, which operates as a general management committee under the
direct authority of the Board. Operating segments are reported in a manner consistent with the internal reporting provided to the
Executive Committee.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the group’s accounting policies. Segmental
income and expenses include transfers between segments and these transfers are conducted at arm’s length. Shared costs are included
in segments on the basis of the actual recharges made.

(g)

Going concern

The Consolidated Financial Statements are prepared on a going concern basis, as the Directors are satisfied that the group and parent
company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considereda wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capitalrequirements and capital resources. These considerations include stressed scenarios that reflect the uncertainty in structural changes
from the Covid-19 pandemic, the Russia-Ukraine war, disrupted supply chains globally, slower Chinese economic activity, climate change
and other top and emerging risks, as well as from the related impacts on profitability, capital and liquidity.

1.2 Summary of significant accounting policies(a)Consolidation and related policies

Investments in subsidiaries
Where an entity is governed by voting rights, the group consolidates when it holds, directly or indirectly, the necessary voting rights topass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of otherfactors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or
principal.
Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fairvalue or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made for eachbusiness combination.
The Bank’s investments in subsidiaries are stated at cost less impairment losses.

Goodwill
Goodwill is allocated to cash-generating units (‘CGU’) for the purpose of impairment testing, which is undertaken at the lowest level atwhich goodwill is monitored for internal management purposes. Impairment testing is performed at least once a year, or whenever there
is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.

Interests in associates
The group classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint
arrangements, as associates.
Investments in associates are recognised using the equity method. The attributable share of the results and reserves of associates is
included in the consolidated financial statements of the group based on either financial statements made up to 31 December or amounts
adjusted for any material transactions or events occurring between the date the financial statements are available and
31 December.
Investments in associates are assessed at each reporting date and tested for impairment when there is an indication that the investment
may be impaired. Goodwill on acquisitions of interests in associates is not tested separately for impairment but is assessed as part of thecarrying amount of the investment.

Critical accounting estimates and judgements
The most significant critical accounting estimates relate to the assessment of impairment of our investment in Bank of Communications Co. Limited(‘BoCom’), which involves estimations of value in use.
Judgements

Estimates• The VIU calculation uses discounted cash flow projections based on management’s
best estimates of future earnings available to ordinary shareholders prepared inaccordance with HKAS 36.
• Key assumptions are used in estimating BoCom’s value in use, the sensitivity of thevalue in use calculations to different assumptions and a sensitivity analysis thatshows the changes in key assumptions that would reduce the excess of value in use
over the carrying amount (the ‘headroom’) to nil are described in Note 14.

(b)

Income and 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 an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.
Interest on credit impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purposeof measuring the impairment loss.
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

87

Notes on the Consolidated Financial Statements

Non-interest income and expense
The group generates fee income from services provided at a fixed price over time, such as account service and card fees, or when thegroup delivers a specific transaction at a point in time such as broking services and import/export services. With the exception of certain
fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can bevariable depending on the size of the customer portfolio and the group’s performance as fund manager. Variable fees are recognised
when all uncertainties are resolved. Fee income is generally earned from short term contracts with payment terms that do not include asignificant financing component.
The group acts as principal in the majority of contracts with customers, with the exception of broking services. For brokerage trades
where the group acts as an agent in the transaction it recognises broking income net of fees payable to other parties in the arrangement.
The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to thecustomer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of theagreement.
Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included inaccount service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct
performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated toeach performance obligation based on the estimated stand-alone selling prices.
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities,
and usually the date when shareholders approve the dividend for unlisted equity securities.
Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:• ‘Net income from financial instruments held for trading or managed on a fair value basis’. This comprises net trading income, which
includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and otherfinancial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding theeffect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in thefair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit orloss.
• ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value throughprofit or loss’. This includes interest income, interest expense and dividend income in respect of financial assets and liabilities
measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately
identifiable from other trading derivatives.
• ‘Changes in fair value of designated debt instruments and related derivatives’. Interest paid on debt instruments and interest cash
flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch.
• ‘Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss’. This includes interest
on instruments that fail the solely payments of principal and interest ('SPPI') test. See (d) below.
The accounting policies for insurance premium income are disclosed in Note 1.2(j).

(c)

Valuation of financial instruments

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument
on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is adifference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an
active market or a valuation technique that uses only data from observable markets, the group recognises the difference as a trading gainor loss at inception (‘a day 1 gain or loss’). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income
statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or thegroup enters into an offsetting transaction.
The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a groupof financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments ismeasured on a net basis but the underlying financial assets and liabilities are presented separately in the Consolidated Financial
Statements, unless they satisfy the HKFRSs offsetting criteria.

Critical accounting estimates and judgements
The majority of valuation techniques employ only observable market data, 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 more significant market
inputs that are unobservable, and for them, the measurement of fair value is more judgemental.
Judgements

Estimates• An instrument in its entirety is classified as valued using significant unobservable• Details on the group’s level 3 financial instruments and the
inputs if, in the opinion of management, a significant proportion of the instrument’s
sensitivity of their valuation to the effect of applying reasonably
inception profit or greater than 5% of the instrument’s valuation is driven bypossible alternative assumptions in determining their fair value
unobservable inputs.
are set out in Note 33.
• ‘Unobservable’ in this context means that there is little or no current market data
available from which to determine the price at which an arm’s length transaction
would be likely to occur. It generally does not mean that there is no data available
at all upon which to base a determination of fair value (consensus pricing data
may, for example, be used).

(d)Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates
to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans
and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost.

88

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of thesefinancial assets at initial recognition includes any directly attributable transactions costs.
The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from thelending commitment is expected to be sold shortly after origination, the commitment to lend is recorded as a derivative. When the groupintends to hold the loan, the loan commitment is included in the impairment calculations set out below.

Non-trading reverse repurchase, repurchase and similar agreements
When debt securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on thebalance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell(‘reverse repos’) are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading
repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price, or between the purchaseand resale price, is treated as interest and recognised in net interest income over the life of the agreement.
Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into
together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or
repo agreements.

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

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

(f)Equity securities measured at fair value with fair value movements presented in OCI

The equity securities for which fair value movements are shown in OCI are business facilitation and other similar investments where thegroup holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are
not transferred to the income statement. Dividend income is recognised in the income statement.

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

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out
below and are so designated irrevocably at inception:• The use of the designation removes or significantly reduces an accounting mismatch.
• A group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value
basis, in accordance with a documented risk management or investment strategy.
• The financial liability contains one or more non-closely related embedded derivatives.
Designated financial assets are recognised when the group enters into contracts with counterparties, which is generally on trade date,
and are normally derecognised when the rights to the cash flows expire or are transferred.
Designated financial liabilities are recognised when the group enters into contracts with counterparties, which is generally on settlement
date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in‘Net income from financial instruments held for trading or managed on a fair value basis’ or ‘Net income/(expense) from assets andliabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’ or ‘Changes in fair value ofdesignated debt and related derivatives’ except for the effect of changes in the liabilities' credit risk which is presented in OCI, unless thattreatment would create or enlarge an accounting mismatch in profit or loss.
Under the above criterion, 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
with discretionary participation features (‘DPF’), but is accounted for as a financial liability. Customer liabilities under linked andcertain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in
the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise bemeasured at either fair value through OCI or amortised cost. The related financial assets and liabilities are managed and reported to
management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values
to be recorded in the income statement and presented in the same line.
• Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance
evaluated on a fair value basis.

(h)Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or otherindices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified asassets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial
liabilities which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.
Where the derivatives are managed with debt securities issued by the group that are designated at fair value where doing so reduces anaccounting mismatch, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt.

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Notes on the Consolidated Financial Statements

Hedge accounting
When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge
accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses thesederivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net
investments in foreign operations as appropriate to the risk being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results
in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise berecognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is
discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on arecalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income
statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments is recognised in OCI and the ineffective portion of the change in fairvalue of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income
statement within ‘Net income from financial instruments held for trading or managed on a fair value basis’. The accumulated gains andlosses recognised in OCI are reclassified to the income statement in the same periods in which the hedged item affects profit or loss.
When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in OCI remains in equity until
the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, thecumulative gain or loss previously recognised in OCI is immediately reclassified to the income statement.

Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was notapplied.

(i)

Impairment of amortised cost and FVOCI financial assets

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

Credit-impaired (stage 3)
The group determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily
whether contractual payments of either principal or interest are past due for more than 90 days, there are other indications that theborrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons relating to theborrower’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, even where
regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit-impaired and default arealigned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired.
Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL
allowance.

Write-off
Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic
prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In
circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further
recovery, write-off may be earlier.

Forbearance
Loans are identified as forborne and classified as either performing or non-performing when the group modifies the contractual terms
due to financial difficulty of the borrower. Non-performing forborne loans are stage 3 and classified as non-performing until they meet thecure criteria, as specified by applicable credit risk policy (for example, when the loan is no longer in default and no other indicators ofdefault have been present for at least 12 months). Any amount written off as a result of any modification of contractual terms uponentering forbearance would not be reversed.
In 2022, the group adopted the EBA Guidelines on the application of definition of default for our retail portfolios, which affects credit risk
policies and our reporting 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 32.
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 iseither 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
the terms of an existing agreement are modified such that the forborne loan is a substantially different financial instrument. Any newloans that arise following derecognition events in these circumstances would generally be classified as POCI and will continue to bedisclosed as forborne.
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The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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) suchthat the group’s rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan isrecognised 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 forderecognition having regard to changes 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 areeconomically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying
amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change of the interest ratebenchmark.

Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period byconsidering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or
implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into accountreasonable and supportable information, including information about past events, current conditions and future economic conditions. The
assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in
the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its
weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, andthe geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be asignificant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale.
However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when
30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers,
and included on a watch or worry list are included in stage 2.
For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default (‘PD’) which
encompasses a wide range of information including the obligor’s customer risk rating ('CRR'), macroeconomic condition forecasts andcredit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD
for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure ofsignificance varies depending on the credit quality at origination as follows:
Origination CRR

Significance trigger – PD to increase by

0.1–1.2
2.1–3.3

15bps
30bps

For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination
PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit
migrations and to relative changes in external market rates.
For loans originated prior to the implementation of HKFRS 9, the origination PD does not include adjustments to reflect expectations of
future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD
must be approximated assuming through-the-cycle 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 32.
For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporate allavailable information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12
months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into
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 than would be expected from loans that are performing as originally expected and higher than thatwhich 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 forcertain 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. These enhancements resulted in significant migrations of loans to customers gross carrying
amounts from stage 1 to stage 2, but did not have a significant impact on the overall ECL for these portfolios in 2022 due to low loan-tovalue ratios.

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Notes on the Consolidated Financial Statements

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 amountof change in lifetime ECL for a POCI loan is recognised in profit or loss until the POCI loan is derecognised, even if the lifetime ECL areless than the amount of ECL included in the estimated cash flows on initial recognition.

Movement between stages
Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk
since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly
increased since initial recognition based on the assessments described above. In the case of non-performing forborne loans, suchfinancial instruments are transferred 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
which is relevant to the assessment including information about past events, current conditions and reasonable and supportable
forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account thetime value of money and considers other factors such as climate-related risks.
In general, the group calculates ECL using three main components, a probability of default, a loss given default ('LGD') and the exposure
at default (‘EAD’).
The 12-month ECL is calculated by multiplying the 12-month PD, LGD, and EAD. Lifetime ECL is calculated using the lifetime PD instead.
The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the
instrument respectively.
The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet
date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD
given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected
to be realised and the time value of money.
The group makes use of the Basel II IRB framework where possible, with recalibration to meet the differing HKFRS 9 requirements as set
out in the following table:
Model

Regulatory capitalPD• Through the cycle (represents long-run average PD throughout a • Point in time (based on current conditions, adjusted to take intofull economic cycle).
account estimates of future conditions that will impact PD).
• The definition of default includes a backstop of 90+ days past
• Default backstop of 90+ days past due for all portfolios.
due.

HKFRS 9EAD

• Cannot be lower than current balance.

• Amortisation captured for term products.

LGD• Downturn LGD (consistent losses expected to be suffered during
a severe but plausible economic downturn).
• Regulatory floors may apply to mitigate risk of underestimating
downturn LGD due to lack of historical data.
• Discounted using cost of capital.
• All collection costs included.

• Expected LGD (based on estimate of loss given default including
the expected impact of future economic conditions such aschanges in value of collateral).
• No floors.
• Discounted using the original effective interest rate of the loan.
• Only costs associated with obtaining/selling collateral included.
• Discounted back from point of default to balance sheet date.

Other

While 12-month PDs are recalibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD
using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating
through the CRR bands over its life.
The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow (‘DCF’) methodology. The expected
future cash flows are based on the credit risk officer’s estimates as 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 theestimated 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 underfour different scenarios are probability-weighted by reference to the economic scenarios applied more generally by the group and thejudgement of the credit risk officer in relation to the likelihood of the work-out strategy succeeding or receivership being required. Forless significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to
the most likely outcome.

Period over which ECL is measured
ECL is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-monthor lifetime ECL) is the maximum contractual period over which the group is exposed to credit risk. 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 notdetermine 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 to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six
years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the92

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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 less frequently 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 loss inmost economic environments. In certain economic environments, additional analysis may be necessary and may result in additional
scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed
methodology is disclosed in ‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on pages 37 to 41.

Critical accounting estimates and judgements
The calculation of the group’s ECL under HKFRS 9 requires the group to make a number of judgements, assumptions and estimates. The most significant
are set out below:
Judgements

Estimates• Defining what is considered to be a significant increase in credit risk.
• Determining the lifetime and point of initial recognition of overdrafts and credit cards.
• Selecting and calibrating the PD, LGD and EAD models, which support the calculations,
including making reasonable and supportable judgements about how models react to current
and future economic conditions.
• Selecting model inputs and economic forecasts, including determining whether sufficient andappropriately weighted economic forecasts are incorporated to calculate unbiased expectedloss.
• Making management adjustments to account for late breaking events, model and data
limitations and deficiencies, and expert credit judgements.
• Selecting applicable recovery strategies for certain wholesale credit-impaired loans.

• The sections ‘Measurement uncertainty andsensitivity analysis of ECL estimates’ marked asaudited from pages 37 to 41, set out the assumptions
used in determining ECL and provide an indication of
the sensitivity of the result to the application ofdifferent weightings being applied to different
economic assumptions.

(j)Insurance contracts

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

Net insurance premium income
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums areaccounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they
relate.

Net insurance claims and benefits paid and movements in liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs
and any policyholder bonuses allocated in anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following
notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when
notified.
Reinsurance recoveries are accounted for in the same period as the related claim.

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

Investment contracts with DPF
While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by
HKFRS 4. The group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting
increase in the carrying amount of the liability.
In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performanceof the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or OCI, following thetreatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised
only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant
assets are recognised in the income statement.

Liabilities under insurance contracts and present value of in-force long-term insurance businessLiabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles.
Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated byreference to the value of the relevant underlying funds or indices.
The group recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term andin-force at the balance sheet date, as an asset. The PVIF asset is presented gross of attributable tax in the balance sheet and movementsin the PVIF asset are included in ‘Other operating income’ on a gross of tax basis.
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Notes on the Consolidated Financial Statements

Critical accounting estimates and judgements
The valuation of the PVIF and insurance contract liabilities are dependent on economic assumptions (e.g. future investment returns) and non-economic
assumptions (e.g. related to policyholder behaviour or demographics).
Judgements

Estimates• The PVIF asset represents the value of the equity holders’ interest in the issuing insurance• The assumptions are reassessed at each reporting
companies’ profits expected to emerge from these contracts written at the balance sheet
date and changes in the estimates which affect thedate. It is determined by discounting those expected future profits using appropriate
value of PVIF and Insurance contract liabilities are
assumptions in assessing factors such as future mortality, lapse rates, investment returns andreflected in the income statement. More informationlevels of expenses, and a risk discount rate that reflects the risk premium attributable to theis included in Note 15 for PVIF and Note 3 forrespective contracts. The PVIF incorporates allowances for both non-market risk and the value
liabilities under insurance contracts.
of financial options and guarantees.
• The sections marked as audited on pages 68 to 72,• Insurance contract liabilities are set in accordance with local actuarial principles in each
‘Insurance manufacturing operations risk
market, aligned with local regulatory measurement frameworks. Core judgements made inmanagement’ provide an indication of the sensitivity
applying these frameworks include demographic and behavioural assumptions, expenseof the result to the application of different weightings
assumptions and investment return assumptions.
being applied to different economic and noneconomic assumptions.

(k)

Property

Land and buildings
Land and buildings held for own use are carried at their revalued amount, being the fair value at the date of the revaluation less any
subsequent accumulated depreciation and impairment losses.
Revaluations are performed by professional qualified valuers, on a market basis, with sufficient regularity to ensure that the net carrying
amount does not differ materially from the fair value. Surpluses arising on revaluation are credited firstly to the income statement, to theextent of any deficits arising on revaluation previously charged to the income statement in respect of the same land and buildings, andare thereafter taken to the ‘Property revaluation reserve’. Deficits arising on revaluation are first set off against any previous revaluation
surpluses included in the ‘Property revaluation reserve’ in respect of the same land and buildings, and are thereafter recognised in theincome statement.
Leasehold land and buildings are depreciated on a straight-line basis over the shorter of the unexpired terms of the leases or theremaining useful lives.
The Government of Hong Kong owns all the land in Hong Kong and permits its use under leasehold arrangements. Similar arrangements
exist in mainland China. The group accounts for its interests in own use leasehold land and land use rights in accordance with HKFRS 16
but discloses these as owned assets when the right of use are considered sufficient to constitute control.

Investment properties
The group holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties areincluded on balance sheet at fair value with changes in fair value being recognised in the income statement.

(l)

Employee compensation and benefits

Post-employment benefit plans
The group operates a number of pension schemes including defined benefit, defined contribution, and post-employment benefit
schemes.
Payments to defined contribution schemes are charged as an expense as the employees render service.
Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainlycomprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.
Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets excludinginterest and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The net defined benefit asset or
liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling
test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to theplan.

(m) Tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates
to items recognised in OCI or directly in equity, in which case the tax is recognised in the same statement as the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect ofprevious years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to
the tax authorities.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and theamounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the
periods in which the assets will be realised or the liabilities settled.
In assessing the probability and sufficiency of future taxable profit, management considers the availability of evidence to support therecognition of deferred tax assets. taking into account the inherent risks in long-term forecasting, including climate change-related, anddrivers 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 orconstructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.
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The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Contingent liabilities and guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related
to legal proceedings or regulatory matters, are not recognised in the Consolidated Financial Statements but are disclosed unless theprobability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, whichis generally the fee received or present value of the fee receivable.
The Bank has issued financial guarantees and similar contracts to other group entities. The group elects to account for certain guarantees
as insurance contracts in the Bank's financial statements, in which case they are measured and recognised as insurance liabilities. This
election is made on a contract-by-contract basis, and is irrevocable.

(o)Impairment of non-financial assets

Software under development is tested for impairment at least annually. Other non-financial assets such as property, plant and equipment,
intangible assets (excluding goodwill) and right-of-use assets are tested for impairment at the individual asset level when there isindication of impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In
addition, impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are
considered to be the principal operating legal entities and branches divided in a similar manner as the group's operating segments.
Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher ofthe fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying value of its assets andliabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on areasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an
appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which
is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs.
When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to theextent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to thehigher of their respective individual recoverable amount or nil. This impairment is not allocated to financial assets within a CGU.
Impairment loss recognised in prior periods for non-financial assets is reversed when there has been a change in the estimate used todetermine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets
would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss beenrecognised in prior periods.

2

Operating profit(a)

Net interest income

Net interest income includes:
2022

2021

HK$m

HK$m

Interest income recognised on impaired financial assets
Interest income recognised on financial assets measured at amortised cost
Interest income recognised on financial assets measured at FVOCI

821
158,552
21,563315
106,916
14,461

Interest expense on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise
mandatorily measured at fair value1(47,525)(20,907)

1 Includes interest expenses on lease liabilities of HK$265m (2021: HK$374m).

(b) Net fee income
Net fee income by reportable segments

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

Wealth andPersonal
Banking

Commercial
BankingGlobalBanking

Markets andSecurities
Services

Corporate
Centre1

Other (GBMother)

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

807
4,894
7,826
332
3,513
—
4,534
—
264
858
1,434
3,132
27,594(9,699)17,895

979
592
257
1,303
53
2,465
112
—
1,902
39
107
2,638
10,447
(720)
9,727

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

—
—
—
—
—
—
—
—
—
—
—
(2,214)(2,214)
2,461
247

—
—
—
—
—
—
—
—
—
—
—
(216)
(216)
160
(56)

2,227
7,326
8,135
2,846
4,303
3,132
4,648
562
2,892
4,103
1,546
8,902
50,622(14,022)
36,600

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

95

Notes on the Consolidated Financial Statements

Net fee income by reportable segments (continued)
Wealth andPersonal
Banking

Commercial
BankingGlobalBanking

Markets andSecurities
Services

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

809
5,927
7,559
409
5,477
—
7,373
1
255
976
1,326
2,329

929
639
207
1,371
69
2,462
176
1
1,843
50
114
2,675

367
16
40
1,304
—
594
1
869
715
47
1
2,497

70
2,028
—
62
869
—
—
683
—
3,414
—
3,413

—
—
—
—
—
—
—
—
—
—
—
(2,156)

—
—
—
—
—
—
—
—
—
—
—
8

2,175
8,610
7,806
3,146
6,415
3,056
7,550
1,554
2,813
4,487
1,441
8,766

Fee income
Fee expense
Year ended 31 Dec 2021

32,441(8,614)23,827

10,536
(708)
9,828

6,451
(705)
5,746

10,539(4,809)5,730(2,156)
2,399
243

8
(86)
(78)

57,819(12,523)
45,296

Corporate
Centre1 Other (GBM-other)Total

1 Includes inter-segment elimination.

Net fee income includes:
2022

2021

HK$m

HK$m

Fees earned on financial assets that are not at fair value through profit and loss (other than amounts included in determining theeffective interest rate)

9,286

9,742

– fee income– fee expense
Fee earned on trust and other fiduciary activities– fee income– fee expense

14,867(5,581)
8,961
11,290(2,329)15,173(5,431)
11,242
12,801(1,559)(c)

Net income from financial instruments measured at fair value through profit or loss
2022

2021

HK$m

HK$m

Net income/(expense) arising on:
Net trading activities
Other instruments managed on a fair value basis
Net income from financial instruments held for trading or managed on a fair value basis
Financial assets held to meet liabilities under insurance and investment contracts
Liabilities to customers under investment contracts

43,138(1,464)
41,674(15,075)
1,881

29,888(1,529)28,35917,837343

Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured atfair value through profit or loss

(13,194)

18,180Change 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

(703)
34
27,811(639)(25)
45,875

1 Includes debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting
mismatch.

(d)Other operating income

Movement in present value of in-force insurance business
Gains/(losses) on investment properties
Losses on disposal of property, plant and equipment and assets held for sale
Gain on acquisition of subsidiary1
Gains on disposal of subsidiaries, associates and business portfolios
Rental income from investment properties
Dividend income
Other
Year ended 31 Dec

2022

2021

HK$m

HK$m

(256)
(133)
(42)
665
4
437
233
2,873
3,781

(1,294)
277
(54)
—
4
393
198
2,509
2,033

1 Represents a gain of HK$665m from the acquisition of AXA Insurance Pte Limited. Details are included in Note 37 'Business acquisitions'.

There was a gain on disposal of loans and receivables of HK$84m in the year (2021: HK$77m). There was no gain or loss on disposal of
financial liabilities measured at amortised cost (2021: loss of HK$136m).

96

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

(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
Loan commitments and guarantees
Other financial assets
Year ended 31 Dec

2022

2021

HK$m

HK$m

15,503
16,383
(880)
409
453
16,365

7,055
8,065(1,010)
(683)
167
6,539

Change in expected credit losses as a percentage of average gross customer advances was 0.40% for 2022 (2021: 0.18%).

(f)

General and administrative expenses

Premises and equipment
Marketing and advertising expenses
Other administrative expenses1
Year ended 31 Dec

2022

2021

HK$m

HK$m

2,956
2,622
48,97154,5492,867
2,417
47,04352,327

1 Include recharges from fellow group entities. Further details are set out in Note 32.

Included in operating expenses were direct operating expenses of HK$47m (2021: HK$37m) arising from investment properties thatgenerated rental income in the year. Direct operating expenses arising from investment properties that did not generate rental income
amounted to HK$9m (2021: HK$4m).

(g)

Depreciation and impairment of property, plant and equipment

Owned property, plant and equipment
Other right-of-use assets
Year ended 31 Dec

(h)

2022

2021

HK$m

HK$m

6,569
2,588
9,157

6,019
2,872
8,891

Auditors’ remuneration

Auditors’ remuneration amounted to HK$172m (2021: HK$152m).

3

Insurance business

Net insurance premium income1
Non-linked
insurance

Unit-linked

Total

HK$m

HK$m

HK$m

Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2022

88,141(9,002)
79,139

1,302
(26)
1,276

89,443(9,028)80,415Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2021

62,937(3,594)
59,343

2,398
(19)
2,379

65,335(3,613)61,722

1 The group's net insurance premium income is presented after elimination of inter-company transactions between our insurance manufacturing
operations and other group entities.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

97

Notes on the Consolidated Financial Statements

Net insurance claims and benefits paid and movement in liabilities to policyholders1
Non-linked
insurance

Unit-linked

Total

HK$m

HK$m

HK$m

Gross claims and benefits paid and movement in liabilities to policyholders– claims, benefits and surrenders paid– movement in liabilities
Reinsurers’ share of claims and benefits paid and movement in liabilities– claims, benefits and surrenders paid– movement in liabilities
Year ended 31 Dec 2022

83,11429,27553,839(9,107)(7,418)(1,689)74,007(4,162)
3,800(7,962)
(31)
(30)
(1)
(4,193)

78,95233,07545,877(9,138)(7,448)(1,690)69,814Gross claims and benefits paid and movement in liabilities to policyholders– claims, benefits and surrenders paid– movement in liabilities
Reinsurers’ share of claims and benefits paid and movement in liabilities– claims, benefits and surrenders paid

78,15918,57359,586(4,013)(2,048)

1,898
6,735
(4,837)4(39)

80,05725,30854,749(4,009)(2,087)– movement in liabilities
Year ended 31 Dec 2021

(1,965)74,14643
1,902(1,922)
76,048

1 The group's net insurance claims and benefits paid and movement in liabilities to policyholders is presented after elimination of inter-company
transactions between our insurance manufacturing operations and other group entities.

Liabilities under insurance contracts
2022

Non-linked insurance
At 1 Jan
Claims and benefits paid
Increase/(decrease) in liabilities to policyholders
Exchange differences and other movements1
At 31 Dec
Unit-linked
At 1 Jan
Claims and benefits paid
Increase/(decrease) in liabilities to policyholders
Exchange differences and other movements1
At 31 Dec
Total liabilities to policyholders

2021
Gross

Reinsurers’
share2

Net

HK$m

HK$m

HK$m

581,139(21,857)
74,007
14,036647,325

547,058(18,573)
78,1591,856
608,500(25,361)
2,048(4,013)(35)(27,361)

521,697(16,525)
74,146
1,821
581,139

29,6403,770(4,193)(7,935)21,282
668,60734,348(6,735)
1,898
134
29,645638,145

(4)
39
4
(44)
(5)
(27,366)

34,344(6,696)1,902
9029,640610,779

Gross

Reinsurers’
share2

Net

HK$m

HK$m

HK$m

608,500(29,275)
83,114
17,120679,459(27,361)
7,418(9,107)(3,084)(32,134)

29,6453,800(4,162)(7,984)
21,299700,758

(5)
(30)
(31)
49
(17)
(32,151)

1 'Exchange differences and other movements’ includes movements in liabilities arising from net unrealised investment gains recognised in othercomprehensive income.
2 Amounts recoverable from reinsurance of liabilities under insurance contracts are included in the consolidated balance sheet in ‘Prepayment,
accrued income and other assets’.

The key factors contributing to the movement in liabilities to policyholders included movements in the market value of assets supporting
policyholder liabilities, death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, thedeclaration of bonuses and other amounts attributable to policyholders.

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

2022

2021

HK$m

HK$m

37,053
1,384
2,225
1,758
467
40,66235,736
1,344
2,181
1,651
530
39,261

1 'Wages and salaries’ includes the effect of share-based payments arrangements of HK$890m (2021: HK$951m).

Post-employment benefit plans
The group operates a number of post-employment benefit plans for its employees. Some of these plans are defined benefit plans, ofwhich the largest plan is The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (the 'Principal Plan’).
The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and thediscounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they arerecoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether asurplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions.

98

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value ofplan 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

Present value of
defined benefit
obligations

Net defined
benefit liability

HK$m

HK$m

HK$m

10,075
—
—
—
162
(841)
(841)
—
345
(1,414)(61)
8,266(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)Retirement benefit assets recognised on the balance sheet (within ‘Prepayment, accrued income and otherassets’)At 1 Jan 2021
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 2021
Retirement benefit liabilities recognised on the balance sheet
Retirement benefit assets recognised on the balance sheet (within ‘Prepayment, accrued income and otherassets’)32
10,453
—
—
—
79
500
500
—
356
(1,340)27
10,075(13,140)
(475)
(492)
17
(125)
385
—
385
—
1,407
3
(11,945)(2,687)
(475)
(492)
17
(46)
885
500
385
356
67
30
(1,870)(1,890)20

Fair value of plan assets by asset classes
At 31 Dec 2022

Fair value of plan assets– equities– bonds– alternative investments– other1

At 31 Dec 2021

Value

Quoted market
price in active
marketThereof HSBC

Value

Quoted market
price in active
marketThereof HSBC

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

8,266
1,078
4,622
2,112
454

8,266
1,078
4,622
2,112
454

195
—
—
—
195

10,075
1,232
5,676
2,490
677

10,075
1,232
5,676
2,490
677

257
—
—
—
257

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 groupand 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 theGroup. The Principal Plan comprises a funded defined benefit scheme (which provides a lump sum benefit on retirement and is now
closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees, and thegroup has been providing defined contribution plans to all new employees. Since the defined benefit scheme of the Principal Plan is a
final salary lump sum scheme, its exposure to longevity risk and interest rate risk is limited compared to a scheme that provides annuity
payments.
The Principal Plan is a funded plan with assets which are held in trust funds separate from the group. The investment strategy of thedefined benefit scheme of the Principal Plan is to hold the majority of assets in fixed income investments, with a smaller portion in
equities. The target asset allocation for the portfolio is as follows: Fixed income investments 75% and Equity 25%. Each investment
manager has been assigned a benchmark applicable to their respective asset class. The actuarial funding valuation of the Principal Plan isconducted at least on a triennial basis in accordance with the local practice and regulations. The actuarial assumptions used to conduct
the actuarial funding valuation of the Principal Plan vary according to the economic conditions.
The trustee, which is a subsidiary of the Bank, assumes the overall responsibility for the Principal Plan and the group has established amanagement committee and a number of sub-committees to broaden the governance and manage the concomitant issues.
Both the group and ServCo participate in the Principal Plan that shares risks between the entities which are under common control of theGroup. As agreed between the group and ServCo, the net defined benefit cost of the defined benefit scheme of the Principal Plan shall becharged separately. Details on the defined benefit scheme of the Principal Plan are disclosed below.
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

99

Notes on the Consolidated Financial Statements

Net asset/(liability) under the defined benefit scheme of the Principal Plan
Included within the group

Fair valueof planassetsIncluded within ServCo

Present
value ofdefinedbenefitobligationsNet
definedbenefitliability

Fair valueof planassetsPresent
value ofdefinedbenefitobligationsNet
definedbenefitliability

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 1 Jan 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

4,424
—
—
56
(409)
(409)
—
191
(737)

(4,915)
(162)
(162)
(61)
566
—
566
—
737

(491)
(162)
(162)
(5)
157
(409)
566
191
—

3,945
—
—
50
(364)
(364)
—
123
(515)

(4,191)
(141)
(141)
(52)
537
—
537
—
515

(246)
(141)
(141)
(2)
173
(364)
537
123
—

Exchange differences and other movements
At 31 Dec 2022
Retirement benefit liabilities recognised on the balance sheet

60
3,585

(67)
(3,902)

(7)
(317)
(317)

(69)
3,170

67
(3,265)

(2)
(95)
(95)

At 1 Jan 2021
Service cost
– current service cost
Net interest income/ (expense) on the net defined benefit asset/(liability)
Re-measurement effects recognised in other comprehensive income– return on plan assets (excluding interest income)– actuarial gains
Contributions
Benefits paid
Exchange differences and other movements
At 31 Dec 2021
Retirement benefit liabilities recognised on the balance sheet

4,486
—
—
22
265
265
—
166
(585)
70
4,424

(5,330)
(179)
(179)
(26)
118
—
118
—
585
(83)
(4,915)

(844)
(179)
(179)
(4)
383
265
118
166
—
(13)
(491)
(491)

4,288
—
—
21
250
250
—
149
(682)
(81)
3,945

(5,001)
(171)
(171)
(24)
240
—
240
—
682
83
(4,191)

(713)
(171)
(171)
(3)
490
250
240
149
—
2
(246)
(246)

The group expects to make HK$180m of contributions to the defined benefit scheme of the Principal Plan during 2023 (during 2022:
HK$160m) and ServCo expects to make HK$116m contributions to the defined benefit scheme of the Principal Plan during 2023 (during2022: HK$136m). 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.
Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate forthe five years thereafter, are as follows:
Benefits expected to be paid from the defined benefit scheme of the Principal Plan1
Five to ten
years

Within one year

One to two years

Two to three
years

Three to four
years

Four to five
years

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

292
187

373
299

382
340

371
271

396
338

1,892
1,825

381
286

467
284

383
333

362
365

396
287

1,896
1,785

As at 31 December 2022 as reported by:– The group– ServCo
As at 31 December 2021 as reported by:– The group– ServCo

1 The duration of the defined benefit obligation is six years for the Principal Plan under the disclosed assumptions (2021: seven years).

Fair value of plan assets of the defined benefit scheme of the Principal Plan by asset classes
At 31 Dec 2022

Fair value of plan assets– equities– bonds– alternative investments– other1

At 31 Dec 2021

Value

Quoted market
price in active
marketThereof HSBC

Value

Quoted market
price in active
marketThereof HSBC

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

6,755
1,581
3,725
1,398
51

6,755
1,581
3,725
1,398
51

51
—
—
—
51

8,369
1,839
4,731
1,723
76

8,369
1,839
4,731
1,723
76

76
—
—
—
76

1 Other mainly consists of cash and cash deposits.

100

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

The Principal Plan’s key actuarial financial assumptions
The group and ServCo determine the discount rate to be applied to the defined benefit scheme's obligations in consultation with the
Principal Plan’s local actuary, on the basis of the current average yields of Hong Kong Government Bonds and Hong Kong Exchange
Fund Notes, with maturities consistent with that of the defined benefit obligations.
The key actuarial assumptions used to calculate the group’s obligations for the defined benefit scheme of the Principal Plan for theyear, and used as the basis for measuring the expenses were as follows:
Key actuarial assumptions for the defined benefit scheme of the Principal Plan
Discount rate

Rate of pay increase% p.a.

% p.a.

At 31 Dec 2022

3.50

3.50% p.a. for 2023 and3.00% p.a. thereafterAt 31 Dec 2021

1.30

3.00

Actuarial assumption sensitivities
The discount rate and rate of pay increase are sensitive to changes in market conditions arising during the reporting period. The
following table shows the financial impact of assumption changes on the defined benefit scheme of the Principal Plan at year end:
The effect of changes in key assumptions on the defined benefit scheme of the Principal Plan
Impact on HSBC Group Hong Kong Local Staff Retirement Benefit
Scheme obligation
Financial impact of increase

Discount rate – increase/decrease of 0.25%
Rate of pay increase – increase/decrease of 0.25%

Financial impact of decrease

2022

2021

2022

2021

HK$m

HK$m

HK$m

HK$m

(111)
115

(158)
160

114
(112)

162
(157)

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$111m (2021: HK$131m). 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 (2021: HK$30m) and other
emoluments of HK$74m (2021: HK$101m) which includes contributions to pension schemes of HK$3m (2021: HK$1m). Non-cash
benefits which are included in other emoluments mainly relate to share-based payment awards, and the provision of housing andfurnishings.
Details on loans to directors are set out in Note 32.

5Tax

The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2021: 16.5%) on the profits forthe year assessable in Hong Kong. Overseas branches and subsidiaries have similarly provided for tax in the countries in which they
operate at the appropriate rates of tax in force in 2022. Deferred taxation is provided for in accordance with the group’s accounting policy
in Note 1.2(m).
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– effect of changes in tax rates– adjustments in respect of prior years
Year ended 31 Dec

2022

2021

HK$m

HK$m

14,8395,072(492)
10,692
(433)
668
128
—
540
15,507

12,489
5,719
(158)
7,151
(223)
1,526
1,209
9
308
14,015

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:

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

101

Notes on the Consolidated Financial Statements

Reconciliation between taxation charge and accounting profit at applicable tax rates

Profit before tax
Notional tax on profit before tax, calculated at the rates applicable to profits in the countries concerned
Effects of profits in associates and joint ventures
Non-taxable income and gains
Local taxes and overseas withholding taxes
Permanent disallowables
OthersYear ended 31 Dec

2022

2021

HK$m

HK$m

97,611
19,832(3,100)(3,591)
1,848
747
(229)
15,50786,563
17,463(3,186)(3,181)
2,695
577
(353)
14,015

Movements of deferred tax assets and liabilities

AssetsLiabilities
At 1 Jan 2022
Exchange and other adjustments
Charge/(credit) to income statement
Charge/(credit) to other comprehensive
incomeAccelerated
capitalallowances

Insurancebusiness

Expenseprovisions

Impairment
allowance on
financial
instruments

Revaluationof properties

Other2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

176
(580)
(404)
(15)
(43)

—
(10,428)(10,428)
(544)
158

1,557
(18)
1,539
(157)
(229)

2,680
—
2,680
(312)
1,002

—
(14,985)(14,985)
215
759

2,106
(9,677)(7,571)(396)(2,315)

6,519(35,688)(29,169)(1,209)
(668)

6

—

10

—

(812)

2,761

1,965

At 31 Dec 2022
Assets1
Liabilities1

(456)
146
(602)

(10,814)—(10,814)

1,163
1,193
(30)

3,370
3,370
—

(14,823)—(14,823)(7,521)
4,550(12,071)(29,081)
9,259(38,340)

AssetsLiabilities
At 1 Jan 2021
Exchange and other adjustments
Charge/(credit) to income statement

102
(358)
(256)
(6)
(142)

—
(10,662)(10,662)
2
232

1,294
—
1,294
(42)
286

2,676
—
2,676
(75)
80

—
(14,645)(14,645)
(1)
524

3,088
(9,167)(6,079)(11)(2,506)

7,160(34,832)(27,672)(133)(1,526)Charge/(credit) to other comprehensive
incomeAt 31 Dec 2021
Assets1
Liabilities1

—

—

1

(1)

(863)

1,025

162

(404)
176
(580)

(10,428)—(10,428)

1,539
1,557
(18)

2,680
2,680
—

(14,985)—(14,985)(7,571)
2,106(9,677)(29,169)6,519(35,688)

1 After netting off balances within countries, the balances as disclosed in the Consolidated Financial Statements are as follows: deferred tax assets
HK$3,856m (2021: HK$3,353m); and deferred tax liabilities HK$32,937m (2021: HK$32,522m).
2 Other included deferred tax of HK$5,847m (2021: HK$5,523m) provided in respect of distributable reserves or post-acquisition reserves ofassociates that, on distribution or sale, would attract withholding tax.

The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$4,537m (2021: HK$3,130m). Of
this amount, HK$1,536m (2021: HK$733m) 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
not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise.

6

Dividends

Dividends to shareholders of the parent company
2022

Dividends paid on ordinary shares
In respect of previous year:– fourth interim dividend
In respect of current year:– first interim dividend paid
– second interim dividend paid
– third interim dividend paid
Total
Distributions on other equity instruments
Dividends to shareholders

2021

HK$ per share

HK$m

HK$ per share

HK$m

0.23

10,5840.47

21,665

0.17
0.12
0.16
0.68

7,761
5,887
7,850
32,082
2,739
34,821

0.26
0.24
0.24
1.21

12,211
11,153
11,361
56,3902,715
59,105

On 14 February 2023, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2022 of
HK$0.27 per ordinary share (HK$13,500m) (2021: HK$0.23 per ordinary share (HK$10,584m)). No liability was recorded in the financial
statements in respect of the fourth interim dividend for 2022.

102

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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%)
Total

7

2022
HK$m

2021
HK$m

460
426
477
580
278
518
2,739

456
422
474
576
275
512
2,715

Trading assets
2022

2021

HK$m

HK$m

Treasury and other eligible bills

132,737

132,104

Debt securities
Equity securities
Reverse repurchase agreements and other similar secured lending1
Other1,2
At 31 Dec

231,601
264,447
59,398
11,622
699,805

274,508
299,420
63,5197,899
777,450

1 Further product details have been included to reconcile to Note 30 'Offsetting of financial assets and financial liabilities' with effect from31 December 2022.
2 'Other' includes term lending and other accounts with banks and customers.

8

Derivatives

Notional contract amounts and fair values of derivatives by product contract type
Notional contract amount

Fair value – Assets

Fair value – Liabilities

Trading

Hedging

Trading

Hedging

Total

Trading

Hedging

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

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

263,215
529,327
18,3632,386
3,230
816,5213,226
12,416———
15,642

266,441
541,743
18,3632,386
3,230
832,163(329,392)
502,771

281,468
575,665
14,017
2,708
3,939
877,797

14
3,326
—
—
—
3,340

281,482
578,991
14,0172,708
3,939
881,137(329,392)
551,745

Foreign ExchangeInterest rate
EquityCreditCommodity and other
Gross total
OffsetAt 31 Dec 2021

17,721,333
30,392,783
845,058
413,340
146,377
49,518,891

74,732
218,885———
293,617

155,110368,523
18,6113,446
1,884
547,574

3,401
4,321
—
—
—
7,722

158,511
372,844
18,6113,446
1,884
555,296(190,129)
365,167

150,034
372,342
14,8004,437
2,378
543,991

523
1,406
—
—
—
1,929

150,557
373,748
14,8004,437
2,378
545,920(190,129)355,791

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

Use of derivatives
The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risk
arising from client business, and to manage and hedge the group’s own risks. Derivatives (except for derivatives which are designated as
effective hedging instruments) are held for trading. Within the held for trading classification are two types of derivative instruments:
those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet thequalifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments
designated at fair value. These activities are described more fully below.
The group’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly
to ensure that they remain within acceptable risk levels. When entering into derivative transactions, the group employs the same credit
risk management framework to assess and approve potential credit exposures that it uses for traditional lending.

Trading derivatives
Most of the group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing ofderivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include
market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose ofgenerating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from clienttransactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying
hedging derivatives.
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

103

Notes on the Consolidated Financial Statements

Derivatives valued using models with unobservable inputs
Any initial gain or loss on financial instruments where the valuation is dependent on unobservable parameters is deferred over the life of
the contract or until the instrument is redeemed, transferred or sold or the fair value becomes observable. All derivatives that are part ofqualifying hedging relationships have valuations based on observable market parameters.
The aggregate unobservable inception profit yet to be recognised in the income statement is immaterial.

Hedge accounting derivatives
The group applies hedge accounting to manage interest rate and foreign exchange risk. The group uses derivatives (principally interest
rate and currency swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This
enables the group to optimise its overall costs of accessing debt capital markets, and to mitigate the market risk which would otherwise
arise from structural imbalances in the maturity and other profiles of its assets and liabilities. The accounting treatment of hedging
transactions varies according to the nature of the instrument hedged and the type of hedging transaction. Derivatives may qualify as
hedges for accounting purposes if they are fair value hedges, or cash flow hedges.

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 orotherwise 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 thegroup designates alternative benchmark rates as the hedged risk which may not have been separately identifiable upon initialdesignation, provided the group reasonably expects it will meet the requirement within 24 months from the first designation date. The
designated risk component accounts for a significant 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 inmarket interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss, including debt
securities held and issued.
HSBC hedging instrument by hedged risk
Hedging instrument
Carrying amount

Hedged risk
Interest rate
At 31 Dec 2022
Interest rate
At 31 Dec 2021

Notional amount1

AssetsLiabilities

HK$m

HK$m

HK$m

Balance sheet
presentation

Change in fair value2309,450
309,450

11,761
11,761

2,281
2,281

Derivatives

6,130
6,130

203,871
203,871

4,148
4,148

1,387
1,387

Derivatives

2,488
2,488

HK$m

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.

HSBC hedged item by hedged risk
Hedged item
Carrying amount

Hedged risk

AssetsLiabilities

AssetsLiabilities

HK$m

HK$m

HK$m

HK$m

257,126(10,312)

5,755

(435)

Interest rate

At 31 Dec 2022

262,881

1,161
33,11334,274(10,747)—(2,260)(2,260)Change in fairvalue1

Recognised
in profit andloss

Balance sheet presentation

HK$m

HK$m

Financial investments
measured at fair value
through othercomprehensive income(10,716)

Loans and advances tocustomers
Debt securities in issue
Subordinated liabilities3

(351)
8
4,692
(6,367)

162,769

116

Financial investments
measured at fair value throughother comprehensive income(4,930)

6,465

(72)

Loans and advances tocustomers(110)

Debt securities in issue
Subordinated liabilities3

3
2,472

Interest rate
1,269
37,783
At 31 Dec 2021

IneffectivenessAccumulated fair value hedge adjustments included incarrying amount2

169,234

39,052

9
2,413
44

2,422

Net income fromfinancial instruments
held for trading or(237)
managed on a fairvalue basis

(237)

(77)

(2,565)

Profit and loss
presentation

Net income fromfinancial instruments
held for trading or
managed on a fairvalue basis(77)

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 assets of HK$143m (2021: HK$164m) for FVOCI assets and assets of HK$1,243m (2021: nil) 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".

104

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fairvalue of derivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items
and hedging instruments.
The interest rate risk of the group's fixed rate debt securities issued is managed in a non-dynamic risk management strategy.

Cash flow hedges
The group’s cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage
the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates
and foreign-currency basis.
The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuancesof non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of
future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on thebasis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows
representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness andineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.
The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes inforeign exchange market rates with cross-currency swaps; these are considered non-dynamic hedges.
Hedging instrument by hedged risk
Hedging instrument

Hedged item

Ineffectiveness

Carrying amount
Notional
amount1

AssetsLiabilities

HK$m

HK$m

HK$m

Balance sheet
presentation

Foreign currency

34,8773,226

14

Derivatives

Interest rate147,291

655

1,045

Derivatives

At 31 Dec 2022

182,168

3,881

1,059

Foreign currency

74,732

3,401

523

Derivatives
Derivatives

Hedged risk

Interest rate

15,014173

19

At 31 Dec 2021

89,746

3,574

542

Change in fairvalue2

Change in fair value3

Recognised in
profit and loss

HK$m

HK$m

HK$m

5,461

5,461

Profit and loss
presentation

(448)

(448)

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

5,013

5,013

—

6,062

6,062

—

140

140

—

6,202

6,202

—

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

Foreign currency

HK$m

HK$m

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 loss
Income taxes
OthersCash flow hedging reserve at 31 Dec 2022

108
(448)

45
5,461

(109)
112
(1)
(338)

(6,891)236—(1,149)Cash flow hedging reserve at 1 Jan 2021
Fair value gains
Fair value (gains) reclassified from the cash flow hedge reserve to the income statement in respect of:Hedged items that have affected profit or loss
Income taxes
OthersCash flow hedging reserve at 31 Dec 2021

35
140

737
6,062

(30)
(37)
—
108

(6,886)132—
45

Interest rate benchmark reform
At 31 December 2022, HK$157,460m (2021: HK$99,608m) 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.
Further details regarding the impact of the market-wide benchmarks reform is set out in the 'Top and emerging risks' section on page
25-26 as specified as 'Audited'.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

105

Notes on the Consolidated Financial Statements

9

Financial assets designated and otherwise mandatorily measured at fair value through profit
or loss
2022

Treasury and other eligible bills
Debt securities
Equity securities
Reverse repurchase agreements and other similar secured lending1
Other1,2
At 31 Dec

2021

Designated atfair value

Mandatorily
measured atfair value

Total

HK$m

HK$m

—
18,754———18,754743
10,492
186,955
1,764
7,743
207,697

Designated atfair value

Mandatorily
measured atfair value

Total

HK$m

HK$m

HK$m

HK$m

743
29,246
186,955
1,764
7,743
226,451—
12,847———
12,847241
11,066
169,125
777
8,343
189,552

241
23,913
169,125
777
8,343
202,399

1 Further product details have been included to reconcile to Note 30 'Offsetting of financial assets and financial liabilities' with effect from 31
December 2022.
2 ‘Other’ includes term lending to banks and customers, and default fund contribution.

10

Loans and advances to customers

Gross loans and advances to customers
Expected credit loss allowances
At 31 Dec

2022

2021

HK$m

HK$m

3,745,113(39,964)
3,705,149

3,872,956(32,017)3,840,939

The following table provides an analysis of gross loans and advances to customers by industry sector based on the Statistical
Classification of economic activities in the European Community (‘NACE’).
Analysis of gross loans and advances to customers

Residential mortgages
Credit card advances
Other personal
Total personal
Real estate
Wholesale and retail trade
Manufacturing
Transportation and storage
Other
Total corporate and commercial
Non-bank financial institutions
At 31 Dec
By geography1
Hong Kong
Rest of Asia Pacific

2022

2021

HK$m

HK$m

1,177,614
92,023
255,747
1,525,384
570,370
377,359
372,060
106,172
490,791
1,916,752
302,977
3,745,113

1,167,487
89,005
275,819
1,532,311
635,217428,785
410,033
111,388471,988
2,057,411
283,234
3,872,956

2,332,813
1,412,300

2,447,799
1,425,157

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.

106

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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
2022

Amounts receivable– within one year
– one to two years– two to three years– three to four years– four to five years– after five years

2021

Total future
minimum
payments

Unearnedfinance
incomePresent value

Total future
minimum
payments

Unearnedfinance
incomeHK$m

Present value

HK$m

HK$m

HK$m

HK$m

HK$m

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

4,205
3,543
2,757
2,357
2,200
22,13337,195(1,213)(1,051)
(912)
(762)
(647)
(3,203)(7,788)

2,992
2,492
1,845
1,595
1,553
18,93029,407(378)
29,029

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

2022

2021

HK$m

HK$m

1,246,652
612,990
626,537
7,125
974,709135,216
839,4932,221,361

1,549,011
653,245888,664
7,102
502,5646,900
495,664
2,051,575

Equity instruments measured at fair value through other comprehensive income
2022

Type of equity instruments
Business facilitation
Investments required by central institutions
OthersAt 31 Dec

2021

Fair value

Dividends
recognised

Fair value

Dividends
recognised

HK$m

HK$m

HK$m

HK$m

6,615
404
106
7,125

217
3
—
220

6,540
420
142
7,102

189
3
6
198

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

107

Notes on the Consolidated Financial Statements

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

2022

2021

HK$m

HK$m

121,131
4,372
22,512
149,687
34,388129,025
461,115354,146

57,631
3,211
30,975
134,747
47,45375,951
349,968
275,815

The table above shows assets where a charge has been granted to secure liabilities on a legal and contractual basis. These transactions
are conducted under terms that are usual and customary to collateralised transactions including repurchase agreements, securities
lending, derivative margining, and include assets pledged to cover short positions and to facilitate settlement processes with clearing
houses as well as swaps of equity and debt securities. The group places both cash and non-cash collateral in relation to derivativetransactions.
Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificatesof indebtedness are held.
Financial assets pledged as collateral which the counterparty has the right to sell or repledge was HK$193,461m (2021: HK$85,162m).

Assets transferred
Transferred financial assets not qualifying for full derecognition and associated financial liabilities
2022

2021

Carrying amount of:Carrying amount of:TransferredassetsRepurchase agreements
Securities lending agreements

Associatedliabilities

Transferredassets

Associatedliabilities

HK$m

HK$m

HK$m

HK$m

167,260
70,036237,296

151,677
3,644
155,321

135,994
44,171
180,165

124,663282
124,945

The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt
securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending
agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to berecognised in full while a related liability, reflecting the group’s obligation to repurchase the assets for a fixed price at a future date, isalso recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no
associated liability as the non-cash collateral received is not recognised on the balance sheet. The group is unable to use, sell or pledge
the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged
assets.

Collateral received
Assets accepted as collateral relate primarily to standard securities borrowing, reverse repurchase agreements, swaps of securities andderivative margining. The group is obliged to return equivalent securities. These transactions are conducted under terms that are usual
and customary to standard securities borrowing, reverse repurchase agreements and derivative margining.
Fair value of collateral accepted as security for assets

Fair value of collateral permitted to sell or repledge in the absence of default
Fair value of collateral actually sold or repledged

108

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

2022

2021

HK$m

HK$m

1,337,822
520,756

1,134,296
377,117

13

Investments in subsidiaries

Main subsidiaries of the Bank
The group’s interest inissued share capital/
registered or charter capital

Place of incorporation

Principal activity

Hang Seng Bank Limited
HSBC Bank (China) Company Limited
HSBC Bank Malaysia Berhad
HSBC Bank Australia Limited1
HSBC Bank (Taiwan) Limited1
HSBC Bank (Singapore) Limited

Hong Kong
mainland China
Malaysia
Australia
TaiwanSingapore

HSBC Life (International) Limited1

BermudaBanking
Banking
Banking
Banking
Banking
Banking
Retirement benefits andlife insurance

62.14%
100%
100%
100%
100%
100%
100%

1 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
mainly in Hong Kong.
The proportion of voting rights held is the same as the proportion of ownership interest held.
The main subsidiaries are regulated banking and insurance entities in the Asia-Pacific region and, as such, are required to maintaincertain minimum levels of capital and liquid assets to support their operations. The effect of these regulatory requirements is to limit theextent to which the subsidiaries may transfer funds to the Bank in the form of repayment of shareholder loans or cash dividends.
Subsidiary with significant non-controlling interest

Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests
Profit attributable to non-controlling interests
Accumulated non-controlling interests of the subsidiary
Dividends paid to non-controlling interests
Summarised financial information (before intra-group eliminations):– total assets– total liabilities– net operating income before change in expected credit losses and other credit impairment charges– profit for the year
– other comprehensive expense for the year, net of tax– total comprehensive income for the year

14

2022

2021

HK$m

HK$m

37.86%
3,835
65,2372,823

37.86%
5,272
65,431
4,415

1,893,805
1,709,844
33,864
10,151(2,446)
7,705

1,820,185
1,635,769
33,265
13,946(357)
13,589Interests in associates and joint ventures

Associates and joint ventures

Share of net assets
Goodwill
Impairment
At 31 Dec

2022

2021

HK$m

HK$m

182,1373,815(54)
185,898

184,402
4,141(58)
188,485

As 31 December 2022, the group’s interests in associates amounted to HK$185,888m (2021: HK$188,485m).

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$63,469m at 31 December 2022
(2021: HK$66,579m).

Bank of Communications Co., Ltd (‘BoCom’)
The group’s investment in BoCom is classified as an associate. Significant influence in BoCom was established with consideration of all
relevant factors, including representation on BoCom’s Board of Directors and participation in a resource and experience sharing
agreement (‘RES’). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom’s financial and operating
policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28, whereby theinvestment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group’s share of BoCom’s net
assets. An impairment test is required if there is any indication of impairment.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

109

Notes on the Consolidated Financial Statements

Impairment testing
At 31 December 2022, the fair value of the group’s investment in BoCom had been below the carrying amount for approximately elevenyears. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment at 31
December 2022 as the recoverable amount as determined by a value-in-use (‘VIU’) calculation was higher than the carrying value.
At
31 Dec 2022

BoCom

31 Dec 2021

VIU

Carrying
value

Fair
value

VIU

Carrying
value

Fair
value

HK$bn

HK$bn

HK$bn

HK$bn

HK$bn

HK$bn

183.0

182.3

63.5

193.0

184.8

66.6

The headroom, which is defined as the extent to which the VIU exceeds the carrying value decreased by HK$7.5bn compared with
31 December 2021. The decrease in headroom was principally due to revisions to management's best estimates of BoCom's future
earnings in the short to medium term, and the impact from BoCom's actual performance.
In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs aredescribed below and are based on factors observed at period-end. The factors that could result in a change in the VIU and an impairment
include a short-term underperformance by BoCom, a change in regulatory capital requirements or an increase in uncertainty regarding
the future performance of BoCom resulting in a downgrade of the forecast of future asset growth or profitability. An increase in the
discount rate could also result in a reduction of VIU and an impairment.
If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying
value.

Basis of recoverable amountThe impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying
amount. The VIU calculation uses discounted cash flow projections based on management’s best estimates of future earnings available
to ordinary shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best
estimate.
There are two main components to the VIU calculation. The first component is management’s best estimate of BoCom’s earnings.
Forecast earnings growth over the short to medium term are lower than recent (within the last five years) historical actual growth andreflect the uncertainty arising from the current economic outlook. Reflecting management's intent to continue to retain its investment,
earnings beyond the short to medium term are then extrapolated into perpetuity using a 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 the earnings that need to be withheld in order for BoCom to meet capital requirements over the forecast period, meaning that
CMC is deducted when arriving at management’s estimate of future earnings available to ordinary shareholders. The principal inputs to
the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets and the expected capitalrequirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management
considers other qualitative factors, to ensure that the inputs to the VIU calculation remain appropriate.

Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in accordance with the requirements of HKAS 36:• Long-term profit growth rate: 3% (2021: 3%) for periods after 2026, which does not exceed forecast GDP growth in mainland China
and is similar to forecasts by external analysts.
• Long-term asset growth rate: 3% (2021: 3%) for periods after 2026, which is the rate that assets are expected to grow to achieve longterm profit growth of 3%.
• Discount rate: 10.04% (2021: 10.03%), which is based on a capital asset pricing model (‘CAPM’), using market data. The discount rateused is within the range of 8.4% to 10.4% (2021: 8.7% to 10.1%) indicated by the CAPM. While the CAPM range sits at the lower endof the range adopted by selected external analysts of 8.8% to 13.5% (2021: 9.9% 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 customer advances: ranges from 0.99% to 1.05% (2021: 0.98% to 1.12%) in the short
to medium term, reflecting reported credit experience through the ongoing Covid-19 pandemic in mainland China followed by an
expected reversion to recent historical levels. For periods after 2026, the ratio is 0.97% (2021: 0.97%), which is higher than BoCom’s
average ECL as a percentage of customer advances in recent years prior to the pandemic.
• Risk-weighted assets as a percentage of total assets: ranges from 61.0% to 64.4% (2021: 61.0% to 62.4%) 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
2026, the ratio is 61.0% (2021: 61.0%), which is similar to BoCom’s actual results in recent years.
• Operating income growth rate: ranges from 1.9% to 7.7% (2021: 5.1% to 6.2%) in the short to medium term, is lower than BoCom’s
actual results in recent years and is similar to the forecasts disclosed by external analysts. This reflects BoCom’s most recent actual
results, global trade tensions and industry developments in mainland China.
• Cost-income ratio: ranges from 35.5% to 36.3% (2021: 35.5% to 36.1%) in the short to medium term. These ratios are similar to
BoCom's actual results in recent years and forecasts disclosed by external analysts.
• Effective tax rate (‘ETR’): ranges from 4.4% to 15.0% (2021: 6.8% 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 2026, the rate is
15.0% (2021: 15.0%), which is higher than the recent historical average, and aligned to the minimum tax rate as proposed by the
OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
• Capital requirements: capital adequacy ratio of 12.5% (2021: 12.5%) and tier 1 capital adequacy ratio of 9.5% (2021: 9.5%), based on
BoCom’s capital risk appetite and capital requirements respectively.

110

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:
Key assumption

Changes to key assumption to reduce headroom to nil

•
•
•
•
•
•
•
•
•
•

•
•
•
•
•
•
•
•
•
•

Long-term profit growth rateLong-term asset growth rate
Discount rate
Expected credit losses as a percentage of customer advances
Risk-weighted assets as a percentage of total assets
Operating income growth rate
Cost-income ratio
Long-term effective tax rate
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio

Decrease by 2 basis points
Increase by 2 basis points
Increase by 3 basis points
Increase by <1 basis points
Increase by 14 basis points
Decrease by 3 basis points
Increase by 9 basis points
Increase by 26 basis points
Increase by 3 basis points
Increase by 173 basis points

The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivityof the VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur atthe same time. The selected rates of reasonably possible changes to key assumptions are based on external analysts’ forecasts, statutory
requirements and other relevant external data sources, which can change period to period.

Sensitivity of VIU to reasonably possible changes in key assumptions
Favourable change

At 31 December 2022
Long-term profit growth rate1
Long-term asset growth rate1
Discount rate
Expected credit losses as a percentage of customer advances
Risk-weighted assets as a percentage of total assets
Operating income growth rate
Cost-income ratio
Long-term effective tax rate
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio
At 31 December 2021
Long-term profit growth rate1
Long-term asset growth rate1
Discount rate
Expected credit losses as a percentage of customer advances
Risk-weighted assets as a percentage of total assets
Operating income growth rate
Cost-income ratio
Long-term effective tax rate
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio

Unfavourable change

Increase in
VIU

VIU

Decrease in
VIU

bps

HK$bn

HK$bn

VIU

bps

HK$bn

HK$bn

+75
-71
-164

28.1
24.2
54.3

211.1
207.2
237.3

-71
+75
+136

(21.1)(31.8)(28.7)

161.9
151.2
154.3

2022 to 2026: 95
2027 onwards: 91

14.9

197.9

2022 to 2026: 120
2027 onwards: 104(22.5)

160.5

-118
+44
-122
-426
—
—

0.6
10.5
8.1
11.8
—
—

183.6
193.5
191.1
194.8
183.0
183.0

+239
-83
+174
+1000
+191
+266

(17.5)(19.3)(16.5)(27.7)(48.8)(24.8)

165.5
163.7
166.5
155.3
134.2
158.2

+87
-69
-133

33.1
22.9
42.2

226.1
215.9
235.2

-69
+87
+207

(20.5)(36.2)(40.8)

172.5
156.8
152.2

2021 to 2025: 103
2026 onwards: 91

11.9

204.9

2021 to 2025: 121
2026 onwards: 105(21.0)

172.0

-111
+37
-152
-104
—
—

2.2
8.2
13.6
2.9
—
—

195.2
201.2
206.6
195.9
193.0
193.0

+280
-58
+174
+1000
+325
+364

(15.8)(13.6)(12.7)(27.4)(77.6)(50.0)

177.2
179.4
180.3
165.6
115.4
143.0

1 The reasonably possible ranges of the long-term profit growth rate and long-term asset growth rate assumptions reflect the close relationshipbetween these assumptions, which would result in offsetting changes to each assumption.

Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of
VIU is HK$131.9bn to HK$223.9bn (2021: HK$148.3bn to HK$228.4bn). The range is based on impacts set out in the table above arisingfrom the favourable/unfavourable change in the earnings in the short to medium term, the long-term expected credit losses as apercentage of customer advances 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. Impairment, if determined, would berecognised in the income statement. The impact on group’s CET1 ratio is expected to be minimal in the event of an impairment, as theadverse impact on CET1 capital from the impairment would be partly offset by the favourable impact from a lower carrying value.

Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2022, the group included theassociate’s results on the basis of financial statements made up for the 12 months to 30 September 2022, but taking into account thefinancial effect of significant transactions or events in the period from 1 October 2022 to 31 December 2022.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

111

Notes on the Consolidated Financial Statements

Selected balance sheet information of BoComAt 30 Sep

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

2022

2021

HK$m

HK$m

891,754778,032
7,968,993
4,282,704
438,653
14,360,136
2,160,865
8,920,656
1,851,657
277,086
13,210,264
1,149,872

960,732
771,522
7,751,362
4,223,488
375,073
14,082,177
2,238,612
8,572,625
1,779,110
312,486
12,902,833
1,179,344

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
Carrying amount

2022

2021

HK$m

HK$m

178,526
3,728
182,254

180,738
4,044
184,782

Selected income statement information of BoCom
For the 12 months ended 30 Sep

Net interest income
Net fee and commission income
Credit and impairment losses
Depreciation and amortisation
Tax expense– profit for the year
– other comprehensive expense
Total comprehensive income
Dividends received from BoCom

2022

2021

HK$m

HK$m

198,218
53,667(76,046)(18,406)(4,681)
106,352(1,921)
104,4315,881

191,076
55,735(75,402)(17,851)(8,119)110,370(2,861)
107,509
5,386

Using the latest period for which BoCom has disclosed this information (at 30 June 2022), the group's share of associate's contingent liabilities was
HK$442,884m (2021: HK$432,259m).

15

Goodwill and intangible assets

Goodwill and intangible assets include goodwill arising on business combinations, the present value of in-force long-term insurance
business, and other intangible assets.

Goodwill
Present value of in-force long-term insurance business
Other intangible assets1
At 31 Dec

2022

2021

HK$m

HK$m

6,795
65,53730,087
102,419

7,116
63,76524,30095,181

1 Included within other intangible assets is internally generated software with a net carrying value of HK$27,209m (2021: HK$21,670m). During theyear, capitalisation of internally generated software was HK$11,570m (2021: HK$10,681m), amortisation charge was HK$5,610m (2021:
HK$4,115m) and impairment charge was HK$332m (2021: HK$184m).

The present value of in-force long-term insurance business
When calculating the present value of in-force long-term ('PVIF') insurance business, expected cash flows are projected after adjusting
for a variety of assumptions made by each insurance operation to reflect local market conditions and management’s judgement of future
trends, and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology).
Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.
Financial Reporting Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. Allchanges to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by
the Financial Reporting Committee.

112

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Movements in PVIFAt 1 Jan
Acquisition
Changes in PVIF of long-term insurance business– value of new business written during the year
– expected return1– assumption changes and experience variances (see below)– other adjustments
Exchange differences and otherAt 31 Dec

2022

2021

HK$m

HK$m

63,765
2,114
(256)
9,213
(5,326)(3,967)(176)(86)
65,53765,052(1,294)
7,381(5,950)(2,873)148
763,765

1 ‘Expected return’ represents the unwinding of the discount rate and reversal of expected cash flows for the period.

Assumption changes and experience variances
Included within this line item are:• HK$(6,896)m (2021: HK$440m) decrease in PVIF due to rising interest rates, which is directly offset within the valuation of liabilities
under insurance contracts.
• HK$(564)m (2021: HK$(2,519)m), reflecting the future expected sharing of returns with policyholders on contracts with discretionary
participation features (‘DPF’), to the extent this sharing is not already included in liabilities under insurance contracts.
• HK$3,493m (2021: HK$(794)m), driven by other assumptions changes and experience variances.

Key assumptions used in the computation of PVIF for the main life insurance operations
Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed
market movements. The following are the key long-term assumptions used in the computation of PVIF for Hong Kong insurance entities,
being the main life insurance operations:2022

Weighted average risk free rate
Weighted average risk discount rate
Expense inflation

2021

%

%

3.85
7.33
3.00

1.40
5.20
3.00

Sensitivity to changes in economic assumptions
The group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances
for risks not reflected in the best-estimate cash flow modelling. Where the insurance operations provide options and guarantees topolicyholders, the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit
addition to the technical provisions required by regulators. See page 71 for further details of these guarantees and the impact of changes
in economic assumptions on our insurance manufacturing subsidiaries.

Sensitivity to changes in non-economic assumptions
Policyholder liabilities and PVIF are determined by reference to non-economic assumptions, including mortality and/or morbidity, lapse
rates and expense rates. See page 72 for further details on the impact of changes in non-economic assumptions on our insurance
manufacturing operations.

16

Property, plant and equipment

Owned property, plant and equipment1
Other right-of-use assets
At 31 Dec

2022

2021

HK$m

HK$m

123,491
7,435
130,926

121,0728,755
129,827

1 Included leasehold land and buildings of HK$112,591m (2021: HK$110,458m) for which the right of use are considered sufficient to constitutecontrol. They are therefore presented as owned assets.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

113

Notes on the Consolidated Financial Statements

Movement in owned property, plant and equipment
2022

Cost or valuation
At 1 Jan
Exchange and other adjustments
Additions
Disposals
Transfers
Elimination of accumulated depreciation onrevalued land and buildings

2021

Land andbuildings

Investment
properties

Total

Land andbuildings

Investment
properties

Equipment

HK$m

HK$m

HK$m

Equipment

Total

HK$m

HK$m

HK$m

HK$m

HK$m

102,367
(797)
3,183
(55)
—

13,4658324——

15,747
(679)
2,253
(680)
—

131,579(1,468)
5,760
(735)
—

100,791
(67)
667
(58)
—

13,16716
2——15,266(112)
2,049(1,456)—129,224(163)
2,718(1,514)—(5,105)——(5,105)(4,633)——(4,633)

Surplus/(deficit) on revaluation
Reclassifications
At 31 Dec
Accumulated depreciation

4,683(2,849)101,427

(133)
2,535
16,199——16,641

4,550(314)
134,2675,643
24
102,367277
313,465——
15,7475,920
27131,579

At 1 Jan
Exchange and other adjustments
Charge for the year
Disposals
Transfers

87
(42)
5,151
—
—

—
—
—
—
—

10,420
(533)
1,418
(620)
—

10,507
(575)
6,569
(620)
—

90
30
4,645
(45)
—

—
—
—
—
—

10,387(46)
1,374(1,295)—

10,477(16)
6,019(1,340)—Elimination of accumulated depreciation onrevalued land and buildings(5,105)——(5,105)(4,633)——(4,633)

91
101,336—
16,19910,685
5,956

10,776
123,49187
102,280—
13,465

10,4205,327

10,507
121,072

At 31 Dec
Net book value at 31 Dec

The carrying amount of land and buildings, had they been stated at cost less accumulated depreciation, would have been as follows:

Cost less accumulated depreciation

2022

2021

HK$m

HK$m

18,584

17,121

Valuation of land and buildings and investment properties
The group’s land and buildings and investment properties were revalued as at 31 December 2022. The basis of valuation for land andbuildings and investment properties was open market value. The resultant values are Level 3 in the fair value hierarchy. The fair values forland and buildings are determined by using a direct comparison approach which values the properties in their respective existing states
and uses, assuming sale with immediate vacant possession and by making reference to comparable sales evidence. The valuations take
into account the characteristics of the properties (unobservable inputs) which include the location, size, shape, view, floor level, year ofcompletion and other factors collectively. The premium or discount applied to the characteristics of the properties is within minus 20%
and plus 20%. In determining the open market value of investment properties, expected future cash flows have been discounted to theirpresent values. The net book value of ‘Land and buildings’ includes HK$6,839m (2021: HK$6,854m) in respect of properties which werevalued using the depreciated replacement cost method.
Valuation of land and buildings and investment properties in Hong Kong, Macau and mainland China were largely carried out by
Cushman & Wakefield Limited, who have recent experience in the location and type of properties and who are members of the Hong
Kong Institute of Surveyors. This represents 93% by value of the group’s properties subject to valuation. Other properties were valued bydifferent independent professionally qualified valuers.

17

Prepayments, accrued income and other assets

Prepayments and accrued income
BullionAcceptances and endorsements
Reinsurers’ share of liabilities under insurance contracts (Note 3)
Current tax assets
Settlement accounts
Cash collateral and margin receivables
Other assets
At 31 Dec

2022

2021

HK$m

HK$m

32,60450,253
57,11832,151
2,144
38,621
94,85047,578355,319

24,98652,98655,78927,366
2,674
24,57744,17737,188
269,743

Prepayments, accrued income and other assets included HK$267,972m (2021: HK$180,757m) of financial assets, the majority of whichwere measured at amortised cost.

114

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

18

Customer accounts

Customer accounts by country/territory

Hong Kong
Singapore
Mainland China
Australia
India
Malaysia
TaiwanIndonesia
Other
At 31 Dec

19

2021
HK$m

4,229,531
479,241
443,954
222,222
176,466
124,792
119,400
45,529272,574
6,113,709

4,284,719
448,976
462,187
220,233
191,116
128,673
120,744
46,938273,596
6,177,182

Trading liabilities

Net short positions in securities
Repurchase agreements and other similar secured lending1
Customer accounts
At 31 Dec

1

2022
HK$m

2022

2021

HK$m

HK$m

80,564
61,404
485
142,453

85,627
6,703
393
92,723Further product details have been included to reconcile to Note 30 'Offsetting of financial assets and financial liabilities' with effect from 31
December 2022.

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

2022

2021

HK$m

HK$m

89,25845,45433,031
167,743

59,611
43,92835,426
138,965

The carrying amount of financial liabilities designated at fair value was HK$370m lower than the contractual amount at maturity(2021: HK$1,385m lower). The cumulative gain in fair value attributable to changes in credit risk was HK$138m (2021: HK$62m loss).

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

22

2022

2021

HK$m

HK$m

78,537
67,826
146,363

79,852
31,440111,292(45,454)
100,909(43,928)
67,364

Accruals and deferred income, other liabilities and provisions

Accruals and deferred income
Acceptances and endorsements
Settlement accounts
Cash collateral and margin payables
Share-based payment liability to HSBC Holdings plc
Lease liabilities
Other liabilities1
Provisions for liabilities and charges
At 31 Dec

2022

2021

HK$m

HK$m

32,77957,21033,536
58,9191,564
7,850
44,957
1,911
238,726

23,02055,824
26,15853,541
1,431
9,165
48,6681,399
219,206

1 Mainly includes marginal deposit on letter of credit and credit card settlement account.

Accruals and deferred income, other liabilities and provisions included HK$227,840m (2021: HK$209,441m) of financial liabilities whichwere measured at amortised cost.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

115

Notes on the Consolidated Financial Statements

Movement in provisions

Provisions (excluding contractual commitments)
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

Restructuring
costs

Other

Total

HK$m

HK$m

HK$m

148
468
(307)
(35)
(3)
271

466
243
(174)
(84)
30
481

614
711
(481)
(119)
27
752
785
374
1,159
1,911

At 31 Dec 2020

116

419

535

Additions
Amounts utilised
Unused amounts reversed
Exchange and other movements
At 31 Dec 2021
Contractual commitments
At 31 Dec 2020
Net change in expected credit loss provision and other movements
At 31 Dec 2021
Total Provisions at 31 Dec 2021

357
(309)
(59)
43
148

333
(258)
(24)
(4)
466

690
(567)
(83)
39
614
1,257
(472)
785
1,399

1 Contractual commitments include provisions for contingent liabilities measured under HKFRS 9 ‘Financial Instruments’ in respect of financial
guarantees and expected credit loss provisions in relation to off-balance sheet guarantees and commitments.

23

Subordinated liabilities

Subordinated liabilities to third parties measured at amortised cost consist of undated primary capital notes and other capital loan having
an original term to maturity of five years or more. Subordinated liabilities to Group entities are not included in the table below.

US$400m
MYR500m
At 31 Dec

Undated floating rate primary capital notes
Fixed rate (5.050%) subordinated bonds due 2027, callable from 20221

2022

2021

HK$m

HK$m

3,119
—
3,119

3,119
935
4,054

1 These securities were called in 2022.

24

Share capital

Paid up share capital in HK$
Paid up share capital in US$1
At 31 Dec

2022

2021

HK$m

HK$m

123,949
56,232
180,181

116,103
56,232
172,335

Ordinary shares issued and fully paid
2022

At 1 Jan
Shares issued during the year
At 31 Dec

2021

HK$m

Number

HK$m

Number172,335
7,846
180,181

46,440,991,798
3,138,400,000
49,579,391,798

172,335—
172,335

46,440,991,798—
46,440,991,798

1 Paid up share capital in US$ represents preference shares which were redeemed or bought back via payment out of distributable profits and forwhich the amount was transferred from retained earnings to share capital in accordance with the requirements of the Companies Ordinance.

3,138.4m new ordinary shares were issued during 2022 (2021: nil) at an issue price of HK$2.5 each for general corporate purposes and tofurther strengthen the capital base. The holder of the ordinary shares is entitled to receive dividends as declared from time to time, rank
equally with regard to the Bank’s residual assets and are entitled to one vote per share at shareholder meetings of the Bank.

116

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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
At 31 Dec

1
2
3
4
5
6
7

2022

2021

HK$m

HK$m

7,834
7,063
5,467
3,905
4,685
7,044
8,617
7,771
52,386

7,834
7,063
5,467
3,905
4,685
7,044
8,617
—
44,615Interest rate fixed at 6.090%.
Interest rate fixed at 6.510%.
Interest rate fixed at 6.172%.
Interest rate fixed at 5.910%.
Interest rate fixed at 6.030%.
Interest rate fixed at 6.000%.
Interest rate at compounded SOFR plus 5.090%.

The additional tier 1 capital instruments are perpetual subordinated loans on which coupon payments may be cancelled at the sole
discretion of the Bank. The subordinated loans will be written down at the point of non-viability on the occurrence of a trigger event as
defined in the Banking (Capital) Rules. They rank higher than ordinary shares in the event of a wind-up.

26

Maturity analysis of assets and liabilities

The following tables provide an analysis of consolidated total assets and liabilities by residual contractual maturity at the balance sheet
date. These balances are included in the maturity analysis as follows:• Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are includedin the ‘Due not more than 1 month’ time bucket, because trading balances are typically held for short periods of time.
• Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the ‘Due over 5 years’ timebucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the
instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the ‘Due over
5 years’ time bucket.
• Non-financial assets and liabilities with no contractual maturity are included in the ‘Due over 5 years’ time bucket.
• Liabilities under insurance contracts are irrespective of contractual maturity included in the ‘Due over 5 years’ time bucket in thematurity table provided below. An analysis of the expected maturity of liabilities under insurance contracts based on undiscounted
cash flows is provided on page 71. Liabilities under investment contracts are classified in accordance with their contractual maturity.
Undated investment contracts are included in the ‘Due over 5 years’ time bucket, however, such contracts are subject to surrenderand transfer options by the policyholders.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

117

Notes on the Consolidated Financial Statements

Maturity analysis of assets and liabilities

Due not
more than
1 monthDue over1 monthbut not
more than
3 months

Due over3 months
but not
more than
6 months

Due over6 months
but not
more than
9 months

Due over9 months
but not
more than
1 yearDue over1 year but
not morethan 2years

Due over2 years but
not morethan 5years

Due over5 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Financial assets
Cash and balances at central banks

232,740

—

—

—

—

—

—

—

232,740

Items in the course of collection from otherbanks

28,557

—

—

—

—

—

—

—

28,557

Hong Kong Government certificates ofindebtedness341,354

—

—

—

—

—

—

—

341,354

Trading assets
Derivatives

691,744495,785

1,764
691

3,089
205

—
142

163
474

3,045
1,840

—
2,556

—
1,078

699,805
502,771

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

6,334

662

2,334

809

306

3,644

13,130199,232

226,451585,333

256,887

54,039

7,679

7,172

13,402

3,464—

927,976

321,807
99,229567,455
370,175
313,122
516,476
101,287
4,652
193,219
40,3003,878,737 1,290,836——
3,878,737 1,290,836

39,705301,012
135,636
4,356
21,535561,911—561,9116,132
151,506
71,865
716
3,864
242,713—242,713

13,686
146,80373,2342,696
4,077
248,611—248,611

16,445441,860
217,677
10,236796
708,945—
708,945

22,020632,986
391,288
7,729
675
1,073,848—
1,073,848

—

—

—

—

—

—

341,354——
519,024
1,093,352 3,705,149
502,063 2,221,361
19
131,691
3,506
267,972
1,799,250 9,804,851
519,301
519,301
2,318,551 10,324,152

341,354

Items in the course of transmission to otherbanks

33,073

—

—

—

—

—

—

—

33,073

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 2022
Non-financial liabilities
Total liabilities at 31 Dec 2022

335,467
193,147
5,050,054
142,432
550,741
35,661
13,723
129,641
138,862—
6,964,155—
6,964,155

2,173
1,249
540,61121
435,22913,266
12,841
41,883—647,277—
647,277

2,557
3,513
304,705—62
12,142
24,251808
22,569—370,607—
370,607—811
81,349—60
10,593
13,388272
5,525—
111,998—
111,998

5,027
176
85,465
—
157
8,957
1,054
842
7,098
—
108,776—
108,776

5,869
12
22,028—175
20,585
9,674
70,332
5,566—
134,241—
134,241——
29,490—489
11,43622,382
49,935
5,228—
118,960—
118,960——
7—
57
33,1403,171
133,987
1,109
3,119
174,590752,285
926,875

351,093
198,908
6,113,709
142,453
551,745
167,743
100,909398,658
227,840
3,1198,630,604
752,285
9,382,889

118

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Maturity analysis of assets and liabilities (continued)

Due not
more than1month

Due over 1
month butnot morethan 3monthsDue over 3
months but
not morethan 6monthsDue over 6
months but
not morethan 9months

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Financial assets
Cash and balances at central banks

276,857

—

—

—

—

Items in the course of collection from otherbanks

21,632————

Hong Kong Government certificates ofindebtedness

332,044

—

—

—

—

Trading assets
Derivatives

768,376
361,447

7,082
1,079

208
466

431
769

—
131

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 2021
Non-financial assets
Total assets at 31 Dec 2021
Financial liabilities
Hong Kong currency notes in circulation

Due over 9
Due over 1
Due over 2
months but year but not
years butnot more more than 2
not morethan 1 year
years than 5 years

Due over 5
years

Total

HK$m

HK$m

HK$m

—

—

—

276,857———

21,632———332,044

815
441

538
713

—
121

777,450
365,167

5,880

172

1,636

884

1,561

3,781

11,244

177,241

202,399

528,832
277,060
605,216
247,163
84,688
119,499
3,628,694—
3,628,694

223,041
80,547
402,921405,109
1,302
31,4491,152,702—
1,152,702

34,435
20,767
312,336
187,038
1,189
19,062
577,137—
577,137

5,081
7,667
177,577
107,3292,227
3,708
305,673—
305,673

1,865
7,532
171,989
118,0292,441
2,034
305,582—
305,582

9,384
20,248410,594
232,3506,138
805
684,556—
684,556

1,137
17,908731,226
307,7535,857
750
1,077,126—
1,077,126—
518
1,029,080
446,804173,450
1,657,231
514,692
2,171,923

803,775
432,247
3,840,939
2,051,575
103,859
180,757
9,388,701
514,692
9,903,393

332,044

—

—

—

—

—

—

—

332,044

Items in the course of transmission to otherbanks

25,701

—

—

—

—

—

—

—

25,701

Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Trading liabilities
Derivatives
Financial liabilities designated at fair value
Debt securities in issue
Amounts due to Group companies
Accruals and other financial liabilities
Subordinated liabilities1
Financial liabilities at 31 Dec 2021
Non-financial liabilities
Total liabilities at 31 Dec 2021

231,463
269,405
5,722,470
92,723354,567
32,086
4,304
114,388
124,346—
7,303,497—
7,303,497

4,713
2,140
272,462—304
21,8495,509
17,50440,286—364,767—
364,767368
6,780
88,483—74
11,05917,363
1,401
24,070—149,598—
149,598—
1,019
34,813—212
4,967
12,374
222
5,135—
58,742—58,742

1,104
526
32,417
—
79
5,574
3,963
223
3,820
—
47,706—47,7067,570
440
11,792
—
241
8,789
9,320
21,6994,802—
64,653—64,653

2,904—
14,741—274
18,89912,324
66,205
5,197—
120,544—
120,544

7,252
—
4
—
40
35,742
2,207
134,534
1,785
4,054
185,618
684,757
870,375

255,374
280,310
6,177,182
92,723355,791
138,965
67,364356,176
209,441
4,054
8,295,125684,757
8,979,882

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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

119

Notes on the Consolidated Financial Statements

27

Analysis of cash flows payable under financial liabilities by remaining contractual maturities

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
At 31 Dec 2021
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 morethan 1 monthDue over 1
month but not
more than 3monthsDue between
3 and
12 months

Due between
1 and 5 years

Due after
5 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

341,354
33,073335,951
193,748
5,053,321
142,453
551,094
37,062
13,917

—
—
2,194
1,250
552,623—
67
36,31014,305

—
—
7,708
4,542
481,006—253
32,404
40,630

—
—
5,877
14
55,739—603
33,19834,698

—
—
—
—
16
—
60
33,1703,400

341,354
33,073351,730
199,554
6,142,705
142,453552,077
172,144
106,950

129,728
135,664—
6,967,365
3,191,864
41,991
10,201,22085%

14,50938,58436
659,878——
659,878
6%

11,396
31,237108609,284——
609,2845%

155,038
9,967
577
295,711——295,7112%

170,299
1,128
4,561
212,634——
212,6342%

480,970
216,580
5,282
8,744,872
3,191,864
41,991
11,978,727

332,044
25,701
231,531
269,681
5,723,441
92,723354,584
33,288
4,336
113,944
123,460—
7,304,733
2,945,560
41,843
10,292,136
91%

—
—
4,714
2,140
273,282—416
22,323
5,667
19,52339,60715367,687——
367,687
3%

—
—
1,517
8,341
157,735—
384
21,90334,6297,301
31,48644
263,340——
263,340
2%——
10,530451
28,638—621
28,536
22,632
108,035
10,630236
210,309——210,309
2%

—
—
7,289
—
4
—
40
35,7682,370
147,000
1,854
4,207
198,532——
198,5322%

332,044
25,701
255,581
280,6136,183,100
92,723356,045
141,818
69,634
395,803
207,037
4,502
8,344,601
2,945,560
41,843
11,332,004

The balances in the above tables incorporate all cash flows relating to principal and future coupon payments on an undiscounted basis.
Trading liabilities and trading derivatives have been included in the ‘On demand’ time bucket as they are typically held for short periodsof time. The undiscounted cash flows payable under hedging derivative liabilities are classified according to their contractual maturity.
Investment contract liabilities have been included in financial liabilities designated at fair value, whereby the policyholders have theoptions to surrender or transfer at any time, and are reported in the ‘Due after 5 years’ time bucket. A maturity analysis prepared on thebasis of the earliest possible contractual repayment date (assuming that all surrender and transfer options are exercised) would result in
all investment contracts being presented as falling due within one year or less. The undiscounted cash flows potentially payable underloan commitments and financial guarantee contracts are classified on the basis of the earliest date they can be called. Cash flows
payable in respect of customer accounts are primarily contractually repayable on demand or at short notice.

120

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

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

2022

2021

HK$m

HK$m

41,991
354,794
1,222
398,007

41,843335,849
1,751
379,443

26,324
48,5603,116,980
3,191,864

32,28440,7452,872,531
2,945,560

1 Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a
specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
2 Performance and other guarantees include re-insurance letters of credit related to particular transactions, trade-related letters of credit issued
without provision for the issuing entity to retain title to the underlying shipment, performance bonds, bid bonds, standby letters of credit and othertransaction-related guarantees.
3 Includes HK$1,892,401m of commitments at 31 December 2022 (2021: HK$1,826,335m) to which the impairment requirements in HKFRS 9 areapplied where the group has become party to an irrevocable commitment.

The above table discloses the nominal principal amounts of commitments (excluding other commitments as disclosed in Note 29),
guarantees and other contingent liabilities, which represent the amounts at risk should contracts be fully drawn upon and clients default.
The amount of the commitments shown above reflects, where relevant, the expected level of take-up of pre-approved facilities. As asignificant proportion of guarantees and commitments are expected to expire without being drawn upon, the total of the nominal
principal amounts is not representative of future liquidity requirements.
It also reflects the group’s maximum exposure under a large number of individual guarantee undertakings. The risks and exposures fromguarantees are captured and managed in accordance with HSBC’s overall credit risk management policies and procedures. Guarantees
are subject to an annual credit review process.
Other contingent liabilities at 31 December 2022 included amounts in relation to legal and regulatory matters as set out in Note 38.

29

Other commitments

Capital commitments
At 31 December 2022, capital commitments, mainly related to the commitment for purchase of properties, were HK$3,834m(2021: HK$4,826m).

30

Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable
right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability
simultaneously (‘the offset criteria’).
The ‘Amounts not set off in the balance sheet’ include transactions where:• the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right to set
off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and• 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 master 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 been sought, 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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

121

Notes on the Consolidated Financial Statements

Offsetting of financial assets and financial liabilities
Amounts subject to enforceable netting arrangements
Amounts not offset in thebalance sheet

CashcollateralNet
amountAmounts not
subject toenforceablenettingarrangements1

HK$m

HK$m

HK$m

HK$m

HK$m

466,436(397,121)(39,022)

30,29336,335

502,771——

57,50555,221(57,273)(54,994)

(227)
(227)

5
—

4,177
4,177

61,68259,3982,284
932,272
891,131
41,141—(29,470)(26,186)(3,284)

2,284
902,802864,945
37,857(2,279)(901,205)(863,840)(37,365)—(1,597)(1,105)
(492)

5
—
—
—

—
63,031
63,031—

2,284
965,833
927,976
37,857

1,764
1,787,369—(358,862)

1,764
1,428,507(1,764)(1,357,363)—(40,846)—
30,298—103,543

1,764
1,532,050

849,582(329,392)

520,190(390,421)(70,825)

58,94431,555551,745

61,437
61,38255
403,019
340,21562,804
1,314,038———(29,470)(26,186)(3,284)(358,862)

61,437
61,382
55
373,549
314,029
59,520955,176(61,436)(61,381)(55)(373,126)(313,747)(59,379)(824,983)

(1)
(1)
—
(352)
(256)
(96)
(71,178)

—
—
—
71
26
45
59,01522
22—37,06437,064—
68,641

61,45961,40455
410,613351,093
59,5201,023,817

524,603(190,129)

334,474(279,958)(36,005)

18,511

30,693365,167

60,41756,205
4,212
806,403

(79)
(79)
—
(71,333)

60,33856,126
4,212
735,071(59,771)(55,561)(4,210)(733,647)

(552)
(552)
—
(197)

15
13
2
1,228

7,393
7,393
—
82,85467,731
63,5194,212
817,925

776,145
30,258(55,224)(16,109)

720,921
14,149(720,662)(12,985)

(197)
—

62
1,166

82,854—

803,775
14,149Net
Financialamounts instruments,
reported inincludingthe balancenon-cash
sheet
collateralGrossamounts

Amounts
offset

HK$m

HK$m

HK$m

795,828(329,392)– trading assets– third party

57,50555,221– 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

At 31 Dec 2022
Financial assets2
Derivatives

Balancesheet total

Reverse repos, stock borrowing and similar agreements
classified as:4

– third party
Financial liabilities3
Derivatives
Repos, stock lending and similar agreements classified
as:4– trading liabilities– third party– amounts due to Group companies– repurchase agreements - non-trading– third party– amounts due to Group companies

At 31 Dec 2021
Financial assets2
Derivatives
Reverse repos, stock borrowing and similar agreements
classified as:4
– 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

777

—

777

(777)

—

—

—

777

1,392,200(261,541)

1,130,659(1,074,153)(36,754)

19,752120,940

1,251,599

516,525(190,129)

326,396(277,624)(27,837)

20,93529,395355,791

6,807
6,782
25
323,559
241,934
81,625
846,891

(79)
(79)
—
(71,333)(55,224)(16,109)(261,541)

6,728
6,703
25
252,226
186,71065,516585,350(6,721)(6,697)(24)(251,802)(186,338)(65,464)(536,147)

—
—
—
(3)
(3)
—
(27,840)

7
6
1
421
369
52
21,363———
68,664
68,664—
98,059

6,728
6,703
25
320,890
255,374
65,516
683,409

Repos, stock lending and similar agreements classified
as:4– trading liabilities– third party– amounts due to Group companies– repurchase agreements - non-trading– third party– amounts due to Group companies

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$208,343m (2021: HK$167,054m).
3 Include balances due to Group companies of HK$213,726m (2021: HK$217,572m).
4 Further product details have been included with effect from 31 December 2022.

122

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

31

Segmental analysis

The Executive Committee (‘EXCO’) is considered the Chief Operating Decision Maker ('CODM') for the purpose of identifying the group’s
operating segments. Operating segment results are assessed by the CODM on the basis of performance measured in accordance withHKFRSs. Although the CODM reviews information on a number of bases, business performance is assessed and capital resources areallocated by operating segments, and the segmental analysis is presented based on reportable segments as assessed under HKFRS 8'Operating Segments'.
Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income
and expenses. These allocations include the costs of certain support services and global functions to the extent that they can bemeaningfully attributed to operational business lines and geographical regions. While such allocations have been made on a systematicand consistent basis, they necessarily involve a degree of subjectivity. Costs which are not allocated to other operating segments areincluded in the ‘Corporate Centre’.
Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company andinter-business line transactions. All such transactions are undertaken on arm’s length terms. The intra-group elimination items for theoperating segments are presented in the Corporate Centre.

Our global businesses and reportable segments
The group provides a comprehensive range of banking and related financial services to our customers in our global businesses: Wealthand Personal Banking (‘WPB’), Commercial Banking (‘CMB’) and Global Banking and Markets ('GBM'). The products and services offeredto customers are organised by these global businesses.
• WPB provides a full range of retail banking and wealth products to our customers from personal banking to ultra high net worth
individuals. Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages andpersonal loans, credit cards, debit cards and local and international payment services. We also provide wealth management services,
including insurance and investment products, global asset management services, investment management and Private Wealth
Solutions for customers with more sophisticated and international requirements.
• CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and mediumsized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables
finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance
and investments. CMB also offers its customers access to products and services offered by other global businesses, such as GBM,
which include foreign exchange products, raising capital on debt and equity markets and advisory services.
• GBM comprises of two separate reportable segments: Global Banking ('GB') and Markets and Securities Services ('MSS'). GB provides
tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focusedbusiness lines deliver a full range of banking capabilities including financing, advisory and transaction services. MSS provides services
in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.
• Corporate Centre includes strategic investments such as our investment in BoCom, Central Treasury revenue, and costs which are notallocated to global businesses, mainly in relation to investments in technology.
•

Other (GBM-other) mainly comprises other business activities which are jointly managed by GB and MSS.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

123

Notes on the Consolidated Financial Statements

Performance by reportable segments is presented in the ‘Financial Review’ on page 16 as specified as 'Audited'.
Information by geographical region

For the year ended 31 Dec 2022
Total operating income
Profit before tax
At 31 Dec 2022
Total assets
Total liabilities
Credit commitments and contingent liabilities (contract amounts)
For the year ended 31 Dec 2021
Total operating income
Profit before tax
At 31 Dec 2021
Total assets
Total liabilities
Credit commitments and contingent liabilities (contract amounts)

Hong Kong

Rest of
Asia-PacificIntra-segment
elimination

Total

HK$m

HK$m

HK$m

HK$m

184,065
43,15390,53654,458905—

275,506
97,6117,450,156
6,954,421
1,894,046

3,898,235
3,452,707
1,695,824(1,024,239)(1,024,239)—

10,324,152
9,382,889
3,589,870

174,859
41,04379,06745,520780—

254,706
86,563

7,035,497
6,559,271
1,792,675

3,696,064
3,248,779
1,532,328(828,168)(828,168)—

9,903,393
8,979,882
3,325,003

Information by country/territory
Revenue1

Non-current assets2

For the year ended 31 Dec

Hong Kong
Mainland China
Australia
India
Indonesia
Malaysia
Singapore
TaiwanOther
Total

At 31 Dec

2022
HK$m

2021
HK$m

2022
HK$m

2021
HK$m

121,031
21,965
7,815
11,7083,188
5,790
15,473
3,823
14,899205,692

106,966
19,381
7,351
10,614
3,242
5,174
10,671
3,124
12,135
178,658

138,717
196,844
1,691
2,426
3,289
1,981
3,453
2,473
2,833
353,707

134,400
196,477
1,837
2,534
3,584
2,022
2,933
2,802
3,140
349,729

1 Revenue (defined as ‘Net operating income before change in expected credit losses and other impairment charges') is attributable to countries
based on the location of the principal operations of the branch, subsidiary, associate or joint venture.
2 Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures andcertain other assets.

32

Related party transactions

The group’s related parties include the parent, fellow subsidiaries, associates, joint ventures, post-employment benefit plans for thegroup’s employees, Key Management Personnel (‘KMP’) as defined by HKAS 24, close family members of KMP and entities that arecontrolled or jointly controlled by KMP or their close family members.
Particulars of transactions with related parties are set out below.

(a) Inter-company
The group is wholly owned by HSBC Asia Holdings Limited, which in turn is a wholly-owned subsidiary of HSBC Holdings plc(incorporated in England).
The group entered into transactions with its fellow subsidiaries in the normal course of business, including the acceptance and placementof interbank deposits, correspondent banking transactions and off-balance sheet transactions. The Bank also acted as agent for the
distribution of retail investment funds for fellow subsidiaries and paid professional fees for services provided by fellow subsidiaries.
The group shared the costs of certain IT projects and also used certain processing services of fellow subsidiaries. These costs arereported under ‘General and administrative expenses – other administrative expenses in the income statement.
The aggregate amount of income and expenses arising from these transactions during the year and the balances of amounts due to andfrom the relevant parties at the year end were as follows:124

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

2022

2021

Immediate
holding company

Ultimate holding
company

Fellow
subsidiaries

Immediate
holding company

Ultimate holding
company

Fellow
subsidiaries

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Income and expenses for the year
Interest income
Interest expense1
Fee income
Fee expense

—
8,364
—
—

50
33
17
8

1,276
1,216
2,246
1,739

—
6,773
—
—

—
(651)
—
1

220
(286)
2,538
1,428

Net income/(losses) from financial instruments held
for trading or managed on a fair value basis

1,106

—

(374)

—

1

(19)

Net insurance premium income

—

—

238

Other operating income
Net insurance claims and benefits paid andmovement in liabilities to policyholders

—

120

1,913

—
—

—
129

249
1,770

—

—

(204)

—

—

(179)

General and administrative expenses2
At 31 Dec
Assets—67

49,891—(141)

47,842

24

3,403

305,3219

1,147

260,256——24
256,031—
183,760—
1,842
70,429
—
—

33
2
3,368
3,804
—
—
3,677
64
63
—
—

2,300
168,200
134,821
293,02155
6
150,474
142,486—
23,2891,405——
9223,565—
175,655—
1,388
46,522
—
—

22
989
136
1,069
—
—
18
980
71
—
—

4,232
147,704
108,320
283,63025
7152,013
131,585—
22,8152,076– trading assets3,7– derivative assets– other assets3,6,8
Liabilities– trading liabilities3,9– financial liabilities designated at fair value3,4– derivative liabilities– other liabilities3,6,10– subordinated liabilities3,5,6
Guarantees
Commitments

1 The amount includes interest expenses on debt instruments issued by the group for funding purposes that are designated under the fair value
option to reduce an accounting mismatch, and interest expenses/(income) on derivatives managed in conjunction with those debt instruments.
2 This includes reimbursement of amount from ultimate holding company in accordance to the billing arrangement of the Group.
3 These balances are presented under ‘Amounts due from/to Group companies’ in the consolidated balance sheet.
4 The balance at 31 December 2022 included capital and loss-absorbing capacity ('LAC') instruments of HK$183,760m (2021: HK$175,655m).
During the year, there were repayment of HK$21,512m (2021: HK$4,437) and issuance of HK$51,579m (2021: HK$54,460m). The carrying
amount of financial liabilities designated at fair value was HK$13,593m lower than the contractual amount at maturity (2021: HK$7,211m higher).
The cumulative gain in fair value attributable to changes in credit risk was HK$3,456m (2021: HK$1,815m loss). The balances are under Level 2.
5 The balance at 31 December 2022 included subordinated liabilities of HK$70,429m to meet TLAC requirements (2021: HK$46,522m). During theyear, there were no repayment (2021: HK$19,665m) and issuance of HK$29,435m (2021: HK$3,304m).
6 The fair value hierarchy of assets and liabilities at amortised cost are under level 2 and the fair value has no material difference with carrying value.
7 Includes trading reverse repo agreements and other similar secured lending of HK$2,284m (2021: HK$4,212m).
8 Includes non-trading reverse repo agreements and other similar secured lending of HK$37,857m (2021: HK$14,149m).
9 Includes trading repurchase agreements and other similar secured lending of HK$55m (2021: HK$25m).
10 Includes non-trading repurchase agreements and other similar secured lending of HK$59,520m (2021: HK$65,516m).

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates
and security, as for comparable transactions with third-party counterparties.

(b)

Share option and share award schemes

The group participates in various share option and share plans operated by HSBC whereby share options or shares of HSBC are granted
to employees of the group. The group recognises an expense in respect of these share options and share awards. The cost borne by theultimate holding company in respect of share options is treated as a capital contribution and is recorded within ‘Other reserves’. In
respect of share awards, the group recognises a liability to the ultimate holding company over the vesting period. This liability ismeasured at the fair value of the shares at each reporting date, with changes since the award dates adjusted through the capital
contribution account within ‘Other reserves’. The balances of the capital contribution and the liability at 31 December 2022 amounted to
HK$3,299m and HK$1,564m respectively (2021: HK$3,436m and HK$1,431m respectively).

(c)Post-employment benefit plans

At 31 December 2022, HK$7.7bn (2021: HK$9.2bn) of the group’s post-employment plan assets were under management by groupcompanies, earning management fees of HK$59m in 2022 (2021: HK$65m). At 31 December 2022, the group’s post-employment benefit
plans had placed deposits of HK$735m (2021: HK$783m) with its banking subsidiaries, earning interest payable to the schemes of
HK$1.1m (2021: HK$0.5m). The above outstanding balances arose from the ordinary course of business and on substantially the sameterms, including interest rates and security, as comparable transactions with third-party counterparties.

(d)

Associates and joint ventures

The group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and noninterest bearing deposits and current accounts. Details of interests in associates and joint ventures are set out in Note 14.
The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful
information to represent the amount of transactions and outstanding balances during the year.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

125

Notes on the Consolidated Financial Statements

Transactions and balances during the year with associates and joint ventures
2022
Highest balance
during the year

Amounts due from associates – unsubordinated1
Amounts due to associates1
Amounts due to joint ventures
Fair value of derivative assets with associates2
Fair value of derivative liabilities with associates2
Guarantees and Commitments2

2021
Balance at
31 December

Highest balance
during the year

Balance at
31 December

HK$m

HK$m

HK$m

HK$m

57,513
19,86240
9,394
33,673
1,769

51,402
10,09916
6,559
28,440287

35,643
27,237
—
7,299
5,424
4,897

32,632
8,786
—
3,644
4,450
1,654

1 Comparatives have been re-presented to incorporate certain balances previously not included.
2 With effect from 31 Dec 2022, derivatives assets and liabilities and guarantees provided are included in the disclosure. Comparatives have been
re-presented to conform to the current year’s presentation.

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates
and security, as comparable transactions with third-party counterparties.

(e)

Key Management Personnel

Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling theactivities of the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Boardof Directors and Group Executive Committee members of HSBC Holdings plc.
Compensation of Key Management Personnel

Salaries and other short-term benefits
Post employment benefits
Termination benefits
Share-based payments
Total

2022

2021

HK$m

HK$m

320
12
2
87
421

314
9
5
123
451

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

2022

2021

HK$m

HK$m

97,366
81,323
1,858

107,31771,516
1,510

12,007
12,186

13,263
13,624

1 The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during theyear.

Transactions, arrangements and agreements are entered into by the group with companies that may be controlled by Key Management
Personnel of the group and their immediate relatives. These transactions are primarily loans and deposits, and were entered into in theordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions withpersons or companies of a similar standing or, where applicable, with other employees. The transactions did not involve more than thenormal risk of repayment or present other unfavourable features. Change in expected credit losses recognised for the year, and expectedcredit loss allowances against balances outstanding at the end of the year, in respect of Key Management Personnel were insignificant(2021: insignificant).
On 8 October 2019, the group acted as Joint Global Co-ordinator and Underwriter on aggregated EUR4.25bn and GBP800m Senior Noteissuances for CK Hutchison Group Telecom Finance S.A. in 6 tranches, with tenors of 4 to 15 years and coupon rates of 0.375% to2.625%. CK Hutchison Group Telecom Finance S.A. is a wholly-owned subsidiary of an associated body corporate (CK Hutchison
Holdings Limited) of Mr Victor Li, a non-executive Director of the Bank.

(f)Loans to directors

Directors are defined as the Directors of the Bank, its ultimate holding company, HSBC Holdings plc and intermediate holding
companies. Loans to directors also include loans to companies that are controlled by, and entities that are connected with these
directors. Particulars of loans to directors disclosed pursuant to section 17 of the Companies (Disclosure of Information about Benefits of
Directors) Regulation are as follows:
Aggregate amount outstanding at
31 DecBy the Bank
By subsidiaries

2022

2021

2022

2021

HK$m

HK$m

HK$m

HK$m

1,483
12
1,495

3,755
13
3,768

2,769
14
2,783

3,967
14
3,981

These amounts include principal and interest, and the maximum liability that may be incurred under guarantees.
126

Maximum aggregate amountoutstanding during the year

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

33

Fair values of financial instruments carried at fair value

Control framework
Fair values are subject to a control framework designed to ensure that they are either determined, or validated, by a function independentof the risk taker.
Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent pricedetermination or validation is utilised. For inactive markets, the group sources alternative market information, with greater weight given
to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrumentcomparability, consistency of data sources, underlying data accuracy and timing of prices.
Fair value of investment funds are sourced from the underlying fund managers which are based upon an assessment of the underlying
investees’ financial positions, results, risk profile and prospects.
For fair values determined using valuation models, the control framework includes development or validation by independent support
functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before
becoming operational and are calibrated against external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including
portfolio changes, market movements and other fair value adjustments.
The majority of financial instruments measured at fair value are in MSS and Insurance. The group's fair value governance structure
comprises its Finance function and Valuation Committees. Finance is responsible for establishing procedures governing valuation andensuring fair values are in compliance with accounting standards. The fair values are reviewed by the group's relevant Valuation
Committees, which consist of independent support functions 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
are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active
market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to thegroup's liabilities. The change in fair value of issued debt securities attributable to the group’s own credit spread is computed as follows:for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar
securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The
difference in the valuations is attributable to the group’s own credit spread. This methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments are included within ‘Financial liabilities designated at fair value’ and aremeasured at fair value. The credit spread applied to these instruments is derived from the spreads at which the group issues structured
notes.
Gains and losses arising from changes in the credit spread of liabilities issued by the group, 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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

127

Notes on the Consolidated Financial Statements

Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:• Level 1 – valuation technique using quoted market price. These are financial instruments with quoted prices for identical instrumentsin active 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 inactive markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models
where all significant inputs are observable.
• Level 3 – valuation technique with significant unobservable inputs. These are financial instruments valued using valuation techniques
where one or more significant inputs are unobservable.
Financial instruments carried at fair value and bases of valuation
Fair Value Hierarchy
Level 1

Level 2

Level 3

Third-party
totalIntercompany2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Derivatives

486,547
1,018

203,975
330,250

9,283
3,301

699,805
334,569—
168,202699,805
502,771

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

100,917

34,13991,395

226,451—

226,451

962,261

280,083

4,308

1,246,652—

1,246,652

74,201
2,425

68,246393,457

6
1,712

142,453
397,594—
154,151

142,453
551,745—

133,009

34,734

167,743—

167,743

537,816440

236,388
212,740

3,246
3,294

777,450
216,474—
148,693

777,450
365,167

At 31 Dec 2022
AssetsTrading assets1

Financial investments
Liabilities
Trading liabilities1
Derivatives
Financial liabilities designated at fair value1
At 31 Dec 2021
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

93,54434,20374,652

202,399—

202,399

1,153,521

391,816

3,674

1,549,011—

1,549,011

73,647963—

19,076200,667
118,516—2,130
20,44992,723203,760
138,965—
152,031—92,723355,791
138,965

1 Amounts with HSBC Group entities are not reflected here.
2 Derivatives balances with HSBC Group entities are largely under ‘Level 2’.

Transfers between Level 1 and Level 2 fair values
AssetsFinancialinvestments

Liabilities

Designatedand otherwise
mandatorily
Tradingmeasured at
assetsfair value

Derivatives

Trading
liabilities

Designated atfair value

Derivatives

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2022
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1

29,781
60,104

23,312
36,025

5,825
9,493

—
—

132
1,443

—
—

—
—

At 31 Dec 2021
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1

57,471
36,07329,852
20,948

1,970
1,679

802
—

1,012
3,452

—
—

1,652
—

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 thefair value hierarchy are primarily attributable to changes in observability of valuation inputs and price transparency.

128

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Fair value adjustments
We adopt the use of fair value adjustments when we take into consideration additional factors not incorporated within the valuation
model that would otherwise be considered by a market participant. We classify fair value adjustments as either ‘risk-related’ or ‘modelrelated’. The majority of these adjustments relate to MSS. Movements in the level of fair value adjustments do not necessarily result in
the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may nolonger be required. Similarly, fair value 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 typicallygenerate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all
residual net portfolio market risks were closed using available hedging instruments or by disposing of, or unwinding the position.

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

Credit valuation adjustment (‘CVA’) and debit valuation adjustment (‘DVA’)The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect the possibility that the counterparty
may default and the group may not receive the full market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that the group may default, and that thegroup may not pay the full market value of the transactions.
The group calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the
exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments
are not netted across group entities.
The group calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of thegroup, to the group’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event ofdefault. Conversely, the group calculates the DVA by applying the PD of the group, conditional on the non-default of the counterparty, tothe expected positive exposure of the counterparty to the group and multiplying the result by the loss expected in the event of default.
Both calculations are performed over the life of the potential exposure.
For most products the group uses a simulation methodology, which incorporates a range of potential exposures over the life of theportfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such ascounterparty netting agreements and collateral agreements with the counterparty.
The methodologies do not, in general, account for ‘wrong-way risk’. 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 thecurrency of the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specificapproach is applied to reflect this risk in the valuation.

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

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

Inception profit (Day 1 profit or loss reserves)
Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant
unobservable inputs.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

129

Notes on the Consolidated Financial Statements

Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3
AssetsLiabilities

Financialinvestments

Trading
assetsDesignatedandotherwise
mandatorily
measured atfair value
through
profit or
loss

HK$m

HK$m

HK$m

Private equity and related
investments

3,742

16

90,767—

94,5256——

6Structured notes
OthersAt 31 Dec 2022

—
566
4,308

—
9,267
9,283

—
628
91,395

—
3,301
3,301

—
13,762
108,287——
6

34,734—34,734

—
1,712
1,712

34,734
1,712
36,452

Private equity and related
investments

3,121

4

74,295—77,420————

Structured notes
OthersAt 31 Dec 2021

—
553
3,674

—
3,242
3,246

—
357
74,652

—
3,294
3,294

—
7,446
84,866———

20,449—20,449

—
2,130
2,130

20,4492,130
22,579Derivatives

Total

Trading
liabilities

Designatedat fair value

Derivatives

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Private equity and related investments
The fair value of a private equity investment (including private equity, infrastructure and private credit, primarily held to support our
Insurance business, and strategic investments) is estimated on the basis of an analysis of the investee’s financial position and results, risk
profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; the price at whichsimilar companies have changed ownership; or from published net asset values (‘NAVs’) received. If necessary, adjustments are made to
the NAV of funds to obtain the best estimate of fair value.

Structured notes
The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded
derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked
notes issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.
Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest andforeign exchange rates.

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

130

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
AssetsFinancialinvestments

Liabilities

Designatedand otherwise
mandatorily
measured atfair value
Trading through profit
assetsor loss

Derivatives

Trading
Designatedliabilities at fair value1

Derivatives

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

3,674
—

3,246
(952)

74,652
1,545

3,294
669

—
3

20,449
(851)

2,130
214

– net income/(losses) from financial instruments held for
trading or managed on a fair value basis

—

(952)

—

669

3

—

214

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

—

—

1,545

—

—

(851)

—

At 1 Jan 2022
Total gains/(losses) recognised in profit or loss

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

—

—

—

—

—

—

—

676
812
(136)
1,670
—
(71)
(1,641)
—
—
4,308

(81)
—
(81)
6,480
—
(644)
(4,742)
(772)
6,748
9,283

(37)
—
(37)
28,304—(71)(12,809)(289)
100
91,395

(25)
—
(25)
—
—
—
(557)
(394)
314
3,301

—
—
—
—
—
—
—
—
3
6

(1,001)
(5)
(996)
—
5,936
—
12,130(2,671)742
34,734

(83)
—
(83)
—
—
—
(553)
(190)
194
1,712

Unrealised gains/(losses) recognised in profit or loss relating
to assets and liabilities held at 31 Dec 2022

—

(734)

(1,615)

2,631

—

(19)

(78)

– net income/(losses) from financial instruments held for
trading or managed on a fair value basis

—

(734)

—

2,631

—

—

(78)

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

(1,615)

—

—

(19)

—

6,635
(7)

1,237
(2,211)49,534
11,700

1,028
4,002

—
—

20,484(3,207)

3,538
3,082

– net income/(losses) from financial instruments held for
trading or managed on a fair value basis—(2,211)

—

4,002

—

—

3,082

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

11,700——(3,207)—– gains less losses from financial investments at fair value
through other comprehensive income

Total gains recognised in other comprehensive income (‘OCI’)– financial investments: fair value gains/(losses)– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 Dec 2022

At 1 Jan 2021
Total gains/(losses) recognised in profit or loss

(7)

—

—

—

—

—

—

Total gains/(losses) recognised in other comprehensive
income (‘OCI’)(3,013)

10

11

18

—

386

23

– financial investments: fair value (losses)– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 Dec 2021

(3,002)
(11)
1,383
—
(35)
(1,289)
—
—
3,674

—
10
5,082
—
(561)
(87)
(691)
467
3,246

—
11
22,232—(6)(7,898)(921)—
74,652—18———(1,247)
(614)
107
3,294

—
—
—
—
—
—
—
—
—

(3)
389
—
9,196
—
(7,165)(2,895)3,650
20,449—23———(4,060)
(878)
425
2,130

Unrealised gains/(losses) recognised in profit or loss relating
to assets and liabilities held at 31 Dec 2021—

(2,278)

11,236

2,686

—

113

(34)

– net income/(losses) from financial instruments held for
trading or managed on a fair value basis—(2,278)

—

2,686

—

—

(34)

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

11,236

—

—

113

—

1 Includes structured deposits where the settlement balance represents the net of matured and new deposits.

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 thefair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

131

Notes on the Consolidated Financial Statements

Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Sensitivity of fair values to reasonably possible alternative assumptions2022
Reflected in profit or loss
Favourable
changes
HK$m

Unfavourable
changes
HK$m

Derivatives, trading assets and trading
liabilities1

2021
Reflected in OCI

Reflected in profit or loss

Favourable
changes
HK$m

Unfavourable
changes
HK$m—

Reflected in OCI

Favourable
changes
HK$m

Unfavourable
changes
HK$m

Favourable
changes
HK$m

Unfavourable
changes
HK$m

—

158

(162)

—

—

242

(308)

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

4,580

(4,580)

—

—

3,741

(3,742)——Financial investments
At 31 Dec

—
4,822

—
(4,888)

187
187

(187)
(187)

—
3,899

—
(3,904)

157
157

(157)
(157)

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

The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval.
Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observableproxy and historical data.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the mostfavourable or the most unfavourable change from varying the assumptions individually.

Key unobservable inputs to Level 3 financial instruments
The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31 December
2022.
Quantitative information about significant unobservable inputs in Level 3 valuations
Fair value

Private equity and related investments

Assets Liabilities Valuation
HK$m
HK$m techniques

Key unobservable
inputs94,525

See below

6 See below

Structured notes—

34,734– equity-linked notes—

12,917– FX-linked notes– other
Others1
At 31 Dec 2022——
13,762
108,287

Model – Option model
Model – Option model
20,972 Model – Option model
845
1,712
36,4522022

2021

Full range
of inputs

Full range
of inputs

Lower

HigherLower

Higher

6%
38%
4%

142%
98%
37%

6%
22%
2%

90%
97%
36%

Equity volatility
Equity correlation
FX volatility

1 ‘Others’ includes a range of smaller asset holdings.

Private equity and related investments
Given the bespoke nature of the analysis in respect of each holding, it is not practical to quote a range of key unobservable inputs. The
key unobservable inputs would be price and correlation. The valuation approach includes using a range of inputs that include company
specific financials, traded comparable companies multiples, published net asset values and qualitative assumptions, which are notdirectly comparable or quantifiable.

Volatility
Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strikeand maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated fromobservable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price.

Correlation
Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one.
It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of
instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations
is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.
Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, group's trade prices,
proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects
the wide variation in correlation inputs by market price pair.

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

132

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

34

Fair values of financial instruments not carried at fair value

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

Carrying
amountQuotedmarket price
Level 1

Observable
inputsLevel 2Significant
unobservable
inputsLevel 3

Total

HK$m

HK$m

HK$m

HK$m

HK$m

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

927,976
519,024
3,705,149
974,709———455,444927,190
514,524
56,130448,341—
4,452
3,628,504
1,960

927,190
518,976
3,684,634
905,745

351,093—

349,133—

349,133

Deposits by banks
Customer accounts
Debt securities in issue
Subordinated liabilities

198,908
6,113,709
100,909
3,119

—
—
—
—

198,905
6,114,290
101,414
2,191

—
—
—
—

198,905
6,114,290
101,4142,191

803,775
432,247
3,840,939
502,564———
89,050802,881424,175
65,268449,284947
8,356
3,765,148
2,142

803,828
432,5313,830,416
540,476

255,374
280,310
6,177,182
67,364
4,054

—
—
—
—
—

255,366
280,408
6,177,676
67,842
3,864

—
—
—
—
—

255,366
280,408
6,177,676
67,842
3,864

At 31 Dec 2021
Assets1
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers
Financial investments – at amortised cost
Liabilities1
Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Debt securities in issue
Subordinated liabilities

1 Amounts with HSBC Group entities are not reflected here. Further details are set out in Note 32.

The fair values above are stated at a specific date and may be significantly different from the amounts which will actually be paid on thematurity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values
given the size of the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to thegroup as a going concern.
Other financial instruments not carried at fair value are typically short term in nature or re-priced to current market rates frequently.
Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in
the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness, Hong Kong currency
notes in circulation, other financial assets and other financial liabilities, all of which are measured at amortised cost.

Valuation
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. It does not reflect the economic benefits and costs that the group expects to flow from an
instrument’s cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which noobservable market prices are available may differ from those of other companies.

Repurchase and reverse repurchase agreements – non-trading
Fair values approximate carrying amounts as these balances are generally short dated.

Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios ofsimilar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values
are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates fromthird-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expectedcustomer prepayment rates, using assumptions that the group believes are consistent with those that would be used by market
participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants
including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure thefair value of a pool of loans.
The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants’ expectations ofcredit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit
impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

133

Notes on the Consolidated Financial Statements

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

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

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

35

Structured entities

The group is involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets,
conduits and investment funds, established either by the group or a third party.

Consolidated structured entities
The group uses consolidated structured entities to securitise customer loans and advances it originates to diversify its sources of funding
for asset origination and capital efficiency purposes. The loans and advances are transferred by the group to the structured entities forcash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. The group's transactions
with these entities are not significant.

Unconsolidated structured entities
The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by the group. The group enters intotransactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specificinvestment opportunities.
Nature and risks associated with the group’s interests in unconsolidated structured entities
Total asset values of the entities (HK$bn)
0–4
4–15
15–39
39–196196+
Number of entities at 31 Dec 2022
Total assets in relation to the group's interests in the unconsolidated
structured entities

Securitisations

HSBC
managed funds

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– trading assets

—

2,527

—

82

2,609

– financial assets designated and otherwise mandatorily measured at fairvalue through profit or loss—

31,544

109,351—

140,895– derivatives

—

—

—

10

10

17,564
—

—
—

—
—

5,070
83

22,634
83

—

—

—

223

223

—
1,395
18,959—11,75345,824—30,862140,213223
11,342
16,364223
55,352
221,360– 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

134

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

Nature and risks associated with the group’s interests in unconsolidated structured entities (continued)
Total asset values of the entities (HK$bn)
0–4
4–15
15–39
39–196196+
Number of entities at 31 Dec 2021
Total assets in relation to the group's interests in the unconsolidated
structured entities

Securitisations

HSBC
managed funds

Non-HSBC
managed funds

Other

Total

65
11
—
—
—
76

65
37
15
1
1
119

114
130
91
50
3
388

21
—
—
—
—
21

265
178
106
51
4
604

HK$m

HK$m

HK$m

HK$m

HK$m

35,22532,22386,044

10,140163,632– trading assets– financial assets designated and otherwise mandatorily measured at fairvalue through profit or loss

—

1,041

—

432

1,473

—

31,182

86,044—

117,226– derivatives

—

—

—

—

—

35,225

—

—

9,625

44,850– other assets

—

—

—

83

83

Total liabilities in relation to the group's interests in the unconsolidated
structured entities

—

—

—

60

60

—
402
35,627—
6,999
39,222—
26,246112,29060
5,939
16,01960
39,586203,158– loans and advances to customers– derivatives
Other off balance sheet commitments
The group's maximum exposure at 31 Dec 2021

The maximum exposure to loss from the group’s interests in unconsolidated structured entities represents the maximum loss it could
incur as a result of its involvement with these entities regardless of the probability of the loss being incurred.
• For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential
future losses.
• For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the
carrying value of these interests at the balance sheet reporting date.
The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate the group’s
exposure to loss.

Securitisations
The group has interests in unconsolidated securitisation vehicles through holding notes issued by these entities.

HSBC managed funds
The group establishes and manages money market funds and non-money market investment funds to provide customers withinvestment opportunities. The group, as fund manager, may be entitled to receive management and performance fees based on theassets under management. The group may also retain units in these funds.

Non-HSBC managed funds
The group purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs.

Other
The group has established structured entities in the normal course of business, such as structured credit transactions for customers, toprovide finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to theinterest disclosed above, the group enters into derivative contracts, reverse repos and stock borrowing transactions with structured
entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management
solutions.

Structured entities sponsored by the group
The amount of assets transferred to and income received from such sponsored entities during 2022 and 2021 were not significant.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

135

Notes on the Consolidated Financial Statements

36

Bank balance sheet and statement of changes in equity

Bank balance sheet 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
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

136

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

2022

2021

HK$m

HK$m

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

203,988
17,825332,044647,625
346,937
3,246
488,312230,592
1,984,297
893,848544,587
101,535
39,83019,22672,312
1,275
145,729
6,073,208

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

332,044
19,101
175,476
224,650
3,816,715
46,585
337,010
36,39725,393
1,098
482,995
120,846
481
9,339
3,119
5,631,249

180,181

172,335

52,386
3,143

44,615
19,218

232,784
468,494
6,455,962

205,791
441,959
6,073,208

Bank statement of changes in equity for the year ended 31 December 2022
Other reserves

Sharecapital1

Otherequityinstruments

Retainedearnings

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cash
flow
hedge
reserve

Foreignexchangereserve

Other3Total
equity

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

172,335—

44,615—

205,791
54,98736,900
—

1,524
—

63
—

(15,369)—(3,900)—441,959
54,987

Other comprehensive income/(expense) (netof tax)

—

—

4,600

2,948

(10,829)(993)(4,999)—(9,273)– debt instruments at fair value throughother comprehensive income

—

—

—

—

(11,369)———(11,369)– equity instruments designated at fair value
through other comprehensive income– cash flow hedges

—
—

—
—

—
—

—
—

540
—

—
(993)

—
—

—
—

540
(993)

– changes in fair value of financial liabilities
designated at fair value upon initialrecognition arising from changes in own
credit risk
– property revaluation

—
—

—
—

4,432
—

—
2,948

—
—

—
—

—
—

—
—

4,432
2,948

At 1 Jan 2022
Profit for the year

– remeasurement of defined benefit asset/
liability

—

—

168

—

—

—

—

—

168

– exchange differences

—

—

—

—

—

—

(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)

Total comprehensive income/(expense)
for the year
Shares issued1
Other equity instruments issued2
Dividends to shareholders4
Movement in respect of share-based
payment arrangements
Transfers and other movements5
At 31 Dec 2022
At 1 Jan 2021
Profit for the year
Other comprehensive income/(expense) (netof tax)

—

—

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

172,335—

44,615—

221,300
40,81535,196
—

6,364
—

605
—

(12,679)—(3,760)—463,976
40,815

—

—

912

3,453

(4,834)(542)(2,690)—(3,701)– debt instruments at fair value throughother comprehensive income

—

—

—

—

(3,289)———(3,289)– equity instruments designated at fair value
through other comprehensive income

—

—

—

—

(1,545)———(1,545)– cash flow hedges

—

—

—

—

—

(542)

—

—

(542)

– changes in fair value of financial liabilities
designated at fair value upon initialrecognition arising from changes in own
credit risk

—

—

524

—

—

—

—

—

524

– property revaluation

—

—

—

3,453

—

—

—

—

3,453

– remeasurement of defined benefit asset/
liability

—

—

388

—

—

—

—

—

388

– exchange differences

—

—

—

—

—

—

(2,690)—(2,690)Total comprehensive income/(expense) for the
year

—

—

41,727

3,453(4,834)(542)(2,690)—37,114

Dividends to shareholders4——(59,105)

—

—

—

—

—

(59,105)

Movement in respect of share-based
payment arrangements

—

—

115

—

—

—

—

(140)

(25)

—
172,335—
44,615

1,754
205,791(1,749)36,900

(6)
1,524

—
63

—
(15,369)—(3,900)(1)
441,959

Transfers and other movements5
At 31 Dec 2021

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 2022, an additional tier 1 capital instrument was issued amounted to US$1,000m on which there were US$10m issue costs.
3 The other reserves mainly comprise purchase premium arising from transfer of business from fellow subsidiaries, property revaluation reserve
relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment reserve is used to record
the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.
4 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.
5 The movements include transfers from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

137

Notes on the Consolidated Financial Statements

37

Business acquisitions

The following acquisitions form part of our strategy to become a market leader in Asian wealth management:• On 28 January 2022, HSBC Insurance (Asia-Pacific) Holdings Limited, a subsidiary of the group, notified the shareholders of Canara
HSBC Life Insurance Company Limited (‘Canara HSBC’) of its intention to increase its shareholding in Canara HSBC up to 49%. The
group currently has a 26% shareholding which is accounted for as an associate. Any increase in shareholding is subject to agreementwith other shareholders in Canara HSBC, as well as internal and regulatory approvals. Established in 2008, Canara HSBC is a life
insurance company based in India.
• On 11 February 2022, HSBC Insurance (Asia-Pacific) Holdings Limited completed the acquisition of 100% of AXA Insurance Pte
Limited ('AXA Singapore') for HK$4.1bn. A gain on acquisition of HK$665m was recorded, reflecting the excess of the fair value of net
assets acquired (gross assets of HK$35.6bn and gross liabilities of HK$30.8bn) over the acquisition price. The legal integration of AXA
Singapore with HSBC’s pre-existing insurance operations in the country concluded on 1 February 2023.
• On 6 April 2022, the Bank announced it had increased its shareholding in HSBC Qianhai Securities Limited, a partially-owned
subsidiary, from 51% to 90%.
• On 23 June 2022, HSBC Insurance (Asia) Limited, a subsidiary of the group, acquired the remaining 50% equity interest in HSBC Life
Insurance Company Limited. Headquartered in Shanghai, HSBC Life Insurance Company Limited offers a comprehensive range of
insurance solutions covering annuity, whole life, critical illness and unit-linked insurance products.

38

Legal proceedings and regulatory matters

The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations.
Apart from the matters described below, the group considers that none of these matters are material. The recognition of provisions isdetermined in accordance with the accounting policies set out in Note 1.2(n). While the outcomes of legal proceedings and regulatory
matters are inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been
made in respect of these matters as at 31 December 2022. Any provision recognised does not constitute an admission of wrongdoing or
legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters
as a class of contingent liabilities.

Anti-money laundering and sanctions-related matters
In December 2012, HSBC Holdings plc ('HSBC Holdings') entered into a number of agreements, including an undertaking with the UK
Financial Services Authority (replaced with a Direction issued by the UK Financial Conduct Authority (‘FCA’) in 2013 and again in 2020) as
well as a cease-and-desist order with the US Federal Reserve Board (‘FRB’), both of which contained certain forward-looking anti-money
laundering (‘AML’) and sanctions-related obligations. For several years thereafter, HSBC retained a Skilled Person under section 166 of
the Financial Services and Markets Act and an Independent Consultant, under the FRB cease-and-desist order to produce periodic
assessments of the Group’s AML and sanctions compliance programme. The Skilled Person completed its engagement in the second
quarter of 2021, and the FCA determined that no further Skilled Person work is required. Separately, the Independent Consultant's
engagement is now complete and, in August 2022, the FRB terminated its cease-and-desist order.

Singapore Interbank Offered Rate (‘Sibor’) and Singapore Swap Offer Rate (‘SOR’)
In 2016, the Bank and other panel banks were named as defendants in a putative class action filed in the New York District Court onbehalf of persons who transacted in products related to the Sibor and SOR benchmark rates. The complaint alleged, among other things,
misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law.
In October 2021, the Bank reached a settlement-in-principle with the plaintiffs to resolve this action, the agreement for which was
executed in May 2022. The court granted final approval of the settlement in November 2022.

Other regulatory investigations, reviews and litigation
The Bank and/or certain of its affiliates are subject to a number of other investigations and reviews by various regulators and competitionand law enforcement authorities, as well as litigation, in connection with various matters relating to the firm’s businesses and operations,
including investigations by tax administration, regulatory and law enforcement authorities in India and elsewhere in connection withallegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could besignificant.

138

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

39

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.

40

Events after the balance sheet date

There have been no events after the balance sheet date that would require disclosure in the consolidated financial statements.

41

Approval of financial statements

The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on 21 February 2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

139

Additional Information

Additional cautionary statement regarding ESG
and climate-related data, metrics and forwardlooking statements
The Annual Report and Accounts 2022 contains a number offorward-looking statements (as defined above) with respect to theGroup’s (including the group’s) ESG targets, commitments,
ambitions, climate-related scenarios or pathways and themethodologies the Group uses to assess the Group’s progress inrelation to these (“ESG-related forward-looking statements”).
In preparing the ESG-related information contained in the Annual
Report and Accounts 2022, the group has relied on a number ofkey judgements, estimations and assumptions of the Group andthe processes and issues involved are complex. The Group has
used ESG and climate data, models and methodologies that it
considers, as of the date on which they were used, to beappropriate and suitable to understand and assess climate change
risk and its impact, to analyse financed emissions - andoperational and supply chain emissions, to set ESG-related targets
and to evaluate the classification of sustainable finance andinvestments. However, these data, models and methodologies arenew, are rapidly evolving and are not of the same standard as
those available in the context of other financial information, nor
are they subject to the same or equivalent 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 thecase of climate change and its evolution. Outputs of models,
processed data and methodologies are also likely to be affected byunderlying data quality, which can be hard to assess and theGroup expects industry guidance, market practice, and regulationsin this field to continue to change. In light of the highly uncertain
nature of the evolution of climate change and its impact, 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 collective approach to
ESG and climate analysis and may be required to amend, update
and recalculate its ESG disclosures and assessments in the future,as market practice and data quality and availability develops
rapidly. The ESG-related forward-looking statements and metrics
discussed in the Annual Report and Accounts 2022 therefore carryan additional degree of inherent risk and uncertainty.
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 or returns contained herein. Readers are
cautioned that a number of factors, both external and thosespecific to the Group (including the group), could cause actual
achievements, results, performance or other future events orconditions of the group to differ, in some cases materially, fromthose stated, implied and/or reflected in any ESG-related forwardlooking statements or metrics 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;• Data availability, accuracy, verifiability and data gaps: theGroup’s disclosures are limited by the availability of high quality
data needed to calculate financed emissions. Where data is notavailable for all sectors or consistently year on year, there may
be an impact to the Group’s data quality scores. Whilst theGroup expects its data quality scores to improve over time, ascompanies continue to expand their disclosures to meetgrowing regulatory and stakeholder expectations, there may be
unexpected fluctuations within sectors year on year, and/or
differences between the data quality scores between sectors.
Any such changes in the availability and quality of data overtime 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: the methodologies the Group(including the group) uses to assess financed emissions and set
ESG-related targets may develop over time in line with market
practice, regulation and/or developments in science, whereapplicable. Any such developments in methodologies could
result in revisions to reported data going forward, including on
financed emissions meaning that data outputs may not bereconcilable or comparable year-on year. In addition, climate
scenarios and the models that analyse them have limitations
that are sensitive to key assumptions and parameters, which
are themselves subject to some uncertainty, and cannot fully
capture all of the potential effects of climate, policy andtechnology driven outcomes; and• Risk management capabilities: governments’, customers’, and
the Group’s (including the group’s) actions may not be effective
in supporting the global transition to net zero carbon emissions
and in managing and mitigating ESG risks, including inparticular climate risk, nature-related risks 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 commitments set forth in the Group’s thermal
coal phase-out policy, energy policy and targets to reduceon-balance sheet financed emissions in its portfolio ofselected high-emitting sectors), which may result in its
failure to achieve any of the expected benefits of its
strategic priorities; and– the Group (including the group) may not be able to develop
sustainable finance and climate-related products consistent
with the evolving expectations of its regulators, and its
capacity to measure the climate impact 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 climate ambition, its
targets to reduce its on-balance sheet financed emissions in
its portfolio of selected high-emitting sectors and thecommitments set forth in the Group’s thermal coal phaseout policy and energy policy, and increase the risk ofgreenwashing.

• Changes in the ESG regulatory landscape: this involveschanges in government approach and regulatory treatment inrelation to ESG disclosures and reporting requirements, and thecurrent lack of a single standardised regulatory approach to
ESG across all sectors and markets;

The group makes no commitment to revise or update any ESG
forward-looking statements to reflect events or circumstances
occurring or existing after the date of any ESG forward-looking
statements. Written and/or oral ESG-related forward-looking
statements may also be made in its periodic reports to its
regulators, public offering or disclosure documents, press releases
and other written materials, and in oral statements made by its
Directors, officers or employees to third parties, including financial
analysts.

• Variation in reporting standards: ESG reporting standards arestill developing and are not standardised or comparable acrossall sectors and markets, new reporting standards in relation todifferent ESG metrics are still emerging

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-andresponsible-business/esg-reporting-centre.

140

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022

© The Hongkong and Shanghai Banking
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The Hongkong and Shanghai Banking Corporation Limited
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