The Hongkong and Shanghai
Banking Corporation Limited
Annual Report and Accounts 2020

Contents

Certain defined terms
Page

Certain defined terms
Cautionary statement regarding forward-looking statements

1
1

Chinese translation
Financial Highlights

1
2

Report of the Directors
Financial Review

3
10

Risk
Statement of Directors’ Responsibilities

14
64

Independent Auditor’s Report

65

Consolidated Financial Statements
Consolidated income statement

71

Consolidated statement of comprehensive income
Consolidated balance sheet

72
73

Consolidated statement of cash flows
Consolidated statement of changes in equity

74
75

Notes on the Consolidated Financial
Statements
1

Basis of preparation and significant accounting policies

77

2
3
4
5
6
7
8
9

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

88
90
91
94
95
95
96

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

97

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

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

97
98
98
99
100
103
104
105
105
105
106
106
106
107
107
107
108

Analysis of cash flows payable under financial liabilities byremaining contractual maturities

110

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

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

111
111
111
112
114
116
119
120
122
124
125
125
125

This document comprises the Annual Report and Accounts 2020
for The Hongkong and Shanghai Banking Corporation Limited (‘theBank’) and its subsidiaries (together ‘the group’). References to‘HSBC’, ‘the Group’ or ‘the HSBC Group’ within this document
mean HSBC Holdings plc together with its subsidiaries. Within thisdocument the Hong Kong Special Administrative Region of thePeople’s Republic of China is referred to as ‘Hong Kong’. The
abbreviations ‘HK$m’ and ‘HK$bn’ represent millions and billions(thousands of millions) of Hong Kong dollars respectively.

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

Chinese translation
A Chinese translation of the Annual Report and Accounts 2020 isavailable upon request from: Communications (Asia), Level 32,
HSBC Main Building, 1 Queen’s Road Central, Hong Kong. The
report is also available, in English and Chinese, on the Bank’s
website at www.hsbc.com.hk.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 20201

Financial Highlights | Report of the Directors

Financial Highlights
2020

2019

HK$m

HK$m

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

189,338
90,196219,381
136,433

Profit attributable to shareholders
At the year-end

69,447

105,722

Total shareholders’ equity
Total equity

845,353
911,531814,678879,281

Total capital1
Customer accounts

614,545
5,911,396

598,934
5,432,424

Total assets
Ratios9,416,403

8,661,714

For the year%%

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

8.6
0.8

13.9
1.3

Cost efficiency ratio
Net interest margin

50.6
1.6

42.6
2.0

Advances-to-deposits ratio
Capital ratios

62.1

68.5

Common equity tier 1 capital
Tier 1 capital

17.2
18.8

17.2
18.8

Total capital

20.8

21.0

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 organised into four geographical regions: 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 2020

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. Building on the momentum of the past
10 years, we are well positioned to further extend the strengths of
our leading Hong Kong franchise across the Greater Bay Area, andin other key growth markets, including India and Southeast Asia.
By increasing investment in our people and technology, we willfurther grow our leading Asian Wealth Management business,while maintaining our distinct position as the leading internationalbank for our corporate and commercial clients. We remain
focused on connecting Asia to the world through HSBC’s global
network, supporting the ongoing transition to a low-carbon
economy as a Sustainable Finance leader, continually streamlining
our organisation to realise greater operating efficiencies, andimproving service for our domestic, regional, and global clients
through our technology, talent, and 156 years of experience in theregion.

Consolidated Financial Statements
The consolidated financial statements of the group are set out on
pages 71 to 125.

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

Dividends
The interim dividends paid in respect of 2020 are set out in Note 6
on the Consolidated Financial Statements.

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

Laura May Lung Cha*, GBM
Chairman
She is an independent non-executive Director of HSBC Holdings plc. She
is also Chairman and an independent non-executive Director of Hong
Kong Exchanges and Clearing Limited; an independent non-executive
Director of Unilever PLC and Unilever N.V.; and a non-executive Directorof The London Metal Exchange. She holds a Bachelor of Arts from
University of Wisconsin-Madison and a Juris Doctor from University of
Santa Clara Law School. She is admitted to practice in the State ofCalifornia and in U.S. Federal Courts.

Peter Tung Shun Wong, GBS, JP
Deputy Chairman & Chief Executive
He is a Group Managing Director and a member of the Group Executive
Committee of HSBC Holdings plc and a non-executive Director of Hang
Seng Bank Limited. He is also Chairman and a non-executive Director of
HSBC Bank (China) Company Limited. He holds a Bachelor of Arts, a
Master of Business Administration and a Master of Science from Indiana
University.

Zia Mody*
Deputy Chairman
She is a partner of AZB & Partners; an independent non-executive Directorof CLP Holdings Limited; and an independent Director of Ascendas
Property Fund Trustee Pte. Ltd. She holds a Bachelor of Arts (Law) from
Cambridge University and a Master of Laws from Harvard University.

Graham John Bradley*
He is Chairman and a non-executive Director of United Malt Group Limited
and Shine Justice Ltd.; and Chairman and a Director of EnergyAustralia
Holdings Limited, Infrastructure New South Wales and Virgin Australia
International Holdings Limited. He holds a Bachelor of Arts and a Bachelorof Laws (Hons I) from Sydney University and a Master of Laws from
Harvard University. He was non-executive Chairman and a Director of
HSBC Bank Australia Limited from 2004 to 2020.

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

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

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

Beau Khoon Chen Kuok*
He is Chairman and Managing Director of Kerry Group Limited. He holds a
Bachelor of Economics from Monash University. He was previously
Chairman and Chief Executive Officer of Shangri-La Asia Limited;
Chairman of Kerry Properties Limited; and Non-Executive Director ofWilmar International Limited.

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

Jennifer Xinzhe Li*
She is General Managing Partner of Changcheng Investment Partners.
She is also an independent non-executive Director of Philip MorrisInternational Inc. and a non-executive Director of Flex Ltd. and ABB Ltd.
She holds a Bachelor of Arts from Tsinghua University and a Master ofBusiness Administration from University of British Columbia. She waspreviously Chief Executive Officer and General Partner of Baidu Capitaland Chief Financial Officer of Baidu, Inc.

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 20203

Report of the Directors

Bin Hwee Quek (née Chua)*, PBM, BBM, JP

Directors’ Rights to Acquire Shares or Debentures

She is an independent non-executive Director of CapitaLand Integrated
Commercial Trust Management Limited, Certis Cisco Security Pte. Ltd.
and Mapletree Oakwood Holdings Pte. Ltd. She is also a Director ofseveral government or government-funded organisations in Singapore,including Health Promotion Board, Maritime and Port Authority ofSingapore, and National Heritage Board. She holds a Bachelor of
Accountancy (Hons) from The University of Singapore and is a Chartered
Accountant with the Institute of Singapore Chartered Accountants.
She was an audit partner of PricewaterhouseCoopers (PwC) Singapore
until June 2017 and held leadership positions including Vice Chairman of
PwC Singapore and Deputy Markets Leader of PwC Asia-Pacific andAmericas.

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.

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

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

During the year, Louisa Wai Wan Cheang and Raymond Kuo Fung
Ch'ien stepped down as Directors with effect from 10 August and
13 November 2020 respectively. Beau Khoon Chen Kuok andSonia Chi Man Cheng were appointed as Directors with effectfrom 10 August and 20 November 2020 respectively. Save for theabove, 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 2020 to the date of this report will be available on the
Bank’s website www.hsbc.com.hk/legal/regulatory-disclosures/.

Secretary
Paul Stafford was appointed as the Corporation Secretary witheffect from 13 January 2020. Neil Olofsson was Corporation
Secretary until 13 December 2019, when Philip Miller assumed the
responsibilities on an interim basis until Paul Stafford's
appointment.

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

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

4

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
GBP500,000 or below. 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 three 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.
All unvested deferred awards made under the HSBC Share Plan
2011 are subject to the application of malus, i.e. the cancellation
and reduction of unvested deferred awards. All paid or vested
variable pay awards made to Identified Staff and MRTs will be
subject to clawback for a period of seven years from the date ofaward. For Senior Managers, this may be extended to 10 years in
the event of an ongoing internal or regulatory investigation at theend of the seven-year period.
Executive Directors and other senior executives of HSBC Holdings
plc are subject to Group minimum shareholding requirements.
Individuals are given five years from 2014 or (if later) their
appointment to build up the recommended levels of shareholding.
HSBC operates an anti-hedging policy for Group, sectorial andlocal MRTs including executive Directors in accordance with the
PRA Rules, who are required to certify each year via the Bank's
Global Personal Account Dealing system that they have notentered into any personal hedging strategies in relation to theirholdings of HSBC shares as part of the Global Personal Account
Dealing Certification.
The HSBC International Employee Share Purchase Plan is an
employee share purchase plan offered to employees in Hong Kong
since 2013 and has been extended to further countries in the
HSBC Group from 2014. For every three shares in HSBC Holdings
plc purchased by an employee (‘Investment Shares’), a conditional
award to acquire one share is granted (‘Matching Shares’). The
employee becomes entitled to the Matching Shares subject tocontinued employment with HSBC and retention of the Investment
Shares until the third anniversary of the start of the relevant plan
year. HSBC Holdings Savings-Related Share Option Plan (UK) is an
all employee share plan under which eligible employees may be
granted options to acquire HSBC Holdings ordinary shares.
Employees may make monthly contributions, up to a maximum
defined limit, over a period of three or five years and shares are
exercisable within six months following either the third or fifth
anniversary of the commencement. The exercise price is set at a
20% discount to the market value immediately preceding the dateof invitation.
During the year, Peter Wong and Louisa Cheang acquired or wereawarded shares of HSBC Holdings plc under the terms of the
HSBC Share Plan 2011.
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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Donations
Donations made by the Bank and its subsidiaries during the year
amounted to HK$345m (2019: HK$339m).

Compliance with the Banking (Disclosure) Rules
The Directors are of the view that the Annual Report and Accounts
2020 and Banking Disclosure Statements 2020 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’.

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 comprised: the independent
non-executive Chairman; the Deputy Chairman and Chief
Executive; one Deputy Chairman who is an independent nonexecutive Director; one non-executive Director; and another 10
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 are
12 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 Chief Executive
The roles of the Chairman and Chief Executive are separate andheld respectively by an experienced independent non-executive
Director and a full-time employee of the HSBC Group. There is aclear division of responsibilities between leading the Board and theexecutive 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 Chief Executive andmanagement. The Chairman’s role includes promoting an open
and inclusive culture on the Board to facilitate open and critical
discussion and challenge and leading the Board in setting anappropriate ‘tone from the top’ and in the oversight of the Bank’s
corporate culture. The Chairman also leads an annual evaluation of
the performance of the Board, its Committees and individual
Directors.
The Chief Executive is responsible for ensuring implementation of
the strategy and policy as established by the Board and the day-today running of operations. The Chief Executive is Chairman of the
Executive Committee. Each Asia-Pacific Global Business andGlobal Function head reports to the Chief Executive.

Board Committees
The Board has established various committees consisting of
Directors and senior management. The committees include the
Executive Committee, Audit Committee, Risk Committee,
Nomination Committee, Remuneration Committee and Chairman's
Committee. The Chairmen of the Executive Committee and of each
Board committee that includes independent non-executive
Directors report to each subsequent Board meeting on the relevant
committee’s proceedings.
The Board has also established an Asset, Liability and CapitalManagement Committee, a Risk Management Meeting and a
Financial Crime Risk Management Committee. The Executive
Committee has the delegated authority to approve any changes in
the membership and terms of reference of the Asset, Liability andCapital Management Committee, the Risk Management Meetingand the Financial Crime Risk Management Committee.
The Board and each Board committee have terms of reference todocument their responsibilities and governance procedures. The
key roles of the committees are described in the paragraphs
below.

Executive Committee
The Executive Committee is responsible for the exercise of all of
the powers, authorities and discretions of the Board in so far as
they concern the management, operations and day-to-day runningof the group, in accordance with such policies and directions as
the Board may from time to time determine, with power to subdelegate. A schedule of items that require the approval of theBoard is maintained.
The Bank’s Deputy Chairman and Chief Executive, Peter Wong, is
Chairman of the Committee. The current members of theCommittee are: Diana Cesar (Chief Executive Officer Hong Kong);
Anthony Cripps (Chief Executive Officer Singapore); Darren
Furnarello (Chief Compliance Officer, Asia-Pacific); David Grimme(Chief Operating Officer, Asia-Pacific); Gregory Hingston (Regional
Head of Wealth and Personal Banking, Asia-Pacific); Mukhtar
Hussain (Head of Belt and Road Initiative, Asia-Pacific); Ming Lau(Chief Financial Officer, Asia-Pacific); David Liao (Head of AsiaPacific Global Banking Coverage); Matthew Lobner (Head of
Strategy and Planning, Asia-Pacific and Head of International,
Asia-Pacific); Mark McKeown (Chief Risk Officer, Asia-Pacific);
Kaber Mclean (Chief Executive Officer Australia); Stuart Milne(Chief Executive Officer Malaysia); Surendranath Rosha (Chief
Executive Officer India); Susan Sayers (Regional General Counsel,
Asia-Pacific); Stuart Tait (Regional Head of Commercial Banking,Asia-Pacific); David Thomas (Regional Head of Human Resources,
Asia-Pacific) and Mark Wang (President and Chief Executive
Officer China). Paul Stafford (Corporation Secretary) is theCommittee Secretary. In attendance are: Patrick Humphris (Headof Communications, Asia-Pacific); Astor Law (Head of Global
Internal Audit, Asia-Pacific) and Philip Miller (Deputy Corporation
Secretary). The Committee met 11 times in 2020. In between
Committee meetings, there were periodic ‘check-in’ sessions heldby the Committee Chairman with members to discuss urgent orimportant 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 balance sheet within the constraints of

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 20205

Report of the Directors

liquidity, funding and capital, and other key balance sheet risks
such as interest rate risk, market risk and equity risk. The
Committee also has responsibility for the Bank's resolution
planning activities.
The Committee consists of Ming Lau (Chief Financial Officer, AsiaPacific), Peter Wong (the Bank's Deputy Chairman and Chief
Executive), the Regional Head of Asset and Liability Management,
Asia-Pacific, the Regional Head of Capital Management, AsiaPacific, the Regional Head of Markets Treasury, Asia-Pacific, andother senior executives of the Bank most of whom are members of
the Executive Committee. The Committee met 11 times in 2020.

Risk Management Meeting
The Risk Management Meeting is chaired by the Chief Risk Officer
and is a formal governance committee established to provide
recommendations and advice to the Chief Risk Officer onenterprise-wide management of all risks, including key policies
and frameworks for the management of risk within the Bank. The
Risk Management Meeting consists of Mark McKeown (Chief Risk
Officer, Asia-Pacific), Peter Wong (the Bank’s Deputy Chairman
and Chief Executive), the Head of Global Internal Audit, AsiaPacific and other senior executives of the Bank most of whom aremembers of the Executive Committee. The Risk Management
Meeting met 10 times in 2020.

Financial Crime Risk Management Committee
The Financial Crime Risk Management Committee is chaired by
the Bank’s Deputy Chairman and Chief Executive and is a formal
governance committee established to ensure effective enterprisewide management of financial crime risk within the Asia–PacificRegion and to support the Chief Executive in discharging his
financial crime risk responsibilities. The Committee consists ofPeter Wong (the Bank's Deputy Chairman and Chief Executive),
the Regional Chief Compliance Officer, Asia–Pacific, the Regional
Head of Financial Crime, Asia–Pacific, the Regional Head ofOperational Risk, Asia-Pacific, and other senior executives of the
Bank most of whom are members of the Executive Committee.
The Committee met 10 times in 2020.

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, all being independent non-executive
Directors, are Kevin Westley (Chairman of the Committee),
Graham Bradley, Yiu Kwan Choi, Irene Lee and Jennifer Li. The
Committee met six times in 2020.
The Audit Committee monitors the integrity of the Consolidated
Financial Statements and disclosures relating to financial
performance, the effectiveness of the internal audit function andthe external audit process, and the effectiveness of internalfinancial control systems. The Committee reviews the adequacy of
resources and expertise as well as succession planning for thefinance function. It reviews, and considers changes to, the Bank’s
accounting policies. The Committee advises the Board on theappointment, re-appointment, or removal of the external auditor
and reviews and monitors the external auditor’s independence andobjectivity. The Committee reviews matters escalated for its
attention by subsidiaries’ audit committees and receives minutesof meetings of the Asset, Liability and Capital Management
Committee.

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, all being
independent non-executive Directors, are Graham Bradley(Chairman of the Committee), Christopher Cheng, Sonia Cheng,
Yiu Kwan Choi, Irene Lee, Zia Mody and Kevin Westley. The
Committee met five times in 2020.

6

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 enterprise risk management framework which
provides a clear policy of risk ownership and accountability of all
staff for identifying, assessing and managing risks within thescope of their assigned responsibilities. This personalaccountability, 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 a disciplined and constructive culture of risk
management and control throughout the group.
The Board and the Risk Committee oversee the maintenance anddevelopment of a strong risk management framework bycontinually monitoring the risk environment, top and emerging
risks facing the group and mitigating actions planned and taken.
The Risk Committee reviews the Group risk management policies
and procedures at least annually and advises the Board if these areappropriate for the circumstances of the Bank. It also reviews local
risk management policies at least annually, and approves orrecommends any changes to the Board for approval.
The Committee reviews any revisions to the group’s risk appetitestatement twice a year and recommends any proposed changes tothe Board for approval. The Committee reviews management’s
assessment of risk against the risk appetite statement andprovides scrutiny of management’s proposed mitigating actions.
The Committee monitors the risk profiles for all of the risk
categories within the group’s business. The Committee also
monitors the effectiveness of the Bank’s risk management andinternal controls other than those over financial reporting. Regular
reports from the Risk Management Meeting are also presented ateach Risk Committee meeting to report on the ongoing
monitoring, assessment and management of the risk environment
and the effectiveness of the risk management framework. The
Committee reviews matters escalated for its attention bysubsidiaries’ risk committees and receives minutes of meetings of
the Risk Management Meeting.

Nomination Committee
The Nomination Committee is responsible for leading the process
for Board appointments and for identifying and nominating, for theapproval of the Board, candidates for appointment to the Boardand certain senior management roles. Appointments to the Boardand certain senior management roles are subject to the approvalof the HKMA. The Committee considers plans for orderly
succession to the Board and the appropriate balance of skills,
knowledge and experience on the Board. The Committee also
considers and endorses appointments to boards of directors andspecified senior management positions of certain subsidiaries of
the Bank.
The current members of the Committee, all being independent
non-executive Directors, are Christopher Cheng (Chairman of theCommittee), Laura Cha (Chairman of the Board) and Zia Mody. The
Deputy Chairman and Chief Executive attends each meeting of theCommittee. The Committee met eight times in 2020.
A rigorous selection process, overseen by the Nomination
Committee and based upon agreed requirements using an external
search consultancy, is followed in relation to the appointment of
non-executive Directors. Before recommending an appointment ofa Director to the Board, the Committee evaluates the Board
composition including balance of skills, knowledge andexperience, as well as diversity and the role and capabilities
required. In identifying suitable Board candidates, the Committee
considers candidates’ backgrounds, knowledge and experience(including international experience) to promote diversity of views,
and takes into account the required time commitment and any
potential conflicts of interest.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Chairman’s Committee
The Chairman’s Committee acts on behalf of the Board either inaccordance with authority delegated by the Board from time totime, or as specifically set out within its terms of reference. The
Committee meets with such frequency and at such times as it may
determine and can implement previously agreed strategic
decisions by the full Board, approve specified matters subject totheir prior review by the full Board, and act exceptionally on urgent
matters within its terms of reference.
The current members of the Committee comprise the Chairman of
the Board, the Deputy Chairman and Chief Executive, the nonexecutive Deputy Chairman and the Chairmen of the Audit andRisk Committees. The Committee met twice in 2020.

Remuneration Committee
The Group Remuneration Committee is responsible for setting theoverarching principles, parameters and governance for theGroup‘s remuneration framework applicable to all Group
employees. The Remuneration Committee of the Bank is
responsible for the oversight of matters related to remuneration
impacting the Bank and its subsidiaries, in particular, overseeing
the implementation and operation of the Group’s remuneration
framework and satisfying itself that the remuneration frameworkcomplies with local laws, rules or regulations; is in line with therisk appetite, business strategy, culture and values, and long-term
interests of the Bank; and is appropriate to attract, retain andmotivate employees to support the success of the Bank. The
Committee annually reviews the effectiveness and compliance of
the Group's reward strategy as adopted by the Bank alongside thesubmission of the Bank's HKMA Supervisory Policy Manual CG-5
'Guideline on a Sound Remuneration System' Self Assessment as
conducted by Deloitte LLP. The current members of theCommittee, all being independent non-executive Directors, are
Irene Lee (Chairman of the Committee), Christopher Cheng, Beau
Kuok, Jennifer Li, Bin Hwee Quek and Francis Yeoh. The
Committee met six times in 2020.The following is a summary of
the Committee's key activities during 2020:
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 Chief
Executive and Executive Committee members of the BankAll employees• Approved 2019/2020 performance year pay review matters• Reviewed remuneration framework effectiveness• Received updates on notable events and regulatory and corporate
governance matters• Reviewed and approved 2020 Material Risk Taker (‘MRT’) identification
approaches and outcomes• Reviewed attrition data and plans to address area of concerns• Approved 2020 remuneration related regulatory submissions* Senior Management includes the Chief Executive of the Bank, Chief
Executive of Hang Seng Bank Limited, Executive Committee members,
Alternate Chief Executives and Managers as registered with HKMA.

Remuneration Strategy
Our performance and pay strategy underpinned by our Group’s
Remuneration Framework is designed to reward competitively theachievement of long-term sustainable performance, and attract,
motivate and retain the very best people, regardless of gender,
ethnicity, age, disability or any other factor unrelated toperformance or experience. We believe that remuneration is an
important tool for instilling the right behaviours, and driving andencouraging actions that are aligned to organisational values andthe long-term interests of our stakeholders.
The strategy supports our people to perform their roles to support
our strategic priorities and long-term interests of our stakeholders,which includes the customers and communities we serve, ourshareholders and regulators. We maintain key principles that

underpin the performance and pay decisions for our workforce, as
outlined below. These principles were crucial to the approach we
took in response to Covid-19 to adequately support and recognisethem and ensure they were treated fairly.
• Ensuring that the assessments completed by people managers
are fair, appropriate and free from bias. Managers areencouraged to challenge and communicate with peers, andanalytical reviews are undertaken to identify any bias.
• An alignment to performance at all levels (individual, businessand Group) taking into account both ‘what’ has been achievedand ‘how’ it has been achieved. The ‘how’ helps ensure that
performance is sustainable in the longer term, consistent with
HSBC’s values, risk and compliance standards.
• Being informed, but not driven by, market position andpractice. Market benchmarks are sourced through independent
specialists and provide an indication of the range of pay levels
and employee benefits provided by our competitors.
• Supporting a culture of continuous feedback through manager
and employee empowerment and creating a culture where
employees can fulfil their potential, gain new skills and develop
their careers for the future.
• Considering the full-market range when making pay decisions
for employees, taking into account the individual’s and theGroup’s performance in any given year. An individual’s pay willvary depending upon their performance.
• Compliance with relevant regulation across all of our countries
and territories.
More details of the Bank’s remuneration strategy are contained
within the Annual Report and Accounts 2020 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 2019was commissioned externally to Deloitte LLP, and the results
confirm that the Bank’s remuneration framework as adopted fromthe 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 the group could implement in the event ofsevere stress in order to restore its business to a stable andsustainable condition. The Bank typically submits recovery planson an annual basis to the HKMA and to other regulators that have
implemented recovery planning requirements. The Bank’s
recovery plans are continually re-appraised, and this involves
stress testing and ‘fire drill’ tests.

Resolution
The Financial Institutions (Resolution) (Loss-absorbing Capacity
Requirements–Banking Sector) Rules (‘LAC Rules’) came into
operation in Hong Kong in December 2018, under the powers set
out in the Financial Institutions (Resolution) Ordinance (‘FIRO’)
which came into effect in 2017. Within the LAC Rules, the groupneeds to have sufficient loss-absorbing capacity (‘LAC’) which canbe written down or converted into equity at an intermediateholding company in Hong Kong to recapitalise the group as awhole in the event of failure.
HSBC Asia Holdings Limited, a wholly-owned subsidiary of HSBC
Holdings plc and the intermediate holding company of the group,is designated as the resolution entity for the group, where
adequate LAC has to be available in a form that will be bailed-in at
the point of resolution. The group completed the restructuring of
its internal regulatory capital and LAC-eligible debt and equity

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 20207

Report of the Directors

instruments such that they are all held by HSBC Asia Holdings
Limited, in compliance with LAC requirements as at 1 July 2019.
In July 2019, the Bank of England and Prudential Regulation
Authority (‘PRA’) published final policies on the Resolvability
Assessment Framework (‘RAF’), which places the onus on firms todemonstrate their own resolvability and is designed to increasetransparency and accountability for resolution planning. In order tobe considered resolvable, HSBC Group must meet threeoutcomes: (i) have adequate resources in resolution; (ii) be able tocontinue business through resolution and restructuring; and (iii) beable to co-ordinate its resolution and communicate effectively withstakeholders. The RAF requires the HSBC Group to perform a selfassessment of its preparedness for resolution, submit a report ofthe outcome of this self-assessment to the PRA in October 2021
and publish a public summary of the HSBC Group’s resolvability inJune 2022. The group is part of the HSBC Group-wide RAF
implementation along with continued bilateral engagement with
the HKMA and other principal Asian regulators to ensure
adherence to local requirements and regulatory expectations.

Supporting Sustainable FinanceAt the heart of the Group's climate ambition announced in October
2020 is an aim to help our customers embrace and thrive throughthe low carbon transition, and the goal to align financed emissions
from our portfolio of customers to the Paris Agreement goal of net
zero by 2050 or sooner. In 2020, the group was awarded 'Asia’s
Best Bank for Sustainable Finance' by Euromoney for the third
consecutive year since award inception. Throughout the year, we
continued to expand our sustainable finance offerings across ourglobal businesses.
We have played our role to mitigate the impact of Covid-19. In
addition to HSBC's US$25m Covid-19 donation fund, we have arange of measures to support individuals and businesses affectedby the pandemic in Asia, including the provision of immediate
medical relief, access to food, and care for the most vulnerable
people. We have also dedicated effort to facilitate Covid-19
themed bonds (examples illustrated below).
In 2020, we continued to expand our sustainable finance offerings
across Global Banking and Markets, Commercial Banking and
Wealth and Personal Banking.

Global Banking and Markets
In July 2020, HSBC formed a dedicated team to help clients to‘build back better’ following Covid-19. The Environmental, Socialand Governance ('ESG') Solutions unit provides advice, expertiseand financing ideas to clients in Asia, and around the world. The
ESG Solutions team is led from Hong Kong and draws on theexpertise of our bankers across sector, product and geography toassess client needs and deliver actionable ESG solutions which arein the best interests of our clients.
We have led a number of Covid-19 themed bonds, including theworld’s first Covid-19 impact alleviation bond for Bank of China(Macau), first Covid-19 impact alleviation bond (private placement)
for Shinhan Bank and a sovereign bond for Republic of Indonesia
with a partial fund for Covid-19 relief. We have also facilitated
Downer EDI Limited’s AUD1.4bn Sustainability Linked Loan('SLL'), which is the largest SLL in Australia with internal key
performance indicators. We were ranked first in Dealogic's 'Green,
Social and Sustainability Bond League Table for Asia Pacific in G3
currencies' in 2020.
Across Asia, we have completed a number of innovative deals,
including the first Green CNH Dim Sum Private Placement via thePlacement Portal Exchange platform in Hong Kong, the first
Structured Equity Product linked to an in-house ESG Index, andthe first THB-denominated ESG bond issued out of HSBC Thailand.

8

Commercial Banking
In 2020, Commercial Banking launched a Sustainable Financing
Programme and green loan and green trade products for ourclients. In mainland China, the HSBC Sustainable Financing
Programme is a market-first amongst foreign banks to provide
green loans to clients with cash rebates linked to carbon savings,
providing support and recognition for clients investing into ecofriendly projects and adopting a sustainable way of doing
business. In Singapore, the HSBC SME Green Loan draws on
existing green projects or asset certifications from Singapore’s
industry authorities, which helps reduce the time, complexity andcost typically associated with applying for green finance.
Our suite of green / sustainable trade and receivable financeproducts now comprises the end-to-end solution from preshipment / manufacturing advance to post-shipment receivables
financing and supply chain financing solutions. In 2020, thisoffering was further complemented with our range of contingent
solutions that encompass letters of credit / stand-by letters ofcredit and guarantee solutions to assist our clients with thefinancing of their sustainable activities. We received industry
accolades – Asset Asian recognised the Walmart Sustainable
Supply Chain Solutions transaction as the ‘Best ESG Supply Chain
Solutions (Regional)’.

Wealth and Personal Banking
A comprehensive range of sustainable investment products isoffered to help clients fulfil their sustainability preferences while
delivering financial goals. These include green, social andsustainability bonds, investment funds, structured products andgreen certificates of deposit. Our structured product offer linked to
ESG baskets was recognised as 'Best ESG Solution' in the SRP
China Awards 2020.
In addition to our existing offering, we have extended the HSBC
GIF Lower Carbon Bond Fund in mainland China and Taiwan, andintroduced a number of other third party sustainable investment
funds across various Asian markets in 2020. We have also
launched retail green certificates of deposit in Hong Kong, where
proceeds were used to fund green and sustainable development
projects.
HSBC Private Banking in Asia won the Asiamoney award of 'Best
for ESG in Hong Kong' in 2020. In 2020, we have further enriched
our ESG product offerings in structured products, long-only funds
and alternatives with examples in impact investing, ESG
structured products, and UN Sustainable Development Goals
Fund.

Environmental, Social and Governance
We have the responsibility to protect our customers, ourcommunities and the integrity of the financial system.

Environmental matters
We recognise our wider obligations to the communities where we
operate, and understand economic growth must also besustainable. In September 2020, the Group announced an
ambitious plan to prioritise financing and investment that supports
the transition to a net zero global economy, and which helps tobuild a thriving, resilient future for society and businesses. The
global climate plan has three elements: to support our portfolio ofcustomers to make the transition; to unlock climate solutions andinnovation; and to transform HSBC into a net zero bank. To
achieve these goals, we will work with a range of stakeholders
including charities, governments, and policymakers.
More information about our assessment of climate risk can befound in ‘Top and emerging risks’ on page 19.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Employee matters

Business Review

We are opening up a world of opportunity for our people throughbuilding a fully inclusive organisation that prioritises well-being,
invests in learning and careers and prepares our colleagues for the
future of work. We believe in the importance of listening to ourpeople and seek new and innovative ways to encourage
employees to speak up. At times, individuals may not feel
comfortable speaking up through the usual channels. Our global
whistleblowing channel, HSBC Confidential, is open to colleagues,
past and present, to raise concerns either confidentially oranonymously.

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.

We foster a healthy working environment and expect colleagues
to treat each other with dignity and respect and take action where
we find behaviour that falls short of our expectations. We monitor
how we perform on metrics that we value and benchmark against
history and internal best practice, including employee focus andengagement, employee belief in leadership and our strategy andemployee willingness to speak up. We have a growing range oftools and resources to help colleagues to take ownership of theirdevelopment journey, including training in core skills of leadership,risk management and cyber awareness.

On behalf of the Board

Laura Cha, Chairman
23 February 2021

Social matters
We have a responsibility to invest in the long-term prosperity of
the communities where we operate. We recognise that technology
is developing at a rapid pace and that a range of new and different
skills are now needed to succeed in the workplace. For thisreason, much of our focus is on programmes that develop
employability and financial capability. We also back initiatives that
support responsible business, and contribute to disaster relief
efforts based on need. More details on customer relief
programmes can be found on page 44.

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

Anti-corruption and anti-bribery
We are committed to high standards of ethical behaviour andoperate a zero-tolerance approach to bribery and corruption,
which we consider unethical and contrary to good corporate
governance. Our anti-bribery and corruption policy sets theframework for the Group to comply with anti-bribery andcorruption legislation in all jurisdictions in which we operate, andgives practical effect to global initiatives. The principal risks
addressed by our anti-bribery and corruption policy are the riskthat our employees, associated persons or customers engage inbribery or corruption, or that the Group does so through its
strategic activities.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 20209

Financial Review

Financial Review
Results for 2020
(Unaudited)

Profit before tax for 2020 reported by The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries(together ‘the group’) decreased by HK$46,237m, or 34%, to HK$90,196m.
Consolidated income statement and balance sheet data by global business1(Audited)
Wealth andPersonal
Banking

Commercial
BankingGlobal Banking
and Markets

Corporate
Centre2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

Year ended 31 Dec 2020
Net interest income
Net fee income

59,78322,02634,192
9,102

22,895
10,380(5,357)
162

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

18,927

2,985

21,2882,067

45,267772
58,261
5,056
164,825

450
3,627
66
50,422417—
862
55,842

(15)
(325)
(372)
(3,840)1,624
61,563
5,612
267,249(74,394)(3,700)—183(77,911)90,431

46,722

55,842(3,657)

189,338

77,521
12,910(4,441)
85,990(47,292)
38,698
6
38,70450,075(3,353)(12,145)
34,577(19,391)
15,186—15,18666,453(10,611)(1,128)54,714(24,013)30,701—30,701(4,711)1,054(5)(3,662)(5,132)(8,794)
14,3995,605

189,338—(17,719)
171,619(95,828)
75,791
14,40590,196

1,463,558
3,333,360

1,206,857
1,472,646

994,864
1,104,941

3,402
449

3,668,681
5,911,396

Year ended 31 Dec 2019
Net interest income
Net fee income

73,776
21,47344,6049,950

27,067
9,965(14,544)
117

130,90341,505

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

17,983

2,959

17,862

11,65450,458186
56,222
13,906
183,546

187
4,380
431
62,511

264—
821
55,9791(327)
600(2,499)638
60,27515,758299,537(75,627)(4,529)——(80,156)

107,919

57,982

55,979(2,499)219,381

80,93526,984(2,084)
105,835(46,077)
59,758346
60,104

61,593(3,611)(3,034)54,948(19,442)
35,506—35,506

83,087(27,108)(554)
55,425(23,654)
31,771—
31,771(6,234)
3,735—(2,499)(4,321)(6,820)15,872
9,052

219,381—(5,672)
213,709(93,494)
120,215
16,218
136,433

1,409,169
3,101,820

1,244,027
1,345,176

1,066,254
985,0181,425
410

3,720,875
5,432,424

Gains less losses from financial investments
Net insurance premium income/(expense)
Other operating income
Total operating income
Net insurance claims and benefits paid and movement in liabilities topolicyholders
Net operating income before change in expected credit losses andother credit impairment charges– of which: – external– inter-segment
Change in expected credit losses and other credit impairment charges
Net operating income
Operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Balance sheet data at 31 Dec 2020
Loans and advances to customers (net)Customer accounts

Gains less losses from financial investments
Net insurance premium income/(expense)
Other operating income
Total operating income
Net insurance claims and benefits paid and movement in liabilities topolicyholders
Net operating income before change in expected credit losses and othercredit impairment charges– of which: – external– inter-segment
Change in expected credit losses and other credit impairment charges
Net operating income
Operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Balance sheet data at 31 Dec 2019
Loans and advances to customers (net)Customer accounts

1 Effective from 2020, the reportable segments have been changed to reflect the merging of Retail Banking and Wealth Management and Global
Private Banking to form Wealth and Personal Banking ('WPB'), and the re-allocation of Balance Sheet Management from Corporate Centre to theglobal businesses. Comparatives have been re-presented to conform to the current year's presentation. Further details on the change in reportablesegments are set out in Note 31 'Segmental analysis' on the Consolidated Financial Statements.
2 Includes inter-segment elimination.

10

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Financial Review(Unaudited)

The commentary that follows compares the group's financial
performance for the years ended 2020 with 2019.

Results Commentary
The group reported profit before tax of HK$90,196m, a decrease of
HK$46,237m, or 34%.
Net interest income decreased by HK$19,390m, or 15%.
Excluding the unfavourable foreign exchange impact, net interest
income decreased by HK$18,401m, or 14%, driven by Hong Kong
primarily due to narrower customer deposit spreads and lower
reinvestment yields as market interest rates decreased, partly
offset by balance sheet growth. Net interest income in mainland
China, Singapore and Malaysia also decreased. These were partly
offset by an increase in India, primarily from lower funding costs
on customer deposits, coupled with balance sheet growth.
Net fee income increased by HK$165m. Excluding theunfavourable foreign exchange impact, net fee income increased
by HK$355m, or 1%, driven by Wealth and Personal Banking('WPB') in Hong Kong from an increase in securities brokerage
income due to higher equities turnover, partly offset by lower
income from unit trusts due to lower transaction volumes, coupledwith lower credit cards income due to lower customer spending asa result of Covid-19. Net fee income in Commercial Banking('CMB') decreased, mainly due to lower trade-related andremittance fees.
Net income from financial instruments measured at fairvalue through profit or loss decreased by HK$5,191m, or 10%.
Net income from financial instruments held for trading or
managed on a fair value basis decreased by HK$4,216m, or 12%,mainly in Hong Kong from lower trading income, notably in Global
Foreign Exchange, Securities Financing and Debt Trading and
Financing businesses. Decreases also occurred in Taiwan andJapan from unfavourable revaluation on funding swaps, and in
mainland China mainly from revaluation losses on foreign currencytranslation of balance sheet exposures.
Net income from assets and liabilities of insurance businesses,
including related derivatives, measured at fair value through profit
or loss decreased by HK$1,129m, or 8%, notably in WPB in Hong
Kong, driven by lower revaluation gains on the equity portfolio
held to support insurance and investment contracts due to lessfavourable market conditions in 2020 as compared to 2019. To theextent that these gains are attributable to policyholders, there is anoffsetting movement reported under ‘Net insurance claims andbenefits paid and movement in liabilities to policyholders’.

Net insurance premium income increased by HK$1,288m, or
2%, driven by lower reinsurance arrangements in 2020 in HongKong. Gross insurance premium income (excluding the impact
from reinsurance arrangements) decreased by 10%, mainly inHong Kong driven by lower volumes due to the Covid-19 outbreak.
These were largely offset by a corresponding movement in ‘Net
insurance claims and benefits paid and movement in liabilities topolicyholders’.
Other operating income decreased by HK$10,146m, or 64%,
driven by the less favourable movement in the present value of inforce long-term insurance business ('PVIF'), and from theunfavourable revaluation on investment properties, mainly in HongKong. The movement in PVIF was partly offset by a corresponding
movement in ‘Net insurance claims and benefits paid andmovement in liabilities to policyholders’.
Net insurance claims and benefits paid and movement inliabilities to policyholders decreased by HK$2,245m, or 3%,
mainly driven by lower reinsurance share of policy reserve, lower
investment returns to policyholders due to the less favourable
equity market performance compared with the prior year, coupledwith lower premium income and the less favourable movement in
PVIF.
Change in expected credit losses and other credit risk
provisions increased by HK$12,047m, or 212%, with increases
across all global businesses, mainly from higher specific charges
in CMB, notably in Singapore and Hong Kong, coupled withcharges relating to the global impact of Covid-19 and theunfavourable economic outlook.
Total operating expenses increased by HK$2,334m, or 2%.
Excluding the favourable foreign exchange impact, operating
expenses increased by HK$2,900m, or 3%, reflecting an increasein principally IT-related investments to enhance our digital
capabilities and on regulatory programmes. The increase was also
due to higher amortisation charges on intangible assets due toincreased capitalised costs, coupled with an impairment charge on
intangible assets. These increases were partly offset by lower
employee compensation and benefits, mainly from lower
performance-related pay and lower average headcount, partly
offset by wage inflation across the region. To a lesser extent,
decreases were also noted in marketing and advertising, travel
and entertainment, and professional and consultancy expenses.
Share of profit in associates and joint ventures decreased by
HK$1,813m, or 11%. Excluding the unfavourable foreign exchange
impact, the share of profit in associates and joint ventures
decreased by HK$1,646m, or 10%, mainly from Bank ofCommunications Co., Limited.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202011

Financial Review

Net interest income(Unaudited)
2020

2019

HK$m

HK$m

Net interest income
Average interest-earning assets

111,5136,882,970

130,9036,464,424%%

Net interest spread
Contribution from net free funds
Net interest margin

1.53
0.09
1.62

1.87
0.15
2.02

Net interest income (‘NII’) decreased by HK$19,390m, or 15%.
Excluding the unfavourable foreign exchange impact, net interest
income decreased by HK$18,401m, or 14%, driven by Hong Kong
primarily from narrower customer deposit spreads and lower
reinvestment yields as market interest rates decreased, partly
offset by balance sheet growth. NII in mainland China, Singapore
and Malaysia also decreased. These were partly offset by anincrease in India, primarily from lower funding costs on customer
deposits, coupled with balance sheet growth.
Average interest-earning assets increased by HK$419bn, or
6%, driven by Hong Kong and mainland China, mainly fromincreases in financial investments, reflecting growth in thecommercial surplus as customer deposits increased. To a lesser
extent, increases were also noted in Singapore, Australia andIndia.

Net interest margin ('NIM') dropped by 40 basis points, withdecreases noted across the region, primarily in Hong Kong andmainland China, as market interest rates decreased significantly
compared to the prior year. This resulted in narrower customer
deposit spreads and lower reinvestment yields. The increase incommercial surplus, which was primarily deployed into financial
investments, also contributed to lower yields.
As a result, the NIM at the Bank’s operations in Hong Kongdecreased by 53 basis points, and at Hang Seng Bank, the NIM
decreased by 51 basis points.

Insurance business(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
2020

2019

HK$m

HK$m

Insurance manufacturing operations1
Net interest income
Net fee expense
Net income from financial instruments measured at fair value
Net insurance premium income
Change in present value of in-force long-term insurance business
Other operating income/(expense)

15,654(2,923)
13,812
61,874
3,840(364)

14,634(4,424)
13,63360,577
12,546267

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 operations2Distribution income earned by the group's bank channels

91,893(78,093)
13,800(440)
13,360(2,595)
10,765
6
10,771
15,749
4,092

97,233(80,156)
17,077(113)
16,964(2,095)
14,869346
15,21523,6175,800

1 The results presented for insurance manufacturing operations are shown before elimination of intercompany transactions with the group's noninsurance operations.
2 Annualised new business premium comparatives have been re-presented to include 100% of first year regular premiums and 10% of single
premiums, before reinsurance ceded.

12

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Insurance manufacturing
Profit before tax from the insurance manufacturing operations
decreased by HK$4,444m, or 29%, driven by the less favourable
equity market performance compared to 2019, together withlower new business volumes in 2020 due to the Covid-19
outbreak.
Net interest income 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
increased, mainly from favourable gains from currency swaps,
partly offset by lower revaluation gains on the equity portfolio held
to support insurance and investment contracts. While there wasstrong investment performance within the portfolio in light ofvolatile markets during the year, the overall fair value gains werelower compared to 2019.
Net insurance premium income increased slightly, driven by lower
reinsurance arrangements in 2020 in Hong Kong. Gross insurance
premium income (excluding the impact from reinsurance
arrangements) decreased by 10%, mainly in Hong Kong driven bylower volumes due to the Covid-19 outbreak.
The less favourable movement in the present value of in-force
long-term insurance business was driven by Hong Kong, mainly
from the effect of interest rate changes on the valuation of
liabilities under insurance contracts, lower sales volumes of new
business written during 2020 due to the Covid-19 outbreak, andactuarial assumptions and methodology updates. For further
details, please see Note 15 on the Consolidated Financial
Statements.
To the extent that the above gains are attributable topolicyholders, there is an offsetting movement reported under ‘Net
insurance claims and benefits paid and movement in liabilities topolicyholders'.
Annualised new business premiums (‘ANP’) is a measure of new
insurance premium generation by the business. It is calculated as
the sum of 100% of annualised first year regular premiums and
10% of single premiums, before reinsurance ceded. The decreasein ANP during the year reflected lower volumes in all insurance
manufacturing markets, principally in Hong Kong.

Balance sheet commentary compared with 31
December 2019
(Unaudited)

The consolidated balance sheet at 31 December 2020 is set out in
the Consolidated Financial Statements.
Gross loans and advances to customers decreased by
HK$41bn, or 1%, which included favourable foreign exchangetranslation effects of HK$54bn. Excluding this impact, theunderlying decrease of HK$95bn was driven by a decrease incorporate and commercial lending of HK$112bn, mainly in Hong
Kong and Australia, coupled with decreases in other personal
lending of HK$15bn and credit card advances of HK$9bn, mainlyin Hong Kong. The decrease was partly offset by an increase inresidential mortgages of HK$50bn, mainly in Hong Kong andAustralia.
Overall credit quality remained strong, with total gross impairedloans and advances as a percentage of gross loans and advances
standing at 0.99% at the end of 2020. The change in expectedcredit losses as a percentage of average gross customer advances
was 0.44% for 2020 (2019: 0.15%).

Interest in associates and joint ventures
At 31 December 2020, an impairment review on the group’s
investment in Bank of Communications Co., Ltd (‘BoCom’) was
carried out and it was concluded that the investment was not
impaired based on our value in use calculation (see Note 14 on theConsolidated Financial Statements for further details). As
discussed in that note, in future periods the value in use may
increase or decrease depending on the effect of changes to model
inputs. It is expected that the carrying amount will increase due toretained profits earned by BoCom. At the point where the carrying
amount exceeds the value in use, impairment would berecognised. The group would continue to recognise its share of
BoCom’s profit or loss, but the carrying amount would be reduced
to equal the value in use, with a corresponding reduction inincome. An impairment review would continue to be performed ateach subsequent reporting period, with the carrying amount andincome adjusted accordingly.
Customer deposits rose by HK$479bn, or 9%, to HK$5,911bn.
The advances-to-deposits ratio was 62.1% at the end of the year
(2019: 68.5%).
Shareholders’ equity grew by HK$32bn to HK$912bn at
31 December 2020, mainly reflecting the current year’s profit, netof dividend payments, coupled with an increase in the foreignexchange reserve due to appreciation of various currencies against
the Hong Kong dollar.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

13

Risk

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

Our approach to risk

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

Our risk appetite
We recognise the importance of a strong risk culture, which refers
to our shared attitudes, values and norms that shape behaviours
related to risk awareness, risk taking and risk management. All our
people are responsible for the management of risk, with theultimate accountability residing with the Board.
We seek to build our business for the long term by balancing
social, environmental and economic considerations in thedecisions we make. Our strategic priorities are underpinned by ourendeavour to operate in a sustainable way. This helps us to carryout our social responsibility and manage the risk profile of thebusiness. We are committed to managing and mitigating climaterelated risks, both physical and transition, and will continue toincorporate this into how we manage and oversee risks internallyand 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 a conservative risk
appetite and strong risk management capability.
• We aim to deliver sustainable earnings and consistent returns
for shareholders.

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

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

Risk Management
We recognise that the primary role of risk management is toprotect our business, customers, colleagues, shareholders and thecommunities that we serve, while ensuring we are able to support
our strategy and provide sustainable growth.
We are focused upon the implementation of our business strategy,
as part of which we are carrying out a major change programme.
It is critical that we ensure that as we implement changes, we use
active risk management to manage the execution risks.
We will also perform periodic risk assessments, including against
strategies to ensure retention of key personnel for our continued
safe operation.
We use a comprehensive risk management framework across theorganisation and across all risk types, underpinned by the group's
culture and values. This outlines the key principles, policies andpractices that we employ in managing material risks, bothfinancial and non-financial.
The framework fosters continual monitoring, promotes risk
awareness and encourages sound operational and strategic
decision making. It also ensures a consistent approach toidentifying, assessing, managing and reporting the risks we accept
and incur in our activities.

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

• an alignment with our strategy, purpose, values and customer
needs;• trends highlighted in other group risk reports;

14

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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

Non-executive risk governance

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

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

Three lines of defence model

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

Risk governance

Roles and
responsibilities

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

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

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

Policies and procedures

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

Control activities
Internal controls

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

Systems and infrastructure

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

Global business/Siterisk management
meetings

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

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

15

Risk

Our responsibilities

Stress testing and recovery planning

All our people are responsible for identifying and managing risk
within the scope of their role as part of the three lines of defence
model.

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 Internal Audit function, which
provides independent assurance that our risk management
approach and processes are designed and operating effectively.

Risk function
The group’s Risk function, headed by the group’s Chief Risk
Officer, is responsible for the group’s risk management
framework. This responsibility includes establishing andmonitoring of risk profiles, and forward-looking risk identificationand management. The group’s Risk function is made up of subfunctions covering all risks to our business and forms part of thesecond line of defence. It is independent from the global
businesses, including sales and trading functions, to provide
challenge, appropriate oversight and balance in risk/return
decisions.
Responsibility for minimising both financial and non-financial risklies with our people. They are required to manage the risks of thebusiness and operational activities for which they are responsible.
We maintain adequate oversight of our risks through our various
specialist risk stewards as well as the collective accountability heldby our Chief Risk Officers.
Non-financial risk is the risk to achieving our strategy or objectives
as a result of failed internal processes, people and systems, orfrom external events. Sound non-financial risk management iscentral to achieving good outcomes for our customers.
During 2020 we continued to strengthen the control environmentand our approach to the management of non-financial risk, as
broadly set out in our risk management framework. The
management of non-financial risk focuses governance and risk
appetite, and provides a single view of the non-financial risks thatmatter the most and the associated controls. It incorporates a risk
management system designed to enable the active managementof non-financial risk. Our ongoing focus is on simplifying ourapproach to non-financial risk management, while driving more
effective oversight and better end-to-end identification andmanagement of non-financial risks. This is overseen by the
Operational and Resilience Risk function, headed by the group
Head of Operational and Resilience Risk.

16

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

Internal stress tests
Our internal capital assessment uses a range of stress scenariosthat explore risks identified by management. They include
potential adverse macroeconomic, geopolitical and operationalrisk events, as well as other potential events that are specific to
the group.
The selection of 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, should be absorbed through capital and liquidity. Thisin turn informs decisions about preferred capital and liquidity
levels and allocations.
In addition to the group-wide stress testing scenarios, each major
subsidiary and branch performs regular macroeconomic andevent-driven scenario analyses specific to its region. They also
participate, as required, in the regulatory stress testing
programmes of the jurisdictions in which they operate, and thestress tests of the HKMA. Global functions and businesses also
perform bespoke stress testing to inform their assessment of risks
in 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 an integral framework in thesafeguarding of the group’s financial stability. Together with stresstesting, it helps us understand the outcomes of adverse businessor economic conditions and the identification of mitigating
actions.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Key developments in 2020
In 2020, it was announced that Edward Jenkins was stepping
down from his role of the group's Chief Risk Officer. Mark
McKeown, who is the Global Chief Corporate Credit Officer andHead of Wholesale Credit and Market Risk, has been appointed as
the group's Chief Risk Officer on an interim basis with effect from
1 July 2020.

An ‘emerging risk’ is a thematic issue with large unknown
components that may form and crystallise beyond a one year time
horizon. If it were to materialise, it could have a material effect on
the group’s long-term strategy, profitability and/or reputation.
Existing mitigation action plans are likely to be minimal, reflecting
the uncertain nature of these risks at this stage. Some high-level
analysis and/or stress testing may have been carried out to assess
the potential impact.

During the year, we have actively managed the risks resulting
from the Covid-19 outbreak and its impacts on our customers andoperations, as well as other key risks described in this section.

Our current top and emerging risks are as follows:In addition, we enhanced our risk management in the following
areas:

Geopolitical and macroeconomic risks• In January 2020, we simplified our approach and articulation ofrisk management through the combination of our enterpriserisk management framework and our operational risk
management framework.
• The global model risk policy and associated standards wererevised to improve how we manage model risk and meetenhanced external expectations.
• We continued to focus on simplifying our approach to nonfinancial risk management. We are driving more effective
oversight and better end-to-end identification and managementof non-financial risks.
• In line with the increasing threat landscape that the industry
faces within non-financial risk, we formed a new Operational
and Resilience Risk combined sub-function in May 2020. The
sub-function provides robust first line of defence oversight andrisk steward oversight, supported by clear plans and evidenced
by effective and timely independent challenge. The subfunction helps to ensure that the first line of defence arefocused firmly on priority tasks. By bringing the two teams
together, we expect to benefit from improved stewardship,
better risk management capabilities and better outcomes forour customers.
• In November 2020, the second line of defence for the Treasury
function within Global Risk was re-named Treasury Risk
Management ('TRM'). TRM will oversee Treasury activities
across the group including capital risk, liquidity and funding
risk and Interest Risk Risk in the Banking Book ('IRRBB').
Through these changes we expect to improve effective
management of capital, liquidity, funding and balance sheet
utilisation across all parts of the group.
• We continue to support the business and our customers
throughout the global pandemic, while continuing to manage
financial crime risk. We continued to invest in both advanced
analytics and artificial intelligence, which remain key
components of our next generation of tools to fight financial
crime. From 2021, we will integrate our RMM and Financial
Crime Risk Management Meetings to ensure a holistic view of
all risks.

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 regions andglobal businesses, for any risks that may require global escalation,
updating our top and emerging risks as necessary.
We define a ‘top risk’ as a thematic issue that may form andcrystallise within one year, and which has the potential tomaterially affect the group’s financial results, reputation orbusiness model. It may arise across any combination of risk types,
countries or global businesses. The impact may be wellunderstood by senior management and some mitigating actions
may already be in place.

Externally driven
Our operations and portfolios are exposed to risks associated with
political instability, civil unrest and military conflict, which could
lead to disruption of our operations, physical risk to our staff and/or physical damage to our assets.
Global tensions over trade, technology and ideology can manifest
themselves in divergent regulatory, standards and complianceregimes, presenting long-term strategic challenges for
multinational businesses.
The Covid-19 outbreak dominated the political and economic
landscape through much of 2020. The twin shocks of a publichealth emergency and the resultant economic fallout have been
felt around the world, and hit both advanced and emerging
markets. The closure of borders threatened medical and foodsupplies for many markets, leading to countries and territories
focusing efforts on building resilient supply chains closer to home.
Covid-19 and the corresponding vaccine rollout will likely
dominate the political and economic agenda for most of 2021.
Tensions could be raised as countries compete for access for thearray of vaccines under development, approved or pending
approval, while the potential differences of protection offered, thespeed and scale with which they can be manufactured, and the
take-up rates of vaccines will impact the speed of economic
recovery.
The Covid-19 outbreak also heightened existing US-China
tensions. Tensions span a wide range of issues, including trade,finance, military, technology and human rights. The Covid-19
outbreak has accelerated US and Chinese efforts to reduce mutual
dependence in strategic industries such as sensitive technology,
pharmaceuticals and precursor chemicals.
A range of tensions in US-China relations could have potential
ramifications for the group and its customers. These tensions
could include divisions over Hong Kong, US funding of and tradingwith strategic Chinese industries, claims of human rights
violations, and others. Some of these tensions have manifested
themselves through actions taken by the governments of theUnited States and China in 2020 and early 2021. These tensions
may affect the group as a result of the impact of sanctions(including sanctions that impact the group’s clients/customers), as
well as regulatory, reputational and market risks.
The United States has imposed a range of sanctions and trade
restrictions on Chinese persons and companies, focusing on
entities the United States believes are involved in human rights
violations, information technology and communications
equipment and services, and military activities, among others. In
response, China has announced a number of sanctions and trade
restrictions that target or provide authority to target foreign
officials and companies, including those in the US. Certain
measures are of particular relevance.
The US Hong Kong Autonomy Act provides 'secondary sanctions'authority that allows for the imposition of US sanctions against
non-US financial institutions found to be engaged in significant
transactions with certain Chinese individuals and entities subject
to US sanctions as a result of a US determination that these
individuals or entities engaged in activities undermining Hong
Kong’s autonomy. The United States has also imposed restrictions
on US persons’ ability to engage in transactions in, or relating to,
publicly traded securities of a number of prominent Chinese

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

17

Risk

companies. China has subsequently adopted regulations providing
a framework for specific prohibitions against compliance with, andprivate rights of action for damages resulting from, measures thatthe government determines have an unjustified extraterritorial
application that impairs Chinese sovereignty.
No penalties have yet been imposed against financial institutions
under any of these measures, and their scope and application
remain uncertain. These and any future measures that may betaken by the US and China may affect the group, its customers,
and the markets in which we operate.
While the inauguration of US President Biden may lead to a moreorderly conduct of relations between the US and China in the
future, long-term differences between the two nations remain,which could affect sentiment and restrict global economic
activities. It remains unclear the extent to which the newadministration will impact geopolitical tensions.
While UK-China relations have historically been shaped by strong
trade and investment, there are also emerging challenges.
Following the implementation of the Hong Kong National Security
Law, the UK offered residency rights and a path to citizenship toeligible British National (Overseas) passport holders in Hong Kong.
In addition, both the UK and Hong Kong governments havesuspended their extradition treaties with each other.
As geopolitical tensions rise, the 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 reputational
and political risks for the Group. We continue to seek to monitor,
assess and meet the legal requirements introduced by all
jurisdictions that we operate in, and maintain an open dialogue
with our regulators on the impact of legal and regulatory
obligations on our business and customers.
China's expanding data privacy and cybersecurity laws could pose
potential challenges to intra-group data sharing, especially within
the Greater Bay Area ('GBA'). China's draft Personal Information
Protection Law and Data Security Law, if passed in their current
forms, could increase financial institutions' compliance burdens in
respect of cross-border transfers of personal information. In Hong
Kong, there is also an increasing focus by regulators on the use of
big data and artificial intelligence. Use of personal data throughdigital platforms for GBA initiatives may need to take into accountthese evolving data privacy and cybersecurity obligations.
Emerging and frontier markets have suffered particularly heavily
from the Covid-19 outbreak, in light of healthcare shortcomings,
widespread labour informality, exposure to commodities
production and often weak policy frameworks and buffers.
Multilateral institutions have mobilised support for the weaker
frontier markets, with the World Bank and G-20 marshalling efforts
to implement a standstill on debt to public sector institutions. The
International Monetary Fund has also, to date, made circa
US$106bn in emergency funds available to over 80 countries.
However, negotiations on debt to the private sector will likely
prove more difficult, and may result in sovereign debt
restructuring and defaults for several countries. Most developed
markets are expected to recover from the crisis, asmacroeconomic policies remain highly accommodative. However,permanent business closures and job losses in some sectors will
likely prevent several developed markets from achieving pre-crisis
growth rates or activity levels in the near term.

18

These countries and territories should be able to shoulder thehigher public deficits and debts necessary to offset private sector
weaknesses, given the continuing low cost of servicing public
debt. However, a group of weaker developed markets, including
some members of the EU, have entered the Covid-19 crisis on
weak economic and fiscal footing and suffered high healthcare
and economic costs. Although substantial joint EU monetary andfiscal measures should help support recoveries and keep debt
servicing costs down at least through 2021, there are concernsthat permanently higher debt burdens will eventually lead toinvestors questioning their sustainability. Renewed government
restrictions in response to new waves of infections will put furtherpressure on these economies.
The contraction in the global economy during 2020 has hadvarying effects on our customers, with many of them experiencing
financial difficulties. This has resulted in an increase in expectedcredit losses (‘ECL’) and risk-weighted assets (‘RWAs’). For further
details on customer relief programmes, see page 44. For further
details on RWAs, see page 50.
Central banks have reduced interest rates in most financial
markets due to the adverse impact on the timelines and the pathfor economic recovery from the Covid-19 outbreak, which has inturn increased the likelihood of negative interest rates. This raises
a number of risks and concerns, such as the readiness of oursystems and processes to accommodate zero or negative rates,
the resulting impacts on customers, regulatory constraints and thefinancial implications given the significant impact that prolonged
low interest rates have had, and may continue to have, on our net
interest income. For some products, we have floored deposit rates
at zero or made decisions not to charge negative rates. This,
alongside loans repriced at lower rates, will result in ourcommercial margins being compressed, which is expected to bereflected in our profitability. The pricing of this risk will need to becarefully considered. These factors may challenge the long-term
profitability of the banking sector, including HSBC, and will beconsidered as part of the group’s transformation programme.

Mitigating actions• We closely monitor economic developments in key markets
and sectors and undertake scenario analysis. This helps enable
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 undertake regular reviews of key portfolios to help ensurethat individual customer or portfolio risks are understood andour ability to manage the level of facilities offered through any
downturn is appropriate.
• We continually monitor the geopolitical outlook, in particular incountries where we have material exposures and/or asignificant physical presence. We have also establisheddedicated forums to monitor geopolitical developments.
• We have taken steps to enhance physical security in thosegeographical areas deemed to be at high risk from terrorism
and military conflicts.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Climate-related risks

IBOR transition

Climate change can have an impact across HSBC’s risk taxonomy
through both transition and physical channels. Transition risk canarise from the move to a low-carbon economy, such as throughpolicy, regulatory and technological changes. Physical risk canarise through increasing severity and/or frequency of severe
weather or other climatic events, such as rising sea levels andflooding.

Interbank offered rates (‘Ibors’) are used to set interest rates onhundreds of trillions of US dollars of different types of financialtransactions and are used extensively for valuation purposes, risk
measurement and performance benchmarking.

These have the potential to cause both idiosyncratic and systemicrisks, resulting in potential financial and non-financial impacts for
HSBC. Financial impacts could materialise if transition andphysical risks impact the ability of borrowers to repay their loans.
Non-financial impacts could materialise if our own assets oroperations are impacted by extreme weather or chronic changes
in weather patterns, or as a result of business decisions to achieve
our climate ambition.
Climate risks have also increased over 2020 as a result of the paceand volume of policy and regulatory changes. This impacts theBank, both directly and indirectly, through impacts on ourcustomers.

Mitigating actions• We are in the process of establishing a governance framework
to help ensure that risks associated with climate change are
escalated to and discussed at the Board, as appropriate, in atimely manner. The Board will be presented with a risk profile
report, which includes key issues and common themes
identified across the enterprise risk reports, as required. The
group Chief Risk Officer will provide verbal or written updates
on climate risk to the Board and group Risk Committee whereappropriate.
• We are in the process of incorporating climate-related risk, both
physical and transition, into how we manage and oversee risks.
We have a Board-approved RAS that contains a qualitative
statement on our approach to climate risk, which we intend tofurther enhance in 2021.
• We continue to enhance our approach to climate-related risks,and develop and embed how we measure, monitor andmanage it. An internal climate risk working group provides
oversight by seeking to develop policy and limit frameworks toachieve desired portfolios over time, and protect the Group
from climate-related risks. We will establish a transition risk
framework to gain a better understanding of our exposure to
the highest transition risk sectors.
• We implement sustainability risk policies and focus the policies
on sensitive sectors that may have a high adverse impact on
people or on the environment and in which we have asignificant number of customers. These include sectors withpotentially high-carbon impacts.
• We are developing a framework for climate stress test to
inform the development of our approach to climate risk
management, including the continuous enhancement of our
RAS.
• We continue to engage with our customers, investors andregulators proactively when compiling and disclosing theinformation needed to manage climate risks. We also engage
with initiatives actively, including the Climate Financial Risk
Forum, Equator Principles, Taskforce for Climate-related
Financial Disclosures, and Carbon Disclosure Project to drive
best practice for climate risk management.

The UK’s Financial Conduct Authority ('FCA') announced in July
2017 that it will no longer persuade or require banks to submit
rates for the London interbank offered rate (‘Libor’) after 2021. In
addition, the 2016 EU Benchmark Regulation, which defines theminimum reliability standards for interest rate benchmarks, hasresulted in other regulatory bodies’ reassessment of benchmarks.
As a result, national working groups are actively discussing themechanisms for an orderly transition of the five Libors currencies,
four Asia-Pacific benchmarks that reference US dollar Libor, theEuro Overnight Index Average (‘Eonia’), and the Singapore
interbank offered rate (‘Sibor’) to their chosen replacement rates.
As our Ibor transition programme progresses into the execution
phase, resilience and operational risks, are heightened due to an
expected increase in the number of new near risk-free rate ('RFR')
products being rolled out, compressed timelines for transition of
legacy Ibor contracts and the extensive systems and processchanges required to facilitate both new products and transition.
This is being exacerbated by the current interest rate environment
where low Libor rates, in comparison with replacement RFR, could
affect decisions to transition contracts early, further compressing
transition timelines. Regulatory compliance, legal and conduct
risks may also increase as a result of both the continued sale ofproducts referencing Ibors, as well as the sale of new products
referencing RFRs due to the lack of established market
conventions.
Financial risks resulting from the discontinuation of Ibors and thedevelopment of RFR market liquidity will also affect the groupthroughout transition. The differences in Ibor and RFR interest
rates will create a basis risk that we need to actively manage
through appropriate financial hedging. As contracts aretransitioned from Ibors to RFRs, there is a risk that the associatedfinancial hedges will not be aligned.
The continued orderly transition from Ibors continues to be theprogramme’s key objective throughout 2021 and can be broadlygrouped into two streams of work: development of alternative rate
product capabilities, and the transition of legacy contracts.

Development of alternative rate product capabilities
All global businesses have actively developed and implemented
system and operational capabilities for alternative rates products
during 2020 in key sites, with several key transactions for RFR
products undertaken within Wholesale and Wealth and Private
Banking business areas. The offering of RFR products is expected
to be expanded, with further product releases for Sterling
Overnight Index Average (‘Sonia’) and Secured Overnight
Financing Rate (‘Sofr’) in the first half of 2021, in addition to other
Libor currencies through 2021.
These developments have enabled the group to cease sellingcertain Ibor-related products. Notably, Libor-linked loan products
have been demised for Business Banking and Mid-Market
enterprise segments in Malaysia and Indonesia, while low usage
Libor-linked products have also been demised across thesesegments in Hong Kong, mainland China and Singapore where
there are suitable alternatives.
While Ibor sales do continue for a number of product lines, Ibor
exposures that have post-2021 maturities are reducing, aided bymarket compression of Ibor trades and transacting new activities
in alternative RFR products as market liquidity builds.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

19

Risk

Transition legacy contracts
In addition to offering new alternative rate based products, thedevelopment of new product capabilities will also help facilitates
the transition of legacy Ibor products. HSBC has begun to engage
clients to determine their ability to transition in line with thereadiness of the alternative rate product availability. The Covid-19
outbreak and the interest rate environment may have affected theability of clients to transition early and has resulted in compressed
timelines for Ibor transition. However, this may be mitigated inpart by the recent announcement by InterContinental Exchange
Benchmark Administration ('IBA'), the Libor Benchmark
Administrator, to consult on extending the publication of most US
dollar Libor setting (excluding one week and two month tenors) toenable the legacy US dollar book transition by 30 June 2023.
Despite the proposed extension, regulatory and industry guidancehas been clear that market participants should cease writing new
US dollar Libor contracts as soon as is practicable, and in any
event, by the end of 2021. While the extended deadline will resultin additional US dollar Libor transactions maturing before
cessation, not all of them will, hence it is possible that otherproposed solutions, including legislative relief, will still be needed.
For the derivatives exposures, the adoption of the ISDA protocol,
which comes into effect in the first quarter of 2021, and thesuccessful changes made by clearing house to discountderivatives using in Sofr and euro short-term rate ('€str') reduce
the risk of a disorderly transition of the derivative market.
With respect to the transition of HSBC’s Libor bond issuance, anassessment of the debt issued and the ability to transition basedon solicitation rights has been undertaken with plans to
implement, as appropriate, through 2021. Additionally, Iborissuance has been reduced by new debt issuance in Sonia andSofr through 2020.
For the group’s holdings of Libor bonds, and of those bonds where
HSBC is the payment agent, there remains a dependence on
engagement of third-party market participants in the transition
process of their issued debt.
For the group’s loan book, our global businesses have developed
commercial strategies that include active client engagement andcommunication, providing detailed information on RFR products toassist our clients to transition to a suitable alternative rate or
replacement RFR product before Ibor cessation.

Mitigating actions• We have put in place a global Ibor transition programme tofacilitate an orderly transition to replacement rates for ourbusiness and our clients, which is overseen globally by theGroup Chief Risk Officer, and regionally by the group's Chief
Risk Officer.

• We have widened the scope of the global Ibor transition
programme to include additional interest rate benchmarks,
where plans are in place to demise those benchmarks in thenear future.
• We have and continue to carry out extensive training,communication and client engagement to facilitate appropriate
selection of products, with dedicated teams in place to support
the development of, and transition to, alternative rate andreplacement RFR products.
• We are implementing IT and operational change to enable alonger transition window.
• We have met 2020 regulatory expectations for implementing
relevant contractual language changes for loan products andtransitioning to RFR discounting by clearing houses forderivatives.
• We have actively compressed derivative contracts and aretargeting regulatory set and industry agreed milestones for the
cessation of new standard Libor trades (sterling Libor in thefirst quarter of 2021, other Libors in the second quarter of 2021)
leading to a reduction in the Group’s Ibor portfolio through2020.
• We have assessed, monitored and are dynamically managing
risks, and implemented specific mitigating controls as required.
• We continue to engage with regulatory and industry bodies
actively to mitigate risks relating to hedge accounting changes,
multiple loan/bond conventions, and those contracts that haveno appropriate replacements or no likelihood of renegotiation totransition (‘tough legacy’).

Financial instruments impacted by IBOR reform(Audited)

Amendments to HKFRSs issued in October 2020 (Interest Rate
Benchmark Reform Phase 2) represents the second phase of the
project on the effects of interest rate benchmark reform,
addressing issues affecting financial statements when changes are
made to contractual cash flows and hedging relationships as aresult of reform.
Under these amendments, changes made to financial instruments
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, but instead 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.
These amendments apply from 1 January 2021 with early adoption
permitted. The group has adopted the amendments from 1
January 2020.

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

At 31 Dec 2020
Non-derivative financial assets3
Non-derivative financial liabilities3
Derivative notional contract amount

USD Libor

JPY Libor

SIBOR1

HK$m

HK$m

HK$m

Others2
HK$m

253,239
119,269
6,252,168

2,688
12,192
3,281,539

63,100—299

49,5214,125
1,466,484

1 In December 2020, the Monetary Authority of Singapore announced the discontinuation of the SIBOR in phases, with eventual transition to SORA.
2 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (GBP Libor, EUR Libor,
CHF Libor, EONIA, SOR and THBFIX).
3 Gross carrying amount excluding allowances for expected credit losses.

20

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

The amounts in the above table relate to the group's main operating entities1 and provide an indication of the extent of the group's
exposure to the Ibor benchmarks which are due to be replaced. Amounts are in respect of financial instruments that:• contractually reference an interest rate benchmark that is planned
to transition to an alternative benchmark;• have a contractual maturity date after 31 December 2021, the date by which Libor is expected to cease; and• are recognised on the group's consolidated balance sheet.
1 Entities where we have material exposures impacted by Ibor reform in countries/territories comprising of Hong Kong, Singapore, Thailand,
Australia and Japan.

The administrator of Libor, IBA, has announced a proposal toextend the publication date of most US dollar Libor tenors until 30
June 2023. Publication of one-week and two-month tenors willcease after 31 December 2021. This proposal, if endorsed, would
reduce the amounts presented in the above table as somefinancial instruments included will reach their contractual maturity
date prior to 30 June 2023.

Financial crime risk environment(Unaudited)

Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. Financial crime threats continue to evolve, often in tandemwith increased geopolitical developments, posing challenges forfinancial institutions to keep abreast of developments and manage
conflicting laws. The global economic slowdown as a result of theCovid-19 outbreak and the resulting rapid deployment ofgovernment relief measures to support individuals and businesses,
have increased the risk of fraud. Developments around virtual
currencies, stablecoins and central bank digital currencies havecontinued, with the industry’s financial crime risk assessment andmanagement frameworks in the early stages of development. The
evolving regulatory environment continues to present an execution
challenge. We continue to see increasing challenges presented bynational data privacy requirements in a global organisation, which
may affect our ability to manage financial crime risks effectively.
There has also been an increase in media and public scrutiny on
how financial crime is managed within financial institutions.
In December 2012, among other agreements, HSBC Holdings plc(‘HSBC Holdings’) agreed to an undertaking with the UK's FCA,
which was replaced by a Direction issued by the FCA in 2013, andconsented to a cease-and-desist order with the US Federal
Reserve Board (‘FRB’), both of which contained certain forwardlooking anti-money laundering (‘AML’) and sanctions-related
obligations. HSBC also agreed to retain an independent
compliance monitor (who is, for FCA purposes, a ‘Skilled Person’
under section 166 of the Financial Services and Markets Act and,for FRB purposes, an ‘Independent Consultant’) to produce
periodic assessments of the Group’s AML and sanctions
compliance programme (the ‘Skilled Person/Independent
Consultant’). Reflective of HSBC’s significant progress instrengthening financial crime risk management capabilities, ourengagement with the Skilled Person was terminated in the firstquarter of 2020 and in the second quarter of 2020, and a new
Skilled Person with a narrower mandate was appointed to assess
the remaining areas that require further work in order for us totransition fully to business-as-usual financial crime risk
management. Thereafter, in 2020, the FCA issued a new, more
tailored Direction that replaces the previous Direction issued in
2013. The Independent Consultant will continue to carry out anannual Office of Foreign Assets Control ('OFAC') compliancereview at the FRB’s discretion. The role of the Skilled Person/
Independent Consultant is discussed on page 58.

Mitigating actions• We continue to enhance our financial crime risk management
capabilities. We are investing in next generation capabilities tofight financial crime through the application of advanced
analytics and artificial intelligence.
• We continue to monitor geopolitical developments closely andthe impacts on our financial crime controls.
• We are strengthening and investing in our fraud controls, tointroduce next generation anti-fraud capabilities to protect bothcustomers and the Bank.
• We have developed procedures and controls to manage therisks associated with direct and indirect exposure to virtual
currencies, and we continue to monitor external developments.
• We continue to educate our staff on emerging digitallandscapes and associated risks.
• We continue to monitor external developments on stablecoinsand central bank digital currencies, engaging with central
banks and regulators on financial crime risk management.
• We continue to work with jurisdictions and relevantinternational bodies to address data privacy challenges throughinternational standards, guidance, and legislation to help enableeffective management of financial crime risk.
• We continue to take steps designed to ensure that the reforms
we have put in place are both effective and sustainable over thelong term.
• We continue to work closely with our regulators and engage in
Public Private Partnerships, playing an active role in shaping
the industry’s financial crime controls for the future.

Regulatory developments including conduct, withadverse impact on business model and profitability(Unaudited)

Financial service providers continue to face stringent regulatory
and supervisory requirements, particularly in the areas of capitaland liquidity management, conduct of business, financial crime,
internal control frameworks, the use of models and the integrity offinancial services delivery. The competitive landscape in which thegroup operates may be significantly altered by future regulatorychanges and government intervention. Regulatory changes,
including those driven by geopolitical issues such as US-China
tensions may affect the activities of the group as a whole, or ofsome or all of its principal subsidiaries. For further details, seepages 17-18.

Mitigating actions• We are engaged, wherever possible, with governments andregulators in the countries and territories in which we operate,
to help ensure that new requirements are considered properly
and can be implemented effectively. In particular, we haveengaged proactively with regulators and governments globally
regarding the policy changes issued in response to Covid-19 tohelp our customers and contribute to an economic recovery.
• We have had regular meetings with all relevant authorities todiscuss strategic contingency plans, including those arisingfrom geopolitical issues.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

21

Risk

Cyber threat and unauthorised access to systems(Unaudited)

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

Mitigating actions• We continually evaluate threat levels for the most prevalentattack types and their potential outcomes. To further protect
the group and our customers and help ensure the safe
expansion of our global business lines, we strengthen ourcontrols to reduce the likelihood and impact of advanced
malware, data leakage, infiltration of payment systems anddenial of service attacks.
• We continued 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 our people
remain aware of cybersecurity issues and know how to reportincidents.
• We report and review cyber risk and control effectivenessquarterly at executive and non-executive Board level. We also
report it across the global businesses, functions and regions to
help ensure appropriate visibility and governance of the risk
and mitigating actions.
• We participate globally in several industry bodies and working
groups to share information about tactics employed by cybercrime groups and to collaborate in fighting, detecting andpreventing cyber-attacks on financial organisations.

Internally driven(Unaudited)

Data management
We use a large number of systems and applications to support key
business processes and operations. As a result, we often need toreconcile multiple data sources, including customer data sources,
to reduce the risk of error. Along with other organisations, we alsoneed to meet external/regulatory obligations such as the General
Data Protection Regulation (‘GDPR’) and Basel III.

Mitigating actions• We are improving data quality across a large number ofsystems. Our data management, aggregation and oversightcontinues to strengthen and enhance the effectiveness ofinternal systems and processes. We are implementing data
controls for end-to-end critical processes to improve our data
capture at the point of entry and throughout the data lifecycle.
• Through the Global Data Management Framework, we are
expanding and enhancing our data governance processes tohelp monitor the quality of critical customer, product, reference
and transaction data proactively and resolve associated data
issues in a timely manner.

22• We continue to modernise our data and analytics infrastructure
through investments in advanced capabilities in Cloud,visualisation, machine learning and artificial intelligenceplatforms.
• We help protect customer data via our global data privacy
framework programme which establishes data privacy
practices, design principles and guidelines that enable us todemonstrate compliance with data privacy laws andregulations in the jurisdictions in which we operate.
• To help our employees keep abreast of data privacy laws andregulations we hold data privacy awareness training
highlighting our commitment to protect personal data for ourcustomers, employees and stakeholders.

IT systems infrastructure and resilience
We are committed to investing in the reliability and resilience of
our IT systems and critical services. We do so to protect ourcustomers and ensure they are not impacted by disruption toservices, which could result in reputational and regulatory
damage.

Mitigating actions• We are continuing to invest in transforming how software
solutions are developed, delivered and maintained, with aparticular focus on providing high-quality, stable and secureservices. We concentrate on improving system resilience andservice continuity testing. We have enhanced the security
features of our software development life cycle and improved
our testing processes and tools.
• We upgraded many of our IT systems, simplifying our service
provision and replacing older IT infrastructure and applications.
These enhancements led to continued global improvements inservice availability during 2020 for both our customers andemployees.

Risks arising from the receipt of services from third
parties
We use third parties for the provision of a range of services, incommon with other financial service providers. Risks arising fromthe use of third-party service providers may be less transparent
and therefore more challenging to manage or influence. It is
critical that we ensure that we have appropriate risk management
policies, processes and practices. These should include adequate
control over the selection, governance and oversight of third
parties, particularly for key processes and controls that could
affect operational resilience. Any deficiency in our management ofrisks arising from the use of third parties could affect our ability tomeet strategic, regulatory or client expectations.

Mitigating actions• We continued to embed our delivery model in the first line ofdefence through a dedicated team. We have deployedprocesses, controls and technology to assess third-party
service providers against key criteria and associated control
monitoring, testing and assurance.
• A dedicated oversight forum in the second line of defence
monitors the embedding of policy requirements andperformance against risk appetite.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Risks associated with workforce capability, capacityand environmental factors with potential impact on
growthOur success in delivering our strategic priorities and managing theregulatory environment proactively depends on the development
and retention of our leadership and high-performing employees.
The ability to continue to attract, develop and retain competent
individuals in an employment market impacted by the Covid-19
outbreak proves challenging. Changed working arrangements,
local Covid-19 restrictions and health concerns during the
pandemic also impact employee mental health and well-being.

Mitigating actions• We have put in place measures to help support our people sothey are able to work safely during the Covid-19 outbreak.
While the approach to workplace recovery around the world isconsistent, the measures we take in different locations are
specific to their environment.
• We promote a diverse and inclusive workforce and provide
active support across a wide range of health and well-being
activities. We continue to build our speak-up culture though
active campaigns.
• We monitor people risks that could arise due to organisational
restructuring, helping to ensure we manage redundancies
sensitively and support impacted employees.
• We launched the Future Skills curriculum through HSBC
University to help provide the critical skills that will enable
employees and HSBC to be successful in the future.
• We continue to develop succession plans for key management
roles, with actions agreed and reviewed on a regular basis by
the group Executive Committee.
• We have robust plans in place, driven by senior management,
to mitigate the effect of external factors that may impact ouremployment practices. Political and regulatory challenges areclosely monitored to minimise the impact on the attraction andretention of talent and key performers.

Change execution risk
In February 2020, HSBC announced the plans to restructure theGroup's business, reallocate freed-up capital into higher-growthand higher-return businesses and markets, and to simplify ourorganisation and reduce costs. Our success in delivering ourstrategic priorities and continuing to address regulatory change
and other top and emerging risks is dependent on the effective
and safe delivery of change across the Group.

Mitigating actions• We have established a Global Transformation Programme todeliver the commitments made in February 2020. The
Programme is overseen globally by members of the Group
Executive Committee, and regionally by the members of thegroup's Executive Committee. Related execution risks acrossthe initiatives, including their sequencing and prioritisation, arebeing monitored and managed. Many of the initiatives impact
our staff and require continued investment in technology.
• We continue to work to strengthen our change management
practices to deliver sustainable change. This includes increased
adoption across the Group of Agile ways of working to deliverchange.

Areas of special interest(Unaudited)

During 2020, 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
particular focus on Covid-19.

Risks related to Covid-19
The Covid-19 outbreak and its effect on the global economy have
impacted our customers and our performance, and the future
effects of the outbreak remain uncertain. The outbreaknecessitated governments to respond at unprecedented levels toprotect public health, local economies and livelihoods. It has
affected regions at different times and varying degrees as it hasdeveloped. The varying government measures in response haveadded challenges, given the rapid pace of change and significant
operational demands. The speed at which countries and territories
will be able to return to pre-Covid-19 economic levels will vary
based on the levels of infection, local political decisions andaccess and ability to rollout vaccines. There remains a risk ofsubsequent waves of infection, as evidenced by the new, moretransmissible variants of the virus. Renewed outbreaks emphasise
the ongoing threat of Covid-19 even in countries and territories
that have recorded lower than average cases so far.
Government restrictions imposed around the world to limit the
spread of Covid-19 resulted in a sharp contraction in global
economic activity during 2020. At the same time, governments
also took steps designed to soften the extent of the damage toinvestment, trade and labour markets. Our Central scenario used
to calculate impairment assumes that economic activity will
gradually recover over the course of 2021. In this scenario,
recovery will be supported by a successful rollout of vaccination
programmes across our key markets which, coupled with effective
non-pharmacological measures to contain the virus - such as‘track and trace’ systems and restrictions to mobility - will lead toa decline in infections across over the course of the year.
Governments and central banks are expected to continue to work
together, across many of our key markets, to ensure thathouseholds and firms receive an appropriate level of financial
support until restrictions on economic activity and mobility can bematerially eased. Such support is intended to ensure that labourand housing markets do not experience abrupt, negative
corrections and is also intended to limit the extent of long term
structural damage to economies. There is a high degree of
uncertainty associated with economic forecasts in the current
environment and there are significant risks to our Central scenario.
The degree of uncertainty varies by market, driven by country
specific trends in the evolution of the pandemic and associatedpolicy responses. As a result, our Central scenario for impairment
has not been assigned an equal likelihood of occurrence acrossour key markets. For further details of our Central and otherscenarios see ‘Measurement uncertainty and sensitivity analysis’on page 33.
There is a material risk of a renewed drop in economic activity.
The economic fallout from Covid-19 risks increasing inequality
across markets that have already suffered from social unrest. This
will leave the burden on governments and central banks tomaintain or increase fiscal and monetary stimulus. After financial
markets suffered a sharp fall in the early phases of the spread of
Covid-19, they rebounded but still remain volatile. Depending on
the degree to which global economic growth suffers permanent
losses, financial asset prices may suffer a further sharp fall.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

23

Risk

Governments and central banks in major economies have
deployed extensive measures to support their local populations.
Measures implemented by governments have included income
support to households and funding support to businesses. Central
bank measures have included cuts to policy rates, support tofunding markets and asset purchases. These measures are being
extended in countries where further waves of the pandemic areprompting renewed government restrictions. Central banks are
expected to maintain record-low interest rates for a considerable
period of time and the debt burden of governments is expected torise significantly.
We initiated market-specific measures to support our personal andbusiness customers through these challenging times. These
included mortgage assistance, payment holidays, the waiving ofcertain fees and charges, and liquidity relief for businesses facing
market uncertainty and supply chain disruption. We are also
working closely with governments, and supporting national
schemes that focus on the parts of the economy most impacted
by Covid-19. In Hong Kong, we provided prompt liquidity relief tobusinesses facing market uncertainty and supply chain pressures.
For further details of our customer relief programmes, see page
44.
The rapid introduction and varying nature of the government
support schemes, as well as customer expectations, has led torisks as the group implements large-scale changes in a shortperiod of time. This has led to increased operational risks,
including complex conduct considerations, increased reputationalrisk and increased risk of fraud. These risks are likely to beheightened further as and when those government support
schemes are unwound. Central bank and government actions andsupport measures, and our responses to those, have also led toincreased litigation risk, including lawsuits that have been andmay continue to be brought in connection with our cancellation of
the fourth interim dividend for 2019.
At 31 December 2020, our CET1 ratio was 17.2%, compared with
17.2% at 31 December 2019, and our average liquidity coverage
ratio (‘LCR’) for the quarter ended 31 December 2020 was 172.1%.
Our capital, funding and liquidity position is expected to help us tocontinue supporting our customers throughout the Covid-19
outbreak.
In many of our markets, the Covid-19 outbreak has led to a
weakening in GDP, a key input used for calculating ECL, and there
remains the risk of more adverse economic scenarios given its
ongoing impact. Furthermore, ECL will also increase from otherparts of our business impacted by the disruption to supply chains.
The impact will vary by sectors of the economy.The impact of theoutbreak on the long-term prospects of businesses in these
sectors is uncertain and may lead to significant ECL charges on
specific exposures, which may not be fully captured in ECL
estimates. In addition, in times of crisis, fraudulent activity is often
more prevalent, leading to potentially significant ECL charges oroperational losses.
The significant changes in economic and market drivers, customer
behaviours and government actions caused by Covid-19 have also
impacted the performance of financial models. HKFRS 9 model

24

performance has been dramatically impacted over the course of2020 which has increased reliance on management judgement indetermining the appropriate level of ECL estimates. These models
are driven by forecasts of economic factors such as GDP and
unemployment. Many of these models were not able to deliver
reliable outputs given the significant volatility in these measures,
as a consequence of the current global economic crisis. The
reliability of ECL models has also been impacted by theunprecedented response from governments to provide a variety of
economic stimulus packages to support livelihoods and thehighest hit businesses. This has significantly affected the ability ofthese models to accurately anticipate the effects of thesemeasures on ECL outputs.
In order to address some model limitations and performanceissues, there has been redevelopment of some key models used to
calculate ECL estimates. These models have been independently
validated by the Model Risk Management team and have beenassessed as having the ability to deliver reliable credit loss
estimates. While this has reduced the reliance on management
judgement for determining ECL estimates, the current uncertain
economic outlook, coupled with the expected end to government
support schemes, has led to post model management adjustments
still being required.
The Model Risk Management team is reviewing HKFRS9 model
performance at the country and group level on a quarterly basis toassess whether or not the models in place can deliver reliable
outputs. The assessments of the team on the performance of themodels provide the credit teams with a view of model reliability.
HKFRS 9 model redevelopment will continue as the economic
consequences of the Covid crisis become clearer over time as
economic conditions normalise and actual credit losses occur.
As a result of Covid-19, business continuity responses have beensuccessfully implemented and the majority of service levelagreements have been maintained. We have not experienced any
major impacts to the supply chain from our third-party service
providers due to Covid-19. The risk of damage or theft to ourphysical assets or criminal injury to our employees remains
unchanged and no significant incidents have impacted ourbuildings or staff.
There remain significant uncertainties in assessing the duration of
the Covid-19 outbreak and its impact. The actions taken by thevarious governments and central banks, in particular in the UK,
mainland China, Hong Kong and the US, provide an indication of
the potential severity of the downturn and post-recovery
environment, which from a commercial, regulatory and risk
perspective could be significantly different to past crises andpersist for a prolonged period. A continued prolonged period ofsignificantly reduced economic activity as a result of the impact of
the outbreak would have a materially adverse effect on our
financial condition, results of operations, prospects, liquidity,
capital position and credit ratings. We continue to monitor thesituation closely, and given the novel or prolonged nature of theoutbreak, additional mitigating actions may be required.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Our material banking risks
The material risk types associated with our banking and insurance manufacturing operations are described in the following tables:
Description of risks – banking operations(Audited)
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, and including thefinancial risks arising from historic andcurrent provision of pensions and otherpost-employment benefits to staff andtheir dependants.
Market risk
Market risk is the risk that movements inmarket factors, such as foreign exchange
rates, interest rates, credit spreads, equity
prices and commodity prices, will reduce
our income or the value of our portfolios.

Arising from

Measurement, monitoring and management of risk

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

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

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

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

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

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

Regulatory compliance risk
Regulatory compliance risk is the risk that
we fail to observe the letter and spirit of
all relevant laws, codes, rules, regulations
and standards of good market practice,which as a consequence incur fines andpenalties and suffer damage to ourbusiness.

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

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

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

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

25

Risk

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

Arising from

Measurement, monitoring and management of risk

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

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

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

Model risk
Model risk is the potential for adverse
consequences from business decisions
informed by models, which can beexacerbated by errors in methodology,
design or the way they are used.

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 separately from our banking operations. Risks in the insurance entities aremanaged using methodologies and processes that are subject to oversight at group level. Our insurance operations are also subject tosome of the same risks as our banking operations, and these are covered by the group's risk management processes. There are specificrisks inherent to the insurance operations as noted below.
Description of risks – insurance manufacturing operations(Audited)
Risks

Arising from

Measurement, monitoring and management of risk

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

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

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

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

26

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

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Implementation

Credit risk

(Unaudited)

Overview
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.

A centralised impairment engine performs the expected credit loss(‘ECL’) calculation using data, which is subject to a number ofvalidation checks and enhancements, from a variety of client,finance and risk systems. Where possible, these checks andprocesses are performed in a globally consistent and centralisedmanner.

Credit risk management

GovernanceKey developments 2020

(Unaudited)

Due to the unique market conditions in the COVID-19 outbreak,
we expanded operational practices to provide short-term support
to customers under the current policy framework. For further
details of market-specific measures to support our personal andbusiness customers, see page 44.

Regional management review forums are established in key sites
and regions in order to review and approve the impairment results.
Regional management review forums have representatives from
Credit Risk and Finance. The key site and regional approvals arereported up to the global business impairment committee for final
approval of the Group’s ECL for the period. Required members of
the committee are the global heads of Wholesale Credit andMarket Risk and Wealth and Personal Banking Risk, as well as theglobal business Chief Financial Officers and the Group Chief
Accounting Officer.

Governance and structure

Concentration of exposure(Unaudited)(Audited)

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.

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

(Unaudited)

There were no material changes to the policies and practices
for the management of credit risk in 2020. We continued to apply
the requirements of HKFRS 9 within Credit Risk.

Credit risk sub-function(Audited)

Credit quality of financial instruments

Credit approval authorities are delegated by the Board to thegroup Chief Executive together with the authority to sub-delegate
them. The Credit Risk sub-function in Global Risk is responsible forthe key policies and processes for managing credit risk, which
include formulating group credit policies and risk rating
frameworks, guiding the group’s appetite for credit risk exposures,
undertaking independent reviews and objective assessment ofcredit risk, and monitoring performance and management of
portfolios.
The principal objectives of our credit risk management are:• to maintain across the group a strong culture of responsible
lending, and robust risk policies and control frameworks;• to both partner and challenge our businesses in defining,
implementing and continually re-evaluating our risk appetite
under actual and scenario conditions; and• to ensure there is independent, expert scrutiny of credit risks,
their causes and their mitigation.

Key risk management processes
HKFRS 9 process(Unaudited)

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

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

(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 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.
For debt securities and certain other financial instruments, externalratings have been aligned to the five quality classifications based
upon the mapping of related customer risk rating (‘CRR’) to
external credit rating.

Wholesale lending(Unaudited)

The CRR 10-grade scale summarises a more granular underlying
23-grade scale of obligor probability of default (‘PD’). All corporate
customers are rated using the 10 or 23-grade scale, depending on
the degree of sophistication of the Basel approach adopted for the
exposure.
Each CRR band is associated with an external rating grade byreference to long-run default rates for that grade, represented by
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(‘PIT’) probability-weighted PD.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

27

Risk

Credit quality classification(Unaudited)
Sovereign debt
securities
and bills

Other debt
securities
and bills

Wholesale lending
and derivatives

Retail lending

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

12 monthprobabilityweighted PD %BBB and above
BBB- to BB

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

0 – 0.169
0.170 – 0.740

Band 1 and 2Band 30.000 – 0.500
0.501 – 1.500

BB- to B andunratedBB+ to B andunratedCRR 4 to CRR 5

0.741 – 4.914

Band 4 and 5

1.501 – 20.000

Sub-standard

B- to CB- to CCRR 6 to CRR 8

4.915 – 99.999

Band 620.001 – 99.999

Credit impaired

Default

Default

CRR 9 to CRR 10

100

Band 7100

Quality classification1, 2StrongGood
Satisfactory

1
2

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

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

Renegotiated loans and forbearance

Impairment assessment(Audited)(Audited)‘Forbearance’ describes concessions made on the contractual
terms of a loan in response to an obligor’s financial difficulties.

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

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

Credit quality of renegotiated loans(Unaudited)

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

Renegotiated loans and recognition of expected credit losses

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 Consolidated 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. Write-off periods may
be extended, generally to no more than 360 days past due.
However, in exceptional circumstances, they may be extended
further.
For secured facilities, write-off should occur upon repossession ofcollateral, receipt of proceeds via settlement, or determination thatrecovery of the collateral will not be pursued.
Any secured assets maintained on our 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 where local regulation orlegislation constrain earlier write-off, or where the realisation ofcollateral for secured real estate lending takes more time. In theevent of bankruptcy or analogous proceedings, write-off may
occur earlier than the maximum periods stated above. Collection
procedures may continue after write-off.

(Audited)

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

28

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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)
2020
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 assets
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 sheet

At 31 Dec
Debt instruments measured at Fair Value through Other Comprehensive Income (‘FVOCI’)2

2019

Allowance for
ECL1

Gross
carrying/
nominalamountAllowance for
ECL1

HK$m

HK$m

HK$m

HK$m

3,697,568
403,908
1,869,268
347,999
21,943
313,404
520,344475,553
190,025
82,8496,053,593
1,725,963
32,358
1,758,321
7,811,914(28,887)
(24)
(713)
—
—
—
—
(527)
(186)
—
(29,624)
(825)
(124)
(949)
(30,573)3,738,269
328,934
1,540,963
202,747
21,140298,944422,333
434,523
161,276
85,385
5,693,551
1,630,005
41,163
1,671,168
7,364,719(17,394)
(29)
(341)
(1)
—
—
—
(223)
(117)
—
(17,764)
(560)
(62)
(622)
(18,386)

Fair value

Allowance for
ECL

Fair value

Allowance for
ECL

HK$m

HK$m

HK$m

HK$m

1,689,820(167)

1,457,362(64)

1 For retail overdrafts and credit cards the total ECL is recognised against the financial asset unless the total ECL exceeds the gross carrying amountof the financial asset, in which case the ECL is recognised against the loan commitment.
2 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Changes in ECL
are recognised in 'Change in expected credit losses and other credit impairment charges' in the consolidated income instatement.

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 2020

29

Risk

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

Allowance for ECL

ECL coverage %Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

Stage 1

Stage 2

Stage 3

POCI

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

%

Loans andadvances tocustomers

3,150,921

510,040

35,752855

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

1,381,495

61,7909,062—

1,452,347(1,809)(3,463)– corporate1

1,580,976

391,635

26,514853

1,999,978(2,428)(2,897) (15,763)– financial
institutions2

188,450

56,615176

2245,243

(156)

(78)

(59)

(2)

Loans andadvances tobanks

401,256

2,652

—

—

403,908

(19)

(5)

—

Other financial
assets1,854,154

14,834279

11,869,268

(452)

(221)

Loan andother creditrelated
commitments

1,677,242

48,538183—

1,725,963(514)– personal

1,205,969

6,129

79

—

1,212,177(1)– corporate1

388,833

34,095104—423,032– financial
institutions2

82,440

8,314

—

—

Financialguarantee

25,7866,522

50– personal– corporate1

4,043
20,737

2
6,241

6
44

– financial
institutions2

1,006

279

7,109,359

582,586

At 31 Dec
2020

0.1

1.3

49.5

42.3

0.8

(7,144)

0.1

5.6

20.7

—

0.5

(360) (21,448)

0.2

0.7

59.5

42.2

1.1

(295)

0.1

0.1

33.5

100.0

0.1

—

(24)

0.0

0.2

—

—

0.0

(40)

—

(713)

0.0

1.5

14.3

—

0.0

(281)

(30)

—

(825)

0.0

0.6

16.4

—

0.0

—

—

—

(1)

0.0

—

—

—

0.0

(492)

(266)

(30)

—

(788)

0.1

0.8

28.8

—

0.2

90,754

(21)

(15)

—

—

(36)

0.0

0.2

—

—

0.0

—

32,358

(51)

(56)

(17)

—

(124)

0.2

0.9

34.0

—

0.4

—
—

4,051
27,022

—
(51)

—
(56)

(1)
(16)

—
—

(1)
(123)

—
0.2

—
0.9

16.7
36.4

—
—

0.0
0.5

—

—

1,285

—

—

—

—

—

—

—

—

—

—

36,264856

7,729,065(5,429)(362) (30,573)

0.1

1.2

49.0

42.3

0.4

(1,872)(7,001) (17,781)—

The above table does not include balances due from Group companies.
1 Includes corporate and commercial.
2 Includes non-bank financial institutions.

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

Allowance for ECL

ofwhich:

ofwhich:

ofwhich:

Stage 2

Up-todate

1 to 29DPD

30 and >
DPD

HK$m

HK$m

HK$m

510,040
61,790391,635
56,615499,567
53,063389,941
56,563

6,590
5,311
1,227
52

ECL coverage %ofwhich:

ofwhich:

ofwhich:

ofwhich:

ofwhich:

ofwhich:

Stage 2

Up-todate

1 to 29DPD

30 and >DPDStage 2

Up-todate

1 to 29DPD

30 and
> DPD

HK$m

HK$m

HK$m

HK$m

HK$m

%

%

%

%

3,883
3,416
467
—

(6,438)(3,463)(2,897)(78)(5,505)(2,642)(2,785)
(78)

(268)
(204)
(64)
—

(665)
(617)
(48)
—

1.3
5.6
0.7
0.1

1.1
5.0
0.7
0.1

4.1
3.8
5.2
—

17.1
18.1
10.3
—

At 31 Dec 2020
Loans and advances tocustomers at amortised cost
– personal– corporate and commercial– non-bank financial institutions

30

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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

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

3,423,956

296,522

16,6391,152

3,738,269(3,480)(4,615)(8,999)(300)(17,394)

0.1

1.6

54.1

26.0

0.5

– personal– corporate1

1,351,575
1,850,316

45,606
222,819

5,575
10,914—1,149

1,402,756
2,085,198(1,732)(1,622)(2,646)(1,844)(1,325)(7,525)—(297)(5,703)(11,288)

0.1
0.1

5.8
0.8

23.8
68.9

—
25.8

0.4
0.5

– financial
institutions2

222,065

28,097150

3250,315

(126)

(125)

(149)

(3)

(403)

0.1

0.4

99.3

100.0

0.2

Loans andadvances tobanks

328,355579——

328,934

(26)

(3)

—

—

(29)

0.0

0.5

—

—

0.0

Other financial
assets1,530,910

9,884

167

2

1,540,963

(214)

(77)

(50)

—

(341)

0.0

0.8

29.9

—

0.0

Loan andother creditrelated
commitments

1,601,934

27,967104—

1,630,005

(303)

(236)

(21)

—

(560)

0.0

0.8

20.2

—

0.0

– personal– corporate1

1,158,805
378,362

5,311
18,49569
35——

1,164,185
396,892

—
(293)

(1)
(230)

—
(21)

—
—

(1)
(544)

—
0.1

0.0
1.2

—
60.0

—
—

0.0
0.1

– financial
institutions2

64,767

4,161

—

—

68,928

(10)

(5)

—

—

(15)

0.0

0.1

—

—

0.0

Financialguarantee

34,496

6,634

33

—

41,163

(29)

(20)

(13)

—

(62)

0.1

0.3

39.4

—

0.2

– personal– corporate1

4,377
28,530

—
6,410

3
30

—
—

4,380
34,970

—
(29)

—
(20)

(3)
(10)

—
—

(3)
(59)

—
0.1

—
0.3

100.0
33.3

—
—

0.1
0.2

– financial
institutions2

1,589

224

—

—

1,813

—

—

—

—

—

—

—

—

—

—

6,919,651

341,586

16,943

1,154

7,279,334(4,052)(4,951)(9,083)(300)(18,386)

0.1

1.4

53.6

26.0

0.3

At 31 Dec
2019

The above table does not include balances due from Group companies.
1 Includes corporate and commercial.
2 Includes non-bank financial institutions.

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

Allowance for ECL

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

Stage 2

Up-todate

1 to 29DPD

30 and >DPDStage 2

Up-todate

1 to 29DPD

30 and >DPDStage 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

296,522284,357

8,254

3,911

(4,615)(3,926)

(255)

(434)

1.6

1.4

3.1

11.1

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

45,606
222,819
28,09735,607220,715
28,035

6,505
1,687
62

3,494
417
—

(2,646)(1,844)(125)(2,033)(1,768)
(125)

(217)
(38)
—

(396)
(38)
—

5.8
0.8
0.4

5.7
0.8
0.4

3.3
2.3
—

11.3
9.1
—

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202031

At 31 Dec 2019

Risk

Credit exposure
Maximum exposure to credit risk
(Audited)

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

Other credit risk mitigants
There are arrangements in place that reduce our maximum exposure to credit risk. These include a charge over collateral on borrowers’
specific assets, such as properties, collateral held in the form of financial instruments that are not held on the balance sheet and shortpositions in securities. In addition, for financial assets held as part of linked insurance/investment contracts the risk is predominantly
borne by the policyholder.
Collateral available to mitigate credit risk is disclosed in the Collateral section on pages 45-48.
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 commitments
At 31 Dec

2020

2019

HK$m

HK$m

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

202,746
21,140298,944445,298
280,642
33,464422,333
328,905
3,720,875
1,891,661
87,632
165,497
7,899,137
3,346,414
315,257
3,031,157
11,245,551

Total exposure to credit risk remained broadly unchanged in 2020 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.

32

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Measurement uncertainty and sensitivity analysis
of ECL estimates(Audited)

The recognition and measurement of expected credit losses (‘ECL’)
involves the use of significant judgement and estimation. We form
multiple economic scenarios based on economic forecasts, apply
these assumptions to credit risk models to estimate future credit
losses, and probability-weight the results to determine an
unbiased ECL estimate. Management judgemental adjustments
are used to address late-breaking events, data and model
limitations, and expert credit judgements.

Methodology
Four economic scenarios have been used to capture theexceptional nature of the current economic environment and toarticulate 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 these scenarios are drawn fromconsensus forecasts and distributional estimates. These include a
central scenario, representing a most likely outcome, a downside
and an upside scenario that represent meaningfully different
outcomes from the central. The central scenario is created using
the average of a panel of external forecasters (‘the consensus’)
while consensus upside and downside scenarios are created withreference to distributions for select markets that capture
forecasters' views of the entire range of outcomes. We havechosen to use a fourth scenario to represent severe downside risks
that are not captured in the consensus scenarios. The use ofadditional scenarios is in line with HSBC’s Forward Economic
Guidance (‘FEG’) methodology and has been regularly used overthe course of 2020. Unlike the consensus scenarios, additional
scenarios are driven by narrative assumptions and may result inshocks that drive economic activities permanently away fromtrend.

Description of Consensus Economic Scenarios
The economic assumptions presented in this section have been
formed internally with reference to external forecasts specificallyfor the purpose of calculating ECL.
The world economy experienced a deep economic shock in 2020.
As Covid-19 spread globally, governments in many of our markets
sought to limit the human impact by imposing significant
restrictions on mobility, in turn driving the deep falls in activity thatwere observed in the first half of the year. Restrictions were eased
as cases declined in response to the initial measures which in turnsupported an initial rebound in economic activity by the third
quarter of 2020. This increase in mobility unfortunately led torenewed transmission of the virus in several countries, placing
health-care systems under significant burden, leading
governments to re-impose restrictions on mobility and causing
global economic activity to decline once more.
Economic forecasts are subject to a high degree of uncertainty inthe current environment. Limitations of forecasts and economic
models require a greater reliance on management judgement inaddressing both the imperfections inherent in economic forecasts
and in assessing associated ECL outcomes. The scenarios used to
calculate ECL are described below.

Despite the sharp contraction in activity, government fiscal
support in advanced economies played a crucial role averting
significant financial distress. At the same time, central banks in
our key markets implemented a variety of measures, which
included lowering their main policy interest rates, implementing
emergency support measures for funding markets, and either
restarting or increasing quantitative easing programs in order tosupport economies and the financial system. Across our key
markets, governments and central banks are expected to continue
to work together to ensure that households and firms receive anappropriate level of financial support until restrictions on economic
activity and mobility can be materially eased. Such support will
ensure that labour and housing markets do not experience abrupt,
negative corrections and will also limit the extent of long term
structural damage to economies.
Differences across markets in the speed and scale of economic
recovery in the Central scenario reflect timing differences in the
progression of the Covid-19 outbreak, differences in restrictions
imposed, the coverage achieved by vaccination programmes andthe scale of support measures.
The key features of our Central scenario are:• Growth in economic activity in 2021, supported by a successful
rollout of vaccination programmes across our key markets. We
expect vaccination programmes, coupled with effective nonpharmacological measures to contain the virus (‘track andtrace’ systems and restrictions to mobility) to lead to asignificant decline in infections across our key markets by theend of the third quarter of 2021.
• Where fiscal support schemes are available, they will limit theincrease in the unemployment rate in 2021. We expect a
gradual reversion of the unemployment rate to pre-crisis levels
over the course of the projection period as a result of economic
recovery and due to the orderly withdrawal of fiscal support.
• Inflation will converge towards central bank targets in our key
markets.
• In advanced economies, fiscal support in 2020 led to large
deficits and a significant increase in public debt. Fiscal support
is expected to continue as needed and deficits are expected toreduce gradually over the projection period. Sovereign debt
levels will remain high and our central scenario does notassume fiscal austerity.
• Policy interest rates in key markets will remain at current levels
for an extended period and will increase very modestly towards
the end of our projection period. Central banks will continue toprovide assistance through their asset purchase programmes
as needed.
• The West Texas Intermediate oil price is forecast to average
US$43 per barrel over the projection period.
The following table describes key macroeconomic variables andthe probabilities assigned in the consensus Central scenario.

The consensus Central scenario
HSBC's Central scenario features an improvement in economic
growth in 2021 as activity and employment gradually returns to
the levels experienced prior to the outbreak of Covid-19.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

33

Risk

Central scenario (2021–2025)
Hong Kong Mainland China• Some countries may keep significant restrictions to mobility inplace for an extended period of time and at least until criticalsegments of the population can be inoculated. Further risks tointernational travel also arise for international hubs such as
Hong Kong.

%%

GDP growth rate (annual average)
2020

(6.4)

2.0

2021
2022

4.3
2.9

7.8
5.3

2023
5 Year Average

2.6
2.9

5.2
5.6

Unemployment rate (annual average)
2020

5.8

3.9

2021
2022

5.0
3.9

4.1
4.2

2023
5 Year Average

3.8
4.0

4.1
4.0

• The logistics of inoculating a significant proportion of
populations within a limited time-frame and the public
acceptance of vaccines.

House Price growth (annual average)
2020

(0.8)

2.3

• On a global level, supply challenges could affect the pace of rollout and the efficacy of vaccines is yet to be determined.

2021
2022

(2.2)
2.4

4.7
5.7

2023
5 Year Average

5.2
2.3

5.0
4.7

Government support programmes in advanced economies in 2020
were supported by accommodative actions taken by central
banks.

Short term interest rate (annual
2020:

1.2

3.2

• These measures by governments and central banks haveprovided households and firms with significant support.

2021:
2022
2023
5 Year Average
Probability

1.0
1.1
1.2
1.3
70.0

2.9
3.0
3.1
3.1
80.0

The consensus Upside scenario

A number of vaccines have been developed and approved for use
at a rapid pace and plans to inoculate significant proportions ofnational populations in 2021 across many of our key markets are aclear positive for economic recovery. While we expect vaccination
programmes to be successful, governments and healthcare
authorities face specific challenges that could affect the speed andspread of vaccinations. These challenges include:• An inability or unwillingness to continue with such support or
the untimely withdrawal of support present a downside risk to
growth.
While Covid-19 and related risks dominate the economic outlook,geopolitical risks also present a threat. These risks include:• The potential for increased tensions between the US andmainland China: the outcome of the 2020 Presidential electionin the US signals a more orderly conduct of relations between
the US and mainland China in the future but long term
differences between the two nations remain, which could affectsentiment and restrict global economic activity.

Compared to the consensus Central scenario, the consensus
Upside scenario features a faster recovery in economic activity
during the first two years, before converging to long-run trends.
The scenario is consistent with a number of key upside risk
themes. These include:• Social and political unrest in Hong Kong: mobility restrictions tocombat the spread of Covid-19 and the passage of the National
Security Law in 2020 significantly reduced the scale of protests.
As Covid-19 diminishes as a threat, such unrest has thepotential to return.

• The orderly and rapid global abatement of Covid-19 via
successful containment and prompt deployment of a vaccine;• De-escalation of tensions between the US and China;• De-escalation of political tensions in Hong Kong; and• Continued support from fiscal and monetary policy.

The consensus Downside scenario

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

In the consensus Downside scenario, economic recovery is
considerably weaker compared to the Central scenario:• GDP growth remains weak;

Consensus Upside scenario best outcome
Hong Kong Mainland China

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

13.8 (4Q21)
3.0 (3Q22)
4.9 (1Q22)
1.1 (1Q21)
5.0

20.5 (1Q21)
3.9 (4Q21)
12.2 (1Q22)
3.0 (1Q21)
10.0

Note: Extreme point in the consensus Upside is ‘best outcome’ in the
scenario, i.e. highest GDP growth, lowest unemployment rate etc, in firsttwo years of the scenario.

Downside Scenarios• Unemployment rates stay elevated; and• Asset and commodity prices fall before gradually recovering
towards their long-run trends.
The scenario is consistent with the key downside risks articulated
above. Further outbreaks of Covid-19, coupled with delays invaccination programmes lead to longer lasting restrictions on
economic activity. Other global risks also increase and driveincreased risk-aversion in asset markets.
The following table describes key macroeconomic variables andthe probabilities assigned in the consensus Downside scenario.
Consensus Downside scenario worst outcome

2021 is expected to be a year of economic recovery, but the
progression and management of the pandemic presents a key risk
to global growth.
• A new and more contagious strain of the virus increases thetransmission rate in the UK and resulted in stringent restrictions
to mobility towards the year end.
• This viral strain observed in the UK, together with aggressive
strains observed in other countries including South Africa andBrazil, introduce the risk that transmission may increasesignificantly within the national borders of a number ofcountries in 2021 and also raise concerns around the efficacy
of vaccines as the virus mutates.
34

Hong Kong

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

Mainland
China

%

%

-2.1 (3Q21)
6.4 (1Q21)-6.8 (3Q21)
1.1 (4Q22)
20.0-1.3 (4Q21)
4.3 (3Q22)
0.3 (4Q21)
2.8 (1Q21)
8.0

Note: Extreme point in the consensus Downside is 'worst outcome' inthe scenario, i.e. lowest GDP growth, highest unemployment rate etc, infirst two years of the scenario (2021Q1-2022Q4).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

The Additional Downside scenario

occur and the speed and shape of recovery. The main factors
include the effectiveness of pandemic containment measures,the pace of roll-out and effectiveness of vaccines, and theemergence of new variants of the virus, plus a range of
geopolitical uncertainties,which together represent a very highdegree of estimation uncertainty, particularly in assessing
downside scenarios;

An additional Downside scenario which features a global
recession, has been created to reflect management’s view ofsevere risks:• Infections rise in 2021 and setbacks to vaccine programmes
imply that successful roll out of vaccines only occurs towards
the end of 2021 and it takes until the end of 2022 for the
pandemic to come to an end.

• estimating the economic effects of those scenarios on ECL,
where there is no observable historical trend that can bereflected in the models that will accurately represent the effectsof the economic changes of the severity and speed brought
about by the Covid-19 outbreak. Modelled assumptions andlinkages between economic factors and credit losses may
underestimate or overestimate ECL in these conditions, andthere is significant uncertainty in the estimation of parameterssuch as collateral values and loss severity; and• Governments and central banks are unable to significantly
increase fiscal and monetary programmes which results inabrupt corrections in labour and asset markets.
The following table describes key macroeconomic variables andthe probabilities assigned in the additional Downside scenario.
Additional Downside scenario worst outcome
Hong Kong

Mainland
China

%

%

GDP growth rate
Unemployment rate

-8.3 (4Q21)
6.7 (3Q21)-9.5 (4Q21)
6.1 (3Q22)

House price growth
Short-term interest rate

-21.0 (4Q21) -19.4 (4Q21)
1.3 (1Q21)
4.0 (2Q21)

Probability

5.0

2.0

Note: Extreme point in the additional Downside is 'worst outcome' inthe scenario, i.e. lowest GDP growth, highest unemployment rate etc, infirst two years of the scenario (2021Q1-2022Q4).

In considering economic uncertainty and assigning probabilities toscenarios, management has considered both global and local
specific factors. This has led management to assigning scenario
probabilities that are tailored to our view of uncertainty inindividual markets.
To inform our view, management have considered trends in the
progression and response to the virus in individual markets, theexpected reach and efficacy of vaccine roll-outs over the course of2021, the size and effectiveness of future government support
schemes and the connectivity with other countries. Management
has also been guided by the actual response to the Covid-19
outbreak and by the economic experience across countries in
2020. China’s visible success at containing the virus and its
repeated rapid response to localised outbreaks, coupled withgovernment support programmes and clear signs of economic
recovery, have led management to conclude that the economic
outlook for mainland China is the least volatile out of all our key
markets.
The weights assigned for mainland China reflect this outlook witha probability of 80% for the Central scenario and a total of 10%
across the two downside scenarios. The weights assigned to
Asian markets excluding Hong Kong and mainland China remainunchanged at 70% for the Central scenario and a total of 20%
across the two downside scenarios. The weights assigned to Hong
Kong are 70% for the Central scenario and a total of 25% acrossthe two downside scenarios.
Uncertainty related to the continued impact of the pandemic andthe ability of governments to control its spread via restrictions andvaccinations over the course of 2021 also play a prominent role inassigning scenario weights to other 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 increased during 2020 as a resultof the economic effects of the Covid-19 outbreak, including
significant judgements relating to:• the selection and weighting of economic scenarios, given
rapidly changing economic conditions in an unprecedented
manner, uncertainty as to the effect of government and central
bank support measures designed to alleviate adverse economic
impacts, and a wider distribution of economic forecasts than
before the pandemic. The key judgements are the length oftime over which the economic effects of the pandemic will

• the identification of customers experiencing significant
increases in credit risk and credit impairment, particularly
where those customers have accepted payment deferrals andother reliefs designed to address short-term liquidity issues, or
have extended those deferrals, given limitations in the available
credit information on these customers. The use of
segmentation techniques for indicators of significant increases
in credit risk involves significant estimation uncertainty.

How economic scenarios are reflected in the wholesalecalculation of ECL
The Group has developed a globally consistent methodology forthe application of forward economic guidance into the calculationof ECL by incorporating forward economic guidance into 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.
These models are based largely on historical observations andcorrelations with default rates. Management judgemental
adjustments are described below.

How economic scenarios are reflected in the retailcalculation of ECL
The Group has developed and implemented a globally consistentmethodology for incorporating forward economic guidance into
ECL estimates. The impact of economic scenarios on PD ismodelled at a portfolio level. Historic 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 underlying assets.
The impact on LGD is modelled for mortgage portfolios byforecasting future loan-to-value (‘LTV’) profiles for the remaining
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 historic 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 or portfolio level to account for late breaking events,
model and data limitations and deficiencies, and expert credit

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

35

Risk

judgement applied following management review and challenge.
In the Annual Report and Accounts 2019, these were described as‘Post model adjustments’.

and benchmarks. Considerations include potential default
suppression in some sectors due to government intervention andlate-breaking (idiosyncratic) developments.

The most severe projections at 31 December 2020 ofmacroeconomic variables are outside the historical observations
on which HKFRS 9 models have been built and calibrated tooperate. Moreover, the complexities of governmental support
programmes, the impacts on customer behaviours and theunpredictable nature of the pandemic have never been modelled.
Consequently, the group’s HKFRS 9 models, in some cases,
generate outputs that appear implausible when compared withother economic and credit metrics. Governmental support
programmes and customer payment reliefs have dislocated thecorrelation between economic conditions and defaults on whichmodels are based. Management judgemental adjustments are
required to ensure that an appropriate amount of ECL impairment
is recognised.

At 31 December 2020, retail management judgemental
adjustments led to an ECL increase of HK$2.7bn, primarily fromadditional ECL of HK$1.3bn to reflect adjustments to the timing ofdefault which has been delayed by government support andcustomer relief measures on potential defaults. Retail lending
adjustments of HK$1.2bn address areas such as customer relief,vulnerable segments and data limitations.

Internal governance is in place to regularly monitor management
judgemental adjustments and, where possible, to reduce thereliance on these through model recalibration or redevelopment,
as appropriate. During 2020, the composition of modelled ECL andmanagement judgemental adjustments changed significantly,
reflecting the path of the pandemic containment efforts andgovernment support measures, and this is expected to continue tobe the case until economic conditions improve. Wider-ranging
model changes will take time to develop and need more real dataon which models can be developed. Models will be revisited overtime once the full impacts of Covid-19 are observed.
Management judgemental adjustments made in estimating thereported ECL at 31 December 2020 are set out in the following
table. The table includes adjustments in relation to data and model
limitations resulting from the pandemic, and as a result of theregular process of model development and implementation. Itshows the adjustments applicable to the scenario-weighted ECL
numbers. Adjustments in relation to Downside scenarios are moresignificant, as results are subject to greater uncertainty.
1

Management judgemental adjustments to ECL

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

RetailWholesale

Total

HK$bn

HK$bn

HK$bn

0.21

0.03

0.24

2.99

2.99
1.15

Corporate lending adjustments
Retail lending adjustments

1.15

Retail model default suppression
adjustment

1.31

Total

2.67

1.31
3.02

5.69

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.

During 2020, management judgemental adjustments reflected thevolatile economic conditions associated with the Covid-19
pandemic. The composition of modelled ECL and management
judgemental adjustments changed significantly over 2020 as
certain economic measures, such as GDP growth rate, passed the
expected low point in a number of key markets and returned
towards those reflected in modelled relationships, subject tocontinued uncertainty in the recovery paths of different
economies.
ECL Wholesale adjustments were undertaken in the fourth quarterof 2020 totalling an increase of HK$3bn, versus a decrease insecond quarter of 2020 of HK$10bn. This change came mainly
through the improvement in FEG and implementation of model
enhancements in Hong Kong, mainland China and Australia toaddress previous model limitations relating to PD projections
under extreme scenarios. The effect of these model changes was asignificant reduction in ECL in the alternative Downside scenario.

Adjustments under low-risk counterparties are from modellednumbers on the insurance portfolio as a result of the overall credit
expert best estimates ('CEBE') process.
The retail model default suppression adjustment was applied as
defaults remain temporarily suppressed due to government
support and customer relief programmes which have supported
stabilised portfolio performance. Retail models are reliant on theassumption that as macroeconomic conditions deteriorate,defaults will crystallise. This adjustment aligns the increase indefault due to change in economic conditions to the period of time
when defaults are expected to be observed. The retail model
default suppression adjustment will be monitored and updated
prospectively to ensure appropriate alignment with expected
performance taking into consideration the levels and timing ofgovernment support and customer relief programmes.

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
actual ECL outcomes. The impact of defaults that might occur infuture under different economic scenarios is captured byrecalculating ECL for loans in stages 1 and 2 at the balance sheet
date. The population of stage 3 loans (in default) at the balance
sheet date is unchanged in these sensitivity calculations. Stage 3
ECL would only be sensitive to changes in forecasts of future
economic conditions if the LGD of a particular portfolio wassensitive to these changes.
There is a particularly high degree of estimation uncertainty innumbers representing tail risk scenarios when assigned a 100%weighting.
For wholesale credit risk exposures, the sensitivity analysis
excludes ECL and financial instruments related to defaulted
obligors because the measurement of ECL is relatively moresensitive to credit factors specific to the obligor than future
economic scenarios. Therefore, it is impracticable to separate theeffect of macroeconomic factors in individual assessments. For
retail credit risk exposures, the sensitivity analysis includes ECL forloans and advances to customers related to defaulted obligors.
This is because the retail ECL for secured mortgage portfolios
including loans in all stages is sensitive to macroeconomic
variables.

Wholesale and retail sensitivity
The wholesale and retail sensitivity analysis is stated inclusive ofmanagement judgemental adjustments, as appropriate to eachscenario. The results tables exclude portfolios held by insurance
business and small portfolios. In both the wholesale and retailanalysis, the comparative period results for alternative Downside
scenarios are not directly comparable to the current period,
because they reflect different risk profiles relative with theConsensus scenarios for the period end.

Adjustments to corporate exposures principally reflect theoutcome of management judgements for high-risk and vulnerable
sectors, supported by credit experts input, quantitative analyses
36

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Wholesale analysis

Retail analysis

HKFRS 9 ECL sensitivity to future economic conditions1

HKFRS 9 ECL sensitivity to future economic conditions1
Mainland
China

Hong Kong

ECL coverage of financial instruments
subject to significant measurement
uncertainty at 31 December 20202
Reported ECL
Consensus scenarios
Central scenario
Upside scenario
Downside scenario
Alternative scenario

HK$m

HK$m

3,675

897

3,009
1,638
5,208
10,568

718
217
1,954
8,979
1

HKFRS 9 ECL sensitivity to future economic conditions

ECL coverage of financial instruments subject
to significant measurement uncertainty at 31
December 20192

Hong Kong

Mainland
China

HK$m

HK$m

Reported ECL
Consensus scenarios
Central scenario
Upside scenario

2,555

966

1,895
1,877

919
740

Downside scenario
Alternative scenarios

1,901

826

Asia-Pacific alternative Downside scenario 1
Asia-Pacific alternative Downside scenario 2

4,284
5,452

1,168
N/A

Reported
ECL

ECL coverage ofloans andadvances tocustomers

CentralUpside Downside Alternative
Scenario Scenario
Scenario
Scenarios

HK$m

HK$m

HK$m

HK$m

HK$m

Hong Kong
At 31 December
20192

2,959

2,822

2,711

3,043

4,153

Hong Kong

2,718

2,306

2,197

2,383

4,128

At 31 December
20202

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.

ECL sensitivities demonstrate an increase from 31 December
2019, driven by a significant increase in reported expected credit
losses due to the global Covid-19 pandemic.

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 2020, the most significant level of ECL sensitivity
was observed in Hong Kong. This higher sensitivity was largely
driven by significant exposure and more severe impacts of theDownside Scenarios relative to the Central scenario.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

37

Risk

Reconciliation of changes in gross carrying/nominal amount and allowances for placings with andadvances to banks and loans and advances to customers, including loan commitments and financial
guarantees(Unaudited)

The following disclosure provides a reconciliation by stage of the group’s gross carrying/nominal amount and allowances for loans andadvances 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-date basis they would onlyreflect the opening and closing position of the financial instrument.
The transfers of financial instruments represents the impact of stage transfers upon the gross carrying/nominal amount and associatedallowance for ECL.
The net remeasurement of ECL arising from stage transfers represents the increase or decrease due to these transfers, for example,
moving from a 12-month (stage 1) to a lifetime (stage 2) ECL measurement basis. Net remeasurement excludes the underlying customer
risk rating ('CRR')/ probability of default ('PD') movements of the financial instruments transferring stage. This is captured, along withother credit quality movements in the ‘changes in risk parameters – credit quality’ line item.
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 2020
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

5,383,650(288,695)(975,023)
702,624(17,478)
1,182(3,839)(2,585)2,504(5,130)95(54)331,701
259,962
975,023(702,624)(14,362)
1,925(4,874)
4,322(2,504)
5,130
1,821
(125)

16,77528,733——31,840(3,107)(9,032)(1,737)——(1,916)
179

1,152
—
—
—
—
—

(300)
—
—
—
—
—

5,733,278
—
—
—
—
—

(18,045)—————

Net remeasurement of ECL arisingfrom transfer of stage

—

1,978

—

(2,598)—(5,702)———(6,322)

New financial assets originated andpurchased

1,422,036(1,743)

—

—

—

—

2

—

1,422,038(1,743)

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

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

1,357

—

—

(1,279,693)

2,364

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

140,675

4

41

606

(293)

10

(95,193)(417)

Changes in risk parameters – credit
quality

—

1,501

—

(6,709)—(9,339)

—

(71)

—

(14,618)

Changes to model used for ECL
calculation

—

489

—

2,626

—

26

—

—

—

3,141

Assets written off

—

—

—

—

(6,064)

6,058

—

—

(6,064)

6,058

Credit-related modifications that
resulted in derecognition
Foreign exchange
OthersAt 31 Dec 2020

—

—

—

—

(4)

2

—

—

(4)

2

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

(6)
—
855

(1)
—
(362)

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

ECL income statement charge forthe year(17,595)

Recoveries
Others733(154)

Total ECL income statement
charge for the year

(17,016)
At 31 Dec 2020

Year ended 31 Dec 2020

Gross carrying/nominal 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

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

(17,016)
(452)
—
(147)

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

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

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

1,689,820
N/A

(167)
(30,740)(104)(17,719)38

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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 2019

5,190,396(3,339)213,434(3,849)19,836(9,772)

721

(279)

5,424,387(17,239)

Transfers of financial instruments:– transfers from stage 1 to stage 2(199,043)(424,655)(1,999)904

192,106
424,655

2,829
(904)

6,937
—

(830)
—

—
—

—
—

—
—

—
—

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

227,072(1,987)(2,849)48(227,072)(6,513)

2,849
1,056

—
8,500

—
(1,104)

—
—

—
—

—
—

—
—
—

– transfers from stage 3

527

(102)

1,036

(172)

(1,563)

274

—

—

—

Net remeasurement of ECL arisingfrom transfer of stage

—

1,657

—

(1,887)

—

(215)

—

—

—

New financial assets originated andpurchased

1,655,668(1,347)

—

—

—

—

555

—

1,656,223(1,347)

Assets derecognised (including final
repayments)(1,132,107)

274(77,234)590(4,991)

1,078

(18)

—

(1,214,350)

1,942

Changes to risk parameters – further
lending/repayment(104,136)

757

3,871

289

850

363

(152)

7

(99,567)

1,416

Changes in risk parameters – credit
quality—207—(2,880)—(4,989)

—

(64)

—

(7,726)

Changes to model used for ECL
calculation

—

(50)

—

39

—

113

—

—

—

102

Assets written off

—

—

—

—

(4,842)

4,842

(41)

41

(4,883)

4,883

Credit-related modifications that
resulted in derecognition

(445)

—

—

—

—

(980)

394

—

—

(980)

394

Foreign exchange(7,733)

16

(479)

(2)

63

(37)

(2)

(1)

(8,151)(24)

Others(19,395)

(15)

3

(3)

(98)

21

89

(4)

(19,401)(1)

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

16,775(9,032)

1,152

(300)

5,733,278(18,045)

At 31 Dec 2019
ECL income statement charge forthe year
Recoveries
Others(6,058)863(197)

Total ECL income statement charge
for the year

(5,392)
At 31 Dec 2019Year ended 31 Dec 2019

Gross carrying/nominal
amountAllowance for ECL

HK$m

HK$m

HK$m

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

5,733,278
1,540,963
5,093
N/A
85,385(18,045)
(341)
—
N/A
—

(5,392)
(134)
—
(123)
—

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

7,364,719(18,386)(5,649)Debt instruments measured at FVOCI
Total allowance for ECL/total income statement ECL charge for the year

1,457,362
N/A(64)(18,450)(23)(5,672)

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

ECL charge

39

Risk

Credit quality
Credit quality of financial instruments(Audited)

We assess the credit quality of all financial instruments that are subject to credit risk. The credit quality of financial instruments is a pointin-time assessment of the probability of default of financial instruments, whereas stages 1 and 2 are determined based on relative
deterioration of credit quality since initial recognition. Accordingly, for non-credit-impaired financial instruments, there is no direct
relationship between the credit quality assessment and stages 1 and 2, though typically the lower credit quality bands exhibit a higher
proportion in stage 2.
The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and retaillending businesses and the external ratings attributed by external agencies to debt securities, as shown in the table below.
Distribution of financial instruments by credit quality at 31 December 2020
(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

1,926,557

861,848

832,072

40,48436,607

3,697,568(28,887)

3,668,681

1,220,972
604,310
101,275
393,732
338,968

146,492
631,415
83,941
8,441
8,332

70,098702,801
59,173
1,650
699

5,723
34,085
676
85
—

9,062
27,367178——

1,452,347
1,999,978245,243
403,908
347,999(7,144)(21,448)
(295)
(24)
—

1,445,203
1,978,530
244,948
403,884
347,999

21,943————

21,943—

21,943

Prepayments, accrued income and other assets

313,404
315,534
389,024
100,460—
135,842
75,79246,003—68,968
10,73742,535

—
—
—
747

—
—
—
280

313,404
520,344475,553
190,025

—
—
(527)
(186)

313,404
520,344475,026
189,839

Debt instruments measured at fair value throughother comprehensive income1

1,579,022

69,90930,197——

1,679,128—(167)

1,678,961—

360,104

47,456

24,962

1,507—

434,029—434,029

In-scope for HKFRS 9 impairment
Loans and advances to customers held at
amortised cost
– personal– corporate and commercial– non-bank financial institutions
Loans and advances to banks
Cash and balances at central banks
Items in the course of collection from otherbanks
Hong Kong Government certificates ofindebtedness
Reverse repurchase agreements – non-trading
Financial investments held at amortised cost

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

23,285

6,068

2,197

—

—

31,550—31,550Derivatives

258,643

75,131

11,431318

2345,525—

345,525

6,020,676
71%
1,627,804
101,381
1,729,185

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

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

43,141
1%
14,9684,046
19,01436,889
0%
1,978
879
2,857

8,460,976
100%
2,813,394
306,155
3,119,549(29,791)

8,431,185

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

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 amountThe 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.

40

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Distribution of financial instruments by credit quality at 31 December 2019 (continued)(Audited)
Gross carrying/notional amount
Substandard

Creditimpaired

Total

Allowance for
ECL

Net

HK$m

HK$m

HK$m

HK$m

21,067

17,665

3,738,269(17,394)

3,720,875

4,419
16,602

5,575
11,9381,402,756
2,085,198(5,703)(11,288)

1,397,053
2,073,910

56,759
1,357

46
3

152
—

250,315
328,934

(403)
(29)

249,912
328,905

3,946

1,031

—

—

202,747(1)

202,746

—

—

—

—

21,140—21,140————298,944—

298,944

99,55536,440——422,333—

422,333

46,887
38,627

5,252
38,922

—
833

—
169

434,523
161,276

(223)
(117)

434,300
161,159

1,382,729

60,202

9,301

—

—

1,452,232(64)

1,452,168

378,656

39,057

26,683905—

445,301–445,301

StrongGood

Satisfactory

HK$m

HK$m

HK$m

HK$m

Loans and advances to customers held at
amortised cost

1,997,523

946,831755,183– personal– corporate and commercial

1,173,323
707,662

138,094
731,917

81,345617,079– non-bank financial institutions
Loans and advances to banks

116,538
308,236

76,82019,338Cash and balances at central banks

197,770

Items in the course of collection from otherbanks

21,140Hong Kong Government certificates ofindebtedness

298,944

Reverse repurchase agreements – non-trading

286,338

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

382,384
82,725In-scope for HKFRS 9 impairment

Debt instruments measured at fair value
through other comprehensive income1
Out-of-scope for HKFRS 9 impairment
Trading assets
Other financial assets designated and otherwise
mandatorily measured at fair value throughprofit or loss

22,850

3,702

3,174

—

—

29,726—29,726

Derivatives
Total gross carrying amount on-balance sheet

168,448
5,527,743

44,5201,302,665

3,336
880,679

41
22,849—17,834

216,345
7,751,770—(17,828)

216,345
7,733,942

Percentage of total credit quality
Loan and other credit related commitments
Financial guarantee and similar contracts
Total nominal off-balance sheet amount71%
1,639,786
113,138
1,752,924

17%
678,914108,045786,95912%415,286
71,562486,848

0%
13,6503,222
16,872

0%
303
324
627

100%
2,747,939
296,291
3,044,230

(561)
(213)
(774)

2,747,378
296,078
3,043,456

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 2020

41

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

393,732

8,441

1,650

85

—

403,908(24)

403,884– stage 1– stage 2392,766
966

7,082
1,359

1,408
242

—
85

—
—

401,256
2,652

(19)
(5)

401,237
2,647– stage 3– POCI

—
—

—
—

—
—

—
—

—
—

—
—

—
—

—
—

1,926,557
1,907,066

861,848
697,619832,072
541,177

40,484
5,059

36,607—

3,697,568
3,150,921

19,491—

164,229—

290,895—

35,425——35,752510,040
35,752(6,438)(17,694)503,602
18,058(362)

493

Loans and advances to customers at amortised cost– stage 1– stage 2– stage 3– POCI(28,887) 3,668,681(4,393) 3,146,528

—

—

—

—

855

855

Other financial assets measured at amortised cost

1,479,334

265,966

122,941747

280

1,869,268(713) 1,868,555– stage 1– stage 2

1,475,066
4,268

263,384
2,582

115,572
7,369

132
615

—
—

1,854,154
14,834(452) 1,853,702(221)
14,613– stage 3– POCI

—
—

—
—

—
—

—
—

279
1

279
1

Loan and other credit-related commitments– stage 1

1,270,557
1,269,249

328,523
307,836

122,817
98,578

3,883
1,579

183
—

1,725,963
1,677,242(825) 1,725,138(514) 1,676,728– stage 2– stage 3– POCI
Financial guarantees– stage 1– stage 2– stage 3– POCIAt 31 Dec 2020
Debt instruments at FVOCI1– stage 1– stage 2– stage 3– POCIAt 31 Dec 2020

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

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

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

2,304
—
—
1,084
45
1,039
—
—
46,283

—
183
—
50
—
—
50
—
37,12048,538183—
32,35825,7866,522
50—
7,729,065(281)
48,257
(30)
153
—
—
(124)
32,234(51)
25,735
(56)
6,466
(17)
33
—
—
(30,573) 7,698,492

1,578,971
50——
1,579,021

69,88624——
69,91030,197———30,197

—
—
—
—
—

—
—
—
—
—

1,679,054
74——
1,679,128(167) 1,678,887
—
74
—
—
—
—
(167) 1,678,961

(40)
—

239
1

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

42

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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

SatisfactorySubstandard

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

308,236

19,338

1,357

3

—

328,934(29)

328,905– stage 1– stage 2

307,968
268

19,313
25

1,071
286

3
—

—
—

328,355
579

(26)
(3)

328,329576– stage 3– POCI

—
—

—
—

—
—

—
—

—
—

—
—

—
—

—
—

1,997,523
1,990,700

946,831
859,196755,183
569,372

21,067
4,688

17,665—

3,738,269
3,423,956(17,394)(3,480)3,720,875
3,420,476

6,823—

87,635—

185,811—

16,253——
16,639296,522
16,639(4,615)(8,999)291,907
7,640

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

—

—

—

126

1,026

1,152

(300)

852

Other financial assets measured at amortised cost

1,269,301

189,015

81,645833

169

1,540,963(341)

1,540,622– stage 1– stage 2

1,266,894
2,407

185,925
3,090

77,914
3,731

177
656

—
—

1,530,910
9,884

(214)
(77)

1,530,696
9,807– stage 3– POCI

—
—

—
—

—
—

—
—

167
2

167
2

(50)
—

117
2

Loan and other credit-related commitments– stage 1

1,246,440
1,244,851

285,938
273,593

94,436
81,601

3,087
1,889

104
—

1,630,005
1,601,934

(560)
(303)

1,629,445
1,601,631– stage 2– stage 3– POCI
Financial guarantees– stage 1– stage 2– stage 3– POCIAt 31 Dec 2019
Debt instruments at FVOCI1– stage 1– stage 2– stage 3– POCIAt 31 Dec 2019

1,589
—
—
10,520
10,224296——
4,832,020

12,345——
16,774
15,1081,666——
1,457,896

12,835——
12,860
9,069
3,791
—
—
945,481

1,198
—
—
976
95
881
—
—
25,966

—
104
—
33
—
—
33
—
17,971

27,967
104—
41,16334,4966,634
33—
7,279,334

(236)
(21)
—
(62)
(29)
(20)
(13)
—
(18,386)

27,731
83—
41,101
34,4676,614
20—
7,260,948

1,382,708
21——
1,382,729

60,18022——
60,202

9,301
—
—
—
9,301

—
—
—
—
—

—
—
—
—
—

1,452,189
43——
1,452,232

(64)
—
—
—
(64)

1,452,125
43——
1,452,168

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.

Credit-impaired loans(Audited)

We determine that a financial instrument is credit impaired and instage 3 by considering relevant objective evidence, primarily
whether:• contractual payments of either principal or interest are past due
for more than 90 days;• 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.

• 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; andThe Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

43

Risk

Customer relief programmes(Unaudited)

In response to the Covid-19 outbreak, governments and regulators
across Asia-Pacific have introduced a number of support measuresfor both personal and wholesale customers in market-wide
schemes. The following table presents the number of personalaccounts/wholesale customers and the associated drawn loan
values of customers under these schemes and HSBC-specificmeasures for major markets at 31 December 2020. In relation topersonal lending, the majority of relief measures, including
payment holidays, relate to existing lending, while in wholesalelending, the relief measures comprise payment holidays,
refinancing of existing facilities and new lending under
government-backed schemes.

At 31 December 2020, the gross carrying value of loans topersonal customers under relief was HK$19.9bn (the first half of2020: HK$55.8bn). This comprised HK$16.4bn in relation tomortgages (the first half of 2020: HK$39.0bn) and HK$3.6bn inrelation to other personal lending (the first half of 2020:
HK$16.7bn). The decrease in personal customer relief during thesecond half of the year was driven by customers exiting relief
measures. The gross carrying value of loans to wholesalecustomers under relief was HK$91.8bn (the first half of 2020:
HK$212.9bn). We continue to monitor the recoverability of loans
granted under customer relief programs, including loans to a small
number of customers that were subsequently found to beineligible for such relief. The ongoing performance of such loans
remains an area of uncertainty at 31 December 2020.

Personal lending
Hong Kong

Other
markets1

Total

—
—

6
7,518

6
7,518

—
—

37
2,818

37
2,818

3
8,713
1
582

—
128
5
196

3
8,841
6
778

HK$m

3
8,713
1
582

6
7,646
42
3,014

9
16,359
43
3,596

%

1.2

2.0

1.5

%

0.2

2.7

1.0

Hong Kong

Other
markets

Total

382,356—5,178

387,534

—
1

—
4,295

—
4,296

HK$m

3
82,357—9,473

391,830

%

5.9

1.1

4.1

Extant at 31 December 2020
Market-wide schemes
Number of accounts in mortgage customer relief
Drawn loan value of accounts in mortgage customer relief

HK$m

Number of accounts in other personal lending customer relief
Drawn loan value of accounts in other personal lending customer relief

HK$m

000s
000s

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

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

Wholesale lending
Extant at 31 December 2020
Market-wide schemes
Number of customers under market-wide measures
Drawn loan value of customers under market-wide schemes
HSBC-specific measures
Number of customers under HSBC-specific measures
Drawn loan value of customers under HSBC-specific measures
Total wholesale lending under market-wide schemes and HSBC-specific measures
Number of customers
Drawn loan values
Market-wide schemes and HSBC-specific measures as a proportion of total wholesale lendingloans and advances

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

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

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

Wholesale
Pre-approved Principal Payment Holiday Scheme for Corporate
Customers enables eligible customers to apply for a payment
holiday of six months (or 90 days for trade finance) with nochange to the existing interest rate charge. On 2 September 2020,
the Hong Kong Monetary Authority announced that this scheme
had been extended for a further six months to April 2021.

RetailCustomer relief granted on Hong Kong mortgages consists ofdeferred principal repayment of up to 12 months. This relief
programme is available to existing HSBC mortgage loancustomers who have a good repayment record in the past six
months.

The following narratives provides further details on the major relief
programmes offered in Hong Kong.
44

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Collateral and other credit enhancements

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.

Although collateral can be an important mitigant of credit risk, it is
the group’s general practice to lend on the basis of the customer’sability to meet their obligations out of cash flow resources rather
than placing primary reliance on collateral and other credit riskenhancements. Depending on the customer’s standing and thetype of product, facilities may be provided without any collateralor other credit enhancements. For other lending, a charge overcollateral is obtained and considered in determining the credit
decision and pricing. In the event of default, the bank may utilise
the collateral as a source of repayment.
Depending on its form, collateral can have a significant financial
effect in mitigating our exposure to credit risk. Where there issufficient collateral, an expected credit loss is not recognised. 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 of collateral and credit
risk enhancements, such as second charges, other liens andunsupported guarantees. Guarantees are normally taken from
corporates and export credit agencies. Corporates would normallyprovide guarantees as part of a parent/subsidiary relationship andspan a number of credit grades. The export credit agencies will
normally be investment grade.
Certain credit mitigants are used strategically in portfolio
management activities. While single name concentrations arise inportfolios managed by Global Banking and Corporate Banking, it is
only in Global Banking that their size requires the use of portfolio
level credit mitigants. Across Global Banking, risk limits andutilisations, maturity profiles and risk quality are monitored andmanaged proactively. This process is key to the setting of risk
appetite for these larger, more complex, geographically distributed
customer groups. While the principal form of risk management
continues to be at the point of exposure origination, through thelending decision-making process, Global Banking also utilises loan
sales and credit default swap (‘CDS’) hedges to manage
concentrations and reduce risk. These transactions are theresponsibility of a dedicated Global Banking portfolio management
team. Hedging activity is carried out within agreed credit
parameters, and is subject to market risk limits and a robust
governance structure. Where applicable, CDSs are entered into
directly with a central clearing house counterparty. Otherwise, ourexposure to CDS protection providers is diversified among mainlybanking counterparties with strong credit ratings.

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.
Personal lending(Unaudited)

The following table provides a quantification of the value of fixedcharges we hold over specific assets where we have a history of
enforcing, and are able to enforce, collateral in satisfying a debt in
the event of the borrower failing to meet its contractual
obligations, and where the collateral is cash or can be realised bysale in an established market. The collateral valuation excludes
any adjustments for obtaining and selling the collateral and, inparticular, loans shown as not collateralised or partiallycollateralised may also benefit from other forms of credit
mitigants.

CDS mitigants are held at portfolio level and are not reported in
the presentation below.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

45

Risk

Residential mortgages including loan commitments by level of collateral(Audited)
2020
Gross carrying/nominalamount2019
ECL
coverage

Gross carrying/nominalamountECL
coverage

HK$m

%

HK$m

%

Stage 1
Fully collateralised

1,124,513

0.0

1,044,885

0.0

LTV ratio:– less than 70%

940,033

0.0

914,6650.0– 71% to 90%– 91% to 100%

148,242
36,2380.0
0.0

108,813
21,407

0.0
0.0

2,852
2,762

0.0

2,525
2,445

0.0

1,127,365

0.0

1,047,410

0.0Fully collateralised
LTV ratio:

26,5540.6

26,7480.3– less than 70%– 71% to 90%

22,045
4,059

0.4
1.4

19,430
6,743

0.1
0.7

– 91% to 100%
Partially collateralised (B):

450
116

2.0
3.4

575
151

2.3
6.6

– 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

111
26,6700.6

139
26,899

0.4

4,556

6.4

1,997

6.9

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

4.7
8.8
25.4
52.1

1,433
422
142
97
85
2,094
1,076,403

3.4
13.5
22.5
59.8

Partially collateralised (A):– collateral value on A
Total
Stage 2

7.5
0.1

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.

46

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

9.4
0.0

Commercial real estate loans and advances(Unaudited)

The value of commercial real estate collateral is determined by using a combination of external and internal valuations and physicalinspections. For CRR 1–7, local valuation policies determine the frequency of review on the basis of local market conditions because of
the complexity of valuing collateral for commercial real estate. For CRR 8–10, almost all collateral would have been revalued within thelast three years. In Hong Kong, market practice is typically for lending to major property companies to be either secured by guarantees or
unsecured.
Commercial real estate loans and advances including loan commitments by level of collateral(Audited)
2020
Gross
carrying
nominalamount
HK$m

2019

ECL
coverageGrosscarrying/
nominalamountECL
coverage

%

HK$m

%

Stage 1
Not collateralised

303,8900.0

344,0100.0

Fully collateralised
Partially collateralised (A):

321,650
20,9410.1
0.3

387,796
27,1550.1
0.1– collateral value on A
Total

12,163646,4810.1

15,724758,961

0.1

Stage 2
Not collateralised

23,644

0.1

5,326

0.9

73,9913,092
1,315
100,7270.6
1.3

17,781
589
423
23,696

1.0
0.3

—
298
—
—
298

—
6.4
—

—
165
—
—
165

—
9.1
—

—
—
—
—
—
747,506

—
—
—

—
—
—
—
—
782,822———

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

0.5

6.4

—
0.1

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

1.0

9.1

—
0.1

47

Risk

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

Other corporate, commercial and financial (non-bank) loans are analysed separately in the following table. For financing activities in othercorporate and commercial lending, collateral value is not strongly correlated to principal repayment performance.
Collateral values are generally refreshed when an obligor’s general credit performance deteriorates and we have to assess the likely
performance of secondary sources of repayment should it prove necessary 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)
2020

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

Grosscarrying/
nominalamount
HK$m

2019

ECL coverageGrosscarrying/
nominalamount

ECL coverage

%

HK$m

%

1,918,586
398,232
242,375
103,5822,559,193

0.1
0.1
0.1

2,164,436
345,386
242,433
103,251
2,752,255

0.1
0.1
0.1

294,547
129,799
40,104
19,214464,450

0.4
0.9
1.1

191,455
108,229
37,016
16,629336,700

0.6
0.6
0.3

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

75.1
18.4
31.8

6,815
2,005
2,353
1,046
11,173

78.4
46.0
60.5

506
348
—
—
854
3,052,753

36.4
51.4
—

706
200
246
233
1,152
3,101,280

11.5
0.5
88.6

0.1

0.6

56.1

42.5
0.7

0.1

0.6

68.8

26.0
0.4

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.

48

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Treasury Risk
CapitalCapital 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 thedevelopment of our business and to meet regulatory capitalrequirements at all times. To achieve this, our policy is to holdcapital in a range of different forms and all capital raising is agreed
with major subsidiaries as part of their individual and the group’s
capital management processes.
The policy on capital management is underpinned by a capitalmanagement framework, which enables us to manage our capitalin a consistent manner. The framework defines regulatory capitaland economic capital as the two primary measures for the
management and control of capital.
Capital measures:• economic capital is the internally calculated capital requirement
to support risks to which we are exposed and forms a core partof the internal capital adequacy assessment process; and• regulatory capital is the capital which we are required to hold inaccordance with the rules established by regulators.
Our capital management process is articulated in our annual
capital plan which is approved by the Board. The plan is drawn up
with the objective of maintaining both an appropriate amount of
capital and an optimal mix between the different components ofcapital. Each subsidiary manages its own capital to support its
planned business growth and meet its local regulatory
requirements within the context of the approved annual group
capital plan. In accordance with the Capital Management
Framework, capital generated by subsidiaries in excess of planned
requirements is returned to the Bank, normally by way ofdividends.
The Bank is the primary provider of capital to its subsidiaries andthese investments are substantially funded by the Bank’s own
capital issuance and profit retention. As part of its capitalmanagement process, the Bank seeks to maintain a prudent
balance between the composition of its capital and that of its
investment in subsidiaries.

For market risk, the group uses an internal models approach to
calculate its general market risk for the risk categories of interest
rate and foreign exchange (including gold) exposures, and equity
exposures. The group also uses an internal models approach to
calculate its market risk in respect of specific risk for interest rate
exposures and equity exposures. The group uses the standardised(market risk) approach for calculating other market risk positions,as well as trading book securitisation exposures, and thestandardised (operational risk) approach to calculate its
operational risk.
During the year, the individual entities within the group and thegroup itself complied with all of the externally imposed capitalrequirements of the HKMA.

Basel III
(Unaudited)

The Basel III capital rules set out the minimum CET1 capitalrequirement of 4.5% and total capital requirement of 8%. At 31
December 2020, the capital buffers applicable to the group include
the Capital Conservation Buffer (‘CCB’), the Countercyclical 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 to ensure banks build up capitaloutside periods of stress. The CCyB is set on an individual country
basis and is built up during periods of excess credit growth toprotect against future losses. On 16 March 2020, the HKMA
reduced the CCyB for Hong Kong to 1% from 2%. On 30
December 2020, the HKMA maintained the D-SIB designation as
well as HLA requirement at 2.5% for the group.
In December 2018, the Financial Institutions (Resolution) (Lossabsorbing Capacity Requirements – Banking Sector) Rules (‘LAC’)in Hong Kong were passed into legislation, with transition periods
provided for their implementation. The group is classified as amaterial subsidiary under the LAC 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 on- and off-balance
sheet exposures.

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.

Externally imposed capital requirements(Unaudited)

The Hong Kong Monetary Authority (‘HKMA’) supervises thegroup on both a consolidated and solo-consolidated basis andtherefore receives information on the capital adequacy of, and sets
capital requirements for, the group as a whole and on a soloconsolidated basis. Individual banking subsidiaries and branches
are directly regulated by their local banking supervisors, who set
and monitor their capital adequacy requirements. In mostjurisdictions, non-banking financial subsidiaries are also subject tothe supervision and capital requirements of local regulatory
authorities.
The group uses the advanced internal ratings-based approach to
calculate its credit risk for the majority of its non-securitisation
exposures. For securitisation exposures, the group uses the
securitisation internal ratings-based approach, securitisation
external ratings-based approach, securitisation standardised
approach or securitisation fall-back approach to determine credit
risk for its banking book securitisation exposures. For counterparty
credit risk, the group uses both the current exposure method andan internal models approach to calculate its default risk exposures.

At

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

31 Dec31 Dec

2020

2019

%

%

6.4

6.7

HK$m

HK$m

555,553
8,705,672

537,460
8,078,204

The decrease in the leverage ratio from 31 December 2019 to
31 December 2020 was mainly due to the rise in the exposure
measure, partly offset by an increase in Tier 1 capital.
Further details regarding the group’s leverage position can beviewed in the Banking Disclosure Statement 2020, which will beavailable in the Regulatory Disclosure Section of our website:www.hsbc.com.hk.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

49

Risk

Capital adequacy at 31 December 2020

Risk-weighted assets by risk type

(Unaudited)(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 2020.
Subsidiaries not included in the group's consolidation forregulatory purposes are securities and insurance companies andthe capital invested by the group in these subsidiaries is deductedfrom regulatory capital, subject to threshold.
The Bank and its banking subsidiaries maintain regulatory reserves
to satisfy the provisions of the Banking Ordinance and local
regulatory requirements for prudential supervision purposes. At
31 December 2020, the effect of this requirement is to reduce theamount of reserves which can be distributed to shareholders by
HK$18,063m (31 December 2019: HK$23,979m).

At
31 DecCredit risk
Counterparty credit risk
Market risk
Operational risk
Total

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

50

2019
%

17.2
18.8
20.8

17.2
18.8
21.0

2,318,266

113,650
107,661

79,75897,908356,861
2,956,993

355,448
2,851,380

At
31 Dec

2020

2019

HK$m

HK$m

Wealth and Personal Banking

583,078

567,320

Commercial Banking
Global Banking and Markets

1,072,171944,943

1,043,521
912,550

Corporate Centre
Total

356,801
2,956,993

327,989
2,851,380

At%2,378,821

31 Dec(Unaudited)
31 Dec

HK$m(Unaudited)

Capital ratios

2020

2019

HK$m

Risk-weighted assets by global businessWe 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, over which there remains a significant degree of
uncertainty due to the number of national discretions within
Basel’s reforms. It remains premature to provide details of an
impact although we currently anticipate the potential for an
increase in RWAs, driven by the output floor.

31 Dec31 Dec

2020

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Capital base(Unaudited)

The following table sets out the composition of the group’s capital base under Basel III at 31 December 2020.
Capital base(Unaudited)At
31 Dec31 Dec

2020

2019

HK$m

HK$m

712,119845,353(1,454)(44,615)(87,165)
27,907
66,178(10,801)(27,470)(230,574)(1,648)(23,276)(3,273)(33)

690,104
814,678(1,454)(44,615)(78,505)
27,45964,603(10,316)(26,828)(225,922)(1,554)(20,132)(2,214)
41

1,814
(12)

2,013
(45)

– significant Loss-absorbing capacity (‘LAC’) investments in unconsolidated financial sector entities– property revaluation reserves1(119,868)(66,215)(105,426)(74,626)– regulatory reserve
Total CET1 capital(18,063)509,452(23,979)
491,641

Additional tier 1 (‘AT1’) capital
Total AT1 capital before regulatory deductions

46,10145,819– perpetual subordinated loans– allowable non-controlling interests in AT1 capital

44,615
1,486

44,615
1,204

Total AT1 capital
Total tier 1 capital

46,101
555,553

45,819537,460

Tier 2 capital
Total tier 2 capital before regulatory deductions

66,717

68,340– perpetual subordinated debt2– term subordinated debt

3,101
15,698

3,114
14,839– property revaluation reserves1– impairment allowances and regulatory reserve eligible for inclusion in tier 2 capital

30,451
16,451
1,016

34,236
16,151

Common equity tier 1 (‘CET1’) capital
Shareholders’ equity– shareholders’ equity per balance sheet– revaluation reserve capitalisation issue– other equity instruments– unconsolidated subsidiaries
Non-controlling interests– non-controlling interests per balance sheet– non-controlling interests in unconsolidated subsidiaries– surplus non-controlling interests disallowed in CET1
Regulatory deductions to CET1 capital– valuation adjustments– goodwill and intangible assets– deferred tax assets net of deferred tax liabilities– cash flow hedging reserve– changes in own credit risk on fair valued liabilities– defined benefit pension fund assets– allowable non-controlling interests in tier 2 capital
Regulatory deductions to tier 2 capital(7,725)—(6,866)– significant LAC investments in unconsolidated financial sector entities
Total tier 2 capital(7,725)58,992(6,866)
61,474

Total capital

614,545598,934

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

A detailed breakdown of the group’s CET1 capital, AT1 capital, Tier 2 capital and regulatory deductions can be viewed in the Banking
Disclosure Statement 2020.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

51

Risk

Structural foreign exchange exposures(Unaudited)

Structural foreign exchange exposures represent net investments
in subsidiaries, branches and associates, the functional currenciesof which are currencies other than the HK dollar. An entity’sfunctional currency is normally that of the primary economic
environment in which the entity operates.
Exchange differences on structural exposures are recognised in‘Other comprehensive income’.
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
exposures only in limited circumstances.
The group had the following structural foreign currency exposuresthat were not less than 10% of the total net structural foreign
currency positions:
LCYm

HK$m equivalentRenminbi
At 31 Dec 2019

210,707250,116

Renminbi

201,509

225,392

At 31 Dec 2020

Liquidity and funding risk
(Audited)

Overview
Liquidity risk is the risk that we do not have sufficient financial
resources to meet our obligations as they fall due. Liquidity riskarises from mismatches in the timing of cash flows.
Funding risk is the risk that we cannot raise funding or can only do
so at excessive cost.
The Group maintains a comprehensive liquidity and funding risk
management framework (‘LFRF’), which aims to allow us towithstand severe but plausible liquidity stresses. It is based on
global policies that are designed to be adaptable to different
business models, markets and regulations. The LFRF comprises
policies, metrics and controls designed to ensure that group andentity management has oversight of our liquidity and funding risks
in order to manage them appropriately.
The Group manages liquidity and funding risk at an operating
entity (as defined in LFRF) level to ensure that obligations can be
met in the jurisdiction where they fall due, generally without
reliance on other parts of the group. Operating entities are
required to meet internal minimum requirements and any
applicable regulatory requirements at all times.

Structure and organisation

including liquidity and funding risk management. The group ALCO
delegates to the group Tactical Asset and Liability Management
Committee (‘TALCO’) the task of reviewing and monitoring
operating entities’ liquidity and funding positions.
Compliance with liquidity and funding requirements is monitored
by local ALCO who report to the RMM and Executive Committee
on a regular basis. This process includes:• 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.

Governance
ALCM teams apply the LFRF at both an individual entity and grouplevel, and are responsible for the implementation of Group-wideand local regulatory policy at a legal entity level. Markets Treasury
has responsibility for cash and liquidity management.
Treasury Risk Management carry out independent review,
challenge and assurance of the appropriateness of the risk
management activities undertaken by ALCM and Markets
Treasury. Their work includes setting control standards and advice
on policy implementation.
Internal Audit provide independent assurance that risk is managed
effectively.

Management of liquidity and funding risk
Funding and liquidity plans form part of the annual operating planthat is approved by the Board. The critical Board risk appetite
measures are the liquidity coverage ratio (‘LCR’) and net stable
funding ratio (‘NSFR’). An appropriate funding and liquidity profile
is managed through a wider set of measures:

Asset, Liability and Capital Management (‘ALCM’) teams are
responsible for the application of the LFRF at a local operating
entity level. The elements of the LFRF are underpinned by a robust
governance framework, the two major elements of which are:• a minimum LCR requirement;• Asset and Liability Management Committees (‘ALCOs’) at thegroup and entity level; and• three-month and 12-month cumulative rolling term contractual
maturity limits covering deposits from banks, deposits fromnon-bank financial institutions and securities issued;• annual individual liquidity adequacy assessment (‘ILAA’) used
to validate risk tolerance and set risk appetite.
All operating entities are required to prepare an ILAA document at
appropriate frequency. The final objective of the ILAA, approvedby the relevant ALCOs, is to verify that the entity and subsidiaries
maintain liquidity resources which are adequate in both amountand quality at all times, there is no significant risk that its liabilities
cannot be met as they fall due, and a prudent funding profile ismaintained.
The Board is ultimately responsible for determining the types andmagnitude of liquidity risk that the group is able to take andensuring that there is an appropriate organisation structure formanaging this risk. Under authorities delegated by the Board, thegroup ALCO is responsible for managing all ALCM issues
52• a minimum NSFR requirement or other appropriate metric;• a legal entity depositor concentration limit;• a minimum LCR requirement by currency;• intra-day liquidity;• the application of liquidity funds transfer pricing; and• forward-looking funding assessments.
• The LCR and NSFR metrics are to be supplemented by aninternal liquidity metric in 2021.

Sources of funding(Unaudited)

Our primary sources of funding are customer current accounts andcustomer savings deposits payable on demand or at short notice.
We issue wholesale securities (secured and unsecured) to

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

supplement our customer deposits and change the currency mix,
maturity profile or location of our liabilities.

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

Currency mismatch in the LCR

Further details of the group’s liquidity information disclosures canbe viewed in the Banking Disclosure Statement 2020.

(Unaudited)

The LFRF requires all operating entities to monitor material single
currency LCR. Limits are set to ensure that outflows can be met,
given assumptions on stressed capacity in the FX swap markets.

Additional collateral obligations(Unaudited)

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

Liquidity and funding risk in 2020
(Unaudited)

The management of liquidity risk was enhanced during 2020 in
response to the Covid-19 outbreak to ensure the Bank anticipated,monitored and responded to the impacts both at group and entity
level.
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

2020

2019

%

%

172.1

163.5

The liquidity position of the group remained strong in 2020. The
average LCR increased by 8.6 percentage points from 163.5% for
the quarter ended 31 December 2019 to 172.1% for the quarter
ended 31 December 2020, mainly as a result of the increase incustomer deposits.
The majority of high quality liquid assets ('HQLA') included in the
LCR are Level 1 assets as defined in the BLR, which consist mainlyof government debt securities. From 1 January 2020, listed
ordinary shares and triple-B rated marketable debt securities thatmeet HKMA requirements are also included in HQLA as Level 2B
assets.
The total weighted amount of HQLA of the group for the period
are as follows:
Weighted amount (averagevalue) at quarter ended
31 DecLevel 1 assets
Level 2A assets
Level 2B assets
Total

31 Dec

2020

2019

HK$m

HK$m

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

1,528,908
80,174
10,7881,619,870

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

Net stable funding ratio

31 Dec31 Dec

2020

2019

%

%

159.3

145.8

The funding position of the group remained robust in 2020,highlighting a surplus of stable funding relative to the required
stable funding requirement. The NSFR increased by 13.5
percentage points from 145.8% for the quarter ended 31
December 2019 to 159.3% for the quarter ended 31 December
2020, mainly as a result of the increase in customer deposits.

Interest Rate Risk in the Banking Book
(Unaudited)

Interest Rate Risk in the Banking Book (‘IRRBB’) is the risk of an
adverse impact to earnings or capital due to changes in interest
rates that affect the Bank’s banking book positions. The risk arises
either from timing mismatches in the repricing of non-tradedassets and liabilities, an imperfect correlation between changes in
the rates earned and paid on different instruments with otherwise
similar repricing characteristics; as well as from option derivative
positions or from optional elements embedded in the Bank’s
assets, liabilities and/or off-balance sheet items, where the Bank or
its customer can alter the level and timing of their cash flows. In
its management of the risk, the group aims to mitigate the impactof future interest rate movements which could reduce future netinterest income or its net worth, while balancing the cost ofhedging activities to the current revenue stream. Monitoring thesensitivity of the projected net interest income and of the present
value of expected net cash flows under varying interest ratescenarios is a key part of this.
In order to manage structural interest rate risk, non-traded assets
and liabilities are transferred to Markets Treasury based on theirrepricing and maturity characteristics. For assets and liabilities
with no defined maturity or repricing characteristics,
behaviouralisation is used to assess the interest rate risk profile.
Markets Treasury manage the banking book interest rate positionstransferred to it within approved limits. Local ALCOs are
responsible for monitoring and reviewing their overall structuralinterest rate risk position. Interest rate behaviouralisation policies
have to be formulated in line with the group’s behaviouralisation
policies and approved at least annually by local ALCOs.

Sensitivity of net interest income
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 (simulation modelling), where
all other economic variables are held constant. This monitoring isundertaken at an entity level by local ALCOs, where entities
forecast both one-year and five-year NII sensitivities across a
range of interest rate scenarios. NII sensitivity reflects the group’s
sensitivity of earnings due to changes in market interest rates.
Projected NII sensitivity figures represent the effect of pro forma
movements in projected yield curves based on a constant balance
sheet size and structure. The exception to this is where the size ofthe balances changes materially or repricing is deemed interest
rate sensitive, for example, non-interest-bearing current accountmigration and fixed-rate loan early prepayment. These sensitivity
calculations do not incorporate actions that would be taken byMarkets Treasury or in the business that originate the risk to
mitigate the effect of interest rate movements.

Sensitivity of economic value of equity
Economic value of equity (‘EVE’) represents the present value ofthe future banking book cash flows that could be distributed toequity providers under a managed run-off scenario. This equates
to the 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 movements in interest rates, where all othereconomic variables are held constant. Operating entities are
required to monitor EVE sensitivity as a percentage of Tier 1
capital resources.

Non-traded VaR
Non-traded VaR uses the same models as those used in the
trading book and includes only the elements of risk that aretransferred to Markets Treasury.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

53

Risk

Sensitivity analysis

Market Risk

(Unaudited)

Overview(Unaudited)

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

Value at risk

Market risk management
Key developments in 2020
(Unaudited)

There were no material changes to our policies and practices forthe management of market risk in 2020.

Governance and structure(Unaudited)

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

Risk types

Trading risk

Non-trading risk

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

Global business

GBM incl MT

GBM, MT2,
CMB and WPB

Risk measure

VaR | Sensitivity | Stress
Testing

VaR | Sensitivity | Stress
Testing2

1 The interest rate risk on the fixed-rate securities issued by HSBC
Holdings is not included in the group value at risk.
2 Markets Treasury ('MT'), for external reporting purposes, forms partof the Corporate Centre while daily operations and risk are managed
within GBM.

Where appropriate, we apply similar risk management policies andmeasurement techniques to both trading and non-trading
portfolios. Our objective is to manage and control market risk
exposures to optimise return on risk while maintaining a market
profile consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by
the group's Board of Directors. These limits are allocated throughbusiness lines and to the Group’s legal entities. The majority of
HSBC’s total value at risk (‘VaR’) and almost all trading VaR residein GBM. The group has an independent market risk management
and control sub-function, which is responsible for measuring,monitoring and reporting market risk exposures against limits on adaily basis. Each operating entity is required to assess the market
risks arising in its business and to transfer them either to its local
GBM unit for management, or to separate books managed under
the supervision of the local ALCO. The Traded Risk function
enforces the controls around trading in permissible instruments
approved for each site as well as new product approval
procedures. Trading Risk also restricts trading in the more
complex derivatives products to offices with appropriate levels of
product expertise and robust control systems.

Key risk management processes(Audited)

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

54

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

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

Risk not in VaR framework(Unaudited)

The risks not in VaR (‘RNIV’) framework aims to capture andcapitalise material market risks that are not adequately covered inthe VaR model.
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, stressed VaR also capturesrisk factors considered in the VaR-based RNIV approach. Stresstype RNIVs include a de-peg risk measure to capture risk topegged and heavily-managed currencies.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Stress testing

Market risk in 2020

(Audited)(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.

Global financial conditions worsened rapidly with the onset of theCovid-19 outbreak from mid-February 2020. Market volatility
reached extreme levels across most asset classes and equity
prices fell sharply. In credit markets, spreads and yields reachedmulti-year highs. The gold market experienced Covid-19 related
disruption in refining and transportation, affecting the relative
pricing of gold futures contracts. Oil prices collapsed due to risingoversupply as demand reduced materially from the economic
slowdown. Financial markets stabilised from April onwards, as
governments announced economic recovery programs and key
central banks intervened to provide liquidity and support asset
prices. Global equity markets substantially recovered from theirlosses in February-March and credit spreads reverted towards preCovid-19 levels. Markets remained susceptible to further bouts ofvolatility triggered by increases in Covid-19 cases and deaths, andvarious geopolitical risks.

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

We managed market risk prudently during 2020. Sensitivity
exposures remained within appetite as the business pursued its
core market-making activity in support of our customers during
the outbreak. We also undertook hedging activities to protect thebusiness from potential future deterioration in credit conditions.
Market risk continued to be managed using a complementary setof exposure measures and limits, including stress and scenario
analysis.

Back-testing

Trading portfolios

Trading portfolios

We routinely validate the accuracy of our VaR models by backtesting them with both actual and hypothetical profit and loss
against the corresponding VaR numbers. Hypothetical profit andloss excludes non-modelled items such as fees, commissions andrevenue of intra-day transactions.
The actual number of profits or losses in excess of VaR over thisperiod can be used to gauge how well the models are performing.
A VaR model is deemed satisfactory if it experiences less than fiveprofit or loss exceptions in a 250-day period.
We back-test our VaR at various levels of our group entity
hierarchy.

(Audited)

Value at risk of the trading portfolios
Trading value at risk (‘VaR’) was predominantly generated by
Global Markets. The Fixed Income business continued to be thekey driver of trading VaR. Interest rate risks from market-making
activities were the main drivers of trading VaR. Total trading VaR
was higher as at 31 December 2020 compared to 31 December
2019 mainly due to higher levels of market volatility reached in
March and April 2020 as a result of the economic impact of theCovid-19 outbreak.
The trading VaR for the year is shown in the table below.

Trading value at risk, 99% 1 day1
(Audited)
Foreignexchange andcommodityInterest
rate4

Equity4

CreditspreadPortfolio
diversification2

Total3

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2020
Year end
Average
Maximum

50
48
96

130
140
250

62
62
118

45
49
106

(143)

144
172
251

At 31 Dec 2019Year end
Average
Maximum

48
38
58

90
102
145

50
38
63

24
34
81

(110)

140
157
210

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 includes HK$28m Risk not in VaR (‘RNIV’) for year end 2020.
4 The asset class RNIV was excluded for year 2019.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

55

Risk

Resilience risk
(Unaudited)

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

Resilience risk management

Business operations continuity
As a result of Covid-19, we successfully implemented business
continuity responses and continued to maintain the majority ofservice level agreements. We did not experience any major
impacts to the supply chain from our third-party service providers
due to Covid-19. The risk of damage or theft to our physical assets
or criminal injury to our colleagues remains unchanged and no
significant incidents impacted our buildings or people.

Regulatory compliance risk
(Unaudited)

Key developments in 2020

Overview

In-line with the increasing expectations from customers,
regulators and our Board, and in response to a continually
evolving threat landscape that the wider industry faces, we
combined Operational Risk and Resilience Risk to form a new
Operational and Resilience Risk sub-function. This sub-function
provides robust non-financial risk steward oversight of the Bank’sbusiness, functions, legal entities and critical business services
management of risk, supported by effective and timely
independent challenge. We carried out several initiatives during
the year:

Regulatory compliance risk is the risk that we fail to observe theletter and spirit of all relevant laws, codes, rules, regulations andstandards of good market practice, which as a consequence incurfines and penalties and suffer damage to our business.

• We developed regional hubs accountable for core Operational& Resilience Risk delivery.

Key developments in 2020

• We implemented business and function aligned teams focusedon emerging risks as well as material products and services.
• We deployed risk management oversight of the most materialtransformation programmes across the Group.
• We implemented central services including governance,
reporting and transformation.
• We created a standalone assurance capability that provides
independent review and evaluation of end-to-end processes,
risks and key controls.
We prioritise these efforts on material risks and areas undergoingstrategic growth, aligning our location strategy to this need.

Governance and structure
The Operational and Resilience Risk target operating model
provides a globally consistent view across resilience risks,strengthening our risk management oversight while operating
effectively as part of a simplified non-financial risk structure. Weview resilience risk across seven risk types related to: third parties
and supply-chain; information, technology and cyber security;business interruption and contingency risk; buildings
unavailability; and workplace safety.
A principal senior management meeting for Operational and
Resilience Risk governance is the Non-Financial Risk Management
Board (‘NFRMB’), chaired by the Group Chief Risk Officer, with anescalation path to the Group Risk Management Meeting(‘GRMM’). At the group, the RMM is the senior management
meeting for Operational and Resilience Risk governance.

Key risk management processes
Operational Resilience is our ability to anticipate, prevent, adapt,
respond to, recover and learn from internal or external disruption,
protecting customers, the markets we operate in and theireconomic stability. Resilience is determined by assessing whether
we are able to continue providing our most important services,within an agreed level. We accept that we will not be able toprevent all disruption, but we prioritise investment to continually
improve our response and recovery capability for our mostimportant business services.

56

Regulatory compliance risk arises from the risks associated withbreaching our duty to our customers and inappropriate market
conduct, as well as breaching regulatory licensing, permissions
and rules.

Regulatory compliance risk management
In 2020, we made changes to our wider approach to thegovernance and structure of the Compliance function andcontinued to raise standards related to the conduct of ourbusiness, as set out below.

Governance and structure
In July, we introduced a new operating model to transform theCompliance function. We created a new group capability called
Regulatory Conduct, which was formed from the regulatorycompliance and regulatory affairs capabilities, and the monitor
liaison office team. The group Head of Regulatory Conduct
continues to report to the group Chief Compliance Officer. The
group Regulatory Conduct capability works with the newly
appointed local chief compliance officers and their respective
teams to help them identify and manage regulatory compliancerisks across the Bank. They also work together to ensure good
conduct outcomes and provide enterprise-wide support on theregulatory agenda.

Key risk management processes
The Group Regulatory Conduct capability is responsible for setting
global policies, standards and risk appetite to guide the group’s
management of regulatory compliance. It also devises clear
frameworks and support processes to protect against regulatorycompliance risks. The capability at the group provides oversight,
review and challenge to the local chief compliance officers andtheir teams to help them identify, assess and mitigate regulatorycompliance risks, where required. The Group’s regulatorycompliance risk policies are regularly reviewed. Global policies andprocedures require the prompt identification and escalation of any
actual or potential regulatory breach. Relevant reportable eventsare escalated to the RMM and the Risk Committee, as appropriate.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Conduct of businessIn 2020, we continued to promote and encourage good conduct
through our people’s behaviour and decision making to deliver fairoutcomes for our customers, and to maintain financial market
integrity. During 2020:• We continued to champion a strong conduct and customerfocused culture. We implemented a number of measuresthroughout the Covid-19 pandemic to support our customers infinancial difficulties. We also maintained service and supported
colleagues in unprecedented conditions.
• We continued our focus on culture and behaviours, adapting
our controls and risk management processes to reflectsignificant levels of remote working throughout the year.
• We continued to invest significant resources to improve ourcompliance systems and controls relating to our activities in
global markets and to ensure market integrity. These included
enhancements to pricing and disclosure, order management
and trade execution; trade, voice and audio surveillance; front
office supervision; and improvements to our enforcement anddiscipline framework for employee misconduct.
• We continued to emphasise, and worked to create, anenvironment in which employees are encouraged and feel safeto speak up. We placed a particular focus on the importance ofwell-being during the pandemic through regular top-down
communications, virtual town halls, videos and podcasts.
• We continue to embed conduct within our business line
processes. We also consider and seek to mitigate the conductimpacts of the group’s strategic transformation programmeand other key business change programmes, including thoserelating to the IBOR transition.
• We delivered our sixth annual global mandatory training courseon conduct to reinforce the importance of conduct for allcolleagues.
• We are refreshing our approach to conduct arrangements
across the group with a view to ensuring that the arrangements
remain appropriate for the nature of our business.
• The Board continues to maintain oversight of conduct mattersthrough the Risk Committee.

Financial crime risk
(Unaudited)

Overview
Financial crime risk is the risk of knowingly or unknowingly
helping parties to commit or to further illegal activity through
HSBC, including money laundering, fraud, bribery and corruption,
tax evasion, sanctions breaches, and terrorist and proliferation
financing. Financial crime risk arises from day-to-day banking
operations.

Financial crime risk management
Key developments in 2020
In 2020, we continued to strengthen our fight against financial
crime and to enhance our financial crime risk management
capability. Amid the challenges posed by Covid-19 pandemic, we
introduced a number of financial crime risk management
measures during this period to support the business and ourcustomers. These included:• We supported the most vulnerable customers and those infinancial difficulty, including by increasing the awareness offraud during this period.
• The Compliance function proactively engaged with other partsof the organisation to ensure financial crime risks wereconsidered as part of Covid-19-related decisions.
• Compliance colleagues were seconded to other parts of theorganisation to assist with supporting the establishment ofgovernment relief measures.

• We supported customers and the organisation through policy
exceptions, including by allowing email instructions instead offace-to-face meetings, and introducing virtual onboarding.
We consistently review the effectiveness of our financial crime risk
management framework, which includes consideration ofgeopolitical and wider economic factors. The sanctions regulatoryenvironment remained changeable and uncertain during thecourse of 2020 due to the ongoing geopolitical tensions between
the US and China, and the increasing divergence in sanctions
policies between the US and the EU on Iran and Russia. We
comply with all applicable sanctions regulations in the jurisdictions
in which we operate, and continue to monitor the geopoliticallandscape for ongoing developments. We also continued toprogress several key financial crime risk management initiatives,
including:• We continued to strengthen our anti-fraud capabilities,
focusing on threats posed by new and existing technologies,
and have delivered a comprehensive fraud training programme
across the Bank.
• We continued to invest in the use of artificial intelligence (‘AI’)and advanced analytics techniques to manage financial crimerisk, and we published our principles for the ethical use of Big
Data and AI.
• We continued to work on strengthening our ability to combat
money laundering and terrorist financing. In particular, we
focused on the use of technology to enhance our risk
management processes while minimising the impact to thecustomer. We also continued to develop our approach ofintelligence led financial crime risk management, in part,through enhancements to our automated transaction
monitoring systems.

Governance and structure
Since establishing a global framework of financial crime risk
management committees in 2018, we have continued tostrengthen and review the effectiveness of our governanceframework to manage financial crime risk. Formal governancecommittees are held across all countries, territories and global
business, and are chaired by the respective chief executive
officers. They help to enable compliance with the letter and thespirit of all applicable financial crime laws and regulations, as wellas our own standards, values and policies relating to financial
crime risks. At a group level, the Financial Crime Risk
Management Meeting has served as the pinnacle of thisgovernance structure, ultimately responsible for the managementof financial crime risk. As a reflection of the growing maturity andeffectiveness of our financial crime risk management, this meeting
was integrated with the group Risk Management Meeting inMarch 2021. During the course of 2021, we will review the
management of financial crime risk across the Bank to identify
other areas that could be simplified.
During 2020, we redesigned and delivered an integrated operating
model for our Compliance function, with the accompanying
restructure providing greater accountability to our local
Compliance teams. These teams, led by local chief complianceofficers, will support the group's Chief Compliance Officer inaligning the way in which we manage all compliance risks,
including financial crime risk, to the needs and aims of the wider
business. They will also support making our compliance risk
management processes and procedures more efficient andeffective.

Key risk management processes
We continued to deliver a programme to further enhance thepolicies and controls around identifying and managing the risks ofbribery and corruption across our business. Recognising that thefight against financial crime is a constant challenge, we
maintained our investment in operational controls and newtechnology to deter and detect criminal activity in the banking
system. We continued to simplify our governance and policy
frameworks, and our management information reporting process
which demonstrates the effectiveness of our financial crime
controls. We remain committed to enhancing our risk assessment

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

57

Risk

capabilities and to delivering more proactive risk management,
including our ongoing investment in the next generation ofcapabilities to fight financial crime by applying advanced analytics
and AI.
We are committed to working in partnership with the wider
industry and the public sector in managing financial crime risk,
protecting the integrity of the financial system, and helping toprotect the communities we serve. We are a strong advocate of
public-private partnerships and participate in a number of
information-sharing initiatives around the world. We are aconstructive partner to national governments and international
standard setters, and support reforms being undertaken in key
markets such as Singapore where we work closely with peerbanks and with the Monetary Authority of Singapore.
We have been an advocate for a more effective internationalframework for managing financial crime risk, whether throughengaging directly with intergovernmental bodies such as the
Financial Action Task Force, the global money laundering andterrorist financing watchdog, or via our key role in industry groups
such as the Wolfsberg Group and the Institute of International
Finance.

Skilled Person/Independent Consultant
Following expiration in December 2017 of the anti-money
laundering deferred prosecution agreement entered into with the
DoJ, the then-Monitor has continued to work in his capacity as a
Skilled Person under Section 166 of the Financial Services andMarkets Act under the Direction issued by the FCA in 2013. He
has also continued to work in his capacity as an Independent
Consultant under a cease-and-desist order issued by the FRB.
The Skilled Person has assessed our progress towards being able
to effectively manage our financial crime risk on a business-asusual basis. In 2020, the Skilled Person issued his final report,
concluding that we have continued to make material progress
towards our financial crime risk target end state in terms of key
systems, processes and people, albeit noting areas of potential
improvements. At the request of the FCA, our engagement with
the Skilled Person concluded in the first quarter of 2020. In thesecond quarter of 2020, we appointed a new Skilled Person who is
operating with a narrower mandate and in July 2020, the FCA
issued a new, tailored Direction, replacing the previous Direction,issued in 2013. The new Skilled Person issued one report in 2020,concluding that we were on par with peers in certain areas of thespecific elements of our financial crime management framework
he has reviewed. However, the Skilled Person also identified
opportunities for further improvements. In 2021, the new Skilled
Person will assess certain operational elements that were notassessed in 2020.
In 2020, the Independent Consultant completed his seventh
annual OFAC assessment, which was primarily focused on oursanctions programme. For the first time, the Independent
Consultant concluded that we were now substantially compliant
with all paragraphs of the cease-and-desist consent order issued
by the FRB within scope of the annual assessment. However, theIndependent Consultant has determined that certain areas within
our sanctions compliance programme require further
strengthening. An eighth annual assessment will take place in thefirst half of 2021. It is likely that a new Independent Consultant will
be appointed to carry out an annual OFAC compliance review, at
the FRB’s discretion.
The new FCA Direction noted above requires that the Group Risk
Committee retains oversight of matters relating to anti-money
laundering, sanctions, terrorist financing and proliferation
financing. Throughout 2020, the Group Risk Committee received
regular updates on the Skilled Person’s and the Independent
Consultant’s reviews.

58

Model risk
(Unaudited)

Overview
Model risk is the potential for adverse consequences frombusiness decisions informed by models, which can be exacerbatedby errors in methodology, design or the way they are used. Modelrisk arises in both financial and non-financial contexts wheneverbusiness decision making includes reliance on models.

Key developments in 2020
In 2020, we carried out a number of initiatives to further develop
and embed the new Model Risk Management sub-function,
including:• We refined the model risk policy to enable a more risk-based
approach to model risk management.
• We conducted a full review of model governance arrangements
overseeing model risk, resulting in a range of enhancements tothe underlying structure to improve effectiveness and increasebusiness engagement.
• We worked with the businesses and functions and developed
new model risk controls in the Risk Control Library. These
controls formed the basis for Model Risk Control Assessmentsthat have been implemented for businesses and functions.
• We updated the target operating model for Model Risk
Management, referring to internal and industry best practice.
• The Independent Model Validation team has begun atransformation program that will utilise advanced analytics andnew workflow tools with the objective of providing a more risk
based, efficient and effective management of model validation
processes.
• The consequences of Covid-19 on HKFRS 9 model performanceand reliability has resulted in enhanced monitoring of thosemodels and related model adjustments. Dramatic changes tomodel inputs such as GDP and unemployment rates have madethe model results less reliable. As a result, greater reliance has
been placed on management underlays/overlays based on
business judgement to derive expected credit losses.

Governance and structure
We have placed greater focus on our model risk activities during2020. To reflect this, Group has created the role of Chief Model
Risk Officer, which is undertaken by the Head of Model Risk
Management at the group. We elevated Model Risk Management
to a function in its own right within the Global Risk Structure,
where it had previously been structured as a sub-function within
Global Risk Strategy. The team now reports directly to the group's
Chief Risk Officer. We have also set up a Model Risk Committee atthe group to demonstrate effective oversight of models used. The
Model Risk Committee is supported by other forums such as theWholesale Model Oversight Forum ('WMOF') and Retail Model
Oversight Forum ('RMOF').

Key risk management processes
We use a variety of modelling approaches, including regression,
simulation, sampling, machine learning and judgemental
scorecards for a range of business applications, in activities suchas customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
We regularly review our model risk management policies andprocedures, and require the first line of defence to demonstratecomprehensive and effective controls based on a library of model
risk controls provided by Model Risk Management.
Model Risk Management reports on model risk to senior
management through use of the risk map and regular key updates.
We also review the effectiveness of these processes, including theregional model oversight governance structure, to ensure
appropriate understanding and ownership of model risk isembedded in the businesses and functions.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Insurance manufacturing operations risk
(Unaudited)

Overview
The majority of the risk in our insurance business derives frommanufacturing activities and can be categorised as financial risk orinsurance risk. Financial risks include market risk, credit risk andliquidity risk. Insurance risk is the risk, other than financial risk, ofloss transferred from the holder of the insurance contract to
HSBC, the issuer.

HSBC’s bancassurance model(Unaudited)

We operate an integrated bancassurance model which provides
insurance products principally for customers with whom we havea banking relationship. The insurance contracts we sell relate to
the underlying needs of our banking customers, which we canidentify from our point-of-sale contacts and customer knowledge.
For the products we manufacture, the majority of sales are ofsavings and investment products.
By focusing largely on personal and small and medium-sizedenterprise businesses, we are able to optimise volumes anddiversify individual insurance risks. We choose to manufacture
these insurance products in HSBC subsidiaries based on anassessment of operational scale and risk appetite. Manufacturing
insurance allows us to retain the risks and rewards associatedwith writing insurance contracts by keeping part of theunderwriting profit and investment income within the group.
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 handful ofleading external insurance companies in order to provide
insurance products to our customers through our banking networkand direct channels. These arrangements are generally structured
with our exclusive strategic partners and earn the group a
combination of commissions, fees and a share of profits. We
distribute insurance products in all of our geographical regions.
Insurance products are sold through all global businesses, but
predominantly by WPB and CMB through our branches and directchannels.

Insurance manufacturing operations risk
management
Key developments in 2020
(Unaudited)

There were no material changes to the insurance risk management
framework in 2020. Policies and practices for the management ofrisks associated with the selling of insurance contracts outside of
bancassurance channels were enhanced in response to this being
an increasing area of importance for the insurance business. Also,enhancements were made to the Capital Risk Framework forinsurance operations to better align to the Group’s Capital Risk
Framework.

Governance(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 group's Insurance Risk Management Meeting oversees thecontrol framework globally and is accountable to the WPB Risk
Management Meeting on risk matters relating to insurance
business.

The monitoring of the risks within the insurance operations iscarried out by the Insurance Risk teams. Specific risk functions,
including wholesale credit and market risk, operational risk,
information security risk and Compliance, support 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. Where in scope we participate in local
and Group-wide regulatory stress tests, including the Bank ofEngland stress test of the banking system, the Hong Kong
Monetary Authority stress test, and individual country insurance
regulatory stress tests. These have highlighted that a key risk
scenario for the insurance business is a prolonged low interest
rate environment. In order to mitigate the impact of this scenario,
the insurance operations have a range of strategies that could be
employed, repricing current products to reflect lower interest
rates, moving towards less capital intensive products, anddeveloping investment strategies to optimise the expected returns
against the cost of economic capital.

Key risk management processes
Market risk
(Audited)

All our insurance manufacturing subsidiaries have market riskmandates that specify the investment instruments in which they
are permitted to invest and the maximum quantum of market riskthat they may retain. They manage market risk by using, among
others, some or all of the techniques listed below, depending on
the nature of the contracts written:• We are able to adjust bonus rates to manage the liabilities topolicyholders for products with discretionary participating
features (‘DPF’). The effect is that a significant portion of themarket risk is borne by the policyholder.
• We use asset and liability matching where asset portfolios are
structured to support projected liability cash flows. The groupmanages its assets using an approach that considers asset
quality, diversification, cash flow matching, liquidity, volatility
and target investment return. It is not always possible to match
asset and liability durations, due to several factors such as
uncertainty over the receipt of all future premiums, the timingof claims and because the forecast payment dates of liabilities
may exceed the duration of the longest dated investments
available. We use models to assess the effect of a range of
future scenarios on the values of financial assets andassociated liabilities, and ALCOs employ the outcomes indetermining how best to structure asset holdings to support
liabilities.
• We use derivatives to protect against adverse market
movements to better support liability cash flows.
• For new products with investment guarantees, we consider thecost when determining the level of premiums or the pricestructure.
• We periodically review products identified as higher risk, suchas those that contain investment guarantees and embedded
optionality features linked to savings and investment products,
for active management.
• We design new products to mitigate market risk, such aschanging the investment return sharing portion between
policyholders and the shareholder.
• We exit, to the extent possible, investment portfolios whoserisk is considered unacceptable.
• We reprice premiums charged to policyholders.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

59

Risk

Credit risk

Insurance risk

(Audited)(Unaudited)

Our insurance manufacturing subsidiaries are responsible for thecredit risk, quality and performance of their investment portfolios.
Our assessment of the creditworthiness of issuers andcounterparties is based primarily upon internationally recognised
credit ratings, internal credit ratings, and other publicly available
information.

The group primarily uses the following techniques to manage andmitigate insurance risk:

Investment credit exposures are monitored against limits by our
insurance manufacturing subsidiaries and are aggregated andreported to the Group Insurance Credit Risk and Group Credit Risk
functions. 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.

Liquidity risk
(Audited)

Risk is managed by cash flow matching and maintaining sufficient
cash resources, investing in high credit-quality investments withdeep and liquid markets, monitoring investment concentrations
and restricting them where appropriate, and establishingcommitted contingency borrowing facilities.
Insurance manufacturing subsidiaries complete quarterly liquidity
risk reports and an annual review of the liquidity risks to which
they are exposed.

60• a formalised product approval process covering product design,pricing and overall proposition management (for example,
management of lapses by introducing surrender charges);• underwriting policy;• claims management processes; and• reinsurance which cedes risks above our acceptable thresholds
to an external reinsurer thereby limiting our exposure.

Insurance manufacturing operations risk in 2020
Measurement(Unaudited)

The risk profile of our insurance manufacturing businesses ismeasured using an economic capital approach. Assets andliabilities are measured on a market value basis and a capitalrequirement is defined to ensure that there is a less than onein-200 chance of insolvency over a one-year time horizon, given
the risks that the businesses are exposed to. The methodology forthe economic capital calculation is largely aligned to the panEuropean Solvency II insurance capital regulation. The economic
capital coverage ratio (economic net asset value divided by the
economic capital requirement) is a key risk appetite measure.
Insurance entities in Asia manage their economic capital coverratios against their appetite and tolerance as approved by theirrespective Boards. The tables below show the composition ofassets and liabilities by contract type. 92% (2019: 92%) of both
assets and liabilities are derived from Hong Kong.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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

Unit-linked

Shareholders' assets
and liabilities

Total

HK$m

HK$m

HK$m

HK$m

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

577,666
129,597

42,621
41,366

40,776384

661,063
171,347– derivatives– financial investments measured at amortised cost

1,323
410,16920
222

3
34,824

1,346
445,215– financial investments measured at fair value through other comprehensive income– other financial assets1

4,971
31,606

—
1,013

502
5,063

5,473
37,682

Reinsurance assets
PVIF2

27,299—6——
65,052

27,30565,052Other assets and investment properties
Total assets

13,422
618,387

1
42,628

4,652
110,480

18,075
771,495

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

31,786547,128

7,732
34,348——39,518581,476

Deferred tax3
Other liabilities

9
—

—
—

10,43637,22010,44537,220Total liabilities
Total equity

578,923—

42,080—47,656
102,836

668,659
102,836

Total equity and liabilities

578,923

42,080150,492

771,495

At 31 Dec 2019
Financial assets

501,625

41,89334,940578,458– financial assets designated at fair value– derivatives

103,902957

40,563
4

124
4

144,589965– financial investments – held-to-maturity– financial investments – available-for-sale374,630
4,126

342
—

31,508395

406,480
4,521– other financial assets1
Reinsurance assets

18,01028,031

984
44

2,909
—

21,90328,075PVIF2Other assets and investment properties—
13,015—2

61,075
3,898

61,075
16,915

Total assets
Liabilities under investment contracts designated at fair value

542,671
30,231

41,9396,793

99,913—

684,523
37,024

Liabilities under insurance contracts
Deferred tax3

494,18120

34,579
118

—
9,780

528,760
9,918

Other liabilities
Total liabilities—
524,432—
41,49017,116
26,896

17,116592,818

Total equity
Total equity and liabilities—
524,432—
41,49091,705
118,601

91,705684,523

At 31 Dec 2020

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 PVIF.
Balance sheet of insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance
operations.

Key risk types
The key risks for our insurance operations are market risks (inparticular interest rate and equity) and credit risks, followed byinsurance underwriting risks and operational risks. Liquidity risk,
while significant for the bank, is minor for our insurance
operations.

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’) issued in Hong Kong.
These products typically include some form of capital guarantee orguaranteed return on the sums invested by the policyholders, towhich discretionary bonuses are added if allowed by the overall
performance of the funds. These funds are primarily invested inbonds, with a proportion allocated to other asset classes toprovide 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, calculated
by stochastic modelling.
Where local rules require, these reserves are held as part ofliabilities under insurance contracts. Any remainder is accounted
for as a deduction from the present value of in-force (‘PVIF’) longterm insurance business on the relevant product. The following
table shows the total reserve held for the cost of guarantees, therange of investment returns on assets supporting these products
and the implied investment return that would enable the businessto meet the guarantees.
For unit-linked contracts, market risk is substantially borne by thepolicyholders, but some market risk exposure typically remains as
fees earned are related to the market value of the linked assets.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

61

Risk

Sensitivities

participating 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.

(Unaudited)

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

The following table illustrates the effects of selected interest rate,equity price and foreign exchange rate scenarios on our profit for
the year and the total equity of our insurance manufacturingsubsidiaries.

Sensitivity of the group’s insurance manufacturing subsidiaries to market risk factors(Audited)
31 Dec 2020
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 2019

Effect on total
equityEffect on profit
after tax

Effect on total
equity

HK$m

HK$m

HK$m

HK$m

(1,673)
1,613
2,167(2,183)673(673)(2,283)2,223
2,167(2,183)
673
(673)

(538)
38
1,814
(1,840)
327
(327)

(929)
429
1,814
(1,840)327(327)

Credit risk

Capital and Liquidity risk

(Audited)(Audited)

Description and exposure

Description and exposure

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

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

• risk associated with credit spread volatility and default by debt
security counterparties after investing premiums to generate areturn for policyholders and shareholders; andThe following table shows the expected undiscounted cash flows
for insurance liabilities at 31 December 2020. The liquidity risk
exposure is wholly borne by the policyholders in the case of unitlinked business and is shared with the policyholders for
non-linked insurance.

• risk of default by reinsurance counterparties and nonreimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect ofthese items are shown in the table on page 61.
The credit quality of the reinsurers’ share of liabilities underinsurance contracts is assessed as ‘strong’ or ‘good’ (as definedon page 28), with 100% of the exposure being neither past due nor
impaired (2019: 100%).

The profile of the expected maturity of insurance contracts at
31 December 2020 remained comparable with 2019.
The remaining contractual maturity of investment contract
liabilities is included in the table on page 108.

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 40. 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 2020
Non-linked insurance contracts
Unit-linked

Within 1 year

1-5 years

5-15 years

Over 15 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

47,444
8,558
56,002

168,81118,308187,119

311,975
14,708326,683

517,761
9,162
526,923

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

46,1158,110
54,225

152,561
19,913
172,474

319,151
14,154
333,305

482,6718,940
491,6111,000,498
51,117
1,051,615

At 31 Dec 2019Non-linked insurance contracts
Unit-linked

62

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Insurance 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.

Insurance risk is the risk of loss through adverse experience, ineither timing or amount, of insurance underwriting parameters(non-economic assumptions). These parameters include mortality,
morbidity, longevity, lapses and unit costs.
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 tableon page 61 analyses our life insurance risk exposures by type ofcontract.

Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in mortality
or morbidity depends on the type of business being written.
Sensitivity to lapse rates depends on the type of contracts being
written. In general, for life insurance contracts a policy lapse has
two offsetting effects on profits, which are the loss of future
income on the lapsed policy and the existence of surrender charge
recouped at policy lapse. The net impact depends on the relative
size of these two effects which varies with the type of contracts.
Expense rates risk is the exposure to a change in the cost ofadministering 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.

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

2020

2019

HK$m

HK$m

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

(509)
507
(496)
564
(314)
310

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

63

Statement of Director’s Responsibilities | Independent Auditor’s ReportStatement 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 65-70, 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, whose names and functions are set out in the ‘Report of the Directors’ on pages 3-9 of this Annual Report and Accounts,
confirm to the best of their knowledge that:• the Consolidated Financial Statements, which have been prepared in accordance with HKFRSs and in accordance with the 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

Laura Cha
Chairman
23 February 2021

64

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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’) set out on pages 71 to 125, which comprise:• the consolidated balance sheet as at 31 December 2020;• 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 a summary of significant accounting policies.
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 2020, 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 2020, 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:• 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• IT access management

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202065

Independent Auditor’s Report

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 2020, the group recorded expected credit loss (‘ECL’)
allowances on loans and advances to customers of HK$28.9bn.
The determination of the ECL allowances requires the use of complex credit
risk methodologies based on the group’s historic experience of thecorrelations between defaults and losses, borrower creditworthiness andeconomic conditions, which can result in limitations in their reliability toappropriately estimate ECL. Significant judgement and subjectivity are
involved in determining whether these methodologies and their applicationin models remain appropriate and in determining the quantum of any
management judgemental adjustments required to account for late breaking
events, model deficiencies and expert credit judgement applied following
management review and challenge.
Significant judgement is also required to determine assumptions, which
involve subjectivity and estimation uncertainty. The significant assumptions
include those with greater levels of management judgement and for which
variations have the most significant impact on ECL. Specifically, theseinclude likelihoods of economic scenarios, any alternative and additional
scenarios used, customer risk ratings and probabilities of default, and theprospects of future recoverability of credit impaired wholesale exposures.
Likewise, there is inherent uncertainty with the consensus economic
forecasts data from external economists.
The ongoing Covid-19 pandemic and continued geopolitical tensions
between the US and China increases the inherent risk and estimation
uncertainty involved in determining the ECL allowances and the level ofcredit risk associated with the group’s customers. The speed and severity ofthe economic shock caused specifically by the Covid-19 pandemic andconsequent government and regulator responses may have altered thecorrelations between losses, borrower creditworthiness and economic
conditions, as well as impacted economic factors such as GDP and
unemployment, and consequently the extent and timing of customer
defaults. This broadens the range of possible outcomes in estimating ECLs,
which increases the judgement required in assessing the appropriateness ofexisting methodologies and economic forecasts data from external
economists, and in determining assumptions. ECLs have been adjusted
through management judgemental adjustments to reflect these limitations.
In addition, certain changes to models used for the ECL determination havebeen made during 2020.

We tested controls in place over the methodologies, their application,
significant assumptions and data used to determine the ECL allowances.
Specifically, these included controls over:• Model development, validation and monitoring;• Determination and approval of consensus and alternative economic
scenarios;• Approval of the probability weightings assigned to economic scenarios;• Assigning Customer Risk Ratings and probabilities of default;• The input of critical data into source systems and the flow andtransformation of critical data between source systems to the impairment
ECL models;• Determination and 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, we independently reperformed the modelling for certain
aspects of the ECL calculation. We also assessed the appropriateness of
methodologies and related models that did not change during the year,
giving specific consideration to the Covid-19 pandemic and whether
management judgemental adjustments were needed. Where management
judgemental adjustments were made, we assessed the ECL allowances
determined and the analysis supporting them.
We further performed the following to assess the significant assumptions,data and disclosures:• We challenged the Bank’s basis for determining significant assumptions
and, where relevant, their interrelationships;• We involved our economic experts in assessing the reasonableness of theseverity and likelihood of the group’s economic scenarios. These
assessments considered the sensitivity of the ECL allowances to variationsin the severity and likelihood of different economic scenarios;• We tested a sample of customer risk ratings assigned to wholesale
exposures;
Matters discussed with the Audit Committee• We have independently assessed other significant assumptions andobtained relevant corroborating evidence. We further considered whether
We discussed the appropriateness of the methodologies, their application,
the judgements made in selecting the significant assumptions would givesignificant assumptions, significant data and disclosures with the Audit
rise to indicators of possible management bias;
Committee, giving consideration to the ongoing Covid-19 pandemic and• We performed various substantive audit procedures over critical data used
continued geopolitical tensions between the US and China. We further
in the determination of the ECL allowances to ensure these are relevant
discussed the governance and controls over ECL, with a focus on the impact
and reliable; andfrom the Covid-19 pandemic.
• We assessed the adequacy of the disclosures in relation to expected credit
In relation to the methodologies, we focused our discussions on:
losses on loans and advances to customers made in the Annual Report• Methodology application and model validation, including where models
and Accounts 2020 in the context of the applicable financial reporting
were changed during the year; andframework.
• the identification and assessment of model limitations and resulting
management judgemental adjustments made to derive the ECL
allowances, in particular for approaches adopted in response to the
Covid-19 pandemic.
In relation to significant assumptions and data, we focused on those which
are most sensitive including:• the severity and likelihood of economic scenarios and the probabilities
assigned to those scenarios;• the determination and migration of customer risk ratings; and• assumptions around the future recoverability of significant credit impaired
wholesale exposures.
We further discussed the associated disclosures in the Annual Report andAccounts 2020, in particular the impact of the Covid-19 pandemic on
determining the ECL allowances and continued geopolitical tensions
between the US and China, and the resulting estimation uncertainty.
Relevant references in the Annual Report and Accounts 2020

Risk: Credit Risk, page 27-48
Note 1.2 (i) on the consolidated financial statements: Basis of preparation and significant accounting policies, page 82-85
Note 2 (e) on the consolidated financial statements: Operating profit - Change in expected credit losses and other credit impairment charges, page 89
Note 10 on the consolidated financial statements: Loans and advances to customers, page 97

66

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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 2020, the market value of the investment in BoCom, basedon the share price, was HK$107.6bn lower than the carrying value of
HK$165.4bn. This is an indicator of potential impairment. An impairment
test was performed, with supporting sensitivity analysis, using a value in use('VIU') model. The VIU was HK$3.9bn in excess of the carrying value. On thisbasis, no impairment was recorded and the share of BoCom’s profits has
been recognised in the consolidated income statement.
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 and market data.
The significant assumptions that we focused our audit on were those withgreater levels of management judgement and subjectivity, and for which
variations had the most significant impact on the VIU. Specifically, theseincluded the discount rate, operating income growth rate, long-term profit
and asset growth rates, expected credit losses, effective tax rates, andcapital requirements.

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 basis for determining significant assumptions and, where
relevant, their interrelationships;• Obtained corroborating evidence for data supporting significant
assumptions that may include historic experience, external market
information, third-party sources including analyst reports, informationfrom BoCom management and historical publicly available BoComfinancial information;• Determined a reasonable range for the discount rate assumption, with theassistance of our valuation experts, and comparing it to the discount rateused by management; and• Assessed whether the judgements made in selecting the significant
assumptions give rise to indicators of possible management bias.
We observed meetings in April, May, September and November 2020
between management and senior BoCom executive management, held
specifically to identify facts and circumstances impacting assumptions
relevant to the determination of the VIU.
Representations were obtained from the Bank that assumptions used wereconsistent with information currently available to them, both as ashareholder of BoCom and to which HSBC are entitled through their
participation on BoCom's Board of Directors.
We assessed the adequacy of the disclosures in relation to BoCom made in
the Annual Report and Accounts 2020 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, giving consideration to
the macroeconomic environment and the overall outlook for the Chinesebanking market. We considered reasonably possible alternatives for thesignificant assumptions. We also discussed the disclosures made in relation
to BoCom, including the use of sensitivity analysis to explain estimation
uncertainty and the conditions that would result in an impairment being
recognised.

Relevant references in the Annual Report and Accounts 2020

Note 1.2 (a) on the consolidated financial statements: Basis of preparation and significant accounting policies, page 78-79
Note 14 on the consolidated financial statements: Interests in associates and joint ventures, page 100-103

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202067

Independent Auditor’s Report

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 2020, the group has recorded an asset for PVIF of
HK$65.1bn and liabilities under non-linked life insurance contracts ofHK$547.1bn.
The determination of these balances requires the use of complex actuarial
methodologies that are applied in models and involves significant judgement
about future outcomes. Specifically, significant judgement is required inderiving the economic assumptions, and assumptions related to longevity,
mortality, persistency and expenses. These assumptions are subject toestimation uncertainty, and movements in certain of these can have amaterial impact on the PVIF asset and the liabilities under non-linked life
insurance contracts.

We tested controls in place over the determination of PVIF asset and theliabilities under non-linked life insurance contracts. Specifically, theseincluded controls over:•policy data reconciliations from the policyholder administration system
to the actuarial valuation system;•
assumptions setting;•review and determination of valuation methodologies andcorresponding models;•
restriction of user access to the models; and•production and approval of the actuarial results.
With the assistance of our actuarial experts, we performed the following
Matters discussed with the Audit Committee
audit procedures to assess the methodologies used, their application,
We discussed the appropriateness of the methodologies, their application,
significant assumptions, data and disclosures:significant assumptions and disclosures with the Audit Committee. In•
We assessed the appropriateness of the methodologies used, theirrelation to assumptions, we focused on those for which variations had theapplication and the mathematical accuracy of the calculations;most significant impact on the valuation of PVIF and liabilities under nonlinked life insurance contracts carrying value, including economic•
We challenged the group’s basis for determining significant
assumptions and assumptions related to longevity, mortality, persistency andassumptions and, where relevant, their interrelationships. We haveexpenses.
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
the determination of these balances to ensure these are relevant andreliable; and•We assessed the adequacy of the disclosures in relation to the asset for
PVIF and liabilities under non-linked life insurance contracts made in the
Annual Report and Accounts 2020 in the context of the applicablefinancial reporting framework.
Relevant references in the Annual Report and Accounts 2020

Risk: Insurance manufacturing operations risk, page 59-63
Note 1.2 (j) on the consolidated financial statements: Basis for preparation and significant accounting policies, page 85-86
Note 3 on the consolidated financial statements: Insurance business, page 90
Note 15 on the consolidated financial statements: Goodwill and intangible assets, page 103-104

68

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

IT access management
Nature of the Key Audit Matter

How our audit addressed the Key Audit Matter

The group has operations across a number of countries supporting a wide
range of products and services, resulting in an IT environment that is large,
complex and increasingly reliant on third parties. The Bank’s financial
reporting processes rely upon a significant element of this IT environment,
both within the group’s operations and financial reporting.
Access management controls are an important part of the IT environment toensure both access and changes made to systems and data are appropriate.
Our audit approach relies extensively on the effectiveness of IT accessmanagement.

IT access management controls were tested for systems and data relevant
to financial reporting that we relied upon as part of our audit. Specifically,
these included controls over:•
Authorising new access requests;•
The timely removal of access rights;•
Periodic monitoring of the appropriateness of access rights to systems
and data;•
Restricting highly privileged access to appropriate personnel;•
The accuracy of information about IT users to facilitate accessmanagement;•
Segregation of access across IT and business functions;•
Changes made to systems and data; and•Understanding and assessing reliance on third parties, including Service
Organisation controls reports.
We also independently assessed controls related to password policies andsystem configurations, and performed substantive audit procedures inrelation to access right removal, privileged access, IT user information andsegregation of duties.
We performed further testing where control deficiencies were identified,including:•
Where inappropriate access was identified, we understood andassessed the nature of the access, and when required, obtained
additional evidence on the appropriateness of activities performed; and•Where necessary, we identified and tested compensating business
controls and performed other audit procedures that addressed the riskthat inappropriate changes were made to systems and data.

Matters discussed with the Audit Committee

The significance of IT access management to our audit was discussed at
Audit Committee meetings during the year. We further presented identified
control observations related to IT access management and discussed ourrelated audit response.

Relevant references in the Annual Report and Accounts 2020

Risk: Our material banking risks, page 25-26

Other Information
The directors of the Bank are responsible for the other information. The other information comprises the information included in the
Financial Highlights, Report of the Directors, Financial Review, Risk and Statement of Directors' Responsibilities sections of the Annual
Report and Accounts 2020 (but does not include the consolidated financial statements and our auditor’s report thereon), which we
obtained prior to the date of this auditor’s report, and the Banking Disclosure Statement 2020 and the list of the directors of the Bank's
subsidiary undertakings (consolidated in the financial statements) during the period from 1 January 2020 to 23 February 2021, which are
expected to be made available to us after that date. The other information does not include the specific information presented thereinthat is identified as being an integral part of the consolidated financial statements and, therefore, covered by our audit opinion on the
consolidated financial statements.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any 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 Banking Disclosure Statement 2020 and the list of the directors of the Bank's subsidiary undertakings (consolidated in
the financial statements) during the period from 1 January 2020 to 23 February 2021, if we conclude that there is a material
misstatement therein, we are required to communicate the matter to the Audit Committee and take appropriate action considering ourlegal 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 202069

Independent Auditor’s Report

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

PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 23 February 2021

70

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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

Net interest income

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

2b

2020

2019

HK$m

HK$m

111,513130,903147,376(35,863)

191,322(60,419)

41,67052,37041,50553,099– fee expense
Net income from financial instruments held for trading or managed on a fair value basis

2c(10,700)
32,172(11,594)
36,388Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value throughprofit or loss

2c

13,12814,257

Changes in fair value of designated debts issued and related derivatives

2c

(171)

(305)

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

2c

138
1,624

118
638

3

61,563
5,612

60,27515,758267,249(77,911)
189,338(17,719)
171,619(36,183)(46,304)(9,405)(3,936)(95,828)
75,791
14,40590,196(14,505)
75,691

299,537(80,156)
219,381(5,672)
213,709(38,048)(44,769)(8,230)(2,447)(93,494)
120,215
16,218
136,433(21,393)
115,040

66,9972,450
6,244
75,691

104,200
1,522
9,318
115,040

Net insurance premium income
Other operating income

2d

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

3

2e

4
2f
2g

5

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202071

Consolidated Financial Statements

Consolidated statement of comprehensive income
for the year ended 31 December
2020

2019

HK$m

HK$m

75,691

115,040

Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Debt instruments at fair value through other comprehensive income

2,238

1,674

– fair value gains– fair value gains transferred to the income statement

4,642(1,648)

2,782
(606)

112
(868)

23
(525)

Cash flow hedges– fair value gains/(losses)

969(4,393)5681– fair value (gains)/losses reclassified to the income statement– income taxes

5,551
(189)

(673)
(3)

Share of other comprehensive income/(expense) of associates and joint ventures
Exchange differences(726)
17,891167(3,606)

Items that will not be reclassified subsequently to profit or loss:
Property revaluation(5,774)

3,673– fair value gains/(losses)– income taxes(6,914)
1,140

4,426
(753)

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

1,647
1,654
(7)
257
320
(63)
(315)
(384)
69
16,187
91,878

2,854
2,859
(5)
(2,060)(2,467)
407
192
245
(53)
2,899
117,939

82,7382,450
6,690
91,878106,187
1,522
10,230117,939

Profit for the year
Other comprehensive income/(expense)– expected credit losses recognised in the income statement– income taxes

72

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Consolidated balance sheet
at 31 December
2020

2019

HK$m

HK$m

AssetsCash and balances at central banks

347,999

202,746

Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness

21,943
313,404

21,140298,944

600,414422,945622,761
280,642

178,960
520,344

153,511422,333

403,884
3,668,681

328,905
3,720,875

2,175,432
83,203

1,900,298
87,632

168,754
89,968151,917
81,643

128,537
3,325

137,930
2,179

288,610
9,416,403

248,258
8,661,714

313,404
25,699136,157
248,628
5,911,396
60,812428,211167,013
79,4192,701
296,308
215,987
581,406
2,669
30,997
4,065
8,504,872

298,944
25,576
106,396
179,819
5,432,424
87,532292,231
160,291
106,933
2,595
311,111203,252
528,760
12,61429,8894,066
7,782,433

172,335
44,615
149,500
478,903845,353
66,178911,5319,416,403

172,335
44,615133,099464,629814,678
64,603879,2818,661,714

Notes

Trading assets
Derivatives

7

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
Reverse repurchase agreements – non-trading

98Loans and advances to banks
Loans and advances to customers

10

Financial investments
Amounts due from Group companies

32

11Interests in associates and joint ventures
Goodwill and intangible assets

14

Property, plant and equipment
Deferred tax assets

16

Prepayments, accrued income and other assets
Total assets

17

15

5

Liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Trading liabilities
Derivatives
Financial liabilities designated at fair value
Debt securities in issue
Retirement benefit liabilities
Amounts due to Group companies
Accruals and deferred income, other liabilities and provisions
Liabilities under insurance contracts
Current tax liabilities
Deferred tax liabilities
Subordinated liabilities
Total liabilities
EquityShare capital
Other equity instruments
Other reserves
Retained earnings
Total shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity

18
19
8
20
21
4
32
22
3

5
23

24
25

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202073

Consolidated Financial Statements

Consolidated statement of cash flows
for the year ended 31 December
2020

2019

HK$m

HK$m

Profit before tax
Adjustments for non-cash items:

90,196

136,433

Depreciation and amortisation
Net gain from investing activities

13,341(567)

10,677(790)

Share of profits in associates and joint ventures
Loss on disposal of subsidiaries, businesses, associates and joint ventures(14,405)70(16,218)
14

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

18,452
114

6,535
568

Share-based payment expense
Other non-cash items included in profit before tax

735(3,896)878(16,869)

Elimination of exchange differences
Changes in operating assets and liabilities(22,323)

4,819

Change in net trading securities and derivatives
Change in loans and advances to banks and customers(10,696)
11,959(78,600)(189,346)

Change in reverse repurchase agreements – non-trading
Change in financial assets designated and otherwise mandatorily measured at fair value through profit or loss

(60,741)(25,449)(33,521)(20,652)

Change in other assets
Change in deposits by banks and customer accounts(119,373)
547,781

6,146
239,913

Change in repurchase agreements – non-trading
Change in debt securities in issue
Change in financial liabilities designated at fair value
Change in other liabilities
Dividends received from associates
Contributions paid to defined benefit plans
Tax paid
Net cash from operating activities
Purchase of financial investments
Proceeds from the sale and maturity of financial investments
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment and assets held for sale
Proceeds from disposal of customer loan portfolios
Net investment in intangible assets
Net cash inflow on sale of subsidiaries
Net cash from investing activities
Issue of ordinary share capital and other equity instruments
Dividends paid to shareholders of the parent company and non-controlling interests
Net cash from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 Jan2
Exchange differences in respect of cash and cash equivalents
Cash and cash equivalents at 31 Dec3
Cash and cash equivalents comprise– cash and balances at central banks– items in the course of collection from other banks– loans and advances to banks of one month or less– net settlement accounts and cash collateral– reverse repurchase agreements with banks of one month or less– treasury bills, other bills and certificates of deposit less than three months– less: items in the course of transmission to other banks
Cash and cash equivalents at 31 Dec3

29,761(27,514)
6,722
42,517
5,053(602)(25,466)
455,669(875,648)
823,410(3,768)72
6,284(7,331)
69(56,912)—(59,121)(59,121)339,636
677,664
30,507
1,047,807

36,117
48,697(852)(28,243)
4,962
(391)
(9,420)100,857(836,492)
762,125(3,334)
1,828
2,057(6,019)299(79,536)
8,617(74,015)(65,398)(44,077)
721,609132
677,664

347,999
21,943286,356
43,570186,599
187,039(25,699)
1,047,807

202,746
21,140217,879
18,706
155,587
87,182(25,576)
677,664

Interest received was HK$160,120m (2019: HK$195,528m), interest paid was HK$46,104m (2019: HK$62,557m) and dividends received
were HK$3,946m (2019: HK$5,410m).
1 During 2019, the change in subordinated liabilities included amounts from repayment of HK$92,384m and re-issuance of HK$92,343m to Group
companies with no cash movement. Changes in subordinated liabilities included non-cash changes from foreign exchange gain of HK$303m in2020 (2019: exchange loss of HK$1,012m) and fair value gain after hedging of HK$8,261m (2019: HK$9,736m). There is no change insubordinated loan capital during 2020.
2 From the fourth quarter of 2019, settlement accounts with bank counterparties of one month or less are included on a net basis to align withGroup's presentation. Comparatives have not been re-presented.
3 At 31 December 2020 HK$149,565m (2019: HK$110,076m) was not available for use by the group, of which HK$71,049m (2019:HK$66,943m)
related to mandatory deposits at Central banks.

74

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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

Foreignexchangereserve

Other

HK$m

2

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

172,335—

44,615—

464,629
69,44772,013
—

6,959
—

(104)
—

(28,118) 82,349——

814,678
69,44764,603
6,244

879,281
75,691Other comprehensive income/(expense)(net of tax)

—

—

(98)

(5,286)

2,921

876

17,430(102)

15,741446

16,187– debt instruments at fair value
through other comprehensive income

—

—

—

—

2,203

—

—

—

2,203

35

2,238

– equity instruments designated at fairvalue through other comprehensive
income

—

—

—

—

1,299

—

—

—

1,299

348

1,647

– cash flow hedges

—

—

—

—

—

876

—

—

876

93

969

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

—

—

257

—

—

—

—

—

257

—

257

– property revaluation

—

—

—

(5,286)

—

—

—

—

(5,286)(488)(5,774)– remeasurement of defined benefit
asset/liability

—

—

(312)

—

—

—

—

—

(312)

(3)

(315)

—
—

—
—

(43)
—

—
—

(581)
—

—
—

—
17,430

(102)
—

(726)
17,430

—
461

(726)
17,891————

69,349(54,268)(5,286)
—

2,921
—

876
—

17,430—(102)—

85,188(54,268)

6,690(4,853)91,878(59,121)

—
—

—
—

120
(927)

—
(2,934)

—
3

—
—

—
—

213
3,280

333
(578)

12
(274)

345
(852)

172,335

44,615478,903

63,793

9,883

772(10,688) 85,740

845,353

66,178911,531

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202075

At 1 Jan 2020
Profit for the year

– share of other comprehensive
expense of associates and joint
ventures– exchange differences
Total comprehensive income/(expense) for the year
Dividends paid4
Movement in respect of share-based
payment arrangements
Transfers and other movements5
At 31 Dec 2020

Consolidated Financial Statements

Consolidated statement of changes in equity (continued)
for the year ended 31 December
Other reserves

Sharecapital1

Otherequityinstruments

Retainedearnings

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cash
flow
hedge
reserve

Foreignexchangereserve

Other2

Total
shareholders’equityNoncontrollinginterests

Total
equity

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2018
Impact on transition to HKFRS 16

172,335—

35,879—429,595—

57,914
13,483

2,953
—

(99)
—

(24,649)—

78,830—752,758
13,48360,162—812,920
13,483

At 1 Jan 2019
Profit for the year

172,335—

35,879—429,595
105,722

71,397
—

2,953
—

(99)
—

(24,649)—

78,830—766,241
105,722

60,162
9,318

826,403
115,040

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

(1,949)

3,395

4,006

(5)

(3,469)

9

1,987

912

2,899

– debt instruments at fair value
through other comprehensive
income

—

—

—

—

1,676

—

—

—

1,676

(2)

1,674

– equity instruments designated atfair value through othercomprehensive income– cash flow hedges

—
—

—
—

—
—

—
—

2,169
—

—
(5)

—
—

—
—

2,169
(5)

685
10

2,854
5

– changes in fair value of financial
liabilities designated at fair value
upon initial recognition arisingfrom changes in own credit risk
– property revaluation

—
—

—
—

(2,058)
—

—
3,395

—
—

—
—

—
—

—
—

(2,058)
3,395

(2)
278

(2,060)3,673– remeasurement of defined
benefit asset/liability

—

—

112

—

—

—

—

—

112

80

192

– share of other comprehensive
income/(expense) of associates
and joint ventures– exchange differences

—
—

—
—

(3)
—

—
—

161
—

—
—

—
(3,469)9—167(3,469)

—
(137)

167
(3,606)

Total comprehensive income/(expense) for the year——

103,773

3,395

4,006

(5)

(3,469)9

107,709

10,230117,939

Other equity instruments issued3
Other equity instruments repaid3
Dividends paid4———

44,615(35,879)———(68,369)

—
—
—

—
—
—

—
—
—

—
—
—

—
—
—

44,615(35,879)(68,369)——(5,646)44,615(35,879)(74,015)

Movement in respect of sharebased payment arrangements

—

—

(42)

—

—

—

—

249

207

2

209

Transfers and other movements5

—

—

(328)

(2,779)

—

—

—

3,261

154

(145)

9

172,335

44,615

464,62972,013

6,959

(104)

(28,118)

82,349814,678

64,603879,281

At 31 Dec 2019

1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous
years.
2 The other reserves mainly comprise share of associates’ other reserves, purchase premium arising from transfer of business from fellow
subsidiaries, property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The sharebased payment reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC
Holdings plc.
3 In 2019, there were US$1,100m additional tier 1 capital instruments issued. In addition, US$4,600m of additional tier 1 capital instruments were
repaid and reissued in 2019 with no actual cash movement.
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.

76

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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. ‘Interest
Rate Benchmark Reform – Phase 2’ which amends HKFRS 9, HKAS 39 ‘Financial Instruments’, HKFRS 7 ‘Financial Instruments,’ HKFRS 4‘Insurance Contracts and HKFRS 16 ‘Leases’ has been early adopted as set out below. These consolidated financial statements also
comply with the requirements of the Hong Kong Companies Ordinance (Cap. 622) which are applicable to the preparation of the financial
statements.

Standards adopted during the year ended 31 December 2020
Interest Rate Benchmark Reform – Phase 2Interest Rate Benchmark Reform Phase 2: Amendments to HKFRS 9, HKAS 39, HKFRS 7, HKFRS 4 and HKFRS 16 issued in October 2020
represents the second phase of the project on the effects of interest rate benchmark reform, addressing issues affecting financial
statements when changes are made to contractual cash flows and hedging relationships as a result of the 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, but instead require the effective interest rate to be updated to reflect the change in the interest ratebenchmark. 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.
These amendments apply from 1 January 2021 with early adoption permitted. The group has adopted the amendments from 1 January
2020 and has made the additional disclosures as required by the amendments.
Other changes
In addition, the group has adopted a number of interpretations and amendments to standards, which have had an insignificant effect on
the consolidated financial statements of the group.

(b)

Future accounting developments

Minor amendments to HKFRSs
The HKICPA has not published any minor amendments effective from 1 January 2021 that are applicable to the group. However, theHKICPA has published a number of minor amendments to HKFRSs which are effective from 1 January 2022 and 1 January 2023. The
group expects they will have an insignificant effect, when adopted, on the Consolidated Financial Statements.

New HKFRSs
HKFRS 17 ‘Insurance Contracts’
HKFRS 17 ‘Insurance Contracts’ was issued in January 2018, with amendments to the standard issued in October 2020. The standard
sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds.
Following the amendments, HKFRS 17 is effective from 1 January 2023. The group is in the process of implementing HKFRS 17. Industry
practice and interpretation of the standard are still developing. Therefore, the likely numerical impact of its implementation remains
uncertain. However, we have the following expectations as to the impact compared with the group’s current accounting policy forinsurance contracts, which is set out in Note 1.2(j) below:• Under HKFRS 17, there will be no PVIF asset recognised; rather the estimated future profit will be included in the measurement of the
Insurance contract liability as the contractual service margin ('CSM') and gradually recognised in revenue as services are provided
over the duration of the insurance contract. The PVIF asset will be eliminated to equity on transition, together with other adjustments
to assets and liabilities to reflect HKFRS 17 measurement requirements and any consequential amendments to financial assets in thescope of HKFRS 9;• HKFRS 17 requires increased use of current market values in the measurement of insurance liabilities. Depending on the measurement
model, changes in market conditions for certain products (measured under the General Measurement Approach) are immediately
recognised in the income statement, whilst for other products (measured under the Variable Fee Approach), they will be included in
the measurement of CSM;
• In accordance with HKFRS 17, directly attributable costs will be included in the results of insurance services as profit is recognisedover the duration of insurance contracts and costs that are not directly attributable will remain in operating expenses. This will resultin a reduction in operating expenses compared to the current accounting policy.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202077

Notes on the Consolidated Financial Statements(c)Foreign currencies

Items included in each of the group’s entities are measured using the currency of the primary economic environment in which the entity
operates (the ‘functional currency’). The group’s consolidated financial statements are presented in Hong Kong dollars.
Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities 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 global business are included in the 'Financial Review' on page 10 as
specified as ‘Audited’.
• Disclosures on 'Financial instruments impacted by IBOR reform' are included in the 'Top and Emerging Risks' section on pages 20 to
21 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 25 to 55 and pages 59 to 63 as specified as ‘Audited’.
• Capital disclosures are included in the ‘Treasury Risk’ section on pages 49 to 51 as specified as ‘Audited’.
In accordance with the group’s policy to provide disclosures that help investors and other stakeholders understand the group’s
performance, financial position and changes to them, the information provided in the Risk section goes beyond the minimum levels
required by accounting standards, statutory and regulatory requirements. In addition, the group assesses good practicerecommendations issued from time to time by relevant regulators and standard setters and will assess the applicability and relevance ofsuch guidance, enhancing disclosures where appropriate.

(e)

Critical accounting estimates and judgements

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

(f)

Segmental analysis

The group’s chief operating decision-maker is the Executive Committee, which operates as a general management committee under the
direct authority of the Board. Operating segments are reported in a manner consistent with the internal reporting provided to the
Executive Committee.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the group’s accounting policies. Segmental
income and expenses include transfers between segments and these transfers are conducted at arm’s length. Shared costs are included
in segments on the basis of the actual recharges made.

(g)

Going concern

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

1.2 Summary of significant accounting policies(a)Consolidation and related policies

Investments in subsidiaries
Where an entity is governed by voting rights, the group consolidates when it holds, directly or indirectly, the necessary voting rights topass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of otherfactors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or
principal.
Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fairvalue or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made for eachbusiness combination.
The Bank’s investments in subsidiaries are stated at cost less impairment losses.

78

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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 pro-rated
amounts adjusted for any material transactions or events occurring between the date the financial statements are available and
31 December.
Investments in associates 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• Management’s best estimate of BoCom’s earnings are based on management’s
explicit forecasts over the short to medium term and the capital maintenance charge
which is management’s forecast of the earnings that need to be withheld in order for
BoCom to meet regulatory requirements over the forecast period, both of which are
subject to uncertain factors.
• Key assumptions are used in estimating BoCom’s value in use, the sensitivity of thevalue in use calculations to different assumptions and a sensitivity analysis thatshows the changes in key assumptions that would reduce the excess of value in use
over the carrying amount (the ‘headroom’) to nil are described in Note 14.

(b)

Income and expenses

Operating income
Interest income and expense
Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value arerecognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method. However, as an
exception to this, interest on debt instruments issued by the group for funding purposes that are designated under the fair value option to
reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.
Interest on credit impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purposeof measuring the impairment loss.
Non-interest income and expense
The group generates fee income from services provided at a fixed price over time, such as account service and card fees, or when thegroup delivers a specific transaction at a point in time such as broking services and import/export services. With the exception of certain
fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can bevariable depending on the size of the customer portfolio and the group’s performance as fund manager. Variable fees are recognised
when all uncertainties are resolved. Fee income is generally earned from short term contracts with payment terms that do not include asignificant financing component.
The group acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades
the group acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement.
The group recognises fees earned on transaction-based arrangements at a point in time when we have 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.
The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202079

Notes on the Consolidated Financial Statements• ‘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. 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 are set out in
inputs if, in the opinion of management, a significant proportion of the instrument’s
Note 33.
inception profit or greater than 5% of the instrument’s valuation is driven byunobservable inputs.
• ‘Unobservable’ in this context means that there is little or no current market data
available from which to determine the price at which an arm’s length transaction
would be likely to occur. It generally does not mean that there is no data available
at all upon which to base a determination of fair value (consensus pricing data
may, for example, be used).

(d)Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates
to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans
and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost.
The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of thesefinancial assets at initial recognition includes any directly attributable transactions costs. If the initial fair value is lower than the cash
amount advanced, such as in the case of some leveraged finance and syndicated lending activities, the difference is deferred andrecognised over the life of the loan through the recognition of interest income.
The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from thelending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. When the group intends tohold the loan, the loan commitment is included in the impairment calculations set out below.

Non-trading reverse repurchase, repurchase and similar agreements
When debt securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on thebalance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell(‘reverse repos’) are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading
repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price, or between the purchaseand resale price, is treated as interest and recognised in net interest income over the life of the agreement.
Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into
together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or
repo agreements.

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

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

(f)Equity securities measured at fair value with fair value movements presented in OCI

The equity securities for which fair value movements are shown in OCI are business facilitation and other similar investments where thegroup holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are
not transferred to the income statement. Dividend income is recognised in the income statement.

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(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;• when a group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fairvalue basis, in accordance with a documented risk management or investment strategy; and• where the financial liability contains one or more non-closely related embedded derivatives.
Designated financial assets are recognised when the group enters into contracts with counterparties, which is generally on trade date,
and are normally derecognised when the rights to the cash flows expire or are transferred.
Designated financial liabilities are recognised when the group enters into contracts with counterparties, which is generally on settlement
date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in‘Net income from financial instruments held for trading or managed on a fair value basis’ or ‘Net income/(expense) from assets andliabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’ except for the effect ofchanges in the liabilities' credit risk which is presented in OCI, unless that treatment would create or enlarge an accounting mismatch inprofit or loss.
Under the above criterion, the main classes of financial instruments designated by the group are:• Debt instruments for funding purposes that are designated to reduce an accounting mismatch. The interest and/or foreign exchange
exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain
swaps as part of a documented risk management strategy.
• Financial assets and financial liabilities under unit-linked and non-linked investment contracts. A contract under which the group does
not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts
with discretionary participation features (‘DPF’), but is accounted for as a financial liability. Customer liabilities under linked andcertain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in
the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise bemeasured at either fair value through OCI or amortised cost. The related financial assets and liabilities are managed and reported to
management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values
to be recorded in the income statement and presented in the same line.
• Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance
evaluated on a fair value basis.

(h)Derivatives

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

Hedge accounting
When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge
accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses thesederivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net
investments in foreign operations as appropriate to the risk being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results
in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise berecognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is
discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on arecalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income
statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instruments is recognised in OCI and the ineffective portion of the change in fairvalue of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income
statement within ‘Net income from financial instruments held for trading or managed on a fair value basis’. The accumulated gains andlosses recognised in OCI are reclassified to the income statement in the same periods in which the hedged item affects profit or loss.
When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in OCI remains in equity until
the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, thecumulative gain or loss previously recognised in OCI is immediately reclassified to the income statement.

Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was notapplied.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202081

Notes on the Consolidated Financial Statements(i)

Impairment of amortised cost and FVOCI financial assets

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

Credit-impaired (stage 3)
The group determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily
whether:• contractual payments of either principal or interest are past due for more than 90 days;• there are other indications that the borrower is unlikely to pay such as when a concession has been granted to the borrower for
economic or legal reasons relating to the borrower’s financial condition; and• the loan is otherwise considered to be in default.
If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where
regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit-impaired and default arealigned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired.
Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL
allowance.

Write-off
Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic
prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In
circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further
recovery, write-off may be earlier.

Renegotiation
Loans are identified as renegotiated and classified as credit-impaired when we modify the contractual payment terms due to significant
credit distress of the borrower. Renegotiated loans remain classified as credit-impaired until there is sufficient evidence to demonstrate asignificant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated until maturity orderecognition.
A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different
terms or if the terms of an existing agreement are modified such that the renegotiated loan is a substantially different financial
instrument. Any new loans that arise following derecognition events in these circumstances are considered to be POCI and will continue
to be disclosed as renegotiated loans.
Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any
evidence of being credit-impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future cash flows, over the minimum observation period, and there are no other indicators of
impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a
default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition(based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would
not be reversed.

Loan modifications other than renegotiated loans
Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial
restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan
contract) such that the group’s rights to the cash flows under the original contract have expired, the old loan is derecognised and the
new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is atmarket rates and no payment-related concession has been provided. Mandatory and general offer loan modifications that are notborrower-specific, for example market-wide customer relief programmes, have not been classified as renegotiated loans and generally
have not resulted in derecognition, but their stage allocation is determined considering all available and supportable information under
our ECL impairment policy.

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

Significance trigger – PD to increase by

0.1–1.2
2.1–3.3

15bps
30bps

For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination
PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit
migrations and to relative changes in external market rates.
For loans originated prior to the implementation of HKFRS 9, the origination PD does not include adjustments to reflect expectations of
future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD
must be approximated assuming through-the-cycle (‘TTC’) PDs and TTC migration probabilities, consistent with the instrument’s
underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional
CRR deterioration based thresholds as set out in the table below:
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 27.
For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk
management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment
grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meetits contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may,
but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.
For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores which incorporates all
available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12
months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into
homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts
with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days
past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies
loans with a PD higher than would be expected from loans that are performing as originally expected and higher than what would havebeen acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.

Unimpaired and without significant increase in credit risk – (stage 1)
ECL resulting from default events that are possible within the next 12 months is recognised for financial instruments that remain in stage
1.

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

Movement between stages
Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk
since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly
increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments aretransferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are
not POCI will continue to be in stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-paymentof future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that areassessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original orrevised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available
evidence is assessed on a case-by-case basis.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202083

Notes on the Consolidated Financial Statements

Measurement of ECL
The assessment of credit risk, and the estimation of ECL, are unbiased and probability-weighted, and incorporate all available informationthat is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecastsof future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time valueof money.
In general, the group calculates ECL using three main components, a probability of default, a loss given default ('LGD') and the exposure
at default (‘EAD’).
The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead.
The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the
instrument respectively.
The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet
date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD
given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected
to be realised and the time value of money.
The group leverages 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 re-calibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD
using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating
through the CRR bands over its life.
The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow (‘DCF’) methodology. The expected
future cash flows are based on the credit risk officer’s estimates as at the reporting date, reflecting reasonable and supportable
assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely thatthe recovery of the outstanding amount will include realisation of collateral based on the estimated fair value of collateral at the time of
expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of
the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference tothe economic scenarios applied more generally by the group and the judgement of the credit risk officer in relation to the likelihood of theworkout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios andwork-out strategies is approximated and applied as an adjustment to the most likely outcome.

Period over which ECL is measured
ECL is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-monthor lifetime ECL) is the maximum contractual period over which the group is exposed to credit risk. For wholesale overdrafts, credit risk
management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of the next
substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility. However,where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment andcancel the undrawn commitment does not serve to limit the group’s exposure to credit risk to the contractual notice period, thecontractual period does not determine the maximum period considered. Instead, ECL is measured over the period the group remains
exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where theperiod is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis andranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment
component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial
asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

Forward-looking economic inputs
The group applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions
representative of our 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 33 to 37.

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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; and• selecting model inputs and economic forecasts, including determining whether sufficient andappropriately weighted economic forecasts are incorporated to calculate unbiased expected
loss.

• The sections marked as audited on pages 33 to 37,‘Measurement uncertainty and sensitivity analysis of
ECL estimates’ set out the assumptions used indetermining ECL and provide an indication of thesensitivity of the result to the application of different
weightings being applied to different economic
assumptions.

(j)Insurance contracts

A contract is classified as an insurance contract where the group accepts significant insurance risk from another party by agreeing 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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202085

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 insurancecompanies’ profits expected to emerge from these contracts written at the balance sheet
date. It is determined by discounting those expected future profits using appropriate
assumptions in assessing factors such as future mortality, lapse rates and levels of expenses,
and a risk discount rate that reflects the risk premium attributable to the respective contracts.
The PVIF incorporates allowances for both non-market risk and the value of financial options
and guarantees.
• Insurance contract liabilities are set in accordance with local actuarial principles in eachmarket, aligned with local regulatory measurement frameworks. Core judgements made inapplying these frameworks include demographic and behavioural assumptions, expense
assumptions and investment return assumptions.

• The assumptions are reassessed at each reporting
date and changes in the estimates which affect thevalue of PVIF and Insurance contract liabilities arereflected in the income statement. More information
is included in Note 15 for PVIF and Note 3 for
Liabilities under insurance contracts.
• The sections marked as audited on pages 59 to 63,‘Insurance manufacturing operations risk
management’ provide an indication of the sensitivityof the result to the application of different weightings
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 over the shorter of the unexpired terms of the leases or the remaining useful lives.
The Government of Hong Kong owns all the land in Hong Kong and permits its use under leasehold arrangements. Similar arrangements
exist in mainland China. The group accounts for its interests in own use leasehold land and land use rights in accordance with HKFRS 16
but discloses these as owned assets when the right of use are considered sufficient to constitute control.

Investment properties
The group holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties areincluded on balance sheet at fair value with changes in fair value being recognised in the income statement.

(l)

Employee compensation and benefits

Post-employment benefit plans
The group operates a number of pension schemes including defined benefit and defined contribution, and post-employment benefit
schemes.
Payments to defined contribution schemes are charged as an expense as the employees render service.
Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainlycomprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.
Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets excludinginterest and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The net defined benefit asset or
liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling
test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to theplan.

(m) Tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates
to items recognised in OCI or directly in equity, in which case the tax is recognised in the same statement as the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect ofprevious years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to
the tax authorities.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and theamounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the
periods in which the assets will be realised or the liabilities settled.
Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.

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(n)Provisions, contingent liabilities and guarantees

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

Contingent liabilities, contractual commitments and guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related
to legal proceedings or regulatory matters, are not recognised in the 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 by global business.
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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202087

Notes on the Consolidated Financial Statements

2

Operating profit(a)

Net interest income

Net interest income includes:
2020

2019

HK$m

HK$m

Interest income recognised on impaired financial assets
Interest income recognised on financial assets measured at amortised cost

220
127,178309
160,387

Interest income recognised on financial assets measured at FVOCI

20,16730,974

Interest expense on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise
mandatorily measured at fair value(33,135)(56,493)(b)

Net fee income

Net fee income by global business1
Wealth andPersonal
Banking

Commercial
BankingGlobalBanking andMarkets

Corporate
Centre2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

Account services
Funds under management
Cards
Credit facilities

864
5,071
5,564
349

864
677
1,291
1,347

367
1,796
83
1,175

3
—
1
—

2,098
7,544
6,939
2,871

Broking income
Imports/exports
Unit trusts
Underwriting
Remittances
Global custody
Insurance agency commission
Other
Fee income
Fee expense
Year ended 31 Dec 2020

5,473
—
5,991
1
290
942
1,308
2,312
28,165(6,139)22,026

58
2,176
142
1
1,630
53
107
2,363
10,709(1,607)
9,102

682
755
1
1,521
697
2,998
1
5,566
15,642(5,262)
10,380

—
1
—
(12)
(18)
—
—
(2,121)(2,146)
2,308
162

6,213
2,932
6,134
1,511
2,599
3,993
1,416
8,120
52,370(10,700)
41,670Account services
Funds under management
Cards
Credit facilities
Broking income
Imports/exports
Unit trusts

1,304
4,874
6,755
232
2,821
—
6,992

893
646
1,726
1,693
43
2,590
158

340
1,694
85
1,367
696
690
—

1
1
1
1
—
—
—

2,538
7,215
8,567
3,293
3,560
3,280
7,150

Underwriting
Remittances
Global custody
Insurance agency commission
Other
Fee income
Fee expense
Year ended 31 Dec 2019

3
287
755
1,602
2,530
28,155(6,682)
21,473

2
1,945
51
131
2,148
12,026(2,076)
9,950

1,559
665
2,936
2
5,297
15,331(5,366)
9,965

(9)
(14)
—
—
(2,394)(2,413)
2,530
117

1,555
2,883
3,742
1,735
7,581
53,099(11,594)
41,505

1 Effective from 2020, the reportable segments have been changed to reflect the merging of Retail Banking and Wealth Management and Global
Private Banking to form Wealth and Personal Banking ('WPB'), and the re-allocation of Balance Sheet Management from Corporate Centre to theglobal businesses. Comparatives have been re-presented to conform to the current year's presentation. Further details on the change in reportablesegments are set out in note 31 'Segmental analysis' on the consolidated financial statements.
2 Includes inter-segment elimination.

Net fee income includes:
2020

2019

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)

9,373

11,400– fee income– fee expense
Fee earned on trust and other fiduciary activities– fee income– fee expense

13,850(4,477)
9,745
11,012(1,267)

16,324(4,924)
9,234
10,421(1,187)88

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

(c) Net income from financial instruments measured at fair value through profit or loss
2020

2019

HK$m

HK$m

Net income/(expense) arising on:
Net trading activities

35,14142,813

Other instruments managed on a fair value basis
Net income from financial instruments held for trading or managed on a fair value basis(2,969)32,172(6,425)36,388Financial assets held to meet liabilities under insurance and investment contracts
Liabilities to customers under investment contracts

15,873(2,745)

16,245(1,988)13,128(171)

14,257(305)

138
45,267

118
50,458Net income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value
through profit or loss
Change in fair value of designated debt issued and related derivatives1
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
Year ended 31 Dec

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
2020

2019

HK$m

HK$m

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

3,840
(996)
(61)

12,546154(2)

Losses on disposal of subsidiaries, associates and business portfolios
Rental income from investment properties
Dividend income
Other
Year ended 31 Dec

(70)
370
165
2,364
5,612

(14)
423
161
2,490
15,758There was a loss on disposal of loans and receivables of HK$52m in the year (2019: loss of HK$3m). There were no gains or losses on
disposal of financial liabilities measured at amortised cost in the year (2019: nil).

(e)Change in expected credit losses and other credit impairment charges

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

2020

2019

HK$m

HK$m

16,50917,242
(733)
654
556
17,719

5,420
6,283
(863)
95
157
5,672

Change in expected credit losses as a percentage of average gross customer advances was 0.44% for 2020 (2019: 0.15%).

(f)

General and administrative expenses

Premises and equipment
Marketing and advertising expenses
Other administrative expenses1
Year ended 31 Dec

2020

2019

HK$m

HK$m

2,804
1,959
41,54146,304

3,246
2,815
38,70844,7691 Include intercompany expenses. Further details are set out in Note 32.

Included in operating expenses were direct operating expenses of HK$31m (2019: HK$34m) 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$3m (2019: HK$2m).

(g)

Depreciation and impairment of property, plant and equipment

Owned property, plant and equipment
Other right-of-use assets
Year ended 31 Dec

2020

2019

HK$m

HK$m

6,059
3,346
9,405

5,620
2,610
8,230

(h) Auditors’ remuneration
Auditors’ remuneration amounted to HK$163m (2019: HK$125m).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202089

Notes on the Consolidated Financial Statements

3

Insurance business

Net insurance premium Income
Non-linked
insurance

Unit-linked

Total

HK$m

HK$m

HK$m

Gross insurance premium income
Reinsurers’ share of gross insurance premium income

61,979(2,091)

1,693
(18)

63,672(2,109)Year ended 31 Dec 2020

59,888

1,675

61,563Gross insurance premium income
Reinsurers’ share of gross insurance premium income

69,719(10,798)

1,381
(27)

71,100(10,825)

Year ended 31 Dec 201958,921

1,354

60,275

Non-linked
insurance

Unit-linked

Total

HK$m

HK$m

HK$m

Gross claims and benefits paid and movement in liabilities to policyholders

74,8105,594

80,404– claims, benefits and surrenders paid– movement in liabilities

25,87648,934

5,990
(396)

31,866
48,538

Reinsurers’ share of claims and benefits paid and movement in liabilities– claims, benefits and surrenders paid

(2,459)(2,773)(34)(50)(2,493)(2,823)– movement in liabilities
Year ended 31 Dec 2020

314
72,351

16
5,560

330
77,911Gross 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 201984,921
26,96057,961(10,677)(2,658)(8,019)74,244

5,910
6,095
(185)
2
(107)
109
5,912

90,83133,05557,776(10,675)(2,765)(7,910)80,156Net

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

Liabilities under insurance contracts
2020

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

2019

Gross

Reinsurers’
share2Net

Gross

Reinsurers’
share2

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

494,181(25,876)
74,8103,943
547,058(26,247)
2,773(2,459)572(25,361)

467,934(23,103)
72,351
4,515
521,697433,668(26,960)
84,921
2,552
494,181(17,758)
2,658(10,677)(470)(26,247)

415,910(24,302)74,244
2,082
467,934

34,579(5,990)5,594
165
34,348581,406

(35)
50
(34)
15
(4)
(25,365)

34,544(5,940)5,560
18034,344
556,041

34,921(6,095)5,910(157)
34,579528,760

(34)
107
2
(110)
(35)
(26,282)

34,887(5,988)5,912(267)
34,544502,478

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.

90

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

4

Employee compensation and benefits
2020

2019

HK$m

HK$m

Wages and salaries1
Social security costs

33,367893

34,674
1,264

Post-employment benefits– defined contribution pension plans

1,923
1,528

2,110
1,516

– defined benefit pension plans
Year ended 31 Dec

395
36,183594
38,048

1 'Wages and salaries’ includes the effect of share-based payments arrangements of HK$694m (2019: HK$882m).

Post-employment benefit plans
The group operates a number of post-employment benefit plans for its employees. Some of these plans are defined benefit plans, ofwhich the largest plan is The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (the 'Principal Plan’).
The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and thediscounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they arerecoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether asurplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions.

Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value ofplan assets

At 1 Jan 2020
Service cost
– current service cost
– past service cost and gains/(losses) from settlements
Net interest income/(expense) on the net defined benefit asset/(liability)
Re-measurement effects recognised in other comprehensive income– return on plan assets (excluding interest income)– actuarial losses
Contributions by the group
Benefits paid
Exchange differences and other movements
At 31 Dec 2020
Retirement benefit liabilities recognised on the balance sheet

Present value of
defined benefit
obligations

Net defined
benefit liability

HK$m

HK$m

HK$m

10,302
—
—
—
202
446
446
—
602
(1,097)(2)
10,453(12,848)
(318)
(492)
174
(263)
(830)
—
(830)
—
1,153
(34)
(13,140)(2,546)
(318)
(492)
174
(61)
(384)
446
(830)
602
56
(36)
(2,687)(2,701)Retirement benefit assets recognised on the balance sheet (within ‘Prepayment, accrued income and otherassets’)At 1 Jan 2019
Service cost
– current service cost
Net interest income/ (expense) on the net defined benefit asset/(liability)
Re-measurement effects recognised in other comprehensive income– return on plan assets (excluding interest income)– actuarial losses
Contributions by the group
Benefits paid
Exchange differences and other movements1
At 31 Dec 2019
Retirement benefit liabilities recognised on the balance sheet
Retirement benefit assets recognised on the balance sheet (within ‘Prepayment, accrued income and otherassets’)14
13,856(17,197)(3,341)

—
—

(511)
(511)

(511)
(511)

206
927

(274)
(682)

(68)
245

927
—
391
(1,290)(3,788)10,302

—
(682)
—
1,376
4,440
(12,848)

927
(682)
391
86
652
(2,546)(2,595)49

1 Other movements in 2019 included the impact from transfer of employees from the group to HSBC Global Services (Hong Kong) Limited (the'ServCo'), which is a fellow subsidiary of the Group.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202091

Notes on the Consolidated Financial Statements

Fair value of plan assets by asset classes
At 31 Dec 2020

At 31 Dec 2019

Value

Quoted market
price in active
marketThereof HSBC

Value

Quoted market
price in active
marketThereof HSBC

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Fair value of plan assets– equities

10,453
1,547

10,453
1,547

219
—

10,302
1,354

10,302
1,354

177
—

– bonds– alternative investments1

5,562
2,838
506

5,562
2,838

—
—

6,034
2,391

6,034
2,391

—

506

219

523

523

177

– other2

1 Alternative investments included HK$1,722m previously reported under 'equities', and HK$669m reported under 'other'. Comparatives have been
re-presented to conform to the current year's presentation.
2 Other mainly consists of cash and cash deposits.

The Principal Plan
In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (‘LSRBS’), the Principal Plan, covers employees of thegroup and HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the Group set up in Hong Kong aspart of the recovery and resolution planning to provide functional support services to the group, as well as certain other local employeesof the Group. The Principal Plan comprises a funded defined benefit scheme (which provides a lump sum benefit on retirement and is
now closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees, andthe group has been providing defined contribution plans to all new employees. Since the defined benefit scheme of the Principal Plan is a
final salary lump sum scheme, its exposure to longevity risk and interest rate risk is limited compared to a scheme that provides annuity
payments.
The Principal Plan is a funded plan with assets which are held in trust funds separate from the group. The investment strategy of thedefined benefit scheme of the Principal Plan is to hold the majority of assets in fixed income investments, with a smaller portion in
equities. The target asset allocation for the portfolio has been updated in December 2019 to: Fixed income investments 75% and Equity
25% following an update to the investment strategy to de-risk the investment portfolio. Each investment manager has been assigned abenchmark applicable to their respective asset class. The actuarial funding valuation of the Principal Plan is conducted at least on atriennial basis in accordance with the local practice and regulations. The actuarial assumptions used to conduct the actuarial funding
valuation of the Principal Plan vary according to the economic conditions.
The trustee, which is a subsidiary of the Bank, assumes the overall responsibility for the Principal Plan and the group has established amanagement committee and a number of sub-committees to broaden the governance and manage the concomitant issues.
Both the group and ServCo participate in the Principal Plan that shares risks between the entities which are under common control of theGroup. As agreed between the group and ServCo, the net defined benefit cost of the defined benefit scheme of the Principal Plan shall becharged separately. Details on the defined benefit scheme of the Principal Plan are disclosed below.
Net asset/(liability) under the defined benefit scheme of the Principal Plan
Included within the group

Included within ServCo

Present
value ofdefinedbenefitobligationsNet
definedbenefitliability

Present
value ofdefinedbenefitobligationsNet
definedbenefitliability

Fair valueof planassetsFair valueof planassets

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

4,654

(5,252)

(598)

4,445

(4,960)

(515)

—
—

(182)
(182)

(182)
(182)

—
—

(175)
(175)

(175)
(175)

Net interest income/(expense) on the net defined benefit asset/(liability)
Re-measurement effects recognised in other comprehensive income– return on plan assets (excluding interest income)– actuarial losses
Contributions
Benefits paid
Exchange differences and other movements
At 31 Dec 2020
Retirement benefit liabilities recognised on the balance sheet

80
114
114
—
183
(549)
4
4,486

(89)
(325)
—
(325)
—
549
(31)
(5,330)

(9)
(211)
114
(325)
183
—
(27)
(844)
(844)

76
110
110
—
174
(484)
(33)
4,288

(84)
(297)
—
(297)
—
484
31
(5,001)

(8)
(187)
110
(297)
174
—
(2)
(713)
(713)

At 1 Jan 2019
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 movements1
At 31 Dec 2019
Retirement benefit liabilities recognised on the balance sheet

8,402
—
—
68
390
390
—
198
(637)
(3,767)
4,654(9,749)
(194)
(194)
(80)
(255)
—
(255)
—
637
4,389
(5,252)(1,347)
(194)
(194)
(12)
135
390
(255)
198
—
622
(598)
(598)

478
—
—
63
416
416
—
184
(460)
3,764
4,445

(618)
(182)
(182)
(73)
(168)
—
(168)
—
460
(4,379)(4,960)

(140)
(182)
(182)
(10)
248
416
(168)
184
—
(615)
(515)
(515)

At 1 Jan 2020
Service cost
– current service cost

1 Other movements in 2019 included the impact from transfer of employees from the group to ServCo.

92

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

The group expects to make HK$175m of contributions to the defined benefit scheme of the Principal Plan and ServCo expects to make
HK$162m contributions to the defined benefit scheme of the Principal Plan during 2021. This is determined separately by the group and
ServCo by reference to the actuarial funding valuation carried out by the Principal Plan's local actuary.
Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate forthe five years thereafter, are as follows:
Benefits expected to be paid from the defined benefit scheme of the Principal Plan1
As reported by:

2021

2022

2023

2024

2025

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

413
323

547
524

508
350

426
394

411
417

1,874
1,885

– The group– ServCo

2025-2030

1 The duration of the defined benefit obligation is seven years for the Principal Plan under the disclosure assumptions adopted (2019: seven years).

Fair value of plan assets of the defined benefit scheme of the Principal Plan by asset classes
At 31 Dec 2020

At 31 Dec 2019

Value

Quoted market
price in active
marketThereof HSBC

HK$m

HK$m

HK$m

Fair value of plan assets– equities

8,775
2,448

8,775
2,448

– bonds– alternative investments1

4,537
1,676
114

– other2

Value

Quoted market
price in active
marketThereof HSBC

HK$m

HK$m

HK$m

124
—

9,099
2,228

9,099
2,228

66
—

4,537
1,676

—
—

5,433
1,311

5,433
1,311

—

114

124

127

127

66

1 Alternative investments included HK$1,311m reported under 'other'. Comparatives have been re-presented to conform to the current year's
presentation.
2 Other mainly consists of cash and cash deposits.

The Principal Plan’s key actuarial financial assumptions
The group and ServCo determine the discount rate to be applied to the defined benefit scheme's obligations in consultation with the
Principal Plan’s local actuary, on the basis of the current average yields of Hong Kong Government bonds and Hong Kong Exchange
Fund Notes, with maturities consistent with that of the defined benefit obligations.
The key actuarial assumptions used to calculate the group’s obligations for the defined benefit scheme of the Principal Plan for theyear, and used as the basis for measuring the expenses were as follows:
Key actuarial assumptions for the defined benefit scheme of the Principal Plan
Discount rate

Rate of pay increase% p.a.

% p.a.

Mortality table

At 31 Dec 20202% p.a. for 2020 and
2021 and 3% p.a.
0.50
thereafter

HKLT 20191

At 31 Dec 2019

1.75

HKLT 20182

3.00

1 HKLT 2019 – Hong Kong Life Tables 2019.
2 HKLT 2018 – Hong Kong Life Tables 2018.

Actuarial assumption sensitivities
The discount rate and rate of pay increase are sensitive to changes in market conditions arising during the reporting period. The
following table shows the financial impact of assumption changes on the defined benefit scheme of the Principal Plan at year end:
The effect of changes in key assumptions on the defined benefit scheme of the Principal Plan
Impact on HSBC Group Hong Kong Local Staff Retirement Benefit
Scheme obligation
Financial impact of increase

Discount rate – increase/decrease of 0.25%
Pay – increase/decrease of 0.25%

Financial impact of decrease

2020

2019

2020

2019

HK$m

HK$m

HK$m

HK$m

(180)
182

(173)
183

185
(178)

178
(178)

Directors’ emoluments
The aggregate emoluments of the Directors of the Bank disclosed pursuant to section 4 of the Companies (Disclosure of Information
about Benefits of Directors) Regulation were HK$106m (2019: HK$110m). This comprises fees of HK$26m (2019: HK$17m) and other
emoluments of HK$80m (2019: HK$93m) there is nil contributions to pension schemes for 2020 (2019: HK$1m). Non-cash benefits which
are included in other emoluments mainly relate to share-based payment awards, and the provision of housing and furnishing.
Comparatives for 'fees' and 'other emoluments' had been re-presented as HK$6m of fees paid to non-executive directors' were reported
as 'other emoluments' in 2019.
Details on loans to directors are set out in Note 32.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202093

Notes on the Consolidated Financial Statements

5

Tax

The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2019: 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 2020. Deferred taxation is provided for in accordance with the group’s accounting policy
in Note 1.2(m).
Tax expense
2020

2019

HK$m

HK$m

Current tax– Hong Kong taxation – on current year profit

14,2797,316

19,461
11,058– Hong Kong taxation – adjustments in respect of prior years– overseas taxation – on current year profit

(457)
7,668

(7)
8,813

– overseas taxation – adjustments in respect of prior years
Deferred tax

(248)
226

(403)
1,932

– origination and reversal of temporary differences– effect of changes in tax rates

(414)
36

1,975
—

604
14,505(43)
21,393– adjustments in respect of prior years
Year ended 31 Dec

Tax reconciliation
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the applicable tax
rates in the countries concerned as follows:
Reconciliation between taxation charge and accounting profit at applicable tax rates

Profit before tax
Notional tax on profit before tax, calculated at the rates applicable to profits in the countries concerned
Effects of profits in associates and joint ventures
Non-taxable income and gains
Local taxes and overseas withholding taxes
Permanent disallowables
OthersYear ended 31 Dec

2020

2019

HK$m

HK$m

90,196
18,058(2,523)(3,291)
2,270
523
(532)
14,505

136,433
25,855(2,676)(3,969)
2,503
606
(926)
21,393

Movements of deferred tax assets and liabilities

AssetsLiabilities
At 1 Jan 2020
Exchange and other adjustments
Charge/(credit) to income statement
Charge/(credit) to other comprehensive
incomeExpenseprovisions

Impairment
allowance on
financial
instruments

Revaluationof properties

Other

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

—
(10,140)(10,140)
(19)
(503)

1,290
—
1,290
81
(63)

1,478
—
1,478
23
1,176

—
(16,462)(16,462)
(52)
729

2,280
(6,007)(3,727)73(1,452)

5,231(32,941)(27,710)112(226)

Accelerated
capitalallowances

Insurancebusiness

HK$m

183
(332)
(149)
6
(113)
—

—

(14)

(1)

1,140

(973)

152

At 31 Dec 2020
Assets1
Liabilities1

(256)
102
(358)

(10,662)—(10,662)

1,294
1,294
—

2,676
2,676
—

(14,645)—(14,645)(6,079)3,088(9,167)(27,672)
7,160(34,832)

AssetsLiabilities
At 31 Dec 2018
Impact on transition to HKFRS 16
At 1 Jan 2019
Exchange and other adjustments
Charge/(credit) to income statement

111
(583)
(472)
—
(472)
(1)
324

—
(8,057)(8,057)—(8,057)—(2,083)

1,419
—
1,419
—
1,419
7
(138)

1,314
—
1,314
—
1,314
(107)
271

—
(13,673)(13,673)(2,664)(16,337)
25
603

1,870
(4,599)(2,729)—(2,729)
118
(909)

4,714
(26,912)(22,198)(2,664)(24,862)42(1,932)

Charge/(credit) to other comprehensive
incomeAt 31 Dec 2019
Assets1
Liabilities1

—

—

2

—

(753)

(207)

(958)

(149)
183
(332)

(10,140)—(10,140)

1,290
1,290
—

1,478
1,478
—

(16,462)—(16,462)(3,727)2,280(6,007)(27,710)
5,231(32,941)

1 After netting off balances within countries, the balances as disclosed in the Consolidated Financial Statements are as follows: deferred tax assets
HK$3,325m (2019: HK$2,179m); and deferred tax liabilities HK$30,997m (2019: HK$29,889m).

The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$3,969m (2019: HK$3,497m). Of
this amount, HK$1,917m (2019: HK$1,939m) has no expiry date and the remaining will expire within 10 years.

94

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Deferred tax of HK$4,295m (2019: HK$3,197m) has been provided in respect of distributable reserves or post-acquisition reserves ofassociates that, on distribution or sale, would attract withholding tax.
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
2020

2019

HK$ per share

HK$m

HK$ per share

HK$m

In respect of previous year:– fourth interim dividend

0.58

27,0260.47

21,958In respect of current year:– first interim dividend paid

0.13

5,814

0.32

14,963– second interim dividend paid
– third interim dividend paid

0.19
0.22

8,915
10,0630.32
0.32

14,963
14,963

Total
Distributions on other equity instruments

1.12

51,8182,450

1.43

66,847
1,522

Dividends paid on ordinary shares

Dividends to shareholders

54,26868,369The Directors have declared a fourth interim dividend in respect of the financial year ended 31 December 2020 of HK$0.47 per ordinary
share (HK$21,665m) (2019: HK$0.58 per ordinary share (HK$27,026m)).
Total coupons on capital securities classified as equity

US$1,900m Floating rate perpetual subordinated loans (interest rate at one year US dollar LIBOR plus 3.840%)1
US$1,400m Floating rate perpetual subordinated loans (interest rate at three months US dollar LIBOR plus 3.510%)1
US$600m Floating rate perpetual subordinated loan (interest rate at three months US dollar LIBOR plus 3.620%)1
US$700m Floating rate perpetual subordinated loan (interest rate at three months US dollar LIBOR plus 4.980%)1
US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.510%)2
US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.030%)2
US$1,000m Fixed rate perpetual subordinated loan (interest rate fixed at 6.090%)2
US$1,200m Fixed rate perpetual subordinated loan (interest rate fixed at 6.172%)2
US$600m Fixed rate perpetual subordinated loan (interest rate fixed at 5.910%)2
US$1,100m Fixed rate perpetual subordinated loan (interest rate fixed at 6.000%)2
Total

1
2

7

2020
HK$m

2019
HK$m

—
—
—
—
454
420
370
445
249
512
2,450

497
373
178
214
150
110
—
—
—
—
1,522

These subordinated loans were early repaid in the first half of 2019 and distributions were made on repayment.
These subordinated loans were issued in May and June 2019 and discretionary coupons are paid annually.

Trading assets

Treasury and other eligible bills
Debt securities
Equity securities
Other1
At 31 Dec

2020

2019

HK$m

HK$m

113,668
265,255
166,385
55,106600,414

131,967
281,555
177,463
31,776
622,761

1 'Other' includes reverse repos, stock borrowing and other accounts with banks and customers.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202095

Notes on the Consolidated Financial Statements

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 Exchange

18,274,306

100,371

238,746

232

238,978

261,792

2,625

264,417

Interest rate
Equity26,906,526
591,614304,554—357,195
13,8106,099—

363,294
13,810327,675
19,072

6,718—

334,393
19,072553,790
115,673

—
—

5,381
2,138

—
—

5,381
2,138

5,955
5,030

—
—

5,955
5,030

46,441,909

404,925

617,2706,331

623,601(200,656)

619,524

9,343

628,867(200,656)

CreditCommodity and other
Gross total
OffsetAt 31 Dec 2020

422,945428,211

Foreign Exchange

20,494,866

75,324150,019800

150,819

164,831279

165,110

Interest rate

30,656,367

342,609236,110

3,436

239,546

226,951

3,495

230,446

657,760
664,590——

13,666
6,500——

13,6666,500

17,751
7,170——

17,751
7,170

140,553
52,614,136—
417,933

2,983
409,278

—
4,236

2,983
413,5144,626
421,329

—
3,774

4,626
425,103

EquityCreditCommodity and other
Gross total
OffsetAt 31 Dec 2019

(132,872)
280,642(132,872)
292,231

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

Use of derivatives
The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risk
arising from client business, and to manage and hedge the group’s own risks. Derivatives (except for derivatives which are designated as
effective hedging instruments) are held for trading. Within the held for trading classification are two types of derivative instruments:
those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet thequalifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments
designated at fair value. These activities are described more fully below.
The group’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly
to ensure that they remain within acceptable risk levels. When entering into derivative transactions, the group employs the same credit
risk management framework to assess and approve potential credit exposures that it uses for traditional lending.

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

Derivatives valued using models with unobservable inputs
Any initial gain or loss on financial instruments where the valuation is dependent on unobservable parameters is deferred over the life of
the contract or until the instrument is redeemed, transferred or sold or the fair value becomes observable. All derivatives that are part ofqualifying hedging relationships have valuations based on observable market parameters.
The aggregate unobservable inception profit yet to be recognised in the income statement is immaterial.

Hedge accounting derivatives
The group applies hedge accounting to manage the following risks: interest rate, foreign exchange and net investment in foreign
operations. 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 thetype of hedging transaction. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges,or hedges of net investments in foreign operations.

Fair value hedges
The group enters into to fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value due to movements inmarket interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss, including debt
securities held and issued.
Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fairvalue of derivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items
and hedging instruments.
For some debt securities held, the group manages interest rate risk in a dynamic risk management strategy. The assets in scope of thisstrategy are high quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements.
The interest rate risk of the group's fixed rate debt securities issued is managed in a non-dynamic risk management strategy.
96

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Cash flow hedges
The group’s cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage
the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates
and foreign-currency basis.
The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuancesof non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of
future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on thebasis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows
representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness andineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.
The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes inforeign exchange market rates with cross-currency swaps; these are considered non-dynamic hedges.

Interest rate benchmark reform
At 31 December 2020, HK$192,048m (2019: HK$252,443m) of the notional amounts of interest rate derivatives designated in hedge
accounting relationships represent the extent of the risk exposure managed by the group that is directly affected by market-wide Ibors
reform. The group has also designated hedge accounting relationships which involve cross currency swaps, although the amount is not
significant.
Further details regarding the impact of the market-wide benchmarks reform is set out in the 'Top and emerging risks' section on pages 20
to 21 as specified as 'Audited'.

9

Financial assets designated and otherwise mandatorily measured at fair value through profit
or loss
2020

Treasury and other eligible bills
Debt securities
Equity securities
Other1
At 31 Dec

2019

Designated atfair value

Mandatorily
measured atfair value

Mandatorily
Designated at measured at fair
fair value
value

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

94
14,400——14,494200
8,455
143,815
11,996
164,466294
22,855
143,815
11,996
178,960—
13,350——13,350234
6,733
120,047
13,147140,161234
20,083120,047
13,147
153,511Total

1 ‘Other’ primarily includes loans and advance to banks and customers.

10

Loans and advances to customers

Gross loans and advances to customers
Expected credit loss allowances
At 31 Dec

2020

2019

HK$m

HK$m

3,697,568(28,887)
3,668,681

3,738,269(17,394)
3,720,875

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

2020

2019

HK$m

HK$m

1,097,760
86,735
267,852
1,452,347
638,560
394,624
379,853
97,204
489,737
1,999,978245,2433,697,568

1,027,087
94,582
281,087
1,402,756
666,380
418,669
418,822
86,912494,416
2,085,199
250,314
3,738,269

2,357,375
1,340,193

2,399,867
1,338,402

1 The geographical information shown above is classified by the location of the principal operations of the subsidiary or the branch responsible foradvancing the funds.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202097

Notes on the Consolidated Financial Statements

Finance lease receivables and hire purchase contracts
The group leases a variety of assets to third parties under finance leases. At the end of lease terms, assets may be sold to third parties orleased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income. Loans andadvances to customers include receivables under finance leases and hire purchase contracts having the characteristics of finance leases.
Net investment in finance leases and hire purchase contracts
2020

Amounts receivable– within one year
– one to two years– two to three years– three to four years– four to five years– after five years

2019

Total future
minimum
payments

Unearnedfinance
income

HK$m

HK$m

3,715
3,439
2,717
2,135
1,913
22,186
36,105

(811)
(678)
(554)
(475)
(415)
(3,014)(5,947)

Present value

Total future
minimum
payments

Unearnedfinance
incomePresent value

HK$m

HK$m

HK$m

HK$m

2,904
2,761
2,163
1,660
1,498
19,17230,158(392)
29,766

3,214
2,955
2,593
2,204
1,936
23,19536,097

(639)
(572)
(529)
(496)
(464)
(3,567)(6,267)

2,575
2,383
2,064
1,708
1,472
19,62829,830(175)
29,655

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

2020

2019

HK$m

HK$m

1,700,406
790,627
899,193
10,586
475,026
4,443
470,583
2,175,432

1,465,998
606,738
850,623
8,637
434,300
5,049
429,251
1,900,298

Equity instruments measured at fair value through other comprehensive income
2020

2019

Fair value

Dividends
recognised

Fair value

Dividends
recognised

Type of equity instruments
Business facilitation

HK$m

HK$m

HK$m

HK$m

9,826

157

7,906

141

Investments required by central institutions
OthersAt 31 Dec

413
347
10,586

3
6
166

376
355
8,637

7
5
153

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
Other
Assets pledged at 31 Dec
Amount of liabilities secured

2020

2019

HK$m

HK$m

46,8461,830
28,30776,913
17,60886,240257,744
210,185

88,365228
12,80676,01911,64852,473
241,539
208,436

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. HSBC 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$30,386m (2019: HK$63,194m).
98

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Assets transferred
Transferred financial assets not qualifying for full derecognition and associated financial liabilities
2020

2019

Carrying amount of:Carrying amount of:TransferredassetsRepurchase agreements
Securities lending agreements

Associatedliabilities

Transferredassets

Associatedliabilities

HK$m

HK$m

HK$m

HK$m

85,715
18,946

77,32235

98,92915,27094,296
114

104,661

77,357

114,199

94,410

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

13

2020

2019

HK$m

HK$m

709,091
128,783

556,634
95,154

Investments in subsidiaries

Main subsidiaries of the Bank

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
People's Republic of China
Malaysia
Australia
TaiwanSingapore

HSBC Life (International) Limited1

BermudaBanking
Banking
Banking
Banking
Banking
Banking
Retirement benefits andlife insurance

The group’s interest inissued share capital/
registered or charter capital

62.14%
100%
100%
100%
100%
100%
100%

1 Held indirectly.

All the above subsidiaries are included in the group’s consolidated financial statements. All these subsidiaries make their financial
statements up to 31 December.
The principal places of business are the same as the places of incorporation except for HSBC Life (International) Limited which operates
mainly in Hong Kong.
The proportion of voting rights held is the same as the proportion of ownership interest held.
The main subsidiaries are regulated banking and insurance entities in the Asia-Pacific region and, as such, are required to maintaincertain minimum levels of capital and liquid assets to support their operations. The effect of these regulatory requirements is to limit theextent to which the subsidiaries may transfer funds to the Bank in the form of repayment of shareholder loans or cash dividends.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 202099

Notes on the Consolidated Financial Statements

Subsidiary with significant non-controlling interest
2020

2019

37.86%

37.86%

Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests

HK$m

HK$m

Profit attributable to non-controlling interests
Accumulated non-controlling interests of the subsidiary

6,300
64,975

9,386
63,363

Dividends paid to non-controlling interests
Summarised financial information (before intra-group eliminations):

4,849

5,646

1,759,787
1,576,592

1,676,721
1,497,804– net operating income before change in expected credit losses and other credit impairment charges– profit for the year

35,433
16,67043,54924,822– other comprehensive income for the year
– total comprehensive income for the year

1,079
17,7492,376
27,198– total assets– total liabilities

14

Interests in associates and joint ventures

Associates

Share of net assets
Goodwill
Impairment
At 31 Dec

2020

2019

HK$m

HK$m

164,767
4,011(24)
168,754

148,1543,787(24)
151,917

The above balance represented the group’s interests in associates.

Principal associate
Place of incorporation

Bank of Communications Co., Ltd

The group’s interest in issued share capital

People’s Republic of China

19.03%

Bank of Communications Co., Ltd. is listed on recognised stock exchanges. The fair value represents valuation based on the quoted
market price of the shares held (Level 1 in the fair value hierarchy) and amounted to HK$57,815m at 31 December 2020(2019: HK$78,311m).

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.

Impairment testing
At 31 December 2020, the fair value of the group’s investment in BoCom had been below the carrying amount for approximatelynine years. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment
at 31 December 2020 as the recoverable amount as determined by a value-in-use (‘VIU’) calculation was higher than the carrying value.
At
31 Dec 2020

BoCom

31 Dec 2019

VIU

Carrying
value

Fair
value

VIU

Carrying
value

Fair
value

HK$bn

HK$bn

HK$bn

HK$bn

HK$bn

HK$bn

169.3

165.4

57.8

167.8

148.4

78.3

Compared with 31 December 2019, the extent to which the VIU exceeds the carrying value (‘headroom’) has decreased by HK$15.5bn.
The reduction in headroom was principally due to the impact on the VIU from BoCom's actual performance, which was lower than earlier
forecasts due to the impact of the Covid-19 outbreak and the disruption to global economic activity, downward revisions tomanagement's best estimates of BoCom's future earnings in the short to medium term, and the net impact of revisions to certain longterm assumptions. Both the VIU and the CV increased due to the impact of foreign exchange movements.
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 under-performance 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 as a result of an increase in the risk premium or risk-free rates could also result in a reduction of VIU and an impairment. At
the point where the carrying value exceeds the VIU, impairment would be recognised.
If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying
value.

100

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Basis of recoverable amountThe impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying
amount. The VIU calculation uses discounted cash flow projections based on management’s best estimates of future earnings available
to ordinary shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best
estimate. There are two main components to the VIU calculation. The first component is management’s best estimate of BoCom’s
earnings which is based on explicit forecasts over the short to medium term. This results in forecast earnings growth that is lower thanrecent historical actual growth and also reflects the uncertainty arising from the current economic outlook. Earnings beyond the short tomedium 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 regulatory capital requirements over the forecast period (i.e. CMC is deducted whenarriving 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 minimum regulatory capitalrequirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management
considers other factors (including 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% (2019: 3%) for periods after 2024, which does not exceed forecast GDP growth in mainland China
and is consistent with forecasts by external analysts.
• Long-term asset growth rate: 3% (2019: 3%) for periods after 2024, which is the rate that assets are expected to grow to achieve longterm profit growth of 3%.
•

Discount rate: 11.37% (2019: 11.24%) which is based on a Capital Asset Pricing Model (‘CAPM’) calculation for BoCom, using market
data. Management also compares the rate derived from the CAPM with discount rates from external sources. The discount rate used
is within the range of 10.3% to 15.0% (2019: 10.0% to 15.0%) indicated by external sources. The increased rate reflects the net
impact of updates to certain components of CAPM due to elevated levels of risk arising from the impact of the Covid-19 outbreak andthe disruption to global economic activity.

•

Expected credit losses as a percentage of customer advances (‘ECLs’): ranges from 0.98% to 1.22% (2019: 0.95%) in the short tomedium term, reflecting increases due to the Covid-19 outbreak and BoCom's actual results. For periods after 2024, the ratio is 0.88%(2019: 0.76%), which is slightly higher than BoCom’s average ECLs in recent years. This ratio was increased to reflect trends in
BoCom’s actual results in recent years of increasing ECLs and of changes to BoCom’s loan portfolio.

•

Risk-weighted assets as a percentage of total assets: ranges from 61% to 62% (2019: 61%) in the short to medium term, reflecting
increases that may arise from higher ECLs in the short term, followed by reductions that may arise from a subsequent lowering of
ECLs and a continuation of the trend of strong retail loan growth. For periods after 2024, the ratio is 61% (2019: 61%). These rates are
similar to BoCom’s actual results in recent years and are slightly below forecasts disclosed by external analysts.

•

Operating income growth rate: ranges from 3.5% to 6.7% (2019: 4.9% to 9.4%) in the short to medium term, and are lower than
BoCom’s actual results in recent years and the forecasts disclosed by external analysts, reflecting economic pressures from theCovid-19 outbreak, global trade tensions and industry developments in mainland China.

•

Cost-income ratio: ranges from 36.3% to 36.8% (2019: 37.1% to 38.8%) in the short to medium term. These ratios are similar to
BoCom's actual results in recent years and slightly higher than forecasts disclosed by external analysts.

•

Effective tax rate (‘ETR’): ranges from 7.8% to 16.5% (2019: 12.0% to 17.0%) 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 2024, the rate is
16.8% (2019: 22.5%), which is higher than the recent historical average. This rate was reduced on expectations of a lower ETR in thelong term, reflecting BoCom’s actual results in recent years and forecast financial asset composition, and forecasts disclosed byexternal analysts.

•

Capital requirements: Capital adequacy ratio: 11.5% (2019: 11.5%) and Tier 1 capital adequacy ratio: 9.5% (2019: 9.5%), based on theminimum regulatory requirements.

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 19 basis points
Increase by 17 basis points
Increase by 22 basis points
Increase by 3 basis points
Increase by 115 basis points
Decrease by 24 basis points
Increase by 66 basis points
Increase by 183 basis points
Increase by 22 basis points
Increase by 86 basis points

The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivityof the VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur atthe same time. The selected rates of reasonably possible changes to key assumptions are largely based on external analysts’ forecasts
which can change period to period.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020101

Notes on the Consolidated Financial Statements

Favourable change

Unfavourable change

Increase in
VIU

VIU

Decrease in
VIU

bps

HK$bn

HK$bn

VIU

bps

HK$bn

HK$bn

—
-50

—
11.0

169.3
180.3

-50
—

(10.0)
—

159.3
169.3

-47

At 31 December 2020
Long-term profit growth rateLong-term asset growth rate
Discount rate

9.4

178.7

+53

(9.3)

160.0

2020 to 2024: 96
2025 onwards: 76

17.7

2020 to 2024: 122
187.0 2025 onwards: 95(16.5)

152.8

Risk-weighted assets as a percentage of total assets
Operating income growth rate

-40
+2

0.4
0.9

169.7
170.2

+166
-69

(6.7)
(11.8)

162.6
157.5

Cost-income ratio
Long-term effective tax rate

-149
-316

9.9
6.9

179.2
176.2

+120
+820

(9.6)
(17.7)

159.7
151.6

—
—

—
—

169.3
169.3

+297
+263

(61.0)(41.5)

108.3
127.8

—
-50

—
10.6

167.8
178.4

-50
—

(10.6)
—

157.2
167.8

-54

10.9

178.7

+56

(9.9)

157.9

(9.4)

158.4

(0.4)
(14.1)(9.4)(5.6)(64.1)(47.2)

167.4
153.7
158.4
162.2
103.7
120.6

Expected credit losses as a percentage of customer advances

Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio
At 31 December 2019
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

2019 to 2023: 90
2024 onwards: 70

7.5

175.3

2019 to 2023: 1082024 onwards: 81

-96
+14
-175
-352
—
—

2.9
1.9
7.7
7.8
—
—

170.7
169.7
175.5
175.6
167.8
167.8

+12
-102
+95
+250
+337
+322

Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of
VIU is HK$140.9bn to HK$187.9bn (2019: HK$144.3bn to HK$177.2bn). The range is based on the favourable/unfavourable change in theearnings in the short to medium term, and long-term expected credit losses as a percentage of customer advances as set out in the table
above. All other long-term assumptions, the discount rate and the basis of the CMC have been kept unchanged when determining thereasonably possible range of the VIU.

Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2020, the group included theassociate’s results on the basis of financial statements made up for the 12 months to 30 September 2020, but taking into account thefinancial effect of significant transactions or events in the period from 1 October 2019 to 31 December 2020.
Selected balance sheet information of BoComAt 30 Sep

Cash and balances at central banks
Loans and advances to banks and other financial institutions
Loans and advances to customers
Other financial assets
Other assets
Total assets
Deposits by banks and other financial institutions
Customer accounts
Other financial liabilities
Other liabilities
Total liabilities
Total equity

102

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

2020

2019

HK$m

HK$m

945,836
832,226
6,751,280
3,941,375
349,120
12,819,837
2,122,220
7,852,322
1,605,846
241,177
11,821,565
998,272

874,238
841,420
5,689,981
3,394,004
315,310
11,114,953
2,262,654
6,765,782
1,026,377
179,723
10,234,536
880,417

Reconciliation of BoCom’s net assets to carrying amount in the group’s consolidated financial statements
At 30 Sep
2020

2019

HK$m

HK$m

The group’s share of ordinary shareholders' equity

161,433

144,727

Goodwill
Carrying amount

3,912
165,345

3,687
148,414

Selected income statement information of BoCom
For the 12 months ended 30 Sep
2020

2019

HK$m

HK$m

Net interest income

170,586

161,079

Net fee and commission income
Change in expected credit losses

49,624(75,220)

50,233(58,603)

Depreciation and amortisation(16,069)(15,152)

Tax expense(6,656)(12,822)– profit for the year
– other comprehensive income

79,585(5,965)87,5562,470

Total comprehensive income
Dividends received from BoCom

73,620
4,907

90,0264,810

At 31 December 2020, the group's share of associates' contingent liabilities was HK$356,609m (2019: HK$305,291m).

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.
2020

2019

HK$m

HK$m

Goodwill

7,109

6,315

Present value of in-force long-term insurance business
Other intangible assets1

65,052
17,807

61,075
14,253

At 31 Dec

89,96881,643

1 Included within other intangible assets is internally generated software with a net carrying value of HK$15,283m (2019: HK$11,851m). During theyear, capitalisation of internally generated software was HK$7,241m (2019: HK$6,219m), amortisation charge was HK$3,233m (2019:
HK$2,264m) and impairment charge was HK$603m (2019: HK$103m).

The present value of in-force long-term insurance business
When calculating the present value of in-force long term ('PVIF') insurance business, expected cash flows are projected after adjusting fora variety of assumptions made by each insurance operation to reflect local market conditions and management’s judgement of future
trends, and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology).
Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.
Actuarial Control Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. Allchanges to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by
the Actuarial Control Committee.
Movements in PVIFAt 1 Jan
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

2020

2019

HK$m

HK$m

61,0753,840
5,360(6,743)
5,268
(45)
137
65,052

48,522
12,546
8,779(5,531)
9,386
(88)
7
61,075

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$1,022m (2019: HK$8,829m), directly offsetting interest rate-driven changes to the valuation of liabilities under insurance contracts.
• HK$1,916m (2019: HK$282m), 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$2,330m (2019: HK$275m), driven by other assumptions changes and experience variances.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020103

Notes on the Consolidated Financial Statements

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:
2020

2019

%

%

Weighted average risk free rate
Weighted average risk discount rate

0.71
4.96

1.84
5.44

Expense inflation

3.00

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 62 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 63 for further details on the impact of changes in non-economic assumptions on our insurance
manufacturing operations.

16

Property, plant and equipment
2020

2019

HK$m

HK$m

Owned property, plant and equipment1
Other right-of-use assets

118,747
9,790

128,6039,327

At 31 Dec

128,537

137,930

1 Included leasehold land and buildings of HK$108,320m (2019: HK$119,264m) for which the right of use are considered sufficient to constitutecontrol. They are therefore presented as owned assets.

Movement in owned property, plant and equipment
2020

2019

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

Cost or valuation
At 31 Dec of prior year

111,473

13,335

Impact on transition to HKFRS 16
At 1 Jan—111,473—
13,335

16,922

141,730

94,037

12,87522,728

129,640—
16,922—
141,730

16,284
110,321—
12,875—22,72816,284145,924

Exchange and other adjustments
Additions

453
770

31
635

365
2,363

849
3,768

(119)
1,034

(12)
447

(152)
1,853

(283)
3,334

Disposals
Transfers1

(12)
—

—
—

(4,384)—(4,396)
—

(2)
—

—
—

(903)
(6,604)(905)(6,604)

Elimination of accumulated depreciation onrevalued land and buildings(4,737)——(4,737)(4,306)——(4,306)(Deficit) / surplus on revaluation(6,914)(996)—(7,910)

4,426

154

—

4,580

Reclassifications
At 31 Dec
Accumulated depreciation
At 1 Jan
Exchange and other adjustments
Charge for the year
Disposals
Transfers1(242)
100,791

162
13,167—
15,266(80)
129,224

119
111,473(129)
13,335—
16,922(10)
141,730

84
10
4,734
(1)
—

—
—
—
—
—

13,043305
1,325(4,286)—

13,127315
6,059(4,287)
—

73
6
4,312
(1)
—

—
—
—
—
—

17,487
(56)
1,308
(874)
(4,822)

17,560
(50)
5,620
(875)
(4,822)(4,737)——(4,737)(4,306)——(4,306)

90
100,701—
13,167

10,387
4,879

10,477
118,747

84
111,389—
13,335

13,043
3,879

13,127
128,603

Elimination of accumulated depreciation onrevalued land and buildings
At 31 Dec
Net book value at 31 Dec

1 In 2019, certain equipment was transferred to a fellow subsidiary as part of the Recovery and Resolution Plan. The balance represented thecarrying value of this equipment on the date of transfer.

104

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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

2020

2019

HK$m

HK$m

17,085

16,895

Valuation of land and buildings and investment properties
The group’s land and buildings and investment properties were revalued as at 31 December 2020. 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$7,189m (2019: HK$7,859m) in respect of properties which werevalued using the depreciated replacement cost method.
Valuation of land and buildings and investment properties in Hong Kong, Macau and mainland China were largely carried out by
Cushman & Wakefield Limited, who have recent experience in the location and type of properties and who are members of the Hong
Kong Institute of Surveyors. This represents 92% by value of the group’s properties subject to valuation. Other properties were valued bydifferent independent professionally qualified valuers.

17

Prepayments, accrued income and other assets
2020

2019

HK$m

HK$m

Prepayments and accrued income
BullionAcceptances and endorsements
Reinsurers’ share of liabilities under insurance contracts (Note 3)
Current tax assets
Settlement accounts

24,301
61,26946,70525,3652,783
33,79628,32653,16347,302
26,282
1,521
27,289Cash collateral and margin receivables
Other assets
At 31 Dec

58,58435,807
288,61035,82428,551
248,258

Prepayments, accrued income and other assets included HK$197,362m (2019: HK$165,497m) of financial assets, the majority of whichwere measured at amortised cost.

18

Customer accounts

Customer accounts by country/territory

Hong Kong
Mainland China
Singapore
Australia
India
Malaysia
TaiwanIndonesia
Other
At 31 Dec

19

2020

2019

HK$m

HK$m

4,120,955
440,608
427,537
227,072
156,615
124,036
124,375
40,304
249,894
5,911,396

3,894,175
376,390378,303
180,637
116,330
113,907
114,250
36,861
221,571
5,432,424

Trading liabilities

Deposits by banks1
Customer accounts1
Net short positions in securities
At 31 Dec

2020

2019

HK$m

HK$m

222
835
59,75560,812159
1,150
86,22387,532

1 ‘Deposits by banks’ and ‘Customer accounts’ include repos, stock lending and other amounts.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

105

Notes on the Consolidated Financial Statements

20

Financial liabilities designated at fair value
2020

2019

HK$m

HK$m

Deposits by banks and customer accounts
Debt securities in issue

77,822
49,67374,761
48,506

Liabilities to customers under investment contracts
At 31 Dec

39,518167,01337,024160,291

The carrying amount of financial liabilities designated at fair value was HK$735m higher than the contractual amount at maturity(2019: HK$1,216m higher). The cumulative loss in fair value attributable to changes in credit risk was HK$25m (2019: HK$6m).

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

2020

2019

HK$m

HK$m

94,89434,198129,092

90,36565,074
155,439(49,673)
79,419(48,506)
106,933

Accruals and deferred income, other liabilities and provisions
2020

2019

HK$m

HK$m

Accruals and deferred income

21,58825,600Acceptances and endorsements
Settlement accounts

46,77530,05647,35535,807

Cash collateral and margin payables
Share-based payment liability to HSBC Holdings plc

60,714
1,124

40,2991,417

Lease liabilities
Other liabilities

10,05743,881

9,291
41,687

Provisions for liabilities and charges
At 31 Dec

1,792
215,987

1,796
203,252

Accruals and deferred income, other liabilities and provisions included HK$207,899m (2019: HK$195,122m) of financial liabilities whichwere measured at amortised cost.
Movement in provisions
Restructuring
costs

Other

Total

Provisions (excluding contractual commitments)
At 31 Dec 2019
Additions
Amounts utilised
Unused amounts reversed
Exchange and other movements
At 31 Dec 2020
Contractual commitments1
At 31 Dec 2019
Net change in expected credit loss provision and other movements
At 31 Dec 2020
Total Provisions at 31 Dec 2020

HK$m

HK$m

HK$m

208
222
(269)
(42)
(3)
116

812
296
(356)
(361)
28
419

1,020
518
(625)
(403)
25
535

At 31 Dec 2018
Additions
Amounts utilised
Unused amounts reversed
Exchange and other movements
At 31 Dec 2019
Contractual commitments
At 31 Dec 2018
Net change in expected credit loss provision and other movements
At 31 Dec 2018
Total Provisions at 31 Dec 2019

74
563
(402)
(29)
2
208

776
481
1,257
1,792
640
383
(85)
(254)
128
812

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.

106

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

714
946
(487)
(283)
130
1,020
691
85
776
1,796

23

Subordinated liabilities

Subordinated liabilities issued to third parties measured at amortised cost consist of undated primary capital notes and other loan capital
having an original term to maturity of five years or more. Subordinated liabilities issued to Group entities are not included in the below.

US$400m
MYR500m

Undated floating rate primary capital notes
Fixed rate (5.050%) subordinated bonds due 2027, callable from 20221

At 31 Dec

2020

2019

HK$m

HK$m

3,101
964
4,065

3,114
952
4,066

1 The interest rate on the MYR500m 5.05% callable subordinated bonds due 2027 will increase by 1% from November 2022.

24

Share capital

Paid up share capital in HK$
Paid up share capital in US$1
At 31 Dec

2020

2019

HK$m

HK$m

116,103
56,232
172,335

116,103
56,232
172,335

Ordinary shares issued and fully paid
2020
At 31 Dec

2019

HK$m

Number

HK$m

Number172,335

46,440,991,798

172,335

46,440,991,798

1 Paid up share capital in US$ represents preference shares which were redeemed or bought back via payment out of distributable profits and forwhich the amount was transferred from retained earnings to share capital in accordance with the requirements of the Companies Ordinance.

There were no new ordinary shares issued in 2020 (2019: nil). The holder of the ordinary shares is entitled to receive dividends as
declared from time to time, rank equally with regard to the Bank’s residual assets and are entitled to one vote per share at shareholder
meetings of the Bank.

25

Other equity instruments

Other equity instruments comprise additional tier 1 capital instruments in issue which are accounted for as equity.

US$1,000m Fixed rate perpetual subordinated loan, callable from Mar 20251
US$900m Fixed rate perpetual subordinated loan, callable from Sep 20262
US$700m Fixed rate perpetual subordinated loan, callable from Mar 20253
US$500m Fixed rate perpetual subordinated loan, callable from Mar 20253
US$600m Fixed rate perpetual subordinated loan, callable from May 20274
US$900m Fixed rate perpetual subordinated loan, callable from Sep 20245
US$1,100m Fixed rate perpetual subordinated loan, callable from Jun 20246
At 31 Dec

1
2
3
4
5
6

2020

2019

HK$m

HK$m

7,834
7,063
5,467
3,905
4,685
7,044
8,617
44,615

7,834
7,063
5,467
3,905
4,685
7,044
8,617
44,615Interest rate fixed at 6.090%.
Interest rate fixed at 6.510%.
Interest rate fixed at 6.172%.
Interest rate fixed at 5.910%.
Interest rate fixed at 6.030%.
Interest rate fixed at 6.000%.

The additional tier 1 capital instruments are perpetual subordinated loans on which coupon payments may be cancelled at the sole
discretion of the Bank. The subordinated loans will be written down at the point of non-viability on the occurrence of a trigger event as
defined in the Banking (Capital) Rules. They rank higher than ordinary shares in the event of a wind-up.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020107

Notes on the Consolidated Financial Statements

26

Maturity analysis of assets and liabilities

The following table provides 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 included in the ‘Due over 5 years’ time bucket. Liabilities under investment contracts
are classified in accordance with their contractual maturity. Undated investment contracts are included in the ‘Due over 5 years’ timebucket, however, such contracts are subject to surrender and transfer options by the policyholders.
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

347,999

—

—

—

—

—

—

—

347,999

Items in the course of collection from otherbanks

21,943

—

—

—

—

—

—

—

21,943

Hong Kong Government certificates ofindebtedness

313,404

—

—

—

—

—

—

—

313,404

Trading assets

594,141

4,561

476

431

—

805

—

—

600,414

Derivatives

422,692

23

16

13

26

101

74

—

422,945

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

7,318

1,240

1,334

1,214

1,033

4,648

11,967150,206

178,960

Reverse repurchase agreements – non-trading
Loans and advances to banks

372,199
239,097

113,000
81,31819,15022,587

2,869
19,5761,000
16,278

4,143
8,792

7,983
15,186—
1,050

520,344403,884

Loans and advances to customers
Financial investments

641,990248,651

313,288488,129

277,385
251,982

180,152
75,127

159,612
127,736

411,350
218,219

693,898
330,863

991,006
434,725

3,668,681
2,175,432

Amounts due from Group companies
Accrued income and other financial assets

72,856
140,7883,741
30,145464
16,209

2
2,754

—
1,748

3,814
797

2,326
431

—
4,490

83,203
197,362

Financial assets at 31 Dec 2020
Non-financial assets

3,423,078 1,035,445——

589,603—

282,138—

307,433—

652,669—

1,062,728—

1,581,477
481,832

8,934,571
481,832

Total assets at 31 Dec 2020

3,423,078 1,035,445

589,603

282,138

307,433

652,669

1,062,728

2,063,309

9,416,403

—

—

—

—

—

—

—

313,404

Financial liabilities
Hong Kong currency notes in circulation

313,404

Items in the course of transmission to otherbanks

25,699

—

—

—

—

—

—

—

25,699Repurchase agreements – non-trading

109,062

4,816

—

1,187

5,223

—

8,024

7,845

136,157

Deposits by banks
Customer accounts

237,905
5,396,286

3,157
332,854

2,782
89,287

3,621
39,72776
27,186

1,087
18,676

—
7,376

—
4

248,628
5,911,396

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 2020
Non-financial liabilities
Total liabilities at 31 Dec 2020

60,812421,829
40,325
5,056
78,046
128,880—
6,817,304—
6,817,304—
1,566
28,300
11,234
20,13537,418—439,480—
439,480—
1,207
11,481
12,556766
20,038—138,117—138,117

—
176
7,517
13,611
33
3,326—
69,198—69,198

—
404
7,176
3,991
332
4,565
—
48,953—
48,953

—
1,281
8,930
16,02524,397
4,516—
74,912—
74,912—
1,436
17,024
14,37455,8605,357—
109,451—
109,451—
312
46,2602,572
116,705
3,799
4,065
181,562
625,895
807,457

60,812428,211167,013
79,419296,274
207,899
4,065
7,878,977
625,895
8,504,872

108

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Maturity analysis of assets and liabilities (continued)
Due not
more than1month

Due over 1
month butnot morethan 3monthsDue over 3
months but
not morethan 6monthsDue over 6
months but
not morethan 9months

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Cash and balances at central banks

202,746

—

—

—

—

Items in the course of collection from otherbanks

21,140————Hong Kong Government certificates ofindebtedness

298,944———

Trading assets

618,856

2,253

1,219

—

Derivatives

279,698

115

96

28

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

—

—

—

202,746———

21,140————298,944

—

433

—

—

622,761

81

324

300

—

280,642

Financial assets

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

8,883

393

1,330

938

706

4,605

10,273

126,383

153,511

Reverse repurchase agreements – non-trading
Loans and advances to banks

260,716
180,357

97,16846,56532,322
23,4096,856
19,174

11,772
15,502

9,624
30,018

3,875
10,097—
3,783

422,333
328,905

Loans and advances to customers
Financial investments

643,208
201,596356,953
406,723

285,049
186,055

144,180
70,922

141,465
89,852404,131
197,506

795,421
310,398

950,468
437,246

3,720,875
1,900,298

Amounts due from Group companies
Accrued income and other financial assets

79,091
108,167

3,043
30,046

1,318
15,491

79
3,935

—
1,947

—
1,265

3,911
572

190
4,074

87,632
165,497

Financial assets at 31 Dec 2019Non-financial assets
Total assets at 31 Dec 2019
Financial liabilities
Hong Kong currency notes in circulation

2,903,402—
2,903,402

943,259—
943,259546,289—546,289

246,112—
246,112261,325—
261,325

647,906—
647,906

1,134,847—
1,134,847

1,522,144
456,430
1,978,574

8,205,284
456,430
8,661,714

298,944

—

—

—

—

—

—

—

298,944

Items in the course of transmission to otherbanks

25,576

—

—

—

—

—

—

—

25,576

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 2019Non-financial liabilities
Total liabilities at 31 Dec 2019

90,565
169,344
4,657,422
87,532
290,808
38,524
5,113
88,108114,974—
5,866,910—
5,866,910

3,131
8,474
467,294—113
24,49331,76932,414
38,591—
606,279—
606,279

2,713
1,888
190,460—
15
12,173
18,816
246
18,130—244,441—
244,441

1,566
30
45,681
—
41
4,833
5,614
37
5,573
—
63,375—63,375447
542,479
—
73
4,694
7,757
118
4,846
—
60,419—60,419—52
18,388—339
18,962
17,03835
3,704—
58,518—58,518—26
10,700—662
12,703
17,64079,3084,626—
125,665—
125,665

7,974
—
—
—
180
43,9093,186
110,808
4,678
4,066
174,801
582,025
756,826

106,396
179,819
5,432,424
87,532292,231
160,291
106,933
311,074
195,1224,066
7,200,408
582,025
7,782,433

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 2020109

Notes on the Consolidated Financial Statements

27

Analysis of cash flows payable under financial liabilities by remaining contractual maturities
Due over 1
month but not
Due not more
more than 3than 1 month
monthsDue between
3 and
12 months

Due between
1 and 5 years

Due after
5 years

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

At 31 Dec 2020
Hong Kong currency notes in circulation

313,404

—

—

—

—

313,404

Items in the course of transmission to other banks
Repurchase agreements – non-trading

25,699109,090

—
4,818

—
6,602

—
8,076

—
7,885

25,699136,471

Deposits by banks
Customer accounts

238,153
5,397,993

3,263
333,682

6,630
158,267

1,238
28,007—16

249,284
5,917,965

Trading liabilities
Derivatives

60,812421,811

—
1,462

—
1,561

—
2,840

—
312

60,812427,986

Financial liabilities designated at fair value
Debt securities in issue

40,602
5,121

29,077
11,44526,45731,44526,54931,69946,371
2,686

169,056
82,396

Amounts due to Group companies
Other financial liabilities

78,063
127,644

21,92036,648

5,873
26,09897,021
9,208

122,569
3,792

325,446
203,390

Subordinated liabilities—
6,818,392

16
442,33147
262,980249
204,887

5,225
188,856

5,537
7,917,446

Loan and other credit-related commitments
Financial guarantees

2,815,447
39,923

—
—

—
—

136
—

—
—

2,815,583
39,923

9,673,762
90%

442,3314%

262,9802%

205,0232%

188,856
2%

10,772,952

Proportion of cash flows payable in period

298,944
25,576
90,675
169,7444,664,306
87,532290,016
39,636
5,418
98,361
109,48229
5,879,719
2,750,332
49,1998,679,250
86%

—
—
3,131
8,474
467,294—113
24,49331,76932,414
38,591—
606,279——
606,279
6%

—
—
4,857
1,960
283,081—2
22,58933,538
5,344
25,715
86
377,172——
377,172
4%

—
—
—
84
31,564—846
32,87336,214
100,805
8,313
457
211,156——
211,156
2%

—
—
8,068
—
—
—
180
44,188
3,892
126,697
4,756
5,789
193,570——
193,5702%

298,944
25,576
106,731180,2625,446,245
87,532
291,157
163,779
110,831363,621
186,857
6,361
7,267,896
2,750,332
49,19910,067,427

At 31 Dec 2019
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Trading liabilities
Derivatives
Financial liabilities designated at fair value
Debt securities in issue
Amounts due to Group companies
Other financial liabilities
Subordinated liabilities
Loan and other credit-related commitments
Financial guarantees
Proportion of cash flows payable in period

The balances in the above tables incorporate all cash flows relating to principal and future coupon payments on an undiscounted basis(except for trading liabilities and trading derivatives). Trading liabilities and trading derivatives have been included in the ‘On demand’time bucket as they are typically held for short periods of time. The undiscounted cash flows payable under hedging derivative liabilities
are classified according to their contractual maturity. Investment contract liabilities have been included in financial liabilities designatedat fair value, whereby the policyholders have the options to surrender or transfer at any time, and are reported in the ‘Due after 5 years’time bucket. A maturity analysis prepared on the basis of the earliest possible contractual repayment date (assuming that all surrenderand transfer options are exercised) would result in all investment contracts being presented as falling due within one year or less. The
undiscounted cash flows potentially payable under loan commitments and financial guarantee contracts are classified on the basis of theearliest date they can be called. Cash flows payable in respect of customer accounts are primarily contractually repayable on demand or
at short notice.

110

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

28

Contingent liabilities, contractual commitments and guarantees
2020

2019

HK$m

HK$m

Guarantees and contingent liabilities:– financial guarantees1

39,92349,199– performance and other guarantees2– other contingent liabilities

286,1393,644

266,272
3,299

At 31 Dec
Commitments3:

329,706

318,770– documentary credits and short-term trade-related transactions– forward asset purchases and forward forward deposits placed

29,581
38,24622,45530,2682,747,756
2,815,583

2,697,609
2,750,332– undrawn formal standby facilities, credit lines and other commitments to lend
At 31 Dec

1 Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a
specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
2 Performance and other guarantees include re-insurance letters of credit related to particular transactions, trade-related letters of credit issued
without provision for the issuing entity to retain title to the underlying shipment, performance bonds, bid bonds, standby letters of credit and othertransaction-related guarantees.
3 Includes HK$1,725,963m of commitments at 31 December 2020 (2019: HK$1,630,005m) 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 capital commitments), guarantees and othercontingent liabilities, which represent the amounts at risk should contracts be fully drawn upon and clients default. The amount of thecommitments shown above reflects, where relevant, the expected level of take-up of pre-approved facilities. As a significant proportion ofguarantees 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 2020 included provisions made in relation to legal and regulatory matters as set out in
Note 37.

29

Other commitments

Capital commitments
At 31 December 2020, capital commitments, mainly related to the commitment for purchase of premises, were HK$8,531m(2019: HK$7,413m).

30

Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable
right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability
simultaneously (‘the offset criteria’).
The ‘Amounts not set off in the balance sheet’ include transactions where:• the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right to set
off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and• in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-cash
collateral has been received/pledged.
For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and therelevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains
appropriate.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020111

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

Grossamounts

Amounts
offsetNetamounts
reported in
the balance
sheet

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

Derivatives

583,241(200,656)

382,585(290,517)(11,009)(45,001)

36,05840,360422,945

Reverse repos, stock borrowing and similar
agreements classified as:

532,974(19,276)

513,698—(513,476)

(166)

56

61,715575,413– trading assets– non-trading assets

46,922
486,052—(19,276)

46,922466,776——(46,892)(466,584)

—
(166)

30
26

4,680
57,03551,602523,811

1,116,215(219,932)

896,283(290,517) (524,485)(45,167)

36,114

102,075

998,358

Derivatives

584,214(200,656)

383,558(290,517)(15,977)(47,483)

29,58144,653428,211

Repos, stock lending and similar agreements
classified as:

146,768(19,276)

127,492—(127,281)

(21)

190

51,205

178,697– trading liabilities– non-trading liabilities

1,605
145,163—(19,276)

1,605
125,887——(1,595)(125,686)

—
(21)

10
180

—
51,205

1,605
177,092

730,982(219,932)

511,050(290,517) (143,258)(47,504)

29,771

95,858606,908

At 31 Dec 2019
Financial assets2
Derivatives

384,173(132,872)

251,301(213,466)(8,155)(15,070)

14,61029,341

280,642

Reverse repos, stock borrowing and similar
agreements classified as:

470,307(17,667)

452,640—(451,866)

(125)

649

20,387473,027

28,779441,528
854,480(90)(17,577)(150,539)

28,689423,951
703,941——(213,466)(28,680)(423,186)(460,021)—(125)(15,195)

9640
15,259—20,38749,72828,689444,338
753,669

Financial liabilities3
Derivatives

396,052(132,872)

263,180(213,466)(13,444)(14,238)

22,032

29,051

292,231

Repos, stock lending and similar agreements
classified as:

148,626(17,667)

130,959—(130,399)

(37)

523

43,022

173,981

1,978
146,648544,678(90)(17,577)(150,539)

1,888
129,071
394,139——(213,466)(1,823)(128,576)(143,843)—(37)(14,275)

65
458
22,555—43,022
72,073

1,888
172,093466,212Financial
instruments

Non-cashcollateralCashcollateralNet
amountAmounts not
subject toenforceablenettingarrangements1

Balance
sheet
total

At 31 Dec 2020
Financial assets2

Financial liabilities3– trading assets– non-trading assets– trading liabilities– non-trading liabilities

1 These exposures continue to be secured by financial collateral, but the group may not have sought or been able to obtain a legal opinion
evidencing enforceability of the offsetting right.
2 Amounts presented in the balance sheet included balances due from Group companies of HK$79,027m (2019: HK$85,124m).
3 Amounts presented in the balance sheet included balances due to Group companies of HK$129,230m (2019: HK$133,693m).

31

Segmental analysis

The Executive Committee (‘EXCO’) is considered the Chief Operating Decision Maker ('CODM') for the purpose of identifying the group’sreportable segments. Global business 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 global business, and the segmental analysis is presented on that basis. The global businesses are therefore considered ourreportable segments 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 global businesses are included inthe ‘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 the
global businesses are presented in the Corporate Centre.

Change in reportable segments
Effective from 2020, we made the following realignments within our internal reporting to the CODM:• We simplified our matrix organisational structure by combining Global Private Banking and Retail Banking and Wealth Management toform Wealth and Personal Banking.
• We reallocated our reporting of Balance Sheet Management from Corporate Centre to the global businesses.
Comparative data have been re-presented accordingly.

112

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Our global businesses
The group provides a comprehensive range of banking and related financial services to our customers in our three global businesses. The
products and services offered to customers are organised by these global businesses.
• Wealth and Personal Banking (‘WPB’) provides a full range of retail banking and wealth products to our customers from personalbanking to ultra high net worth individuals. Typically, customer offerings include retail banking products, such as current and savings
accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services. We also provide
wealth management services, including insurance and investment products, global asset management services, investment
management and Private Wealth Solutions for customers with more sophisticated and international requirements.
• Commercial Banking (‘CMB’) offers a broad range of products and services to serve the needs of our commercial customers, including
small and medium-sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade andreceivables 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 Global Banking and Markets, which include foreign exchange products, raising capital on debt and equity markets
and advisory services.
• Global Banking and Markets ('GBM') provides tailored financial solutions to major government, corporate and institutional clients andprivate investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory
and transaction services, a markets business that provides services in credit, rates, foreign exchange, equities, money markets andsecurities services, and principal investment activities.
Performance by global business is presented in the ‘Financial Review’ on page 10 as specified as 'Audited'.
Information by geographical region
Hong Kong

Rest of
Asia-PacificIntra-segment
elimination

Total

HK$m

HK$m

HK$m

HK$m

190,128
57,93776,95532,259166—

267,249
90,196

At 31 Dec 2020
Total assets

6,636,693

3,487,821(708,111)

9,416,403

Total liabilities
Credit commitments and contingent liabilities (contract amounts)

6,141,296
1,727,502

3,071,687
1,417,787(708,111)—

8,504,872
3,145,289

218,525
88,95781,03047,476(18)—299,537
136,433

At 31 Dec 2019
Total assets

6,221,486

3,155,935(715,707)

8,661,714

Total liabilities
Credit commitments and contingent liabilities (contract amounts)

5,724,204
1,705,308

2,773,936
1,363,794(715,707)—

7,782,433
3,069,102

For the year ended 31 Dec 2020
Total operating income
Profit before tax

For the year ended 31 Dec 2019
Total operating income
Profit before tax

Information by country/territory
Revenue1

Non-current assets2

For the year ended 31 Dec

At 31 Dec

2020
HK$m

2019
HK$m

2020
HK$m

2019
HK$m

Hong Kong

120,873

147,456

126,286

132,935

Mainland China
Australia

16,974
6,665

18,153
7,337

176,4622,229

158,215
2,130

India
Indonesia
Malaysia
Singapore
TaiwanOther
Total

10,296
3,649
5,415
9,924
2,932
12,610189,338

9,339
3,701
6,107
10,776
3,064
13,448219,381

2,241
3,701
1,932
3,040
2,687
3,627
322,205

2,339
3,932
1,820
2,820
2,802
3,421
310,414

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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020113

Notes on the Consolidated Financial Statements

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).
For the year ended 31 December 2020, the group recognised a management charge of HK$14,846m (2019: HK$15,718m) for the services
provided by HSBC Global Services (Hong Kong) Limited (the ‘ServCo’), which is a fellow subsidiary of the Group set up in Hong Kong aspart of recovery and resolution planning to provide functional support services to the group. These costs are reported under ‘General andadministrative expenses’, mainly in relation to the remuneration and other costs associated with employees and assets transferred to
ServCo.
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 activities were on substantially thesame terms, including interest rates and security, as for comparable transactions with third-party counterparties.
The group shared the costs of certain IT projects with its fellow subsidiaries and also used certain processing services of fellow
subsidiaries. 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. These transactions and services are priced on an arm’s length basis.
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:
2020

2019

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

—
6,489

339
—

480
39

1
3,678

6
3,967

1,450
2,022

Fee income
Fee expense

—
—

—
—

2,744
1,272

—
—

—
—

2,383
1,296

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

—
—

2
787

18
916

—
—

2
976

152
773

Other operating expenses1
At 31 Dec

—

5,270

33,632—

3,846

31,657

Assets– trading assets2

—
—

2,707
14

157,916
159

—
—

823
67

151,094
1,989– derivative assets– other assets2.5
Liabilities– trading liabilities2——
198,211
—

2,488
205
3,676
11

74,932
82,825
182,145572——
189,690
—

633
123
1,290
—

63,65285,453
187,550622– financial liabilities designated at fair value2,3– derivative liabilities

131,370———887,724

126,237———

967,419– other liabilities2,5– subordinated liabilities2,4,5

1,448
65,3933,593
72

93,841—

1,492
61,961

1,221
69

119,500—

Guarantees——

19,907——

19,179Commitments

—

—

2,189

—

—

2,388

Income and expenses for the year
Interest income
Interest expense

1 In 2020, payments of HK$137m (2019: HK$428m) were made for software costs which were capitalised as intangible assets in the balance sheetof the group.
2 These balances are presented under ‘Amounts due from/to Group companies’ in the consolidated balance sheet.
3 The balance at 31 December 2020 included subordinated liabilities of HK$131,370m to meet Total Loss Absorbing Capacity (‘TLAC’) requirements(2019 HK$126,237m). The carrying amount of financial liabilities designated at fair value was HK$12,518m higher than the contractual amount atmaturity (2019: HK$7,482m). The cumulative loss in fair value attributable to changes in credit risk was HK$2,490m (2019: HK$2,313m). Thebalances are largely under Level 2.
4 The balance at 31 December 2020 included subordinated liabilities of HK$65,393m to meet TLAC requirements (2019: HK$61,961m).
5 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.

114

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

(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 2020 amounted to
HK$3,609m and HK$1,124m respectively (2019: HK$3,396m and HK$1,417m respectively).

(c)Post-employment benefit plans

At 31 December 2020, HK$9.3bn (2019: HK$9.1bn) of the group’s post-employment plan assets were under management by groupcompanies, earning management fees of HK$59m in 2020 (2019: HK$22m). At 31 December 2020, the group’s post-employment benefit
plans had placed deposits of HK$641m (2019: HK$581m) with its banking subsidiaries, earning interest payable to the schemes of
HK$0.2m (2019: HK$2.6m). The above outstanding balances arose from the ordinary course of business and on substantially the sameterms, including interest rates and security, as comparable transactions with third-party counterparties.

(d)

Associates and joint ventures

The group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and noninterest bearing deposits and current accounts. Details of interests in associates and joint ventures are set out in Note 14.
The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful
information to represent the amount of transactions and outstanding balances during the year.
Transactions and balances during the year with associates and joint ventures
2020
Highest balance
during the year

Amounts due from associates – unsubordinated
Amounts due to associates
Commitments

2019
Balance at
31 December

Highest balance
during the year

Balance at
31 December

HK$m

HK$m

HK$m

HK$m

33,57742,377
1

22,811
17,263
1

34,813
19,602
1

16,001
4,016
1

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates
and security, as comparable transactions with third‑party counterparties.

(e)

Key Management Personnel

Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling theactivities of the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Boardof Directors and Group Managing Directors of HSBC Holdings plc.
Compensation of Key Management Personnel
2020

2019

HK$m

HK$m

Salaries and other short-term benefits
Post employment benefits

315
9

336
9

Termination benefits

Share-based payments

4
103

104

Total

431

450

1

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
Guarantees2
Commitments2

2020

2019

HK$m

HK$m

100,834
71,488
1,733

48,94447,211
1,144

12,452
16,701

8,052
5,235

1 The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during theyear.
2 Comparatives have been re-presented to incorporate certain balances previously not included.

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.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020115

Notes on the Consolidated Financial Statements

Change in expected credit losses recognised for the year, and expected credit loss allowances against balances outstanding at the end of
the year, in respect of Key Management Personnel were insignificant (2019: 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 DecMaximum aggregate amountoutstanding during the year

2020

2019

2020

2019

HK$m

HK$m

HK$m

HK$m

By the Bank1

2,690

4,101

4,291

4,301

By subsidiaries

4
2,694

6
4,107

9
4,300

8
4,309

1 Comparatives have been re-presented to exclude certain balances previously included.

These amounts include principal and interest, and the maximum liability that may be incurred under guarantees.

33

Fair values of financial instruments carried at fair value

Control framework
Fair values are subject to a control framework designed to ensure that they are either determined, or validated, by a function independentof the risk taker.
Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent pricedetermination or validation is utilised. For inactive markets, the group sources alternative market information, with greater weight given
to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrumentcomparability, consistency of data sources, underlying data accuracy and timing of prices.
Fair value of investment funds are sourced from the underlying fund managers which are based upon an assessment of the underlying
investees’ financial positions, results, risk profile and prospects.
For fair values determined using valuation models, the control framework includes development or validation by independent support
functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before
becoming operational and are calibrated against external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including
portfolio changes, market movements and other fair value adjustments.
The majority of financial instruments measured at fair value are in GBM and Insurance. The group's fair value governance structure
comprises its Finance function and Valuation Committees. Finance is responsible for establishing procedures governing valuation andensuring fair values are in compliance with accounting standards. The fair values are reviewed by the group's relevant Valuation
Committees, which consist of independent support functions. Within GBM and Insurance, these Committees are overseen by the Group's
Valuation Committee Review Group and the Group Insurance Valuation and Impairment Committee respectively. These two Group
Committees considers all material subjective valuations.

Financial liabilities measured at fair value
In certain circumstances, the group records its own debt in issue at fair value, based on quoted prices in an active market for the specificinstrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which
are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active
market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to thegroup's liabilities. The change in fair value of issued debt securities attributable to the group’s own credit spread is computed as follows:for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar
securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The
difference in the valuations is attributable to the group’s own credit spread. This methodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments are included within ‘Financial liabilities designated at fair value’ and aremeasured at fair value. The credit spread applied to these instruments is derived from the spreads at which the group issues structured
notes.
Gains and losses arising from changes in the credit spread of liabilities issued by the group reverse over the contractual life of the debt,
provided that the debt is not repaid at a premium or a discount.

116

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:• Level 1 – valuation technique using quoted market price: financial instruments with quoted prices for identical instruments in active
markets that the group can access at the measurement date.
• Level 2 – valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active
markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where
all significant inputs are observable.
• Level 3 – valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one
or more significant inputs are unobservable.
Financial instruments carried at fair value and bases of valuation
Fair Value Hierarchy
Level 1

Level 2

Level 3

Third-party
totalIntercompany2

Total

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

403,730

195,447

1,237

600,414—600,4142,140

342,357

1,028

345,525

77,420422,945

At 31 Dec 2020
AssetsTrading assets1
Derivatives
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss

97,59031,83649,534

178,960—

178,960

1,315,696

378,075

6,635

1,700,406—

1,700,406

Trading liabilities1
Derivatives
Financial liabilities designated at fair value1

52,504
2,015
—

8,308
334,934
146,529—
3,538
20,48460,812
340,487
167,013—87,724—60,812428,211167,013

At 31 Dec 2019
AssetsTrading assets1
Derivatives
Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss

426,072
2,282

196,132
213,242557
833

622,761
216,357—
64,285

622,761
280,642

Financial investments
Liabilities

Financial investments
Liabilities
Trading liabilities1
Derivatives
Financial liabilities designated at fair value1

89,152

32,06832,291

153,511—

153,511

1,096,572

363,804

5,622

1,465,998—

1,465,998

78,111
2,892
—

9,421
219,498
139,720—
2,422
20,57187,532
224,812160,291—
67,419—87,532292,231
160,291

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 2020
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1

31,80937,387

20,534
26,796

1,901
1,860

—
5

236
191

—
—

—
—

At 31 Dec 2019
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1

32,281
16,872

9,198
15,069

—
2,359

—
—

131
599

—
—

—
—

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each Group's quarterly reporting period. Transfers
into and out of levels of the fair value hierarchy are primarily attributable to changes in observability of valuation inputs and pricetransparency.

Movements in Level 3 financial instruments
There were no material transfers between Level 3 and Level 1 or Level 2 as a result of change in observability of valuation inputs,
settlement, nor material gains/loss recognised in the income statement/other comprehensive income during the year in relation tofinancial instruments carried at fair value in Level 3 (2019: immaterial). The increase in Level 3 assets was mainly due to the purchase ofprivate equity fund and other alternative investments of HK$16,715m (2019: HK$11,463m) to back policyholder liabilities to support
growth in the insurance business.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020117

Notes on the Consolidated Financial Statements

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

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

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

Credit valuation adjustment (‘CVA’) and debit valuation adjustment (‘DVA’)The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect the possibility that the counterparty
may default and the group may not receive the full market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that the group may default, and that thegroup may not pay the full market value of the transactions.
The group calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the
exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments
are not netted across group entities.
The group calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of thegroup, to the group’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event ofdefault. Conversely, the group calculates the DVA by applying the PD of the group, conditional on the non-default of the counterparty, tothe expected positive exposure of the counterparty to the group and multiplying the result by the loss expected in the event of default.
Both calculations are performed over the life of the potential exposure.
For most products the group uses a simulation methodology, which incorporates a range of potential exposures over the life of theportfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such ascounterparty netting agreements and collateral agreements with the counterparty.
The methodologies do not, in general, account for ‘wrong-way risk’ which arises when the underlying value of the derivative prior to any
CVA is positively correlated to the PD of the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied
to reflect this risk in the valuation.

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

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

Inception profit (Day 1 profit or loss reserves)
Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant
unobservable inputs.

Effects of changes in significant unobservable assumptions to reasonably possible alternatives
The key unobservable inputs to Level 3 financial instruments include volatility and correlation for structured notes and deposits valued
using option models, bid quotes for corporate bonds valued using approaches that take into account market comparables, and multiple
items for private equity and strategic investments. In the absence of an active market, the fair value of private equity and strategic
investments is estimated on the basis of an analysis of the investee’s financial position and results, risk profile, prospects and otherfactors, as well as by reference to market valuations for similar entities quoted in an active market, or the price at which similar
companies have changed ownership. The change in fair values due to changes in reasonably possible alternative assumptions for theseunobservable inputs is not significant.
Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to measure a
range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of thevaluation technique employed, the availability and reliability of observable proxies and historical data. When the available data is not
amenable to statistical analysis, the quantification of uncertainty is judgemental, but remains guided by the 95% confidence interval. The
sensitivity of Level 3 fair values to reasonably possible alternative assumptions is not significant.

118

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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

520,344—518,295

2,106

520,401

403,884
3,668,681——

393,953
61,885

10,374
3,588,431

404,3273,650,316

Financial investments – at amortised cost
Liabilities

475,025

81,912450,962

2,012

534,886

Repurchase agreements – non-trading

136,157—

136,157—

136,157

Deposits by banks

248,628—

248,629—

248,629

Customer accounts
Debt securities in issue

5,911,396
79,419——5,911,813
80,066——

5,911,813
80,066

Subordinated liabilities1

4,065

—

3,749

—

3,749

422,333
328,905
3,720,875
434,300———
77,108417,294
323,304
56,475382,368

5,385
5,501
3,654,716
356

422,679
328,805
3,711,191
459,832

106,396
179,819
5,432,424
106,933
4,066

—
—
—
—
—

106,398
179,823
5,432,803
107,641
952

—
—
—
—
2,999

106,398
179,823
5,432,803
107,641
3,951

At 31 Dec 2020
Assets
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers

At 31 Dec 2019
Assets
Reverse repurchase agreements – non-trading
Loans and advances to banks
Loans and advances to customers
Financial investments – at amortised cost
Liabilities
Repurchase agreements – non-trading
Deposits by banks
Customer accounts
Debt securities in issue
Subordinated liabilities

1 As at 31 December 2020, fair value of subordinated liabilities was reported under 'Level 2 - Observable inputs'. HK$2,999m of the balance waspreviously included under 'Level 3 - Significant unobservable input'. Comparatives have not been re-presented.

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 and Hong Kong
currency notes in circulation, all of which are measured at amortised cost.

Valuation
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. It does not reflect the economic benefits and costs that 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 2020

119

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
Securitisations

HSBC
managed funds

Non-HSBC
managed funds

Other

Total

52
9
—
—
—
61

62
34
18
3
1
118

104
107
56
46
5
318

25
1
—
—
—
26

243
151
74
49
6
523

HK$m

HK$m

HK$m

HK$m

HK$m

26,80826,476

71,481

8,521

133,286

204

1,653

—

—

1,857

—

24,823

71,481—96,304—26,604
—
—

—
—
—
—

—
—
—
—

—
8,218
—
303

—
34,822
—
303

—

—

—

56

56

—
539
27,347—
3,822
30,298—23,024
94,50556
7,137
15,602

56
34,522
167,752

Total asset values of the entities (HK$bn)
0–4
4–15
15–39
39–196196+
Number of entities at 31 Dec 2020
Total assets in relation to the group's interests in the unconsolidated
structured entities– trading assets– financial assets designated and otherwise mandatorily measured at fairvalue through profit or loss
– derivatives– loans and advances to customers– financial investments– other assets
Total liabilities in relation to the group's interests in the unconsolidated
structured entities– derivatives
Other off balance sheet commitments
The group’s maximum exposure at 31 Dec 2020

120

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Nature and risks associated with the group’s interests in unconsolidated structured entities (continued)
Securitisations

HSBC
managed funds

Non-HSBC
managed funds

Other

Total

58
8
—
—
—
66

47
25
6
1
1
80

95
89
41
26
4
255

40
2
—
—
—
42

240
124
47
27
5
443

HK$m

HK$m

HK$m

HK$m

HK$m

27,63624,25850,241

13,140115,275

—

774

—

—

774

—
—

23,484—50,241———73,725—– financial investments– other assets

27,636
—
—

—
—
—

—
—
—

12,742—398

40,378—398

Total liabilities in relation to the group's interests in the unconsolidated
structured entities
Other off balance sheet commitments
The group's maximum exposure at 31 Dec 2019—857
28,493—
1,797
26,055—
14,66464,905—
3,958
17,098—21,276
136,551

Total asset values of the entities (HK$bn)
0–4
4–15
15–39
39–196196+
Number of entities at 31 Dec 2019
Total assets in relation to the group's interests in the unconsolidated
structured entities– trading assets– financial assets designated and otherwise mandatorily measured at fairvalue through profit or loss
– derivatives– loans and advances to customers

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 2020 and 2019 were not significant.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020121

Notes on the Consolidated Financial Statements

36

Bank balance sheet and statement of changes in equity

Bank balance sheet at 31 December 2020
2020

2019

HK$m

HK$m

AssetsCash and balances at central banks

291,071

156,273

Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness

16,836
313,404

15,437
298,944

Trading assets
Derivatives

486,764
396,126

496,660
267,018

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss
Reverse repurchase agreements – non-trading

5,945
299,876

7,087
235,823

Loans and advances to banks
Loans and advances to customers

243,107
1,928,622

184,4292,024,194

Financial investments
Amounts due from Group companies

950,866
400,073

830,648
332,865

Investments in subsidiaries
Interests in associates and joint ventures

95,241
39,83093,35539,830Goodwill and intangible assets
Property, plant and equipment

14,00971,523

11,242
79,208Deferred tax assets
Prepayments, accrued income and other assets

1,266
165,667

819
131,368

5,720,226

5,205,200

313,404
18,40473,606
194,778
3,610,409
29,039396,21241,50729,452
1,574
413,865
121,091
616
9,192
3,101
5,256,250

298,944
17,87861,793
129,7033,287,463
49,399277,42144,74853,584
1,426
384,490
110,893
7,556
9,199
3,114
4,737,611

172,335
44,61525,726
221,300
463,976
5,720,226

172,335
44,615
27,101
223,538
467,589
5,205,200

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

122

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

Bank statement of changes in equity for the year ended 31 December 2020
Other reserves

Sharecapital1

Otherequityinstruments

Retainedearnings

Property
revaluation
reserve

Financialassets at
FVOCI
reserve

Cash
flow
hedge
reserve

Foreignexchangereserve

Other2Total
equity

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

HK$m

172,335

44,615

223,538

40,976

3,504

(119)

(13,327)(3,933)

467,589

Profit for the year——

50,414

—

—

—

—

—

50,414

Other comprehensive income/(expense) (netof tax)——2(4,255)

2,860

724

648

—

(21)

– debt instruments at fair value throughother comprehensive income

—

—

—

—

2,149

—

—

—

2,149

– equity instruments designated at fair value
through other comprehensive income

—

—

—

—

711

—

—

—

711

– cash flow hedges

—

—

—

—

—

724

—

—

724

– changes in fair value of financial liabilities
designated at fair value upon initialrecognition arising from changes in own
credit risk

—

—

306

—

—

—

—

—

306

– property revaluation

—

—

—

(4,255)

—

—

—

—

(4,255)– remeasurement of defined benefit asset/
liability

—

—

(304)

—

—

—

—

—

(304)

– exchange differences

—

—

—

—

—

—

648

—

648

—
—

—
—

50,416(54,268)(4,255)
—

2,860
—

724
—

648
—

—
—

50,393(54,268)

Transfers and other movements5
At 31 Dec 2020——
172,335——
44,615

103
1,511
221,300—(1,525)35,196

—
—
6,364

—
—
605

—
—
(12,679)

173—(3,760)276(14)463,976

At 1 Jan 2019
Profit for the year

172,335—

35,879—212,860
79,69439,506
—

1,037
—

(84)
—

(12,846)—(4,267)—444,420
79,694

Other comprehensive income/(expense) (netof tax)——(1,993)

2,836

2,467

(35)

(481)

—

2,794

– debt instruments at fair value throughother comprehensive income

—

—

—

—

1,438

—

—

—

1,438

– equity instruments designated at fair value
through other comprehensive income– cash flow hedges

—
—

—
—

—
—

—
—

1,029
—

—
(35)

—
—

—
—

1,029
(35)

– changes in fair value of financial liabilities
designated at fair value upon initialrecognition arising from changes in own
credit risk——

(2,007)

—

—

—

—

—

(2,007)– property revaluation

—

—

—

2,836

—

—

—

—

2,836

– remeasurement of defined benefit asset/
liability– exchange differences

—
—

—
—

14
—

—
—

—
—

—
—

—
(481)

—
—

14
(481)

Total comprehensive income/(expense) for theyear
Other equity instruments issued3
Other equity instruments repaid3
Dividends paid4

—
—
—
—

—
44,615(35,879)—

77,701——(68,369)

2,836
—
—
—

2,467
—
—
—

(35)
—
—
—

(481)
—
—
—

—
—
—
—

82,48844,615(35,879)(68,369)——
172,335——
44,615(30)
1,376
223,538—(1,366)40,976

—
—
3,504

—
—
(119)

—
—
(13,327)227
107(3,933)

197
117
467,589

At 1 Jan 2020

Total comprehensive income/(expense)
for the year
Dividends paid4
Movement in respect of share-based payment
arrangements

Movement in respect of share-based
payment arrangements
Transfers and other movements5
At 31 Dec 2019

1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous
years.
2 The other reserves mainly comprise purchase premium arising from transfer of business from fellow subsidiaries, property revaluation reserve
relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment reserve is used to record
the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.
3 In 2019, there were US$1,100m additional tier 1 capital instruments issued. In addition, US$4,600m of additional tier 1 capital instruments were
repaid and reissued in 2019 with no actual cash movement.
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 2020123

Notes on the Consolidated Financial Statements

37

Legal proceedings and regulatory matters

The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations.
Apart from the matters described below, the Bank 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 outcome of legal proceedings and regulatory
matters is 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 2020. 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. HSBC also agreed to retain an independent compliance monitor (who was, for FCA
purposes, a ‘Skilled Person’ under section 166 of the Financial Services and Markets Act and, for FRB purposes, an ‘Independent
Consultant’) to produce periodic assessments of the Group’s AML and sanctions compliance programme. In 2020, HSBC’s engagementwith the independent compliance monitor, acting in his roles as both Skilled Person and Independent Consultant, concluded. The role of
FCA Skilled Person was assigned to a new individual in the second quarter of 2020. Separately, a new FRB Independent Consultant will
be appointed pursuant to the cease-and-desist order.
Based on the facts currently known, it is not practicable at this time for the group to predict the resolution of these matters, including thetiming or any possible impact on the group, which could be significant.

Singapore Interbank Offered Rate (‘Sibor’), Singapore Swap Offer Rate (‘SOR’) and Australia Bank Bill
Swap Rate (‘BBSW’)
In July and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York
District Court on behalf of persons who transacted in products related to the Sibor, SOR and BBSW benchmark rates. The complaints
allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws,
and state law.
In the Sibor/SOR litigation, following a decision on the defendants’ motion to dismiss in October 2018, the claims against a number of
HSBC entities were dismissed, and the Bank remained as the only HSBC defendant in this action. In October 2018, the Bank filed amotion for reconsideration of the decision based on the issue of personal jurisdiction. This motion was denied in April 2019. Also in
October 2018, the plaintiffs filed a third amended complaint, naming only the Sibor panel members, including the Bank, as defendants.
The court dismissed the third amended complaint in its entirety in July 2019 against all defendants. In August 2019, the plaintiffs filed an
appeal to the Second Circuit Court of Appeals, which remains pending.
In the BBSW litigation, in November 2018, the court dismissed all foreign defendants, including all the HSBC entities, on personal
jurisdiction grounds. In April 2019, the plaintiffs filed an amended complaint, which the defendants moved to dismiss. In February 2020,
the court again dismissed the plaintiffs’ amended complaint against all the HSBC entities.
Based on the facts currently known, it is not practicable at this time for the Bank to predict the resolution of these matters, including thetiming or any possible impact on the Bank, which could be significant.

United States Bankruptcy Court for the Southern District of New York litigation
In June 2018, a claim was issued against the Bank in the United States Bankruptcy Court for the Southern District of New York by the
Chapter 11 Trustee of CFG Peru Investments Pte. Ltd. (Singapore) (the ‘Trustee Complaint’). The Trustee Complaint makes allegations
under the Peruvian Civil Code, Hong Kong and U.S. common law and the Bankruptcy Code concerning the Bank's alleged conduct incommencing the winding-up proceedings and pursuing the appointment of joint provisional liquidators for affiliates of CFG Peru
Investments Pte. Ltd. The Trustee is seeking damages and equitable subordination or disallowance of the Bank’s Chapter 11 claims in a
related bankruptcy proceeding.
The Bank is seeking to dismiss the Trustee Complaint. Based on the facts currently known, it is not practicable at this time for the Bank topredict the resolution of this matter, including the timing or any possible impact on the Bank, which could be significant.

Foreign exchange-related investigations
In January 2021, HSBC Holdings exited its three-year deferred prosecution agreement with the Criminal Division of the US Department ofJustice (‘DoJ’) (the ‘FX DPA’), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. HSBC
Holdings entered into the FX DPA in January 2018, following the conclusion of the DoJ’s investigation into HSBC’s historical foreignexchange activities. Under the terms of the FX DPA, the DoJ is expected to file a motion to dismiss the charges deferred by the FX DPA
in due course.
Based on the facts currently known, it is not practicable at this time for the group to predict the resolution of these matters, including thetiming or any possible impact on the group, which could be significant.

124

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020

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, and 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.
Based on the facts currently known, it is not practicable at this time for the group to predict the resolution of these matters, including thetiming or any possible impact on the group, which could be significant.

38

Ultimate holding company

The ultimate holding company of the Bank is HSBC Holdings plc, which is incorporated in England.
The largest group in which the accounts of the Bank are consolidated is that headed by HSBC Holdings plc. The consolidated accounts of
HSBC Holdings plc are available to the public on the HSBC Group’s website at www.hsbc.com or may be obtained from 8 Canada
Square, London E14 5HQ, United Kingdom.

39

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.

40

Approval of financial statements

The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on 23 February 2021.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2020125© The Hongkong and Shanghai Banking
Corporation Limited 2021

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The Hongkong and Shanghai Banking Corporation Limited
HSBC Main Building
1 Queen's Road Central, Hong Kong
Telephone: (852) 2822 1111
www.hsbc.com.hk