TIDMHSBA
RNS Number : 0303H
HSBC Holdings PLC
07 March 2018
Financial Statements Page Consolidated income statement 176 Consolidated statement of comprehensive income 177 Consolidated balance sheet 178 Consolidated statement of cash flows 179 Consolidated statement of changes in equity 180 HSBC Holdings income statement 182 ---------------------------------------------------------------------------- ---- HSBC Holdings statement of comprehensive income 182 HSBC Holdings balance sheet 183 ---------------------------------------------------------------------------- ---- HSBC Holdings statement of cash flows 184 HSBC Holdings statement of changes in equity 185 ---------------------------------------------------------------------------- ---- Notes on the Financial Statements 1 Basis of preparation and significant accounting policies 186 ------------------------------------------------------------------------ 2 Net income/(expense) from financial instruments designated at fair value 195 ------------------------------------------------------------------------ 3 Insurance business 195 ------------------------------------------------------------------------ 4 Operating profit 197 5 Employee compensation and benefits 197 6 Auditors' remuneration 203 7 Tax 203 8 Dividends 206 9 Earnings per share 206 10 Trading assets 207 11 Fair values of financial instruments carried at fair value 207 ------------------------------------------------------------------------ ---- 12 Fair values of financial instruments not carried at fair value 215 -------------------------------------------------------------------------- --- 13 Financial assets designated at fair value 216 --- 14 Derivatives 217 --- 15 Financial investments 219 --- 16 Assets pledged, collateral received and assets transferred 220 --- 17 Interests in associates and joint ventures 221 --- 18 Investments in subsidiaries 224 --- 19 Structured entities 225 --- 20 Goodwill and intangible assets 227 --- 21 Prepayments, accrued income and other assets 229 --- 22 Trading liabilities 229 --- 23 Financial liabilities designated at fair value 230 --- 24 Debt securities in issue 230 --- 25 Accruals, deferred income and other liabilities 230 --- 26 Provisions 231 --- 27 Subordinated liabilities 232 --- 28 Maturity analysis of assets, liabilities and off-balance sheet commitments 235 -------------------------------------------------------------------------- --- 29 Offsetting of financial assets and financial liabilities 239 --- 30 Non-controlling interests 240 --- 31 Called up share capital and other equity instruments 241 --- 32 Contingent liabilities, contractual commitments and guarantees 243 --- 33 Lease commitments 243 --- 34 Legal proceedings and regulatory matters 244 --- 35 Related party transactions 250 --- 36 Events after the balance sheet date 252 --- 37 HSBC Holdings' subsidiaries, joint ventures and associates 252 -------------------------------------------------------------------------- --- HSBC Holdings plc Annual Report and Accounts 2017 175
Financial Statements
Consolidated income statement for the year ended 31 December 2017 2016 2015 Notes $m $m $m --------------------------------------------------------------------------- ----- Net interest income 28,176 29,813 32,531 --------------------------------------------------------------------------- ----- ------- ------- ------- * interest income 40,995 42,414 47,189 * interest expense (12,819) (12,601) (14,658) Net fee income 12,811 12,777 14,705 --------------------------------------------------------------------------- ----- ------- ------- ------- * fee income 15,853 15,669 18,016 * fee expense (3,042) (2,892) (3,311) Net trading income 7,719 9,452 8,723 --------------------------------------------------------------------------- ----- ------- ------- ------- * trading income excluding net interest income 6,098 8,066 6,948 * net interest income on trading activities 1,621 1,386 1,775 Net income/(expense) from financial instruments designated at fair value 2 3,698 (2,666) 1,532 --------------------------------------------------------------------------- ----- ------- ------- ------- * changes in fair value of long-term debt and related derivatives 672 (3,975) 863 * net income from other financial instruments designated at fair value 3,026 1,309 669 --------------------------------------------------------------------------- ----- ------- ------- ------- Gains less losses from financial investments 1,150 1,385 2,068 Dividend income 106 95 123 Net insurance premium income 3 9,779 9,951 10,355 ----- Other operating income/(expense) 337 (971) 1,055
Total operating income 63,776 59,836 71,092 --------------------------------------------------------------------------- ----- ------- ------- ------- Net insurance claims and benefits paid and movement in liabilities to policyholders 3 (12,331) (11,870) (11,292) ----- Net operating income before loan impairment charges and other credit risk provisions 51,445 47,966 59,800 --------------------------------------------------------------------------- ----- ------- ------- ------- Loan impairment charges and other credit risk provisions 4 (1,769) (3,400) (3,721) ----- Net operating income 49,676 44,566 56,079 --------------------------------------------------------------------------- ----- ------- ------- ------- Employee compensation and benefits 5 (17,315) (18,089) (19,900) ----- General and administrative expenses (15,707) (16,473) (17,662) Depreciation and impairment of property, plant and equipment (1,166) (1,229) (1,269) Amortisation and impairment of intangible assets (696) (777) (937) Goodwill impairment of Global Private Banking - Europe 20 - (3,240) - --------------------------------------------------------------------------- ----- ------- Total operating expenses (34,884) (39,808) (39,768) --------------------------------------------------------------------------- ----- ------- ------- ------- Operating profit 4 14,792 4,758 16,311 --------------------------------------------------------------------------- ----- ------- ------- ------- Share of profit in associates and joint ventures 17 2,375 2,354 2,556 ----- Profit before tax 17,167 7,112 18,867 --------------------------------------------------------------------------- ----- ------- ------- ------- Tax expense 7 (5,288) (3,666) (3,771) ----- Profit for the year 11,879 3,446 15,096 --------------------------------------------------------------------------- ----- ------- ------- ------- Attributable to: --------------------------------------------------------------------------- ----- ------- -------- ---------- * ordinary shareholders of the parent company 9,683 1,299 12,572 ----- * preference shareholders of the parent company 90 90 90 --------------------------------------------------------------------------- ----- ------- ------- * other equity holders 1,025 1,090 860 --------------------------------------------------------------------------- ----- * non-controlling interests 1,081 967 1,574 ----- ------- ------- ------- Profit for the year 11,879 3,446 15,096 --------------------------------------------------------------------------- ----- ------- ------- ------- $ $ $ Basic earnings per ordinary share 9 0.48 0.07 0.65 ----- ------- Diluted earnings per ordinary share 9 0.48 0.07 0.64 --------------------------------------------------------------------------- ----- ------- ------- ------- 176 HSBC Holdings plc Annual Report and Accounts 2017 Consolidated statement of comprehensive income for the year ended 31 December 2017 2016 2015 $m $m $m ------ ------ ------- Profit for the year 11,879 3,446 15,096 ------------------------------------------------------------------------------------ Other comprehensive income/(expense) ------------------------------------------------------------------------------------ Items that will be reclassified subsequently to profit or loss when specific conditions are met: Available-for-sale investments 146 (299) (3,072) - fair value gains/(losses) 1,227 475 (1,231) - fair value gains reclassified to the income statement (1,033) (895) (2,437) ------------------------------------------------------------------------------------ - amounts reclassified to the income statement in respect of impairment losses 93 71 127 ------------------------------------------------------------------------------------ - income taxes (141) 50 469 ------------------------------------------------------------------------------------ ------ ------ ------- Cash flow hedges (192) (68) (24) - fair value (losses)/gains (1,046) (297) 704 ------------------------------------------------------------------------------------ - fair value losses/(gains) reclassified to the income statement 833 195 (705) ------------------------------------------------------------------------------------ - income taxes 21 34 (23) ------------------------------------------------------------------------------------ ------ ------ ------- Share of other comprehensive income/(expense) of associates and joint ventures (43) 54 (9) - share for the year (43) 54 (9) ------------------------------------------------------------------------------------ ------ ------ ------- Exchange differences 9,077 (8,092) (10,945) - foreign exchange gains reclassified to income statement on disposal of a foreign operation - 1,894 - ------------------------------------------------------------------------------------ - other exchange differences 8,939 (9,791) (11,112) ------------------------------------------------------------------------------------ - income tax attributable to exchange differences 138 (195) 167 ------------------------------------------------------------------------------------ ------ ------ ------- Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit asset/liability 2,419 7 101 - before income taxes 3,440 (84) 130 ------------------------------------------------------------------------------------ - income taxes (1,021) 91 (29) ------------------------------------------------------------------------------------ ------ ------ ------- Changes in fair value of financial liabilities designated at fair value due to movement in own credit risk (2,024) - - ------ - before income taxes (2,409) - - ------------------------------------------------------------------------------------ - income taxes 385 - - ------------------------------------------------------------------------------------ ------ ------ ------- Other comprehensive income/(expense) for the year, net of tax 9,383 (8,398) (13,949)
------------------------------------------------------------------------------------ ------ ------ ------- Total comprehensive income/(expense) for the year 21,262 (4,952) 1,147 ------------------------------------------------------------------------------------ ------ ------ ------- Attributable to: - ordinary shareholders of the parent company 18,914 (6,968) (490) - preference shareholders of the parent company 90 90 90 ------ - other equity holders 1,025 1,090 860 ------ ------ - non-controlling interests 1,233 836 687 ------------------------------------------------------------------------------------ ------ ------ ------- Total comprehensive income/(expense) for the year 21,262 (4,952) 1,147 ------------------------------------------------------------------------------------ ------ ------ ------- HSBC Holdings plc Annual Report and Accounts 2017 177
Financial Statements
Consolidated balance sheet at 31 December 2017 2016 Notes $m $m --------------------------------------------------- ----- --------- --------- Assets Cash and balances at central banks 180,624 128,009 Items in the course of collection from other banks 6,628 5,003 Hong Kong Government certificates of indebtedness 34,186 31,228 Trading assets 10 287,995 235,125 ----- Financial assets designated at fair value 13 29,464 24,756 Derivatives 14 219,818 290,872 Loans and advances to banks 90,393 88,126 Loans and advances to customers 962,964 861,504 Reverse repurchase agreements - non-trading 201,553 160,974 Financial investments 15 389,076 436,797 Prepayments, accrued income and other assets 21 67,191 63,909 Current tax assets 1,006 1,145 Interests in associates and joint ventures 17 22,744 20,029 Goodwill and intangible assets 20 23,453 21,346 Deferred tax assets 7 4,676 6,163 Total assets at 31 Dec 2,521,771 2,374,986 --------------------------------------------------- ----- --------- --------- Liabilities and equity Liabilities Hong Kong currency notes in circulation 34,186 31,228 Deposits by banks 69,922 59,939 Customer accounts 1,364,462 1,272,386 Repurchase agreements - non-trading 130,002 88,958 Items in the course of transmission to other banks 6,850 5,977 Trading liabilities 22 184,361 153,691 Financial liabilities designated at fair value 23 94,429 86,832 Derivatives 14 216,821 279,819 Debt securities in issue 24 64,546 65,915 Accruals, deferred income and other liabilities 25 45,907 44,291 Current tax liabilities 928 719 Liabilities under insurance contracts 3 85,667 75,273 Provisions 26 4,011 4,773 Deferred tax liabilities 7 1,982 1,623 Subordinated liabilities 27 19,826 20,984 Total liabilities at 31 Dec 2,323,900 2,192,408 --------------------------------------------------- ----- --------- --------- Equity Called up share capital 31 10,160 10,096 Share premium account 31 10,177 12,619 ----- Other equity instruments 22,250 17,110 Other reserves 7,664 (1,234) Retained earnings 139,999 136,795 Total shareholders' equity 190,250 175,386 --------------------------------------------------- ----- --------- --------- Non-controlling interests 30 7,621 7,192 --------------------------------------------------- ----- --------- --------- Total equity at 31 Dec 197,871 182,578 Total liabilities and equity at 31 Dec 2,521,771 2,374,986 --------------------------------------------------- ----- --------- ---------
The accompanying notes on pages 186 to 261, the audited sectionsin 'Global businesses and regions' on pages 46 to 59, 'Risk' on
pages 63 to 116, 'Capital' on pages 117 to 120 and 'Directors'Remuneration Report' on pages 141 to 157 form an integral partof
these financial statements.
These financial statements were approved by the Board ofDirectors on 20 February 2018 and signed on its behalf by:
Mark E Tucker Iain Mackay Group Chairman Group Finance Director 178 HSBC Holdings plc Annual Report and Accounts 2017 Consolidated statement of cash flows for the year ended 31 December 2017 2016 2015 Footnotes $m $m $m -------------------------------------------------------------------- --------- -------- -------- -------- Profit before tax 17,167 7,112 18,867 Adjustments for non-cash items: Depreciation, amortisation and impairment 1,862 5,212 2,181 Net gain from investing activities (1,152) (1,215) (1,935) Share of profits in associates and joint ventures (2,375) (2,354) (2,556) (Gain)/Loss on disposal of subsidiaries, businesses, associates and joint ventures (79) 1,743 - -------- -------- -------- Loan impairment losses gross of recoveries and other credit risk provisions 2,603 4,090 4,546 -------- -------- -------- Provisions including pensions 917 2,482 3,472 Share-based payment expense 500 534 757 Other non-cash items included in profit before tax (381) (207) (191) Elimination of exchange differences 1 (21,289) 15,364 18,308 Changes in operating assets and liabilities Change in net trading securities and derivatives (10,901) 4,395 24,384 Change in loans and advances to banks and customers (108,984) 52,868 32,971 Change in reverse repurchase agreements - non-trading (37,281) (13,138) (3,011) Change in financial assets designated at fair value (5,303) (1,235) 2,394 Change in other assets (6,570) (6,591) 9,090 Change in deposits by banks and customer accounts 102,211 (8,918) (65,907) Change in repurchase agreements - non-trading 41,044 8,558 (26,481) Change in debt securities in issue (1,369) (23,034) 960 Change in financial liabilities designated at fair value 8,508 17,802 (10,785) Change in other liabilities 13,514 8,792 (4,549) Dividends received from associates 740 689 879 Contributions paid to defined benefit plans (685) (726) (664) Tax paid (3,175) (3,264) (3,852) Net cash from operating activities (10,478) 68,959 (1,122) -------------------------------------------------------------------- --------- -------- -------- -------- Purchase of financial investments (357,264) (457,084) (438,376) Proceeds from the sale and maturity of financial investments 418,352 430,085 399,636
Net cash flows from the purchase and sale of property, plant and equipment (1,167) (1,151) (1,249) Net cash flows from disposal of customer and loan portfolios 6,756 9,194 2,023 Net investment in intangible assets (1,285) (906) (954) Net cash flow on disposal of subsidiaries, businesses, associates and joint ventures 2 165 4,802 8 Net cash from investing activities 65,557 (15,060) (38,912) -------------------------------------------------------------------- --------- -------- -------- -------- Issue of ordinary share capital and other equity instruments 5,196 2,024 3,727 --------- Cancellation of shares (3,000) - - -------------------------------------------------------------------- --------- -------- -------- -------- Net sales/(purchases) of own shares for market-making and investment purposes (67) 523 331 Purchase of treasury shares - (2,510) - -------------------------------------------------------------------- -------- -------- -------- Redemption of preference shares and other equity instruments - (1,825) (463) -------- Subordinated loan capital issued - 2,622 3,180 -------- Subordinated loan capital repaid 4 (3,574) (595) (2,157) --------- Dividends paid to shareholders of the parent company and non-controlling interests (9,005) (9,157) (8,195) Net cash from financing activities (10,450) (8,918) (3,577) -------------------------------------------------------------------- --------- -------- -------- -------- Net increase/(decrease) in cash and cash equivalents 44,629 44,981 (43,611) -------------------------------------------------------------------- --------- -------- -------- -------- Cash and cash equivalents at 1 Jan 274,550 243,863 301,301 Exchange differences in respect of cash and cash equivalents 18,233 (14,294) (13,827) Cash and cash equivalents at 31 Dec 337,412 274,550 243,863 -------------------------------------------------------------------- --------- -------- -------- -------- Cash and cash equivalents comprise: 3 - cash and balances at central banks 180,624 128,009 98,934 - items in the course of collection from other banks 6,628 5,003 5,768 - loans and advances to banks of one month or less 82,771 77,318 70,985 - reverse repurchase agreements with banks of one month or less 58,850 55,551 53,971 - treasury bills, other bills and certificates of deposit less than three months 15,389 14,646 19,843 - less: items in the course of transmission to other banks (6,850) (5,977) (5,638) -------------------------------------------------------------------- --------- -------- -------- -------- 337,412 274,550 243,863 -------------------------------------------------------------------- --------- -------- -------- --------
Interest received was $41,676m (2016: $42,586m; 2015: $47,623m),interest paid was $10,962m (2016: $12,027m; 2015: $14,559m) anddividends received were $2,225m (2016: $475m; 2015: $914m).
1 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense. 2 In July 2016, we completed the disposal of the Brazilian operations resulting in net cash inflow of $4.8bn . 3 At 31 December 2017 $39,830m (2016: $35,501m) was not available for use by HSBC, of which $21,424m (2016: $21,108m) related to mandatory deposits at central banks. 4 Subordinated liabilities changes during the year are attributable to repayments of $(3.6)bn (2016: $(0.6)bn) of securities. Non-cash changes during the year included foreign exchange loss/gain ($0.6bn) (2016: $2.1bn) and fair value losses of ($1.2bn) (2016: ($0.3bn)). HSBC Holdings plc Annual Report and Accounts 2017 179
Financial Statements
Consolidated statement of changes in equity for the year ended 31 December Other reserves(6) Called up share Available- Cash Total capital Other Retained for-sale flow Foreign share- Non- and share equity earnings(3, 4, fair value hedging exchange Merger holders' controlling Total premium(1) instru-ments(2) 5) reserve reserve reserve reserve(7) equity interests equity $m $m $m $m $m $m $m $m $m $m ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- At 1 Jan 2017 22,715 17,110 136,795 (477) (27) (28,038) 27,308 175,386 7,192 182,578 ------------------------------------------------------------ Profit for the year - - 10,798 - - - - 10,798 1,081 11,879 ------------------------------------------------------------ Other comprehensive income (net of tax) - - 328 131 (194) 8,966 - 9,231 152 9,383 ------------------------------------------------------------ * available-for-sale investments - - - 131 - - - 131 15 146 ------------------------------------------------------------ * cash flow hedges - - - - (194) - - (194) 2 (192) ------------------------------------------------------------ * changes in fair value of financial liabilities designated at fair value due to movement in own credit risk - - (2,024) - - - - (2,024) - (2,024) ------------------------------------------------------------ * remeasurement of defined benefit asset/liability(8) - - 2,395 - - - - 2,395 24 2,419 ------------------------------------------------------------ * share of other comprehensive income of associates and joint ventures - - (43) - - - - (43) - (43) ------------------------------------------------------------ * exchange differences - - - - - 8,966 - 8,966 111 9,077 ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Total comprehensive income for the year - - 11,126 131 (194) 8,966 - 20,029 1,233 21,262 ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Shares issued under employee remuneration and share plans 622 - (566) - - - - 56 - 56
------------------------------------------------------------ Shares issued in lieu of dividends and amounts arising thereon - - 3,206 - - - - 3,206 - 3,206 ------------------------------------------------------------ Capital securities issued - 5,140 - - - - - 5,140 - 5,140 ------------------------------------------------------------ -------- Dividends to shareholders - - (11,551) - - - - (11,551) (660) (12,211) ------------------------------------------------------------ Cost of share-based payment arrangements - - 500 - - - - 500 - 500 ------------------------------------------------------------ Cancellation of shares (3,000) - - - - - - (3,000) - (3,000) ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Other movements - - 489 (4) (1) - - 484 (144) 340 ------------------------------------------------------------ ---------- --------------- -------------- At 31 Dec 2017 20,337 22,250 139,999 (350) (222) (19,072) 27,308 190,250 7,621 197,871 ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- At 1 Jan 2016 22,263 15,112 143,976 (189) 34 (20,044) 27,308 188,460 9,058 197,518 ------------------------------------------------------------ Profit for the year - - 2,479 - - - - 2,479 967 3,446 ------------------------------------------------------------ ---------- --------------- -------------- Other comprehensive income (net of tax) - - 59 (271) (61) (7,994) - (8,267) (131) (8,398) ------------------------------------------------------------ * available-for-sale investments - - - (271) - - - (271) (28) (299) ------------------------------------------------------------ * cash flow hedges - - - - (61) - - (61) (7) (68) ------------------------------------------------------------ * remeasurement of defined benefit asset/liability - - 5 - - - - 5 2 7 ------------------------------------------------------------ * share of other comprehensive income of associates and joint ventures - - 54 - - - - 54 - 54 ------------------------------------------------------------ * foreign exchange reclassified to income statement on disposal of a foreign operation - - - - - 1,894 - 1,894 - 1,894 ------------------------------------------------------------ * exchange differences - - - - - (9,888) - (9,888) (98) (9,986) ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Total comprehensive income for the year - - 2,538 (271) (61) (7,994) - (5,788) 836 (4,952) ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Shares issued under employee remuneration and share plans 452 - (425) - - - - 27 - 27 ------------------------------------------------------------ Shares issued in lieu of dividends and amounts arising thereon - - 3,040 - - - - 3,040 - 3,040 ------------------------------------------------------------ ---------- Net increase in treasury shares - - (2,510) - - - - (2,510) - (2,510) ------------------------------------------------------------ --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Capital securities issued - 1,998 - - - - - 1,998 - 1,998 ------------------------------------------------------------ Dividends to shareholders - - (11,279) - - - - (11,279) (919) (12,198) ------------------------------------------------------------ Cost of share-based payment arrangements - - 534 - - - - 534 - 534 ------------------------------------------------------------ Other movements - - 921 (17) - - - 904 (1,783) (879) ------------------------------------------------------------ ---------- ------- At 31 Dec 2016 22,715 17,110 136,795 (477) (27) (28,038) 27,308 175,386 7,192 182,578 ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- 180 HSBC Holdings plc Annual Report and Accounts 2017 Consolidated statement of changes in equity (continued) Other reserves(6) -------------------------------------------- Called up share Available- Cash Total capital Other Retained for-sale flow Foreign share- Non- and share equity earnings(3, 4, fair value hedging exchange Merger holders' controlling Total premium(1) instru-ments(2) 5) reserve reserve reserve reserve(7) equity interests equity $m $m $m $m $m $m $m $m $m $m ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- At 1 Jan 2015 21,527 11,532 137,144 2,143 58 (9,265) 27,308 190,447 9,531 199,978 ------------------------------------------------------------ Profit for the year - - 13,522 - - - - 13,522 1,574 15,096 ------------------------------------------------------------ Other comprehensive income (net of tax) - - 73 (2,332) (24) (10,779) - (13,062) (887) (13,949) ------------------------------------------------------------ * available-for-sale investments - - - (2,332) - - - (2,332) (740) (3,072)
------------------------------------------------------------ * cash flow hedges - - - - (24) - - (24) - (24) ------------------------------------------------------------ * remeasurement of defined benefit asset/liability - - 82 - - - - 82 19 101 ------------------------------------------------------------ * share of other comprehensive income of associates and joint ventures - - (9) - - - - (9) - (9) * exchange differences - - - - - (10,779) - (10,779) (166) (10,945) ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Total comprehensive income for the year - - 13,595 (2,332) (24) (10,779) - 460 687 1,147 ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Shares issued under employee remuneration and share plans 736 - (589) - - - - 147 - 147 ------------------------------------------------------------ Shares issued in lieu of dividends and amounts arising thereon - - 3,162 - - - - 3,162 - 3,162 ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- Capital securities issued - 3,580 - - - - - 3,580 - 3,580 ------------------------------------------------------------ -------------- ---------- ------- -------- ---------- -------- ----------- ------- Dividends to shareholders - - (10,660) - - - - (10,660) (697) (11,357) ------------------------------------------------------------ Cost of share-based payment arrangements - - 757 - - - - 757 - 757 ------------------------------------------------------------ Other movements - - 567 - - - - 567 (463) 104 ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- At 31 Dec 2015 22,263 15,112 143,976 (189) 34 (20,044) 27,308 188,460 9,058 197,518 ------------------------------------------------------------ ---------- --------------- -------------- ---------- ------- -------- ---------- -------- ----------- ------- 1 For further details refer to Note 31. In February 2017, HSBC announced a share buy-back of up to $1.0bn. Subsequently, HSBC completed a $1.0bn share buy-back in April 2017. In July 2017, HSBC announced a further share buy-back of up to $2.0bn. Subsequently, HSBC completed a $2.0bn share buy-back in November 2017. 2 During 2017, HSBC Holdings issued $3,000m, SGD1,000m and EUR1,250m of perpetual subordinated contingent convertible capital securities, on which there were $14m of external issuance costs, $37m of intra-group issuance costs and $10m of tax benefits. In 2016, HSBC Holdings issued $2,000m of perpetual subordinated contingent convertible capital securities, after issuance costs of $6m and tax benefits of $4m. In 2015, HSBC Holdings issued $2,450m and EUR1,000m of perpetual subordinated contingent convertible capital securities, on which there were $12m of external issuance costs, $25m of intra-group issuance costs and $19m of tax. Under IFRSs these issuance costs and tax benefits are classified as equity. 3 At 31 December 2017, retained earnings included 360,590,019 treasury shares (2016: 353,356,251; 2015: 81,580,180). In addition, treasury shares are also held within HSBC's Insurance business retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Markets. 4 Cumulative goodwill amounting to $5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including $3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of $1,669m has been charged against retained earnings. 5 At 1 January 2017, the cumulative changes in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a loss of $1,672m. 6 At 31 December 2015, our operations in Brazil were classified as held for sale. The cumulative amount of other reserves attributable to these operations were as follows: available-for-sale fair value reserve debit of $176m, cash flow hedging reserve credit of $34m and foreign exchange reserve debit of $2.6bn. 7 Statutory share premium relief under Section 131 of the Companies Act 1985 (the 'Act') was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003, and the shares issued were recorded at their nominal value only. In HSBC's consolidated financial statements the fair value differences of $8,290m in respect of HSBC France and $12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited ('HOHU'), following a number of intra-group reorganisations. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and $15,796m was recognised in the merger reserve. The merger reserve includes a deduction of $614m in respect of costs relating to the rights issue, of which $149m was subsequently transferred to the income statement. Of this $149m, $121m was a loss arising from accounting for the agreement with the underwriters as a contingent forward contract. The merger reserve excludes the loss of $344m on a forward foreign exchange contract associated with hedging the proceeds of the rights issue. 8 An actuarial gain of $1,730m has arisen as a result of the remeasurement of the defined benefit pension obligation of the HSBC Bank (UK) Pension Scheme. Refer to Note 5 for further detail. HSBC Holdings plc Annual Report and Accounts 2017 181 Financial Statements
HSBC Holdings income statement for the year ended 31 December 2017 2016 2015 Notes $m $m $m ------ ------ ------ Net interest expense (383) (424) (438) ------ ------ ------ * interest income 2,185 1,380 866 * interest expense (2,568) (1,804) (1,304) ------------------------------------------------------------------------- ----- ------ ------ ------ Fee (expense)/income 2 (1) 39 Net trading income/(expense) (392) 119 (349) Net (expense)/income from financial instruments designated at fair value 2 314 (49) 276 ------------------------------------------------------------------------- ------ * changes in fair value of long term debt and related derivatives 103 (49) 276 ------------------------------------------------------------------------- * net income from other financial instruments designated at fair value 211 - - ------------------------------------------------------------------------- ------ ------ ------ Gains less losses from financial investments 154 - - ------------------------------------------------------------------------- ------ ------ ------
Dividend income from subsidiaries 10,039 10,436 8,469 Other operating income 769 696 654 ------------------------------------------------------------------------- ----- ------ ------ ------ Total operating income 10,503 10,777 8,651 ------------------------------------------------------------------------- ----- ------ ------ ------ Employee compensation and benefits 5 (54) (570) (908) General and administrative expenses (4,911) (4,014) (3,434) Impairment of subsidiaries (63) - (26) Total operating expenses (5,028) (4,584) (4,368) ------------------------------------------------------------------------- ----- ------ ------ ------ Profit before tax 5,475 6,193 4,283 ------------------------------------------------------------------------- ----- ------ ------ ------ Tax credit 64 402 570 Profit for the year 5,539 6,595 4,853 ------------------------------------------------------------------------- ----- ------ ------ ------ HSBC Holdings statement of comprehensive income for the year ended 31 December 2017 2016 2015 $m $m $m -------------------------------------------------------------------------------------- ------ ------ ----- Profit for the year 5,539 6,595 4,853 -------------------------------------------------------------------------------------- Other comprehensive income/(expense) Items that will be reclassified subsequently to profit or loss when specific conditions are met: Financial investments in HSBC undertakings (53) (72) (57) -------------------------------------------------------------------------------------- - fair value gains/(losses) (70) (83) (77) -------------------------------------------------------------------------------------- - income taxes 17 11 20 -------------------------------------------------------------------------------------- ------ ------ ----- Items that will not be reclassified subsequently to profit or loss: Changes in fair value of financial liabilities designated at fair value due to movement in own credit risk (828) (896) - - before income taxes (1,007) (1,030) - -------------------------------------------------------------------------------------- - income taxes 179 134 - -------------------------------------------------------------------------------------- ------ ------ ----- Other comprehensive income for the year, net of tax (881) (968) (57) -------------------------------------------------------------------------------------- ------ ------ ----- Total comprehensive income for the year 4,658 5,627 4,796 -------------------------------------------------------------------------------------- ------ ------ ----- 182 HSBC Holdings plc Annual Report and Accounts 2017 HSBC Holdings balance sheet at 31 December 2017 2016 Notes $m $m ----------------------------------------------------------------- ----- ------- ------- Assets Cash and balances with HSBC undertakings 1,985 247 Loans and advances to HSBC undertakings designated at fair value 11,944 - ----------------------------------------------------------------- ----- ------- ------- Derivatives 14 2,388 2,148 Loans and advances to HSBC undertakings 76,627 77,421 ------- ------- Financial investments in HSBC undertakings 4,264 3,590 Prepayments, accrued income and other assets 369 503 Current tax assets 379 631 Investments in subsidiaries 18 92,930 95,850 Intangible assets 293 176 Deferred tax assets 555 232 Total assets at 31 Dec 191,734 180,798 ----------------------------------------------------------------- ----- ------- ------- Liabilities and equity Liabilities ----------------------------------------------------------------- ----- ------- --------- Amounts owed to HSBC undertakings 2,571 2,157 Financial liabilities designated at fair value 23 30,890 30,113 Derivatives 14 3,082 5,025 Debt securities in issue 24 34,258 21,805 Accruals, deferred income and other liabilities 1,269 1,651 Subordinated liabilities 27 15,877 15,189 Total liabilities 87,947 75,940 ----------------------------------------------------------------- ----- ------- ------- Equity ----------------------------------------------------------------- ----- ------- --------- Called up share capital 31 10,160 10,096 Share premium account 10,177 12,619 Other equity instruments 22,107 17,004 Other reserves 37,440 37,483 Retained earnings 23,903 27,656 Total equity 103,787 104,858 ----------------------------------------------------------------- ----- ------- ------- Total liabilities and equity at 31 Dec 191,734 180,798 ----------------------------------------------------------------- ----- ------- -------
The accompanying notes on pages 186 to 261 and the auditedsections in 'Global businesses and regions' on pages 46 to 59,'Risk' on pages 63 to 116, 'Capital' on pages 117 to 120 and'Directors' Remuneration Report' on pages 141 to 157 form anintegral part of these financial statements.
These financial statements were approved by the Board ofDirectors on 20 February 2018 and signed on its behalf by:
Mark E Tucker Iain Mackay Group Chairman Group Finance Director HSBC Holdings plc Annual Report and Accounts 2017 183
Financial Statements
HSBC Holdings statement of cash flows for the year ended 31 December 2017 2016 2015 (Restated)(1) (Restated)(1) $m $m $m Profit before tax 5,475 6,193 4,283 ------- ------------- ------------- Adjustments for non-cash items: (17) 48 114 ------- ------------- ------------- * depreciation, amortisation and impairment 33 10 30 * (credit)/charge for share-based payment (2) 34 86 * other non-cash items included in profit before tax (48) 4 (2) ------- ------------- ------------- Changes in operating assets and liabilities Change in loans to HSBC undertakings (1,122) (36,437) 1,247 ---------------------------------------------------------------------- ------- ------------- ------------- Change in loans and advances to HSBC undertakings designated at fair value (11,944) - - ---------------------------------------------------------------------- ------- ------------- -------------
Change in financial investments in HSBC undertakings (1,775) 612 (289) ---------------------------------------------------------------------- ------- ------------- ------------- Change in net trading securities and net derivatives (2,183) 3,066 1,413 Change in other assets 134 (239) (141) Change in debt securities in issue(2) 1,020 (1,633) (49) Change in financial liabilities designated at fair value 954 (1,229) (1,228) Change in other liabilities 721 (693) (1,065) Tax received 443 646 470 Net cash from operating activities (8,294) (29,666) 4,755 ---------------------------------------------------------------------- ------- ------------- ------------- Purchase of financial investments in HSBC undertakings - - (276) ------- ------------- ------------- Proceeds from the sale and maturity of financial investments in HSBC undertakings 1,165 610 - ------- ------------- ------------- Net cash outflow from acquisition of or increase in stake of subsidiaries (89) (2,073) (2,118) Repayment of capital from subsidiaries 4,070 3,920 790 Net investment in intangible assets (150) (109) (79) Net cash from investing activities 4,996 2,348 (1,683) ---------------------------------------------------------------------- ------- ------------- ------------- Issue of ordinary share capital and other equity instruments 5,647 2,381 4,216 Purchase of treasury shares - (2,510) - ------- ------------- Cancellation of shares (3,000) - - ---------------------------------------------------------------------- ------- ------------- ------------- Subordinated loan capital issued - 2,636 3,180 ---------------------------------------------------------------------- ------- ------------- ------------- Subordinated loan capital repaid (1,184) (1,781) (1,565) Debt securities issued 11,433 32,080 - Debt securities repaid - - - Dividends paid on ordinary shares (6,987) (7,059) (6,548) Dividends paid to holders of other equity instruments (1,359) (1,180) (950) Net cash from financing activities 4,550 24,567 (1,667) ---------------------------------------------------------------------- ------- ------------- ------------- Net increase/(decrease) in cash and cash equivalents 1,252 (2,751) 1,405 ---------------------------------------------------------------------- ------- ------------- ------------- Cash and cash equivalents at 1 January 3,697 6,448 5,043 ---------------------------------------------------------------------- ------- ------------- ------------- Cash and cash equivalents at 31 Dec(1) 4,949 3,697 6,448 ---------------------------------------------------------------------- ------- ------------- ------------- Cash and cash equivalents comprise: - Cash at bank with HSBC undertakings 1,985 247 242 ---------------------------------------------------------------------- ------- ------------- ------------- - Loans and advances to banks of one month or less 2,964 3,450 6,206 ---------------------------------------------------------------------- ------- ------------- -------------
Interest received was $2,103m (2016: $1,329m; 2015: $792m),interest paid was $2,443m (2016: $1,791m; 2015: $1,289m) anddividends received were $10,039m (2016: $10,412m; 2015:$8,469m).
1. In 2017 cash and cash equivalents include loans and advances to HSBC undertakings of one month or less duration. The comparative figures have also been amended. 2. Subordinated liabilities changes during the year $0.7bn (2016: $0.7bn) are wholly attributable to non-cash changes. During the year fair value losses amounted to $0.7bn (2016: gain$0.7bn). 184 HSBC Holdings plc Annual Report and Accounts 2017 HSBC Holdings statement of changes in equity for the year ended 31 December Other reserves ------------------------------------------ Called Merger Total up Other Other and share- share Share equity Retained Available-for-sale paid-in other holders' capital premium instruments earnings(1) fair value reserve capital(2) reserves equity $m $m $m $m $m $m $m $m ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- At 1 Jan 2017 10,096 12,619 17,004 27,656 112 2,244 35,127 104,858 Profit for the year - - - 5,539 - - - 5,539 Other comprehensive income (net of tax) - - - (828) (53) - - (881) * available-for-sale investments - - - - (53) - - (53) * changes in fair value of financial liabilities designated at fair value due to movement in own credit risk - - - (828) - - - (828) ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- Total comprehensive income for the year - - - 4,711 (53) - - 4,658 Shares issued under employee share plans 38 584 - (52) - - - 570 Shares issued in lieu of dividends and amounts arising thereon 190 (190) - 3,205 - - - 3,205 ------------------------------------------------------ Cancellation of shares (164) (2,836) - - - - - (3,000) ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- Capital securities issued - 5,103 - - - - 5,103 Dividends to shareholders - - - (11,551) - - - (11,551) Cost of share-based payment arrangements - - - (2) - - - (2) Other movements - - - (64) - 10 - (54) ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- At 31 Dec 2017 10,160 10,177 22,107 23,903 59 2,254 35,127 103,787 ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- At 1 Jan 2016 9,842 12,421 15,020 32,224 183 2,597 35,127 107,414
Profit for the year - - - 6,595 - - - 6,595 Other comprehensive income (net of tax) - - - (896) (72) - - (968) - available-for-sale investments - - - - (72) - - (72) ------------------------------------------------------ * changes in fair value of financial liabilities designated at fair value due to movement in own credit risk - - - (896) - - - (896) ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- Total comprehensive income for the year - - - 5,699 (72) - - 5,627 Shares issued under employee share plans 35 417 - (51) - - - 401 Shares issued in lieu of dividends and amounts arising thereon 219 (219) - 3,040 - - - 3,040 ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- Net increase in treasury shares - - - (2,510) - - - (2,510) ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- Capital securities issued - 1,984 - - - - 1,984 Dividends to shareholders - - - (11,279) - - - (11,279) Cost of share-based payment arrangements - - - 34 - - - 34 Other movements - - - 499 1 (353) - 147 ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- At 31 Dec 2016 10,096 12,619 17,004 27,656 112 2,244 35,127 104,858 ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- At 1 Jan 2015 9,609 11,918 11,476 34,986 240 2,089 35,127 105,445 Profit for the year - - - 4,853 - - - 4,853 Other comprehensive income (net of tax) - - - - (57) - - (57) - available-for-sale investments - - - - (57) - - (57) ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- Total comprehensive income for the year - - - 4,853 (57) - - 4,796 Shares issued under employee share plans 45 691 - (59) - - - 677 Shares issued in lieu of dividends and amounts arising thereon 188 (188) - 3,162 - - - 3,162 ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- -------- Capital securities issued - - 3,544 - - - - 3,544 Dividends to shareholders - - - (10,660) - - - (10,660) Cost of share-based payment arrangements - - - 86 - - - 86 Other movements - - - (144) - 508 - 364 ------------------------------------------------------ -------- At 31 Dec 2015 9,842 12,421 15,020 32,224 183 2,597 35,127 107,414 ------------------------------------------------------ ------- ------- ----------- ----------- ------------------ ---------- -------- --------
Dividends per ordinary share at 31 December 2017 were $0.51(2016: $0.51; 2015:$0.50).
1 At 31 December 2017, retained earnings included 326,843,840 ($2,542m) of treasury shares (2016: 325,499,152 ($2,499m); 2015: 67,881 ($1m)). The increase principally reflects the share buy-back initiative, with the purchase of 328.2m ordinary shares ($3,000m) all of which were cancelled during the year and used to reduce outstanding ordinary shares. In addition, treasury shares are held to fund employee share plans. 2 Other paid-in capital arises from the exercise and lapse of share options granted to employees of HSBC Holdings subsidiaries. HSBC Holdings plc Annual Report and Accounts 2017 185
Notes on the Financial Statements
1 Basis of preparation and significant accounting policies -------------------------------------------------------- 1.1 Basis of preparation (a) Compliance with International Financial Reporting Standards
The consolidated financial statements of HSBC and the separatefinancial statements of HSBC Holdings have been prepared inaccordance with IFRSs as issued by the IASB, includinginterpretations issued by the IFRS Interpretations Committee, andas endorsed by the European Union ('EU'). At 31 December 2017,there were no unendorsed standards effective for the year ended 31December 2017 affecting these consolidated and separate financialstatements, and HSBC's application of IFRSs results in nodifferences between IFRSs as issued by the IASB and IFRSs asendorsed by the EU.
Standards adopted during the year ended 31 December 2017
HSBC has adopted the requirements of IFRS 9 'FinancialInstruments' relating to the presentation of gains and losses onfinancial liabilities designated at fair value from 1 January 2017in the consolidated financial statements. As a result, the effectsof changes in those liabilities' credit risk is presented in othercomprehensive income with the remaining effect presented in profitor loss. As permitted by the transitional requirements of IFRS 9,comparatives have not been restated. Adoption increased profitafter tax by $2,024m and basic and diluted earnings per share by$0.10 with the opposite effect on other comprehensive income and noeffect on net assets. These requirements were adopted in theseparate financial statements of HSBC Holdings in 2016.
There were no other new standards applied in 2017. However,during 2017, HSBC adopted a number of interpretations andamendments to standards which had an insignificant effect on theconsolidated financial statements of HSBC and the separatefinancial statements of HSBC Holdings.
(b) Differences between IFRSs and Hong Kong Financial Reporting Standards
There are no significant differences between IFRSs and Hong KongFinancial Reporting Standards in terms of their application toHSBC, and consequently there would be no significant differenceshad the financial statements been prepared in accordance with HongKong Financial Reporting Standards. The Notes on the FinancialStatements, taken together with the Report of the Directors,include the aggregate of all disclosures necessary to satisfy IFRSsand Hong Kong reporting requirements.
(c) Future accounting developments
Minor amendments to IFRSs
The IASB has published a number of minor amendments to IFRSswhich are effective from 1 January 2018 and 2019, some of whichhave been endorsed for use in the EU. HSBC expects they will havean insignificant effect, when adopted, on the consolidatedfinancial statements of HSBC and the separate financial statementsof HSBC Holdings. HSBC has not early adopted any of the amendmentseffective after 31 December 2017, except the requirements of IFRS 9'Financial Instruments' relating to the presentation of gains andlosses on financial liabilities designated at fair value which wasadopted from 1 January 2017.
Major new IFRSs
The IASB has published IFRS 9 'Financial Instruments', IFRS 15'Revenue from Contracts with Customers', IFRS 16 'Leases' and IFRS17 'Insurance contracts'. IFRS 9 , IFRS 15 and IFRS 16 have beenendorsed for use in the EU and IFRS 17 has not yet beenendorsed.
IFRS 9 'Financial Instruments'
In July 2014, the IASB issued IFRS 9 'Financial Instruments',which is the comprehensive standard to replace IAS 39 'FinancialInstruments: Recognition and Measurement', and includesrequirements for classification and measurement of financial assetsand liabilities, impairment of financial assets and hedgeaccounting.
Classification and measurement
The classification and measurement of financial assets willdepend on how these are managed (the entity's business model) andtheir contractual cash flow characteristics. These factorsdetermine whether the financial assets are measured at amortisedcost, fair value through other comprehensive income ('FVOCI') orfair value through profit or loss ('FVPL'). The combined effect ofthe application of the business model and the contractual cash flowcharacteristics tests may result in some differences in thepopulation of financial assets measured at amortised cost or fairvalue compared with IAS 39. In addition, on transition to IFRS 9entities are required to revoke previous designations of financialassets and financial liabilities measured at fair value throughprofit or loss where the accounting mismatch no longer exists andare permitted to revoke such designations where accountingmismatches continue to exist.
Impairment
The impairment requirements apply to financial assets measuredat amortised cost and FVOCI, lease receivables, and certain loancommitments and financial guarantee contracts. At initialrecognition, an impairment allowance (or provision in the case ofcommitments and guarantees) is required for expected credit losses('ECL') resulting from default events that are possible within thenext 12 months ('12-month ECL'). In the event of a significantincrease in credit risk, an allowance (or provision) is requiredfor ECL resulting from all possible default events over theexpected life of the financial instrument ('lifetime ECL').Financial assets where 12-month ECL is recognised are in 'stage 1';financial assets that are considered to have experienced asignificant increase in credit risk are in 'stage 2'; and financialassets for which there is objective evidence of impairment, so areconsidered to be in default or otherwise credit impaired, are in'stage 3'.
The assessment of credit risk and the estimation of ECL arerequired to be unbiased and probability-weighted, and shouldincorporate all available information relevant to the assessment,including information about past events, current conditions andreasonable and supportable forecasts of economic conditions at thereporting date. In addition, the estimation of ECL should take intoaccount the time value of money. As a result, the recognition andmeasurement of impairment is intended to be more forward-lookingthan under IAS 39, and the resulting impairment charge may be morevolatile. IFRS 9 may also result in an increase in the total levelof impairment allowances, since all financial assets will beassessed for at least 12-month ECL and the population of financialassets to which lifetime ECL applies is likely to be larger thanthe population for which there is objective evidence of impairmentin accordance with IAS 39.
186 HSBC Holdings plc Annual Report and Accounts 2017
Hedge accounting
The general hedge accounting requirements aim to simplify hedgeaccounting, creating a stronger link with risk management strategyand permitting hedge accounting to be applied to a greater varietyof hedging instruments and risks. However, they do not explicitlyaddress macro hedge accounting strategies, which are particularlyimportant for banks. As a result, IFRS 9 includes an accountingpolicy choice to remain with IAS 39 hedge accounting.
Transitional impact
With the exception of the provisions relating to thepresentation of gains and losses on financial liabilitiesdesignated at fair value, which were adopted from 1 January 2017,the requirements of IFRS 9 'Financial Instruments' will be adoptedfrom 1 January 2018. IFRS 9 includes an accounting policy choice tocontinue IAS 39 hedge accounting, which HSBC has exercised,although it will implement the revised hedge accounting disclosuresrequired by the related amendments to IFRS 7 'FinancialInstruments: Disclosures'. The classification and measurement andimpairment requirements are applied retrospectively by adjustingthe opening balance sheet at the date of initial application, withno requirement to restate comparative periods. HSBC does not intendto restate comparatives. For the consolidated financial statementsof HSBC, adoption is expected to reduce net assets at 1 January2018 by $1.0bn, with the classification and measurement changesincreasing net assets by $0.9bn and impairment reducing net assetsby $2.2bn, net of deferred tax of $0.3bn. As a consequence, commonequity tier 1 capital is expected to increase by $1.2bn, applyingregulatory transitional arrangements, and by $0.2bn on a fullyloaded basis. For the separate financial statements of HSBCHoldings, adoption is expected to increase net assets at 1 January2018 by $0.9bn, net of deferred tax, as a result of classificationand measurement changes. These estimates are based on accountingpolicies, assumptions, judgements and estimation techniques thatremain subject to change until the Group finalises its financialstatements for the year ending 31 December 2018.
IFRS 15 'Revenue from Contracts with Customers'
In May 2014, the IASB issued IFRS 15 'Revenue from Contractswith Customers' and it is effective for annual periods beginning onor after 1 January 2018. IFRS 15 provides a principles-basedapproach for revenue recognition, and introduces the concept ofrecognising revenue for performance obligations as they aresatisfied. HSBC will adopt the standard on its mandatory effectivedate, and the standard will be applied on a retrospective basis,recognising the cumulative effect, if any, of initially applyingthe standard as an adjustment to the opening balance of retainedearnings. HSBC has assessed the impact of IFRS 15 and expects thatthe standard will have no significant effect, when applied, on theconsolidated financial statements of HSBC and the separatefinancial statements of HSBC Holdings.
IFRS 16 'Leases'
In January 2016, the IASB issued IFRS 16 'Leases' with aneffective date for annual periods beginning on or after 1 January2019. IFRS 16 results in lessees accounting for most leases withinthe scope of the standard in a manner similar to the way in whichfinance leases are currently accounted for under IAS 17 'Leases'.Lessees will recognise a 'right of use' asset and a correspondingfinancial liability on the balance sheet. The asset will beamortised over the length of the lease, and the financial liabilitymeasured at amortised cost. Lessor accounting remains substantiallythe same as under IAS 17. HSBC is currently assessing the impact ofIFRS 16, and it is not practicable to quantify the effect at thedate of the publication of these financial statements. Existingoperating lease commitments are set out in Note 33.
IFRS 17 'Insurance contracts'
IFRS 17 'Insurance contracts' was issued in May 2017, and setsout the requirements that an entity should apply in accounting forinsurance contracts it issues and reinsurance contracts it holds.IFRS 17 is effective from 1 January 2021, and HSBC is consideringits impact.
(d) Foreign currencies
HSBC's consolidated financial statements are presented in USdollars because the US dollar and currencies linked to it form themajor currency bloc in which HSBC transacts and funds its business.The US dollar is also HSBC Holdings' functional currency becausethe US dollar and currencies linked to it are the most significantcurrencies relevant to the underlying transactions, events andconditions of its subsidiaries, as well as representing asignificant proportion of its funds generated from financingactivities.
Transactions in foreign currencies are recorded at the rate ofexchange on the date of the transaction. Assets and liabilitiesdenominated in foreign currencies are translated at the rate ofexchange at the balance sheet date except non-monetary assets andliabilities measured at historical cost which are translated usingthe rate of exchange at the initial transaction date. Exchangedifferences are included in other comprehensive income or in theincome statement depending on where the gain or loss on theunderlying item is recognised.
In the consolidated financial statements, the assets,liabilities and results of foreign operations whose functionalcurrency is not US dollars are translated into the Group'spresentation currency at the reporting date. Exchange differencesarising are recognised in other comprehensive income. On disposalof a foreign operation, exchange differences previously recognisedin other comprehensive income are reclassified to the incomestatement.
(e) Presentation of information
Certain disclosures required by IFRSs have been included in theaudited sections of this Annual Report and Accounts as follows:
-- segmental disclosures are included in the 'Report of the Directors: Financial Review' on pages 32 to 62; -- disclosures concerning the nature and extent of risks relating to insurance contracts and financial instruments are included in the 'Report of the Directors: Risk' on pages 63 to 116; -- capital disclosures are included in the 'Report of the Directors: Capital' on pages 117 to 120; and -- disclosures relating to HSBC's securitisation activities and structured products are included in the 'Report of the Directors: Risk' on pages 63 to 116.
In accordance with its policy to provide disclosures that helpinvestors and other stakeholders understand the Group'sperformance, financial position and changes to them, theinformation provided in the Notes on the Financial Statements andthe Report of the Directors goes beyond the minimum levels requiredby accounting standards, statutory and regulatory requirements andlisting rules. In addition, HSBC follows the UK Finance DisclosureCode ('the UKF Disclosure Code'). The UKF Disclosure Code aims toincrease the quality and comparability of UK banks' disclosures andsets out five disclosure principles together with supportingguidance agreed in 2010. In line with the principles of the UKFDisclosure Code, HSBC assesses good practice recommendations issuedfrom time to time by relevant
HSBC Holdings plc Annual Report and Accounts 2017 187
Notes on the Financial Statements
regulators and standard setters, and will assess theapplicability and relevance of such guidance, enhancing disclosureswhere appropriate.
(f) Critical accounting estimates and judgements
The preparation of financial information requires the use ofestimates and judgements about future conditions. In view of theinherent uncertainties and the high level of subjectivity involvedin the recognition or measurement of items highlighted as thecritical accounting estimates and judgements in section 1.2 below,it is possible that the outcomes in the next financial year coulddiffer from those on which management's estimates are based. Thiscould result in materially different estimates and judgements fromthose reached by management for the purposes of these financialstatements. Management's selection of HSBC's accounting policieswhich contain critical estimates and judgements reflects themateriality of the items to which the policies are applied and thehigh degree of judgement and estimation uncertainty involved.
(g) Segmental analysis
HSBC's chief operating decision-maker is the Group ChiefExecutive, supported by the rest of the Group Management Board('GMB'), which operates as a general management committee under thedirect authority of the Board. Operating segments are reported in amanner consistent with the internal reporting provided to the GroupChief Executive and the GMB.
Measurement of segmental assets, liabilities, income andexpenses 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 areincluded in segments on the basis of the actual recharges made.
(h) Going concern
The financial statements are prepared on a going concern basis,as the Directors are satisfied that the Group and parent companyhave the resources to continue in business for the foreseeablefuture. In making this assessment, the Directors have considered awide range of information relating to present and futureconditions, including future projections of profitability, cashflows and capital resources.
1.2 Summary of significant accounting policies (a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, HSBC consolidateswhen it holds, directly or indirectly, the necessary voting rightsto pass resolutions by the governing body. In all other cases, theassessment of control is more complex and requires judgement ofother factors, including having exposure to variability of returns,power to direct relevant activities and whether power is held asagent or principal.
Business combinations are accounted for using the acquisitionmethod. The amount of non-controlling interest is measured eitherat fair value or at the non-controlling interest's proportionateshare of the acquiree's identifiable net assets. This election ismade for each business combination.
HSBC Holdings' investments in subsidiaries are stated at costless impairment losses.
Goodwill
Goodwill is allocated to cash-generating units ('CGUs') for thepurpose of impairment testing, which is undertaken at the lowestlevel at which goodwill is monitored for internal managementpurposes. HSBC's CGUs are based on geographical regions subdividedby global business, except for Global Banking and Markets, forwhich goodwill is monitored on a global basis.
Impairment testing is performed at least once a year, orwhenever there is an indication of impairment, by comparing therecoverable amount of a CGU with its carrying amount.
Goodwill is included in a disposal group if the disposal groupis a CGU to which goodwill has been allocated or it is an operationwithin such a CGU. The amount of goodwill included in a disposalgroup is measured on the basis of the relative values of theoperation disposed of and the portion of the CGU retained.
Critical accounting estimates and judgements
The review of goodwill for impairment reflects management's best estimate of the future cash flows of the CGUs and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows: -- The future cash flows of the CGUs are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management's view of future business prospects at the time of the assessment. -- The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of capital assigned to individual CGUs. The cost of capital percentage is generally derived from a capital asset pricing model, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management's control. They are therefore subject to uncertainty and require the exercise of significant judgement. The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. In such circ*mstances, management retests goodwill for impairment more frequently than once a year when indicators of impairment exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management's best estimate of future business prospects. ====================================================================================================
HSBC sponsored structured entities
HSBC is considered to sponsor another entity if, in addition toongoing involvement with the entity, it had a key role inestablishing that entity or in bringing together relevantcounterparties so the transaction that is the purpose of the entitycould occur. HSBC is generally not considered a sponsor if the onlyinvolvement with the entity is merely administrative.
Interests in associates and joint arrangements
Joint arrangements are investments in which HSBC, together withone or more parties, has joint control. Depending on HSBC's rightsand obligations, the joint arrangement is classified as either ajoint operation or a joint venture. HSBC classifies investments inentities over which it has significant influence, and that areneither subsidiaries nor joint arrangements, as associates.
HSBC recognises its share of the assets, liabilities and resultsin a joint operation. Investments in associates and interests injoint ventures are recognised using the equity method. Theattributable share of the results and reserves of joint venturesand associates are
188 HSBC Holdings plc Annual Report and Accounts 2017
included in the consolidated financial statements of HSBC basedon either financial statements made up to 31 December or pro-ratedamounts adjusted for any material transactions or events occurringbetween the date the financial statements are available and
31 December.
Investments in associates and joint ventures are assessed ateach reporting date and tested for impairment when there is anindication that the investment may be impaired. Goodwill onacquisitions of interests in joint ventures and associates is nottested separately for impairment, but is assessed as part of thecarrying amount of the investment.
Critical accounting estimates and judgements
Impairment testing of investments in associates involves significant judgement in determining the value in use, and in particular estimating the present values of cash flows expected to arise from continuing to hold the investment. The most significant judgements relate to the impairment testing of our investment in Bank of Communications Co., Limited ('BoCom'). Key assumptions used in estimating BoCom's value in use, the sensitivity of the value in use calculation to different assumptions and a sensitivity analysis that shows 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 17. ===================================================================================================== (b) Income and expense Operating income
Interest income and expense
Interest income and expense for all financial instruments,excluding those classified as held for trading or designated atfair value are recognised in 'Interest income' and 'Interestexpense' in the income statement using the effective interestmethod. However, as an exception to this, interest on debtsecurities issued by HSBC that are designated under the fair valueoption and derivatives managed in conjunction with those debtsecurities are included in interest expense.
Interest on impaired financial assets is recognised using therate of interest used to discount the future cash flows for thepurpose of measuring the impairment loss.
Non-interest income and expense
Fee income is earned from a diverse range of services providedby HSBC to its customers. Fee income is accounted for asfollows:
-- Income earned on the execution of a significant act is recognised as revenue when the act is completed (for example, fees arising from negotiating a transaction, such as the acquisition of shares, for a third party); and -- Income earned from the provision of services is recognised as revenue as the services are provided (for example, asset management services).
Net trading income comprises all gains and losses from changesin the fair value of financial assets and financial liabilitiesheld for trading, together with the related interest income,expense and dividends.
Dividend income is recognised when the right to receive paymentis established. This is the ex-dividend date for listed equitysecurities, and usually the date when shareholders approve thedividend for unlisted equity securities.
'Net income/(expense) from financial instruments designated atfair value' includes all gains and losses from changes in the fairvalue of financial assets and liabilities designated at fair valuethrough profit or loss, including derivatives that are managed inconjunction with those financial assets and liabilities, andliabilities under investment contracts. Interest income, interestexpense and dividend income in respect of those financialinstruments are also included, except for interest arising fromdebt securities issued by HSBC and derivatives managed inconjunction with those debt securities, which is recognised in'Interest expense'.
The accounting policies for insurance premium income aredisclosed in Note 1.2(f).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fairvalue. Fair value is the price that would be received to sell anasset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date. The fair valueof a financial instrument on initial recognition is generally itstransaction price (that is, the fair value of the considerationgiven or received). However, if there is a difference between thetransaction price and the fair value of financial instruments whosefair value is based on a quoted price in an active market or avaluation technique that uses only data from observable markets,HSBC recognises the difference as a trading gain or loss atinception (a 'day 1 gain or loss'). In all other cases, the entireday 1 gain or loss is deferred and recognised in the incomestatement over the life of the transaction either until thetransaction matures or is closed out, the valuation inputs becomeobservable or HSBC enters into an offsetting transaction.
The fair value of financial instruments is generally measured onan individual basis. However, in cases where HSBC manages a groupof financial assets and liabilities according to its net market orcredit risk exposure, the fair value of the group of financialinstruments is measured on a net basis but the underlying financialassets and liabilities are presented separately in the financialstatements, unless they satisfy the IFRS offsetting criteria.
Critical accounting estimates and judgements
The majority of valuation techniques employ only observable market data. However, certain financial instruments are valued 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. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument's inception profit or greater than 5% of the instrument's valuation is driven by unobservable 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
Loans and advances to banks and customers, held-to-maturityinvestments and most financial liabilities are measured atamortised cost. The carrying value of these financial assets atinitial recognition includes any directly attributable transactionscosts. If the initial fair value is lower than the cash amountadvanced, such as in the case of some leveraged finance andsyndicated lending activities, the difference is deferred andrecognised over the life of the loan (as described in sub-section(c) above) through the recognition of interest income, unless theloan becomes impaired.
HSBC Holdings plc Annual Report and Accounts 2017 189
Notes on the Financial Statements
HSBC may commit to underwriting loans on fixed contractual termsfor specified periods of time. When the loan arising from thelending commitment is expected to be held for trading, thecommitment to lend is recorded as a derivative. When HSBC intendsto hold the loan, a provision on the loan commitment is onlyrecorded where it is probable that HSBC will incur a loss.
Impairment of loans and advances
Losses for impaired loans are recognised when there is objectiveevidence that impairment of a loan or portfolio of loans hasoccurred. Losses which may arise from future events are notrecognised.
Individually assessed loans and advances
The factors considered in determining whether a loan isindividually significant for the purposes of assessing impairmentinclude the size of the loan, the number of loans in the portfolio,the importance of the individual loan relationship and how this ismanaged. Loans that are determined to be individually significantwill be individually assessed for impairment, except when volumesof defaults and losses are sufficient to justify treatment under acollective methodology.
Loans considered as individually significant are typically tocorporate and commercial customers, are for larger amounts and aremanaged on an individual basis. For these loans, HSBC considers ona case-by-case basis at each balance sheet date whether there isany objective evidence that a loan is impaired.
The determination of the realisable value of security is basedon the most recently updated market value at the time theimpairment assessment is performed. The value is not adjusted forexpected future changes in market prices, though adjustments aremade to reflect local conditions such as forced sale discounts.
Impairment losses are calculated by discounting the expectedfuture cash flows of a loan, which include expected future receiptsof contractual interest, at the loan's original effective interestrate or an approximation thereof, and comparing the resultantpresent value with the loan's current carrying amount.
Collectively assessed loans and advances
Impairment is assessed collectively to cover losses which havebeen incurred but have not yet been identified on loans subject toindividual assessment or for hom*ogeneous groups of loans that arenot considered individually significant, which are generally retaillending portfolios.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of impairmenthas been specifically identified on an individual basis are groupedtogether according to their credit risk characteristics for acollective impairment assessment. This assessment capturesimpairment losses that HSBC has incurred as a result of eventsoccurring before the balance sheet date that HSBC is not able toidentify on an individual loan basis, and that can be reliablyestimated. When information becomes available that identifieslosses on individual loans within a group, those loans are removedfrom the group and assessed individually.
hom*ogeneous groups of loans and advances
Statistical methods are used to determine collective impairmentlosses for hom*ogeneous groups of loans not considered individuallysignificant. The methods used to calculate collective allowancesare set out below:
-- When appropriate empirical information is available, HSBC utilises roll-rate methodology, which employs statistical analyses of historical data and experience of delinquency and default to reliably estimate the amount of the loans that will eventually be written off as a result of events occurring before the balance sheet date. Individual loans are grouped using ranges of past due days, and statistical estimates are made of the likelihood that loans in each range will progress through the various stages of delinquency and become irrecoverable. Additionally, individual loans are segmented based on their credit characteristics, such as industry sector, loan grade or product. In applying this methodology, adjustments are made to estimate the periods of time between a loss event occurring, for example because of a missed payment, and its confirmation through write-off (known as the loss identification period). Current economic conditions are also evaluated when calculating the appropriate level of allowance required to cover inherent loss. In certain highly developed markets, models also take into account behavioural and account management trends as revealed in, for example, bankruptcy and rescheduling statistics. -- When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll-rate methodology, HSBC adopts a basic formulaic approach based on historical
loss rate experience, or a discounted cash flow model. Where a basic formulaic approach is undertaken, the period between a loss event occurring and its identification is estimated by local management, and is typically between six and 12 months.
Write-off of loans and advances
Loans and the related impairment allowance accounts are normallywritten off, either partially or in full, when there is norealistic prospect of recovery. Where loans are secured, this isgenerally after receipt of any proceeds from the realisation ofsecurity. In circ*mstances where the net realisable value of anycollateral has been determined and there is no reasonableexpectation of further recovery, write-off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequentperiod, and the decrease can be related objectively to an eventoccurring after the impairment was recognised, the excess iswritten back by reducing the loan impairment allowance accountaccordingly. The write-back is recognised in the incomestatement.
Assets acquired in exchange for loans
When non-financial assets acquired in exchange for loans as partof an orderly realisation are held for sale, these assets arerecorded as 'Assets held for sale.'
Renegotiated loans
Loans subject to collective impairment assessment whose termshave been renegotiated are no longer considered past due, but aretreated as up-to-date loans for measurement purposes once a minimumnumber of required payments has been received. Where collectivelyassessed loan portfolios include significant levels of renegotiatedloans, these loans are segregated from other parts of the loanportfolio for the purposes of collective impairment assessment toreflect their risk profile. Loans subject to individualimpairment
190 HSBC Holdings plc Annual Report and Accounts 2017
assessment, whose terms have been renegotiated, are subject toongoing review to determine whether they remain impaired. Thecarrying amounts of loans that have been classified as renegotiatedretain this classification until maturity or derecognition.
A loan that is renegotiated is derecognised if the existingagreement is cancelled and a new agreement made on substantiallydifferent terms or if the terms of an existing agreement aremodified such that the renegotiated loan is substantially adifferent financial instrument. Any new loans that arise followingderecognition events will continue to be disclosed as renegotiatedloans and are assessed for impairment as above.
Critical accounting estimates and judgements
Loan impairment allowances represent management's best estimate of losses incurred in the loan portfolios at the balance sheet date. Management is required to exercise judgement in making assumptions and estimates when calculating loan impairment allowances on both individually and collectively assessed loans and advances. Collective impairment allowances are subject to estimation uncertainty, in part because it is not practicable to identify losses on an individual loan basis due to the large number of individually insignificant loans in the portfolio. The estimation methods include the use of statistical analyses of historical information, supplemented with significant management judgement, to assess whether current economic and credit conditions are such that the actual level of incurred losses is likely to be greater or less than historical experience. Where changes in economic, regulatory or behavioural conditions result in the most recent trends in portfolio risk factors being not fully reflected in the statistical models, risk factors are taken into account by adjusting the impairment allowances derived solely from historical loss experience. Risk factors include loan portfolio growth, product mix, unemployment rates, bankruptcy trends, geographical concentrations, loan product features, economic conditions such as national and local trends in housing markets, the level of interest rates, portfolio seasoning, account management policies and practices, changes in laws and regulations, and other influences on customer payment patterns. Different factors are applied in different regions and countries to reflect local economic conditions, laws and regulations. The methodology and the assumptions used in calculating impairment losses are reviewed regularly in the light of differences between loss estimates and actual loss experience. For example, roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they remain appropriate. For individually assessed loans, judgement is required in determining whether there is objective evidence that a loss event has occurred and, if so, the measurement of the impairment allowance. In determining whether there is objective evidence that a loss event has occurred, judgement is exercised in evaluating all relevant information on indicators of impairment, including the consideration of whether payments are contractually past due and the consideration of other factors indicating deterioration in the financial condition and outlook of borrowers, affecting their ability to pay. A higher level of judgement is required for loans to borrowers showing signs of financial difficulty in market sectors experiencing economic stress, particularly where the likelihood of repayment is affected by the prospects for refinancing or the sale of a specified asset. For those loans where objective evidence of impairment exists, management determines the size of the allowance required based on a range of factors such as the realisable value of security, the likely dividend available on liquidation or bankruptcy, the viability of the customer's business model and the capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations. HSBC might provide loan forbearance to borrowers experiencing financial difficulties by agreeing to modify the contractual payment terms of loans in order to improve the management of customer relationships, maximise collection opportunities or avoid default or repossession. Where forbearance activities are significant, higher levels of judgement and estimation uncertainty are involved in determining their effects on loan impairment allowances. Judgements are involved in differentiating the credit risk characteristics of forbearance cases, including those which return to performing status following renegotiation. Where collectively assessed loan portfolios include significant levels of loan forbearance, portfolios are segmented to reflect the different credit risk characteristics of forbearance cases, and estimates are made of the incurred losses inherent within each forbearance portfolio segment. The exercise of judgement requires the use of assumptions which are highly subjective and very sensitive to the risk factors, in particular to changes in economic and credit conditions across a large number of geographical areas. Many of the factors have a high degree of interdependency and there is no single factor to which our loan impairment allowances as a whole are sensitive. =======================================================================================================
Non-trading reverse repurchase, repurchase and similaragreements
When debt securities are sold subject to a commitment torepurchase them at a predetermined price ('repos'), they remain onthe balance sheet and a liability is recorded in respect of theconsideration received. Securities purchased under commitments toresell ('reverse repos') are not recognised on the balance sheetand an asset is recorded in respect of the initial considerationpaid. Non-trading repos and reverse repos are measured at amortisedcost. The difference between the sale and repurchase price orbetween the purchase and resale price is treated as interest andrecognised in net interest income over the life of theagreement.
Contracts that are economically equivalent to reverse repurchaseor repurchase agreements (such as sales or purchases of debtsecurities entered into together with total return swaps with thesame counterparty) are accounted for similarly to, and presentedtogether with, reverse repurchase or repurchase agreements.
(e) Financial instruments measured at fair value
Available-for-sale financial assets
Available-for-sale financial assets are recognised on the tradedate when HSBC enters into contractual arrangements to purchasethem, and are normally derecognised when they are either sold orredeemed. They are subsequently remeasured at fair value, andchanges therein are recognised in other comprehensive income untilthe assets are either sold or become impaired. Upon disposal, thecumulative gains or losses in other comprehensive income arerecognised in the income statement as 'Gains less losses fromfinancial investments'.
Impairment of available-for-sale financial assets
Available-for-sale financial assets are assessed at each balancesheet date for objective evidence of impairment. Impairment lossesare recognised in the income statement within 'Loan impairmentcharges and other credit risk provisions' for debt instruments andwithin 'Gains less losses from financial investments' forequities.
Available-for-sale debt securities
In assessing objective evidence of impairment at the reportingdate, HSBC considers all available evidence, including observabledata or information about events specifically relating to thesecurities which may result in a shortfall in the recovery offuture cash flows. A subsequent decline in the fair value of theinstrument is recognised in the income statement when there isobjective evidence of impairment as a result of decreases in theestimated future cash flows. Where there is no further objectiveevidence of impairment, the decline in the fair value of thefinancial asset is recognised in other comprehensive income. If thefair value of a debt security increases in a subsequent period, andthe increase can be objectively related to an event occurring afterthe impairment loss was recognised in the income statement, or theinstrument is no longer impaired, the impairment loss is reversedthrough the income statement.
Available-for-sale equity securities
A significant or prolonged decline in the fair value of theequity below its cost is objective evidence of impairment. Inassessing whether it is significant, the decline in fair value isevaluated against the original cost of the asset at initialrecognition. In assessing whether it is
HSBC Holdings plc Annual Report and Accounts 2017 191
Notes on the Financial Statements
prolonged, the decline is evaluated against the continuousperiod in which the fair value of the asset has been below itsoriginal cost at initial recognition.
All subsequent increases in the fair value of the instrument aretreated as a revaluation and are recognised in other comprehensiveincome. Subsequent decreases in the fair value of theavailable-for-sale equity security are recognised in the incomestatement to the extent that further cumulative impairment losseshave been incurred. Impairment losses recognised on the equitysecurity are not reversed through the income statement.
Financial instruments designated at fair value
Financial instruments, other than those held for trading, areclassified in this category if they meet one or more of thecriteria set out below, and are so designated irrevocably atinception:
-- the use of the designation removes or significantly reduces an accounting mismatch; -- when a group of financial assets, liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; and -- where financial instruments contain one or more non-closely related embedded derivatives.
Designated financial assets are recognised when HSBC enters intocontracts with counterparties, which is generally on trade date,and are normally derecognised when the rights to the cash flowsexpire or are transferred. Designated financial liabilities arerecognised when HSBC enters into contracts with counterparties,which is generally on settlement date, and are normallyderecognised when extinguished. Subsequent changes in fair valuesare recognised in the income statement in 'Net income/(expense)from financial instruments designated at fair value'.
Under this criterion, the main classes of financial instrumentsdesignated by HSBC are:
Long-term debt issues
The interest and/or foreign exchange exposure on certain fixedrate debt securities issued has been matched with the interestand/or foreign exchange exposure on certain swaps as part of adocumented risk management strategy.
Financial assets and financial liabilities under unit-linked andnon-linked investment contracts
A contract under which HSBC does not accept significantinsurance risk from another party is not classified as an insurancecontract, other than investment contracts with discretionaryparticipation features ('DPF'), but is accounted for as a financialliability. See Note 1.2(f) for investment contracts with DPF andcontracts where HSBC accepts significant insurance risk. Customerliabilities under linked and certain non-linked investmentcontracts issued by insurance subsidiaries and the correspondingfinancial assets are designated at fair value. Liabilities are atleast equivalent to the surrender or transfer value which iscalculated by reference to the value of the relevant underlyingfunds or indices. Premiums receivable and amounts withdrawn areaccounted for as increases or decreases in the liability recordedin respect of investment contracts. The incremental costs directlyrelated to the acquisition of new investment contracts or renewingexisting investment contracts are deferred and amortised over theperiod during which the investment management services areprovided.
Derivatives
Derivatives are financial instruments that derive their valuefrom the price of underlying items such as equities, interest ratesor other indices. Derivatives are recognised initially and aresubsequently measured at fair value, with changes in fair valuegenerally recorded in the income statement. Derivatives areclassified as assets when their fair value is positive or asliabilities when their fair value is negative; this includesembedded derivatives which are bifurcated from the host contractwhen they meet the definition of a derivative on a stand-alonebasis and are required by IFRSs to be accounted for separately fromthe host contract.
Gains and losses from changes in the fair value of derivativesthat do not qualify for hedge accounting are reported in 'Nettrading income'. Gains and losses on derivatives managed inconjunction with financial instruments designated at fair value arereported in 'Net income from financial instruments designated atfair value' together with the gains and losses on the economicallyhedged items. Where the derivatives are managed with debtsecurities issued by HSBC that are designated at fair value, thecontractual interest is shown in 'Interest expense' together withthe interest payable on the issued debt.
Hedge accounting
When derivatives are not part of fair value designatedrelationships, if held for risk management purposes they aredesignated in hedge accounting relationships where the requiredcriteria for documentation and hedge effectiveness are met. HSBCuses these derivatives or, where allowed, other non-derivativehedging instruments in fair value hedges, cash flow hedges orhedges of net investments in foreign operations as appropriate tothe risk being hedged.
Fair value hedge
Fair value hedge accounting does not change the recording ofgains and losses on derivatives and other hedging instruments, butresults in recognising changes in the fair value of the hedgedassets or liabilities attributable to the hedged risk that wouldnot otherwise be recognised in the income statement. If a hedgerelationship no longer meets the criteria for hedge accounting,hedge accounting is discontinued; the cumulative adjustment to thecarrying amount of the hedged item is amortised to the incomestatement on a recalculated effective interest rate, unless thehedged item has been derecognised, in which case it is recognisedin the income statement immediately.
Cash flow hedge
The effective portion of gains and losses on hedging instrumentsis recognised in other comprehensive income; the ineffectiveportion
of the change in fair value of derivative hedging instrumentsthat are part of a cash flow hedge relationship is recognisedimmediately
in the income statement within 'Net trading income'. Theaccumulated gains and losses recognised in other comprehensiveincome
are reclassified to the income statement in the same periods inwhich the hedged item affects profit or loss. In hedges of forecasttransactions that result in recognition of a non-financial asset orliability, previous gains and losses recognised in othercomprehensive income are included in the initial measurement of theasset or liability. When a hedge relationship is discontinued, orpartially discontinued, any cumulative gain or loss recognised inother comprehensive income remains in equity until the forecasttransaction is recognised in the income statement. When a forecasttransaction is no longer expected to occur, the cumulative gain orloss previously recognised in other comprehensive income isimmediately reclassified to the income statement.
192 HSBC Holdings plc Annual Report and Accounts 2017
Net investment hedge
Hedges of net investments in foreign operations are accountedfor in a similar way to cash flow hedges. The effective portion ofgains and losses on the hedging instrument is recognised in othercomprehensive income; other gains and losses are recognisedimmediately in the income statement. Gains and losses previouslyrecognised in other comprehensive income are reclassified to theincome statement on the disposal, or part disposal, of the foreignoperation.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economichedges of assets and liabilities for which hedge accounting was notapplied.
(f) Insurance contracts
A contract is classified as an insurance contract where HSBCaccepts significant insurance risk from another party by agreeingto compensate that party on the occurrence of a specified uncertainfuture event. An insurance contract may also transfer financialrisk, but is accounted for as an insurance contract if theinsurance risk is significant. In addition, HSBC issues investmentcontracts with DPF which are also accounted for as insurancecontracts as required by IFRS 4 'Insurance Contracts'.
Net insurance premium income
Premiums for life insurance contracts are accounted for whenreceivable, except in unit-linked insurance contracts wherepremiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accountingperiod as the premiums for the direct insurance contracts to whichthey relate.
Net insurance claims and benefits paid and movements inliabilities to policyholders
Gross insurance claims for life insurance contracts reflect thetotal cost of claims arising during the year, including claimhandling costs and any policyholder bonuses allocated inanticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrendersare recognised when paid or at an earlier date on which, followingnotification, the policy ceases to be included within thecalculation of the related insurance liabilities. Death claims arerecognised when notified.
Reinsurance recoveries are accounted for in the same period asthe related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts arecalculated by each life insurance operation based on localactuarial principles. Liabilities under unit-linked life insurancecontracts are at least equivalent to the surrender or transfervalue, which is calculated by reference to the value of therelevant underlying funds or indices.
Future profit participation on insurance contracts with DPF
Where contracts provide discretionary profit participationbenefits to policyholders, liabilities for these contracts includeprovisions for the future discretionary benefits to policyholders.These provisions reflect the actual performance of the investmentportfolio to date and management's expectation of the futureperformance of the assets backing the contracts, as well as otherexperience factors such as mortality, lapses and operationalefficiency, where appropriate. The benefits to policyholders may bedetermined by the contractual terms, regulation, or pastdistribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments,they continue to be treated as insurance contracts as required byIFRS 4. The Group therefore recognises the premiums for thesecontracts as revenue and recognises as an expense the resultingincrease in the carrying amount of the liability.
In the case of net unrealised investment gains on thesecontracts, whose discretionary benefits principally reflect theactual performance of the investment portfolio, the correspondingincrease in the liabilities is recognised in either the incomestatement or other comprehensive income, following the treatment ofthe unrealised gains on the relevant assets. In the case of netunrealised losses, a deferred participating asset is recognisedonly to the extent that its recoverability is highly probable.Movements in the liabilities arising from realised gains and losseson relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
HSBC recognises the value placed on insurance contracts andinvestment contracts with DPF, which are classified as long-termand in-force at the balance sheet date, as an asset. The assetrepresents the present value of the equity holders' interest in theissuing insurance companies' profits expected to emerge from thesecontracts written at the balance sheet date. The present value ofin-force business ('PVIF') is determined by discounting thoseexpected future profits using appropriate assumptions in assessingfactors such as future mortality, lapse rates and levels ofexpenses, and a risk discount rate that reflects the risk premiumattributable to the respective contracts. The PVIF incorporatesallowances for both non-market risk and the value of financialoptions and guarantees. The PVIF asset is presented gross ofattributable tax in the balance sheet and movements in the PVIFasset are included in 'Other operating income' on a gross of taxbasis.
(g) Employee compensation and benefits
Share-based payments
HSBC enters into both equity-settled and cash-settledshare-based payment arrangements with its employees as compensationfor services provided by employees.
The vesting period for these schemes may commence before thegrant date if the employees have started to render services inrespect of the award before the grant date. Expenses are recognisedwhen the employee starts to render service to which the awardrelates.
Cancellations result from the failure to meet a non-vestingcondition during the vesting period, and are treated as anacceleration of vesting recognised immediately in the incomestatement. Failure to meet a vesting condition by the employee isnot treated as a cancellation, and the amount of expense recognisedfor the award is adjusted to reflect the number of awards expectedto vest.
HSBC Holdings plc Annual Report and Accounts 2017 193
Notes on the Financial Statements
Post-employment benefit plans
HSBC operates a number of pension schemes including definedbenefit and defined contribution, and post-employment benefitschemes.
Payments to defined contribution schemes are charged as anexpense as the employees render service.
Defined benefit pension obligations are calculated using theprojected unit credit method. The net charge to the incomestatement mainly comprises the service cost and the net interest onthe net defined benefit asset or liability, and is presented inoperating expenses.
Remeasurements of the net defined benefit asset or liability,which comprise actuarial gains and losses, return on plan assetsexcluding interest and the effect of the asset ceiling (if any,excluding interest), are recognised immediately in othercomprehensive income. The net defined benefit asset or liabilityrepresents the present value of defined benefit obligations reducedby the fair value of plan assets, after applying the asset ceilingtest, where the net defined benefit surplus is limited to thepresent value of available refunds and reductions in futurecontributions to the plan.
The cost of obligations arising from other post-employment plansare accounted for on the same basis as defined benefit pensionplans.
(h) Tax
Income tax comprises current tax and deferred tax. Income tax isrecognised in the income statement except to the extent that itrelates to items recognised in other comprehensive income ordirectly in equity, in which case the tax is recognised in the samestatement as the related item appears.
Current tax is the tax expected to be payable on the taxableprofit for the year and on any adjustment to tax payable in respectof previous years. HSBC provides for potential current taxliabilities that may arise on the basis of the amounts expected tobe paid to the tax authorities.
Deferred tax is recognised on temporary differences between thecarrying amounts of assets and liabilities in the balance sheet,and the amounts attributed to such assets and liabilities for taxpurposes. Deferred tax is calculated using the tax rates expectedto apply in the periods in which the assets will be realised or theliabilities settled.
Current and deferred tax are calculated based on tax rates andlaws enacted, or substantively enacted, by the balance sheetdate.
Critical accounting estimates and judgements
The recognition of a deferred tax asset relies on an assessment of the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies. In the absence of a history of taxable profits, the most significant judgements relate to expected future profitability and to the applicability of tax planning strategies, including corporate reorganisations. ================================================================================================== (i) Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow ofeconomic benefits will be required to settle a present legal orconstructive obligation that has arisen as a result of past eventsand for which a reliable estimate can be made.
Critical accounting estimates and judgements
Judgement is involved in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. Professional expert advice is taken on the assessment of litigation, property (including onerous contracts) and similar obligations. Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous judgements and estimates as appropriate. At more advanced stages, it is typically easier to make judgements and estimates around a better defined set of possible outcomes. However, the amount provisioned can remain very sensitive to the assumptions used. There could be a wide range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result, it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions because of the diverse nature and circ*mstances of such matters and the wide range of uncertainties involved. Provisions for customer remediation also require significant levels of estimation and judgement. The amounts of provisions recognised depend on a number of different assumptions, such as the volume of inbound complaints, the projected period of inbound complaint volumes, the decay rate of complaint volumes, the population identified as systemically mis-sold and the number of policies per customer complaint. =====================================================================================================
Contingent liabilities, contractual commitments andguarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees andletters of credit pledged as collateral security, and contingentliabilities related to legal proceedings or regulatory matters, arenot recognised in the financial statements but are disclosed unlessthe probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts which are notclassified as insurance contracts are recorded initially at theirfair value, which is generally the fee received or present value ofthe fee receivable.
HSBC Holdings has issued financial guarantees and similarcontracts to other Group entities. HSBC elects to account forcertain guarantees as insurance contracts in HSBC Holdings'financial statements, in which case they are measured andrecognised as insurance liabilities. This election is made on acontract-by-contract basis, and is irrevocable.
194 HSBC Holdings plc Annual Report and Accounts 2017 2 Net income/(expense) from financial instruments designated at fair value ------------------------------------------------------------------------ 2017 2016 2015 Footnote $m $m $m ---------------------------------------------------------------------------- -------- ----- ------ ------ Net income/(expense) arising on: ---------------------------------------------------------------------------- -------- ------ ------- --------- Financial assets ---------------------------------------------------------------------------- -------- ------ ------- --------- Financial assets held to meet liabilities under insurance and investment contracts 3,211 1,480 531 Other financial assets designated at fair value 198 90 89 ---------------------------------------------------------------------------- -------- Derivatives managed with other financial assets designated at fair value (9) (43) 13 ------ 3,400 1,527 633 ---------------------------------------------------------------------------- -------- ----- ------ ------ Financial liabilities ---------------------------------------------------------------------------- -------- ----- ------- --------- Liabilities to customers under investment contracts (375) (218) 34 ---------------------------------------------------------------------------- -------- HSBC's long-term debt issued and related derivatives 672 (3,975) 863 ---------------------------------------------------------------------------- -------- - changes in own credit spread on long-term debt 1 - (1,792) 1,002 ---------------------------------------------------------------------------- -------- - derivatives managed in conjunction with HSBC's issued debt securities (273) (1,367) (1,997) ---------------------------------------------------------------------------- -------- - other changes in fair value 945 (816) 1,858 ---------------------------------------------------------------------------- -------- ----- ------ ------ Other financial liabilities designated at fair value 1 (6) 3 ---------------------------------------------------------------------------- -------- ----- ------ Derivatives managed with other financial liabilities designated at fair value - 6 (1) ---------------------------------------------------------------------------- -------- ----- ------ ------ 298 (4,193) 899 ---------------------------------------------------------------------------- -------- ----- ------ ------ Year ended 31 Dec 3,698 (2,666) 1,532 ---------------------------------------------------------------------------- -------- ----- ------ ------ 1 From 1 January 2017, HSBC Holdings plc adopted, in its consolidated financial statements, the requirements of IFRS 9 'Financial Instruments' relating to the presentation of gains and losses on financial liabilities designated at fair value. As a result, changes in fair value attributable to changes in own credit risk are presented in other comprehensive income with the remaining effect presented in profit or loss.
HSBC Holdings
Net income/(expense) arising on HSBC Holdings' long-term debt issued and related derivatives 2017 2016 2015 Footnote $m $m $m Net income/(expense) arising on: ------------------------------------------------------------------------------- ----- ----- ------- Financial assets: 211 - - ---- ---- ---- - other financial assets designated at fair value 161 - - ------------------------------------------------------------------------------- - derivatives managed with other financial assets designated at fair value 50 - - ------------------------------------------------------------------------------- ---- ---- ---- Financial liabilities 103 (49) 276 ---- ---- ---- - changes in own credit spread on long-term debt 1 - - 348 - derivatives managed in conjunction with HSBC Holdings issued debt securities 292 (642) (927) - other changes in fair value (189) 593 855 ------------------------------------------------------------------------------- -------- ---- ---- ---- Year ended 31 Dec 314 (49) 276 ------------------------------------------------------------------------------- -------- ---- ---- ---- 1 From 1 January 2016, HSBC Holdings plc adopted, in its separate financial statements, the requirements of IFRS 9 'Financial Instruments' relating to the presentation of gains and losses on financial liabilities designated at fair value. As a result, changes in fair value attributable to changes in own credit risk are presented in other comprehensive income with the remaining effect presented in profit or loss. 3 Insurance business ------------------ Net insurance premium income Non-linked Linked life Investment contracts insurance insurance with DPF(1) Total $m $m $m $m ---------------------------------------------------- ---------- ----------- -------------------- ------ Gross insurance premium income 8,424 351 2,027 10,802 Reinsurers' share of gross insurance premium income (1,016) (7) - (1,023) Year ended 31 Dec 2017 7,408 344 2,027 9,779 ---------------------------------------------------- ---------- ----------- -------------------- ------ Gross insurance premium income 8,036 675 1,877 10,588 Reinsurers' share of gross insurance premium income (629) (8) - (637) Year ended 31 Dec 2016 7,407 667 1,877 9,951 ---------------------------------------------------- ---------- ----------- -------------------- ------ Gross insurance premium income 7,506 1,409 2,097 11,012 Reinsurers' share of gross insurance premium income (648) (9) - (657) Year ended 31 Dec 2015 6,858 1,400 2,097 10,355 ---------------------------------------------------- ---------- ----------- -------------------- ------ 1 Discretionary participation features. HSBC Holdings plc Annual Report and Accounts 2017 195
Notes on the Financial Statements
Net insurance claims and benefits paid and movement in liabilities to policyholders Investment Non-linked Linked life contracts insurance insurance with DPF(1) Total $m $m $m $m ------------------------------------------------------------ ---------- ----------- ------------ ------ Gross claims and benefits paid and movement in liabilities 8,894 1,413 2,901 13,208 - claims, benefits and surrenders paid 2,883 1,044 2,002 5,929 - movement in liabilities 6,011 369 899 7,279 ------------------------------------------------------------ ---------- ----------- ------------ ------ Reinsurers' share of claims and benefits paid and movement in liabilities (942) 65 - (877) - claims, benefits and surrenders paid (297) (223) - (520) - movement in liabilities (645) 288 - (357) ---------- ----------- ------------ ------ Year ended 31 Dec 2017 7,952 1,478 2,901 12,331 ------------------------------------------------------------ ---------- ----------- ------------ ------ Gross claims and benefits paid and movement in liabilities 8,778 1,321 2,409 12,508 - claims, benefits and surrenders paid 2,828 749 2,017 5,594 - movement in liabilities 5,950 572 392 6,914 ---------- ----------- ------------ ------ Reinsurers' share of claims and benefits paid and movement in liabilities (560) (78) - (638) - claims, benefits and surrenders paid (112) (14) - (126) - movement in liabilities (448) (64) - (512) ---------- ----------- ------------ ------ Year ended 31 Dec 2016 8,218 1,243 2,409 11,870 ------------------------------------------------------------ ---------- ----------- ------------ ------ Gross claims and benefits paid and movement in liabilities 7,746 1,398 2,728 11,872 - claims, benefits and surrenders paid 3,200 1,869 2,101 7,170 - movement in liabilities 4,546 (471) 627 4,702 ---------- ----------- ------------ ------ Reinsurers' share of claims and benefits paid and movement in liabilities (575) (5) - (580) - claims, benefits and surrenders paid (153) (64) - (217) - movement in liabilities (422) 59 - (363) ---------- ----------- ------------ ------ Year ended 31 Dec 2015 7,171 1,393 2,728 11,292 ------------------------------------------------------------ ---------- ----------- ------------ ------ 1 Discretionary participation features. Liabilities under insurance contracts Investment Non-linked Linked life contracts insurance insurance with DPF(1) Total Footnotes $m $m $m $m ------------------------------------------------ --------- ---------- ----------- ------------ ------ Gross liabilities under insurance contracts at 1 Jan 2017 46,043 6,949 22,281 75,273 Claims and benefits paid (2,883) (1,044) (2,002) (5,929) Increase in liabilities to policyholders 8,894 1,413 2,901 13,208 Exchange differences and other movements 2 58 230 2,827 3,115 Gross liabilities under insurance contracts at 31 Dec 2017 52,112 7,548 26,007 85,667 ------------------------------------------------ --------- ---------- ----------- ------------ ------ Reinsurers' share of liabilities under insurance contracts (2,203) (268) - (2,471) Net liabilities under insurance contracts at 31 Dec 2017 49,909 7,280 26,007 83,196 ------------------------------------------------ --------- ---------- ----------- ------------ ------ Gross liabilities under insurance contracts at 1 Jan 2016 40,538 6,791 22,609 69,938 Claims and benefits paid (2,828) (749) (2,017) (5,594) Increase in liabilities to policyholders 8,778 1,321 2,409 12,508 Exchange differences and other movements 2 (445) (414) (720) (1,579) Gross liabilities under insurance contracts at 31 Dec 2016 46,043 6,949 22,281 75,273 ------------------------------------------------ --------- ---------- ----------- ------------ ------ Reinsurers' share of liabilities under insurance contracts (1,500) (320) - (1,820) ------------------------------------------------ --------- ---------- ----------- ------------ ------ Net liabilities under insurance contracts at 31 Dec 2016 44,543 6,629 22,281 73,453 ------------------------------------------------ --------- ---------- ----------- ------------ ------ 1 Discretionary participation features. 2 'Exchange differences and other movements' includes movements in liabilities arising from net unrealised investment gains recognised in other comprehensive income.
The key factors contributing to the movement in liabilities topolicyholders included death claims, surrenders, lapses,liabilities to policyholders created at the initial inception ofthe policies, the declaration of bonuses and other amountsattributable to policyholders.
196 HSBC Holdings plc Annual Report and Accounts 2017 4 Operating profit ----------------
Operating profit is stated after the following items:
2017 2016 2015 $m $m $m ---------------------------------------------------------------------------------- ------- ------- ------- Income ---------------------------------------------------------------------------------- -------- -------- ------- Interest recognised on impaired financial assets 261 574 934 Fees earned on financial assets that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate) 7,577 7,732 8,736 Fees earned on trust and other fiduciary activities 2,691 2,543 3,052 Expense ---------------------------------------------------------------------------------- ------- ------- ------- Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value (10,912) (11,858) (13,680) ------- ------- Fees payable on financial liabilities that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate) (1,475) (1,214) (1,251) Fees payable relating to trust and other fiduciary activities (134) (129) (166) Payments under lease and sublease agreements (936) (969) (1,190) - minimum lease payments (911) (945) (1,058) - contingent rents and sublease payments (25) (24) (132) ------- ------- -------
UK bank levy (916) (922) (1,421) Restructuring provisions (204) (415) (430) ------- Gains/(losses) ---------------------------------------------------------------------------------- ------- ------- ------- Impairment of available-for-sale equity securities (98) (36) (111) Gains/(losses) recognised on assets held for sale 195 (206) (244) Gains on the partial sale of shareholding in Industrial Bank - - 1,372 ------- Gain/(loss) on disposal of Brazilian operations 19 (1,743) - ---------------------------------------------------------------------------------- ------- ------- ------- Loan impairment charges and other credit risk provisions (1,769) (3,400) (3,721) - net impairment charge on loans and advances (1,992) (3,350) (3,592) - release of impairment on available-for-sale debt securities 190 63 17 - other credit risk provisions 33 (113) (146) ---------------------------------------------------------------------------------- ------- ------- -------
External net operating income is attributed to countries on thebasis of the location of the branch responsible for reporting theresults or advancing the funds:
2017 2016 2015 Footnote $m $m $m ----------------------------------------- -------- ------ ------ ------ External net operating income by country 1 51,445 47,966 59,800 ----------------------------------------- -------- * UK 11,057 9,495 14,132 ----------------------------------------- -------- * Hong Kong 14,992 12,864 14,447 ----------------------------------------- -------- * US 4,573 5,094 5,541 ----------------------------------------- -------- * France 2,203 2,571 2,706 ----------------------------------------- -------- * other countries 18,620 17,942 22,974 - of which: Brazil 60 (204) 3,546 ----------------------------------------- -------- ------ ------ ------ 1 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue. 5 Employee compensation and benefits ---------------------------------- 2017 2016 2015 $m $m $m ------------------------- ------ ------ ------ Wages and salaries 15,227 15,735 17,245 Social security costs 1,419 1,312 1,600 Post-employment benefits 669 1,042 1,055 Year ended 31 Dec 17,315 18,089 19,900 ------------------------- ------ ------ ------ Average number of persons employed by HSBC during the year by global business 2017 2016 2015 -------------------------------------------------- ---------- --------- --------- Retail Banking and Wealth Management 134,021 137,234 155,859 Commercial Banking 46,716 45,912 51,007 Global Banking and Markets 49,100 47,623 49,912 Global Private Banking 7,817 8,322 8,934 Corporate Centre 7,134 7,842 2,721 --------- Year ended 31 Dec 244,788 246,933 268,433 -------------------------------------------------- ---------- --------- --------- HSBC Holdings plc Annual Report and Accounts 2017 197
Notes on the Financial Statements
Average number of persons employed by HSBC during the year by geographical region 2017 2016 2015 ------------------------------------------------ ------------ ----------- ----------- Europe 70,301 71,196 68,408 Asia 125,004 122,282 121,438 Middle East and North Africa 10,408 12,021 14,467 North America 18,610 20,353 21,506 ----------- ----------- Latin America 20,465 21,081 42,614 Year ended 31 Dec 244,788 246,933 268,433 ------------------------------------------------ ------------ ----------- ----------- Reconciliation of total incentive awards granted to income statement charge 2017 2016 2015 $m $m $m ---------------------------------------------------------------------------- ----- ----- ----- Total incentive awards approved for the current year 3,303 3,035 3,462 ---------------------------------------------------------------------------- ----- ----- ----- Less: deferred bonuses awarded, expected to be recognised in future periods (337) (323) (387) Total incentives awarded and recognised in the current year 2,966 2,712 3,075 ---------------------------------------------------------------------------- ----- ----- ----- Add: current year charges for deferred bonuses from previous years 336 371 483 Other (78) (128) (40) Income statement charge for incentive awards 3,224 2,955 3,518 ---------------------------------------------------------------------------- ----- ----- ----- Year in which income statement is expected to reflect deferred bonuses Charge recognised Expected charge --------------------- ----------------------- 2017 2016 2015 2018 2019 and beyond $m $m $m $m $m ------------------------------------------------------- ------ ------ ----- ---- --------------- Variable compensation from 2017 bonus pool 162 - - 162 175 Variable compensation from 2016 bonus pool 126 152 - 109 84 Variable compensation from 2015 bonus pool and earlier 210 168 253 82 21 Total 498 320 253 353 280 ------------------------------------------------------- ------ ------ ----- ---- --------------- Cash awards 184 114 67 117 99 Equity awards 314 206 186 236 181 ------------------------------------------------------- ------ ------ ----- ---- ---------------
Share-based payments
'Wages and salaries' includes the effect of share-based paymentsarrangements, of which $500m were equity settled (2016: $534m;2015: $757m), as follows:
2017 2016 2015 $m $m $m Restricted share awards 520 591 748 Savings-related and other share award option plans 26 33 43 --------------------------------------------------- ---- ---- ---- Year ended 31 Dec 546 624 791 --------------------------------------------------- ---- ---- ---- HSBC share awards Deferred share awards (including annual incentive awards, LTI awards delivered in shares) * An assessment of performance over the relevant period and GPSP ending on 31 December is used to determine the amount of the award to be granted. -- Deferred awards generally require employees to remain in employment over the vesting period and are not subject to performance conditions after the grant date. -- Deferred share awards generally vest over a period of three, five or seven years. -- Vested shares may be
subject to a retention requirement post-vesting. GPSP awards are retained until cessation of employment. -- Awards granted from 2010 onwards are subject to a malus provision prior to vesting. -- Awards granted to Material Risk Takers from 2015 onwards are subject to clawback post vesting. --------------------------------------------------------- International Employee Share Purchase Plan ('ShareMatch') * The plan was first introduced in Hong Kong in 2013 and now includes employees based in 27 jurisdictions. -- Shares are purchased in the market each quarter up to a maximum value of GBP750, or the equivalent in local currency. -- Matching awards are added at a ratio of one free share for every three purchased. -- Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months. --------------------------------------------------------- ----------------------------------------------------------- Movement on HSBC share awards 2017 2016 Number Number (000s) (000s) -------------------------------------------------- ------- ------- Restricted share awards outstanding at 1 Jan 123,166 118,665 Additions during the year 62,044 94,981 Released in the year (76,051) (76,552) Forfeited in the year (4,634) (13,928) Restricted share awards outstanding at 31 Dec 104,525 123,166 Weighted average fair value of awards granted ($) 7.09 7.25 -------------------------------------------------- ------- ------- 198 HSBC Holdings plc Annual Report and Accounts 2017 HSBC share option plans Savings-related share option plans ('Sharesave') * Two plans: the UK Plan and the International Plan. The last grant of options under the International Plan was in 2012. -- From 2014, eligible employees can save up to GBP500 per month with the option to use the savings to acquire shares. -- Exercisable within six months following either the third or fifth anniversary of the commencement of a three-year or five-year contract, respectively. -- The exercise price is set at a 20% (2016: 20%) discount to the market value immediately preceding the date of invitation. Calculation of fair values
The fair values of share options are calculated using aBlack-Scholes model. The fair value of a share award is based onthe share price at the date of the grant.
Movement on HSBC share option plans Savings-related share option plans ------------------------- Number WAEP(1) Footnotes (000s) GBP Outstanding at 1 Jan 2017 70,027 4.30 Granted during the year 2 10,447 5.96 Exercised during the year 3 (9,503) 4.83 Expired during the year (3,902) 4.45 Forfeited during the year (2,399) 4.27 ---------------------------------------------------- --------- --------- -------- Outstanding at 31 Dec 2017 64,670 4.49 ---------------------------------------------------- --------- -------- Of which exercisable 1,129 5.00 Weighted average remaining contractual life (years) 2.42 Outstanding at 1 Jan 2016 74,775 4.36 Granted during the year 2 15,044 4.40 Exercised during the year 3 (4,354) 5.02 Expired during the year (13,243) 4.49 ---------------------------------------------------- --------- --------- -------- Forfeited during the year (2,195) 4.34 Outstanding at 31 Dec 2016 70,027 4.30 ---------------------------------------------------- --------- --------- -------- Of which exercisable 1,086 5.25 Weighted average remaining contractual life (years) 2.91 ---------------------------------------------------- --------- --------- ---------- 1 Weighted average exercise price. 2 The weighted average fair value of options granted during the year was $1.29 (2016: $1.28). 3 The weighted average share price at the date the options were exercised was $9.93 (2016: $6.98).
Post-employment benefit plans
The Group operates pension plans throughout the world for itsemployees. 'Pension risk management' on page 80 contains details ofthe policies and practices associated with these pension plans.Some are defined benefit plans, of which the largest is the HSBCBank (UK) Pension Scheme ('the principal plan').
The principal plan
The principal plan has a defined benefit section and a definedcontribution section. The defined benefit section was closed tofuture benefit accrual in 2015, with defined benefits earned byemployees at that date continuing to be linked to their salarywhile they remain employed by HSBC Bank. The plan is overseen by anindependent corporate trustee, who has a fiduciary responsibilityfor the operation of the plan. Its assets are held separately fromthe assets of the Group.
The investment strategy of the plan is to hold the majority ofassets in bonds, with the remainder in a diverse range ofinvestments. It also includes some interest rate swaps to reduceinterest rate risk and inflation swaps to reduce inflationrisk.
The latest funding valuation of the plan at 31 December 2014 wascarried out by Colin G Singer, of Willis Towers Watson Limited, whois a Fellow of the UK Institute and Faculty of Actuaries, using theprojected unit credit method. At that date, the market value of theplan's assets was GBP24.6bn ($30.3bn) and this exceeded the valueplaced on its liabilities on an ongoing basis by GBP520m ($641m),giving a funding level of 102%. The main differences between theassumptions used for assessing the liabilities for this fundingvaluation and those used for IAS 19 are more prudent assumptionsfor discount rate, inflation rate and life expectancy.
Although the plan was in surplus at the valuation date, HSBCagreed to make further contributions to the plan to support alower-risk investment strategy over the longer term. The remainingcontributions are GBP64m ($79m) in each of 2018 and 2019, andGBP160m ($197m) in each of 2020 and 2021.
To meet the requirements of the Banking Reform Act, it iscurrently planned that from 1 July 2018, the main employer of theplan will change from HSBC Bank plc to HSBC UK Bank plc, withadditional support from HSBC Holdings plc. At the same time,non-ring fenced entities including HSBC Bank plc will exit thesection of the plan for ring-fenced entities and join a newlycreated section for the future defined benefit and definedcontribution pension benefits of their employees (approximately0.2% of the total plan). These changes are not expected tomaterially affect the funding position of the plan.
HSBC Holdings plc Annual Report and Accounts 2017 199
Notes on the Financial Statements
The following chart shows the expected profile of futurebenefits payable from the plan.
Future benefit payments ($bn)
The actuary also assessed the value of the liabilities if theplan were to be stopped and an insurance company asked to secureall future pension payments. This is generally larger than theamount needed on the ongoing basis described above because aninsurance company would use more prudent assumptions and include anexplicit allowance for the future administrative expenses of theplan. Under this approach, the amount of assets needed wasestimated to be GBP31bn ($38bn) at 31 December 2014.
Income statement charge 2017 2016 2015 $m $m $m -------------------------------------------------- ---- ----- ----- Defined benefit pension plans 100 218 256 Defined contribution pension plans 603 783 793 -------------------------------------------------- ---- ----- ----- Pension plans 703 1,001 1,049 -------------------------------------------------- ---- ----- ----- Defined benefit and contribution healthcare plans (34) 41 6 Year ended 31 Dec 669 1,042 1,055 -------------------------------------------------- ---- ----- ----- Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans Effect of Fair value of Present value of defined benefit limit on plan plan assets obligations surpluses Total $m $m $m $m ---------------------------------- ------------- -------------------------------- -------------- ------ Defined benefit pension plans 47,265 (40,089) (37) 7,139 Defined benefit healthcare plans 124 (663) - (539) At 31 Dec 2017 47,389 (40,752) (37) 6,600 ---------------------------------- ------------- -------------------------------- -------------- ------ Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities') (2,152) ---------------------------------- ------------- -------------------------------- -------------- ------ Total employee benefit assets (within 'Prepayments, accrued income and other assets') 8,752 ---------------------------------- ------------- -------------------------------- -------------- ------ Defined benefit pension plans 42,397 (39,747) (24) 2,626 Defined benefit healthcare plans 118 (711) - (593) At 31 Dec 2016 42,515 (40,458) (24) 2,033 ---------------------------------- ------------- -------------------------------- -------------- ------ Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities') (2,681) ---------------------------------- ------------- --------------------------------- --------------- ------ Total employee benefit assets (within 'Prepayments, accrued income and other assets') 4,714 ---------------------------------- ------------- --------------------------------- --------------- ------
HSBC Holdings
Employee compensation and benefit expense in respect of HSBCHoldings' employees in 2017 amounted to $54m (2016: $570m). Theaverage number of persons employed during 2017 was 55 (2016:1,660). Employees who are members of defined benefit pension plansare principally members of either the HSBC Bank (UK) Pension Schemeor the HSBC International Staff Retirement Benefits Scheme. HSBCHoldings pays contributions to such plans for its own employees inaccordance with the schedules of contributions determined by thetrustees of the plans and recognises these contributions as anexpense as they fall due.
From 1 July 2016 employment costs of most employees arerecognised by the ServCo group and the ServCo group startedproviding services to HSBC Holdings. HSBC Holdings recognised amanagement charge of $2,240m (2016 :$406m) for these services whichis included under 'General and administrative expenses'.
200 HSBC Holdings plc Annual Report and Accounts 2017
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans Present value of Fair value of plan defined benefit Effect of the Net defined benefit assets obligations asset ceiling asset/(liability) Principal Other Principal Other Principal Other Principal Other plan plans plan plans plan plans plan plans $m $m $m $m $m $m $m $m -------------------- --------- ----- --------- ------- --------- ----- --------- ------ At 1 Jan 2017 33,442 8,955 (29,279) (10,468) - (24) 4,163 (1,537) --------- ----- --------- ------- --------- ----- --------- ------ Current service cost - - (65) (160) - - (65) (160) --------- Past service cost and gains/(losses) from settlements - (833) (231) 1,051 - - (231) 218 ----- --------- ------- --------- ----- --------- ------ Service cost - (833) (296) 891 - - (296) 58 --------- ----- --------- ------- --------- ----- --------- ------ Net interest income/(cost) on the net defined benefit asset/(liability) 864 272 (750) (300) - (1) 114 (29) -------------------- --------- ----- --------- ------- --------- ----- --------- ------ Re-measurement effects recognised in other comprehensive income 1,410 784 1,730 (486) - (9) 3,140 289 - return on plan assets (excluding interest income) 1,410 784 - - - - 1,410 784 - actuarial gains/(losses) - - 954 (491) - (9) 954 (500) - other changes - - 776 5 - - 776 5 --------- ----- --------- ------- --------- ----- --------- ------ Exchange differences 3,292 239 (2,723) (306) - (3) 569 (70) -------------------- --------- ----- --------- ------- --------- ----- --------- ------ Contributions by HSBC 449 236 - - - - 449 236 - normal 58 215 - - - - 58 215 - special 391 21 - - - - 391 21 --------- ----- --------- ------- --------- ----- --------- ------ Contributions by employees - 27 - (27) - - - - --------- ----- --------- Benefits paid (1,143) (663) 1,143 716 - - - 53 Administrative costs and taxes paid by plan (49) (17) 49 17 - - - - -------------------- --------- ----- --------- ------- --------- ----- --------- ------ At 31 Dec 2017 38,265 9,000 (30,126) (9,963) - (37) 8,139 (1,000) --------- ----- --------- ------- --------- ----- --------- ------ Present value of defined benefit obligation relating to: - actives (5,837) (5,084) - deferreds (8,745) (1,663) -------------------- --------- ----- --------- ------- --------- ----- --------- ------ - pensioners (15,544) (3,216) -------------------- --------- ----- --------- ------- --------- ----- --------- ------ At 1 Jan 2016 32,670 8,754 (27,675) (10,651) - (14) 4,995 (1,911) --------- ----- --------- ------- --------- ----- --------- ------ Current service cost - - (70) (235) - - (70) (235) Past service cost and gains/(losses) from settlements - (1) - (39) - - - (40) --------- --------- Service cost - (1) (70) (274) - - (70) (275) Net interest income/(cost) on the net defined benefit
asset/(liability) 1,085 294 (914) (337) - (1) 171 (44) -------------------- --------- ----- --------- ------- --------- ----- --------- ------ Re-measurement effects recognised in other comprehensive income 6,449 671 (6,886) (299) - (8) (437) 364 -------------------- - return on plan assets (excluding interest income) 6,449 671 - - - - 6,449 671 -------------------- - actuarial gains/(losses) - - (7,029) (152) - (8) (7,029) (160) -------------------- - other changes - - 143 (147) - - 143 (147) -------------------- --------- ----- --------- ------- --------- ----- --------- ------ Exchange differences (6,097) (534) 5,254 410 - (1) (843) (125) --------- ----- --------- ------- --------- ----- --------- ------ Contributions by HSBC 347 379 - - - - 347 379 - normal 64 207 - - - - 64 207 -------------------- - special 283 172 - - - - 283 172 -------------------- --------- ----- --------- ------- --------- ----- --------- ------ Contributions by employees - 30 - (30) - - - - --------- --------- Benefits paid (970) (623) 970 698 - - - 75 Administrative costs and taxes paid by plan (42) (15) 42 15 - - - - -------------------- At 31 Dec 2016 33,442 8,955 (29,279) (10,468) - (24) 4,163 (1,537) -------------------- --------- ----- --------- ------- --------- ----- --------- ------ Present value of defined benefit obligation relating to: -------------------- ---------- ------ ---------- ----------- --------- ------ ---------- ---------- - actives (7,066) (5,066) - deferreds (9,219) (2,306) -------------------- ---------- ------ --------- ------- --------- ------ ---------- ---------- - pensioners (12,994) (3,096) -------------------- ---------- ------ --------- ------- --------- ------ ---------- ----------
HSBC expects to make $278m of contributions to defined benefitpension plans during 2018. Benefits expected to be paid from theplans to retirees over each of the next five years, and inaggregate for the five years thereafter, are as follows:
Benefits expected to be paid from plans 2018 2019 2020 2021 2022 2023-2027 Footnote $m $m $m $m $m $m ------------------- -------- ----- ----- ----- ----- ----- --------- The principal plan 1 1,241 1,279 1,320 1,360 1,402 7,692 ----- Other plans 1 443 508 511 527 520 2,307 ------------------- -------- ----- ----- ----- ----- ----- --------- 1 The duration of the defined benefit obligation is 17.4 years for the principal plan under the disclosure assumptions adopted (2016: 19.0 years) and 12.9 years for all other plans combined (2016: 13.9 years). HSBC Holdings plc Annual Report and Accounts 2017 201
Notes on the Financial Statements
Fair value of plan assets by asset classes 31 Dec 2017 31 Dec 2016 ----------------------------------------- ----------------------------------------------- Quoted No quoted Quoted No quoted market market market market price price price price in active in active Thereof in active in active Thereof Value market market HSBC(1) Value market market HSBC(1) $m $m $m $m $m $m $m $m ------------ ------ ---------- ---------- -------- ------ ----------- ----------- -------- The principal plan ------------ ------ ---------- ----------- -------- ------- ----------- ------------ ----------- Fair value of plan assets 38,265 33,624 4,641 1,006 33,442 29,379 4,063 878 - equities 6,131 5,503 628 - 5,386 4,722 664 - - bonds 26,591 26,591 - - 23,426 23,426 - - ------------ - derivatives 2,398 - 2,398 1,006 2,107 - 2,107 878 ------------ - other 3,145 1,530 1,615 - 2,523 1,231 1,292 - ------------ ------ ---------- ---------- -------- ------ ----------- ----------- -------- Other plans ------------ ------ ---------- ---------- -------- ------- ----------- ------------ ----------- Fair value of plan assets 9,000 7,737 1,263 114 8,955 7,631 1,324 239 - equities 2,005 1,340 665 - 2,255 1,502 753 - ------------ - bonds 5,871 5,714 157 7 5,811 5,592 219 5 ------------ - derivatives - 39 (39) - (89) 44 (133) (85) ------------ - other 1,124 644 480 107 978 493 485 319 ------------ ------ ---------- ---------- -------- ------ ----------- ----------- -------- 1 The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 35.
Post-employment defined benefit plans' principal actuarialfinancial assumptions
HSBC determines the discount rates to be applied to itsobligations in consultation with the plans' local actuaries, on thebasis of current average yields of high quality (AA-rated orequivalent) debt instruments with maturities consistent with thoseof the defined benefit obligations.
Key actuarial assumptions for the principal plan Discount rate Inflation rate Rate of increase for pensions Rate of pay increase % % % % --------------- ------------- -------------- ----------------------------- -------------------- UK --------------- ------------- -------------- ----------------------------- -------------------- At 31 Dec 2017 2.60 3.40 3.10 3.88 --------------- ------------- -------------- ----------------------------- -------------------- At 31 Dec 2016 2.50 3.50 3.20 4.00 At 31 Dec 2015 3.70 3.20 3.00 3.70 --------------- ------------- -------------- ----------------------------- -------------------- Mortality tables and average life expectancy at age 65 for the principal plan Mortality Life expectancy at age 65 for Life expectancy at age 65 for table a male member currently: a female member currently: Aged 65 Aged 45 Aged 65 Aged 45 ---------------------- ---------------- ---------------- ------------- --------------- -------------- UK ---------------------- ---------------- ---------------- ------------- --------------- -------------- At 31 Dec 2017 SAPS S2(1) 22.2 23.6 24.4 25.9 ---------------------- ---------------- ---------------- ------------- --------------- -------------- At 31 Dec 2016 SAPS S2(2) 22.4 24.1 24.7 26.6 ---------------------- ---------------- ---------------- ------------- --------------- -------------- 1 Self-administered pension scheme ('SAPS') S2 table (males: 'All Pensioners' version; females: 'Normal Pensions' version) with a multiplier of 0.98 for both male and female pensioners. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI') core projection model 2016 with a long-term rate of improvement of 1.25% per annum. Separate tables assuming lighter mortality have been applied to higher paid pensioners. 2 Self-administered pension scheme ('SAPS') S2 table (males: 'All Pensioners' version; females: 'Normal Pensions' version) with a multiplier of 0.98 for both male and female pensioners. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI') core projection model 2015 with a long-term rate of improvement of 1.25% per annum. Separate tables assuming lighter mortality have been applied to higher paid pensioners. The effect of changes in key assumptions on the principal plan Impact on HSBC Bank (UK) Pension Scheme Obligation ---------------------------------------------------------------------------- Financial impact of increase Financial impact of decrease ---------------------------------------- ---------------------------------- 2017 2016 2017 2016 $m $m $m $m ---------------------------------------- --------------- --- -------------- ------------- ------------ Discount rate - increase/decrease of 0.25% (1,246) (1,322) 1,333 1,419 Inflation rate - increase/decrease of 0.25% 850 735 (837) (1,048) Pension payments and deferred pensions - increase/decrease of 0.25% 1,077 1,305 (1,021) (1,255) Pay - increase/decrease of 0.25% 62 143 (61) (139) Change in mortality - increase of 1 year 1,332 1,326 n/a n/a ---------------------------------------- --------------- --- -------------- ------------- ------------
Directors' emoluments
Details of Directors' emoluments, pensions and their interestsare disclosed in the Directors' Remuneration Report on page141.
202 HSBC Holdings plc Annual Report and Accounts 2017 6 Auditors' remuneration ---------------------- 2017 2016 2015 Footnote $m $m $m -------------------------- -------- ---- ---- ---- Audit fees payable to PwC 1 84.8 65.7 62.0 Other audit fees payable 1.2 1.6 1.2 -------------------------- -------- ---- Year ended 31 Dec 86.0 67.3 63.2 -------------------------- -------- ---- ---- ---- Fees payable by HSBC to PwC 2017 2016 2015 Footnotes $m $m $m ----------------------------------------- --------- ----- ----- ---- Fees for HSBC Holdings' statutory audit 2 15.1 14.0 13.1 ----- ----- ---- Fees for other services provided to HSBC 114.6 97.1 85.1 - audit of HSBC's subsidiaries 3 69.7 51.7 48.9 ----------------------------------------- - audit-related assurance services 4 22.5 20.6 16.6 ----------------------------------------- - taxation compliance services 1.2 1.9 1.0 ----------------------------------------- - taxation advisory services - 0.4 0.9 ----------------------------------------- - other assurance services 5 3.9 4.5 2.8 ----------------------------------------- - other non-audit services 5 17.3 18.0 14.9 ----------------------------------------- --------- ----- ----- ---- Year ended 31 Dec 129.7 111.1 98.2 ----------------------------------------- --------- ----- ----- ----
No fees were payable by HSBC to PwC as principal auditor for thefollowing types of services: internal audit services and servicesrelated to litigation, recruitment and remuneration.
Fees payable by HSBC's associated pension schemes to PwC 2017 2016 2015 $000 $000 $000 --------------------------------------------- ---- ---- ---- Audit of HSBC's associated pension schemes 260 208 352 ---------------------------------------------- Audit related assurance services 4 4 5 Year ended 31 Dec 264 212 357 ---------------------------------------------- ---- ---- ---- 1 The 2016 audit fees payable amount includes $4.2m related to the prior year audit in respect of overruns. 2 Fees payable to PwC for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They include amounts payable for services relating to the consolidation returns of HSBC Holdings' subsidiaries which are clearly identifiable as being in support of the Group audit opinion. 3 Fees payable for the statutory audit of the financial statements of HSBC's subsidiaries, including the 2017 and 2016 changes in scope and additional procedures performed due to the technology systems and data access controls matter as described on page 166. 4 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews and work performed related to the implementation of IFRS 9. 5 Including other permitted services relating to advisory, corporate finance transactions, etc.
No fees were payable by HSBC's associated pension schemes to PwCas principal auditor for the following types of services: internalaudit services, other assurance services, services related tocorporate finance transactions, valuation and actuarial services,litigation, recruitment and remuneration, and informationtechnology.
In addition to the above, the estimated fees paid to PwC bythird parties associated with HSBC amount to $3.5m (2016: $4.3m;2015: $2.4m). In these cases, HSBC is connected with thecontracting party and may therefore be involved in appointing PwC.These fees arise from services such as auditing mutual fundsmanaged by HSBC and reviewing the financial position of corporateconcerns which borrow from HSBC.
Fees payable for non-audit services for HSBC Holdings are notdisclosed separately because such fees are disclosed on aconsolidated basis for the HSBC Group.
7 Tax --- Tax expense 2017 2016 2015 Footnote $m $m $m ---------------------------------------------------- -------- ----- ----- ----- Current tax 1 4,264 3,669 3,797 -------- - for this year 4,115 3,525 3,882 -------- - adjustments in respect of prior years 149 144 (85) ---------------------------------------------------- ----- ----- ----- Deferred tax 1,024 (3) (26) - origination and reversal of temporary differences (228) (111) (153) ---------------------------------------------------- - effect of changes in tax rates 1,337 (4) 110 ---------------------------------------------------- - adjustments in respect of prior years (85) 112 17 ---------------------------------------------------- ----- ----- ----- Year ended 31 Dec 5,288 3,666 3,771 ---------------------------------------------------- -------- ----- ----- ----- 1 Current tax included Hong Kong profits tax of $1,350m (2016: $1,118m; 2015: $1,294m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2016: 16.5%; 2015: 16.5%). HSBC Holdings plc Annual Report and Accounts 2017 203
Notes on the Financial Statements
Tax reconciliation
The tax charged to the income statement differs from the taxcharge that would apply if all profits had been taxed at the UKcorporation tax rate as follows:
2017 2016 2015 $m % $m % $m % ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- Profit before tax 17,167 7,112 18,867 Tax expense ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- Taxation at UK corporation tax rate of 19.25% (2016: 20.0%; 2015: 20.25%) 3,305 19.25 1,422 20.00 3,821 20.25 ------------------------------------------------------------ ----- ----- ------ ----- Impact of differently taxed overseas profits in overseas locations 407 2.3 43 0.6 71 0.4 Items increasing tax charge in 2017 not in 2016: ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * deferred tax remeasurement due to US federal tax rate reduction 1,288 7.5 - - - - ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- Other items increasing tax charge in 2017: ------------------------------------------------------------ ------ ----- ----- ----- ------ -----
* local taxes and overseas withholding taxes 618 3.6 434 6.1 416 2.2 ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * other permanent disallowables 400 2.3 438 6.2 421 2.2 ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * bank levy 180 1.0 170 2.4 286 1.5 ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * non-deductible UK customer compensation 166 1.0 162 2.3 87 0.5 ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * UK banking surcharge 136 0.8 199 2.8 - - ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * UK tax losses not recognised 70 0.4 305 4.3 - - ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * adjustments in respect of prior period liabilities 64 0.4 256 3.6 (68) (0.4) ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * change in tax rates 49 0.3 (4) (0.1) 110 0.6 ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * non-UK tax losses not recognised 33 0.2 147 2.1 - - ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * non-deductible goodwill write-down - - 648 9.1 - - ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * non-deductible loss and taxes suffered on Brazil disposal - - 464 6.5 - - ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- Items reducing tax charge in 2017: ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * non-taxable income and gains (766) (4.4) (577) (8.1) (501) (2.7) ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * effect of profits in associates and joint ventures (481) (2.8) (461) (6.5) (508) (2.7) ------------------------------------------------------------ ----- ----- ------ ----- * non-deductible regulatory settlements (132) (0.8) 20 0.3 184 1.0 ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * other deferred tax temporary differences previously not recognised (49) (0.3) - - (21) (0.1) ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * non-taxable income and gains - Industrial Bank - - - - (227) (1.2) ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * US deferred tax temporary differences previously not recognised - - - - (184) (1.0) ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- * other items - - - - (116) (0.6) ------------------------------------------------------------ ------ ----- ----- ----- ------ ----- Year ended 31 Dec 5,288 30.8 3,666 51.6 3,771 20.0 ------------------------------------------------------------ ------ ----- ----- ----- ------ -----
The Group's profits are taxed at different rates depending onthe country in which the profits arise. The key applicable taxrates for 2017 include Hong Kong (16.5%), the USA (35%) and the UK(19.25%). If the Group's profits were taxed at the statutory ratesof the countries in which the profits arose then the tax rate forthe year would have been 21.15% (2016: 20.60%). The effective taxrate for the year was 30.8% (2016: 51.6%) and includes a charge of$1.3bn relating to the remeasurement of US deferred tax balances toreflect the reduction in the US federal tax rate to 21% from 2018.The effective tax rate for 2017 was significantly lower than for2016 as 2016 included the impact of a non-deductible goodwillwrite-down and loss on disposal of our operations in Brazil, taxlosses not recognised and adjustments in respect of priorperiods.
Accounting for taxes involves some estimation because the taxlaw is uncertain and its application requires a degree ofjudgement, which authorities may dispute. Liabilities arerecognised based on best estimates of the probable outcome, takinginto account external advice where appropriate. We do not expectsignificant liabilities to arise in excess of the amounts provided.HSBC only recognises current and deferred tax assets where recoveryis probable.
204 HSBC Holdings plc Annual Report and Accounts 2017 Movement of deferred tax assets and liabilities Unused tax losses Derivatives, Loan and FVOD(1) and impairment tax other Insurance Expense provisions credits investments business provisions Other Total Footnote $m $m $m $m $m $m $m -------------- -------- ---------- ------- ------------ --------- ---------- ------ ------ Assets 950 2,212 1,441 - 893 1,857 7,353 Liabilities - - (274) (1,170) - (1,369) (2,813) ---------- ------- ------------ --------- ---------- ------ ------ At 1 Jan 2017 950 2,212 1,167 (1,170) 893 488 4,540 -------------- -------- ---------- ------- ------------ --------- ---------- ------ ------ Income statement (235) (873) (397) 12 (269) 738 (1,024) -------- Other comprehensive income 3 (6) 368 - - (1,255) (890) Equity - - - - - 29 29 Foreign exchange and other adjustments (5) 40 51 (24) 19 (42) 39 ---------- ------- ------------ --------- ---------- ------ ------ At 31 Dec 2017 713 1,373 1,189 (1,182) 643 (42) 2,694 -------------- -------- ---------- ------- ------------ --------- ---------- ------ ------ Assets 2 713 1,373 1,282 - 643 2,313 6,324 -------- Liabilities 2 - - (93) (1,182) - (2,355) (3,630) -------- ---------- ------- ------------ --------- ---------- ------ ------ Assets 1,351 1,388 1,400 - 1,271 1,050 6,460 Liabilities - - (230) (1,056) - (883) (2,169) ---------- ------- ------------ --------- ---------- ------ ------ At 1 Jan 2016 1,351 1,388 1,170 (1,056) 1,271 167 4,291 -------------- -------- ---------- ------- ------------ --------- ---------- ------ ------ Income statement (279) 876 18 (123) (370) (314) (192) -------------- -------- Other comprehensive income - - 28 - - 259 287 -------------- -------- Equity - - - - - 20 20 -------------- -------- ---------- ------- ------------ --------- ---------- ------ ------ Foreign exchange and other adjustments (122) (52) (49) 9 (8) 356 134 -------------- -------- ---------- ------- ------------ --------- ---------- ------ ------ At 31 Dec 2016 950 2,212 1,167 (1,170) 893 488 4,540 -------------- -------- ---------- ------- ------------ --------- ---------- ------ ------ Assets 2 950 2,212 1,441 - 893 1,857 7,353 Liabilities 2 - - (274) (1,170) - (1,369) (2,813) -------------- -------- ---------- ------- ------------ --------- ---------- ------ ------
1 Fair value of own debt. 2 After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets $4,676m (2016: $6,163m); and deferred tax liabilities $1,982m (2016: $1,623m).
In applying judgement in recognising deferred tax assets,management has critically assessed all available information,including future business profit projections and the track recordof meeting forecasts.
The net deferred tax asset of $2.7bn (2016: $4.5bn) includes$3.2bn (2016: $4.8bn) of deferred tax assets relating to the US, ofwhich $1bn relates to US tax losses that expire in 16 -19 years.Management expects the US deferred tax asset to be substantiallyrecovered in six to seven years, with the majority recovered in thefirst five years. The most recent financial forecasts approved bymanagement covers a five-year period and the forecasts have beenextrapolated beyond five years by assuming that performance remainsconstant after the fifth year.
The US reported a loss for the prior period, mainly due to theHousehold International class action litigation settlement, and aprofit for the current period. Excluding the HouseholdInternational class action settlement the US would have reported aprofit for the prior period. Management does not expect the priorperiod loss to adversely impact future deferred tax asset recoveryto a significant extent.
US tax reform enacted in late 2017 and effective from 2018included a reduction in the federal rate of tax from 35% to 21% andthe introduction of a base erosion anti-avoidance tax. The USdeferred tax asset at 31 December 2017 is calculated using the rateof 21%. The remeasurement of the deferred tax asset due to thereduction in tax rate results in charges of $1.3bn to the incomestatement and $0.3bn to other comprehensive income. The impact ofthe base erosion anti-avoidance tax is currently uncertain and willdepend on future regulatory guidance and actions management maytake. It is not currently expected that the base erosionanti-avoidance tax will have a material impact on the Group'sfuture tax charges.
Unrecognised deferred tax
The amount of gross temporary differences, unused tax losses andtax credits for which no deferred tax asset is recognised in thebalance sheet was $18.1bn (2016: $18.2bn). These amounts includedunused state losses arising in the Group's US operations of $12.3bn(2016: $12.3bn). Of the total amounts unrecognised, $4.8bn (2016:$4.9bn) had no expiry date, $0.8bn (2016: $1.0bn) was scheduled toexpire within 10 years and the remaining balance is expected toexpire after 10 years.
Deferred tax is not recognised in respect of the Group'sinvestments in subsidiaries and branches where HSBC is able tocontrol the timing of remittance or other realisation and whereremittance or realisation is not probable in the foreseeablefuture. The aggregate temporary differences relating tounrecognised deferred tax liabilities arising on investments insubsidiaries and branches is $12.1bn (2016: $10.6bn) and thecorresponding unrecognised deferred tax liability is $0.8bn (2016:$0.7bn).
HSBC Holdings plc Annual Report and Accounts 2017 205
Notes on the Financial Statements
8 Dividends --------- Dividends to shareholders of the parent company 2017 2016 2015 ------------------------- ------------------------- -------------------------- Per Settled Per Settled Per Settled share Total in scrip share Total in scrip share Total in scrip $ $m $m $ $m $m $ $m $m ------ ------ --------- ------ ----- --------- Dividends paid on ordinary shares In respect of previous year: -------------------- ------ ------ --------- ------ ------ --------- ------ ----- --------- - fourth interim dividend 0.21 4,169 1,945 0.21 4,137 408 0.20 3,845 2,011 In respect of current year: - first interim dividend 0.10 2,005 826 0.10 1,981 703 0.10 1,951 231 -------------------- - second interim dividend 0.10 2,014 193 0.10 1,991 994 0.10 1,956 160 -------------------- - third interim dividend 0.10 2,005 242 0.10 1,990 935 0.10 1,958 760 -------------------- Total 0.51 10,193 3,206 0.51 10,099 3,040 0.50 9,710 3,162 -------------------- ------ ------ --------- ------ ------ --------- ------ ----- --------- Total dividends on preference shares classified as equity (paid quarterly) 62.00 90 62.00 90 62.00 90 -------------------- ------ ------ --------- ------ ------ --------- ------ ----- --------- Total coupons on capital securities classified as equity 2017 2016 2015 ------------------- ----- ----- Total Total Total Footnotes First call date Per security $m $m $m --------------------------------------------- --------- --------------- ------------ ----- ----- ----- Perpetual subordinated capital securities 1, 3 --------------------------------------------- --------- --------------- ------------ ----- ----- ------- - $2,200m issued at 8.125% Apr 2013 $2.032 179 179 179 - $3,800m issued at 8.000% Dec 2015 $2.000 304 304 304 --------------------------------------------- Perpetual subordinated contingent convertible securities 2, 3 --------------------------------------------- --------- --------------- ------------ ----- ----- ------- - $1,500m issued at 5.625% Jan 2020 $56.250 84 84 70 --------------------------------------------- --------- --------------- ------------ ----- ----- ----- - $2,000m issued at 6.875% Jun 2021 $68.750 138 69 - --------------------------------------------- --------- --------------- ------------ ----- ----- ----- - $2,250m issued at 6.375% Sep 2024 $63.750 143 143 143 --------------------------------------------- - $2,450m issued at 6.375% Mar 2025 $63.750 156 156 78 --------------------------------------------- --------- --------------- ------------ ----- ----- ----- - $3,000m issued at 6.000% May 2027 $60.000 90 - - --------------------------------------------- --------- --------------- ------------ ----- ----- ----- - EUR1,500m issued at 5.250% Sep 2022 EUR52.500 89 88 86 --------------------------------------------- --------------- - EUR1,000m issued at 6.000% Sep 2023 EUR60.000 68 67 - --------------------------------------------- --------- - SGD1,000m issued at 4.700% Jun 2022 SGD47.000 17 - - --------------------------------------------- --------------- ------------ ----- ----- ----- Total 1,268 1,090 860 --------------------------------------------- --------- --------------- ------------ ----- ----- ----- 1 Discretionary coupons are paid quarterly on the perpetual subordinated capital securities, in denominations of $25 per security. 2 Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities, in denominations of each security's issuance currency 1,000 per security. 3 Further details of these securities can be found in Note 31.
After the end of the year, the Directors declared a fourthinterim dividend in respect of the financial year ended 31 December2017 of $0.21 per ordinary share, a distribution of approximately$4,199m. The fourth interim dividend will be payable on 6 April2018 to holders on the Principal Register in the UK, the Hong KongOverseas Branch Register or the Bermuda Overseas Branch Register on23 February 2018. No liability was recorded in the financialstatements in respect of the fourth interim dividend for 2017.
On 4 January 2018, HSBC paid a coupon on its EUR1,250msubordinated capital securities, representing a total distributionof EUR30m ($36.3m). On 17 January 2018, HSBC paid a coupon on its$2,200m subordinated capital securities of $0.508 per security, adistribution of $45m. On 17 January 2018, HSBC paid a coupon on its$1,500m subordinated contingent convertible securities issued at5.625% of $28.125 per security, a distribution of $42m. Noliability was recorded in the balance sheet at 31 December 2017 inrespect of these coupon payments.
9 Earnings per share ------------------
Basic earnings per ordinary share is calculated by dividing theprofit attributable to ordinary shareholders of the parent companyby the weighted average number of ordinary shares outstanding,excluding own shares held. Diluted earnings per ordinary share iscalculated by dividing the basic earnings, which require noadjustment for the effects of dilutive potential ordinary shares,by the weighted average number of ordinary shares outstanding,excluding own shares held, plus the weighted average number ofordinary shares that would be issued on conversion of dilutivepotential ordinary shares.
Profit attributable to the ordinary shareholders of the parent company 2017 2016 2015 $m $m $m ----------------------------------------------------------- ------ ------ ------ Profit attributable to shareholders of the parent company 10,798 2,479 13,522 Dividend payable on preference shares classified as equity (90) (90) (90) Coupon payable on capital securities classified as equity (1,025) (1,090) (860) Year ended 31 Dec 9,683 1,299 12,572 ----------------------------------------------------------- ------ ------ ------ 206 HSBC Holdings plc Annual Report and Accounts 2017 Basic and diluted earnings per share 2017 2016 2015 ------------------------- ------------------------- --------------------------- Number Per Number Per Number Per Profit of shares share Profit of shares share Profit of shares share Footnote $m (millions) $ $m (millions) $ $m (millions) $ ---------- -------- ------ ---------- ----- ------ ---------- ----- ------ ---------- ----- Basic 1 9,683 19,972 0.48 1,299 19,753 0.07 12,572 19,380 0.65 ------ ---------- ----- Effect of dilutive potential ordinary shares 100 92 137 Diluted 1 9,683 20,072 0.48 1,299 19,845 0.07 12,572 19,517 0.64 ---------- -------- ------ ---------- ----- ------ ---------- ----- ------ ---------- ----- 1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
The number of anti-dilutive employee share options excluded fromthe weighted average number of dilutive potential ordinary sharesis nil (2016: 10m; 2015: 7m).
10 Trading assets -------------- 2017 2016 Footnote $m $m Treasury and other eligible bills 17,532 14,451 Debt securities 107,486 94,054 Equity securities 99,260 63,604 ---------------------------------- -------- ------- ------- Trading securities 224,278 172,109 ---------------------------------- -------- ------- ------- Loans and advances to banks 1 26,057 24,769 ---------------------------------- -------- ------- ------- Loans and advances to customers 1 37,660 38,247 At 31 Dec 287,995 235,125 ---------------------------------- -------- ------- ------- 1 Loans and advances to banks and customers include settlement accounts, stock borrowing, reverse repos, cash collateral and margin accounts relating to trading activities. Trading Securities(1) ------- --------- 2017 2016 Footnotes $m $m US Treasury and US Government agencies 2 15,995 17,010 ------- UK Government 9,540 9,493 ------- Hong Kong Government 10,070 7,970 ------- Other governments 58,858 49,229 ------- Asset-backed securities 3 2,986 2,668 ------- Corporate debt and other securities 27,569 22,135 --------------------------------------- --------- ------- ------- Equity securities 99,260 63,604 At 31 Dec 224,278 172,109 --------------------------------------- --------- ------- ------- 1 Included within these figures are debt securities issued by banks and other financial institutions of $18,585m (2016: $14,630m), of which $906m (2016: $789m) are guaranteed by various governments. 2 Includes securities that are supported by an explicit guarantee issued by the US Government. 3 Excludes asset-backed securities included under US Treasury and US Government agencies. 11 Fair values of financial instruments carried at fair value ----------------------------------------------------------
Control framework
Fair values are subject to a control framework designed toensure that they are either determined or validated by a functionindependent of the risk taker.
Where fair values are determined by reference to externallyquoted prices or observable pricing inputs to models, independentprice determination or validation is used. For inactive markets,HSBC sources alternative market information, with greater weightgiven to information that is considered to be more relevant andreliable. Examples of the factors considered are priceobservability, instrument comparability, consistency of datasources, underlying data accuracy and timing of prices.
For fair values determined using valuation models, the controlframework includes development or validation by independent supportfunctions of the model logic, inputs, model outputs andadjustments. Valuation models are subject to a process of duediligence before becoming operational and are calibrated againstexternal market data on an ongoing basis.
Changes in fair value are generally subject to a profit and lossanalysis process and are disaggregated into high-level categoriesincluding portfolio changes, market movements and other fair valueadjustments.
The majority of financial instruments measured at fair value arein GB&M. GB&M's fair value governance structure comprisesits Finance function, Valuation Committees and a ValuationCommittee Review Group. Finance is responsible for establishingprocedures governing valuation and ensuring fair values are incompliance with accounting standards. The fair values are reviewedby the Valuation Committees, which consist of independent supportfunctions. These Committees are overseen by the Valuation CommitteeReview Group, which considers all material subjectivevaluations.
HSBC Holdings plc Annual Report and Accounts 2017 207
Notes on the Financial Statements
Financial liabilities measured at fair value
In certain circ*mstances, HSBC records its own debt in issue atfair value, based on quoted prices in an active market for thespecific instrument. When quoted market prices are unavailable, theown debt in issue is valued using valuation techniques, the inputsfor which are either based on quoted prices in an inactive marketfor the instrument or are estimated by comparison with quotedprices in an active market for similar instruments. In both cases,the fair value includes the effect of applying the credit spreadwhich is appropriate to HSBC's liabilities. The change in fairvalue of issued debt securities attributable to the Group's owncredit spread is computed as follows: for each security at eachreporting date, an externally verifiable price is obtained or aprice is derived using credit spreads for similar securities forthe same issuer. Then, using discounted cash flow, each security isvalued using a Libor-based discount curve. The difference in thevaluations is attributable to the Group's own credit spread. Thismethodology is applied consistently across all securities.
Structured notes issued and certain other hybrid instruments areincluded within trading liabilities and are measured at fair value.The credit spread applied to these instruments is derived from thespreads at which HSBC issues structured notes.
Gains and losses arising from changes in the credit spread ofliabilities issued by HSBC reverse over the contractual life of thedebt, provided that the debt is not repaid at a premium or adiscount.
Fair value hierarchy
Fair values of financial assets and liabilities are determinedaccording to the following hierarchy:
-- Level 1 - valuation technique using quoted market price: financial instruments with quoted prices for identical instruments in active markets that HSBC can access at the measurement date. -- Level 2 - valuation technique using observable inputs: 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 2017 2016 ---------------------------------- ------------------------------------ Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $m $m $m $m $m $m $m $m Recurring fair value measurements at 31 Dec ------------------------------ ------- ------- ------- ------- ------- ------- ------- --------- Assets ------------------------------ ------- ------- ------- ------- ------- ------- ------- --------- Trading assets 181,168 101,775 5,052 287,995 133,744 94,892 6,489 235,125 ------------------------------ Financial assets designated at fair value 24,622 3,382 1,460 29,464 19,882 4,144 730 24,756 ------------------------------ Derivatives 1,017 216,357 2,444 219,818 1,076 287,044 2,752 290,872 ------------------------------ Financial investments: available for sale 227,943 104,692 3,432 336,067 274,655 111,743 3,476 389,874 ------------------------------ Liabilities ------------------------------ ------- ------- ------- ------- ------- ------- ------- --------- Trading liabilities 62,710 117,451 4,200 184,361 45,171 104,938 3,582 153,691 ------------------------------ Financial liabilities designated at fair value 4,164 90,265 - 94,429 4,248 82,547 37 86,832 ------------------------------ ------- ------- ------- ------- ------- ------- ------- ------- Derivatives 1,635 213,242 1,944 216,821 1,554 275,965 2,300 279,819 ------------------------------ ------- ------- ------- ------- ------- ------- ------- ------- Transfers between Level 1 and Level 2 fair values Assets Liabilities ------------------------------------------------- ----------------------------------------- Designated Designated Available Held for at fair Held for at fair for sale trading value Derivatives trading value Derivatives $m $m $m $m $m $m $m At 31 Dec 2017 ------------ --------- ----------- ------------ ----------- ------------ ------------ ------------- Transfers from Level 1 to Level 2 2,231 1,507 - - 35 - - Transfers from Level 2 to Level 1 11,173 1,384 - - 683 - - ------------ --------- ----------- ------------ ----------- ------------ ------------ ----------- At 31 Dec 2016 ------------ --------- ----------- ------------ ----------- ------------ ------------ ------------- Transfers from Level 1 to Level 2 162 1,614 122 465 2,699 - 209 ------------ --------- ----------- ------------ ----------- ------------ ------------ ----------- Transfers from Level 2 to Level 1 1,314 - - - 341 - - ------------ --------- ----------- ------------ ----------- ------------ ------------ -----------
Transfers between levels of the fair value hierarchy are deemedto occur at the end of each semi-annual reporting period. Transfersinto and out of levels of the fair value hierarchy are primarilyattributable to observability of valuation inputs and pricetransparency.
Fair value adjustments
Fair value adjustments are adopted when HSBC determines thereare additional factors considered by market participants that arenot incorporated within the valuation model. Movements in the levelof fair value adjustments do not necessarily result in therecognition of profits or losses within the income statement, suchas when models are enhanced and therefore fair value adjustmentsmay no longer be required
208 HSBC Holdings plc Annual Report and Accounts 2017 Global Banking & Markets ('GB&M') and Corporate Centre fair value adjustments 2017 2016 ------------------------ -------------------------- GB&M Corporate Centre GB&M Corporate Centre $m $m $m $m ------------------------------------------------ ----- ---------------- ----- ---------------- Type of adjustment ------------------------------------------------ ------ ---------------- ------ ------------------ Risk-related 1,078 79 1,131 5 - bid-offer 413 5 416 5 - uncertainty 91 8 87 - ------------------------------------------------ - credit valuation adjustment ('CVA') 420 59 633 - ------------------------------------------------ - debit valuation adjustment ('DVA') (82) - (437) - ------------------------------------------------ - funding fair value adjustment ('FFVA') 233 7 429 - ------------------------------------------------ - other 3 - 3 - ------------------------------------------------ ---------------- Model-related 92 13 14 1 - model limitation 92 6 14 1 - other - 7 - - ------------------------------------------------ ----- ---------------- ----- ---------------- Inception profit (Day 1 P&L reserves) (Note 14) 106 - 99 - ------------------------------------------------ ----- ---------------- ----- ---------------- At 31 Dec 1,276 92 1,244 6 ------------------------------------------------ ----- ---------------- ----- ---------------- Fair value adjustments increased by $118m during the year.Movements in CVA, DVA, FFVA and model limitations were driven bytightening credit spreads and refinements to model methodology.Fair value adjustments under Corporate Centre in 2017 include thetransfer of balances on legacy positions no longer managed inGB&M.
Bid-offer
IFRS 13 'Fair value measurement' requires use of the pricewithin the bid-offer spread that is most representative of fairvalue. Valuation models will typically generate mid-market values.The bid-offer adjustment reflects the extent to which bid-offercosts would be incurred if substantially all residual net portfoliomarket risks were closed using available hedging instruments or bydisposing of or unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable frommarket data, and/or the choice of model itself may be moresubjective. In these circ*mstances an adjustment may be necessaryto reflect the likelihood that market participants would adopt moreconservative values for uncertain parameters and/or modelassumptions than those used in HSBC's valuation model.
Credit and debit valuation adjustments
The CVA is an adjustment to the valuation of over-the-counter('OTC') derivative contracts to reflect the possibility that thecounterparty may default and that HSBC may not receive the fullmarket value of the transactions.
The DVA is an adjustment to the valuation of OTC derivativecontracts to reflect the possibility that HSBC may default, andthat it may not pay the full market value of the transactions.
HSBC calculates a separate CVA and DVA for each legal entity,and for each counterparty to which the entity has exposure. Withthe exception of central clearing parties, all third-partycounterparties are included in the CVA and DVA calculations, andthese adjustments are not netted across Group entities.
HSBC calculates the CVA by applying the probability of default('PD') of the counterparty, conditional on the non-default of HSBC,to HSBC's expected positive exposure to the counterparty andmultiplying the result by the loss expected in the event ofdefault. Conversely, HSBC calculates the DVA by applying the PD ofHSBC, conditional on the non-default of the counterparty, to theexpected positive exposure of the counterparty to HSBC andmultiplying the result by the loss expected in the event ofdefault. Both calculations are performed over the life of thepotential exposure.
For most products HSBC uses a simulation methodology, whichincorporates a range of potential exposures over the life of theportfolio, to calculate the expected positive exposure to acounterparty. The simulation methodology includes credit mitigants,such as counterparty netting agreements and collateral agreementswith the counterparty.
The methodologies do not, in general, account for 'wrong-wayrisk'. Wrong-way risk is an adverse correlation between thecounterparty's probability of default and the mark-to-market valueof the underlying transaction. The risk can either be general,perhaps related to the currency of the issuer country, or specificto the transaction concerned. When there is significant wrong-wayrisk, a trade-specific approach is applied to reflect this risk inthe valuation.
Funding fair value adjustment
The FFVA is calculated by applying future market funding spreadsto the expected future funding exposure of any uncollateralisedcomponent of the OTC derivative portfolio. The expected futurefunding exposure is calculated by a simulation methodology, whereavailable, and is adjusted for events that may terminate theexposure, such as the default of HSBC or the counterparty. The FFVAand DVA are calculated independently.
Model limitation
Models used for portfolio valuation purposes may be based upon asimplified set of assumptions that do not capture all current andfuture material market characteristics. In these circ*mstances,model limitation adjustments are adopted.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted when the fair valueestimated by a valuation model is based on one or more significantunobservable inputs. The accounting for inception profitadjustments is discussed in Note 1.
HSBC Holdings plc Annual Report and Accounts 2017 209
Notes on the Financial Statements
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3 Assets Liabilities --------------------------------------------------- ----------------------------------------- Held Designated Held Designated Available for at fair for at fair for sale trading value Derivatives Total trading value Derivatives Total $m $m $m $m $m $m $m $m $m Private equity including strategic investments 2,012 38 1,458 - 3,508 20 - - 20 Asset-backed securities 1,300 1,277 - - 2,577 - - - - Loans held for securitisation - 24 - - 24 - - - - Structured notes - 3 - - 3 4,180 - - 4,180 Derivatives with monolines - - - 113 113 - - - - Other derivatives - - - 2,331 2,331 - - 1,944 1,944 Other portfolios 120 3,710 2 - 3,832 - - - - --------------- --------- ------- ---------- ----------- ------ ------- ---------- ----------- ----- At 31 Dec 2017 3,432 5,052 1,460 2,444 12,388 4,200 - 1,944 6,144 --------------- --------- ------- ---------- ----------- ------ ------- ---------- ----------- ----- Private equity including strategic investments 2,435 49 712 - 3,196 25 - - 25 Asset-backed securities 761 789 - - 1,550 - - - - Loans held for securitisation - 28 - - 28 - - - - Structured notes - 2 - - 2 3,557 - - 3,557 Derivatives with monolines - - - 175 175 - - - - Other derivatives - - - 2,577 2,577 - - 2,300 2,300 Other portfolios 280 5,621 18 - 5,919 - 37 - 37 --------------- --------- ------- ---------- ----------- ------ ------- ---------- ----------- ----- At 31 Dec 2016 3,476 6,489 730 2,752 13,447 3,582 37 2,300 5,919 --------------- --------- ------- ---------- ----------- ------ ------- ---------- ----------- -----
Level 3 instruments are present in both ongoing and legacybusinesses. Loans held for securitisation, derivatives withmonolines, certain 'other derivatives' and predominantly all Level3 ABSs are legacy positions. HSBC has the capability to hold thesepositions.
Private equity including strategic investments
The investment's fair value is estimated: on the basis of ananalysis of the investee's financial position and results, riskprofile, prospects and other factors; by reference to marketvaluations for similar entities quoted in an active market; or theprice at which similar companies have changed ownership.
Asset-backed securities
While quoted market prices are generally used to determine thefair value of these securities, valuation models are used tosubstantiate the reliability of the limited market data availableand to identify whether any adjustments to quoted market prices arerequired. For certain ABSs such as residential mortgage-backedsecurities, the valuation uses an industry standard model withassumptions relating to prepayment speeds, default rates and lossseverity based on collateral type, and performance, as appropriate.The valuations output is benchmarked for consistency againstobservable data for securities of a similar nature.
Structured notes
The fair value of Level 3 structured notes is derived from thefair value of the underlying debt security, and the fair value ofthe embedded derivative is determined as described in the paragraphbelow on derivatives. These structured notes comprise principallyequity-linked notes issued by HSBC which provide the counterpartywith a return linked to the performance of equity securities andother portfolios. Examples of the unobservable parameters includelong-dated equity volatilities and correlations between equityprices, and interest and foreign exchange rates.
Derivatives
OTC derivative valuation models calculate the present value ofexpected future cash flows, based upon 'no-arbitrage' principles.For many vanilla derivative products, the modelling approaches usedare standard across the industry. For more complex derivativeproducts, there may be some differences in market practice. Inputsto valuation models are determined from observable market datawherever possible, including prices available from exchanges,dealers, brokers or providers of consensus pricing. Certain inputsmay not be observable in the market directly, but can be determinedfrom observable prices via model calibration procedures orestimated from historical data or other sources.
210 HSBC Holdings plc Annual Report and Accounts 2017
Reconciliation of fair value measurements in Level 3 of the fairvalue hierarchy
Movement in Level 3 financial instruments Assets Liabilities ----------------------------------------------- ------------------------------------- Held Designated Held Designated Available for at fair for at fair for sale trading value Derivatives trading value Derivatives Footnote $m $m $m $m $m $m $m At 1 Jan 2017 3,476 6,489 730 2,752 3,582 37 2,300 ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- Total gains/(losses) recognised in profit or loss 351 (188) (107) 152 154 (5) 400 ------------------------------------------------------------ -------- * trading income/(expense) excluding net interest income - (188) - 152 154 - 400
------------------------------------------------------------ * net income/(expense) from other financial instruments designated at fair value - - (107) - - (5) - * gains less losses from financial investments 313 - - - - - - * loan impairment charges and other credit risk provisions ('LICs') 38 - - - - - - ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- Total gains/(losses) recognised in other comprehensive income ('OCI') 1 71 106 7 188 169 1 120 ------------------------------------------------------------ -------- * available-for-sale investments: fair value gains/(losses) (30) - - - - - - ------------------------------------------------------------ -------- * cash flow hedges: fair value gains/(losses) - (1) 3 (23) - - (35) * exchange differences 101 107 4 211 169 1 155 ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- Purchases 200 1,503 1,127 2 5 - 23 New issuances - - - 1 1,915 - - Sales (939) (3,221) (130) (8) (12) - (12) Settlements (69) (331) (166) (60) (998) - (123) Transfers out (565) (149) (3) (885) (678) (33) (1,030) Transfers in 907 843 2 302 63 - 266 ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- At 31 Dec 2017 3,432 5,052 1,460 2,444 4,200 - 1,944 ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2016 16 (110) (146) 218 (117) - (397) ------------------------------------------------------------ -------- * trading income/(expense) excluding net interest income - (110) - 218 (117) - (397) * net income/(expense) from other financial instruments designated at fair value - - (146) - - - - * loan impairment charges and other credit risk provisions 16 - - - - - - ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- At 1 Jan 2016 4,727 6,856 474 2,262 4,285 3 1,210 ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- Total gains/(losses) recognised in profit or loss 178 31 25 1,107 337 (1) 1,428 ------------------------------------------------------------ -------- * trading income/(expense) excluding net interest income - 31 - 1,107 337 - 1,428 * net income from other financial instruments designated at fair value - - 25 - - (1) - * gains less losses from financial investments 91 - - - - - - * loan impairment charges and other credit risk provisions ('LICs') 87 - - - - - - ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- Total gains/(losses) recognised in other comprehensive income ('OCI') 1 (162) (610) (8) (335) (130) (1) (240) ------------------------------------------------------------ -------- * available-for-sale investments: fair value gains/(losses) 123 - - - - - - * cash flow hedges: fair value gains/(losses) - - - - - - 12 * exchange differences (285) (610) (8) (335) (130) (1) (252) ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- Purchases 350 823 359 - 20 6 - New issuances - - - - 1,882 - - Sales (1,212) (1,760) (7) - (40) (2) - Settlements (177) (311) (113) (107) (1,907) - (239) Transfers out (947) (199) (2) (187) (920) - (229) Transfers in 719 1,659 2 12 55 32 370 ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- At 31 Dec 2016 3,476 6,489 730 2,752 3,582 37 2,300 ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2015 87 (170) 21 364 (143) 1 (335) ------------------------------------------------------------ -------- * trading income/(expense) excluding net interest income - (170) - 364 (143) - (335) * net income from other financial instruments designated at fair value - - 21 - - 1 - * loan impairment charges and other credit risk provisions 87 - - - - - - ------------------------------------------------------------ -------- --------- ------- ---------- ----------- ------- ---------- ----------- 1 Included in 'Available-for-sale investments: fair value gains/(losses)' and 'Exchange differences' in the consolidated statement of comprehensive income. Transfers between levels of the fair value hierarchy are deemedto occur at the end of each semi-annual reporting period. Transfersinto and out of Levels of the fair value hierarchy are primarilyattributable to observability of valuation inputs and pricetransparency.
HSBC Holdings plc Annual Report and Accounts 2017 211
Notes on the Financial Statements
Effect of changes in significant unobservable assumptions toreasonably possible alternatives
Sensitivity of Level 3 fair values to reasonably possible alternative assumptions 2017 2016 ------------------------------------------------ -------------------------------------------------- Reflected in profit or Reflected in profit or loss Reflected in OCI loss Reflected in OCI ----------------------- ----------------------- ----------------------- ------------------------- Un- Un- Un- Un- Favourable favourable Favourable favourable Favourable favourable Favourable favourable changes changes changes changes changes changes changes changes Footnote $m $m $m $m $m $m $m $m Derivatives, trading assets and trading liabilities 1 372 (253) - - 238 (177) - - Financial assets and liabilities designated at fair value 89 (74) - - 48 (38) - - ------------- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Financial investments: available for sale 53 (30) 128 (149) 72 (36) 170 (149) ------------- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- At 31 Dec 514 (357) 128 (149) 358 (251) 170 (149) ------------- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these instruments are risk managed. Sensitivity of Level 3 fair values to reasonably possible alternative assumptions by instrument type 2017 2016 ------------------------------------------------ -------------------------------------------------- Reflected in profit or Reflected in profit or loss Reflected in OCI loss Reflected in OCI Un- Un- Un- Un- Favourable favourable Favourable favourable Favourable favourable Favourable favourable changes changes changes changes changes changes changes changes $m $m $m $m $m $m $m $m Private equity including strategic investments 142 (105) 117 (102) 112 (73) 121 (106) Asset-backed securities 66 (39) 3 (39) 43 (15) 33 (27) Loans held for securitisation 1 (1) - - 1 (1) - - Structured notes 12 (9) - - 10 (7) - - Derivatives with monolines - - - - 3 (3) - - Other derivatives 249 (150) - - 141 (94) - - Other portfolios 44 (53) 8 (8) 48 (58) 16 (16) --------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- At 31 Dec 514 (357) 128 (149) 358 (251) 170 (149) --------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The sensitivity analysis aims to measure a range of fair valuesconsistent with the application of a 95% confidence interval.Methodologies take account of the nature of the valuation techniqueemployed, as well as the availability and reliability of observableproxy and historical data.
When the fair value of a financial instrument is affected bymore than one unobservable assumption, the above table reflects themost favourable or the most unfavourable change from varying theassumptions individually.
212 HSBC Holdings plc Annual Report and Accounts 2017
Key unobservable inputs to Level 3 financial instruments
Quantitative information about significant unobservable inputs in Level 3 valuations Fair value 2017 2016 Key Valuation unobservable Full range Core range Full range Core range Assets Liabilities techniques inputs of inputs of inputs(1) of inputs of inputs(1) Footnotes $m $m Lower Higher Lower Higher Lower Higher Lower Higher Private equity including See page strategic investments 3,508 20 255 See page 255 n/a n/a n/a n/a n/a n/a n/a n/a ------ ----- ------ ------ ------- Asset-backed securities 2 2,577 --------------------------------- --------- ------ ----------- ---------- ------------ --------- ---------- --------- ---------- ----- ------ ----- ------- Market Prepayment * CLO/CDO 520 proxy rate 2% 7% 2% 7% 2% 7% 2% 7% Market proxy Bid quotes 0 101 6 53 0 101 42 94 --------- ----- ------ ----- ------ ----- ------ ----- ------- Market - other ABSs 2,057 proxy Bid quotes 0 103 34 98 0 96 57 90 --------------------------------- ------ ----------- ---------- ------------ ----- ------ ----- ------ ----- ------ ----- ------- Loans held for securitisation 24 - --------------------------------- --------- ------ ----------- ---------- ------------ --------- ---------- --------- ---------- ----- ------ ----- ------- Structured notes 3 4,180 --------------------------------- --------- ------ ----------- ---------- ------------ --------- ---------- --------- ---------- ----- ------ ----- ------- Model - Option Equity * equity-linked notes - 4,077 model volatility 7% 47% 14% 30% 11% 96% 16% 36% Model - Option Equity model correlation 33% 95% 45% 72% 33% 94% 46% 81% Model - Option Fund * fund-linked notes - 7 model volatility 6% 15% 6% 15% 6% 11% 6% 11% Model - Option FX * FX-linked notes - 76 model volatility 3% 20% 4% 13% 3% 29% 5% 18% --------- * other 3 20 --------------------------------- --------- ------ ----------- ---------- ------------ --------- ---------- --------- ---------- ----- ------ ----- ------- Model -
Discounted Credit Derivatives with monolines 113 - cash flow spread 0.4% 3% 1% 3% 2% 2% 2% 2% --------------------------------- Other derivatives 2,331 1,944 ------ ----------- * Interest rate derivatives: --------------------------------- --------- ---------- ------------ ----- ------ ----- ------ ----- ------ ----- ------- Model - Discounted Prepayment securitisation swaps 285 806 cash flow rate 20% 90% 20% 90% 0% 90% 8% 27% --------- Model - Option IR long-dated swaptions 1,244 66 model volatility 8% 41% 15% 31% 8% 101% 21% 39% --------------------------------- --------- ---------- ------------ ----- ------ ----- ------ ----- ------ ----- ------- other 302 145 --------------------------------- * FX derivatives: --------------------------------- --------- ---------- ------------ --------- ---------- --------- ---------- ----- ------ ----- ------- Model - Option FX FX options 86 83 model volatility 0.7% 50% 5% 11% 0.6% 25% 7% 12% ---------- ------------ ----- ------ ----- ------ ----- ------ ----- ------- other 135 129 --------------------------------- --------- * Equity derivatives: --------------------------------- --------- Model - long-dated single stock Option Equity options 158 359 model volatility 7% 84% 15% 44% 11% 83% 16% 36% ---------- ------------ ----- ------ ----- ------ ----- ------ ----- ------- other 96 329 --------------------------------- --------- * Credit derivatives: --------------------------------- --------- ---------- ------------ --------- ---------- --------- ---------- ----- ------ ----- ------- other 25 27 --------------------------------- --------- ------ ----------- Other portfolios 3,832 - --------------------------------- Model - Discounted Credit * structured certificates 3,014 - cash flow volatility 2% 4% 2% 4% 3% 4% 3% 4% ---------- ------------ ----- ------ ----- ------ ----- ------ ----- ------- Market * EM corporate debt 85 - proxy Bid quotes 100 100 100 100 96 144 113 113 --------------------------------- --------- ---------- ------------ ----- ------ ----- ------ ----- ------ ----- ------- * other 3 733 - --------------------------------- --------- ------ ----------- ---------- ------------ --------- ---------- --------- ---------- ----- ------ ----- ------- At 31 Dec 2017 12,388 6,144 --------------------------------- --------- ------ ----------- ---------- ------------ --------- ---------- --------- ---------- ----- ------ ----- ------- 1 The core range of inputs is the estimated range within which 90% of the inputs fall. 2 Collateralised loan obligation/collateralised debt obligation. 3 'Other' includes a range of smaller asset holdings.
Private equity including strategic investments
Given the bespoke nature of the analysis in respect of eachholding, it is not practical to quote a range of key unobservableinputs.
Prepayment rates
Prepayment rates are a measure of the anticipated future speedat which a loan portfolio will be repaid in advance of the duedate. They vary according to the nature of the loan portfolio andexpectations of future market conditions, and may be estimatedusing a variety of evidence, such as prepayment rates implied fromproxy observable security prices, current or historical prepaymentrates and macroeconomic modelling.
Market proxy
Market proxy pricing may be used for an instrument when specificmarket pricing is not available but there is evidence frominstruments with common characteristics. In some cases it might bepossible to identify a specific proxy, but more generally evidenceacross a wider range of instruments will be used to understand thefactors that influence current market pricing and the manner ofthat influence.
HSBC Holdings plc Annual Report and Accounts 2017 213
Notes on the Financial Statements
Volatility
Volatility is a measure of the anticipated future variability ofa market price. It varies by underlying reference market price, andby strike and maturity of the option.
Certain volatilities, typically those of a longer-dated nature,are unobservable and are estimated from observable data. The rangeof unobservable volatilities reflects the wide variation involatility inputs by reference market price. The core range issignificantly narrower than the full range because these exampleswith extreme volatilities occur relatively rarely within the HSBCportfolio.
Correlation
Correlation is a measure of the inter-relationship between twomarket prices and is expressed as a number between minus one andone. It is used to value more complex instruments where the payoutis dependent upon more than one market price. There is a wide rangeof instruments for which correlation is an input, and consequentlya wide range of both same-asset correlations and cross-assetcorrelations is used. In general, the range of same-assetcorrelations will be narrower than the range of cross-assetcorrelations.
Unobservable correlations may be estimated based upon a range ofevidence, including consensus pricing services, HSBC trade prices,proxy correlations and examination of historical pricerelationships. The range of unobservable correlations quoted in thetable reflects the wide variation in correlation inputs by marketprice pair.
Credit spread
Credit spread is the premium over a benchmark interest raterequired by the market to accept lower credit quality. In adiscounted cash flow model, the credit spread increases thediscount factors applied to future cash flows, thereby reducing thevalue of an asset. Credit spreads may be implied from market pricesand may not be observable in more illiquid markets.
Inter-relationships between key unobservable inputs
Key unobservable inputs to Level 3 financial instruments may notbe independent of each other. As described above, market variablesmay be correlated. This correlation typically reflects the mannerin which different markets tend to react to macroeconomic or otherevents. Furthermore, the effect of changing market variables on theHSBC portfolio will depend on HSBC's net risk position in respectof each variable.
HSBC Holdings
Basis of valuing HSBC Holdings' financial assets and liabilities measured at fair value 2017 2016 $m $m Valuation technique using observable inputs: Level 2 Assets at 31 Dec - derivatives 2,388 2,148 --------------------------------------------------------------------------- - financial investments in HSBC undertakings 4,264 3,590 --------------------------------------------------------------------------- ------- ------ - loans and advances to HSBC undertakings designated at fair value 11,944 - --------------------------------------------------------------------------- ------- ------ Liabilities at 31 Dec - designated at fair value 30,890 30,113 --------------------------------------------------------------------------- - derivatives 3,082 5,025 --------------------------------------------------------------------------- ------- ------ 214 HSBC Holdings plc Annual Report and Accounts 2017 12 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 Significant Quoted market Observable unobservable Carrying price inputs inputs amount Level 1 Level 2 Level 3 Total $m $m $m $m $m --------- ------------- ---------- ------------- --------- At 31 Dec 2017 Assets -------------------------------------------- --------- ------------- ---------- ------------- ----------- Loans and advances to banks 90,393 - 87,384 3,007 90,391 Loans and advances to customers 962,964 - 20,029 944,176 964,205 -------------------------------------------- Reverse repurchase agreements - non-trading 201,553 - 200,012 1,526 201,538 -------------------------------------------- Financial investments - debt securities 52,919 1,363 52,707 17 54,087 -------------------------------------------- Liabilities -------------------------------------------- --------- ------------- ---------- ------------- --------- Deposits by banks 69,922 - 69,862 30 69,892 -------------------------------------------- Customer accounts 1,364,462 - 1,353,017 11,608 1,364,625 -------------------------------------------- Repurchase agreements - non-trading 130,002 1 129,995 - 129,996 -------------------------------------------- Debt securities in issue 64,546 - 65,138 - 65,138 -------------------------------------------- Subordinated liabilities 19,826 - 23,740 355 24,095 -------------------------------------------- --------- ------------- ---------- ------------- --------- At 31 Dec 2016 Assets -------------------------------------------- --------- ------------- ---------- ------------- --------- Loans and advances to banks 88,126 - 85,568 2,572 88,140 -------------------------------------------- Loans and advances to customers 861,504 - 15,670 845,894 861,564 -------------------------------------------- Reverse repurchase agreements - non-trading 160,974 - 159,504 1,527 161,031 -------------------------------------------- Financial investments - debt securities 46,923 1,190 46,014 19 47,223 -------------------------------------------- Liabilities Deposits by banks 59,939 - 59,883 42 59,925 -------------------------------------------- Customer accounts 1,272,386 - 1,262,540 10,136 1,272,676 -------------------------------------------- Repurchase agreements - non-trading 88,958 - 88,939 - 88,939 -------------------------------------------- Debt securities in issue 65,915 - 66,386 - 66,386 -------------------------------------------- Subordinated liabilities 20,984 - 23,264 292 23,556 -------------------------------------------- --------- ------------- ---------- ------------- ---------
Other financial instruments not carried at fair value aretypically short-term in nature and reprice to current market ratesfrequently. Accordingly, their carrying amount is a reasonableapproximation of fair value. They include cash and balances atcentral banks, items in the course of collection from andtransmission to other banks, Hong Kong Government certificates ofindebtedness and Hong Kong currency notes in circulation, all ofwhich are measured at amortised cost.
Carrying amount and fair value of loans and advances to customers by industry sector Carrying amount Fair value ------------------------------- --------------------------------- Not Impaired Impaired Total Not Impaired Impaired Total $m $m $m $m $m $m Loans and advances to customers * personal 370,842 3,920 374,762 371,131 3,257 374,388 * corporate and commercial 510,784 5,970 516,754 512,597 5,769 518,366 * financial 71,377 71 71,448 71,351 100 71,451 ------------ -------- ------- ------------ -------- ------- At 31 Dec 2017 953,003 9,961 962,964 955,079 9,126 964,205 -------------------------------- ------------ -------- ------- ------------ -------- ------- Loans and advances to customers * personal 332,574 5,252 337,826 330,167 4,597 334,764 * corporate and commercial 453,151 7,058 460,209 456,816 6,393 463,209 * financial 63,316 153 63,469 63,411 180 63,591 -------------------------------- ------------ -------- ------- ------------ -------- ------- At 31 Dec 2016 849,041 12,463 861,504 850,394 11,170 861,564 -------------------------------- ------------ -------- ------- ------------ -------- -------
Loans and advances to customers are classified as not impairedor impaired in accordance with the criteria described on page86.
Valuation
Fair value is an estimate of the price that would be received tosell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. Itdoes not reflect the economic benefits and costs that HSBC expectsto flow from an instrument's cash flow over its expected futurelife. Our valuation methodologies and assumptions in determiningfair values for which no observable market prices are available maydiffer from those of other companies.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks andcustomers, loans are segregated, as far as possible, intoportfolios of similar characteristics. Fair values are based onobservable market transactions, when available. When they areunavailable, fair values are estimated using valuation modelsincorporating a range of input assumptions. These assumptions mayinclude: value estimates from third-party brokers reflectingover-the-counter trading activity; forward-looking discounted cashflow models, taking account of expected customer prepayment rates,using assumptions that HSBC believes are consistent with those thatwould be used by market participants in valuing such loans; newbusiness rates estimates for similar loans; and trading inputs fromother market participants including
HSBC Holdings plc Annual Report and Accounts 2017 215
Notes on the Financial Statements
observed primary and secondary trades. From time to time, we mayengage a third-party valuation specialist to measure the fair valueof a pool of loans.
The fair value of loans reflects impairments at the balancesheet date and estimates of market participants' expectations ofcredit losses over the life of the loans, and the fair value effectof repricing between origination and the balance sheet date. Forimpaired loans, fair value is estimated by discounting the futurecash flows over the time period they are expected to berecovered.
Financial investments
The fair values of listed financial investments are determinedusing bid market prices. The fair values of unlisted financialinvestments are determined using valuation techniques thatincorporate the prices and future earnings streams of equivalentquoted securities.
Deposits by banks and customer accounts
The fair values of on-demand deposits are approximated by theircarrying value. For deposits with longer-term maturities, fairvalues are estimated using discounted cash flows, applying currentrates offered for deposits of similar remaining maturities.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at thebalance sheet date where available, or by reference to quotedmarket prices for similar instruments.
Repurchase and reverse repurchase agreements - non-trading
Fair values approximate carrying amounts as balances aregenerally short dated.
HSBC Holdings
The methods used by HSBC Holdings to determine fair values offinancial instruments for the purposes of measurement anddisclosure are described above.
Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet 2017 2016 ----------------------- ------------------------- Carrying Fair Carrying Fair amount value(1) amount value(1) $m $m $m $m --------------------------------------------------- ---------- ----------- ---------- ----------- Assets at 31 Dec Loans and advances to HSBC undertakings 76,627 78,534 77,421 79,985 ---------------------------------------------------- ---------- ----------- ---------- ----------- Liabilities at 31 Dec Amounts owed to HSBC undertakings 2,571 2,571 2,157 2,156 Debt securities in issue 34,258 36,611 21,805 23,147 Subordinated liabilities 15,877 19,596 15,189 17,715 ---------------------------------------------------- ---------- ----------- ---------- ----------- 1 Fair values were determined using valuation techniques with observable inputs (Level 2). 13 Financial assets designated at fair value ----------------------------------------- 2017 2016 $m $m Securities 29,456 24,677 ------------------------------------------- - treasury and other eligible bills 606 204 - debt securities 4,090 4,189 - equity securities 24,760 20,284 ------------------------------------------- ------ ------ Loans and advances to banks and customers 8 79 At 31 Dec 29,464 24,756 ------------------------------------------- ------ ------ Securities(1) 2017 2016 Footnotes $m $m US Treasury and US Government agencies 2 - 104 UK Government 17 41 Hong Kong Government 64 16 Other governments 1,247 747 Asset-backed securities 3 2 20 Corporate debt and other securities 3,366 3,465 Equities 24,760 20,284 At 31 Dec 29,456 24,677 --------------------------------------- --------- ------ ------ 1 Included within these figures are debt securities issued by banks and other financial institutions of $1,621m (2016: $1,766m), of which $0.4m (2016: $19m) are guaranteed by various governments. 2 Includes securities that are supported by an explicit guarantee issued by the US Government. 3 Excludes asset-backed securities included under US Treasury and US Government agencies. 216 HSBC Holdings plc Annual Report and Accounts 2017 14 Derivatives ----------- Notional contract amounts and fair values of derivatives by product contract type held by HSBC Notional contract amount Fair value - Assets Fair value - Liabilities -------------------------- --------------------------- ------------------------------ Trading Hedging Trading Hedging Total Trading Hedging Total $m $m $m $m $m $m $m $m Foreign exchange 6,215,518 28,768 78,089 428 78,517 74,915 853 75,768 Interest rate 19,751,577 178,289 235,430 1,365 236,795 229,989 3,042 233,031 ---------- Equities 590,156 - 9,353 - 9,353 11,845 - 11,845 Credit 391,798 - 4,692 - 4,692 5,369 - 5,369 Commodity and other 59,716 - 886 - 886 1,233 - 1,233 -------------- Gross total fair values 27,008,765 207,057 328,450 1,793 330,243 323,351 3,895 327,246 --------------- -------------- ---------- ------- ------- -------- -------- ------- -------- Offset (Note 29) (110,425) (110,425) --------------- -------------- ---------- ------- ------- -------- -------- ------- -------- At 31 Dec 2017 27,008,765 207,057 328,450 1,793 219,818 323,351 3,895 216,821 --------------- -------------- ---------- ------- ------- -------- -------- ------- -------- Foreign exchange 5,819,814 26,281 126,185 1,228 127,413 118,813 968 119,781 Interest rate 13,729,757 215,006 253,398 1,987 255,385 245,941 4,081 250,022 Equities 472,169 - 7,410 - 7,410 9,240 - 9,240 Credit 448,220 - 5,199 - 5,199 5,767 - 5,767 Commodity and other 62,009 - 2,020 - 2,020 1,564 - 1,564 ---------- Gross total fair values 20,531,969 241,287 394,212 3,215 397,427 381,325 5,049 386,374 --------------- -------------- ---------- ------- ------- -------- -------- ------- -------- Offset (Note 29) (106,555) (106,555) --------------- -------------- ---------- ------- ------- -------- -------- ------- -------- At 31 Dec 2016 20,531,969 241,287 394,212 3,215 290,872 381,325 5,049 279,819 --------------- -------------- ---------- ------- ------- -------- -------- ------- --------
The notional contract amounts of derivatives held for tradingpurposes and derivatives designated in hedge accountingrelationships indicate the nominal value of transactionsoutstanding at the balance sheet date; they do not representamounts at risk.
Derivative assets and liabilities decreased during 2017,reflecting changes in yield curve movements and changes in foreignexchange rates.
Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries Notional contract amount Fair value - Assets Fair value - Liabilities Trading Hedging Trading Hedging Total Trading Hedging Total $m $m $m $m $m $m $m $m Foreign exchange 20,484 1,120 588 - 588 1,330 110 1,440 ------------ ------------ --------- --------- ------ --------- --------- ------ Interest rate 41,061 25,294 1,364 436 1,800 678 964 1,642 ------------ ------------ --------- --------- ------ --------- --------- ------ At 31 Dec 2017 61,545 26,414 1,952 436 2,388 2,008 1,074 3,082 -------------- ------------ ------------ --------- --------- ------ --------- --------- ------ Foreign exchange 23,442 1,120 223 - 223 3,201 239 3,440 Interest rate 26,858 24,356 1,478 447 1,925 639 946 1,585 -------------- ------------ ------------ --------- --------- ------ --------- --------- ------ At 31 Dec 2016 50,300 25,476 1,701 447 2,148 3,840 1,185 5,025 -------------- ------------ ------------ --------- --------- ------ --------- --------- ------
Use of derivatives
For details regarding use of derivatives, see page 107 under'Market Risk'.
Trading derivatives
Most of HSBC's derivative transactions relate to sales andtrading activities. Sales activities include the structuring andmarketing of derivative products to customers to enable them totake, transfer, modify or reduce current or expected risks. Tradingactivities include market-making and risk management. Market-makingentails quoting bid and offer prices to other market participantsfor the purpose of generating revenues based on spread and volume.Risk management activity is undertaken to manage the risk arisingfrom client transactions, with the principal purpose of retainingclient margin. Other derivatives classified as held for tradinginclude non-qualifying hedging derivatives.
Substantially all of HSBC Holdings' derivatives entered intowith subsidiaries are managed in conjunction with financialliabilities designated at fair value.
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition(the transaction price) and the value that would have been derivedhad valuation techniques used for subsequent measurement beenapplied at initial recognition, less subsequent releases, is asfollows:
HSBC Holdings plc Annual Report and Accounts 2017 217
Notes on the Financial Statements
Unamortised balance of derivatives valued using models with significant unobservable inputs 2017 2016 Footnote $m $m Unamortised balance at 1 Jan 99 97 Deferral on new transactions 191 156 ---------------------------------------------------------------------- ---------- ----- ---- Recognised in the income statement during the year: (187) (140) - amortisation (85) (70) - subsequent to unobservable inputs becoming observable (2) (5) - maturity, termination or offsetting derivative (100) (65) ---------------------------------------------------------------------- ----- ---- Exchange differences 10 (13) Other (7) (1) ---------------------------------------------------------------------- ---------- ----- ---- Unamortised balance at 31 Dec 1 106 99 ---------------------------------------------------------------------- ---------- ----- ---- 1 This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
Fair value hedges
HSBC's fair value hedges principally consist of interest rateswaps that are used to protect against changes in the fair value offixed-rate long-term financial instruments due to movements inmarket interest rates.
Notional contract amounts and fair values of derivatives designated as fair value hedges by product type 2017 2016 ----------------------------------------- ---------------------------------------- Fair Value Fair Value Fair Value Fair Value Notional Assets Liabilities Notional Assets Liabilities $m $m $m $m $m $m HSBC Foreign exchange 1,027 - 23 618 10 22 Interest rate 112,714 1,020 2,744 124,361 1,078 3,726 At 31 Dec 113,741 1,020 2,767 124,979 1,088 3,748 --------------------- ---------- ------------ --------------- --------- ----------- -------------- HSBC Holdings Foreign exchange 1,120 - 110 1,120 - 239 Interest rate 25,294 436 964 24,356 447 946 --------------------- ---------- ------------ --------------- --------- ----------- -------------- At 31 Dec 26,414 436 1,074 25,476 447 1,185 --------------------- ---------- ------------ --------------- --------- ----------- -------------- Gains or losses arising from fair value hedges 2017 2016 2015 $m $m $m ---- ---- ---- HSBC Gains/(losses): - on hedging instruments 621 (439) 40 ------------------------------------------------------ - on the hedged items attributable to the hedged risk (617) 462 (51) ------------------------------------------------------ Year ended 31 Dec 4 23 (11) ------------------------------------------------------ ---- ---- ---- HSBC Holdings Gains/(losses): - on hedging instruments (57) (909) (4) - on the hedged items attributable to the hedged risk 23 926 6 ---- ---- ---- Year ended 31 Dec (34) 17 2 ------------------------------------------------------ ---- ---- ----
Cash flow hedges
HSBC's cash flow hedges consist principally of interest rateswaps, futures and cross-currency swaps that are used to protectagainst exposures to variability in future interest cash flows onnon-trading assets and liabilities which bear interest at variablerates or which are expected to be re-funded or reinvested in thefuture. The amounts and timing of future cash flows, representingboth principal and interest flows, are projected for each portfolioof financial assets and liabilities on the basis of theircontractual terms and other relevant factors, including estimatesof prepayments and defaults. The aggregate principal balances andinterest cash flows across all portfolios over time form the basisfor identifying gains and losses on the effective portions ofderivatives designated as cash flow hedges of forecasttransactions.
Notional contract amounts and fair values of derivatives designated as cash flow hedges by product held by HSBC 2017 2016 --------------------------------------- --------------------------------------- Notional Assets Liabilities Notional Assets Liabilities $m $m $m $m $m $m Foreign Exchange 22,741 424 759 25,663 1,081 939 ----------------------- Interest rate 65,575 345 298 90,645 909 355 ----------------------- At 31 Dec 88,316 769 1,057 116,308 1,990 1,294 ----------------------- ----------- --------- --------------- ---------- -------- --------------- 218 HSBC Holdings plc Annual Report and Accounts 2017 Forecast principal balances on which interest cash flows are expected to arise 3 months More than 3 months 5 years or less or less but less than 1 year but more than 1 year More than 5 years $m $m $m $m Net cash inflows/(outflows) exposure --------- ---------------------- ---------------------- -------------------- Assets 70,769 65,771 44,347 956 ------------------------------- Liabilities (7,729) (7,017) (4,992) (536) ------------------------------- At 31 Dec 2017 63,040 58,754 39,355 420 ------------------------------- -------- --------------------- --------------------- ----------------- Net cash inflows/(outflows) exposure Assets 83,472 79,749 57,553 2,750 ------------------------------- Liabilities (13,169) (12,977) (11,761) (1,502) ------------------------------- At 31 Dec 2016 70,303 66,772 45,792 1,248 ------------------------------- -------- --------------------- --------------------- -----------------
This table reflects the interest rate repricing profile of theunderlying hedged items. During the year to 31 December 2017, aloss of
$5m (2016: $5m loss; 2015: $15m gain) was recognised due tohedge ineffectiveness.
Hedges of net investments in foreign operations
The Group applies hedge accounting in respect of certainconsolidated net investments. Hedging is undertaken using forwardforeign exchange contracts or by financing with foreign currencyborrowings. At 31 December 2017, the fair values of outstandingfinancial instruments designated as hedges of net investments inforeign operations were assets of $4m (2016: $137m), liabilities of$71m (2016: $7m) and notional contract values of $5,000m (2016:$3,544m). Ineffectiveness recognised in 'Net trading income' in theyear ended
31 December 2017 was nil (2016: nil; 2015: nil).
15 Financial investments --------------------- Carrying amount of financial investments 2017 2016 Footnote $m $m ------- ------- Available for sale securities at fair value 336,157 389,874 - treasury and other eligible bills 78,851 99,226 - debt securities 253,389 285,981 ---------------------------------------------- - equity securities 3,917 4,667 ---------------------------------------------- ------- ------- Held to maturity securities at amortised cost 52,919 46,923 - debt securities 1 52,919 46,923 ---------------------------------------------- ------- -------
At 31 Dec 389,076 436,797 ---------------------------------------------- -------- ------- ------- 1 Fair value $54.1bn (2016: $47.2bn). Financial investments at amortised cost and fair value 2017 2016 Amortised cost Fair value(1) Amortised cost Fair value(1) Footnotes $m $m $m $m --------- -------------- ------------- -------------- ------------- US Treasury 41,427 41,274 57,135 56,625 US Government agencies 2 18,691 18,494 15,790 15,682 US Government sponsored entities 2 10,998 11,033 14,397 14,442 UK Government 17,817 18,538 27,506 28,480 Hong Kong Government 52,269 52,252 62,500 62,475 Other governments 134,766 136,414 140,943 142,594 Asset-backed securities 3 6,187 5,781 10,246 9,392 Corporate debt and other securities 99,136 102,540 100,180 102,741 Equities 2,989 3,917 3,042 4,667 -------------- ------------- At 31 Dec 384,280 390,243 431,739 437,098 ------------------------------------ --------- -------------- ------------- -------------- ------------- 1 Included within 'fair value' figures are debt securities issued by banks and other financial institutions of $67bn (2016: $69bn), of which $15bn (2016: $20bn) are guaranteed by various governments. 2 Includes securities that are supported by an explicit guarantee issued by the US Government. 3 Excludes asset-backed securities included under US Government agencies and sponsored entities. Maturities of investments in debt securities at their carrying amount 5 years or less 10 years or less but over but over 1 year or less 1 year 5 years Over 10 years Total $m $m $m $m $m Available for sale 63,896 122,113 37,292 30,088 253,389 Held to maturity 3,731 9,406 13,482 26,300 52,919 At 31 Dec 2017 67,627 131,519 50,774 56,388 306,308 ------------------- -------------- --------------- ---------------- ------------- ------- Available for sale 64,155 142,700 45,385 33,741 285,981 Held to maturity 2,502 10,210 10,348 23,863 46,923 At 31 Dec 2016 66,657 152,910 55,733 57,604 332,904 ------------------- -------------- --------------- ---------------- ------------- ------- HSBC Holdings plc Annual Report and Accounts 2017 219
Notes on the Financial Statements
Contractual maturities and weighted average yields of investment debt securities 5 years or less 10 years or less but over but over 1 year or less 1 year 5 years Over 10 years ---------------- ----------------- ------------------ --------------- Amount Yield Amount Yield Amount Yield Amount Yield $m % $m % $m % $m % Available for sale ------------------------------------ -------- ------ --------- ------ --------- ------- -------- ----- US Treasury 3,981 1.1 16,213 1.9 15,806 2.0 3,318 3.1 US Government agencies 50 1.9 129 2.2 19 3.8 7,924 2.6 US Government-sponsored agencies 148 3.5 2,759 3.0 1,965 2.6 2,733 2.7 UK Government 636 0.2 6,970 0.9 6,552 0.8 - - Hong Kong Government 216 0.8 1,014 1.3 - - - - Other governments 45,337 1.8 57,441 2.7 7,429 3.0 1,678 3.4 Asset-backed securities 26 7.8 28 5.5 271 1.7 5,858 2.9 Corporate debt and other securities 13,613 1.7 35,598 1.9 4,043 2.6 7,779 3.9 Total amortised cost at 31 Dec 2017 64,007 120,152 36,085 29,290 ------------------------------------ -------- ------ --------- ------ --------- ------- -------- ----- Total carrying value 63,896 122,113 37,292 30,088 ------------------------------------ -------- ------ --------- ------ --------- ------- -------- ----- Held to maturity ------------------------------------ -------- ------ --------- ------ --------- ------- -------- ----- US Treasury 41 5.0 22 4.7 49 4.9 130 4.2 US Government agencies - - 21 4.0 27 2.5 10,519 2.4 US Government-sponsored agencies - - 322 2.4 325 2.8 2,747 2.9 Hong Kong Government 227 0.5 28 2.6 13 1.2 7 1.4 Other governments 108 4.7 240 4.0 198 3.7 847 4.3 Asset-backed securities - - - - - - 4 6.7 Corporate debt and other securities 3,355 3.7 8,773 3.4 12,870 3.3 12,046 3.9 Total amortised cost at 31 Dec 2017 3,731 9,406 13,482 26,300 ------------------------------------ -------- ------ --------- ------ --------- ------- -------- ----- Total carrying value 3,731 9,406 13,482 26,300 ------------------------------------ -------- ------ --------- ------ --------- ------- -------- -----
The maturity distributions of ABSs are presented in the abovetable on the basis of contractual maturity dates. The weightedaverage yield for each range of maturities is calculated bydividing the annualised interest income for the year ended 31December 2017 by the book amount of available-for-sale debtsecurities at that date. The yields do not include the effect ofrelated derivatives.
16 Assets pledged, collateral received and assets transferred ----------------------------------------------------------
Assets pledged
Financial assets pledged as collateral 2017 2016 $m $m Treasury bills and other eligible securities 10,183 7,151 Loans and advances to banks 14,518 17,444 Loans and advances to customers 68,336 74,109 Debt securities 96,245 80,063 Equity securities 33,209 2,655 Other 2,743 1,838 Assets pledged at 31 Dec 225,234 183,260 --------------------------------------------- ------- -------
Assets pledged as collateral include all assets categorised asencumbered in the disclosure on page 67 of the Pillar 3 Disclosuresat 31 December 2017.
The amount of assets pledged to secure liabilities may begreater than the book value of assets utilised as collateral. Forexample, in the case of securitisations and covered bonds, theamount of liabilities issued plus mandatory over-collateralisationis less than the book value of the pool of assets available for useas collateral. This is also the case where assets are placed with acustodian or a settlement agent which has a floating charge overall the assets placed to secure any liabilities under settlementaccounts.
These transactions are conducted under terms that are usual andcustomary to collateralised transactions including, where relevant,standard securities lending and borrowing, repurchase agreementsand derivative margining. HSBC places both cash and non-cashcollateral in relation to derivative transactions.
Financial assets pledged as collateral which the counterparty has the right to sell or repledge 2017 2016 $m $m Trading assets 70,117 37,141 ----------------- ----------------- Financial investments 13,581 4,044
At 31 Dec 83,698 41,185 -------------------------------------------------------------- ----------------- -----------------
Collateral received
The fair value of assets accepted as collateral, relatingprimarily to standard securities lending, reverse repurchaseagreements, swaps of securities and derivative margining, that HSBCis permitted to sell or repledge in the absence of default was$387,678m (2016: $250,919m). The fair value of any such collateralsold or repledged was $243,531m (2016: $149,185m).
HSBC is obliged to return equivalent securities. Thesetransactions are conducted under terms that are usual and customaryto standard securities lending, reverse repurchase agreements andderivative margining.
220 HSBC Holdings plc Annual Report and Accounts 2017
Assets transferred
The assets pledged include transfers to third parties that donot qualify for derecognition, notably secured borrowings such asdebt securities held by counterparties as collateral underrepurchase agreements and equity securities lent under securitieslending agreements, as well as swaps of equity and debt securities.For secured borrowings, the transferred asset collateral continuesto be recognised in full and a related liability, reflecting theGroup's obligation to repurchase the assets for a fixed price at afuture date is also recognised on the balance sheet. Wheresecurities are swapped, the transferred asset continues to berecognised in full. There is no associated liability as thenon-cash collateral received is not recognised on the balancesheet. The Group is unable to use, sell or pledge the transferredassets for the duration of the transaction, and remains exposed tointerest rate risk and credit risk on these pledged assets. Withthe exception of 'Other sales' in the table below, thecounterparty's recourse is not limited to the transferredassets.
Transferred financial assets not qualifying for full derecognition and associated financial liabilities Carrying amount of: Fair value of: --------------------------------- ---------------------------------- Transferred Associated Transferred Associated Net assets liabilities assets liabilities position $m $m $m $m $m At 31 Dec 2017 Repurchase agreements 55,510 52,093 Securities lending agreements 33,878 3,324 Other sales (recourse to transferred assets only) 2,387 2,388 2,377 2,378 (1) ------------------------- ---------------- --------------- ---------------- ---------------- --------- At 31 Dec 2016 ------------------------- ---------------- --------------- ---------------- ---------------- ------------ Repurchase agreements 40,364 39,568 Securities lending agreements 3,324 2,655 ------------------------- ---------------- --------------- ---------------- ---------------- ------------ Other sales (recourse to transferred assets only) 2,441 2,466 2,455 2,458 (3) ------------------------- ---------------- --------------- ---------------- ---------------- --------- 17 Interests in associates and joint ventures ------------------------------------------
Associates
At 31 December 2017, the carrying amount of HSBC's interests inassociates was $22,577m (2016: $19,874m).
Principal associates of HSBC 2017 2016 ------------------- --------------------- Carrying Fair Carrying Fair amount value(1) amount value(1) $m $m $m $m -------- --------- -------- --------- Bank of Communications Co., Limited 18,057 10,491 15,765 10,207 The Saudi British Bank 3,618 4,320 3,280 3,999 ------------------------------------- -------- --------- -------- --------- 1 Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy). At 31 Dec 2017 --------------------------------------------------------- Country of HSBC's incorporation and Principal interest Footnote principal place of business activity % -------- Bank of Communications Co., Limited 1 PRC Banking services 19.03 The Saudi British Bank Saudi Arabia Banking services 40.00 ------------------------------------ -------- ---------------------------- ---------------- --------- 1 People's Republic of China.
A list of all associates and joint ventures is set out on page258.
Bank of Communications Co., Limited
The Group's significant influence in Bank of Communications Co.,Limited ('BoCom') was established via representation on BoCom'sboard of directors and a technical cooperation and exchangeprogramme. Under this programme, a number of HSBC staff have beenseconded to assist in the maintenance of BoCom's financial andoperating policies.
Impairment testing
At 31 December 2017, the fair value of HSBC's investment inBoCom had been below the carrying amount for approximately 68months. As a result, the Group performed an impairment test on thecarrying amount of the investment in BoCom, which confirmed therewas no impairment at 31 December 2017.
At 31 Dec 2017 At 31 Dec 2016 ---------------------------- ------------------------------ Fair Fair VIU Carrying value value VIU Carrying value value $bn $bn $bn $bn $bn $bn Bank of Communications Co., Limited 18.3 18.1 10.5 16.1 15.8 10.2 ------------------------------------ ---- -------------- ------ ---- -------------- ------ HSBC Holdings plc Annual Report and Accounts 2017 221
Notes on the Financial Statements
Basis of recoverable amount
The impairment test was performed by comparing the recoverableamount of BoCom, determined by a value in use ('VIU') calculation,with its carrying amount. The VIU calculation uses discounted cashflow projections based on management's estimates of earnings. Cashflows beyond the short to medium term are extrapolated inperpetuity using a long-term growth rate to derive a terminalvalue, which comprises the majority of VIU. An imputed capitalmaintenance charge ('CMC') is calculated to reflect expectedregulatory capital requirements, and is deducted from forecast cashflows. The principal inputs to the CMC calculation includeestimates of asset growth, the ratio of risk-weighted assets tototal assets, and the expected minimum regulatory capitalrequirements. An increase in the CMC as a result of a change tothese principal inputs would reduce VIU. Additionally, managementconsiders other factors (including qualitative factors) to ensurethat the inputs to the VIU calculation remain appropriate.Significant management judgement is required in estimating thefuture cash flows of BoCom.
Key assumptions in value in use calculation
We used a number of assumptions in our VIU calculation:
-- Long-term profit growth rate of 3% (2016: 5%) for periods after 2020, which does not exceed forecast GDP growth in mainland China and is within the range forecast by external analysts. -- Long-term asset growth rate of 3% (2016: 4%) for periods after 2020, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%. -- Discount rate of 11.85% (2016: 13.0%), which is based on a capital asset pricing model ('CAPM') calculation for BoCom, using market data. Management also compares rates derived from the CAPM with discount rates from external sources. The discount rate used was within the range of 10.2% to 13.4% (2016: 10.2% to 15.0%) indicated by external sources. -- Loan impairment charge as a percentage of customer advances: a range from 0.66% to 0.82% (2016: 0.72% to 0.87%) in the short to medium term, largely based on forecasts disclosed by external analysts. For periods after 2020, the ratio is 0.70% (2016: 0.70%), slightly higher than the historical average. -- Risk-weighted assets as a percentage of total assets: 62% (2016: 62%) for all forecast periods. This is consistent with the forecasts disclosed by external analysts. -- Cost-income ratio: ranges from 37.1% to 38.0% (2016: 40.0%) in the short to medium term. This is slightly higher than the forecasts disclosed by external analysts. The long-term profit growth rate, long-term asset growth rateand discount rate assumptions were updated in 2017 to better alignwith market practice when setting long-term assumptions in VIUcalculations. The long-term profit growth rate was set at the lowerend of the range forecast by external analysts and there was acorresponding change to the long-term asset growth rate. Thesechanges reduced management's uncertainty in respect of estimatedfuture cash flows and accordingly the discount rate was set basedon CAPM with no adjustment for uncertainty in future cashflows.
The following table shows the change to each key assumption inthe VIU calculation that on its own would reduce the headroom tonil.
Key assumption Changes to key assumption to reduce headroom to nil -- -- Long-term profit growth rate Decrease by 11 basis points -- -- Long-term asset growth rate Increase by 10 basis points -- -- Discount rate Increase by 13 basis points -- -- Loan impairment charge as a percentage of customer advances Increase by 2 basis points -- -- Risk-weighted assets as a percentage of total assets Increase by 63 basis points -- -- Cost-income ratio Increase by 46 basis points ============================================================ ===================================================
The following table illustrates the effect on VIU of reasonablypossible changes to key assumptions. This reflects the sensitivityof the VIU to each key assumption on its own, and it is possiblethat more than one favourable and/or unfavourable change will occurat the same time. The selected rates of reasonably possible changesto key assumptions is largely based on external analysts' forecastswhich can change period to period.
Sensitivity of VIU to reasonably possible changes in key assumptions Favourable change Unfavourable change ---------------------------------------- ------------------------------------------ Increase Decrease in VIU VIU In VIU VIU bps $bn $bn bps $bn $bn At 31 Dec 2017 ------------------------------------------------------------ --------------------- -------- ---- --------------------- -------- ---- Long-term profit growth rate 200 6.6 24.9 - - 18.3 -------- ---- Long-term asset growth rate (20) 0.5 18.9 200 (7.1) 11.2 -------- ---- --------------------- Discount rate (35) 0.7 19.1 65 (1.2) 17.1 -------- ---- --------------------- 2017-20: 0.71% 2017-20: 0.90% Loan impairment charge as a percentage of customer advances 2021 onwards: 0.70% 0.1 18.5 2021 onwards: 0.77% (1.3) 17.0 -------- ---- --------------------- Risk-weighted assets as a percentage of total assets (60) 0.2 18.6 30 (0.1) 18.2 -------- ---- Cost-income ratio (173) 1.5 19.8 - - 18.3 ------------------------------------------------------------ --------------------- -------- ---- --------------------- -------- ---- At 31 Dec 2016 ------------------------------------------------------------ --------------------- -------- ---- --------------------- -------- ---- Long-term profit growth rate - - 16.1 (150) (3.3) 12.8 Long-term asset growth rate (80) 1.8 17.8 - - 16.1 Discount rate (100) 2.3 18.4 - - 16.1 2016-19: 0.93% Loan impairment charge as a percentage of customer advances - - 16.1 2020 onwards: 0.80% (1.1) 15.0 Risk-weighted assets as a percentage of total assets (30) 0.1 16.2 170 (0.6) 15.5 Cost income ratio (170) 0.9 17.0 250 (1.4) 14.7 ------------------------------------------------------------ --------------------- -------- ---- --------------------- -------- ---- 222 HSBC Holdings plc Annual Report and Accounts 2017
Considering the interrelationship of the changes set out in thetable above, management estimates that the reasonably possiblerange of VIU is $14.7bn to $21.1bn (2016: $10.8bn to $19.0bn).
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December.For the year ended 31 December 2017, HSBC included the associate'sresults on the basis of financial statements for the 12 monthsended 30 September 2017, taking into account changes in thesubsequent period from 1 October 2017 to 31 December 2017 thatwould have materially affected the results.
Selected balance sheet information of BoCom At 30 Sep 2017 2016 $m $m Cash and balances at central banks 146,029 137,844 Loans and advances to banks and other financial institutions 120,403 101,436 Loans and advances to customers 662,706 566,126 Other financial assets 386,067 311,207 Other assets 58,202 48,922 --------- --------- Total assets 1,373,407 1,165,535 ------------------------------------------------------------- --------- --------- Deposits by banks and other financial institutions 366,993 297,442 Customer accounts 747,882 680,915 Other financial liabilities 123,751 69,954 Other liabilities 32,568 27,860 --------- --------- Total liabilities 1,271,194 1,076,171 ------------------------------------------------------------- --------- --------- Total equity 102,213 89,364 ------------------------------------------------------------- --------- --------- Reconciliation of BoCom's total shareholders' equity to the carrying amount in HSBC's consolidated financial statements At 30 Sep 2017 2016 $m $m HSBC's share of total shareholders' equity 17,551 15,285 Goodwill and other intangible assets 506 480 ------------------------------------------------------------------------------ ----------- ---------- Carrying amount 18,057 15,765 ------------------------------------------------------------------------------ ----------- ---------- Selected income statement information of BoCom For the 12 months ended 30 Sep 2017 2016 $m $m Net interest income 19,080 20,614 Net fee and commission income 5,698 5,493 Loan impairment charges (4,286) (4,284)
Depreciation and amortisation (1,342) (1,216) Tax expense (2,234) (2,800) Profit for the year 10,288 10,151 --------------------------------- ------------- --- ------------ Other comprehensive income (624) 875 --------------------------------- ------------- ------------ Total comprehensive income 9,664 11,026 --------------------------------- ------------- --- ------------ Dividends received from BoCom 565 580 --------------------------------- ------------- --- ------------ Summarised aggregate financial information for all associates excluding BoCom 2017 2016 $m $m Carrying amount 4,520 4,109 HSBC's share of: -------------------------------------------------------------- -------- -------- - total assets 20,625 20,757 -------------------------------------------------------------- - total liabilities 16,119 16,661 -------------------------------------------------------------- - revenues 1,051 923 -------------------------------------------------------------- - profit or loss from continuing operations 487 454 -------------------------------------------------------------- -------- --------
Joint ventures
At 31 December 2017, the carrying amount of HSBC's interests injoint ventures was $167m (2016: $155m).
Associates and joint ventures
For the year ended 31 December 2017, HSBC's share of associates'and joint ventures' tax on profit was $440m (2016: $542m). This isincluded within 'Share of profit in associates and joint ventures'in the 'Consolidated income statement'.
HSBC Holdings plc Annual Report and Accounts 2017 223
Notes on the Financial Statements
Movements in interests in associates and joint ventures 2017 2016 Footnote $m $m --------------------------------------------------------------------- -------- ------ ------ At 1 Jan 20,029 19,139 Additions 60 76 Disposals (67) (25) Share of results 2,375 2,354 Dividends (740) (751) Exchange differences 1,144 (1,115) Share of other comprehensive income of associates and joint ventures (43) 54 Other movements (14) 297 At 31 Dec 1 22,744 20,029 --------------------------------------------------------------------- -------- ------ ------ 1 Includes goodwill of $521m (2016: $488m). 18 Investments in subsidiaries --------------------------- Principal subsidiaries of HSBC Holdings At 31 Dec 2017 ------------------------------------------------------------------------------------ Country of incorporation or registration HSBC's interest % Share class Europe -------------------------------- -------------------------------- ----------------- ------------------------------- GBP1 Ordinary and Preferred Ordinary, $0.01 Non-cumulative HSBC Bank plc England and Wales 100 third Dollar Preference Shares HSBC France France 99.99 EUR5 Actions ----------------- HSBC Assurances Vie (France) France 99.99 287.50 EUR Ordinary shares -------------------------------- ----------------- HSBC Private Banking Holdings (Suisse) SA Switzerland 100 CHF1,000 Ordinary ----------------- HSBC Trinkaus & Burkhardt AG Germany 80.67 Stückaktien no par value ----------------- Asia -------------------------------- -------------------------------- ----------------- ------------------------------- Hang Seng Bank Limited Hong Kong 62.14 HK$5 Ordinary ----------------- HSBC Bank Australia Limited Australia 100 Ordinary no par value ----------------- HSBC Bank (China) Company Limited PRC(4) 100 CNY1 Ordinary ----------------- HSBC Bank Malaysia Berhad Malaysia 100 RM0.50 Ordinary ----------------- HSBC Bank (Taiwan) Limited Taiwan 100 TWD10 Ordinary ----------------- HSBC Life (International) Limited Bermuda 100 HK$1 Ordinary ----------------- The Hongkong and Shanghai Ordinary no par value, CIP(1) Banking Corporation Limited Hong Kong 100 and NIP(2) ----------------- ------------------------------- HSBC Bank (Singapore) Limited Singapore 100 SGD100 Ordinary -------------------------------- -------------------------------- ----------------- ------------------------------- Middle East and North Africa -------------------------------- -------------------------------- ----------------- ------------------------------- HSBC Bank Middle East Limited United Arab Emirates 100 $1 Ordinary and $1 CRP(3) -------------------------------- ----------------- HSBC Bank Egypt S.A.E. Egypt 94.54 EGP84 Ordinary ----------------- North America -------------------------------- -------------------------------- ----------------- ------------------------------- Common no par value and HSBC Bank Canada Canada 100 Preference no par value -------------------------------- -------------------------------- ----------------- ------------------------------- $100 Common and $0.01 HSBC Bank USA, N.A. USA 100 Preference -------------------------------- -------------------------------- ----------------- ------------------------------- HSBC Securities (USA) Inc. USA 100 $0.05 Common ----------------- Latin America -------------------------------- -------------------------------- ----------------- ------------------------------- HSBC Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC Mexico 99.99 MXN2 Ordinary -------------------------------- -------------------------------- ----------------- ------------------------------- 1 Cumulative Irredeemable Preference shares. 2 Non-cumulative Irredeemable Preference shares. 3 Cumulative Redeemable Preference shares. 4 People's Republic of China.
Details of the debt, subordinated debt and preference sharesissued by the principal subsidiaries to parties external to theGroup are included in Notes 24 'Debt securities in issue', 27'Subordinated liabilities' and 30 'Non-controlling interests',respectively.
A list of all related undertakings is set out on pages 252 to261. The principal countries of operation are the same as thecountries of incorporation except for HSBC Life (International)Limited, which operates mainly in Hong Kong.
HSBC is structured as a network of regional banks and locallyincorporated regulated banking entities. Each bank is separatelycapitalised in accordance with applicable prudential requirementsand maintains a capital buffer consistent with the Group's riskappetite for the relevant country or region. HSBC's capitalmanagement process is incorporated in the Annual Operating Plan,which is approved by the Board.
HSBC Holdings is the primary provider of equity capital to itssubsidiaries and also provides them with non-equity capital wherenecessary. These investments are substantially funded by HSBCHoldings' issuance of equity and non-equity capital, and by profitretention. The reduction in HSBC Holdings investments insubsidiaries of $2,920m during the year (2016: $1,920m) is drivenby $4,070m return of capital from subsidiaries (2016: $3,898m),$242m intra-group disposals (2016: $0m), $352m of other movementsincluding provisions (2016: $95m) partially offset by $1,744m ofnew capital injections (2016: $2,073m).
224 HSBC Holdings plc Annual Report and Accounts 2017
As part of its capital management process, HSBC Holdings seeksto maintain a balance between the composition of its capital andits investment in subsidiaries. Subject to this, there is nocurrent or foreseen impediment to HSBC Holdings' ability to providefunding for such investments. During 2017, consistent with theGroup's capital plan, the Group's subsidiaries did not experienceany significant restrictions on paying dividends or repaying loansand advances. Also, there are no foreseen restrictions envisagedwith regard to planned dividends or payments. However, the abilityof subsidiaries to pay dividends or advance monies to HSBC Holdingsdepends on, among other things, their respective local regulatorycapital and banking requirements, exchange controls, statutoryreserves, and financial and operating performance.
The amount of guarantees by HSBC Holdings in favour of otherGroup entities is set out in Note 32.
Information on structured entities consolidated by HSBC whereHSBC owns less than 50% of the voting rights is included in Note 19'Structured entities'. In each of these cases, HSBC controls andconsolidates an entity when it is exposed, or has rights, tovariable returns from its involvement with the entity and has theability to affect those returns through its power over theentity.
Subsidiaries with significant non-controlling interests 2017 2016 Hang Seng Bank Limited -------------------------------------------------------------------------------------- --------- ----------- Proportion of ownership interests and voting rights held by non-controlling interests 37.86% 37.86% Place of business Hong Kong Hong Kong --------- --------- $m $m Profit attributable to non-controlling interests 997 814 Accumulated non-controlling interests of the subsidiary 6,233 5,792 Dividends paid to non-controlling interests 594 811 Summarised financial information: -------------------------------------------------------------------------------------- --------- --------- - total assets 186,638 175,242 - total liabilities 169,275 159,035 - net operating income before loan impairment 4,556 3,937 - profit for the year 2,632 2,148 -------------------------------------------------------------------------------------- - total comprehensive income for the year 2,895 2,044 -------------------------------------------------------------------------------------- --------- --------- 19 Structured entities -------------------
HSBC is mainly involved with both consolidated andunconsolidated structured entities through the securitisation offinancial assets, conduits and investment funds, established eitherby HSBC or a third party.
Consolidated structured entities
Total assets of HSBC's consolidated structured entities, split by entity type HSBC Conduits Securitisations managed funds Other Total $bn $bn $bn $bn $bn ------------------- ----------- ------------------- ----------------- ------ ------ At 31 Dec 2017 12.9 4.8 7.0 3.2 27.9 At 31 Dec 2016 15.8 5.7 4.8 3.7 30.0 ------------------- ----------- ------------------- ----------------- ------ ------
Conduits
HSBC has established and manages two types of conduits:securities investment conduits ('SICs') and multi-sellerconduits.
Securities investment conduits
The SICs purchase highly rated ABSs to facilitate tailoredinvestment opportunities.
-- Solitaire - At 31 December 2017, Solitaire, HSBC's principal SIC held $3.2bn of ABSs (2016: $4.7bn). These are included within the disclosures of ABSs on page 100. It is currently funded entirely by commercial paper ('CP') issued to HSBC. Although HSBC continues to provide a liquidity facility, Solitaire has no need to draw on it as long as HSBC purchases its issued CP, which HSBC intends to do for the foreseeable future. At 31 December 2017, HSBC held $4.6bn of CP (2016: $6.1bn). -- Mazarin, Barion and Malachite - All three SICs are now funded by medium-term notes, and are no longer funded by repurchase agreements. HSBC's primary exposure to Mazarin, Barion and Malachite is represented by the amortised cost of the debt required to support the non-cash assets of the vehicles. At 31 December 2017, this amounted to $0.9bn (2016: $1.3bn). For all three SICs first loss protection is provided through the capital notes issued by these vehicles, which are held substantially by third parties. Multi-seller conduit
HSBC's multi-seller conduit was established to provide access toflexible market-based sources of finance for its clients.Currently, HSBC bears risk equal to the transaction-specificfacility offered to the multi-seller conduit, amounting to $15.7bnat 31 December 2017 (2016: $15.2bn (restated)). First lossprotection is provided by the originator of the assets, and not byHSBC, through transaction-specific credit enhancements. A layer ofsecondary loss protection is provided by HSBC in the form ofprogramme-wide enhancement facilities.
Securitisations
HSBC uses structured entities to securitise customer loans andadvances it originates in order to diversify its sources of fundingfor asset origination and capital efficiency purposes. The loansand advances are transferred by HSBC to the structured entities forcash or synthetically through credit default swaps, and thestructured entities issue debt securities to investors.
HSBC managed funds
HSBC has established a number of money market and non-moneymarket funds. Where it is deemed to be acting as principal ratherthan agent in its role as investment manager, HSBC controls thesefunds.
HSBC Holdings plc Annual Report and Accounts 2017 225
Notes on the Financial Statements
Other
HSBC has also entered into a number of transactions in thenormal course of business which include asset and structuredfinance transactions where it has control of the structured entity.In addition, HSBC is deemed to control a number of third-partymanaged funds through its involvement as a principal in thefunds.
Unconsolidated structured entities
The term 'unconsolidated structured entities' refers to allstructured entities not controlled by HSBC. The Group enters intotransactions with unconsolidated structured entities in the normalcourse of business to facilitate customer transactions and forspecific investment opportunities.
Nature and risks associated with HSBC interests in unconsolidated structured entities HSBC Non-HSBC Securitisations managed funds managed funds Other Total Total asset values of the entities ($m) ----------------------------------------------- 0 - 500 78 321 930 210 1,539 ----------------------------------------------- 500 - 2,000 6 56 578 3 643 ----------------------------------------------- 2,000 - 5,000 - 17 235 - 252 ----------------------------------------------- 5,000 - 25,000 2 10 104 1 117 ----------------------------------------------- 25,000+ - 2 11 - 13 ----------------------------------------------- Number of entities at 31 Dec 2017 86 406 1,858 214 2,564 ----------------------------------------------- --------------- ------------- ------------- ----- -----
$bn $bn $bn $bn $bn ----------------------------------------------- --------------- ------------- ------------- ----- ----- Total assets in relation to HSBC's interests in the unconsolidated structured entities 4.0 9.1 9.3 4.1 26.5 * trading assets - 0.2 0.2 2.4 2.8 ----------------------------------------------- * financial assets designated at fair value - 8.0 8.3 - 16.3 * loans and advances to banks - - - 0.1 0.1 * loans and advances to customers 4.0 - - 1.1 5.1 * financial investments - 0.9 0.8 0.1 1.8 * other assets - - - 0.4 0.4 Total liabilities in relation to HSBC's interests in the unconsolidated structured entities - - - 0.3 0.3 ----------------------------------------------- --------------- ------------- ------------- ----- ----- - other liabilities - - - 0.3 0.3 ----------------------------------------------- --------------- ------------- ------------- ----- ----- Other off balance sheet commitments - 0.1 2.2 0.3 2.6 ----------------------------------------------- --------------- ------------- ------------- ----- ----- HSBC's maximum exposure at 31 Dec 2017 4.0 9.2 11.5 4.4 29.1 ----------------------------------------------- --------------- ------------- ------------- ----- ----- Total asset values of the entities ($m) ----------------------------------------------- ----------------- --------------- --------------- ------- ------- 0 - 500 93 374 1,104 95 1,666 ----------------------------------------------- 500 - 2,000 10 43 498 5 556 ----------------------------------------------- 2,000 - 5,000 - 22 187 2 211 ----------------------------------------------- 5,000 - 25,000 - 8 72 2 82 ----------------------------------------------- 25,000+ - 1 4 1 6 ----------------------------------------------- ------------- ----- Number of entities at 31 Dec 2016 103 448 1,865 105 2,521 ----------------------------------------------- --------------- ------------- ------------- ----- ----- $bn $bn $bn $bn $bn --------------- ------------- ------------- ----- ----- Total assets in relation to HSBC's interests in the unconsolidated structured entities 2.4 7.1 8.3 6.2 24.0 * trading assets - 0.4 0.1 2.1 2.6 * financial assets designated at fair value - 5.9 7.5 - 13.4 * loans and advances to banks - - - 0.4 0.4 * loans and advances to customers 2.4 - - 3.2 5.6 * financial investments - 0.8 0.7 0.2 1.7 * other assets - - - 0.3 0.3 --------------- ------------- ------------- ----- ----- Total liabilities in relation to HSBC's interests in the unconsolidated structured entities - - - 0.2 0.2 - other liabilities - - - 0.2 0.2 Other off balance sheet commitments - - 2.7 0.1 2.8 ----------------------------------------------- --------------- ------------- ------------- ----- ----- HSBC's maximum exposure at 31 Dec 2016 2.4 7.1 11.0 6.3 26.8 ----------------------------------------------- --------------- ------------- ------------- ----- -----
The maximum exposure to loss from HSBC's interests inunconsolidated structured entities represents the maximum loss itcould incur as a result of its involvement with these entitiesregardless 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 ofhedging and collateral arrangements entered into to mitigate HSBC'sexposure to loss.
Securitisations
HSBC has interests in unconsolidated securitisation vehiclesthrough holding notes issued by these entities. In addition, HSBChas investments in ABSs issued by third-party structured entitiesas set out on page 100.
226 HSBC Holdings plc Annual Report and Accounts 2017
HSBC managed funds
HSBC establishes and manages money market funds and non-moneymarket investment funds to provide customers with investmentopportunities. Further information on funds under management isprovided on page 60.
HSBC, as fund manager, may be entitled to receive management andperformance fees based on the assets under management. HSBC mayalso retain units in these funds.
Non-HSBC managed funds
HSBC purchases and holds units of third-party managed funds inorder to facilitate business and meet customer needs. In additionto entities, asset and liability classes disclosed above HSBCenters into derivative contracts with Non-HSBC managed funds. Theseinterests arise in the normal course of business for thefacilitation of third-party transactions and risk managementsolutions. Note 14 provides information on derivatives entered intoby HSBC.
Other
HSBC has established structured entities in the normal course ofbusiness, such as structured credit transactions for customers, toprovide finance to public and private sector infrastructureprojects, and for asset and structured finance transactions. Inaddition to entities, asset and liability classes disclosed aboveHSBC enters into derivative contracts with Other StructuredEntities. These interests arise in the normal course of businessfor the facilitation of third-party transactions and riskmanagement solutions. Note 14 provides information on derivativesentered into by HSBC.
HSBC sponsored structured entities
The amount of assets transferred to and income received fromsuch sponsored entities during 2017 and 2016 were notsignificant.
20 Goodwill and intangible assets ------------------------------ 2017 2016 Footnote $m $m Goodwill 13,588 12,330 Present value of in-force long-term insurance business 6,610 6,502 Other intangible assets 1 3,255 2,514 ------------------------------------------------------- -------- ------ ------ At 31 Dec 23,453 21,346 ------------------------------------------------------- -------- ------ ------ 1 Included within other intangible assets is internally generated software with a net carrying value of $2,641m (2016: $1,982m). Movement analysis of goodwill 2017 2016 $m $m ------ ------ Gross amount ------------------------------ ------ ------ At 1 Jan 21,445 22,187 Exchange differences 1,490 (562) Reclassified to held for sale - (183) Other (33) 3 At 31 Dec 22,902 21,445 Accumulated impairment losses ------------------------------ ------ ------ At 1 Jan (9,115) (5,893) ------------------------------ Impairment losses - (3,240) ------------------------------ ------ ------ Exchange differences (327) - ------------------------------ ------ ------ Other 128 18 At 31 Dec (9,314) (9,115) ------------------------------ ------ ------
Net carrying amount at 31 Dec 13,588 12,330 ------------------------------ ------ ------
Impairment testing
The Group's impairment test in respect of goodwill allocated toeach cash generating unit ('CGU') is performed as at 1 July eachyear. A review for indicators of impairment is undertaken at eachsubsequent quarter-end and as at 31 December 2017. No indicators ofimpairment were identified as part of these reviews.
Basis of the recoverable amount
The recoverable amount of all CGUs to which goodwill has beenallocated was equal to its value in use ('VIU') at each respectivetesting date for 2016 and 2017. For each CGU, the VIU is calculatedby discounting management's cash flow projections for the CGU. Thekey assumptions used in the VIU calculation for each significantCGU are discussed below.
HSBC Holdings plc Annual Report and Accounts 2017 227
Notes on the Financial Statements
Key assumptions in VIU calculation Nominal growth Nominal rate beyond growth rate beyond Goodwill at Discount initial cash flow Goodwill at Discount initial cash flow 1 Jul 2017 rate projections 1 Jul 2016 rate projections Footnote $m % % $m % % Cash-generating unit Europe ------------------- -------- ----------- -------- ----------------- ----------- -------- ------------------ RBWM 3,508 8.9 3.7 3,446 8.9 3.6 CMB 2,570 9.9 3.6 2,517 9.7 3.8 Global ------------------- -------- ----------- -------- ----------------- ----------- -------- ------------------ GB&M 1 4,000 10.6 5.8 n/a n/a n/a ------------------- -------- ----------- -------- ----------------- ----------- -------- ------------------ 1 Subsequent to the 1 July 2016 annual test the CGU for Global Banking and Markets was amended from a regional to a global basis. The first formal impairment test for this CGU was performed as at 1 July 2017.
At 1 July 2017, aggregate goodwill of $3,059m (1 July 2016:$3,025m) had been allocated to CGUs that were not consideredindividually significant. The Group's CGUs do not carry on theirbalance sheets any significant intangible assets with indefiniteuseful lives, other than goodwill.
Management's judgement in estimating the cash flows of a CGU
The cash flow projections for each CGU are based on plansapproved by the GMB. For the goodwill impairment test conducted at1 July 2017, management's cash flow projections until the end of2021 were used.
Discount rate
The rate used to discount the cash flows is based on the cost ofcapital assigned to each CGU, which is derived using a capitalasset pricing model ('CAPM'). CAPM depends on a number of inputsreflecting financial and economic variables, including therisk-free rate and a premium to reflect the inherent risk of thebusiness being evaluated. These variables are based on the market'sassessment of the economic variables and management's judgement.The discount rates for each CGU are refined to reflect the rates ofinflation for the countries within which the CGU operate. Inaddition, for the purposes of testing goodwill for impairment,management supplements this process by comparing the discount ratesderived using the internally generated CAPM, with cost of capitalrates produced by external sources for businesses operating insimilar markets.
Nominal long-term growth rate
The long-term growth rate is used to extrapolate the cash flowsin perpetuity because of the long-term perspective within the Groupof business units making up the CGUs. These growth rates reflectGDP and inflation for the countries within which the CGU operatesor derives revenue from.
Sensitivities of key assumptions in calculating VIU
At 1 July 2017, none of the CGUs were sensitive to reasonablypossible adverse changes in key assumptions supporting therecoverable amount. In making an estimate of reasonably possiblechanges to assumptions, management considers the available evidencein respect of each input to the model such as the external range ofdiscount rates observable, historical performance against forecastand risks attaching to the key assumptions underlying cash flowprojections.
Present value of in-force long-term insurance business
When calculating the present value of in-force insurancebusiness ('PVIF'), expected cash flows are projected afteradjusting for a variety of assumptions made by each insuranceoperation to reflect local market conditions and management'sjudgement of future trends, and uncertainty in the underlyingassumptions is reflected by applying margins (as opposed to a costof capital methodology). Variations in actual experience andchanges to assumptions can contribute to volatility in the resultsof the insurance business.
Actuarial Control Committees of each key insurance entity meeton a quarterly basis to review and approve PVIF assumptions. Allchanges to non-economic assumptions, economic assumptions that arenot observable and model methodology must be approved by theActuarial Control Committee.
Movements in PVIF 2017 2016 Footnotes $m $m PVIF at 1 Jan 6,502 5,685 Change in PVIF of long-term insurance business 24 902 - value of new business written during the year 919 900 - expected return 1 (599) (532) - assumption changes and experience variances (see below) (280) 513 - other adjustments (16) 21 ----- ----- Transfer of assets classified as held for sale 2 - (45) Exchange differences and other 84 (40) PVIF at 31 Dec 6,610 6,502 ---------------------------------------------------------- --------- ----- ----- 1 'Expected return' represents the unwinding of the discount rate and reversal of expected cash flows for the period. 2 Relates to the Brazilian insurance operations which were classified as held for sale in 2015. 228 HSBC Holdings plc Annual Report and Accounts 2017
Assumption changes and experience variances
Included within this line item are:
-- $(98)m (2016: $279m), directly offsetting regulatory-driven changes to the valuation of liabilities under insurance contracts. -- $(141)m (2016: $301m), 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. -- $(41)m (2016: $(67)m), driven by other assumptions changes and experience variances. Key assumptions used in the computation of PVIF for main lifeinsurance operations
Economic assumptions are set in a way that is consistent withobservable market values. The valuation of PVIF is sensitive toobserved market movements and the impact of such changes isincluded in the sensitivities presented below.
2017 2016 -------------------- -------------------- Hong Kong France(1) Hong Kong France(1) % % % % Weighted average risk-free rate 2.02 1.50 2.09 0.99 Weighted average risk discount rate 6.20 2.20 6.34 1.84 ------------------------------------ --------- --------- --------- --------- Expense inflation 3.00 1.48 3.00 1.66 ------------------------------------ --------- --------- --------- --------- 1 For 2017, the calculation of France's PVIF assumes a risk discount rate of 2.20% (2016: 1.84%) plus a risk margin of $80m (2016: $101m).
Sensitivity to changes in economic assumptions
The Group sets the risk discount rate applied to the PVIFcalculation by starting from a risk-free rate curve and addingexplicit allowances for risks not reflected in the best estimatecash flow modelling. Where the insurance operations provide optionsand guarantees to policyholders the cost of these options andguarantees is an explicit reduction to PVIF, unless it is alreadyallowed for as an explicit addition to the technical provisionsrequired by regulators. See page 115 for further details of theseguarantees and the impact of changes in economic assumptions on ourinsurance manufacturing subsidiaries.
Sensitivity to changes in non-economic assumptions
Policyholder liabilities and PVIF are determined by reference tonon-economic assumptions including mortality and/or morbidity,lapse rates and expense rates. See page 116 for further details onthe impact of changes in non-economic assumptions on our insurancemanufacturing operations.
21 Prepayments, accrued income and other assets -------------------------------------------- 2017 2016 $m $m -------------------------------------------------------------------- ------ ------ Prepayments and accrued income 7,929 7,335 ------ Assets held for sale 781 4,389 -------------------------------------------------------------------- ------ ------ Bullion 13,128 15,406 Endorsem*nts and acceptances 9,750 8,574 Reinsurers' share of liabilities under insurance contracts (Note 3) 2,471 1,820 Employee benefit assets (Note 5) 8,752 4,714 Other accounts 14,353 12,298 Property, plant and equipment 10,027 9,373 At 31 Dec 67,191 63,909 -------------------------------------------------------------------- ------ ------
Prepayments, accrued income and other assets include $30,431m(2016: $26,927m) of financial assets, the majority of which aremeasured at amortised cost.
22 Trading liabilities ------------------- 2017 2016 Footnotes $m $m ------------------------------------------------------ --------- ------- ------- Deposits by banks 1 23,297 24,827 Customer accounts 1, 2 52,595 45,085 Other debt securities in issue (Note 24) 3 40,734 32,656 Other liabilities - net short positions in securities 67,735 51,123 At 31 Dec 184,361 153,691 ------------------------------------------------------ --------- ------- ------- 1 'Deposits by banks' and 'Customer accounts' include repos, settlement accounts, stock lending, cash collateral and margin accounts relating to trading activities. 2 Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation, a US government agency, up to $250,000 per depositor. 3 'Other debt securities in issue' comprises structured notes issued by HSBC for which market risks are actively managed as part of trading portfolios.
At 31 December 2017, the cumulative amount of change in fairvalue attributable to changes in HSBC's credit risk was a loss of$543m (2016: gain of $2m).
HSBC Holdings plc Annual Report and Accounts 2017 229
Notes on the Financial Statements
23 Financial liabilities designated at fair value ---------------------------------------------- HSBC 2017 2016 $m $m ---------------------------------------------------- ------ ------ Deposits by banks and customer accounts 145 135 Liabilities to customers under investment contracts 5,635 6,002 Debt securities in issue (Note 24) 64,359 57,112 Subordinated liabilities (Note 27) 23,831 23,172 Preferred securities (Note 27) 459 411 At 31 Dec 94,429 86,832 ---------------------------------------------------- ------ ------
The carrying amount of financial liabilities designated at fairvalue was $5,343m more than the contractual amount at maturity(2016: $4,413m more). The cumulative own credit loss recognised was$4,107m (2016: loss of $1,672m).
HSBC Holdings 2017 2016 $m $m ----------------------------------- ------ ------ Debt securities in issue (Note 24) 17,496 16,766 Subordinated liabilities (Note 27) 13,394 13,347 ----------------------------------- ------ At 31 Dec 30,890 30,113 ----------------------------------- ------ ------
The carrying amount of financial liabilities designated at fairvalue was $3,370m more than the contractual amount at maturity
(2016: $2,681m more). The cumulative amount of change in fairvalue attributable to changes in credit risk was a loss of
$2,209m (2016: loss of $1,202m).
24 Debt securities in issue ------------------------ HSBC 2017 2016 $m $m ----------------------------------------------------------- ------- ------- Bonds and medium-term notes 146,539 133,721 Other debt securities in issue 23,100 21,962 Total debt securities in issue 169,639 155,683 ----------------------------------------------------------- ------- ------- Included within: ----------------------------------------------------------- ------- ------- - trading liabilities (Note 22) (40,734) (32,656) ----------------------------------------------------------- - financial liabilities designated at fair value (Note 23) (64,359) (57,112) ----------------------------------------------------------- At 31 Dec 64,546 65,915 ----------------------------------------------------------- ------- ------- HSBC Holdings 2017 2016 $m $m ----------------------------------------------------------- ------- Debt securities 51,754 38,571 ------- ------- Included within: ----------------------------------------------------------- ------- ------- - financial liabilities designated at fair value (Note 23) (17,496) (16,766) ------- ------- At 31 Dec 34,258 21,805 ----------------------------------------------------------- ------- ------- 25 Accruals, deferred income and other liabilities ----------------------------------------------- 2017 2016 $m $m --------------------------------------------- ------ ------ Accruals and deferred income 11,521 10,770 Endorsem*nts and acceptances 9,746 8,567 Employee benefit liabilities (Note 5) 2,152 2,681 Liabilities of disposal groups held for sale 1,286 2,790 --------------------------------------------- ------ ------ Other liabilities 21,202 19,483 At 31 Dec 45,907 44,291 --------------------------------------------- ------ ------
Accruals, deferred income and other liabilities include $34,048m(2016: $30,932m) of financial liabilities, the majority of whichare measured at amortised cost.
230 HSBC Holdings plc Annual Report and Accounts 2017 26 Provisions ---------- Legal proceedings Restructuring Contractual and regulatory Customer Other costs commitments matters remediation provisions Total $m $m $m $m $m $m At 1 Jan 2017 551 298 2,436 1,124 364 4,773 Additions 204 87 829 820 280 2,220 Amounts utilised (353) (3) (850) (543) (133) (1,882) Unused amounts reversed (103) (135) (980) (52) (107) (1,377) Unwinding of discounts - (1) - - 9 8 Exchange and other movements 35 7 66 105 56 269 ----------------- ------------- ------------ ----------------- ------------ ----------- ------ At 31 Dec 2017 334 253 1,501 1,454 469 4,011 ----------------- ------------- ------------ ----------------- ------------ ----------- ------ At 1 Jan 2016 463 240 3,174 1,340 335 5,552 Additions 415 141 1,258 762 208 2,784 Amounts utilised (168) (1) (1,831) (680) (118) (2,798) Unused amounts
reversed (115) (97) (165) (94) (96) (567) Unwinding of discounts - - - - 6 6 Exchange and other movements (44) 15 - (204) 29 (204) At 31 Dec 2016 551 298 2,436 1,124 364 4,773 ----------------- ------------- ------------ ----------------- ------------ ----------- ------
Further details of 'Legal proceedings and regulatory matters'are set out in Note 34. Legal proceedings include civil court,arbitration or tribunal proceedings brought against HSBC companies(whether by way of claim or counterclaim); or civil disputes thatmay, if not settled, result in court, arbitration or tribunalproceedings. Regulatory matters refers to investigations, reviewsand other actions carried out by, or in response to the actions of,regulators or law enforcement agencies in connection with allegedwrongdoing by HSBC.
Customer remediation refers to HSBC's activities to compensatecustomers for losses or damages associated with a failure to complywith regulations or to treat customers fairly. Customer remediationis often initiated by HSBC in response to customer complaintsand/or industry developments in sales practices, and is notnecessarily initiated by regulatory action. Further details ofcustomer remediation are set out in this note.
Payment protection insurance
$1,174m (2016: $919m) relating to the estimated liability forredress in respect of the possible mis-selling of PaymentProtection Insurance ('PPI') policies in previous years. Cumulativeprovisions made since the Judicial Review ruling in the first halfof 2011 amount to $5.1bn, of which $3.9bn had been paid at 31December 2017.
An increase in provisions of $637m was recognised during theyear, primarily reflecting an adjustment to expected futurecomplaint volumes; in light of additional detail becoming availablearound the likely impact and profile of regulatory media campaignsduring the remainder of the period during which complaints could bereceived.
The estimated liability for redress is calculated on the basisof the total premiums paid by the customer plus simple interest of8% per annum (or the rate inherent in the related loan productwhere higher). The basis for calculating the redress liability isthe same for single premium and regular premium policies. Futureestimated redress levels are based on the historically observedredress per policy.
A total of 5.4 million PPI policies have been sold since 2000,generating estimated revenues of $3.3bn at 2017. The gross writtenpremiums on these policies was approximately $4.4bn.
At 31 December 2017, the estimated total complaints expected tobe received were 2.2 million, representing 41% of total policiessold. It is estimated that contact will be made with regard to 2.6million policies, representing 48% of total policies sold. Thisestimate includes inbound complaints as well as the group'sproactive contact exercise on certain policies ('outboundcontact').
The following table details the cumulative number of complaintsreceived at 31 December 2017 and the number of claims expected inthe future:
Cumulative PPI complaints received to 31 December 2017 and future claims expected Cumulative actual to Future Footnotes 31 Dec 2017 expected ------------------------------------------------------------- --------- -------------------- --------- Inbound complaints (000s of policies) 1 1,555 363 Outbound contact (000s of policies) 685 - Response rate to outbound contact 44% n/a Average uphold rate per claim 2 76% 84% Average redress per claim ($) 2,564 3,029 Complaints to Financial Ombudsman Service (000s of policies) 144 26 -------------------- --------- Average uphold rate per Financial Ombudsman Service claim 40% 47% ------------------------------------------------------------- --------- -------------------- --------- 1 Excludes invalid claims for which no PPI policy exists. 2 Claims include inbound and responses to outbound contact.
A 100,000 increase/decrease in the total inbound complaintswould increase/decrease the redress provision by approximately$194m at 2017 average exchange rates.
HSBC Holdings plc Annual Report and Accounts 2017 231
Notes on the Financial Statements
27 Subordinated liabilities ------------------------ HSBC's subordinated liabilities 2017 2016 $m $m At amortised cost 19,826 20,984 - subordinated liabilities 17,988 19,230 - preferred securities 1,838 1,754 Designated at fair value (Note 23) 24,290 23,583 - subordinated liabilities 23,831 23,172 - preferred securities 459 411 ----------------------------------- ------ ------ At 31 Dec 44,116 44,567 ----------------------------------- ------ ------ Issued by HSBC subsidiaries 15,470 16,860 Issued by HSBC Holdings 28,646 27,707 ----------------------------------- ------ ------
Subordinated liabilities rank behind senior obligations andgenerally count towards the capital base of HSBC. Capitalsecurities may be called and redeemed by HSBC subject to priornotification to the PRA and, where relevant, the consent of thelocal banking regulator. If not redeemed at the first call date,coupons payable may step up or become floating rate based oninterbank rates. On capital securities other than floating ratenotes, interest is payable at fixed rates of up to 10.176%.
The balance sheet amounts disclosed below are presented on anIFRS basis and do not reflect the amount that the instrumentscontribute to regulatory capital principally due to regulatoryamortisation and regulatory eligibility limits.
232 HSBC Holdings plc Annual Report and Accounts 2017 HSBC's subordinated liabilities in issue 2017 2016 Footnotes First call date Maturity date $m $m Additional tier 1 capital securities guaranteed by HSBC Holdings plc 1 ----------------------------------------------------- --------- ----------------- ------------- -------- -------- 10.176% non-cumulative step-up perpetual $900m preferred securities, series 2 Jun 2030 892 891 892 891 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Additional tier 1 capital securities guaranteed by HSBC Bank plc 1 ----------------------------------------------------- --------- ----------------- ------------- -------- -------- 5.862% non-cumulative step-up perpetual GBP300m preferred securities Apr 2020 459 411 5.844% non-cumulative step-up perpetual GBP700m preferred securities Nov 2031 946 863 1,405 1,274 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Tier 2 securities issued by HSBC Bank plc ----------------------------------------------------- --------- ----------------- ------------- -------- -------- $750m Undated floating rate primary capital notes Jun 1990 750 750 $500m Undated floating rate primary capital notes Sep 1990 500 500 Undated floating rate primary capital notes, $300m series 3 Jun 1992 300 300 $300m 7.65% subordinated notes - May 2025 375 372 ------- -------------------------------------------- --------- --------------- ------------- ------ ------ GBP350m 5.00% callable subordinated notes 2 Mar 2018 Mar 2023 496 466 GBP300m 6.50% subordinated notes - Jul 2023 405 369 GBP350m 5.375% callable subordinated step-up notes 3 Nov 2025 Nov 2030 584 489 GBP500m 5.375% subordinated notes - Aug 2033 912 750 GBP225m 6.25% subordinated notes - Jan 2041 303 276 GBP600m 4.75% subordinated notes - Mar 2046 802 731 5,427 5,003
------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd ----------------------------------------------------- --------- ----------------- ------------- -------- -------- Primary capital undated floating rate notes $400m (third series) Jul 1991 400 400 400 400 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Tier 2 securities issued by HSBC Bank Malaysia Berhad ----------------------------------------------------- --------- ----------------- ------------- -------- -------- MYR500m 4.35% subordinated bonds 4 Jun 2017 Jun 2022 - 112 --------- MYR500m 5.05% subordinated bonds Nov 2022 Nov 2027 123 112 ------- -------------------------------------------- ------ ------ 123 224 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Tier 2 securities issued by HSBC USA Inc. ----------------------------------------------------- --------- ----------------- ------------- -------- -------- $750m 5.00% subordinated notes - Sep 2020 748 748 ------ ------ $250m 7.20% subordinated debentures - Jul 2097 221 220 -------------------------------------------- ------ ------ Other subordinated liabilities each less than $150m 5 277 284 ------ ------ 1,246 1,252 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Tier 2 securities issued by HSBC Bank USA, N.A. ----------------------------------------------------- --------- ----------------- ------------- -------- -------- $500m 6.00% subordinated notes - Aug 2017 - 498 ------ ------ $1,250m 4.875% subordinated notes - Aug 2020 1,236 1,257 ------ ------ $1,000m 5.875% subordinated notes - Nov 2034 1,272 1,137 ------ ------ $750m 5.625% subordinated notes - Aug 2035 955 862 ------ ------ $700m 7.00% subordinated notes - Jan 2039 700 701 ------ ------ 4,163 4,455 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Tier 2 securities issued by HSBC Finance Corporation ----------------------------------------------------- --------- ----------------- ------------- -------- -------- $2,939m 6.676% senior subordinated notes 6 - Jan 2021 1,092 2,192 ------- -------------------------------------------- --------- --------------- ------------- ------ ------ Tier 2 securities issued by HSBC Bank Canada ----------------------------------------------------- --------- ----------------- ------------- -------- -------- CAD400m 4.80% subordinated debentures 4 Apr 2017 Apr 2022 - 299 Other subordinated liabilities each less than $150m Oct 1996 Nov 2083 31 29 ------- -------------------------------------------- --------- --------------- ------------- ------ ------ 31 328 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Securities issued by HSBC Mexico, S.A. $300m Non-convertible subordinated obligations 7, 8 Jun 2014 Jun 2019 240 240 Other subordinated liability less than $150m 7, 9 115 198 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ 355 438 ------- -------------------------------------------- --------- ----------------- ------------- ------ ------ Securities issued by other HSBC subsidiaries ----------------------------------------------------- --------- ----------------- ------------- -------- -------- Other subordinated liabilities each less than $200m 5 336 403 ------ ------ Subordinated liabilities issued by HSBC subsidiaries at 31 Dec 15,470 16,860 ----------------------------------------------------- --------- ----------------- ------------- ------ ------ 1 See paragraph below, 'Guaranteed by HSBC Holdings or HSBC Bank plc'. 2 In January 2018, HSBC gave notice it will redeem these securities. 3 The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50% percentage points. 4 In 2017 HSBC redeemed these securities. 5 Some securities included here are ineligible for inclusion in the capital base of HSBC. 6 HSBC tendered for these securities in 2017. In January 2018 a further tender was conducted. The principal balance is now $509m. 7 These securities are ineligible for inclusion in the capital base of HSBC. 8 Approximately $60m of these securities are held by HSBC Holdings. 9 In February 2018, HSBC gave notice it will redeem these securities. HSBC Holdings plc Annual Report and Accounts 2017 233
Notes on the Financial Statements
HSBC Holdings 2017 2016 $m $m At amortised cost 15,877 15,189 Designated at fair value (Note 23) 13,394 13,347 At 31 Dec 29,271 28,536 ----------------------------------- ------ ------ HSBC Holdings' subordinated liabilities First call Maturity 2017 2016 Footnotes date date $m $m Tier 2 securities issued by HSBC Holdings plc Amounts owed to third parties $2,000m 4.25% subordinated notes 2,4 - Mar 2024 2,038 2,060 --------- --------------------------------------------- --------- ---------- --------- ------ ------ $1,500m 4.25% subordinated notes 2 - Jun 2025 1,586 1,539 $1,500m 4.375% subordinated notes 2 - Nov 2026 1,580 1,520 $488m 7.625% subordinated notes 1 - May 2032 553 528 $222m 7.35% subordinated notes 1 - Nov 2032 248 278 --------- --------------------------------------------- --------- ---------- --------- ------ ------ $2,000m 6.5% subordinated notes 1 - May 2036 2,042 2,029 --------- --------------------------------------------- --------- ---------- --------- ------ ------ $2,500m 6.5% subordinated notes 1 - Sep 2037 3,365 3,170 --------- --------------------------------------------- --------- ---------- --------- ------ $1,500m 6.8% subordinated notes 1 - Jun 2038 1,489 1,487 --------- --------------------------------------------- --------- ---------- --------- ------ ------ $1,500m 5.25% subordinated notes 2,4 - Mar 2044 1,755 1,747 --------- --------------------------------------------- --------- ---------- --------- ------ ------
GBP900m 6.375% subordinated notes 1,3 Oct 2017 Oct 2022 - 1,163 --------- --------------------------------------------- --------- ---------- --------- ------ ------ GBP650m 5.75% subordinated notes 2 - Dec 2027 1,114 932 GBP650m 6.75% subordinated notes 2 - Sep 2028 873 793 GBP750m 7.0% subordinated notes 2 - Apr 2038 1,043 971 GBP900m 6.0% subordinated notes 2 - Mar 2040 1,199 1,086 EUR1,600m 6.25% subordinated notes 2 - Mar 2018 1,918 1,693 EUR1,750m 6.0% subordinated notes 2 - Jun 2019 2,349 2,168 --------- --------------------------------------------- --------- ---------- --------- ------ ------ EUR1,500m 3.375% subordinated notes 2,4 Jan 2019 Jan 2024 1,827 1,626 EUR1,500m 3.0% subordinated notes 2 - Jun 2025 2,037 1,716 --------- --------------------------------------------- --------- ---------- --------- ------ ------ EUR1,000m 3.125% subordinated notes 2 - Jun 2028 1,363 1,139 --------- --------------------------------------------- --------- ---------- --------- ------ ------ 28,379 27,645 --------- --------------------------------------------- --------- ---------- --------- ------ ------ Amounts owed to HSBC undertakings -------------------------------------------------------- --------- ---------- --------- ------ ------ $900m 10.176% subordinated step-up cumulative notes Jun 2030 Jun 2040 892 891 892 891 --------- --------------------------------------------- --------- ---------- --------- ------ ------ At 31 Dec 29,271 28,536 -------------------------------------------------------- --------- ---------- --------- ------ ------ 1 Amounts owed to third parties represent securities included in the capital base of HSBC as tier 2 securities in accordance with the grandfathering provisions under CRD IV rules. 2 These securities are included in the capital base of HSBC as fully CRD IV compliant tier 2 securities on an end point basis. 3 In 2017, HSBC redeemed these securities. 4 These subordinated notes are measured at amortised cost in HSBC Holdings, where the interest rate risk is hedged using a fair value hedge, while they are measured at fair value in the Group.
Additional tier 1 capital securities
Additional tier 1 capital securities are perpetual subordinatedsecurities on which coupon payments may be deferred or cancelled atthe discretion of HSBC. The securities presented in this Note areaccounted for as liabilities because HSBC has an obligation to paydividends in perpetuity. See Note 31 for additional tier 1 capitalsecurities accounted for as equity.
The additional tier 1 securities presented in this section donot meet the identifying criteria in full for recognition as tier 1capital under CRD IV but are eligible as regulatory capital subjectto grandfathering limits and progressive phase-out.
Guaranteed by HSBC Holdings or HSBC Bank plc
These capital securities were issued by the Jersey limitedpartnerships and proceeds lent to the respective guarantors by thelimited partnerships in the form of subordinated notes. Theyqualify as additional tier 1 capital for HSBC under CRD IV byvirtue of the application of grandfathering provisions, and the twocapital securities guaranteed by HSBC Bank plc ('HSBC Bank') alsoqualify as additional tier 1 capital for HSBC Bank (on a solo and aconsolidated basis) under CRD IV by virtue of the samegrandfathering process.
These preferred securities, together with the guarantee, areintended to provide investors with economic rights equivalent tothe rights that they would have had if they had purchasednon-cumulative perpetual preference shares of the relevant issuer.There are limitations on the payment of distributions if suchpayments are prohibited under UK banking regulations or otherrequirements, if a payment would cause a breach of HSBC's capitaladequacy requirements or if HSBC Holdings or HSBC Bank hasinsufficient distributable reserves (as defined).
HSBC Holdings and HSBC Bank have individually covenanted that ifprevented under certain circ*mstances from paying distributions onthe preferred securities in full, they will not pay dividends orother distributions in respect of their ordinary shares, orrepurchase or redeem their ordinary shares, until the distributionon the preferred securities has been paid in full.
Preference shares of HSBC Holdings that have economic termsequal in all material respects to the preferred securities andtheir guarantee together will be substituted for the preferredsecurities guaranteed by HSBC Holdings if the total capital ratioof HSBC Holdings falls below the regulatory minimum required, orthe Directors expect it to in the near term.
Preference shares of HSBC Bank that have economic terms equal inall material respects to the preferred securities and theirguarantee together will be substituted for the preferred securitiesguaranteed by HSBC Bank if any of the two issues of preferredsecurities are
234 HSBC Holdings plc Annual Report and Accounts 2017
outstanding in April 2049 or November 2048, respectively; or thetotal capital ratio of HSBC Bank on a solo and consolidated basisfalls below the regulatory minimum required, or the Directorsexpect it to in the near term.
Tier 2 capital securities
These capital securities are included within HSBC's regulatorycapital base as tier 2 capital under CRD IV by virtue of theapplication of grandfathering provisions (with the exception ofidentified securities that are compliant with CRD IV end pointrules). Tier 2 capital securities are either perpetual or datedsubordinated securities on which there is an obligation to paycoupons. In accordance with CRD IV, the capital contribution of alltier 2 securities is amortised for regulatory purposes in theirfinal five years before maturity.
28 Maturity analysis of assets, liabilities and off-balance sheet commitments --------------------------------------------------------------------------
The table on page 236 provides an analysis of consolidated totalassets, liabilities and off-balance sheet commitments by residualcontractual maturity at the balance sheet date. These balances areincluded in the maturity analysis as follows:
-- Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are included in the 'Due not more than 1 month' time bucket, because trading balances are typically held for short periods of time. -- Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the 'Due over 5 years' time bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled 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. -- Financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction. -- 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' time bucket, however, such contracts are subject to surrender and transfer options by the policyholders. -- Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down. Application of this policy throughout the Group was improved in 2017, and therefore comparative information has been represented. HSBC Holdings plc Annual Report and Accounts 2017 235
Notes on the Financial Statements
HSBC
Maturity analysis of assets, liabilities and off-balance sheet commitments Due Due over over Due Due 3 6 over over months months 9 Due Due 1 month but but months over over but not not not but 1 year 2 years more more more not but not but not Due not than than than more more more Due
more than 3 6 9 than than than over 1 month months months months 1 year 2 years 5 years 5 years Total $m $m $m $m $m $m $m $m $m --------- ------- ------ ------ ------ ------- ------- ------- --------- Financial assets -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- ----------- Cash and balances at central banks 180,624 - - - - - - - 180,624 --------- ------- ------ ------ ------ ------- ------- ------- --------- Items in the course of collection from other banks 6,628 - - - - - - - 6,628 --------- ------- ------ ------ ------ ------- ------- ------- --------- Hong Kong Government certificates of indebtedness 34,186 - - - - - - - 34,186 --------- ------- ------ ------ ------ ------- ------- ------- --------- Trading assets 284,781 1,432 642 - 1,140 - - - 287,995 --------- ------- ------ ------ ------ ------- ------- ------- --------- Financial assets designated at fair value 612 93 230 162 197 556 2,068 25,546 29,464 --------- ------- ------ ------ ------ ------- ------- ------- --------- Derivatives 218,103 162 97 124 42 234 592 464 219,818 --------- ------- ------ ------ ------ ------- ------- ------- --------- Loans and advances to banks 61,968 10,665 4,212 2,344 1,502 5,799 2,491 1,412 90,393 --------- ------- ------ ------ ------ ------- ------- ------- --------- Loans and advances to customers 195,577 65,469 49,860 34,107 37,176 93,065 218,784 268,926 962,964 - personal 42,593 9,126 8,483 7,441 7,492 23,552 61,238 214,837 374,762 - corporate and commercial 124,669 50,532 36,046 22,932 26,577 61,785 144,451 49,762 516,754 - financial 28,315 5,811 5,331 3,734 3,107 7,728 13,095 4,327 71,448 --------- ------- ------ ------ ------ ------- ------- ------- --------- Reverse repurchase agreements - non-trading 144,244 30,289 7,951 2,194 3,960 1,072 4,598 7,245 201,553 --------- ------- ------ ------ ------ ------- ------- ------- --------- Financial investments 31,981 51,487 31,634 13,446 17,647 40,582 90,366 111,933 389,076 --------- ------- ------ ------ ------ ------- ------- ------- --------- Accrued income and other financial assets 19,259 5,795 2,050 358 411 652 513 2,046 31,084 --------- ------- ------ ------ ------ ------- ------- ------- --------- Financial assets at 31 Dec 2017 1,177,963 165,392 96,676 52,735 62,075 141,960 319,412 417,572 2,433,785 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Non-financial assets - - - - - - - 87,986 87,986 --------- ------- ------ ------ ------ ------- ------- ------- --------- Total assets at 31 Dec 2017 1,177,963 165,392 96,676 52,735 62,075 141,960 319,412 505,558 2,521,771 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Off-balance sheet commitments received -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Loan and other credit-related commitments 2,431 - 3,335 - - 133 - - 5,899 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Financial liabilities -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- ----------- Hong Kong currency notes in circulation 34,186 - - - - - - - 34,186 --------- ------- ------ ------ ------ ------- ------- ------- --------- Deposits by banks 56,829 1,961 1,097 616 157 361 7,393 1,508 69,922 --------- ------- ------ ------ ------ ------- ------- ------- --------- Customer accounts(1) 1,269,003 44,129 21,596 11,570 10,757 4,527 2,257 623 1,364,462 - personal 648,040 22,938 13,489 6,810 5,727 2,753 1,557 119 701,433 - corporate and commercial 458,937 16,496 6,983 3,712 3,970 1,705 641 451 492,895 - financial 162,026 4,695 1,124 1,048 1,060 69 59 53 170,134 --------- ------- ------ ------ ------ ------- ------- ------- --------- Repurchase agreements - non-trading 113,208 14,042 1,592 160 - - 1,000 - 130,002 --------- ------- ------ ------ ------ ------- ------- ------- --------- Items in the course of transmission to other banks 6,850 - - - - - - - 6,850 --------- ------- ------ ------ ------ ------- ------- ------- --------- Trading liabilities 145,028 2,026 2,177 2,130 3,077 5,038 12,814 12,071 184,361 Financial liabilities designated at fair value 80 281 2,094 271 2,798 4,215 22,468 62,222 94,429 * debt securities in issue: covered bonds - - - 209 - 212 2,494 1,654 4,569 - debt securities in issue: unsecured 55 95 2,087 62 2,797 1,654 19,505 33,535 59,790 * subordinated liabilities and preferred securities - - - - - 2,349 459 21,482 24,290 -------------------------------------------------------- - other 25 186 7 - 1 - 10 5,551 5,780 --------- ------- ------ ------ ------ ------- ------- ------- --------- Derivatives 213,011 79 141 140 202 504 1,107 1,637 216,821 --------- ------- ------ ------ ------ ------- ------- ------- --------- Debt securities in issue 6,081 6,295 5,228 5,795 9,240 6,725 22,767 2,415 64,546 -------------------------------------------------------- - covered bonds - - - - 1 3 10 34 48 - otherwise secured 3,479 4 - - 1,000 1,100 914 1,193 7,690 - unsecured 2,602 6,291 5,228 5,795 8,239 5,622 21,843 1,188 56,808 --------- ------- ------ ------ ------ ------- ------- ------- --------- Accruals and other financial liabilities 18,009 9,547 2,798 749 717 1,007 1,569 938 35,334 --------- ------- ------ ------ ------ ------- ------- ------- --------- Subordinated liabilities - 1,918 73 36 132 273 3,595 13,799 19,826
--------- ------- ------ ------ ------ ------- ------- ------- --------- Total financial liabilities at 31 Dec 2017 1,862,285 80,278 36,796 21,467 27,080 22,650 74,970 95,213 2,220,739 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Non-financial liabilities - - - - - - - 103,161 103,161 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Total liabilities at 31 Dec 2017 1,862,285 80,278 36,796 21,467 27,080 22,650 74,970 198,374 2,323,900 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Off-balance sheet commitments given -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Loan and other credit-related commitments 628,070 38,736 3,310 1,777 4,087 3,436 3,824 2,349 685,589 -------------------------------------------------------- - personal 187,545 2,001 340 343 1,583 1,033 952 513 194,310 - corporate and commercial 388,778 32,011 2,782 1,322 2,309 2,403 2,804 1,716 434,125 - financial 51,747 4,724 188 112 195 - 68 120 57,154 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- 236 HSBC Holdings plc Annual Report and Accounts 2017 Maturity analysis of assets, liabilities and off-balance sheet commitments (continued) Due Due over over Due Due 3 6 over over months months 9 Due Due 1 month but but months over over but not not not but 1 year 2 years more more more not but not but not Due not than than than more more more Due more than 3 6 9 than than than over 1 month months months months 1 year 2 years 5 years 5 years Total $m $m $m $m $m $m $m $m $m Financial assets -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- ----------- Cash and balances at central banks 128,009 - - - - - - - 128,009 Items in the course of collection from other banks 5,003 - - - - - - - 5,003 Hong Kong Government certificates of indebtedness 31,228 - - - - - - - 31,228 ------- ------ ------ ------ ------- ------- ------- Trading assets 232,550 758 230 415 1,172 - - - 235,125 Financial assets designated at fair value 176 182 75 178 363 749 2,486 20,547 24,756 Derivatives 287,749 149 207 96 110 704 1,056 801 290,872 Loans and advances to banks 59,636 13,404 4,494 2,375 1,765 2,879 2,298 1,275 88,126 --------- ------- ------ ------ ------ ------- ------- ------- --------- Loans and advances to customers 167,531 61,693 47,664 30,115 30,362 85,144 192,787 246,208 861,504 - personal 39,295 7,812 6,723 5,928 6,799 22,664 53,620 194,985 337,826 - corporate and commercial 108,906 48,333 35,180 21,317 19,573 54,739 126,890 45,271 460,209 - financial 19,330 5,548 5,761 2,870 3,990 7,741 12,277 5,952 63,469 --------- ------- ------ ------ ------ ------- ------- ------- --------- Reverse repurchase agreements - non-trading 115,942 25,525 10,378 5,220 2,350 479 1,080 - 160,974 Financial investments 36,932 59,826 30,403 16,800 19,564 50,255 104,933 118,084 436,797 Accrued income and other financial assets 16,885 8,050 1,737 407 462 421 1,033 1,907 30,902 --------- ------- ------ ------ ------ ------- ------- ------- --------- Financial assets at 31 Dec 2016 1,081,641 169,587 95,188 55,606 56,148 140,631 305,673 388,822 2,293,296 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Non-financial assets - - - - - - - 81,690 81,690 Total assets at 31 Dec 2016 1,081,641 169,587 95,188 55,606 56,148 140,631 305,673 470,512 2,374,986 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Off-balance sheet commitments received -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- ----------- Loan and other credit-related commitments 2,813 - 2,050 - - 110 - - 4,973 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Financial liabilities -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- ----------- Hong Kong currency notes in circulation 31,228 - - - - - - - 31,228 Deposits by banks 46,306 4,075 2,085 665 489 422 4,842 1,055 59,939 Customer accounts(1) 1,180,641 45,245 19,187 10,277 8,325 4,709 3,500 502 1,272,386 - personal 590,654 22,222 12,024 5,823 4,786 3,484 2,483 121 641,597 - corporate and commercial 436,666 17,460 6,178 3,951 3,082 1,200 967 360 469,864 - financial 153,321 5,563 985 503 457 25 50 21 160,925 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Repurchase agreements - non-trading 82,330 2,707 2,871 50 - - 1,000 - 88,958 Items in the course of transmission to other banks 5,977 - - - - - - - 5,977 Trading liabilities 121,707 2,053 1,423 1,845 3,013 6,219 9,010 8,421 153,691 Financial liabilities designated at fair value 1,659 958 1,396 3 1,701 5,046 17,989 58,080 86,832 * debt securities in issue: covered bonds 1,587 - 303 - - 207 1,348 2,558 6,003 - debt securities in issue: unsecured 25 15 1,091 3 1,700 4,839 14,056 29,380 51,109 * subordinated liabilities and preferred securities - - - - - - 2,578 21,005 23,583 - other 47 943 2 - 1 - 7 5,137 6,137 --------- ------- ------ ------ ------ ------- ------- ------- --------- Derivatives 274,965 39 39 112 273 506 1,471 2,414 279,819 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Debt securities in issue 4,708 8,598 8,280 5,996 4,610 10,953 19,432 3,338 65,915
-------------------------------------------------------- - covered bonds - - 1 71 1 3 24 26 126 - otherwise secured 3,207 823 893 114 329 1,882 2,680 1,181 11,109 - unsecured 1,501 7,775 7,386 5,811 4,280 9,068 16,728 2,131 54,680 --------- ------- ------ ------ ------ ------- ------- ------- --------- Accruals and other financial liabilities 19,052 8,172 2,392 833 519 885 1,299 568 33,720 --------- ------- ------ ------ ------ ------- ------- ------- --------- Subordinated liabilities 12 - 143 61 497 1,788 5,056 13,427 20,984 Total financial liabilities at 31 Dec 2016 1,768,585 71,847 37,816 19,842 19,427 30,528 63,599 87,805 2,099,449 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Non-financial liabilities - - - - - - - 92,959 92,959 Total liabilities at 31 Dec 2016 1,768,585 71,847 37,816 19,842 19,427 30,528 63,599 180,764 2,192,408 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- Off-balance sheet commitments given -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- ----------- Loan and other credit-related commitments 609,923 29,752 3,010 1,897 3,253 2,514 4,280 1,214 655,843 --------- ------- ------ ------ ------ ------- ------- ------- --------- - personal 177,462 1,835 89 262 1,896 1,114 747 405 183,810 - corporate and commercial 366,573 26,650 2,839 1,350 904 996 3,410 754 403,476 - financial 65,888 1,267 82 285 453 404 123 55 68,557 -------------------------------------------------------- --------- ------- ------ ------ ------ ------- ------- ------- --------- 1 'Customer accounts' includes $386,417m (2016: $343,782m) insured by guarantee schemes. HSBC Holdings plc Annual Report and Accounts 2017 237
Notes on the Financial Statements
HSBC Holdings
Maturity analysis of assets, liabilities and off-balance sheet commitments Due Due Due Due Due over over over Due over over 1 3 6 over 1 2 month months months 9 year years Due but but but months but but not not not not but not not more more more more not more more than than than than more than than Due 1 3 6 9 than 2 5 over month months months months 1 year years years 5 years Total $m $m $m $m $m $m $m $m $m Financial assets -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- --------- Cash at bank and in hand: - balances with HSBC undertakings 1,985 - - - - - - - 1,985 ----- ------ ------ ------ ------ ----- ------ ------- ------- Derivatives 1,952 - - - - 80 - 356 2,388 Loans and advances to HSBC undertakings 4,861 13,039 3,145 5 2 1,134 29,560 24,881 76,627 Loans and advances to HSBC undertakings designated at fair value - - - - - 2,411 9,533 11,944 -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- Financial investments in HSBC undertakings 17 3 - - - - 1,798 2,446 4,264 Accrued income and other financial assets - 4 - - - - - 123 127 Total financial assets at 31 Dec 2017 8,815 13,046 3,145 5 2 1,214 33,769 37,339 97,335 -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- Non-financial assets - - - - - - - 94,399 94,399 Total assets at 31 Dec 2017 8,815 13,046 3,145 5 2 1,214 33,769 131,738 191,734 -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- Financial liabilities -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- Amounts owed to HSBC undertakings 120 2,405 46 - - - - - 2,571 Financial liabilities designated at fair value - - - - - 2,349 11,491 17,050 30,890 - debt securities in issue - - - - - - 11,491 6,005 17,496 -------------------------------------------------------- * subordinated liabilities and preferred securities - - - - - 2,349 - 11,045 13,394 -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- Derivatives 2,008 - - - - 110 183 781 3,082 Debt securities in issue - - - - 1,081 - 10,354 22,823 34,258 Accruals and other financial liabilities 439 395 157 39 7 3 1 11 1,052 Subordinated liabilities - 1,918 - - - - - 13,959 15,877 Total financial liabilities at 31 Dec 2017 2,567 4,718 203 39 1,088 2,462 22,029 54,624 87,730 -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- Non-financial liabilities - - - - - - - 217 217 Total liabilities at 31 Dec 2017 2,567 4,718 203 39 1,088 2,462 22,029 54,841 87,947 -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- Off-balance sheet commitments given -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- Undrawn formal standby facilities, credit lines and other commitments to lend - - - - - - - - - -------------------------------------------------------- ----- ------ ------ ------ ------ ----- ------ ------- ------- 238 HSBC Holdings plc Annual Report and Accounts 2017 Maturity analysis of assets, liabilities and off-balance sheet commitments (continued) Due Due Due Due Due over over over Due over over 1 3 6 over 1 2 month months months 9 year years Due but but but months but but not not not not but not not more more more more not more more than than than than more than than Due 1 3 6 9 than 2 5 over month months months months 1 year years years 5 years Total
$m $m $m $m $m $m $m $m $m Financial assets -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- --------- Cash at bank and in hand: -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- --------- * balances with HSBC undertakings 247 - - - - - - - 247 -------------------------------------------------------- Derivatives 1,702 - - - - - 93 353 2,148 Loans and advances to HSBC undertakings 16,372 - - - - 167 14,204 46,678 77,421 Financial investments in HSBC undertakings 40 2 - - - - 838 2,710 3,590 Accrued income and other financial assets 12 - - - - - - 107 119 Total financial assets at 31 Dec 2016 18,373 2 - - - 167 15,135 49,848 83,525 -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- ------- Non-financial assets - - - - - - - 97,273 97,273 Total assets at 31 Dec 2016 18,373 2 - - - 167 15,135 147,121 180,798 -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- ------- Financial liabilities -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- --------- Amounts owed to HSBC undertakings 2,052 - - - - - 105 - 2,157 Financial liabilities designated at fair value - - - - - 2,167 5,845 22,101 30,113 -------------------------------------------------------- - debt securities in issue - - - - - - 5,845 10,921 16,766 -------------------------------------------------------- * subordinated liabilities and preferred securities - - - - - 2,167 - 11,180 13,347 -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- ------- Derivatives 3,841 - - - - - 592 592 5,025 Debt securities in issue - - - - - 953 4,822 16,030 21,805 Accruals and other financial liabilities 75 1,268 142 22 - - - - 1,507 Subordinated liabilities - - - - - 1,693 - 13,496 15,189 Total financial liabilities at 31 Dec 2016 5,968 1,268 142 22 - 4,813 11,364 52,219 75,796 -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- ------- Non-financial liabilities - - - - - - - 144 144 Total liabilities at 31 Dec 2016 5,968 1,268 142 22 - 4,813 11,364 52,363 75,940 -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- ------- Off-balance sheet commitments given -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- --------- Undrawn formal standby facilities, credit lines and other commitments to lend - - - - - - - - - -------------------------------------------------------- ------ ------ ------ ------ ------ ----- ------ ------- ------- 29 Offsetting of financial assets and financial liabilities --------------------------------------------------------
The 'Amounts not set off in the balance sheet' includetransactions where:
-- the counterparty has an offsetting exposure with HSBC 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 andadvances to customers are subject to limits, which are monitoredand the relevant customer agreements are subject to review andupdated, as necessary, to ensure that the legal right to set offremains appropriate.
HSBC Holdings plc Annual Report and Accounts 2017 239
Notes on the Financial Statements
Offsetting of financial assets and financial liabilities ------------ ----------- ----------- ------ Amounts subject to enforceable netting arrangements --------------------------------------------------------------------------- Amounts not set off in the balance sheet Net Amounts not amounts subject to in the enforceable Gross Amounts balance Financial Non-cash Cash Net netting amounts offset sheet instruments collateral collateral amount arrangements(5) Total Footnotes $m $m $m $m $m $m $m $m $m Financial assets Derivatives (Note 14) 1 322,422 (110,425) 211,997 (156,088) (11,092) (37,302) 7,515 7,821 219,818 Reverse repos, stock borrowing and similar agreements classified as: 2 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- - trading assets 15,893 - 15,893 (430) (15,462) - 1 1,227 17,120 ------------ ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- - non-trading assets 265,666 (105,776) 159,890 (3,714) (155,973) (49) 154 41,663 201,553 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- Loans and advances to customers 3 42,091 (10,424) 31,667 (26,390) - (181) 5,096 619 32,286 At 31 Dec 2017 646,072 (226,625) 419,447 (186,622) (182,527) (37,532) 12,766 51,330 470,777 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- Derivatives (Note 14) 1 387,999 (106,555) 281,444 (210,067) (11,647) (40,188) 19,542 9,428 290,872 Reverse repos, stock borrowing and similar agreements classified as: 2 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- - trading assets 9,859 - 9,859 (475) (9,383) - 1 348 10,207 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- - non-trading assets 222,485 (87,929) 134,556 (4,779) (129,373) (215) 189 26,418 160,974 --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- Loans and advances to customers 3 46,296 (14,602) 31,694 (24,459) - (248) 6,987 743 32,437 At 31 Dec 2016 666,639 (209,086) 457,553 (239,780) (150,403) (40,651) 26,719 36,937 494,490 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- Financial liabilities Derivatives (Note 14) 1 321,932 (110,425) 211,507 (156,072) (14,342) (28,666) 12,427 5,314 216,821 Repos, stock lending and similar agreements classified as: 2 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- - trading liabilities 10,555 - 10,555 (430) (9,615) - 510 63 10,618 ------------ ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- - non-trading liabilities 187,268 (105,776) 81,492 (7,165) (74,048) (240) 39 48,510 130,002
------------ ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- Customer accounts 4 42,533 (10,424) 32,109 (26,390) - (188) 5,531 158 32,267 At 31 Dec 2017 562,288 (226,625) 335,663 (190,057) (98,005) (29,094) 18,507 54,045 389,708 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- Derivatives (Note 14) 1 378,571 (106,555) 272,016 (210,035) (15,512) (33,754) 12,715 7,803 279,819 Repos, stock lending and similar agreements classified as: 2 ------------ --------- ------- --------- ------- ------------ ----------- ----------- ------ --------------- --------- - trading liabilities 5,034 - 5,034 (475) (4,515) - 44 37 5,071 ------------ ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- - non-trading liabilities 148,443 (87,929) 60,514 (6,202) (54,126) (146) 40 28,444 88,958 ------------ ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- Customer accounts 4 45,422 (14,602) 30,820 (24,459) - (248) 6,113 228 31,048 At 31 Dec 2016 577,470 (209,086) 368,384 (241,171) (74,153) (34,148) 18,912 36,512 404,896 ------------ --------- ------- -------- ------- ----------- ---------- ---------- ------ --------------- ------- 1 At 31 December 2017, the amount of cash margin received that had been offset against the gross derivatives assets was $6,324m (2016: $3,720m). The amount of cash margin paid that had been offset against the gross derivatives liabilities was $5,196m (2016: $5,862m). 2 For the amount of repos, reverse repos, stock lending, stock borrowing and similar agreements recognised on the balance sheet within 'Trading assets' $17,120m (2016: $10,207m) and 'Trading liabilities' $10,618m (2016: $5,071m), see the 'Funding sources and uses' table on page 102. 3 At 31 December 2017, the total amount of 'Loans and advances to customers' was $962,964m (2016: $861,504m) of which $31,667m (2016: $31,694m) was subject to offsetting. 4 At 31 December 2017, the total amount of 'Customer accounts' was $1,364,462m (2016: $1,272,386m) of which $32,109m (2016: $30,820m) was subject to offsetting. 5 These exposures continue to be secured by financial collateral, but we may not have sought or been able to obtain a legal opinion evidencing enforceability of the right of offset. 30 Non-controlling interests ------------------------- 2017 2016 $m $m Non-controlling interests attributable to holders of ordinary shares in subsidiaries 7,621 6,932 Preferred securities issued by subsidiaries - 260 At 31 Dec 7,621 7,192 ------------------------------------------------------------------------------------- ----- -----
Hang Seng Bank Limited is the only subsidiary in the Group thatgives rise to significant non-controlling interest. For summarisedfinancial information of Hang Seng Bank Limited see Note 18.
Preferred securities issued by subsidiaries
Preferred securities are securities for which there is noobligation to pay a dividend and, if the dividend is not paid, itmay not be cumulative. Such securities do not generally carryvoting rights but rank higher than ordinary shares for dividendpayments and in the event of a winding-up. These securities have nostated maturity date but may be called and redeemed by the issuer,subject to prior notification to the PRA and, where relevant, theconsent of the local banking regulator.
240 HSBC Holdings plc Annual Report and Accounts 2017
All non-cumulative preferred securities are classified asadditional tier 1 capital.
Preferred securities issued by HSBC's subsidiaries 2017 2016 First call Footnote date $m $m HSBC Bank Canada ----------------------------------------------------------------------- ---------- ---- ------ CA$175m Non-cumulative redeemable class 1 preferred shares, series C 1 Jun 2010 - 130 ---- CA$175m Non-cumulative redeemable class 1 preferred shares, series D 1 Dec 2010 - 130 ---- ---- At 31 Dec - 260 ----------------------------------------------------------------------- -------- ---------- ---- ---- 1 In 2017 HSBC redeemed these securities. 31 Called up share capital and other equity instruments ----------------------------------------------------
Called up share capital and share premium
HSBC Holdings ordinary shares of $0.50 each, issued and fully paid 2017 2016 ------------------------ ------------------------ Footnote Number $m Number $m -------------- ------ At 1 Jan 20,191,586,214 10,096 19,685,096,934 9,842 Shares issued under HSBC employee share plans 76,701,249 38 69,187,052 35 Shares issued in lieu of dividends 380,652,196 190 437,302,228 219 Less: Shares repurchased and cancelled (328,223,401) (164) - - -------------- ------ At 31 Dec 1 20,320,716,258 10,160 20,191,586,214 10,096 ---------------------------------------------- -------- -------------- ------ -------------- ------ HSBC Holdings non-cumulative preference shares of $0.01 each 2017 2016 --------------- ----------------- Footnote Number $m Number $m ----------- At 1 Jan and 31 Dec 2 1,450,000 - 1,450,000 - ------------------------- ---------- ----------- ----------- HSBC Holdings share premium 2017 2016 $m $m ------- At 31 Dec 10,177 12,619 ------------- -------- ------- Total called up share capital and share premium 2017 2016 $m $m ---------------------- ------------- ------------- At 31 Dec 20,337 22,715 ---------------------- ------------- ------------- 1 All HSBC Holdings ordinary shares in issue, excluding 325,273,407 shares held in treasury, confer identical rights, including in respect of capital, dividends and voting. 2 Included in the capital base of HSBC as additional tier 1 capital in accordance with the CRD IV rules, by virtue of the application of grandfathering provisions.
HSBC Holdings non-cumulative preference shares of $0.01
HSBC Holdings pays dividends on non-cumulative preference sharesof $0.01 each ('dollar preference shares') quarterly, at the soleand absolute discretion of the Board. The Board will not declare adividend on them if this would stop the company from meeting thePRA's capital adequacy requirements, or if profit available fordistribution as dividends is insufficient to also pay dividends onother shares that are equally entitled and scheduled on the samedate.
HSBC Holdings may not declare or pay dividends on shares rankinglower in the right to dividends than dollar preference shares, orredeem or purchase any of its other shares ranking equal or lowerthan dollar preference shares, unless it has fully paid, or setaside an amount to fully pay, the dividends on the dollarpreference shares for the then current dividend period.
The dollar preference shares carry no rights to conversion intoordinary shares. Holders of dollar preference shares are onlyentitled to attend and vote at shareholder meetings if dividends onthese shares have not been paid in full on four consecutivedividend payment dates. In such circ*mstances, holders of theseshares are entitled to vote at shareholder meetings until HSBCHoldings has paid a full dividend on them. These securities can beredeemed by HSBC at any time, subject to prior approval by thePRA.
HSBC Holdings non-cumulative preference share of GBP0.01
The one non-cumulative sterling preference share of GBP0.01('sterling preference share') has been in issue since 29 December2010 and is held by a subsidiary of HSBC Holdings. Dividends arepaid quarterly at the sole and absolute discretion of the Board.The sterling preference share carries no rights of conversion intoordinary shares of HSBC Holdings and no right to attend or vote atshareholder meetings of HSBC Holdings. These securities can beredeemed by HSBC at any time, subject to prior approval by thePRA.
Other equity instruments
HSBC Holdings includes three types of additional tier 1 capitalsecurities in its tier 1 capital. Two are presented in this Noteand are accounted for as equity because HSBC does not have anobligation to transfer cash or a variable number of its ownordinary shares to holders under any circ*mstances outside itscontrol. See Note 27 for additional tier 1 securities accounted foras liabilities.
HSBC Holdings plc Annual Report and Accounts 2017 241
Notes on the Financial Statements
Additional tier 1 capital securities
Additional tier 1 capital securities are perpetual subordinatedsecurities on which coupon payments may be deferred at HSBCHoldings' discretion. While any coupon payments are unpaid ordeferred, HSBC Holdings will not declare or pay dividends or makedistributions or similar periodic payments in respect of anysecurities of lower or equal rank, or repurchase or redeem them.Such securities do not generally carry voting rights but rankhigher than ordinary shares for coupon payments, and in the eventof a winding-up. They do not meet the identifying criteria in fullfor recognition as tier 1 capital under CRD IV but are eligible asregulatory capital subject to grandfathering limits and progressivephase-out.
At HSBC Holdings' discretion, and subject to certain conditionsbeing satisfied, the capital securities may be exchanged on anycoupon payment date for non-cumulative preference shares to beissued by HSBC Holdings and ranking pari passu with the dollar andsterling preference shares in issue. The preference shares would beissued at a nominal value of $0.01 per share and a premium of$24.99 per share, with both amounts being subscribed and fullypaid. These securities can be redeemed by HSBC at any time, subjectto prior approval by the PRA.
HSBC's additional tier 1 capital securities in issue which are accounted for in equity 2017 2016 First call date $m $m $2,200m 8.125% perpetual subordinated capital securities Apr 2013 2,133 2,133 $3,800m 8.000% perpetual subordinated capital securities, Series 2 Dec 2015 3,718 3,718 At 31 Dec 5,851 5,851 ---------------------------------------------------------------------- ----------- ----- -----
Additional tier 1 capital - contingent convertiblesecurities
During 2017, HSBC continued to issue contingent convertiblesecurities that are included in its capital base as fully CRD IVcompliant additional tier 1 capital securities on an end pointbasis. The net proceeds of the issuances are used for generalcorporate purposes and to further strengthen its capital base tomeet requirements under CRD IV. These securities bear a fixed rateof interest until their initial call dates. After the initial calldates, if they are not redeemed, the securities will bear interestat rates fixed periodically in advance for 5-year periods based onprevailing market rates. Interest on the contingent convertiblesecurities will be due and payable only at the sole discretion ofHSBC, and HSBC has sole and absolute discretion at all times tocancel for any reason (in whole or in part) any interest paymentthat would otherwise be payable on any payment date. Distributionswill not be paid if they are prohibited under UK bankingregulations or if the company has insufficient reserves or fails tomeet the solvency conditions defined in the securities' terms.
The contingent convertible securities are undated and arerepayable, at the option of HSBC, in whole at the initial calldate, or on any fifth anniversary after this date. In addition, thesecurities are repayable at the option of HSBC in whole for certainregulatory or tax reasons. Any repayments require the prior consentof the PRA. These securities rank pari passu with HSBC's dollar andsterling preference shares and are therefore ahead of ordinaryshares. The contingent convertible securities will be convertedinto fully paid ordinary shares of HSBC at a predetermined price,should HSBC's consolidated end point CET1 ratio fall below 7.0%.Therefore, in accordance with the terms of the securities, if theend point CET1 ratio breaches the 7.0% trigger, the securities willconvert into ordinary shares at fixed contractual conversion pricesin the issuance currencies of the relevant securities, equivalentto GBP2.70 at the prevailing rate of exchange on the issuance date,subject to certain anti-dilution adjustments.
HSBC's additional tier 1 capital - contingent convertible securities in issue which are accounted for in equity 2017 2016 First call date $m $m $1,500m 5.625% perpetual subordinated contingent convertible securities Jan 2020 1,494 1,494 ----------- ------------------------------------------------------------------ ----------- ------ ------ $2,000m 6.875% perpetual subordinated contingent convertible securities Jun 2021 1,998 1,998 ----------- ------------------------------------------------------------------ ----------- ------ ------ $2,250m 6.375% perpetual subordinated contingent convertible securities Sep 2024 2,244 2,244 ----------- ------------------------------------------------------------------ ----------- ------ ------ $2,450m 6.375% perpetual subordinated contingent convertible securities Mar 2025 2,460 2,460 ----------- ------------------------------------------------------------------ ----------- ------ ------ $3,000m 6.000% perpetual subordinated contingent convertible securities May 2027 2,997 - ----------- ------------------------------------------------------------------ ----------- ------ ------ EUR1,500m 5.250% perpetual subordinated contingent convertible securities Sep 2022 1,943 1,943 ----------- ------------------------------------------------------------------ ----------- ------ ------ EUR1,000m 6.000% perpetual subordinated contingent convertible securities Sep 2023 1,120 1,120 ----------- ------------------------------------------------------------------ ----------- ------ ------ EUR1,250m 4.750% perpetual subordinated contingent convertible securities Jul 2029 1,420 - ----------- ------------------------------------------------------------------ ----------- ------ ------ SGD1,000m 4.700% perpetual subordinated contingent convertible securities Jun 2022 723 - ----------- ------------------------------------------------------------------ ----------- ------ ------ At 31 Dec 16,399 11,259 ------------------------------------------------------------------------------- ----------- ------ ------
Shares under option
For details of the options outstanding to subscribe for HSBCHoldings ordinary shares under the HSBC Holdings savings-relatedshare option plans, see Note 5.
Aggregate options outstanding under these plans 31 Dec 2017 31 Dec 2016 -------------------------------------------------------- ---------------------------------------------------------- Number of Number of HSBC Holdings HSBC Holdings ordinary shares Period of exercise Exercise price ordinary shares Period of exercise Exercise price 64,604,932 2017 to 2023 GBP4.0472-5.9640 69,217,725 2016 to 2022 GBP4.0472-5.4738 36,309 2017 to 2018 HK$55.4701 504,467 2016 to 2018 HK$55.4701-63.9864 10,539 2017 to 2018 EUR5.3532 86,916 2016 to 2018 EUR5.3532-6.0657 17,873 2017 to 2018 $7.1456 217,738 2016 to 2018 $7.1456-8.2094 ---------------- ------------------ ---------------- ---------------- ------------------ ------------------ 242 HSBC Holdings plc Annual Report and Accounts 2017
Maximum obligation to deliver HSBC Holdings ordinary shares
At 31 December 2017, the maximum obligation to deliver HSBCHoldings ordinary shares under all of the above option arrangementsand the HSBC International Employee Share Purchase Plan, togetherwith GPSP awards, long-term incentive awards and deferred shareawards granted under the HSBC Share Plan and/or the HSBC Share Plan2011, was 169,615,437 (2016: 198,483,750). The total number ofshares at 31 December 2017 held by employee benefit trusts that maybe used to satisfy such obligations to deliver HSBC Holdingsordinary shares was 5,883,444 (2016: 3,997,619).
32 Contingent liabilities, contractual commitments and guarantees -------------------------------------------------------------- HSBC HSBC Holdings(1) ---------------- -------------------- 2017 2016 2017 2016 $m $m $m $m ------- ------- -------- -------- Guarantees and other contingent liabilities: * financial guarantees and similar contracts 38,328 37,072 7,778 7,619 ----------------------------------------------------------- * other guarantees 51,434 44,394 - - ----------------------------------------------------------- * other contingent liabilities 616 553 - - ----------------------------------------------------------- -------- At 31 Dec 90,378 82,019 7,778 7,619 ----------------------------------------------------------- ------- ------- -------- -------- Commitments: * documentary credits and short-term trade-related transactions 8,776 9,190 - - ----------------------------------------------------------- * forward asset purchases and forward deposits placed 4,295 5,386 - - ----------------------------------------------------------- * standby facilities, credit lines and other commitments to lend 672,518 641,267 - - ----------------------------------------------------------- -------- At 31 Dec 685,589 655,843 - - ----------------------------------------------------------- ------- ------- -------- -------- 1 Guarantees by HSBC Holdings are all in favour of other Group entities.
The above table discloses the nominal principal amounts, whichrepresents the maximum amounts at risk should the contracts befully drawn upon and clients default. As a significant portion ofguarantees and commitments is expected to expire without beingdrawn upon, the total of the nominal principal amounts is notindicative of future liquidity requirements.
Approximately half the guarantees have a term of less than oneyear, while guarantees with terms of more than one year are subjectto HSBC's annual credit review process.
Contingent liabilities arising from legal proceedings,regulatory and other matters against Group companies are disclosedin Notes 26
and 34.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme ('FSCS') has providedcompensation to consumers following the collapse of a number ofdeposit takers. The compensation paid out to consumers is currentlyfunded through loans from HM Treasury, which at 31 December 2017stood at approximately $6.3bn (GBP4.7bn). The Group could be liableto pay a proportion of the outstanding amount that the FSCS hasborrowed from HM Treasury. The ultimate FSCS levy to the industryas a result of the collapses cannot currently be estimatedreliably, as it is dependent on various uncertain factors,including the potential recoveries of assets by the FSCS andchanges in the level of protected deposits and the population ofFSCS members at the time.
Associates
HSBC's share of associates' contingent liabilities amounted to$38.8bn at 31 December 2017 (2016: $35.3bn). No matters arose whereHSBC was severally liable.
33 Lease commitments -----------------
Operating lease commitments
At 31 December 2017, future minimum lease payments undernon-cancellable operating leases for land, buildings and equipmentwere
$3,950m (2016: $3,893m).
Finance lease receivables
HSBC leases a variety of assets to third parties under financeleases, including transport assets (such as aircraft), property andgeneral plant and machinery. At the end of lease terms, assets maybe sold to third parties or leased for further terms. Rentals arecalculated to recover the cost of assets less their residual value,and earn finance income.
2017 2016 -------------------------------- ---------------------------------- Total future Unearned Total future Unearned minimum finance Present minimum finance Present payments income value payments income value $m $m $m $m $m $m Lease receivables: -------------------------------------- No later than one year 3,523 (326) 3,197 3,248 (330) 2,918 -------------------------------------- Later than one year and no later than five years 7,033 (696) 6,337 6,563 (702) 5,861 -------------------------------------- Later than five years 4,784 (669) 4,115 4,548 (633) 3,915 -------------------------------------- ------------ -------- ------- ------------ -------- ------- At 31 Dec 15,340 (1,691) 13,649 14,359 (1,665) 12,694 -------------------------------------- ------------ -------- ------- ------------ -------- ------- HSBC Holdings plc Annual Report and Accounts 2017 243
Notes on the Financial Statements
34 Legal proceedings and regulatory matters ----------------------------------------
HSBC is party to legal proceedings and regulatory matters in anumber of jurisdictions arising out of its normal businessoperations. Apart from the matters described below, HSBC considersthat none of these matters are material. The recognition ofprovisions is determined in accordance with the accounting policiesset out in Note 1. While the outcome of legal proceedings andregulatory matters is inherently uncertain, management believesthat, based on the information available to it, appropriateprovisions have been made in respect of these matters at 31December 2017 (see Note 26). Where an individual provision ismaterial, the fact that a provision has been made is stated andquantified, except to the extent doing so would be seriouslyprejudicial. Any provision recognised does not constitute anadmission of wrongdoing or legal liability. It is not practicableto provide an aggregate estimate of potential liability for ourlegal proceedings and regulatory matters as a class of contingentliabilities.
Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff ('Madoff') was arrested in December 2008 andlater pleaded guilty to running a Ponzi scheme. His firm, BernardL. Madoff Investment Securities LLC ('Madoff Securities'), is beingliquidated in the US by a trustee (the 'Trustee').
Various non-US HSBC companies provided custodial, administrationand similar services to a number of funds incorporated outside theUS whose assets were invested with Madoff Securities. Based oninformation provided by Madoff Securities, at 30 November 2008, thepurported aggregate value of these funds was $8.4bn, includingfictitious profits reported by Madoff.
Based on information available to HSBC, the funds' actualtransfers to Madoff Securities minus their actual withdrawals fromMadoff Securities during the time HSBC serviced the funds areestimated to have totalled approximately $4bn. Various HSBCcompanies have been named as defendants in lawsuits arising out ofMadoff Securities' fraud.
US/UK litigation: The Trustee has brought lawsuits againstvarious HSBC companies in the US Bankruptcy Court and in theEnglish High Court, seeking recovery of transfers from MadoffSecurities to HSBC in an amount not yet pleaded or determined. HSBCand other parties to the action have moved to dismiss the Trustee'sUS actions. The US Bankruptcy Court granted HSBC's motion todismiss with respect to certain of the Trustee's claims in November2016. In September 2017, the US Court of Appeals for the SecondCircuit (the 'Second Circuit Court of Appeals') agreed to hear theTrustee's appeal of the US Bankruptcy Court's decision, where thismatter is pending.
The deadline by which the Trustee must serve HSBC with hisEnglish action has been extended to September 2018 for UK-baseddefendants and November 2018 for all other defendants.
Fairfield Sentry Limited, Fairfield Sigma Limited and FairfieldLambda Limited (together, 'Fairfield') (in liquidation since July2009) have brought lawsuits in the US and the British VirginIslands ('BVI') against fund shareholders, including HSBC companiesthat acted as nominees for clients, seeking restitution ofredemption payments. In October 2016, the liquidators for Fairfield(the 'Fairfield Liquidators') filed a motion seeking leave to amendtheir complaints in the US Bankruptcy Court. In January 2017, thedefendants moved to dismiss and oppose the Fairfield Liquidators'motion. These motions are pending.
In December 2014, three additional actions were filed in the US.A purported class of direct investors in Madoff Securities assertedcommon law claims against various HSBC companies in the US DistrictCourt for the Southern District of New York (the 'New York DistrictCourt'). In September 2016, the New York District Court grantedHSBC's motion to dismiss this action and the plaintiffs' failure toappeal renders the court's ruling final. Two investors in HermesInternational Fund Limited ('Hermes') also asserted common lawclaims against various HSBC companies in the New York DistrictCourt. In March 2017, the court granted HSBC's motion to dismiss,which dismissal was upheld by the Second Circuit Court of Appealsin November 2017. In addition, SPV Optimal SUS Ltd ('SPV OSUS'),the purported assignee of the Madoff-invested company, OptimalStrategic US Equity Ltd ('Optimal'), filed a lawsuit in New Yorkstate court against various HSBC companies and others, seekingdamages on various alleged grounds, including breach of fiduciaryduty and breach of trust. This action has been stayed pending theissuance of a potentially dispositive decision in an actioninitiated by Optimal regarding the validity of the assignment ofits claims to SPV OSUS.
Bermuda litigation: In January 2009, Kingate Global Fund Limitedand Kingate Euro Fund Limited (together, 'Kingate') brought anaction against HSBC Bank Bermuda Limited ('HBBM') for recovery offunds held in Kingate's accounts, fees and dividends. This actionis pending, but is not expected to move forward until theresolution of the Trustee's US actions against Kingate andHBBM.
Thema Fund Limited and Hermes each brought three actions in2009. The first set of actions seeks recovery of funds in frozenaccounts held at HSBC Institutional Trust Services (Bermuda)Limited. The second set of actions asserts liability against HSBCInstitutional Trust Services (Bermuda) Limited in relation toclaims for mistake, recovery of fees and damages for breach ofcontract. The third set of actions seeks return of fees from HBBMand HSBC Securities Services (Bermuda) Limited. The parties haveagreed to a standstill in respect of all three sets of actions.
Cayman Islands litigation: In February 2013, Primeo Fund Limited('Primeo') (in liquidation since April 2009) brought an actionagainst HSBC Securities Services Luxembourg ('HSSL') and Bank ofBermuda (Cayman) Limited, alleging breach of contract and breach offiduciary duty, and claiming damages and equitable compensation.The trial concluded in February 2017, and in August 2017, the courtdismissed all claims against the defendants. In September 2017,Primeo appealed to the Court of Appeal of the Cayman Islands, wherethe matter is pending.
Luxembourg litigation: In April 2009, Herald Fund SPC ('Herald')(in liquidation since July 2013) brought an action against HSSLbefore the Luxembourg District Court, seeking restitution of cashand securities Herald purportedly lost because of MadoffSecurities' fraud, or money damages. The Luxembourg District Courtdismissed Herald's securities restitution claim, but reservedHerald's cash restitution claim and its claim for money damages.Herald has appealed this judgment to the Court of Appeal, wherethis matter is pending.
In March 2010, Herald (Lux) SICAV ('Herald (Lux)') (inliquidation since April 2009) brought an action against HSSL beforethe Luxembourg District Court seeking restitution of securities, orthe cash equivalent, or money damages. Herald (Lux) has alsorequested the restitution of fees paid to HSSL. In 2017, theparties agreed a settlement, which was approved by the Luxembourgcourt in November 2017. The settlement was concluded in January2018.
In October 2009, Alpha Prime and, in December 2014, Senator,each brought an action against HSSL before the Luxembourg DistrictCourt, seeking the restitution of securities, or the cashequivalent, or money damages. Both actions have been temporarilysuspended at the plaintiffs' request. In April 2015, Senatorcommenced an action against the Luxembourg branch of HSBC Bank plcasserting identical claims before the Luxembourg District Court.HSSL has also been named as a defendant in various actions byshareholders in Primeo Select Fund, Herald, Herald (Lux), andHermes. Most of these actions have been dismissed, suspended orpostponed.
244 HSBC Holdings plc Annual Report and Accounts 2017
Ireland litigation: In November 2013, Defender Limited broughtan action against HSBC Institutional Trust Services (Ireland)Limited ('HTIE') and others, alleging breach of contract andclaiming damages and indemnification for fund losses. A provisionaltrial date has been scheduled for October 2018.
SPV OSUS's action against HTIE and HSBC Securities Services(Ireland) Limited alleging breach of contract and claiming damagesand indemnification for fund losses was dismissed by the Irish HighCourt in October 2015. In March 2017, the Irish Court of Appealaffirmed the dismissal. In April 2017, SPV OSUS filed anapplication seeking leave to appeal the dismissal to the IrishSupreme Court. The application was heard by the Irish Supreme Courtin February 2018 and judgment is pending.
There are many factors that may affect the range of possibleoutcomes, and the resulting financial impact, of the variousMadoff-related proceedings described above, including but notlimited to the multiple jurisdictions in which the proceedings havebeen brought. Based upon the information currently available,management's estimate of the possible aggregate damages that mightarise as a result of all claims in the various Madoff-relatedproceedings is up to or exceeding $500m, excluding costs andinterest. Due to uncertainties and limitations of this estimate,the ultimate damages could differ significantly from thisamount.
US mortgage-related investigations
In April 2011, HSBC Bank USA N.A. ('HSBC Bank USA') entered intoa consent order (the 'OCC Servicing Consent Order') with the Officeof the Comptroller of the Currency ('OCC'), and HSBC FinanceCorporation ('HSBC Finance') and HSBC North America Holdings Inc.('HNAH') entered into a similar consent order (the 'FRB ServicingConsent Order') with the Federal Reserve Board ('FRB') (togetherwith the OCC Servicing Consent Order, the 'Servicing ConsentOrders'). The Servicing Consent Orders required prescribed actionsto address certain foreclosure practice deficiencies.
In January 2017, the OCC terminated the OCC Servicing ConsentOrder after determining that HSBC Bank USA had satisfied therequirements thereunder. In connection with the termination of theOCC Servicing Consent Order, the OCC also assessed a civil moneypenalty against HSBC Bank USA, finding that HSBC Bank USA failed tocorrect deficiencies identified under the OCC Servicing ConsentOrder in a timely fashion. The civil money penalty has been paid.In January 2018, the FRB terminated the FRB Servicing Consent Orderafter having determined that HNAH and HBIO are in compliance withits terms.
In February 2016, HSBC Bank USA, HSBC Finance, HSBC MortgageServices Inc. and HNAH entered into an agreement with the USDepartment of Justice (the 'DoJ'), the US Department of Housing andUrban Development, the Consumer Financial Protection Bureau, otherfederal agencies (the 'Federal Parties') and the Attorneys Generalof 49 states and the District of Columbia (the 'State Parties') toresolve civil claims related to past residential mortgage loanorigination and servicing practices (the 'National MortgageSettlement Agreement' or 'NMS'). The cash payments required underthe NMS were made in 2016. In March 2017, the NMS independentmonitor validated that the consumer relief obligations weresatisfied; and in June 2017, the NMS independent monitor validatedthat all remaining obligations under the NMS were satisfied.
The Servicing Consent Orders and the National MortgageSettlement Agreement do not completely preclude other enforcementactions by regulatory, governmental or law enforcement agenciesrelated to foreclosure and other mortgage servicing practices,including, but not limited to, matters relating to thesecuritisation of mortgages for investors, which could include theimposition of civil money penalties, criminal fines or othersanctions. In addition, these practices have in the past resultedin private litigation, and may result in further privatelitigation.
US mortgage securitisation activity and litigation
HSBC Bank USA was a sponsor or seller of loans used tofacilitate whole loan securitisations underwritten by HSBCSecurities (USA) Inc. ('HSI'). From 2005 to 2007, HSBC Bank USApurchased and sold approximately $24bn of such loans to HSI, whichwere subsequently securitised and sold by HSI to third parties. Theoutstanding principal balance was approximately $4.1bn at 31December 2017. HSBC notes that the scale of its mortgagesecuritisation activities was more limited in relation to a numberof other banks in the industry. In addition, HSI served as anunderwriter on securitisations issued by HSBC Finance or thirdparties, and HSBC Bank USA served as trustee on behalf of variousmortgage securitisation trusts.
Mortgage foreclosure and trustee matters: As the industry'sresidential mortgage foreclosure issues continue, HSBC Bank USA hastaken title to a number of foreclosed homes as trustee on behalf ofvarious mortgage securitisation trusts. As nominal record owner ofthese properties, HSBC Bank USA has been sued by municipalities andtenants alleging various violations of law, including laws relatingto property upkeep and tenants' rights. While HSBC believes andcontinues to maintain that these obligations and any relatedliabilities are those of the servicer of each trust, HSBC continuesto receive significant adverse publicity in connection with theseand similar matters, including foreclosures that are serviced byothers in the name of 'HSBC, as trustee'.
Beginning in June 2014, a number of lawsuits were filed in stateand federal courts in New York and Virginia against HSBC Bank USAas trustee of more than 280 mortgage securitisation trusts. Theselawsuits are brought on behalf of the trusts by a putative class ofinvestors including, among others, BlackRock and PIMCO funds. Thecomplaints allege that the trusts have sustained losses incollateral value of approximately $38bn. The lawsuits seekunspecified damages resulting from alleged breaches of the US TrustIndenture Act, breach of fiduciary duty, negligence, breach ofcontract and breach of the common law duty of trust. HSBC's motionsto dismiss in several of these lawsuits were, for the most part,denied.
It is not practicable to estimate the possible financial impactof these matters, as there are many factors that may affect therange of possible outcomes; however, the resulting financial impactcould be significant.
Loan repurchase matters: HSBC Bank USA, HSBC Finance andDecision One Mortgage Company LLC ('Decision One'), an indirectsubsidiary of HSBC Finance, have been named as defendants invarious mortgage loan repurchase actions brought by trustees ofmortgage securitisation trusts. In the aggregate, these actionsseek to have the HSBC defendants repurchase mortgage loans, or paycompensatory damages, totalling at least $1bn. In August 2016, HSBCreached an agreement in principle to settle one of the matters. InSeptember 2017, the court approved the settlement, concluding thematter. Another matter against HSBC Bank USA was dismissed onappeal in December 2017.
HSBC Mortgage Corporation (USA) Inc. and Decision One have alsobeen named as defendants in two separate actions filed byResidential Funding Company LLC ('RFC'), a mortgage loan purchasecounterparty, seeking unspecified damages in connection withapproximately 25,000 mortgage loans.
It is not practicable to estimate the possible financial impactof these matters, as there are many factors that may affect therange of possible outcomes; however, the resulting financial impactcould be significant.
HSBC Holdings plc Annual Report and Accounts 2017 245
Notes on the Financial Statements
FIRREA: Since 2010, various HSBC entities have receivedsubpoenas and requests for information from the DoJ and theMassachusetts state Attorney General seeking the production ofdocuments and information regarding HSBC's involvement in certainRMBS transactions as an issuer, sponsor, underwriter, depositor,trustee, custodian or servicer. In November 2014, HNAH, on behalfof itself and various subsidiaries including, but not limited to,HSBC Bank USA, HSI Asset Securitization Corp., HSI, HSBC MortgageCorporation (USA), HSBC Finance and Decision One, received asubpoena from the US Attorney's Office for the District ofColorado, pursuant to the Financial Industry Reform, Recovery andEnforcement Act ('FIRREA'), concerning the origination, financing,purchase, securitisation and servicing of sub-prime andnon-sub-prime residential mortgages. HSBC continues to cooperatewith these investigations, which are at or nearing completion.
In December 2016, HSBC had an initial discussion with the DoJ,wherein the DoJ stated its preliminary view that HSBC is subject toliability under FIRREA in connection with certain securitisationsfrom 2005 to 2007 with respect to which HSBC Bank USA served assponsor or seller of loans and HSI served as underwriter. In March2017, HSBC provided its response to the DoJ, which, among otherthings, outlined why the Bank disagrees with the DoJ's preliminaryview. Since then, the Bank has been in active discussions with theDoJ regarding a potential resolution; however, the Bank has alsoindicated a willingness to defend itself in the event that formallegal proceedings are commenced. There can be no assurance as tohow or when this matter will be resolved, or whether this matterwill be resolved prior to the commencement of formal legalproceedings by the DoJ. Moreover, it is possible that any suchresolution could result in significant penalties and other costs.To date, at least one bank has been sued by the DoJ and at leasteight other banks have reported settlements of mortgage-backedsecurities-related matters pursuant to FIRREA. The prior DoJsettlements provide no clear guidance as to how those individualsettlement amounts were calculated, and due to the high degree ofuncertainty involved, it is not practicable to estimate anypossible financial impact of this matter, which could besignificant.
HSBC expects the focus on mortgage securitisations to continueand that it may be subject to additional claims, litigation andgovernmental or regulatory scrutiny relating to its participationin the US mortgage securitisation market.
Anti-money laundering and sanctions-related matters
In October 2010, HSBC Bank USA entered into a consent cease anddesist order with the OCC, and HNAH entered into a consent ceaseand desist order with the FRB. In 2012, HSBC Bank USA furtherentered into an enterprise-wide compliance consent order (each an'Order' and together, the 'Orders'). These Orders requiredimprovements to establish an effective compliance risk managementprogramme across HSBC's US businesses, including risk managementrelated to the Bank Secrecy Act ('BSA') and AML compliance. Whilethese Orders remain open, HSBC Bank USA and HNAH believe that theyhave taken appropriate steps to bring themselves into compliancewith the requirements of the Orders.
In December 2012, HSBC Holdings, HNAH and HSBC Bank USA enteredinto agreements with US and UK government and regulatory agenciesregarding past inadequate compliance with the BSA, AML andsanctions laws. Among those agreements, HSBC Holdings and HSBC BankUSA entered into a five-year deferred prosecution agreement with,among others, the DoJ (the 'AML DPA'); and HSBC Holdings consentedto a cease and desist order, and HSBC Holdings and HNAH consentedto a civil money penalty order with the FRB. HSBC Holdings alsoentered into an agreement with the Office of Foreign Assets Control('OFAC') regarding historical transactions involving partiessubject to OFAC sanctions, as well as an undertaking with the UKFCA to comply with certain forward-looking AML andsanctions-related obligations. In addition, HSBC Bank USA enteredinto civil money penalty orders with the Financial CrimesEnforcement Network of the US Treasury Department ('FinCEN') andthe OCC.
Under these agreements, HSBC Holdings and HSBC Bank USA madepayments totalling $1.9bn to US authorities and undertook variousfurther obligations, including, among others, to retain anindependent compliance monitor (who is, for FCA purposes, a'skilled person' under section 166 of the Financial Services andMarkets Act) to produce annual assessments of the Group's AML andsanctions compliance programme (the 'Monitor'). Under the cease anddesist order issued by the FRB in 2012, the Monitor also serves asan independent consultant to conduct annual assessments. InFebruary 2018, the Monitor delivered his fourth annual follow-upreview report.
Through his country-level reviews, the Monitor identifiedpotential anti-money laundering and sanctions compliance issuesthat HSBC is reviewing further with the DoJ, FRB and/or FCA. Inparticular, the DoJ is investigating HSBC's handling of a corporatecustomer's accounts. In addition, FinCEN as well as the CivilDivision of the US Attorney's Office for the Southern District ofNew York are investigating the collection and transmittal ofthird-party originator information in certain payments instructedover HSBC's proprietary payment systems. The FCA is also conductingan investigation into HSBC Bank plc's compliance with UK moneylaundering regulations and financial crime systems and controlsrequirements. HSBC is cooperating with all of theseinvestigations.
In December 2017, the AML DPA expired and the charges deferredby the AML DPA were dismissed. The Monitor will continue working inhis capacity as a skilled person and independent consultant for aperiod of time at the FCA's and FRB's discretion. The role of theMonitor and his fourth annual follow-up review report, as well asthe AML DPA and related agreements and consent orders are discussedon pages 65 and 78.
Concurrent with entry into the AML DPA, HSBC Bank USA alsoentered into two consent orders with the OCC. The first, discussedabove, required HSBC Bank USA to adopt an enterprise-widecompliance programme. The second required HSBC Bank USA to correctthe circ*mstances noted in the OCC's report and imposedrestrictions on HSBC Bank USA acquiring control of, or holding aninterest in, any new financial subsidiary, or commencing a newactivity in its existing financial subsidiary, without the OCC'sprior approval.
These settlements with US and UK authorities have led to privatelitigation, and do not preclude further private litigation relatedto HSBC's compliance with applicable BSA, AML and sanctions laws orother regulatory or law enforcement actions for BSA, AML, sanctionsor other matters not covered by the various agreements.
In May 2014, a shareholder derivative action was filed by ashareholder of HSBC Holdings purportedly on behalf of HSBCHoldings, HSBC Bank USA, HNAH and HSBC USA Inc. (the 'NominalCorporate Defendants') in New York state court against certaincurrent and former directors and officers of those HSBC companies(the 'Individual Defendants'). The complaint alleges that theIndividual Defendants breached their fiduciary duties to theNominal Corporate Defendants and caused a waste of corporate assetsby allegedly permitting and/or causing the conduct underlying theAML DPA. In November 2015, the New York state court granted theNominal Corporate Defendants' motion to dismiss. The plaintiff hasappealed that decision.
In July 2014, a claim was filed in the Ontario Superior Court ofJustice against HSBC Holdings and a former employee purportedly onbehalf of a class of persons who purchased HSBC common shares andAmerican Depositary Shares between July 2006 and July 2012. Thecomplaint, which seeks monetary damages of up to CA$20bn, allegesthat the defendants made statutory and common lawmisrepresentations in documents released by HSBC Holdings and itswholly owned indirect subsidiary, HSBC Bank Canada, relating to
246 HSBC Holdings plc Annual Report and Accounts 2017
HSBC's compliance with BSA, AML, sanctions and other laws. InSeptember 2017, the Ontario Superior Court of Justice dismissed thestatutory claims against HSBC Holdings and the former employee forlack of jurisdiction, and stayed the common law misrepresentationclaim against HSBC Holdings on the basis of forum non-conveniens.In October 2017, the plaintiff appealed to the Court of Appeal forOntario, where the matter is pending.
Since November 2014, five lawsuits have been filed in federalcourt in New York, Illinois and Texas, against various HSBCcompanies and others, on behalf of plaintiffs who are, or arerelated to, victims of terrorist attacks in Iraq and Jordan or ofcartel violence in Mexico. In each case, it is alleged that thedefendants aided and abetted the unlawful conduct of varioussanctioned parties in violation of the US Anti-Terrorism Act. Oneaction was voluntarily dismissed in October 2017. The remainingactions are pending in federal court in New York and are at anearly stage.
Based on the facts currently known, it is not practicable atthis time for HSBC to predict the resolution of these matters,including the timing or any possible impact on HSBC, which could besignificant.
Tax-related investigations
Various tax administration, regulatory and law enforcementauthorities around the world, including in the US, Belgium,Argentina, India and Spain are conducting investigations andreviews of HSBC Private Bank (Suisse) SA ('HSBC Swiss PrivateBank') and other HSBC companies, in connection with allegations oftax evasion or tax fraud, money laundering and unlawfulcross-border banking solicitation.
HSBC continues to cooperate in ongoing investigations by the DoJand the US Internal Revenue Service regarding whether certain HSBCcompanies and employees, including those associated with HSBC SwissPrivate Bank and an HSBC company in India, acted appropriately inrelation to certain customers who may have had US tax reportingobligations. In connection with these investigations, HSBC SwissPrivate Bank, with due regard for Swiss law, has produced recordsand other documents to the DoJ. In August 2013, the DoJ informedHSBC Swiss Private Bank that it was not eligible for the 'Programfor Non-Prosecution Agreements or Non-Target Letters for SwissBanks' since a formal investigation had previously beenauthorised.
In November 2014, HSBC Swiss Private Bank was placed underformal criminal examination in France for alleged tax-relatedoffences in 2006 and 2007 and, in April 2015, HSBC Holdings wasinformed that it had been placed under formal criminal examinationin France in connection with the conduct of HSBC Swiss PrivateBank. In November 2017, HSBC Swiss Private Bank reached anagreement with the French public prosecutor to resolve itsinvestigation. Under the terms of the settlement, HSBC SwissPrivate Bank agreed to pay
EUR300 million in fines and damages. The investigation into HSBCHoldings was dismissed without further proceedings.
In November 2014, HSBC Swiss Private Bank was also placed underformal criminal examination in Belgium for alleged tax-relatedoffences. In June 2017, Belgian authorities placed HSBC Holdingsand HSBC Private Bank Holdings (Suisse) SA, a Swiss holdingcompany, under formal criminal examination.
In November 2014, the Argentine tax authority initiated acriminal action against various individuals, including current andformer HSBC employees. The criminal action includes allegations oftax evasion, conspiracy to launder undeclared funds and an unlawfulassociation among HSBC Swiss Private Bank, HSBC Bank Argentina,HSBC Bank USA and certain HSBC employees, which allegedly enablednumerous HSBC customers to evade their Argentine taxobligations.
In February 2015, the Indian tax authority issued a summons andrequest for information to an HSBC company in India. In August 2015and November 2015, HSBC companies received notices issued by twooffices of the Indian tax authority, alleging that the Indian taxauthority had sufficient evidence to initiate prosecution againstHSBC Swiss Private Bank and an HSBC company in Dubai for allegedlyabetting tax evasion of four different Indian individuals and/orfamilies and requesting that the HSBC companies show why suchprosecution should not be initiated. HSBC Swiss Private Bank andthe HSBC company in Dubai have responded to the show cause notices.HSBC is cooperating with the relevant authorities.
At 31 December 2017, HSBC has recognised a provision for thesevarious matters in the amount of $604m. There are many factors thatmay affect the range of outcomes, and the resulting financialimpact, of these investigations and reviews. Based on theinformation currently available, management's estimate of thepossible aggregate penalties that might arise as a result of thematters in respect of which it is practicable to form estimates isup to or exceeding $1.5bn, including amounts for which a provisionhas been recognised. Due to uncertainties and limitations of theseestimates, the ultimate penalties could differ significantly fromthis amount.
In light of the media attention regarding these matters, it ispossible that other tax administration, regulatory or lawenforcement authorities will also initiate or enlarge similarinvestigations or regulatory proceedings.
Mossack Fonseca & Co.
HSBC has received requests for information from variousregulatory and law enforcement authorities around the worldconcerning persons and entities believed to be linked to MossackFonseca & Co., a service provider of personal investmentcompanies. HSBC is cooperating with the relevant authorities.
Based on the facts currently known, it is not practicable atthis time for HSBC to predict the resolution of this matter,including the timing or any possible impact on HSBC, which could besignificant.
London interbank offered rates, European interbank offered ratesand other benchmark interest rate investigations and litigation
Various regulators and competition and law enforcementauthorities around the world, including in the UK, the US, the EUand Switzerland, are conducting investigations and reviews relatedto certain past submissions made by panel banks and the processesfor making submissions in connection with the setting of Libor,Euribor and other benchmark interest rates and screens used toprice certain derivative products. HSBC has been the subject ofregulatory demands for information and is cooperating with thoseinvestigations and reviews.
In December 2016, the European Commission (the 'Commission')issued a decision finding that HSBC, among other banks, engaged inanti-competitive practices in connection with the pricing of eurointerest rate derivatives in early 2007. The Commission imposed afine on HSBC based on a one-month infringement. HSBC has appealedthe decision.
US dollar Libor: Beginning in 2011, HSBC and other panel bankshave been named as defendants in a number of private lawsuits filedin the US with respect to the setting of US dollar Libor. Thecomplaints assert claims under various US laws, including USantitrust and racketeering laws, the US Commodity Exchange Act ('USCEA'), and state law. The lawsuits include individual and putativeclass actions, most of which have been transferred and/orconsolidated for pre-trial purposes before the New York DistrictCourt.
HSBC Holdings plc Annual Report and Accounts 2017 247
Notes on the Financial Statements
The New York District Court has issued decisions dismissingcertain of the claims in response to motions filed by thedefendants. Those decisions resulted in the dismissal of theplaintiffs' federal and state antitrust claims, racketeering claimsand unjust enrichment claims. The dismissal of the antitrust claimswas appealed to the US Court of Appeals for the Second Circuit,which reversed the decisions in May 2016. In July 2016, thedefendants filed a joint motion to dismiss the antitrust claims onadditional grounds not previously addressed by the court and, inDecember 2016, the New York District Court granted in part anddenied in part the motion, leaving only certain antitrust claims tobe litigated. Certain plaintiffs have appealed the December 2016order to the US Court of Appeals for the Second Circuit.Separately, in October 2016, the New York District Court granted amotion to dismiss claims brought by certain individual plaintiffsfor lack of personal jurisdiction, which is also on appeal to theSecond Circuit. Finally, in January 2017, the District Courtgranted the defendants' motion to dismiss certain of the remainingantitrust claims against defendants that did not serve on the USdollar Libor submission panel. In the New York District Court, thecases with remaining claims against HSBC have been
stayed while the court considers motions to certify classes inseveral putative class actions that are pending against HSBC'sco-defendants.
In 2017, HSBC reached agreements with plaintiffs to resolvethree putative class actions brought on behalf of persons whopurchased US dollar Libor-indexed bonds, persons who purchased USLibor-indexed-exchange-traded instruments and US based lendinginstitutions that made or purchased US dollar Libor-indexed loans.In February 2018, HSBC reached an agreement with plaintiffs toresolve a putative class action brought on behalf of persons whopurchased US dollar Libor-indexed interest rate swaps and otherinstruments directly from the defendant banks and their affiliates.These settlements are subject to court approval.
Euribor: In November 2013, HSBC and other panel banks were namedas defendants in a putative class action filed in the New YorkDistrict Court on behalf of persons who transacted in euro futurescontracts and other financial instruments allegedly related toEuribor. The complaint alleges, among other things, misconductrelated to Euribor in violation of US antitrust laws, the US CEAand state law. In December 2016, HSBC reached an agreement withplaintiffs to resolve this action, subject to court approval. Thecourt issued an order granting preliminary approval in January2017, and has scheduled the final approval hearing in May 2018.
Singapore Interbank Offered Rate ('SIBOR'), Singapore Swap OfferRate ('SOR') and Australia Bank Bill Swap Rate ('BBSW'): In July2016 and August 2016, HSBC and other panel banks were named asdefendants in two putative class actions filed in the New YorkDistrict Court on behalf of persons who transacted in productsrelated to the SIBOR, SOR and BBSW benchmark rates. The complaintsallege, among other things, misconduct related to these benchmarkrates in violation of US antitrust, commodities and racketeeringlaws, and state law. In August 2017, the defendants moved todismiss the SIBOR and SOR case, and this motion remains pending.The defendants moved to dismiss the BBSW case in February 2017 andthis motion also remains pending.
US dollar International Swaps and Derivatives Association fix('ISDAfix'): In September 2014, HSBC and other panel banks werenamed as defendants in a number of putative class actionsconsolidated in the New York District Court on behalf of personswho transacted in interest rate derivatives or purchased or soldfinancial instruments that were either tied to ISDAfix rates orwere executed shortly before, during, or after the time of thedaily ISDAfix setting window. The consolidated complaint alleges,among other things, misconduct related to these activities inviolation of US antitrust laws, the US CEA and state law. HSBC'smotion to dismiss the complaint was denied in March 2016. In June2017, HSBC reached an agreement with plaintiffs to resolve thisconsolidated action, subject to court approval. The court issued anorder granting preliminary approval in July 2017, but has not yetset a date for the final approval hearing.
Canadian Dealer Offered Rate: In January 2018, various HSBCentities and other banks were named as defendants in a putativeclass action filed in the New York District Court in relation tothe Canadian Dealer Offered Rate. The claim, which is at an earlystage, asserts various breaches of US laws, including US antitrustand racketeering laws, the US CEA, and common law.
There are many factors that may affect the range of outcomes,and the resulting financial impact, of these matters, which couldbe significant.
Supranational, sovereign and agency bonds
In April 2017, various HSBC companies, among other banks, wereadded as defendants in a putative class action alleging aconspiracy to manipulate the market for US dollar-denominatedsupranational, sovereign and agency bonds between 2005 and 2015 inviolation of US antitrust laws. In November 2017, plaintiffs filedan amended consolidated complaint which omitted certain HSBCdefendants. The remaining HSBC defendants moved to dismiss theamended consolidated complaint, and this motion remainspending.
In November 2017, various HSBC companies and other financialinstitutions were named as defendants in a putative class actionissued in Canada making similar allegations under Canadian law. Theclaim has not yet been served.
Based on the facts currently known, it is not practicable atthis time for HSBC to predict the resolution of these matters,including the timing or any possible impact on HSBC, which could besignificant.
Foreign exchange rate investigations and litigation
Various regulators and competition and law enforcementauthorities around the world, including in the US, the EU,Switzerland, Brazil, South Korea and South Africa, are conductingcivil and criminal investigations and reviews into trading by HSBCand others on the foreign exchange markets. HSBC is cooperatingwith these investigations and reviews.
In August 2016, the DoJ indicted two now-former HSBC employeesand charged them with wire fraud and conspiracy relating to a 2011foreign exchange transaction. In October 2017, one of the formeremployees was found guilty after trial. In January 2018, HSBCHoldings entered into a three-year deferred prosecution agreementwith the Criminal Division of the DoJ (the 'FX DPA'), regardingfraudulent conduct in connection with two particular transactionsin 2010 and 2011. This concluded the DoJ's investigation intoHSBC's historical foreign exchange activities. Under the terms ofthe FX DPA, HSBC has a number of ongoing obligations, includingcontinuing to cooperate with authorities and implementingenhancements to its internal controls and procedures in its GlobalMarkets business, which will be the subject of annual reports tothe DoJ. In addition, HSBC agreed to pay a financial penalty andrestitution.
In September 2017, HSBC Holdings and HNAH consented to a civilmoney penalty order with the FRB in connection with itsinvestigation into HSBC's foreign exchange activities. Under theterms of the order, HSBC Holdings and HNAH agreed to undertakecertain remedial steps and to pay a civil money penalty to theFRB.
In December 2016, HSBC Bank plc entered into a settlement withBrazil's Administrative Council of Economic Defense ('CADE') inconnection with its investigation into 15 banks, including HSBCBank plc, as well as 30 individuals, relating to practices in theoffshore foreign exchange market. Under the terms of thesettlement, HSBC Bank plc agreed to pay a financial penalty toCADE. CADE has also publicly announced that it is initiating aseparate investigation into the onshore foreign exchange market andhas identified a number of banks, including HSBC, as subjects ofits investigation.
248 HSBC Holdings plc Annual Report and Accounts 2017
In February 2017, the Competition Commission of South Africareferred a complaint for proceedings before the South AfricanCompetition Tribunal against 18 financial institutions, includingHSBC Bank plc, for alleged misconduct related to the foreignexchange market in violation of South African antitrust laws. InApril 2017, HSBC filed an exception to the complaint, based on alack of jurisdiction and statute of limitations. In January 2018,the South African Competition Tribunal approved the provisionalreferral of additional financial institutions, including HSBC BankUSA, to the proceedings. These proceedings are at an earlystage.
In late 2013 and early 2014, HSBC and other banks were named asdefendants in various putative class actions consolidated in theNew York District Court. The consolidated complaint alleged, amongother things, that the defendants conspired to manipulate theWM/Reuters foreign exchange benchmark rates. In September 2015,HSBC reached an agreement with plaintiffs to resolve theconsolidated action, subject to court approval. In December 2015,the court granted preliminary approval of the settlement, and HSBCmade payment of the agreed settlement amount into an escrowaccount. The settlement remains subject to final approval by thecourt.
In June 2015, a putative class action was filed in the New YorkDistrict Court making similar allegations on behalf of EmployeeRetirement Income Security Act of 1974 ('ERISA') plan participants.The court dismissed the claims in the ERISA action, and theplaintiffs have appealed to the US Court of Appeals for the SecondCircuit. In May 2015, another complaint was filed in the USDistrict Court for the Northern District of California makingsimilar allegations on behalf of retail customers. HSBC filed amotion to transfer that action from California to New York, whichwas granted in November 2015. In March 2017, the New York DistrictCourt dismissed the retail customers' complaint in response to thedefendants' joint motion to dismiss. In August 2017, the retailcustomer plaintiffs filed an amended complaint and the defendantsmoved to dismiss. The motion remains pending. In April and June2017, putative class actions making similar allegations on behalfof purported 'indirect' purchasers of foreign exchange productswere filed in New York. Those plaintiffs subsequently filed aconsolidated amended complaint. HSBC's motion to dismiss theconsolidated amended complaint was filed in August 2017 and remainspending.
In September 2015, two additional putative class actions makingsimilar allegations under Canadian law were issued in Canadaagainst various HSBC companies and other financial institutions. InJune 2017, HSBC reached an agreement with the plaintiffs to resolvethese actions. The settlement received final court approval inOctober 2017.
At 31 December 2017, HSBC has recognised a provision for theseand similar matters in the amount of $511m. There are many factorsthat may affect the range of outcomes, and the resulting financialimpact, of these matters. Due to uncertainties and limitations ofthese estimates, the ultimate penalties could differ significantlyfrom the amount provided.
Precious metals fix-related investigations and litigation
Various regulators and competition and law enforcementauthorities, including in the US and the EU, are conductinginvestigations and reviews relating to HSBC's precious metalsoperations and trading. HSBC is cooperating with theseinvestigations and reviews. In November 2014, the AntitrustDivision and Criminal Fraud Section of the DoJ issued a documentrequest to HSBC Holdings, seeking the voluntary production ofcertain documents in connection with a criminal investigation thatthe DoJ is conducting of alleged anti-competitive and manipulativeconduct in precious metals trading. In January 2016, the AntitrustDivision of the DoJ informed HSBC that it was closing itsinvestigation. In January 2018, HSI reached an agreement with theUS Commodity Futures Trading Commission ('CFTC') to resolve itsinvestigation of HSBC's precious metals activities. Under the termsof the settlement, HSBC Securities (USA) Inc. agreed to pay afinancial penalty to the CFTC.
Gold: Beginning in March 2014, numerous putative class actionswere filed in the New York District Court and the US DistrictCourts for the District of New Jersey and the Northern District ofCalifornia, naming HSBC and other members of The London Gold MarketFixing Limited as defendants. The complaints allege that, fromJanuary 2004 to June 2013, defendants conspired to manipulate theprice of gold and gold derivatives for their collective benefit inviolation of US antitrust laws, the US CEA and New York state law.The actions were consolidated in the New York District Court. Thedefendants' motion to dismiss the consolidated action was grantedin part and denied in part in October 2016. In June 2017, the courtgranted plaintiffs leave to file a third amended complaint, whichnames a new defendant. The court has denied the pre-existingdefendants' request for leave to file a joint motion to dismiss.HSBC and the other pre-existing defendants have requested a stay ofdiscovery.
Beginning in December 2015, numerous putative class actionsunder Canadian law were filed in the Ontario and Quebec SuperiorCourts of Justice against various HSBC companies and otherfinancial institutions. The plaintiffs allege that, among otherthings, from January 2004 to March 2014, defendants conspired tomanipulate the price of gold and gold derivatives in violation ofthe Canadian Competition Act and common law. These actions are atan early stage.
Silver: Beginning in July 2014, numerous putative class actionswere filed in the US District Courts for the Southern and EasternDistricts of New York, naming HSBC and other members of The LondonSilver Market Fixing Ltd as defendants. The complaints allege that,from January 2007 to December 2013, the defendants conspired tomanipulate the price of silver and silver derivatives for theircollective benefit in violation of US antitrust laws, the US CEAand New York state law. The actions were consolidated in the NewYork District Court. The defendants' motion to dismiss theconsolidated action was granted in part and denied in part inOctober 2016. In June 2017, the court granted plaintiffs leave tofile a third amended complaint, which names several new defendants.The court has denied the pre-existing defendants' request for leaveto file a joint motion to dismiss. HSBC and the other pre-existingdefendants have requested a stay of discovery.
In April 2016, two putative class actions under Canadian lawwere filed in the Ontario and Quebec Superior Courts of Justiceagainst various HSBC companies and other financial institutions.Plaintiffs in both actions allege that, from January 1999 to August2014, the defendants conspired to manipulate the price of silverand silver derivatives in violation of the Canadian Competition Actand common law. The Ontario action is at an early stage. The Quebecaction has been temporarily stayed.
Platinum and palladium: Between late 2014 and early 2015,numerous putative class actions were filed in the New York DistrictCourt, naming HSBC and other members of The London Platinum andPalladium Fixing Company Limited as defendants. The complaintsallege that, from January 2008 to November 2014, the defendantsconspired to manipulate the price of platinum group metals ('PGM')and PGM-based financial products for their collective benefit inviolation of US antitrust laws and the US CEA. In March 2017, thedefendants' motion to dismiss the second amended consolidatedcomplaint was granted in part and denied in part. In June 2017,plaintiffs filed a third amended complaint. The defendants filed ajoint motion to dismiss, which remains pending.
There are many factors that may affect the range of outcomes,and the resulting financial impact, of these matters, which couldbe significant.
HSBC Holdings plc Annual Report and Accounts 2017 249
Notes on the Financial Statements
Treasury auctions
Beginning in July 2015, HSI, among other financial institutions,was named as a defendant in several putative class actions filed inthe New York District Court. The complaints generally allege thatthe defendants violated US antitrust laws and the US CEA bycolluding
to manipulate prices of US Treasury securities sold at auction.The cases have been consolidated in the New York District Court. InNovember 2017, the plaintiffs filed an amended consolidatedcomplaint that focused on a sub-group of primary dealer defendants,and dropped several of the financial institutions named in theoriginal consolidated complaint, including HSBC. In December 2017the court dismissed the consolidated class claims against thosedefendants, including HSBC, not named in the consolidated amendedcomplaint.
The DoJ has also requested information from HSBC and reportedlyother banks regarding US Treasury securities trading practices.HSBC is cooperating with this ongoing investigation.
Based on the facts currently known, it is not practicable atthis time for HSBC to predict the resolution of these matters,including the timing or any possible impact on HSBC, which could besignificant.
Interest rate swap and credit default swap litigation
In February 2016, various HSBC companies, among others, wereadded as defendants in a putative class action filed in the NewYork District Court. The complaint alleged that the defendantsviolated US antitrust laws by, among other things, conspiring toboycott and eliminate various entities and practices that wouldhave brought exchange trading to buy-side investors in the interestrate swaps marketplace. In June 2016, this action along with othercomplaints filed in the New York District Court and the IllinoisDistrict Court were consolidated in the New York District Courtand, in January 2017, the defendants filed a motion to dismiss. InJuly 2017, the court granted HSBC's motion to dismiss.
In June 2017, certain plaintiffs in the consolidated actionbrought a separate individual action in the New York District Courtagainst most of the same defendants, alleging similar violations offederal and state antitrust laws and breaches of common law inrelation to the credit default swap market.
Based on the facts currently known, it is not practicable atthis time for HSBC to predict the resolution of these matters,including the timing or any possible impact on HSBC, which could besignificant.
Fédération Internationale de Football Association ('FIFA')related investigations
HSBC has received enquiries from the DoJ regarding its bankingrelationships with certain individuals and entities that are or maybe associated with FIFA. The DoJ is investigating whether multiplefinancial institutions, including HSBC, permitted the processing ofsuspicious or otherwise improper transactions, or failed to observeapplicable AML laws and regulations. HSBC is cooperating with theDoJ's investigation.
Based on the facts currently known, it is not practicable atthis time for HSBC to predict the resolution of this matter,including the timing or any possible impact on HSBC, which could besignificant.
Hiring practices investigation
The US Securities and Exchange Commission (the 'SEC') isinvestigating multiple financial institutions, including HSBC, inrelation to hiring practices of candidates referred by or relatedto government officials or employees of state-owned enterprises inAsia-Pacific. HSBC has received various requests for informationand is cooperating with the SEC's investigation.
Based on the facts currently known, it is not practicable atthis time for HSBC to predict the resolution of this matter,including the timing or any possible impact on HSBC, which could besignificant.
Stanford litigation
In January 2018, HSBC Bank plc received a letter of claim fromthe Antiguan Joint Liquidators of Stanford International Bank Ltd('SIB') asserting various claims in connection with HSBC Bank plc'srole as a correspondent bank to SIB from 2003 to 2009. HSBC Bankplc denies the allegations and is preparing its response.
HSBC Bank plc continues to defend putative class action lawsuitsin the US District Court for the Northern District of Texas againstHSBC Bank plc and other bank and individual defendants. Thecomplaints, filed by the Official Stanford Investors Committee anda putative class of persons who held monies on deposit and/orcertificates of deposit issued by SIB, allege various fraudulenttransfer, statutory and tort claims. In November 2017, the courtdenied the class plaintiffs' motion for class certification.Permission to appeal that ruling has been requested by the classplaintiffs.
Based on the facts currently known, it is not practicable atthis time for HSBC to predict the resolution of these matters,including the timing or any possible impact on HSBC, which could besignificant.
35 Related party transactions --------------------------
Related parties of the Group and HSBC Holdings includesubsidiaries, associates, joint ventures, post-employment benefitplans for HSBC employees, Key Management Personnel ('KMP') asdefined by IAS 24, close family members of KMP and entities whichare controlled or jointly controlled by KMP or their close familymembers. KMP are defined as those persons having authority andresponsibility for planning, directing and controlling theactivities of HSBC Holdings. These individuals also constitute'senior management' for the purposes of the Hong Kong ListingRules. Following a review of the application of IAS 24, it wasdetermined that the roles of Chief Legal Officer, Group Head ofInternal Audit and Group Head of Human Resources did not meet thecriteria for KMP as provided for in the standard.
Particulars of transactions with related parties are tabulatedbelow. The disclosure of the year-end balance and the highestamounts outstanding during the year is considered to be the mostmeaningful information to represent the amount of the transactionsand outstanding balances during the year.
Key Management Personnel
Details of Directors' remuneration and interest in shares aredisclosed in the Directors' Remuneration Report on pages 141 to157. IAS 24 'Related party disclosures' requires the followingadditional information for key management compensation.
250 HSBC Holdings plc Annual Report and Accounts 2017 Compensation of Key Management Personnel 2017 2016 2015 $m $m $m Short-term employee benefits 43 41 40 Post-employment benefits - - 1 Other long-term employee benefits 5 5 9 Share-based payments 35 37 51 Year ended 31 Dec 83 83 101 ---------------------------------- ---- ---- ---- Shareholdings, options and other securities of Key Management Personnel 2017 2016 (000s) (000s) Number of options held over HSBC Holdings ordinary shares under employee share plans 15 18 ------ Number of HSBC Holdings ordinary shares held beneficially and non-beneficially 22,609 22,283 ------ At 31 Dec 22.624 22,301 ------------------------------------------------------------------------------------- ------ ------ Transactions and balances during the year with Key Management Personnel 2017 2016 ----------------------------------------- ------------------------------------ Highest amounts Highest amounts outstanding Balance outstanding Balance at 31 Dec during year at 31 Dec during year Footnotes $m $m $m $m Key Management Personnel 1 ----------------- ---------------------- Advances and credits 2 329 334 215 220 ------------------------ --------- ----------------- ---------------------- ---------- ---------------------- Guarantees 6 52 55 63 ------------------------ --------- ----------------- ---------------------- ---------- ---------------------- Deposits 300 893 229 677 ------------------------ --------- ----------------- ---------------------- ---------- ---------------------- 1 Includes Key Management Personnel, close family members of Key Management Personnel and entities which are controlled or jointly controlled by Key Management Personnel or their close family members. 2 Advances and credits entered into by subsidiaries of HSBC Holdings during 2017 with Directors, disclosed pursuant to Section 413 of the Companies Act 2006, totalled $2m (2016: $2m).
Some of the transactions were connected transactions as definedby the Rules Governing The Listing of Securities on The StockExchange of Hong Kong Limited, but were exempt from any disclosurerequirements under the provisions of those rules. The abovetransactions were made in the ordinary course of business and onsubstantially the same terms, including interest rates andsecurity, as for comparable transactions with persons of a similarstanding or, where applicable, with other employees. Thetransactions did not involve more than the normal risk of repaymentor present other unfavourable features.
Associates and joint ventures
The Group provides certain banking and financial services toassociates and joint ventures including loans, overdrafts, interestand non-interest bearing deposits and current accounts. Details ofthe interests in associates and joint ventures are given in Note17.
Transactions and balances during the year with associates and joint ventures 2017 2016 ---------------------------- ------------------------------ Highest balance Balance at Highest balance Balance at during the year 31 Dec during the year 31 Dec $m $m $m $m Unsubordinated amounts due from joint ventures 138 119 126 113 Unsubordinated amounts due from associates 3,104 2,537 3,136 2,881 ----------------------------------------------- ---------------- ---------- ---------------- ---------- Subordinated amounts due from associates 411 411 - - ----------------------------------------------- ---------------- ---------- ---------------- ---------- Amounts due to associates 2,617 1,232 1,112 576 Guarantees and commitments 654 665 776 594 ----------------------------------------------- ---------------- ---------- ---------------- ----------
The above outstanding balances arose in the ordinary course ofbusiness and on substantially the same terms, including interestrates and security, as for comparable transactions with third-partycounterparties.
Post-employment benefit plans
At 31 December 2017, $5.3bn (2016: $4.4bn) of HSBCpost-employment benefit plan assets were under management by
HSBC companies, earning management fees of $8m in 2017 (2016:$6m). At 31 December 2017, HSBC's post-employment
benefit plans had placed deposits of $875m (2016: $710m) withits banking subsidiaries, earning interest payable to theschemes
of nil (2016: $1m). The above outstanding balances arose fromthe ordinary course of business and on substantially the sameterms, including interest rates and security, as for comparabletransactions with third-party counterparties.
The HSBC Bank (UK) Pension Scheme and International StaffRetirement Benefit Scheme enter into swap transactions with HSBC tomanage inflation and interest rate sensitivity of its liabilitiesand selected assets. At 31 December 2017, the gross notional valueof the swaps with HSBC Bank (UK) Pension Scheme was $11.3bn (2016:$10.5bn); these swaps had a positive fair value to the scheme of$1.0bn (2016: $0.9bn); and HSBC had delivered collateral of $1.0bn(2016: $0.9bn) to the scheme in respect of these arrangements.
At 31 December 2017, the International Staff Retirement BenefitScheme no longer held any swaps. In the prior year, it held swaps(gross notional value in 2016: $1.2bn) which had a net negativefair value to the scheme (2016: $85m negative). All swaps wereexecuted at prevailing market rates and within standard marketbid/offer spreads.
HSBC Holdings plc Annual Report and Accounts 2017 251
Notes on the Financial Statements
HSBC Holdings
Details of HSBC Holdings' subsidiaries are shown in Note 37.
Transactions and balances during the year with subsidiaries 2017 2016 ---------------------------- ------------------------------ Highest balance Balance at Highest balance Balance at during the year 31 Dec during the year 31 Dec $m $m $m $m Assets Cash and balances with HSBC undertakings 1,985 1,985 997 247 -------------------------------------------------- Loans and advances to HSBC undertakings designated at fair value 11,944 11,944 - - -------------------------------------------------- ---------------- ---------- ---------------- ----------
Derivatives 2,796 2,388 4,494 2,148 -------------------------------------------------- Loans and advances to HSBC undertakings 89,810 76,627 77,732 77,421 -------------------------------------------------- Financial investments in HSBC undertakings 4,264 4,264 4,314 3,590 -------------------------------------------------- Investments in subsidiaries 95,850 92,930 97,827 95,850 -------------------------------------------------- Total related party assets at 31 Dec 206,649 190,138 185,364 179,256 -------------------------------------------------- ---------------- ---------- ---------------- ---------- Liabilities Amounts owed to HSBC undertakings 2,906 2,571 3,823 2,157 Derivatives 4,904 3,082 5,025 5,025 Subordinated liabilities 892 892 1,749 891 Total related party liabilities at 31 Dec 8,702 6,545 10,597 8,073 -------------------------------------------------- ---------------- ---------- ---------------- ---------- Guarantees and commitments 9,692 7,778 63,719 7,619 -------------------------------------------------- ---------------- ---------- ---------------- ----------
The above outstanding balances arose in the ordinary course ofbusiness and on substantially the same terms, including interestrates and security, as for comparable transactions with third-partycounterparties.
Some employees of HSBC Holdings are members of the HSBC Bank(UK) Pension Scheme, which is sponsored by a separate Groupcompany. HSBC Holdings incurs a charge for these employees equal tothe contributions paid into the scheme on their behalf. Disclosurein relation to the scheme is made in Note 5.
36 Events after the balance sheet date -----------------------------------
A fourth interim dividend for 2017 of $0.21 per ordinary share(a distribution of approximately $4,199m) was declared by theDirectors after 31 December 2017.
These accounts were approved by the Board of Directors on 20February 2018 and authorised for issue.
37 HSBC Holdings' subsidiaries, joint ventures and associates ----------------------------------------------------------
In accordance with section 409 of the Companies Act 2006 a listof HSBC Holdings plc subsidiaries, joint ventures and associates,the registered office address and the effective percentage ofequity owned at 31 December 2017 is disclosed below.
Unless otherwise stated, the share capital comprises ordinary orcommon shares which are held by Group subsidiaries. The ownershippercentage is provided for each undertaking. The undertakings beloware consolidated by HSBC unless otherwise indicated.
252 HSBC Holdings plc Annual Report and Accounts 2017
Subsidiaries
% of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ACN 087 652 113 Pty Limited 100.00 15 ---------------------------------- ---------------------------------- --------------------------------- --------- Almacenadora Banpacifico S.A. (in liquidation) 99.99 9, 16 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance December (F) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance December (H) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance December (M) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance December (P) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance December (R) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance June (A) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance June (D) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance March (B) Limited 100.00 18 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance March (D) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance March (F) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance September (F) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Assetfinance September (G) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- B&Q Financial Services Limited 100.00 19 ---------------------------------- ---------------------------------- --------------------------------- --------- Banco Nominees (Guernsey) Limited 100.00 9, 20 ---------------------------------- ---------------------------------- --------------------------------- --------- Banco Nominees 2 (Guernsey) Limited 100.00 20 ---------------------------------- ---------------------------------- --------------------------------- --------- Banco Nominees Limited 100.00 21 ---------------------------------- ---------------------------------- --------------------------------- --------- Bank of Bermuda (Cayman) Limited 100.00 22 ---------------------------------- ---------------------------------- --------------------------------- --------- Beau Soleil Limited Partnership n/a 7, 9, 23 ---------------------------------- ---------------------------------- --------------------------------- --------- Beijing Miyun HSBC Rural Bank Company Limited 100.00 12, 24 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Company LLC 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Consumer Discount Company 100.00 26 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Financial I Inc. 100.00 27 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Florida Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Homeowner Service Corporation 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Kentucky Inc. 100.00 25
---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Loan & Thrift Co. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Louisiana Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Maine Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Massachusetts Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Michigan Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial New Hampshire Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Oregon Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Rhode Island Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial South Dakota Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Tennessee Inc. 100.00 28 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial West Virginia, Inc. 100.00 29 ---------------------------------- ---------------------------------- --------------------------------- --------- Beneficial Wyoming Inc. 100.00 30 ---------------------------------- ---------------------------------- --------------------------------- --------- BFC Insurance Agency of Nevada 100.00 223 ---------------------------------- ---------------------------------- --------------------------------- --------- Billingsgate Nominees Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Cal-Pacific Services, Inc. 100.00 27 ---------------------------------- ---------------------------------- --------------------------------- --------- Canada Crescent Nominees (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Canada Square Nominees (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Canada Square Property Participations Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Canada Water Nominees (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Capco/Cove, Inc. 100.00 31 ---------------------------------- ---------------------------------- --------------------------------- --------- Card-Flo #1, Inc. 100.00 32 ---------------------------------- ---------------------------------- --------------------------------- --------- Card-Flo #3, Inc. 100.00 25 ---------------------------------- ---------------------------------- --------------------------------- --------- Cayman International Finance Limited 100.00 33 ---------------------------------- ---------------------------------- --------------------------------- --------- CC&H Holdings LLC 100.00 34 ---------------------------------- ---------------------------------- --------------------------------- --------- CCF Charterhouse GmbH & Co Asset Leasing KG (In Liquidation) 100.00 (99.99) 35 ---------------------------------- ---------------------------------- --------------------------------- --------- CCF Charterhouse GmbH (in Liquidation) 100.00 (99.99) 4, 35 ---------------------------------- ---------------------------------- --------------------------------- --------- CCF Holding (LIBAN) S.A.L. (in liquidation) 74.99 1, 36 ---------------------------------- ---------------------------------- --------------------------------- --------- CCF & Partners Asset Management Limited 99.99 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Charterhouse Administrators ( D.T.) Limited 100.00 (99.99) 9, 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Charterhouse Development Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Charterhouse Management Services Limited 100.00 (99.99) 9, 17 ---------------------------------- ---------------------------------- --------------------------------- --------- Charterhouse Pensions Limited 100.00 17 ---------------------------------- ---------------------------------- --------------------------------- --------- % of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ---------------------------------- -------------------------------------------------------------------- ------------ Chongqing Dazu HSBC Rural Bank Company Limited (100.00) 12, 37 ---------------------------------- --------------------------------- --------------------------------- ------------ Chongqing Fengdu HSBC Rural Bank Company Limited 100.00 12, 38 ---------------------------------- --------------------------------- --------------------------------- ------------ Chongqing Rongchang HSBC Rural Bank Company Limited 100.00 12, 39 ---------------------------------- --------------------------------- --------------------------------- ------------ CL Residential Limited (in liquidation) 100.00 40 ---------------------------------- --------------------------------- --------------------------------- ------------ COIF Nominees Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ Cordico Management AG 100.00 41 ---------------------------------- --------------------------------- --------------------------------- ------------ Corhold Limited (in liquidation) 100.00 42 ---------------------------------- --------------------------------- --------------------------------- ------------ Dalian Pulandian HSBC Rural Bank
Company Limited 100.00 12, 43 ---------------------------------- --------------------------------- --------------------------------- ------------ Decision One Mortgage Company, LLC 100.00 44 ---------------------------------- --------------------------------- --------------------------------- ------------ Dem 5 100.00 (99.99) 4, 9, 45 ---------------------------------- --------------------------------- --------------------------------- ------------ Dem 9 100.00 (99.99) 4, 9, 45 ---------------------------------- --------------------------------- --------------------------------- ------------ Dempar 1 100.00 (99.99) 4, 9, 46 ---------------------------------- --------------------------------- --------------------------------- ------------ Dempar 4 100.00 (99.99) 9, 46 ---------------------------------- --------------------------------- --------------------------------- ------------ Desarrollo Turistico, S.A. de C.V. 99.99 9, 16 ---------------------------------- --------------------------------- --------------------------------- ------------ Ellenville Holdings, Inc. 100.00 31 ---------------------------------- --------------------------------- --------------------------------- ------------ Elysees GmbH (in Liquidation) 100.00 (99.99) 35 ---------------------------------- --------------------------------- --------------------------------- ------------ Elysées Immo Invest 100.00 (99.99) 4, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ EMTT Limited (in liquidation) 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ Equator Holdings Limited (in liquidation) 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ Eton Corporate Services Limited 100.00 20 ---------------------------------- --------------------------------- --------------------------------- ------------ Far East Leasing SA 100.00 48 ---------------------------------- --------------------------------- --------------------------------- ------------ Fdm 5 SAS 100.00 (99.99) 4, 9, 45 ---------------------------------- --------------------------------- --------------------------------- ------------ FEPC Leasing Ltd. 100.00 49 ---------------------------------- --------------------------------- --------------------------------- ------------ Finanpar 2 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Finanpar 7 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Flandres Contentieux S.A. 100.00 (99.99) 1, 4, 9, 50 ---------------------------------- --------------------------------- --------------------------------- ------------ Foncière Elysées 100.00 (99.99) 4, 9, 46 ---------------------------------- --------------------------------- --------------------------------- ------------ Forward Trust Rail Services Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ Fujian Yongan HSBC Rural Bank Company Limited 100.00 12, 51 ---------------------------------- --------------------------------- --------------------------------- ------------ Fulcher Enterprises Company Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Fundacion HSBC, A.C. 99.99 1, 9, 11, 16 ---------------------------------- --------------------------------- --------------------------------- ------------ Gesellschaft fur Industrielle Beteiligungen und Finanzierung mbH 100.00 (80.67) 9, 53 ---------------------------------- --------------------------------- --------------------------------- ------------ Gesico International SA (in liquidation) 100.00 54 ---------------------------------- --------------------------------- --------------------------------- ------------ Giller Ltd. 100.00 31 ---------------------------------- --------------------------------- --------------------------------- ------------ GPIF Co-Investment, LLC 80.00 25 ---------------------------------- --------------------------------- --------------------------------- ------------ GPIF-I Equity Co., Ltd. 100.00 8, 22 ---------------------------------- --------------------------------- --------------------------------- ------------ GPIF-I Finance Co., Ltd 100.00 8, 22 ---------------------------------- --------------------------------- --------------------------------- ------------ Griffin International Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ Grupo Financiero HSBC, S. A. de C. V. 99.99 9, 16 ---------------------------------- --------------------------------- --------------------------------- ------------ Guangdong Enping HSBC Rural Bank Company Limited 100.00 12, 55 ---------------------------------- --------------------------------- --------------------------------- ------------ GZ Guyerzeller Corporation (in liquidation) 100.00 129 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng (Nominee) Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Bank (China) Limited 100.00 (62.14) 12, 57 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Bank (Trustee) Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Bank Limited 62.14 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Bullion Company Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Credit Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Data Services Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------
Hang Seng Finance Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Financial Information Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Futures Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Indexes Company Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Insurance Company Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Investment Management Limited 100.00 (62.14) 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Investment Services Limited 100.00 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Life Limited 100.00 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Real Estate Management Limited 100.00 52 ---------------------------------- --------------------------------- --------------------------------- ------------ Hang Seng Securities Limited 100.00 52 ---------------------------------- --------------------------------- --------------------------------- ------------ HSBC Holdings plc Annual Report and Accounts 2017 253
Notes on the Financial Statements
% of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ----------------------------------- ---------------------------------------------------------------------- --------- Hang Seng Security Management Limited 100.00 52 Haseba Investment Company Limited 100.00 52 ----------------------------------- ---------------------------------- ---------------------------------- --------- HFC Bank Limited (in liquidation) 100.00 40 ----------------------------------- ---------------------------------- ---------------------------------- --------- HFC Company LLC 100.00 25 High Time Investments Limited 100.00 (62.14) 52 ----------------------------------- ---------------------------------- ---------------------------------- --------- HITG Administration GmbH 100.00 58 ----------------------------------- ---------------------------------- ---------------------------------- --------- Honey Green Enterprises Ltd. 100.00 59 ----------------------------------- ---------------------------------- ---------------------------------- --------- Hongkong International Trade Finance (Holdings) Limited (in liquidation) 100.00 17 Household Capital Markets LLC 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Commercial Financial Services, Inc. 100.00 26 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Finance Consumer Discount Company 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Finance Corporation II 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Finance Corporation III 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Finance Corporation of Alabama 100.00 224 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Finance Corporation of California 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Finance Industrial Loan Company of Iowa 100.00 225 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Finance Realty Corporation of Nevada 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Finance Realty Corporation of New York 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Financial Center Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Industrial Finance Company 100.00 226 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Insurance Group Holding Company 100.00 227 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household International Europe Limited (in liquidation) 100.00 3, 40 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Pooling Corporation 100.00 60 ----------------------------------- ---------------------------------- ---------------------------------- --------- Household Realty Corporation 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HRMG Nominees Limited 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC (BGF) Investments Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC (BVI) Limited (in liquidation) 100.00 56 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC (General Partner) Limited 100.00 2, 61 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC (Guernsey) GP PCC Limited 100.00 1, 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC (Kuala Lumpur) Nominees Sdn Bhd 100.00 62
----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC (Malaysia) Trustee Berhad 100.00 63 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC (Singapore) Nominees Pte Ltd 100.00 64 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Administradora de Inversiones S.A. 100.00 (99.65) 65 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Agency (India) Private Limited 100.00 66 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Alpha Funding (UK) Holdings LP (in liquidation) n/a 7, 67 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Alternative Investments Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Amanah Malaysia Berhad 100.00 62 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Amanah Takaful (Malaysia) Berhad 49.00 56, 62 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Americas Corporation (Delaware) 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Argentina Holdings S.A. 100.00 68 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Asia Holdings (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Asia Holdings B.V. 100.00 3, 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Asia Holdings Limited 100.00 2, 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Asia Pacific Holdings (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Asset Finance (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Asset Finance Holdings Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Asset Finance M.O.G. Holdings (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- --------- HSBC Asset Management (India) Private Limited 100.00 (99.99) 3, 9, 70 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Assurances Vie (France) 100.00 (99.99) 4, 9, 50 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Australia Holdings Pty Limited 100.00 15 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank (Chile) 100.00 (99.99) 9, 71 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank (China) Company Limited 100.00 12, 72 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank (General Partner) Limited 100.00 61 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank (Mauritius) Limited 72.95 73 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank (RR) (Limited Liability Company) 100.00 13, 74 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank (Singapore) Limited 100.00 64 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank (Taiwan) Limited 100.00 75 ----------------------------------- ---------------------------------- ---------------------------------- --------- % of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ----------------------------------- ---------------------------------------------------------------------- --------- HSBC Bank (Uruguay) S.A. 100.00 76 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank (Vietnam) Ltd. 100.00 77 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank A.S. 100.00 78 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Argentina S.A. 100.00 (99.99) 79 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Armenia cjsc 70.00 80 ---------------------------------- HSBC Bank Australia Limited 100.00 15 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Bermuda Limited 100.00 21 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Canada 100.00 81 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Capital Funding (Sterling 1) LP 100.00 7, 61 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Capital Funding (Sterling 2) LP 100.00 7, 61 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Egypt S.A.E 94.54 82 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank International Limited 100.00 83 ----------------------------------- ---------------------------------- ---------------------------------- ---------
HSBC Bank Malaysia Berhad 100.00 62 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Malta p.l.c. 70.03 84 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Middle East Limited 100.00 5, 85 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Middle East Limited, Representative Office Morocco SARL 100.00 86 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Nominee (Jersey) Limited 100.00 83 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Oman S.A.O.G. 51.00 87 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Pension Trust (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank plc 100.00 2, 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank Polska S.A. 100.00 3, 88 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Bank USA, National Association 100.00 3, 89 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Branch Nominee (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Brasil Holding S.A. 100.00 90 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Brasil S.A. Banco De Investimento 100.00 90 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Broking Forex (Asia) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Broking Futures (Asia) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Broking Futures (Hong Kong) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Broking Nominees (Asia) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Broking Securities (Asia) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Broking Securities (Hong Kong) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Broking Services (Asia) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Canada Holdings (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Canadian Covered Bond (Legislative) GP Inc 100.00 199 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Capital (Canada) Inc. 100.00 91 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Capital (USA), Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Capital Funding (Dollar 1) L.P. 100.00 61 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Capital Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Card Services Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Casa de Bolsa, S.A. de C.V., Grupo Financiero HSBC 99.99 9, 16 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Cayman Services Limited 100.00 33 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC City Funding Holdings 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Client Holdings Nominee (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Client Share Offer Nominee (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Columbia Funding, LLC 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Corporate Advisory (Malaysia) Sdn Bhd 100.00 62 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Corporate Finance (Hong Kong) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Corporate Trustee Company (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Credit Center, Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Custody Nominees (Australia) Limited 100.00 15 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Custody Services (Guernsey) Limited 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Daisy Investments (Mauritius) Limited 100.00 92
----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Diversified Loan Fund General Partner Sarl 100.00 93 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Electronic Data Processing (Guangdong) Limited 100.00 12, 94 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Electronic Data Processing (Malaysia) Sdn Bhd 100.00 95 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Electronic Data Processing (Philippines), Inc. 100.00 96 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Electronic Data Processing India Private Limited 100.00 97 ----------------------------------- ---------------------------------- ---------------------------------- --------- 254 HSBC Holdings plc Annual Report and Accounts 2017 % of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ----------------------------------- ---------------------------------------------------------------------- --------- HSBC Electronic Data Processing Lanka (Private) Limited 100.00 98 HSBC Electronic Data Service Delivery (Egypt) S.A.E. 100.00 99 HSBC Enterprise Investment Company (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- --------- HSBC Epargne Entreprise (France) 100.00 (99.99) 4, 9, 50 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Equator (UK) Limited (in liquidation) 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Equipment Finance (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Equities (Luxembourg) S.a r.l. (in liquidation) 100.00 1, 100 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Equity (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Europe B.V. 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC European Clients Depositary Receipts Nominee (UK) Limited (in liquidation) 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Executor & Trustee Company (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Factoring (France) 100.00 (99.99) 4, 9, 46 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Finance (Brunei) Berhad 100.00 101 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Finance (Netherlands) 100.00 2, 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Finance Corporation 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Finance Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Finance Mortgages Inc. 100.00 102 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Finance Transformation (UK) Limited 100.00 2, 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Financial Services (Lebanon) s.a.l. 99.70 103 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Financial Services (Middle East) Limited (In Liquidation) 100.00 104 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Financial Services (Uruguay) S.A. (in liquidation) 100.00 105 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC France 99.99 4, 46 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Fund Services (Korea) Limited 92.95 1, 106 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Funding (UK) Holdings 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Germany Holdings GmbH 100.00 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Gestion (Monaco) SA 99.80 107 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Bermuda) Limited 100.00 21 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Canada) Limited 100.00 108 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Deutschland) GmbH 100.00 (80.67) 9, 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (France) 100.00 (99.99) 4, 9, 109 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Hong Kong) Limited 100.00 23 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (International) Limited 100.00 110 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Japan) K. K. 100.00 111
----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Malta) Limited 100.00 (70.02) 112 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (México), S.A. de C.V., Sociedad Operadora de Fondos de Inversión, Grupo Financiero HSBC 99.99 9, 16 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Oesterreich) GmbH 100.00 (80.67) 6, 9, 222 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Singapore) Limited 100.00 64 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Switzerland) AG 100.00 (90.33) 4, 9, 113 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (Taiwan) Limited 100.00 114 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management (USA) Inc. 100.00 115 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management Holdings (Bahamas) Limited 100.00 116 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Asset Management Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Custody Nominee (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Custody Proprietary Nominee (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Global Services (Hong Kong) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- % of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ---------------------------------- ---------------------------------------------------------------------- ---------- HSBC Global Services (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Global Services Limited 100.00 2, 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Global Shared Services (India) Private Limited (in liquidation) 100.00 (99.99) 9, 66 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Group Management Services Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Group Nominees UK Limited 100.00 1, 2, 17 ---------------------------------- ---------------------------------- ---------- HSBC Holdings B.V. 100.00 17 ---------------------------------- ---------------------------------- ---------- HSBC Home Equity Loan Corporation II 100.00 25 ---------------------------------- ---------------------------------- ---------- HSBC IM Pension Trust Limited 100.00 1, 17 ---------------------------------- ---------------------------------- ---------- HSBC Infrastructure Limited 100.00 17 ---------------------------------- ---------------------------------- ---------- HSBC INKA Investment-AG TGV 100.00 (80.67) 9, 14, 117 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Inmobiliaria (Mexico), S.A. de C.V. 99.99 9, 16 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Institutional Trust Services (Asia) Limited 100.00 69 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Institutional Trust Services (Bermuda) Limited 100.00 118 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Institutional Trust Services (Ireland) DAC 100.00 119 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Institutional Trust Services (Mauritius) Limited 100.00 120 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Institutional Trust Services (Singapore) Limited 100.00 64 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance (Asia) Limited 100.00 121 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance (Asia-Pacific) Holdings Limited 100.00 122 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance (Bermuda) Limited 100.00 21 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance (Singapore) Pte. Limited 100.00 64 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance Agency (USA) Inc. 100.00 123 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance Brokers (Philippines) Inc 100.00 (99.99) 9, 124 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance Brokers (Taiwan) Limited 100.00 125 ---------------------------------- ---------------------------------- ---------------------------------- ----------
HSBC Insurance Holdings Limited 100.00 2, 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance Management Services Limited (in liquidation) 100.00 126 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance Services (Lebanon) S.A.L. (in liquidation) 97.70 9, 127 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Insurance Services Holdings Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC International Finance Corporation (Delaware) 100.00 128 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC International Financial Services (UK) Limited (in liquidation) 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC International Holdings (Jersey) Limited 100.00 83 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC International Nominees Limited 100.00 1, 129 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC International Trade Finance Limited (in liquidation) 100.00 40 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC International Trustee (BVI) Limited 100.00 10, 130 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC International Trustee (Holdings) Pte. Limited 100.00 64 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC International Trustee Limited 100.00 129 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Inversiones S.A. 99.99 9, 71 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Inversiones y Servicios Financieros Limitada 100.00 (99.99) 9, 71 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC InvestDirect (India) Limited 99.99 (99.54) 131 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC InvestDirect Financial Services (India) Limited 100.00 (99.54) 9, 131 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC InvestDirect Sales & Marketing (India) Limited 99.99 (98.54) 9, 66 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC InvestDirect Securities (India) Private Limited 99.99 (99.61) 9, 131 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Investment Bank Holdings B.V. 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Investment Bank Holdings Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Investment Funds (Canada) Inc. 100.00 108 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Investment Funds (Hong Kong) Limited 100.00 23 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Investment Funds (Luxembourg) SA 100.00 100 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Investments (Bahamas) Limited (in liquidation) 100.00 133 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Invoice Finance (UK) Limited 100.00 134 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Iris Investments (Mauritius) Ltd 100.00 92 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Issuer Services Common Depositary Nominee (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Holdings plc Annual Report and Accounts 2017 255
Notes on the Financial Statements
% of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ---------------------------------- ---------------------------------------------------------------------- ---------- HSBC Issuer Services Depositary Nominee (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Land Title Agency (USA) LLC 100.00 (55.00) 135 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Latin America B.V. 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Latin America Holdings (UK) Limited 100.00 2, 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Leasing (Asia) Limited 100.00 69 HSBC Leasing (France) 100.00 (99.99) 4, 9, 45 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Life (International) Limited 100.00 118 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Life (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Life Assurance (Malta) Limited 100.00 (70.02) 112 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Lodge Funding (UK) Holdings 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC LU Nominees Limited 100.00 17
---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Management (Guernsey) Limited 100.00 20 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Markets (USA) Inc. 100.00 25 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Marking Name Nominee (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero HSBC 99.99 16 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Middle East Finance Company Limited 100.00 (80.00) 136 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Middle East Holdings B.V. 100.00 2, 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Middle East Leasing Partnership n/a 7, 9, 137 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Middle East Securities L.L.C 49.00 56, 138 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Mortgage Corporation (Canada) 100.00 81 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Mortgage Corporation (USA) 100.00 25 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Mortgage Services Inc. 100.00 25 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Nominees (Asing) Sdn Bhd 100.00 62 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Nominees (Hong Kong) Limited 100.00 69 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Nominees (New Zealand) Limited 100.00 139 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Nominees (Tempatan) Sdn Bhd 100.00 62 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC North America Holdings Inc. 100.00 25 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Odeme Sistemleri Bilgisayar Teknolojileri Basin Yayin Ve Musteri Hizmetleri 100.00 (99.99) 140 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Overseas Holdings (UK) Limited 100.00 2, 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Overseas Investments Corporation (New York) 100.00 141 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Overseas Nominee (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Participaciones (Argentina) S.A. 100.00 (99.99) 9, 68 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC PB Corporate Services 1 Limited 100.00 142 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC PB Services (Suisse) SA 100.00 143 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Pension Trust (Ireland) DAC 100.00 119 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Pensiones, S.A. 99.99 9, 144 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC PI Holdings (Mauritius) Limited 100.00 120 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Portfoy Yonetimi A.S. 100.00 (99.98) 9, 145 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Preferential LP (UK) 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Bank (C.I.) Limited 100.00 20 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Bank (Luxembourg) S.A. 100.00 100 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Bank (Monaco) SA 100.00 4, 107 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Bank (Suisse) SA 100.00 143 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Bank (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Bank International 100.00 132 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Banking Holdings (Suisse) SA 100.00 143 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Banking Nominee 3 (Jersey) Limited 100.00 142 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Equity Advisors LLC 100.00 25 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Equity Investments (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Trustee (Hong Kong) Limited 100.00 69 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Private Wealth Services (Canada) Inc. 100.00 108
---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Professional Services (India) Private Limited 100.00 66 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Property (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Property Funds (Holding) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Property Funds Investment Limited (in liquidation) 100.00 40 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Provident Fund Trustee (Hong Kong) Limited 100.00 69 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Qianhai Securities Limited 100.00 (51.00) 1, 12, 146 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Rail (UK) Limited 100.00 17 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Real Estate Leasing (France) 99.00 4, 9, 50 ---------------------------------- ---------------------------------- ---------------------------------- ---------- HSBC Realty Credit Corporation (USA) 100.00 25 ---------------------------------- ---------------------------------- ---------------------------------- ---------- % of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ----------------------------------- ---------------------------------------------------------------------- --------- HSBC REIM (France) 100.00 (99.99) 4, 9, 50 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Representative Office (Nigeria) Limited 100.00 147 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Retail Services Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Retirement Benefits Trustee (UK) Limited 100.00 1, 2, 17 ---------------------------------- HSBC Savings Bank (Philippines) Inc. 99.99 148 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (Asia) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (B) Berhad 100.00 1, 101 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (Canada) Inc. 100.00 149 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (Egypt) S.A.E. 100.00 (94.65) 82 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (Japan) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (Philippines) Inc. 99.99 1, 9, 150 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (Singapore) Pte Limited 100.00 64 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (South Africa) (Pty) Limited 100.00 151 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (Taiwan) Corporation Limited 100.00 75 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities (USA) Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities and Capital Markets (India) Private Limited 99.99 9, 66 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Asia International Nominees Limited 100.00 152 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Asia Nominees Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Brokers (Asia) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Investments (Asia) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Services (Bermuda) Limited 100.00 118 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Services (Guernsey) Limited 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Services (Ireland) DAC 100.00 119 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Services (Luxembourg) S.A. 100.00 100 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Services (USA) Inc. 100.00 153 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Services Holding Limited 100.00 129 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Securities Services Holdings (Ireland) DAC 100.00 119 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Seguros de Retiro (Argentina) S.A. 100.00 (99.99) 9, 68 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Seguros de Vida (Argentina)
S.A. 100.00 (99.99) 9, 68 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Seguros, S.A de C.V., Grupo Financiero HSBC 99.99 3, 9, 144 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Service Delivery (Polska) Sp. z o.o. 100.00 154 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Services (France) 100.00 (99.99) 4, 9, 46 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Services Japan Limited 100.00 133 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Servicios Financieros, S.A. de C.V. 99.99 9, 16 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Servicios, S.A. DE C.V., Grupo Financiero HSBC 99.99 9, 16 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC SFH (France) 100.00 (99.99) 4, 9, 50 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Software Development (Canada) Inc 100.00 155 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Software Development (Guangdong) Limited 100.00 12, 156 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Software Development (India) Private Limited 100.00 157 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Software Development (Malaysia) Sdn Bhd 100.00 95 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Specialist Investments Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Stockbroker Services (Client Assets) Nominees Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Stockbrokers Nominee (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Taxpayer Financial Services Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Technology & Services (China) Limited 100.00 12, 158 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Technology & Services (USA) Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC TFS I 2005 LLC 100.00 32 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Transaction Services GmbH 100.00 6, 159 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trinkaus & Burkhardt (International) S.A. 100.00 (80.67) 100 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trinkaus & Burkhardt AG 100.00 (80.67) 14, 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trinkaus & Burkhardt Gesellschaft fur Bankbeteiligungen mbH 100.00 (80.67) 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trinkaus Europa Immobilien-Fonds Nr. 5 GmbH 100.00 (80.67) 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trinkaus Family Office GmbH 100.00 (80.67) 6, 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trinkaus Immobilien Beteiligungs KG 100.00 (80.67) 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trinkaus Real Estate GmbH 100.00 (80.67) 6, 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trust Company (Canada) 100.00 81 ----------------------------------- ---------------------------------- ---------------------------------- --------- 256 HSBC Holdings plc Annual Report and Accounts 2017 % of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ----------------------------------- ---------------------------------------------------------------------- --------- HSBC Trust Company (Delaware), National Association 100.00 1, 160 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trust Company (UK) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trust Company AG 100.00 41 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trustee (C.I.) Limited 100.00 142 HSBC Trustee (Cayman) Limited 100.00 161 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trustee (Guernsey) Limited 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trustee (Hong Kong) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trustee (Mauritius) Limited (in liquidation) 100.00 162 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Trustee (Singapore) Limited 100.00 64 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC UK Bank plc 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC UK Holdings Limited 100.00 2, 17
----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC USA Inc. 100.00 141 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Valores S.A. 100.00 (99.99) 9, 163 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Violet Investments (Mauritius) Limited 100.00 92 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Wealth Client Nominee Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSBC Yatirim Menkul Degerler A.S. 99.99 (99.98) 9, 145 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSI Asset Securitization Corporation 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSI International Limited 100.00 (62.14) 52 ----------------------------------- ---------------------------------- ---------------------------------- --------- HSIL Investments Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Hubei Macheng HSBC Rural Bank Company Limited 100.00 12, 164 ----------------------------------- ---------------------------------- ---------------------------------- --------- Hubei Suizhou Cengdu HSBC Rural Bank Company Limited 100.00 12, 165 ----------------------------------- ---------------------------------- ---------------------------------- --------- Hubei Tianmen HSBC Rural Bank Company Limited 100.00 12, 166 ----------------------------------- ---------------------------------- ---------------------------------- --------- Hunan Pingjiang HSBC Rural Bank Company Limited 100.00 12, 167 ----------------------------------- ---------------------------------- ---------------------------------- --------- Imenson Limited 100.00 (62.14) 52 ----------------------------------- ---------------------------------- ---------------------------------- --------- INKA Internationale Kapitalanlagegesellschaft mbH 100.00 (80.67) 159 ----------------------------------- ---------------------------------- ---------------------------------- --------- Inmobiliaria Banci, S.A. de C.V. 100.00 (98.91) 3, 16 ----------------------------------- ---------------------------------- ---------------------------------- --------- Inmobiliaria Bisa, S.A. de C.V. 100.00 (99.99) 9, 16 ----------------------------------- ---------------------------------- ---------------------------------- --------- Inmobiliaria Grufin, S.A. de C.V. 100.00 (99.99) 9, 16 ----------------------------------- ---------------------------------- ---------------------------------- --------- Inmobiliaria Guatusi, S.A. de C.V. 100.00 (99.99) 3, 9, 16 ----------------------------------- ---------------------------------- ---------------------------------- --------- IRERE Property Investments (French Offices) Sarl 100.00 168 ----------------------------------- ---------------------------------- ---------------------------------- --------- James Capel & Co. Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- James Capel (Channel Islands) Nominees Limited 100.00 110 ----------------------------------- ---------------------------------- ---------------------------------- --------- James Capel (Nominees) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- James Capel (Second Nominees) Limited (in liquidation) 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- James Capel (Taiwan) Nominees Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- John Lewis Financial Services Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Keyser Ullmann Limited 100.00 (99.99) 9, 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Kings Meadow Nominees Limited 100.00 169 ----------------------------------- ---------------------------------- ---------------------------------- --------- Legend Estates Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Lion Corporate Services Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- Lion International Corporate Services Limited 100.00 129 ----------------------------------- ---------------------------------- ---------------------------------- --------- Lion International Management Limited 100.00 129 ----------------------------------- ---------------------------------- ---------------------------------- --------- Lion Management (Hong Kong) Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- Lyndholme Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- Marks and Spencer Financial Services plc 100.00 169 ----------------------------------- ---------------------------------- ---------------------------------- --------- Marks and Spencer Retail Financial Services Holdings Limited 100.00 169 ----------------------------------- ---------------------------------- ---------------------------------- --------- Marks and Spencer Savings and Investments Limited 100.00 169 ----------------------------------- ---------------------------------- ---------------------------------- --------- Marks and Spencer Unit Trust Management Limited 100.00 169 ----------------------------------- ---------------------------------- ---------------------------------- --------- Maxima S.A. AFJP (in liquidation) 100.00 (99.98) 68 ----------------------------------- ---------------------------------- ---------------------------------- --------- Mercantile Company Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Mexicana de Fomento, S.A. de C.V. 99.80 16
----------------------------------- ---------------------------------- ---------------------------------- --------- Midcorp Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Midland Bank (Branch Nominees) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Midland Nominees Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- MIL (Cayman) Limited 100.00 33 ----------------------------------- ---------------------------------- ---------------------------------- --------- MW Gestion SA 100.00 68 ----------------------------------- ---------------------------------- ---------------------------------- --------- % of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ---------------------------------- -------------------------------------------------------------------- ------------ Promocion en Bienes Raices, S.A. de C.V. 100.00 (99.19) 3, 9, 16 Prudential Client HSBC GIS Nominee (UK) Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ PT Bank HSBC Indonesia 100.00 (98.93) 170 ---------------------------------- --------------------------------- --------------------------------- ------------ PT HSBC Sekuritas Indonesia 100.00 (85.00) 171 ---------------------------------- --------------------------------- --------------------------------- ------------ R/CLIP Corp. 100.00 25 ---------------------------------- --------------------------------- --------------------------------- ------------ Republic Nominees Limited 100.00 20 --------------------------------- Republic Overseas Capital Corporation 100.00 123 ---------------------------------- --------------------------------- --------------------------------- ------------ RLUKREF Nominees (UK) One Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ RLUKREF Nominees (UK) Two Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ S.A.P.C. - Ufipro Recouvrement 100.00 (99.97) 11, 45 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Baiyun 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Chang Jiang 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Chang Jiang Shi Liu 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Chang Jiang Shi Wu 100.00 (99.99) 1, 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Guangzhou 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Yi 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Ba 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Er 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Jiu 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Liu 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Qi 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang San 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Shi 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Shi Ba 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Shi Er 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Shi Jiu 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Shi Liu 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Shi Qi 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Shi Wu 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Shiyi 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Saf Zhu Jiang Wu 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Samada Limited 100.00 142 ---------------------------------- --------------------------------- --------------------------------- ------------ SAS Bosquet-Audrain 100.00 (94.90) 1, 4, 221 ---------------------------------- --------------------------------- --------------------------------- ------------ SAS Cyatheas Pasteur 100.00 (94.93) 1, 4, 45 ---------------------------------- --------------------------------- --------------------------------- ------------ SAS Orona 100.00 (94.92) 1, 4, 220
---------------------------------- --------------------------------- --------------------------------- ------------ SCI HSBC Assurances Immo 100.00 (99.99) 1, 9, 11, 50 ---------------------------------- --------------------------------- --------------------------------- ------------ Secondary Club Deal I GP Limited 100.00 20 ---------------------------------- --------------------------------- --------------------------------- ------------ Secondary Club Deal II GP Limited 100.00 20 ---------------------------------- --------------------------------- --------------------------------- ------------ SFSS Nominees (Pty) Limited 100.00 151 ---------------------------------- --------------------------------- --------------------------------- ------------ Shandong Rongcheng HSBC Rural Bank Company Limited 100.00 12, 172 ---------------------------------- --------------------------------- --------------------------------- ------------ Sico Limited 100.00 173 ---------------------------------- --------------------------------- --------------------------------- ------------ SNC Dorique 100.00 (99.99) 1,9,11,174 ---------------------------------- --------------------------------- --------------------------------- ------------ SNC Kerouan 100.00 (99.99) 1, 9, 11, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ SNC Les Mercuriales 100.00 (99.99) 1, 9, 11, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ SNC Les Oliviers D'Antibes 59.99 11, 50 ---------------------------------- --------------------------------- --------------------------------- ------------ SNC Makala 100.00 (99.99) 1,9,11,47 ---------------------------------- --------------------------------- --------------------------------- ------------ SNC Nuku-Hiva Bail 100.00 (99.99) 1,9,11,47 ---------------------------------- --------------------------------- --------------------------------- ------------ SNCB/M6 - 2008 A 100.00 (99.99) 1, 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ SNCB/M6-2007 A 100.00 (99.99) 1, 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ SNCB/M6-2007 B 100.00 (99.99) 1, 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Societe CCF Finance Moyen-Orient S.A.L. 96.64 (99.99) 4, 9, 36 ---------------------------------- --------------------------------- --------------------------------- ------------ Société Financière et Mobilière 100.00 (99.99) 4, 9, 46 ---------------------------------- --------------------------------- --------------------------------- ------------ Société Française et Suisse 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ Societe Immobiliere Atlas S.A. 100.00 143 ---------------------------------- --------------------------------- --------------------------------- ------------ Somers Dublin DAC 100.00 119 ---------------------------------- --------------------------------- --------------------------------- ------------ Somers Nominees (Far East) Limited 100.00 118 ---------------------------------- --------------------------------- --------------------------------- ------------ Sopingest 100.00 (99.99) 4, 9, 47 ---------------------------------- --------------------------------- --------------------------------- ------------ South Yorkshire Light Rail Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ SPE 1 2005 Manager Inc. 100.00 32 ---------------------------------- --------------------------------- --------------------------------- ------------ St Cross Trustees Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ Sun Hung Kai Development (Lujiazui III) Limited 100.00 12, 175 ---------------------------------- --------------------------------- --------------------------------- ------------ Swan National Leasing (Commercials) Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ Swan National Limited 100.00 17 ---------------------------------- --------------------------------- --------------------------------- ------------ HSBC Holdings plc Annual Report and Accounts 2017 257
Notes on the Financial Statements
% of share class held by immediate parent company (or by the Group Subsidiaries where this varies) Footnotes ----------------------------------- ---------------------------------------------------------------------- --------- Tasfiye Halinde HSBC Internet ve Telekomunikasyon Hizmetleri Anonim Sirketi (in liquidation) 100.00 (99.99) 176 ----------------------------------- ---------------------------------- ---------------------------------- --------- Tempus Management AG (in liquidation) 100.00 41 ----------------------------------- ---------------------------------- ---------------------------------- --------- Thasosfin 100.00 (99.99) 4, 9, 50 ----------------------------------- ---------------------------------- ---------------------------------- --------- The Hongkong and Shanghai Banking Corporation Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- The Venture Catalysts Limited 100.00 17 Timberlink Settlement Services (USA) Inc. 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- TKM International Limited (in liquidation) 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Tooley Street View Limited 100.00 1, 2, 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Tower Investment Management 100.00 177 ----------------------------------- ---------------------------------- ---------------------------------- --------- Trinkaus Australien Immobilien Fonds Nr. 1 Brisbane GmbH & Co. KG 100.00 (80.67) 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- Trinkaus Australien Immobilien-Fonds Nr. 1 Treuhand-GmbH 100.00 (80.67) 6, 53
----------------------------------- ---------------------------------- ---------------------------------- --------- Trinkaus Canada Immobilien-Fonds Nr. 1 Verwaltungs-GmbH 100.00 (80.67) 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- Trinkaus Europa Immobilien-Fonds Nr.3 Objekt Utrecht Verwaltungs-GmbH 100.00 (80.67) 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- Trinkaus Immobilien-Fonds Geschaeftsfuehrungs-GmbH 100.00 (80.67) 6, 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- Trinkaus Immobilien-Fonds Verwaltungs-GmbH 100.00 (80.67) 6, 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- Trinkaus Private Equity Management GmbH 100.00 (80.67) 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- Trinkaus Private Equity Verwaltungs GmbH 100.00 (80.67) 6, 53 ----------------------------------- ---------------------------------- ---------------------------------- --------- Tropical Nominees Limited 100.00 33 ----------------------------------- ---------------------------------- ---------------------------------- --------- Turnsonic (Nominees) Limited 100.00 17 ----------------------------------- ---------------------------------- ---------------------------------- --------- Vadep Holding AG (in liquidation) 100.00 178 ----------------------------------- ---------------------------------- ---------------------------------- --------- Valeurs Mobilières Elysées 100.00 (99.99) 4, 9, 179 ----------------------------------- ---------------------------------- ---------------------------------- --------- Vintage 2016 HV GP Limited (in liquidation) 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- Vintage 2016 KKR GP Limited (in liquidation) 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- Vintage 2017 Athyrium GP Limited (in liquidation) 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- Vintage I Secondary GP Limited (in liquidation) 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- Vintage III Special Situations GP Limited (in liquidation) 100.00 20 ----------------------------------- ---------------------------------- ---------------------------------- --------- Wardley Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- Wayfoong Credit Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- Wayfoong Finance Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- Wayfoong Nominees Limited 100.00 69 ----------------------------------- ---------------------------------- ---------------------------------- --------- Wayhong (Bahamas) Limited (in liquidation) 100.00 116 ----------------------------------- ---------------------------------- ---------------------------------- --------- Westminster House, LLC 100.00 25 ----------------------------------- ---------------------------------- ---------------------------------- --------- Woodex Limited 100.00 21 ----------------------------------- ---------------------------------- ---------------------------------- --------- Yan Nin Development Company Limited 62.14 52 ----------------------------------- ---------------------------------- ---------------------------------- ---------
Joint Ventures
The undertakings below are Joint Ventures and equityaccounted.
% of share class held by immediate parent company (or by the Group Joint Ventures where this varies) Footnotes ------------------------------------------------- ------------------------------------ --------- HCM Holdings Limited 50.99 40 ------------------------------------------------- --------------- ------------------- --------- House Network Sdn Bhd 25.00 180 ------------------- HSBC Jintrust Fund Management Company Limited 49.00 12, 181 ------------------- --------- HSBC Kingdom Africa Investments (Cayman) Limited 50.00 182 ------------------- --------- HSBC Life Insurance Company Limited 50.00 183 ------------------- --------- ProServe Bermuda Limited 50.00 184 ------------------- Vaultex UK Limited 50.00 186 ------------------------------------------------- --------------- ------------------- --------- HSBC Saudi Arabia 49.40 (69.40) 201 ------------------------------------------------- --------------- ------------------- ---------
Associates
The undertakings below are associates and equity accounted.
% of share class held by immediate parent company (or by the Group Associates where this varies) Footnotes -------------------------------------------------------------------- ---------------------------------- ---------- Bank of Communications Co., Ltd. 19.03 56, 188 -------------------------------------------------------------------- ---------------------------------- ---------- Barrowgate Limited 24.64 189 -------------------------------------------------------------------- ---------------------------------- ---------- BGF Group Limited 24.38 190 -------------------------------------------------------------------- ---------------------------------- ---------- Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited 26.00 191 -------------------------------------------------------------------- ---------------------------------- ---------- CFAC Payment Scheme Limited 33.33 192 -------------------------------------------------------------------- ---------------------------------- ---------- Chemi and Cotex Industries Limited 33.99 195
-------------------------------------------------------------------- ---------------------------------- ---------- Corsair IV Financial Services Capital Partners n/a 7, 219 -------------------------------------------------------------------- ---------------------------------- ---------- Electronic Payment Services Company (Hong Kong) Limited 19.33 56, 69 -------------------------------------------------------------------- ---------------------------------- ---------- EPS Company (Hong Kong) Limited 40.58 69 -------------------------------------------------------------------- ---------------------------------- ---------- Guangzhou GuangZheng Hang Seng Securities Advisory Co. Ltd. 33.00 217 -------------------------------------------------------------------- ---------------------------------- ---------- GZHS Research Co Ltd 20.50 197 -------------------------------------------------------------------- ---------------------------------- ---------- Hang Seng Qianhai Fund Management Company Limited 43.50 9, 12, 198 ---------------------------------- HSBC Mortgage LLP n/a 7, 200 -------------------------------------------------------------------- ---------------------------------- ---------- HSBC TFS II 2005 LLC 20.00 32 -------------------------------------------------------------------- ---------------------------------- ---------- InfraRed NF China Real Estate Investments LP n/a 7, 214 -------------------------------------------------------------------- ---------------------------------- ---------- Jeppe Star Limited 33.99 187 -------------------------------------------------------------------- ---------------------------------- ---------- MENA Infrastructure Fund (GP) Ltd 33.33 203 Northstar Trade Finance Inc. 20.88 205 Novo Star Limited 33.99 206 -------------------------------------------------------------------- ---------------------------------- ---------- PEF 2005 (A) & (D) Limited Partnership n/a 7, 216 -------------------------------------------------------------------- ---------------------------------- ---------- PEF 2010 (A) Limited Partnership n/a 7, 216 -------------------------------------------------------------------- ---------------------------------- ---------- Peregrine Capital Services Ltd 33.46 218 -------------------------------------------------------------------- ---------------------------------- ---------- Quantexa Limited 10.00 56, 212 -------------------------------------------------------------------- ---------------------------------- ---------- Services Epargne Entreprise SAS 14.35 56, 215 -------------------------------------------------------------------- ---------------------------------- ---------- The London Gold Market Fixing Limited 25.00 210 -------------------------------------------------------------------- ---------------------------------- ---------- The Saudi British Bank 40.00 211 Vizolution Limited 17.95 56, 213 -------------------------------------------------------------------- ---------------------------------- ---------- 258 HSBC Holdings plc Annual Report and Accounts 2017 Footnotes for Note 37 1 Management has determined that these undertakings are excluded from consolidation in the Group accounts as these entities do not meet the definition of subsidiaries in accordance with IFRS. HSBC's consolidation policy is described in Note 1.2(a). --------------------------------------------------------------------------------------------------- 2 Directly held by HSBC Holdings plc 3 Preference Shares --------------------------------------------------------------------------------------------------- Description of Shares 4 Actions 5 Redeemable Preference Shares 6 GmbH Anteil 7 This undertaking is a partnership and does not have share capital 8 Liquidating Share Class 9 In the prior period the Group disclosed the immediate parent company's interest in this undertaking 10 Non-Participating Voting Shares 11 Parts 12 Registered Capital Shares 13 Russian Limited Liability Company Shares 14 Stückaktien --------------------------------------------------------------------------------------------------- Registered Offices 15 Level 36 Tower 1 International Towers Sydney, 100 Barangaroo Avenue, Sydney, New South Wales, Australia, 2000 -------------------------------------------------------------------------------------------------- 16 Paseo de la Reforma 347, Col. Cuauhtemoc, Mexico, 06500 -------------------------------------------------------------------------------------------------- 17 8 Canada Square, London, United Kingdom, E14 5HQ -------------------------------------------------------------------------------------------------- 18 5 Donegal Square South, Belfast, Northern Ireland, BT1 5JP -------------------------------------------------------------------------------------------------- 19 Camden House West The Parade, Birmingham, United Kingdom, B1 3PY -------------------------------------------------------------------------------------------------- 20 Arnold House St Julians Avenue, St Peter Port, Guernsey, GY1 3NF -------------------------------------------------------------------------------------------------- 21 37 Front Street, Hamilton, Bermuda, HM 11 -------------------------------------------------------------------------------------------------- 22 PO Box 513 HSBC House, 68 West Bay Road, George Town, Grand Cayman, Cayman Islands, KY1-1106 -------------------------------------------------------------------------------------------------- 23 HSBC Main Building 1 Queen's Road Central, Hong Kong -------------------------------------------------------------------------------------------------- 24 First Floor, Xinhua Bookstore Xindong Road (SE of roundabout), Miyun District, Beijing, China -------------------------------------------------------------------------------------------------- 25 c/o The Corporation Trust Company 1209 Orange Street, Wilmington, Delaware, United States, 19801 -------------------------------------------------------------------------------------------------- 26 CT Corporation System 1515 Market Street, Registered Office, Philadelphia, Pennsylvania, United States, 19102 -------------------------------------------------------------------------------------------------- 27 CT Corporation System 800 S. Figueroa, Los Angeles, California, United States, 90017 -------------------------------------------------------------------------------------------------- 28 CT Corporation System 530 Gay Street, Knoxville, Tennessee, United States, 37902 -------------------------------------------------------------------------------------------------- 29 CT Corporation System Secretary of State, 707 Virginia Street East, Charleston, West Virginia, United States, 25301 -------------------------------------------------------------------------------------------------- 30 CT Corporation System 1720 Carey Avenue, Cheyenne, Wyoming, United States, 82001 -------------------------------------------------------------------------------------------------- 31 95 Washington Street, Buffalo, New York, United States, 14203 -------------------------------------------------------------------------------------------------- 32 1209 Orange Street, Wilmington, Delaware, United States, 19801 -------------------------------------------------------------------------------------------------- 33 PO Box 1109 HSBC House, 68 West Bay Road, George Town, Grand Cayman, Cayman Islands, KY1-1102 -------------------------------------------------------------------------------------------------- 34 Corporation Service Company 251 Little Falls Drive, Wilmington, Delaware, United States, 19808 -------------------------------------------------------------------------------------------------- 35 Unsoeldstrasse 2, Munich, Germany, 80538 -------------------------------------------------------------------------------------------------- 36 Solidere - Rue Saad Zaghloul Immeuble - 170 Marfaa, PO Box 17 5476 Mar Michael 11042040, Beyrouth, Lebanon -------------------------------------------------------------------------------------------------- 37 No 1, Bei Huan East Road Dazu County, Chongqing, China
-------------------------------------------------------------------------------------------------- 38 No 107, Ping Du Avenue (E), Sanhe Town, Fengdu County, Chongqing, China -------------------------------------------------------------------------------------------------- 39 No. 3, 5, 7, Haitang Erzhi Road Changyuan, Rongchang, Chongqing, China, 402460 -------------------------------------------------------------------------------------------------- 40 Hill House 1 Little New Street, London, United Kingdom, EC4A 3TR -------------------------------------------------------------------------------------------------- 41 Bederstrasse 49, Zurich, Switzerland, CH-8002 -------------------------------------------------------------------------------------------------- 42 Rawlinson and Hunter Limited Woodbourne Hall, PO Box 3162, Road Town, Tortola, British Virgin Islands, VG1110 -------------------------------------------------------------------------------------------------- 43 15 Rue GFirst & Second Floor, No.3 Nanshan Road, Pulandian, Dalian, Liaoning, China uynemer BP 412 Noumea 98845 Nouvelle Calédonie -------------------------------------------------------------------------------------------------- 44 CT Corporation System 225 Hillsborough Street, Raleigh, North Carolina, United States, 27603 -------------------------------------------------------------------------------------------------- 45 39 rue de Bassano, Paris, France, 75008 -------------------------------------------------------------------------------------------------- 46 103 avenue des Champs-Elysées, Paris, France, 75008 -------------------------------------------------------------------------------------------------- 47 64 rue Galilée, Paris, France, 75008 -------------------------------------------------------------------------------------------------- Registered Offices 48 MMG Tower, 23 floor Ave. Paseo del Mar Urbanizacion Costa del Este, Panama -------------------------------------------------------------------------------------------------- 49 Walkers Corporate Services Limited, Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9005, Cayman Islands -------------------------------------------------------------------------------------------------- 50 15 rue Vernet, Paris, France, 75008 -------------------------------------------------------------------------------------------------- 51 No. 1 1211 Yanjiang Zhong Road, Yongan, Fujian, China -------------------------------------------------------------------------------------------------- 52 83 Des Voeux Road Central, Hong Kong -------------------------------------------------------------------------------------------------- 53 Königsallee 21/23, Düsseldorf, Germany, 40212 -------------------------------------------------------------------------------------------------- 54 Bufete Tapia, PO Box 7412, Panama, Panama, 5 -------------------------------------------------------------------------------------------------- 55 No. 44, Xin Ping Road Central, Encheng, Enping, Guangdong, China, 529400 -------------------------------------------------------------------------------------------------- 56 HSBC Holdings plc exercises control or significant influence over this undertaking notwithstanding its equity interest -------------------------------------------------------------------------------------------------- 57 34/F and 36/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road 27/F, Shanghai Stock Exchange Bldg, 528 Pudong South Road, Shanghai, Shanghai, China, 200120 -------------------------------------------------------------------------------------------------- 58 11-17 Ludwig-Erhard-Str., Hamburg, Germany, 20459 59 Akara Bldg. 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands 60 The Corporation Trust Company of Nevada 311 S. Division Street, Carson City, Nevada, United States, 89703 61 HSBC House Esplanade, St. Helier, Jersey, JE4 8UB 62 10th Floor, North Tower 2 Leboh Ampang, Kuala Lumpur, Malaysia, 50100 63 13th Floor, South Tower 2 Leboh Ampang, Kuala Lumpur, Malaysia, 50100 64 21 Collyer Quay #13-02 HSBC Building, Singapore, 049320 65 Bouchard 557, Piso 18deg, Cdad. Autónoma de Buenos Aires, Argentina, 1106 66 52/60 M G Road, Fort, Mumbai, India, 400 001 67 PO Box 513 HSBC House, 68 West Bay Road, George Town, Grand Cayman, Cayman Islands, KY1-1102 68 Florida 229, 10deg, Ciudad de Buenos Aires, Argentina, C1005AAE 69 1 Queen's Road Central, Hong Kong 70 3rd Floor, Merchantile Bank Chamber 16, Veer Nariman Road, Fort, Mumbai, India, 400001 71 Isidora Goyenechea 2800, 23rd floor, Las Condes, Santiago, Chile, 7550647 72 HSBC Building Shanghai ifc, 8 Century Avenue, Pudong, Shanghai, China, 200120 73 6th floor, HSBC Centre, 18, Cybercity, Ebene, Mauritius 74 2 Paveletskaya square, building 2, Moscow, Russian Federation, 115054 75 13F-14F, 333 Keelung Road, Sec.1, Taipei, 110 76 Rincon 391, Montevideo, Uruguay, 11000 77 The Metropolitan 235 Dong Khoi Street, District 1, Ho Chi Minh City, Vietnam 78 Esentepe mah. Büyükdere Caddesi No.128 Istanbul 34394, Turkey 79 Florida 201, 10deg, Ciudad de Buenos Aires, Argentina, C1005AAE 80 66 Teryan street, Yerevan, Armenia, 0009 81 885 West Georgia Street Suite 300, Vancouver, British Columbia, Canada, V6C 3E9 82 306 Corniche El Nil, Maadi, Egypt, 11728 83 HSBC House Esplanade, St. Helier, Jersey, JE1 1HS 84 116 Archbishop Street, Valletta, Malta 85 Level 1, Building No. 8, Gate Village Dubai International Financial Centre, PO Box 502601, United Arab Emirates 86 Tour Crystal 1 10EME Etage BD Al Mohades, Casablanca, Morocco 87 Al Khuwair Office PO Box 1727 PC111 CPO Seeb, Muscat, Oman 88 Rondo ONZ 1, Warsaw, Poland, 00-124 89 1800 Tysons Boulevard Suite 50, McLean, Virginia, United States, 22102 90 Rua Funchal, n 160, SP Corporate Towers, Torre Norte, 19deg andar, cj 191A - Parte, São Paulo, Brazil, 04551-060 91 300, 885 West Georgia Street, Vancouver, British Columbia, Canada, V6C 3E9 92 c/o Kross Border Trust Services Limited St. Louis Business Centre, Cnr Desroches & St Louis Streets, Port Louis, Mauritius 93 49 avenue J.F. Kennedy, Luxembourg, Luxembourg, 1855 94 4-17/F, Office Tower 2 TaiKoo Hui, No. 381 Tian He Road, Tian He District, Guangzhou, Guangdong, China 95 Suite 1005, 10th Floor, Wisma Hamzah Kwong Hing No. 1, Leboh Ampang, Kuala Lumpur, Malaysia, 50100 96 HSBC, Filinvest One Bldg, Northgate Cyberzone, Filinvest Corporate City, Alabang, Muntinlupa City, Philippines 97 HSBC House Plot No.8, Survey No.64 (Part), Hightec City Layout Madhapur, Hyderabad, India, 500081 98 439, Sri Jayawardenapura Mawatha Welikada, Rajagiriya, Colombo, Sri Lanka -------------------------------------------------------------------------------------------------- HSBC Holdings plc Annual Report and Accounts 2017 259
Notes on the Financial Statements
Registered Offices 99 Smart Village 28th Km Cairo- Alexandria Desert Road Building, Cairo, Egypt 100 16 Boulevard d'Avranches, Luxembourg, L-1160 101 HSBC Chambers, Corner of Jalan Sultan / Jalan Pemancha , Bandar Seri Begawan, Brunei Darussalam, BS8811 102 Suite 300, 3381 Steeles Avenue East, Toronto, Ontario, Canada, M2H 3S7 103 Centre Ville 1341 Building - 4th Floor Patriarche Howayek Street (facing Beirut Souks), PO Box Riad El Solh, Lebanon, 9597 104 3rd Floor, HSBC Bank Middle East Limited Building Al Souq Road, Bur Dubai, PO Box 4604, Dubai, United Arab Emirates 105 World Trade Center Montevideo Avenida Luis Alberto de Herrera 1248, Torre 1, Piso 15, Oficina 1502, Montevideo, Uruguay, CP 11300 106 Level 12, HSBC Building 37, Chilpae-ro, Jung-gu, Seoul, Korea, Republic of ----------------------------------------------------------------------------------------------------- 107 17 avenue d'Ostende, Monaco, 98000 ----------------------------------------------------------------------------------------------------- 108 2910 Virtual Way, Vancouver, British Columbia, Canada, V5M 0B2 ----------------------------------------------------------------------------------------------------- 109 Immeuble Coeur Défense 110, Esplanade du Général de Gaulle- La défense 4, Courbevoie, France, 92400 ----------------------------------------------------------------------------------------------------- 110 HSBC House Esplanade, St. Helier, Jersey, JE4 8WP ----------------------------------------------------------------------------------------------------- 111 HSBC Building 11-1, Nihonbashi 3-chome, Chuo-ku, Tokyo, Japan, 103-0027 ----------------------------------------------------------------------------------------------------- 112 80 Mill Street, Qormi, Malta, QRM 3101 ----------------------------------------------------------------------------------------------------- 113 Gartenstrasse 26, Zurich, Switzerland ----------------------------------------------------------------------------------------------------- 114 24th Fl., 99, Sec.2, Tunhwa S. Rd., Taipei, Taiwan, Province of China ----------------------------------------------------------------------------------------------------- 115 452 Fifth Avenue 7th floor, New York NY10018, United States ----------------------------------------------------------------------------------------------------- 116 Mareva House 4 George Street, Nassau, Bahamas ----------------------------------------------------------------------------------------------------- 117 Breite Str. 29/31, Düsseldorf, Germany, 40213 ----------------------------------------------------------------------------------------------------- 118 37 Front Street, Hamilton, Bermuda, HM 11
----------------------------------------------------------------------------------------------------- 119 1 Grand Canal Square Grand Canal Harbour, Dublin 2, D02 P820, Ireland ----------------------------------------------------------------------------------------------------- 120 HSBC Centre Eighteen, Cybercity, Ebene, Mauritius ----------------------------------------------------------------------------------------------------- 121 18th Floor, Tower 1 HSBC Centre, 1 Sham Mong Road, Kowloon, Hong Kong ----------------------------------------------------------------------------------------------------- 122 Level 32, HSBC Main Building 1 Queen's Road Central, Hong Kong ----------------------------------------------------------------------------------------------------- 123 452 Fifth Avenue, New York NY10018, United States --- ----------------------------------------------------------------------------------------------------- 124 9th Floor, HSBC Centre 3058 Fifth Avenue West, Bonifacio Global City, Taguig City, Philippines ----------------------------------------------------------------------------------------------------- 125 16F 369 Zhongxiao East Road, Section 7 , Nangang District , Taipei, Taiwan, Province of China, 115 ----------------------------------------------------------------------------------------------------- 126 1 More London Place, London, United Kingdom, SE1 2AF ----------------------------------------------------------------------------------------------------- 127 HSBC Building Minet El Hosn, Riad el Solh, Beirut 1107-2080, PO Box 11-1380, Lebanon ----------------------------------------------------------------------------------------------------- 128 300 Delaware Avenue Suite 1400, Wilmington, Delaware, United States, 19801 ----------------------------------------------------------------------------------------------------- 129 Craigmuir Chambers, PO Box 71, Road Town, Tortola, British Virgin Islands ----------------------------------------------------------------------------------------------------- 130 Woodbourne Hall, Road Town PO Box 916, Tortola, British Virgin Islands ----------------------------------------------------------------------------------------------------- 131 9-11 Floors, NESCO IT Park Building No. 3 Western Express Highway, Goregaon (East), Mumbai, India, 400063 ----------------------------------------------------------------------------------------------------- 132 1441 Brickell Avenue, Miami, Florida, United States 33131 ----------------------------------------------------------------------------------------------------- 133 MB&H Corporate Services Ltd Mareva House, 4 George Street, Nassau, Bahamas ----------------------------------------------------------------------------------------------------- 134 21 Farncombe Road, Worthing, United Kingdom, BN11 2BW ----------------------------------------------------------------------------------------------------- 135 3303 Express Drive North, Islandia, New York, United States, 11749 ----------------------------------------------------------------------------------------------------- 136 Shop 4 & 5 Ground Floor & Mezzanine, Bldg. of Hilal Salim Bin Tarraf, Al Wasel Area, Sheikh Zayed Road, PO Box 1956 Dubai, United Arab Emirates ----------------------------------------------------------------------------------------------------- 137 Precinct Building 4, Level 3 Dubai International Financial Centre, Dubai, United Arab Emirates, PO BOX 506553 ----------------------------------------------------------------------------------------------------- 138 HSBC Bank Middle East Building - level 5, building 5, Emaar, Dubai, United Arab Emirates, 502601 ----------------------------------------------------------------------------------------------------- 139 HSBC House Level 9, One Queen Street, Auckland, New Zealand, 1010 ----------------------------------------------------------------------------------------------------- 140 Büyükdere Cad. No.122 D Blok Esentepe Sisli Istanbul, Turkey ----------------------------------------------------------------------------------------------------- 141 c/o The Corporation Trust Incorporated 351 West Camden Street, Baltimore, Maryland, United States, 21201 ----------------------------------------------------------------------------------------------------- 142 HSBC House Esplanade, St. Helier, Jersey, JE1 1GT ----------------------------------------------------------------------------------------------------- 143 Quai des Bergues 9-17, Geneva, Switzerland, 1201 ----------------------------------------------------------------------------------------------------- 144 Paseo de la Reforma 359, 6th Floor, Mexico, 06500 ----------------------------------------------------------------------------------------------------- 145 Büyükdere Cad. No.128 D Blok Esentepe Sisli Istanbul, Turkey ----------------------------------------------------------------------------------------------------- 146 Block 27 A&B, Qianhai Enterprise Dream Park No. 63 Qianwan Yi Road, Shenzhen-Hong Kong Cooperation Zone, Shenzhen, China, 518052 ----------------------------------------------------------------------------------------------------- 147 St Nicholas House, 10th Floor Catholic Mission St Lagos, Nigeria ----------------------------------------------------------------------------------------------------- 148 Unit 1 GF The Commercial Complex Madrigal Avenue Ayala Alabang Village, Muntinlupa City, Philippines, 1770 ----------------------------------------------------------------------------------------------------- 149 70 York Street 7th Floor, Toronto, Ontario, Canada, M5J 1S9 ----------------------------------------------------------------------------------------------------- 150 7/F The Enterprise Centre - Tower I, 6766 Ayala Avenue corner Paseo De Roxas, Makati City, Philippines ----------------------------------------------------------------------------------------------------- 151 2 Exchange Square 85 Maude Street, Sandown, Sandton, South Africa, 2196 --- ----------------------------------------------------------------------------------------------------- Registered Offices 152 Palm Grove House PO Box 438, Road Town, Tortola, British Virgin Islands --------------------------------------------------------------------------------------------------- 153 The Corporation Trust Company 820 Bear Tavern Road, West Trenton, New Jersey, United States, 08628 --------------------------------------------------------------------------------------------------- 154 Kapelanka 42A, Krakow, Poland, 30-347 --------------------------------------------------------------------------------------------------- 155 Suite 2400, 745 Thurlow Street, Vancouver, Canada, BC V6E 0C5 --------------------------------------------------------------------------------------------------- 156 L22, Office Tower 2, Taikoo Hui, 381 Tianhe Road, Tianhe District, Guangzhou, Guangdong, China --------------------------------------------------------------------------------------------------- 157 HSBC Centre River Side, West Avenue, 25B Raheja woods, Kalyaninagar, Pune, India, 411006 --------------------------------------------------------------------------------------------------- 158 Level 19, HSBC Building, Shanghai ifc 8 Century Avenue Pudong, Shanghai, China --------------------------------------------------------------------------------------------------- 159 Yorckstraße 21 - 23 40476, Duesseldorf, Germany --------------------------------------------------------------------------------------------------- 160 300 Delaware Avenue Suite 1401, Wilmington, Delaware, United States, 19801 --------------------------------------------------------------------------------------------------- 161 PO Box 484, Ground Floor, HSBC House 68 West Bay Road, Grand Cayman, KY1-1106, Cayman Islands --------------------------------------------------------------------------------------------------- 162 c/o HSBC Bank (Mauritius) Limited 6th Floor, HSBC Centre, 18 Cyber City, Ebene, Mauritius --------------------------------------------------------------------------------------------------- 163 Bouchard 680, 11deg, Ciudad de Buenos Aires, Argentina, 1106 --------------------------------------------------------------------------------------------------- 164 No. 56, Yu Rong Street, Macheng, China, 438300 --------------------------------------------------------------------------------------------------- 165 No. 205, Lie Shan Road Suizhou, Hubei, China --------------------------------------------------------------------------------------------------- 166 Building 3, Yin Zuo Di Jing Wan Tianmen New City Tianmen, Hubei Province, China --------------------------------------------------------------------------------------------------- 167 RM101, 102 & 106 Sunshine Fairview, Sunshine Garden, Pedestrian Walkway, Pingjiang, China --------------------------------------------------------------------------------------------------- 168 6 rue Adolphe, Luxembourg, L-1116 --------------------------------------------------------------------------------------------------- 169 Kings Meadow Chester Business Park, Chester, United Kingdom, CH99 9FB --------------------------------------------------------------------------------------------------- 170 World Trade Center 1, Floor 8-9 Jalan Jenderal Sudirman Kavling 29-31, Jakarta, Indonesia, 12920 --------------------------------------------------------------------------------------------------- 171 4th Floor, World Trade Center, J1, Jend. Sudirman Kav. 29-31, Jakarta, Indonesia, 12920
--------------------------------------------------------------------------------------------------- 172 No.198-2, Chengshan Avenue (E), Rongcheng, China, 264300 --------------------------------------------------------------------------------------------------- 173 Woodbourne Hall, Road Town PO Box 3162, Tortola, British Virgin Islands --------------------------------------------------------------------------------------------------- 174 43 rue de Paris, Saint Denis, 97400 --------------------------------------------------------------------------------------------------- 175 RM 2112, HSBC Building, Shanghai ifc No. 8 Century Road, Pudong, Shanghai, China, 200120 --------------------------------------------------------------------------------------------------- 176 Büyükdere Cad. No 124 kat 9 Oda 2 Esentepe --i li Istanbul, Turkey --------------------------------------------------------------------------------------------------- 177 11 Dr. Roy's Drive PO Box 694GT, Grand Cayman, Cayman Islands, KY1-1107 --------------------------------------------------------------------------------------------------- 178 Philippe Kaiser Baarerstrasse 8, Zug, Switzerland, 6300 --------------------------------------------------------------------------------------------------- 179 109 avenue des Champs-Elysees, Paris, France, 75008 --------------------------------------------------------------------------------------------------- 180 Suite 8-3A, Menara RA, No. 18, Jalan Dataran SD2,, Dataran SD, PJU 9, Bandar Sri Damansara, 52200, Malaysia --------------------------------------------------------------------------------------------------- 181 17F, HSBC Building, Shanghai ifc 8 Century Avenue, Pudong, Shanghai, China --------------------------------------------------------------------------------------------------- 182 Maples Corporate Services Limited PO Box 309, Ugland House, South Church Street, George Town, Cayman Islands, KY1-1104 --------------------------------------------------------------------------------------------------- 183 18/F, HSBC Building, 8 Century Avenue China (Shanghai) Pilot Free Trade Zone, China, 200120 --------------------------------------------------------------------------------------------------- 184 c/o MUFG Fund Services (Bermuda) Limited The Belvedere Building, 69 Pitts Bay Road, Pembroke, Bermuda, HM08 --------------------------------------------------------------------------------------------------- 186 21 Garlick Hill, London, United Kingdom, EC4V 2AU --------------------------------------------------------------------------------------------------- 187 c/o Trident Trust Company Trident Chambers, PO Box 146, Tortola, British Virgin Islands --------------------------------------------------------------------------------------------------- 188 No.188, Yin Cheng Zhong Road China (Shanghai) Pilot Free Trade Zone, Shanghai, China --------------------------------------------------------------------------------------------------- 189 49/F, The Lee Gardens, 33 Hysan Avenue, Hong Kong --------------------------------------------------------------------------------------------------- 190 13-15 York Buildings, London, United Kingdom, WC2N 6JU --------------------------------------------------------------------------------------------------- 191 Unit No. 208, 2nd Floor, Kanchenjunga Building 18 Barakhamba Road, New Delhi - 110001, India --------------------------------------------------------------------------------------------------- 192 6th Floor 65 Gresham Street, London EC2V 7NQ --------------------------------------------------------------------------------------------------- 195 Plot No. 89-90 Mbezi Industrial Area Box 347, Dar es Salaam City --------------------------------------------------------------------------------------------------- 196 37 avenue Henri Lafleur, Nouméa, New Caledonia, BP K3 98849 --------------------------------------------------------------------------------------------------- 197 1101-J46, 11/F, Nansha Financial Building 171 Haibin Road, Nansha District, Guangzhou, China --------------------------------------------------------------------------------------------------- 198 2-3/F, Unit 21A, Qianhai Enterprise Dream Park, No. 63 Qian Wan Yi Road,, Qianhai Shenzhen-Hongkong Cooperation Zone, Shenzhen, China --------------------------------------------------------------------------------------------------- 199 66 Wellington Street West, Suite 5300, Toronto, Ontario, Canada, M5K 1E6 --------------------------------------------------------------------------------------------------- 200 35 Great St Helens, London, United Kingdom, EC3A 6AP --------------------------------------------------------------------------------------------------- 201 HSBC Building 7267 Olaya - Al Murrooj, Riyadh, Kingdom of Saudi Arabia, 12283 - 2255 --------------------------------------------------------------------------------------------------- 203 Level 3 Building 4, Gate District, Dubai International Financial Centre, Dubai, United Arab Emirates --- --------------------------------------------------------------------------------------------------- 260 HSBC Holdings plc Annual Report and Accounts 2017 Registered Offices 204 13th Floor, Lulu Center Building Salam Street, PO Box 44505, United Arab Emirates -------------------------------------------------------------------------------------------- 205 833 Three Bentall Centre 595 Burrard Street, Vancouver, British Columbia, Canada, V7X 1C4 -------------------------------------------------------------------------------------------- 206 Jayla Place Wickhams Cay I, PO Box 3190, Road Town, British Virgin Islands -------------------------------------------------------------------------------------------- 210 c/o Hackwood Secretaries Limited One Silk Street, London, United Kingdom, EC2Y 8HQ -------------------------------------------------------------------------------------------- 211 Prince Abdulaziz Ibn Mossaad Ibn Jalawi Street, Riyadh, Kingdom of Saudi Arabia -------------------------------------------------------------------------------------------- 212 75 Park Lane, Croydon, Surrey, United Kingdom, CR9 1XS -------------------------------------------------------------------------------------------- 213 Ground Floor, Office Block A Bay Studio Business Park, Fabian Way, Swansea, Wales, United Kingdom, SA1 8QB -------------------------------------------------------------------------------------------- 214 Ground Floor, Dorey Court, Admiral Park, St Peter Port Guernsey GY1 2HT --- -------------------------------------------------------------------------------------------- 215 32 Rue du Champ de Tir, 44300 NANTES --- -------------------------------------------------------------------------------------------- 216 1020-885 West Georgia Street, Vancouver BC, V6C3E8 --- -------------------------------------------------------------------------------------------- 217 11/F, J46 of Room1101,Nansha Financial Mansion, No.171 Haibin Road, Nansha Area, Guangzhou, China --- -------------------------------------------------------------------------------------------- 218 Rahejas, 4th Floor, Corner of Main Avenue & V.P Road, Santacruz (West) Mumbai - 400 054 --- -------------------------------------------------------------------------------------------- 219 717 Fifth Avenue, New York, NY 10022 --- -------------------------------------------------------------------------------------------- 220 10 rue Jean Jaurès BP Q5 Noumea 98845 Nouvelle Calédonie --- -------------------------------------------------------------------------------------------- 221 15 rue Guynemer BP 412 Noumea 98845 Nouvelle Calédonie --- -------------------------------------------------------------------------------------------- 222 Herrengasse 1-3, 1010 Wien, Austria --- -------------------------------------------------------------------------------------------- 223 2156 Horse Prairie Drive, Henderson NV 89052 United States --- -------------------------------------------------------------------------------------------- 224 2 North Jackson Street, Suite 605, Montgomery AL, 36104 United States --- -------------------------------------------------------------------------------------------- 225 2222 Grand Avenue, Des Moines IA 50312 United States --- -------------------------------------------------------------------------------------------- 226 c/o The Corporation Trust Company, 100 S. 5th Street-Suite 1075 Minneapolis MN 55401, United States --- -------------------------------------------------------------------------------------------- 227 545 Washington Blvd., 11th Floor Jersey City NJ 07310 United States --- -------------------------------------------------------------------------------------------- HSBC Holdings plc Annual Report and Accounts 2017 261
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