HSBC Bank plc 2010 Annual Report

HSBC Bank plc
Annual Report and Accounts 2010
HSBC BANK PLC
Annual Reports and Accounts 2010
Contents
Financial Highlights of the group ............................................................................................................... 1
Products and Services ................................................................................................................................ 2
Report of the Directors................................................................................................................................ 4
Operating and Financial Review
Principal activities ................................................................. 4
Financial summary
Business segments ................................................................. 4
Income statement.................................................................. 9
Strategic direction.................................................................. 4
Performance by income and expense item............................ 9
Key performance indicators................................................... 5
Balance sheet........................................................................ 13
Economy................................................................................ 7
Performance and business review......................................... 14
Reconciliation of reported and underlying profit ................... 7
Other information ................................................................. 22
Risk
Risk management .................................................................. 25
Liquidity and funding risk .................................................... 47
Challenges and uncertainties ................................................. 25
Market risk ........................................................................... 49
Regulation and supervision.................................................... 27
Operational risk .................................................................... 55
Outlook ................................................................................. 29
Risk management of insurance operations............................ 56
Credit risk ............................................................................. 29
Other material risks .............................................................. 62
Capital Management ...................................................................................................................................................... 65
Governance
Directors ................................................................................ 69
Corporate sustainability........................................................ 73
Board of Directors and Board Committees............................ 70
Share capital ......................................................................... 75
Internal control ...................................................................... 70
Statement of Directors’ Responsibilities................................................................................................... 77
Independent Auditor’s Report .................................................................................................................... 78
Financial Statements................................................................................................................................... 79
Notes on the Financial Statements ........................................................................................................... 89
Presentation of Information
This document comprises the Annual Report and Accounts 2010 for HSBC Bank plc (‘the bank’) and its subsidiary
undertakings (together ‘the group’). It contains the Report of the Directors and Financial Statements, together with the
Auditor’s report, as required by the UK Companies Act 2006. References to ‘HSBC’ or ‘the Group’ within this document
mean HSBC Holdings plc together with its subsidiaries.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report contains certain forward-looking statements with respect to the financial condition, results of
operations and business of the bank.
Statements that are not historical facts, including statements about the bank’s beliefs and expectations, are forwardlooking statements. Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’
and ‘reasonably possible’, variations of these words and similar expressions are intended to identify forward-looking
statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should
not be placed on them. Forward-looking statements speak only as of the date they are made, and it should not be assumed
that they have been revised or updated in the light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors
could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking
statement.
HSBC BANK PLC
Financial Highlights of the group
2010
2009
2008
For the year (£m)
Profit on ordinary activities before tax .................................................................................
Total operating income ..........................................................................................................
Net operating income before loan impairment charges and other credit risk provisions .....
Profit attributable to shareholders of the parent company ....................................................
4,011
18,099
15,076
2,959
4,014
19,102
15,562
3,092
4,366
16,175
14,340
3,441
At year-end (£m)
Shareholders’ funds of the parent company .........................................................................
Risk weighted assets ..............................................................................................................
Loans and advances to customers (net of impairment allowances) .....................................
Customer accounts ................................................................................................................
31,825
201,720
285,218
344,123
27,787
203,281
274,659
332,896
19,923
257,883
298,304
369,880
Capital ratios (%)
Core Tier 1 ratio1 ...................................................................................................................
Tier 1 ratio .............................................................................................................................
Total capital ratio ...................................................................................................................
10.5
11.4
16.1
10.2
11.2
15.7
5.9
6.8
10.5
Performance ratios (%)
Return on average invested capital (on underlying basis) 2 ...................................................
Return on average shareholders’ funds (equity) of the parent company3 .............................
Post-tax return on average total assets ..................................................................................
Post-tax return on average risk-weighted assets....................................................................
8.7
9.9
0.3
1.5
9.2
13.2
0.4
1.4
7.8
14.5
0.5
1.5
9.0
0.7
13.7
1.1
10.6
0.7
52.8
55.1
68.0
60.5
52.7
56.6
42.5
22.3
11.7
42.4
21.3
13.7
35.2
24.5
18.3
82.9
3.4
82.5
2.7
80.6
3.0
Credit coverage ratios (%)
Loan impairment charges as a percentage of total operating income ..................................
Loan impairment charges as a percentage of average gross customer advances .................
Total impairment allowances outstanding as a percentage of impaired loans at the year
end ..........................................................................................................................................
Efficiency and revenue mix ratios (%)
Cost efficiency ratio4 ..............................................................................................................
As a percentage of total operating income: ...........................................................................
- net interest income .............................................................................................................
- net fee income ....................................................................................................................
- net trading income ..............................................................................................................
Financial ratios (%)
Ratio of customer advances to customer accounts ................................................................
Average total shareholders’ equity to average total assets....................................................
1 As a result of changes to the definition of the Core Tier 1 made by the Financial Services Authority in May 2009, the basis of calculation of
the 2008 ratio differs from that of the 2009 and 2010 ratios.
2 The return on average invested capital measures the return made in the business, enabling management to benchmark HSBC against
competitors. This ratio is defined as profit attributable to shareholders of the parent company divided by average invested capital. Average
invested capital is measured as average total shareholders’ equity after:
• adding back the average balance of goodwill amortised pre-transition to IFRSs or subsequently written off, directly to reserves (less
goodwill previously amortised in respect of the French regional banks sold in 2008);
• deducting the average balance of HSBC’s revaluation surplus relating to property held for own use. This reserve was generated when
determining the deemed carrying cost of such properties on transition to IFRSs and will run down over time as the properties are sold;
• deducting average preference shares and other equity instruments issued by HSBC Bank plc (as defined in Note 36 Called up share
capital and other equity instruments); and
• deducting average reserves for unrealised gains/ (losses) on effective cash flow hedges and available-for-sale securities.
3 The return on average total shareholders’ equity is defined as profit attributable to shareholders of the parent company divided by the
average total shareholders’ equity.
4 The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and other
credit risk provisions.
The financial highlights are influenced by changes in the group structure over the three years.
1
HSBC BANK PLC
Products and Services
•
Personal Financial Services
The group’s Personal Financial services business offers
products and services to customers based on their
individual needs. Premier and Advance services are
targeted at mass affluent and emerging affluent customers
who value international connectivity and benefit from our
global reach and scale. For customers who have simpler
everyday banking needs, we offer a full range of banking
products and services reflecting local requirements.
•
Typically, customer offerings include personal
banking products (current and savings accounts,
mortgages and personal loans, credit cards, debit cards and
local and international payment services) and wealth
management services (insurance and investment products
and financial planning services).
•
HSBC Premier provides preferential banking services
and global recognition to high net worth customers and
their immediate families with a dedicated relationship
manager, specialist wealth advice and tailored solutions.
Customers can access emergency travel assistance,
priority telephone banking and an online ‘global’ view of
their Premier accounts around the world with free money
transfers between them.
HSBC Advance provides a range of preferential
products and services customised to meet local needs.
With a dedicated telephone service, access to wealth
advice and online tools to support financial planning, it
gives customers an online ‘global view’ of their Advance
accounts with money transfers between them.
Wealth solutions and financial planning: a
financial planning process designed around individual
customer needs to help clients to protect, grow and
manage their wealth through best-in-class investment and
wealth insurance products manufactured by in-house
partners (Global Asset Management, Global Markets and
HSBC Insurance) and by selected third party providers.
Customers can interact with the bank via a range of channels
such as internet banking and self-service terminals in addition
to traditional and automated branches and telephone service
centres.
•
Commercial Banking
The group’s Commercial Banking business is segmented
into Corporate and Business Banking, enabling the
development of tailored customer propositions while
adopting a broader view of the entire commercial banking
sector, from sole traders to large corporations. This allows
the group to provide continuous support to companies as
they grow in size both domestically and internationally,
and ensures a clear focus on the business banking
segments, which are typically the key to innovation and
growth in market economies.
•
•
The group places particular emphasis on geographical
collaboration to meet the needs of our business customers,
and the group aims to be recognised as the leading
international business bank and the best bank for business
in target markets.
•
•
•
•
•
2
Financing: the group offers a broad range of financing,
both domestic and cross-border, including overdrafts,
receivables finance, term loans and syndicated,
leveraged, acquisition and project finance. Asset finance
is offered in selected sites, focused on leasing and
instalment finance for vehicles, plant and equipment.
Payments and cash management: HSBC is a
leading provider of domestic and cross-border payments
and collections, liquidity management and account
services worldwide, delivered through HSBCnet.
International trade: the group provides various
international trade products and services, to both buyers
and suppliers such as export finance, guarantees,
documentary collections and forfeiting to improve
efficiency and mitigate risks throughout the supply chain.
Treasury: Commercial Banking customers are volume
users of the group’s foreign exchange, derivatives and
structured products.
Capital markets & advisory: capital raising on debt
and equity markets and advisory services are available
Commercial cards: card issuing helps customers
enhance cash management, credit control and purchasing.
Card acquiring services enable merchants to accept credit
and debit card payments in person or remotely.
Insurance: Commercial Banking offers key person,
employee benefits and a variety of commercial risk
insurance.
Direct channels: these include online and direct
banking offerings such as HSBCnet and Business
Internet Banking.
HSBC BANK PLC
Products and services (continued)
Global Banking and Markets
Global Banking and Markets provides tailored financial
solutions to major government, corporate and institutional
clients and private investors worldwide. Managed as a
global business, Global Banking and Markets operates a
long-term relationship management approach to build a
full understanding of clients’ financial requirements.
Sector-focused client service teams comprising
relationship managers and product specialists develop
financial solutions to meet individual client needs.
Global Banking and Markets is managed as four
principal business lines: Global Markets, Global Banking,
Global Asset Management and Principal Investments. This
structure allows us to focus on relationships and sectors
that best fit the Group’s footprint and facilitates seamless
delivery of our products and services to clients.
•
•
•
•
Private Banking
HSBC Private Bank is the principal marketing name of our
international private banking business. Utilising the most
suitable products from the marketplace, Private Banking
works with its clients to offer both traditional and
innovative ways to manage and preserve wealth while
optimising returns.
•
•
Private Banking accesses expertise in six major
advisory centres in Hong Kong, Singapore, Geneva, New
York, Paris and London to identify opportunities which
meet clients’ needs and investment strategies.
•
•
3
Global Markets operations consist of treasury and
capital markets services. Products include foreign
exchange; currency, interest rate, bond, credit, equity
and other derivatives; government and nongovernment fixed income and money market
instruments; precious metals and exchange-traded
futures; equity services; distribution of capital markets
instruments; and securities services, including custody
and clearing services and funds administration to both
domestic and cross-border investors.
Global Banking offers financing, advisory and
transaction services. Products include:
– Capital raising, advisory services, bilateral and
syndicated lending, leveraged and acquisition
finance, structured and product finance, lease
finance and non-retail deposit taking;
– International, regional and domestic payments
and cash management services; and trade
services for large corporate clients.
Global Asset Management offers investment
solutions to institutions, financial intermediaries and
individual investors globally.
Principal Investments includes the group’s
strategic relationships with third-party private equity
managers and other investments.
Private Banking services comprise multi-currency
deposit accounts and fiduciary deposits, credit and
specialist lending, treasury trading services, cash
management, securities custody and clearing. HSBC
Private Bank works to ensure that its clients have full
access to other products and services available in the
group such as credit cards, internet banking, corporate
banking and investment banking.
Private Wealth Management comprises both
advisory and discretionary investment services. A
wide range of investment vehicles is covered,
including bonds, equities, derivatives, options,
futures, structured products, mutual funds and
alternatives (hedge funds, private equity and real
estate).
Corporate Finance Solutions helps provide
clients with cross border solutions for their
companies, working in conjunction with Global
Banking and Markets.
Private Wealth Solutions comprise inheritance
planning, trustee and other fiduciary services designed
to protect wealth and preserve it for future generations
through structures tailored to meet the individual
needs of each family. Areas of expertise include
trusts, foundation and company administration,
charitable trusts and foundations, insurance, family
office advisory and philanthropy.
HSBC BANK PLC
Report of the Directors: Operating and Financial Review
Introduction
distribution channels under various brands, including
HSBC, first direct, Marks & Spencer Money and
partnership cardTM. UK Commercial Banking provides a
wide range of products and services to commercial
organisations, from sole proprietors to quoted
companies. These include current and savings accounts,
payments, electronic banking, trade finance, loans,
overdrafts, asset finance, foreign exchange and other
treasury and capital markets instruments, wealth
management services and general insurance.
While 2010 remained a challenging operating
environment for most European economies, HSBC’s
financial strength, premium customer base and ability to
leverage its brand and global networks ensured that all
business segments of the group remained strong and
profitable. HSBC Bank plc maintained its well-funded
balance sheet and strong capital position.
Results for 2010
Continental Europe Retail Banking
The consolidated profit for the year attributable to the
shareholders of the bank was £2,959 million.
Continental Europe Retail Banking comprises the
customer groups Personal Financial Services and
Commercial Banking, providing a comprehensive range
of retail financial services to local and expatriate
personal and commercial customers in Europe. The
principal Continental European Retail Banking
operations are in France, Turkey, Malta and Germany.
Interim dividends of £850 million (in lieu of a final
dividend in respect of the previous financial year) and
£900 million were paid on the ordinary share capital
during the year.
A second interim dividend of £915 million in respect of
2010 was declared after 31 December 2010, payable on
28 February 2011.
Global Banking and Markets
Global Banking and Markets provides tailored financial
solutions to major government, corporate and
institutional clients worldwide. The business is
managed as four principal business lines: Global
Markets, Global Banking, Principal Investments and
HSBC Global Asset Management. This structure allows
the group to focus on relationships and sectors that best
fit the Group’s footprint and facilitates seamless
delivery of HSBC’s products and services to clients.
Further information about the results is given in the
consolidated income statement on page 79.
Principal activities
The group provides a comprehensive range of banking
and related financial services. The group divides its
activities into the business segments: UK Retail
Banking; Continental Europe Retail Banking; Global
Banking and Markets; and Private Banking.
Private Banking
As at 31 December 2010, the bank had 1,311
branches in the United Kingdom, 14 branches in the Isle
of Man and the Channel Islands with further branches
in Belgium, the Czech Republic, France, Greece, the
Hong Kong Special Administrative Region, Ireland,
Israel, Italy, Netherlands, Slovakia, and Spain.
Private Banking reflects the operations of HSBC
Private Banking Holdings (Suisse) S.A. and its
subsidiaries. Private Banking helps high net worth
individuals and families meet their complex
international financial needs by offering product and
service leadership in areas such as credit, alternative
investments, estate planning and investment advice.
The bank’s subsidiaries have banks, branches and
offices in Armenia, the Channel Islands, the Czech
Republic, France, Georgia, Germany, Greece, Hong
Kong Special Administrative Region, Hungary, Ireland,
Kazakhstan, Luxembourg, Malta, Monaco, Singapore,
Poland, Russia, South Africa, Slovakia, Switzerland and
Turkey.
Other
Activities or transactions which do not relate directly to
the business segments are reported in Other. Other
includes the result of certain property activities,
unallocated investment activities, movements in the fair
value of own debt and financing operations.
Business segments
Strategic direction
The group has four reportable business segments which
reflect the basis on which senior management review
operating activities, allocate capital, and assess
performance.
The group’s strategy reflects HSBC’s position as ‘The
world’s local bank’ and is focused on delivering
superior growth and earnings over time by building
HSBC’s heritage, skills and investment. In particular,
the group aims to leverage the HSBC brand and
network to reach new customers and offer more
services to existing customers, to maximise efficiency
by taking advantage of local, regional and global
economies of scale and to ensure staff are engaged by
aligning objectives and incentives.
UK Retail Banking
UK Retail Banking comprises two customer groups:
Personal Financial Services and Commercial Banking.
UK Personal Financial Services provides current
accounts, savings, personal loans, mortgages, cards,
financial planning, as well as life and general insurance
to UK personal customers through a variety of
4
HSBC BANK PLC
Report of the Directors: Operating and financial review (continued)
markets by providing relevant, efficient and sustainable
propositions to Premier and Advance customers in
selected markets across the region. During 2011, the
group intends to further develop its direct distribution
channels to expand customer choice and improve
efficiency.
The strategy has identified three main business
models for its customer groups and global businesses
that embody HSBC’s areas of natural advantage:
•
•
•
businesses with international customers for whom
developing connectivity across markets is crucial –
Global Banking and Markets, Private Banking, the
large business segment of Commercial Banking
and the mass affluent segment of Personal
Financial Services;
In Commercial Banking, the strategy focuses on
leveraging HSBC’s expansive international connectivity
to meet the needs of customers around the world;
‘Leading International Business’. Selective investments
including the launch of receivables finance in Germany
and the first corporate branch in Switzerland have been
made in the region to support this strategy.
businesses with local customers where efficiency
can be enhanced through global scale – the small
and medium business segments of Commercial
Banking and the mass market segment of Personal
Financial Services; and
Global Banking and Markets
Global Banking and Markets continues to pursue its
now well established ‘emerging markets-led and
financing-focused’ strategy, encompassing its objective
to be a leading wholesale bank by:
products where global scale can be achieved
through building efficiency, expertise and brand
awareness – global product platforms include
global transaction banking.
As part of HSBC, the group has an ambitious
programme of rationalising and simplifying the number
of core systems it deploys across the world.
Standardised systems common to multiple geographies
are being developed to reduce operating expenses and
improve the speed of upgrade. Within this programme
the group continues to invest heavily in straightthrough-processing technology to improve customer
experience and reduce servicing costs.
UK Retail Banking
•
developing Global Banking and Markets’ hub-andspoke business model; and
•
continuing to build capabilities in major hubs to
support the delivery of an advanced suite of
services to corporate, institutional and government
clients across the HSBC network.
Private Banking
Private Banking strives to be the world’s leading
international private bank, recognised for excellent
client experience and global connections.
The UK Commercial Banking strategy is to be:
•
utilising the Group’s extensive distribution
network;
The combination of product depth and distribution
strength to meet the needs of both existing and new
clients is expected to allow Global Banking and
Markets to achieve its strategic goals.
The UK Personal Financial Services business continues
to build its position as a leading provider of financial
services to mass affluent customers in the UK through
the Premier and Advance propositions.
•
•
the ‘Leading International Business’ bank, using
HSBC’s extensive geographical network together
with product expertise in payments, trade,
receivables finance and foreign exchange to
actively support customers who are trading and
investing across borders; and
HSBC’s brand, capital strength, extensive global
network and positioning provides a foundation from
which Private Banking continues to attract and retain
clients. Product and service leadership in areas such as
alternative investments, foreign exchange, estate
planning, credit and investment advice helps meet the
complex international financial needs of high net worth
individuals and families.
the best bank for small and medium-sized
enterprises (‘SMEs’) in target markets, building
global scale and creating efficiencies by sharing
systems and best practice, including customer
experience, training and product offerings, and
selectively applying a direct banking model.
Through continuing investment in people,
integrated IT solutions, and focusing on domestic
operations in emerging markets, Private Banking is
positioned for sustainable long-term growth.
Continental Europe Retail Banking
In Continental Europe, investment is being redirected
towards markets with strong group connectivity. The
key objective is to provide relationship-driven services
to selected internationally minded and emerging market
clients.
Key Performance Indicators (‘KPIs’)
The Board of Directors monitors the group’s progress
against its strategic objectives on a regular basis.
Progress is assessed by comparison with group strategy,
operating plan targets and historical performance using
both financial and non-financial measures.
The Continental Europe Personal Financial
Services strategy builds on its strength in mass affluent
5
HSBC BANK PLC
Report of the Directors: Operating and financial review (continued)
Following a review of the high-level KPIs, changes
to the group’s published indicators were made in order
to restrict the number to those which most accurately
reflect management priorities. The group now has five
financial and three non-financial KPIs.
with a remaining term to maturity in excess of one year.
Management uses this ratio to ensure that customer
advances are being funded from stable funding sources
and not short term wholesale market sources. In 2010,
customer advances remained funded by core funding.
Financial KPIs
Non-financial KPIs
In addition to the use of financial KPIs, the group
employs three non-financial measures to assess
performance against its strategic objectives.
Risk adjusted revenue
growth1
Cost efficiency2 ......................
Return on average total
shareholders’ equity3................
Tier 1 capital ..........................
Advances to core funding
ratio4 ...................................
2010
%
2009
%
2008
%
7.6
60.5
(2.3)
52.7
6.1
56.6
9.9
11.4
13.2
11.2
14.5
6.8
95.7
96.5
–
Employee engagement
Employee engagement is a measure of employees’
emotional and rational attachment to HSBC that
motivates them to remain with the group and align
themselves wholeheartedly with its success. HSBC
measures employee engagement through its annual
Global People Survey (‘GPS’), which took place in the
middle of 2010. Over 65,000 employees from HSBC’s
UK and European businesses shared their views.
Compared with 2009, employee engagement fell by 2
per cent to 64 per cent, mirroring the fall in global best
in class.
1 The percentage increase/ (decrease) in ‘Net operating income’
after loan impairment charges and other credit risk provisions
compared with the previous reporting period.
2 Total operating expenses divided by net operating income
before loan impairment charges and other credit risk provisions.
3 Profit attributable to ordinary shareholders divided by average
shareholders’ equity.
4 Loans and advances to customers as a percentage of the total
of core current and savings accounts and term funding with a
remaining term to maturity in excess of one year. Data for 2008 is
not included due to change in basis of calculation from 2009.
Management have discussed the results of the GPS
with their respective teams and are currently
formulating action plans to address key focus areas.
Actions will centre upon bringing leaders closer to their
people, enhancing career development and driving
diversity and inclusion across the businesses.
Risk-adjusted revenue growth provides an important
guide to the group’s success in generating business. In
2010, revenues fell primarily in Global Banking and
Markets as uncertainty in the Eurozone resulted in a
deterioration in market conditions and, as anticipated,
Balance Sheet Management revenues were lower.
However, this was more than offset by lower loan
impairment charges across all business lines.
Brand perception
HSBC’s brand is one of the most recognised and
respected in the world. It reflects the trust HSBC’s
customers place in the bank and represents the values
that guide its business. The stronger, more trusted and
recognised the brand is, the more likely HSBC is to
attract business and to retain existing customers.
Cost efficiency is a relative measure that indicates the
consumption of cost resources in generating revenue.
Management uses this to assess the success of
technology utilisation and, more generally, the
productivity of the group’s distribution platforms and
sales forces. The deterioration in the cost efficiency
ratio reflected a combination of one-off costs and
accounting gains but also increased investment in
operational infrastructure.
HSBC monitors the strength of its brand through
an index derived from an independent survey of brand
measures, benchmarked against competitors.
Customer recommendation
In addition to tracking the strength of its brand, HSBC
closely tracks the satisfaction of its customers by
examining how likely they are to recommend the bank
to others.
Return on average total shareholders’ equity
measures the return on the equity held in the business
enabling management to benchmark HSBC against
competitors. The fall in return on equity reflected the
impact of the share capital issued during 2009. As the
impact of new regulation becomes clearer, management
believe that the impact of increased regulatory capital
requirements will depress returns for shareholders of
banks.
The bank does this by aggregating data from
accredited independent organisations. The resulting
recommendation scores are benchmarked against
competitors.
Results 2010
Tier 1 capital measures the component of regulatory
capital comprising core tier 1 and other tier 1 capital. In
2010, the group’s ratio marginally strengthened.
The benchmark recommendations seen in 2010 for
Personal Financial Services and Commercial Banking
were ahead of the competitor average by 2 points and 1
point respectively on a 100 point scale.
Advances to core funding ratio describes loans and
advances to customers as a percentage of the total of
core current and savings accounts and term funding
first direct, HSBC’s internet and telephone bank,
achieved the highest level of customer satisfaction in
the UK according to research company TNS.
6
HSBC BANK PLC
Report of the Directors: Operating and financial review (continued)
encountered funding difficulties. To assist these
governments, the European Union established stability
funds in liaison with the International Monetary Fund
and Eurozone governments. The European Central
Bank left its key interest rate at 1.0 per cent throughout
the year.
Awards
HSBC was recognised in several industry awards
throughout 2010. A small selection of those follows:
•
‘Best Bank Mortgage Provider’ - Moneyfacts 2010
(HSBC)
•
‘Most Trusted Financial Provider’ - Moneywise
2010 (first direct)
•
‘Best Lender for First Time Buyers’ - Moneywise
2010 (HSBC)
•
‘Best Trade Finance Provider’ - Global Finance
Magazine 2010
•
‘Best Service from a Business Bank’ – Moneyfacts
2010
•
‘Best Bank for FX for Corporate Customers 2010’
FX Week
•
The Euromoney ‘Best Debt House’ in Central and
Eastern Europe
•
‘Best Global Wealth Manager’ – Euromoney
Awards for Excellence 2010
•
The Euromoney 2011 Private Banking Survey
named HSBC ‘Best Private Bank in Asia’
•
‘Outstanding Private Bank’ – Middle East Private
Banker International Awards 2010
Reconciliation of reported and
underlying profit before tax
The group measures its performance internally on a
like-for-like basis by eliminating acquisitions, disposals
of subsidiaries and businesses, and fair value
movements on own debt designated at fair value
attributable to credit spread where the net result of such
movements will be zero upon maturity of the debt, all
of which distort period-on-period comparisons. The
group refers to this as its underlying performance.
Reported results include the effects of the above items.
This approach is used to monitor progress against
operating plans and previous period results because
management believes that the underlying basis more
accurately reflects operating performance.
Underlying performance
The tables below compare the group’s underlying
performance in 2010, 2009 and 2008 with reported
profits in those years.
The following items comprise the underlying
adjustments:
Economy
After falling 4.9 per cent in 2009, UK Gross Domestic
Product (‘GDP’) partially recovered in 2010 rising 1.4
per cent. The unemployment rate stayed at 7.9 per cent.
Despite the weakness of activity, the annual rate of
Consumer Price Index (‘CPI’) inflation rose during the
course of the year and reached 3.7 per cent in
December. Rising inflation was partially driven by food
and energy prices, and an increase in VAT in January
2010. Wage growth remained subdued with average
earnings rising at a rate close to 2 per cent through the
course of 2010. The Bank of England maintained the
base rate at 0.5 per cent throughout the year.
The Eurozone economy also made a partial
recovery over the course of the year. The region
benefited from the improvement in the global economy
and an increase in domestic demand. Within the region,
Germany saw the strongest recovery with GDP growing
by 3.5 per cent. The German unemployment rate fell
during the year but for the Eurozone as a whole, it
remained near 10%. Large increases in government debt
that have emerged in certain parts of Europe over the
last three years started to put upward pressure on
government bond yields and some governments
7
•
the change in own credit spread on long-term debt
which resulted in a loss of £122 million in 2010; a
loss of £439 million in 2009 and a gain of £477
million for 2008 in Net income/(expense) from
financial instruments designated at fair value;
•
£163 million gain on the disposal of Eversholt Rail
Group in December 2010 in Other operating
income;
•
disposal of HSBC Insurance Brokers Limited in
April 2010, including the profit on disposal of £83
million;
•
£180 million gain on the disposal of the residual 49
per cent stake in a UK merchant acquiring business
in June 2009 in Other operating income. This was
further to the initial gain of £215 million on the
initial disposal in June 2008; and
•
£644 million gain on the disposal of seven regional
banks in France in July 2008 in Other operating
income. As well as adjusting for the £80 million
operating profit from the seven regional banks sold
in 2008.
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Reconciliation of reported and underlying profit before tax
Net interest income.........................
Net fee income ...............................
Trading income ..............................
Net income from financial
instruments designated at fair
value1 ..........................................
Gains less losses from financial
investments.................................
Net earned insurance premiums.....
Other operating income..................
Total operating income ..................
Net insurance claims incurred
and movement in liabilities to
policyholders..............................
Net operating income before
impairments and provisions....
Loan impairment charges and
other credit risk provisions ........
Net operating income ...................
Total operating expenses................
Operating profit............................
Share of profit in associates and
joint ventures..............................
Profit on ordinary activities
before tax ..................................
2010 compared with 2009
2009
2009
reported
adjust£m
ments
2010
reported
£m
2010
adjustments
2010
underlying
£m
7,694
4,040
–
(31)
7,694
4,009
8,091
4,077
2,117
–
2,117
276
122
537
–
–
2009
underlying
£m
Reported
change %
Underlying
change %
(1)
(185)
8,090
3,892
(5%)
(1%)
(5%)
3%
2,626
–
2,626
(19%)
(19%)
398
543
439
982
(49%)
(59%)
537
(73)
–
–
(73)
836%
836%
2,635
800
18,099
(246)
(155)
2,635
554
17,944
2,716
1,122
19,102
(182)
71
2,716
940
19,173
(3%)
(29%)
(5%)
(3%)
(41%)
(6%)
(3,023)
–
(3,023)
(3,540)
–
(3,540)
(15%)
(15%)
15,076
(155)
14,921
15,562
71
15,633
(3%)
(5%)
(1,951)
13,125
(9,119)
4,006
–
(1,951)
12,970
(9,067)
3,903
(3,364)
12,198
(8,198)
4,000
–
(155)
52
(103)
71
176
247
(3,364)
12,269
(8,022)
4,247
(42%)
8%
11%
0%
(42%)
6%
13%
(8%)
5
–
5
14
(1)
13
(64%)
(61%)
4,011
(103)
3,908
4,014
246
4,260
0%
(8%)
2009
reported
£m
2009
adjustments
2009
underlying
£m
8,091
4,077
2,626
2008
underlying
£m
5,660
3,924
2,967
Reported
change %
2009 compared with 2008
2008
2008
reported
adjust£m
ments
Underlying
change %
8,091
5,697
(37)
42%
43%
Net interest income.........................
4,077
3,957
(33)
3%
4%
Net fee income ...............................
2,626
2,967
(11%)
(11%)
Trading income ..............................
Net income / (expense) from
financial instruments
designated at fair value1 .............
543
439
982
(1,097)
(477)
(1,574)
(149%)
(162%)
Gains less losses from financial
investments.................................
(73)
(73)
82
(33)
49
(189%)
(249%)
2,716
2,716
2,891
2,891
(6%)
(6%)
Net earned insurance premiums.....
1,122
(180)
942
1,678
(878)
800
(33%)
18%
Other operating income..................
19,102
259
19,361
16,175
(1,458)
14,717
18%
32%
Total operating income ..................
Net insurance claims incurred
and movement in liabilities to
policyholders..............................
(3,540)
(3,540)
(1,835)
(1,835)
93%
93%
Net operating income before
impairments and provisions....
15,562
259
15,821
14,340
(1,458)
12,882
9%
23%
Loan impairment charges and
other credit risk provisions ........
(3,364)
(3,364)
(1,861)
3
(1,858)
81%
81%
12,198
259
12,457
12,479
(1,455)
11,024
(2%)
13%
Net operating income ...................
(8,198)
(8,198)
(8,122)
39
(8,083)
1%
1%
Total operating expenses................
4,000
259
4,259
4,357
(1,416)
2,941
(8%)
45%
Operating profit............................
Share of profit in associates and
joint ventures..............................
14
14
9
9
56%
56%
Profit on ordinary activities
before tax ..................................
4,014
259
4,273
4,366
(1,416)
2,950
(8%)
45%
1 Changes in fair value due to movements in own credit spread on long-term debt issued. This does not include the fair value changes due to
own credit spread on structured notes issues and other hybrid instruments included within trading liabilities.
8
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Financial summary
Summary consolidated income statement
2010
£m
2009
£m
2008
£m
Net interest income .......................................................................................................
Net fee income ..............................................................................................................
Trading income .............................................................................................................
Net income / (expense) from financial instruments designated at fair value ...............
Gains less losses from financial investments................................................................
Net earned insurance premiums....................................................................................
Other operating income.................................................................................................
Total operating income .................................................................................................
Net insurance claims incurred and movement in liabilities to policyholders ..............
Net operating income before impairments and provisions...........................................
Loan impairment charges and other credit risk provisions ..........................................
7,694
4,040
2,117
276
537
2,635
800
18,099
(3,023)
15,076
(1,951)
8,091
4,077
2,626
543
(73)
2,716
1,122
19,102
(3,540)
15,562
(3,364)
5,697
3,957
2,967
(1,097)
82
2,891
1,678
16,175
(1,835)
14,340
(1,861)
Net operating income ..................................................................................................
Total operating expenses...............................................................................................
13,125
(9,119)
12,198
(8,198)
12,479
(8,122)
Operating profit ..........................................................................................................
Share of profit in associates and joint ventures ............................................................
4,006
5
4,000
14
4,357
9
Profit on ordinary activities before tax.....................................................................
Tax Expense ..................................................................................................................
Profit for the year .......................................................................................................
4,011
(996)
3,015
4,014
(856)
3,158
4,366
(843)
3,523
Profit attributable to shareholders of the parent company............................................
Profit attributable to non-controlling interests..............................................................
2,959
56
3,092
66
3,441
82
Review of business performance
international business and the group actively supported
corporates and SMEs in response to changing economic
circumstances.
2010 compared with 2009
HSBC Bank plc and its subsidiary undertakings
reported profit before tax of £4,011 million, in line with
the £4,014 million in 2009, but 8 per cent lower on an
underlying basis. The differences between reported and
underlying results are explained on page 7. The fall in
underlying profits was largely due to lower levels of
Global Banking and Markets income, where the
exceptional results of 2009 were not repeated.
The following items are significant in a comparison
of 2010’s underlying results to 2009:
Global Banking and Markets results remained
strong by historical standards. However Global Banking
and Markets income decreased in 2010 due to the more
difficult market conditions and a reduced contribution
from Balance Sheet Management. In Private Banking,
reported profit before tax decreased as the impact on
revenues persisted in the low interest rate environment
and higher costs from increased investment in systems
and compliance costs.
Retail Banking in both the UK and Continental
Europe recorded a resilient financial performance in a
challenging economic environment. In Personal
Financial Services, sustainable long term relationships
continued to be built with the Premier and Advance
customer segments, focusing on wealth management
and secured lending. During 2010, the group increased
its market share of UK mortgage lending while
maintaining a conservative loan to value ratio. In
Commercial Banking, progress continued to be made on
the group’s strategy of becoming the leading bank for
9
•
the sale and leaseback of the Paris headquarters
building in February 2010 resulted in a gain of
£125 million being reported as an increase in Other
operating income in 2010;
•
one-off payroll and bonus taxes amounting to £218
million in respect of certain 2009 bonuses was
recognised and paid in 2010 reported as an increase
in Total operating expenses;
•
a loss of £179 million, booked across various lines,
for HSBC Insurance (UK) Limited in 2009 (as the
UK motor insurance underwriter was significantly
affected by adverse claims experience during the
year) compared with £7 million profit in 2010. The
motor insurance underwriting business was placed
into run-off during 2009 with no new customer
business written in 2010;
•
a gain of £322 million related to a change in the
delivery of certain staff benefits in the main UK
pension scheme reported as a reduction in Total
operating expenses in 2009;
•
a gain of £353 million on the sale of the Group’s
London headquarters building reported as an
increase in Other operating income in 2009.
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
value, issued as part of our overall funding strategy with
an offset from trading assets held as economic hedges
reported in Trading income.
The commentary that follows is on an underlying
basis.
Net interest income decreased by £397 million or 5
per cent. Net interest income in Balance Sheet
Management decreased, as expected, from the strong
levels in 2009 as higher yielding positions taken in prior
years matured and opportunities for reinvestment at
equivalent yields were limited by prevailing low
interest rates and flatter yield curves. The fall in income
from interest-earning assets was driven by the group
repositioning its lending portfolios towards lower
yielding but higher quality secured assets. In Private
Banking, the continuing low interest rate environment
impacted customer deposit margins resulting lower in
net interest income. These reductions were offset, in
part, by a £6 billion increase in average mortgage
balances in the UK and improved asset margins.
Gains less losses from financial investments were
£537 million, compared to a £73 million loss
recognised in 2009. This reflected gains on sale of
private equity investments as market conditions
improved and higher net gains in Balance Sheet
Management on disposal of available-for-sale debt
securities. There was also a reduction in the level of
write-downs required on equity investments.
Net earned insurance premiums decreased by £81
million following the decision in 2009 to place the UK
motor insurance business into run-off; no new
premiums were written in 2010 in this business. The
decision taken during 2010 not to renew certain
contracts in the Irish business resulted in a further
decrease in premiums. This was partly offset by strong
sales activity in the UK Life and French insurance
businesses.
Net fee income increased by £117 million or 3 per
cent. Higher fee income from sales of investment
products was driven by a stronger investment
performance in funds and improved customer
sentiment. There was also an increase in fee income
from credit facilities in line with higher customer
volumes. Fees were also received for management
services provided by the bank to structured investment
conduits. Partially offsetting these increases were
reductions in the level of fees from equity capital
markets due to reduced client activity.
Other operating income decreased by £386 million
or 41 per cent, as the non-recurrence of the gain on the
sale and leaseback of the Group’s London headquarters
building in 2009 was only partly offset by the £125
million gain recorded on the sale and leaseback of the
Paris headquarters in 2010.
Net insurance claims incurred and movement in
liabilities to policyholders decreased by £517 million in
2010. This was in line with the movement in liabilities
to insurance and investment with DPF policyholders
reported above in Net income from financial
instruments designated at fair value. In addition, the
non-recurrence of the strengthening of reserves in 2009,
on the now-closed UK motor insurance book and the
decision not to renew certain contracts in the Irish
business also resulted in lower claims.
Trading income decreased by £509 million or 19
per cent. Credit and Rates revenues were adversely
affected by the unfavourable market conditions caused
by the impact of the European sovereign debt crisis.
Foreign exchange reported lower revenues reflecting
spread compression resulting from increased
competition. This was partly offset by lower net fair
value losses on structured liabilities and a net release of
previous write-downs on legacy positions as asset
prices improved.
Loan impairment charges and other credit risk
provisions decreased by £1,413 million or 42 per cent
reflecting the more stable credit environment and the
risk mitigation actions taken by management. In Global
Banking and Markets, loan restructuring activity and
the non-recurrence of specific charges taken in relation
to a small number of customers in 2009 contributed to a
decline in loan impairment charges. Credit risk
provisions on certain available-for-sale asset backed
securities also decreased due to a slowing in the rate of
anticipated losses on the underlying collateral pools.
In addition, Trading income included foreign
exchange gains on trading assets held as economic
hedges of foreign currency debt designated at fair value,
compared to losses reported in 2009. An offsetting
amount is reported in Other income.
Net income from financial instruments designated
at fair value decreased by £584 million. The growth in
equity markets in 2010 was lower than 2009 resulting in
lower investment gains recognised on the fair value of
assets held to meet liabilities under insurance and
investment contracts. To the extent that these gains
accrued to policyholders holding unit-linked insurance
policies and insurance or investment contracts with
discretionary participation features (‘DPF’), there was a
corresponding decrease in Net insurance claims
incurred and movement in liabilities to policyholders.
In addition, foreign exchange losses were reported in
the year on foreign currency debt designated at fair
The loan impairment charges in both UK and
Continental Europe Retailing Banking were
significantly lower than in 2009. In Personal Financial
Services, lower loan impairment charges were driven by
improved delinquencies across both the secured and
unsecured lending portfolios due to enhanced credit risk
management practices and improved collections. In UK
Commercial Banking, loan impairments were lower,
with the improvement spread across most industry
10
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
environment. Net interest income also benefited from a
reduction in the cost of funding trading activities as
interest rates fell. Conversely, the Retail business and
payments and cash management were adversely
affected by margin compression following interest rate
reductions in late 2008 and early 2009. Mortgage
balances increased as the bank gained market share in
the UK, through the success of a new Rate Matcher
mortgage promotion and other campaigns launched in
line with its secured lending growth strategy. In 2009
the bank more than met its commitment to make
available £15 billion of new mortgage lending.
sectors. Reductions were also seen across the
Commercial Banking business in Continental Europe.
Total operating expenses increased by £1,045
million or 13 per cent. Included in 2010 was a one-off
payroll and bonus tax levied on certain 2009 bonuses in
the UK and France amounting to £218 million,
primarily in Global Banking and Markets. Operating
expenses in 2009 included an accounting gain of £322
million relating to a change in the basis of delivering of
certain staff benefits in the main UK pension scheme.
Excluding these items, operating expenses were £505
million higher than the prior year. This was mainly
driven by continued strategic investments in Global
Banking and Markets capabilities and operational
infrastructure to drive future growth. In addition, there
were also increases in rental expenses, following the
sale and leaseback of the London and Paris
headquarters, and litigation provisions.
2009 compared with 2008
In Commercial Banking, net lending fell compared
with 2008 as a result of muted customer demand.
Customer utilisation of committed overdraft facilities
provided by the bank in the UK to commercial
customers was only 40 per cent at the end of 2009
illustrating the availability of credit when demand
resumes. Across most businesses asset balances
declined reflecting; reduced customer demand for
credit, increased debt issuance as the bond markets
reopened in 2009 and the group’s diminished appetite
for unsecured lending in the UK and Continental
Europe. Asset spreads widened, most notably in the UK
and Turkey, as funding costs reduced in the low interest
rate environment and the market pricing of corporate
lending increased.
The group reported pre-tax profit of £4,014 million,
compared with £4,366 million in 2008. On an
underlying basis pre-tax profit was £4,273 million,
against £2,950 million in 2008.
Throughout 2009, the group worked to retain and
build on the deposit base gained in the last quarter of
2008, in the face of fierce competition and narrowing of
spreads across the region following interest rate cuts.
The following items are significant in a
comparison of 2009’s underlying results to 2008:
Net fee income increased by £153 million, or 4 per
cent. The group generated higher underwriting fees
from increased government and corporate debt
issuances, and by taking market share in equity capital
markets issues as corporates and financial institutions
restructured their balance sheets by raising share
capital. As part of its wealth management strategy the
bank continued to grow the Premier customer base and
successfully launched the World Selection fund in the
UK with £959 million invested during the year. This
was partially offset by lower equity brokerage
commissions and reduced performance and
management fees in Private Banking as investor
sentiment for risk and structured products remained
subdued.
The effective tax rate was 25 per cent (2009: 21 per
cent). This is lower than the UK statutory tax rate of 28
per cent (2009: 28 per cent). The major items of note
are the benefit of tax free capital gains and profits
earned in lower tax jurisdictions, partially offset by the
non-deductibility of the one-off bonus tax paid in the
UK.
•
a gain of £353 million on the sale of the Group’s
London headquarters building. In 2008 the group
reported a gain of £265 million from the
cancellation of an agreement to sell this building;
•
a change in the basis of delivering death-in-service,
ill health and early retirement benefits for some
UK employees generated an accounting gain of
£322 million in 2009;
•
a loss of £179 million for HSBC Insurance (UK)
Limited, compared with a loss of £19 million in
2008. The UK motor insurance underwriter was
very significantly affected by adverse claims
experience during the year and a decision was
taken to close to new business in September 2009
with the company now in run off.
Trading income decreased by £341 million, or 11
per cent. This reflects £981 million of foreign exchange
losses on trading assets, held as economic hedges of
foreign currency debt designated at fair value, which
offset the £640 million increase in other trading income
arising from a strong performance in Global Banking
and Markets.
The commentary that follows is on an underlying
basis.
Net interest income increased by £2,431 million, or
43 per cent. Balance Sheet Management revenues in
Global Banking and Markets rose significantly due to
the early positioning of balance sheet in anticipation of
decisions by central banks to preserve a low base rate
A net gain of £982 million was recognised as Net
income from financial instruments designated at fair
value, compared with a loss in 2008. This was primarily
11
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
insurance premiums. This was partly offset by the
decrease in liabilities following reduced sales of the
personal insurance bond product offering noted above.
due to gains on the fair value of assets held to meet
liabilities under insurance and investment contracts as
equity markets recovered from declines experienced in
2008. To the extent that these gains were attributed to
policyholders holding either insurance contracts or
investment contracts with DPF, there was a
corresponding increase in Net insurance claims
incurred and movement in liabilities to policyholders.
Foreign exchange gains on debt designated at fair value
were largely offset by losses on the tightening of credit
spreads on own debt.
Loan impairment charges and other credit risk
provisions increased by £1,506 million, or 81 per cent,
as the impact of weaker economic conditions across the
region fed through to higher delinquency and default. In
Global Banking and Markets, loan impairment charges
and credit risk provisions increased, with the charges
concentrated among a small number of clients. The
emergence in the year of cash flow impairment on
certain asset-backed debt securities held within the
available-for-sale portfolios added £745 million to the
charge. Impairment booked on these exposures reflects
mark-to-market losses which the bank judges to be
significantly in excess of the likely ultimate cash losses.
Gains less losses from financial investments were
£122 million lower than in 2008 mainly due to the nonrecurrence of certain disposals in that year, including
MasterCard shares, private equity investments and the
remaining stake in the Hermitage Fund.
In Commercial Banking, loan impairment charges
rose from a low base by £318 million, reflecting the
general economic downturn with a small number of
larger cases having a material impact. In the personal
sector loan impairments rose by £248 million, with
deterioration most evident in the cards and other
unsecured portfolios as unemployment rose.
Net earned insurance premiums decreased by 6 per
cent. In the UK, an insurance linked Guaranteed Income
Bond offered in 2008 was replaced with an alternative
banking deposit product, giving rise to a decrease in
insurance premium income, with an equivalent decrease
in Net insurance claims incurred and movement in
liabilities to policyholders. Adjusting for the impact of
a significant re-insurance transaction in 2008 which
passed insurance premiums to a third-party reinsurer,
net premiums in France increased by 5 per cent, despite
a significant reduction in the distribution network
following the disposal of the regional banks network in
July 2008.
Operating expenses increased by £115 million, or 1
per cent. Excluding an accounting gain of £322 million
following a change in the basis of delivering death-inservice, ill health and early retirement benefits for some
UK employees, operating expenses increased despite
efficiency benefits as higher performance-related
awards were made to reflect exceptional revenue and
profit growth in Global Banking and Markets.
Other operating income increased by 18 per cent,
mainly due to the £353 million gain on the sale and
leaseback of 8 Canada Square in London which was
effected through the disposal of HSBC’s entire
shareholding in the company which is the legal owner
of the building and long leasehold interest in 8 Canada
Square. In 2008, HSBC recognised a gain of £265
million representing the equity deposit on a previously
negotiated sale of the building which ultimately did not
complete. The growth in revenue also reflected lower
costs associated with the provision of support to certain
money market funds in Global Asset Management.
In the UK and Continental Europe Retail
businesses, operational cost savings reflected the
group’s leverage of its global technology platforms and
processes to reduce costs and improve customer
experience, complemented by tight control over
discretionary expenditure and a reduction in staff
numbers.
In Europe overall, full time equivalent staff
numbers fell by some 6,000 during the year.
The bank’s share of profit in associates and joint
ventures increased by £5 million.
Net insurance claims incurred and movement in
liabilities to policyholders increased by £1,705 million.
The majority of the movement was due to the change in
liabilities to policyholders reported above in Financial
instruments designated at fair value, and the large oneoff reinsurance transaction in France in 2008. In
addition, an increase of £200 million in claims
reserving was required to reflect a higher incidence and
severity of insurance claims in the UK motor
underwriting business and a higher incidence of credit
protection claims through the reinsurance business in
Ireland. Risk mitigation measures implemented in 2009
included the decision to cease originations of UK motor
The effective tax rate was 21.3 per cent (2008: 19.3
per cent). This rate is lower than the UK statutory tax
rate of 28 per cent (2008: 28.5 per cent) reflecting the
benefit of tax free gains in both years. In 2009, the most
significant tax free gain related to the sale of the bank’s
London head office building.
12
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Summary consolidated balance sheet
2010
£m
2009
£m
2008
£m
Total assets ................................................................................................................................................
Cash and balances at central banks............................................................................................................
Trading assets.............................................................................................................................................
Financial assets designated at fair value ....................................................................................................
Derivative assets.........................................................................................................................................
Loans and advances to banks.....................................................................................................................
Loans and advances to customers ..............................................................................................................
Financial investments ................................................................................................................................
Other...........................................................................................................................................................
798,494
24,495
159,552
15,467
129,158
57,027
285,218
102,086
25,491
751,928
14,274
165,008
16,435
118,516
46,994
274,659
86,695
29,347
924,231
9,470
172,026
13,895
243,084
50,719
298,304
103,511
33,222
Total liabilities ..........................................................................................................................................
Deposits by banks ......................................................................................................................................
Customer accounts .....................................................................................................................................
Trading liabilities .......................................................................................................................................
Financial liabilities designated at fair value ..............................................................................................
Derivative liabilities ...................................................................................................................................
Debt securities in issue...............................................................................................................................
Liabilities under insurance contracts issued ..............................................................................................
Other...........................................................................................................................................................
766,137
48,287
344,123
132,360
27,935
129,204
48,119
17,116
18,993
723,500
57,729
332,896
118,881
18,164
118,689
39,340
16,505
21,296
903,570
61,431
369,880
124,450
15,184
241,031
52,308
16,132
23,154
Total equity ...............................................................................................................................................
Total shareholders’ equity..........................................................................................................................
Non-controlling interests............................................................................................................................
32,357
31,825
532
28,428
27,787
641
20,661
19,923
738
Movements in 2010
yield curves. The notional value of outstanding
contracts also rose, reflecting an increase in the number
of open transactions compared with 2009.
Total assets amounted to £798 billion, 6 per cent higher
than at 31 December 2009 reflecting higher levels of
secured lending in the UK, strong demand for
commercial loans and a rise in derivative assets as a
result of a downward shift in yield curves. The group
maintained a strong and liquid balance sheet with the
ratio of customer advances to customer accounts at 82.9
per cent (2009: 82.5 per cent, 2008: 80.6 per cent). The
group’s reported tier 1 ratio remained stable at 11.4 per
cent.
Loans and advances to banks increased by 21 per
cent due to higher levels of reverse repo transactions
transacted with bank counterparties, fewer of which
meet the accounting netting criteria.
Loans and advances to customers grew by 4 per cent
through targeted commercial loans growth. Competitive
pricing continued to drive growth in mortgage lending
in the UK.
Assets
Cash and balances at central banks grew 72 per cent as
residual cash from daily operations was placed with the
central banks.
Financial investments rose by 18 per cent as Balance
Sheet Management redeployed cash into available-forsale treasury bills and government agency debt
securities.
Trading assets fell by 3 per cent. This was primarily
driven by lower levels of reverse repo activities and a
decrease in holdings of treasury bills and debt securities
to reduce exposures to Eurozone peripheral countries.
This was partially offset by increased holdings of
equities to hedge derivative positions arising from a rise
in client trading activity.
Liabilities
Deposits by banks decreased by 16 per cent primarily
driven by lower levels of repo activity and a fall in
central bank deposits in France.
Customer accounts were 3 per cent higher driven by
an overall increase in savings accounts. Growth in
Premier and online savings contributed to an increase in
current account balances as customers responded well
to targeted promotional campaigns. This was partially
offset by a fall in repo activity.
Financial assets designated at fair value fell by 6 per
cent following as the sale of European government debt
securities by Balance Sheet Management. This was
partially offset by an increase in the fair value of equity
securities held within the insurance business as market
values recovered.
Trading liabilities increased by 11 per cent primarily
due to increased short bond and equity positions used to
hedge derivative transactions, reflecting higher client
demand.
Derivative assets rose by 9 per cent. This was
primarily driven by increases in the fair value of interest
rate contracts as a result of downward shifts in major
13
HSBC BANK PLC
Report of the Directors (continued)
Liabilities under insurance contracts grew by 4 per
cent. This was driven by gains on unit-linked products
as investment market values improved.
Financial liabilities designated at fair value rose by
54 per cent due to new debt issuances during 2010.
Derivative liabilities increased by 9 per cent. The
derivative businesses are managed within market risk
limits and, as a consequence, the increase in the value
of derivative liabilities broadly matched that of
derivative assets.
Equity
Total shareholders’ equity increased by 15 per cent,
driven by profits generated during the year. In addition,
the negative balance on the available-for-sale reserve
declined from £6 billion at 31 December 2009 to
£3 billion at 31 December 2010, largely reflecting
improvements in the market value of assets.
Debt securities in issue rose by 22 percent as result of
new issuances of medium-term notes during 2010.
Performance and Business Review
Profit on ordinary activities before tax
UK Retail Banking .....................................
Continental Europe Retail Banking ...........
Global Banking and Markets ....................
Private Banking ..........................................
Other/Intersegment.....................................
2010
£m
Reported
2009
£m
Reported
2008
£m
Reported
2010
£m
Underlying
2009
£m
Underlying
2008
£m
Underlying
1,313
322
1,876
616
(116)
988
197
2,511
728
(410)
2,139
236
122
726
1,143
1,265
322
1,699
616
6
791
197
2,515
728
29
1,924
156
122
726
22
4,011
4,014
4,366
3,908
4,260
2,950
HSBC Bank plc and its subsidiary undertakings
reported a pre-tax profit of £4,011 million, in line with
2009, and 8 per cent lower on an underlying basis.
2010 compared with 2009
Overview
The year remained a challenging period for the UK
economy and, in this environment, the group’s financial
strength and diversification enabled it to continue to
support its personal and commercial customers in
managing their financial challenges and planning for
the future. This resulted in a resilient financial
performance.
Retail Banking operations in both the UK and
Continental Europe recorded significant increases in
profits. Lower levels of profit were recorded in Global
Banking and Markets, where the exceptional
performance of 2009 was not repeated, and in Private
Banking.
UK Retail Banking
Net interest income .................
Net fee income ........................
Trading income.......................
Other income ..........................
Net operating income
before impairments and
provisions ...........................
Loan impairment charges
and other credit risk
provisions ...........................
Net operating income............
Total operating expenses ........
Operating profit ....................
Share of profit in associates
and joint ventures....................
Profit on ordinary activities
before tax ...........................
2010
£m
3,536
1,852
9
255
2009
£m
3,361
1,913
28
241
2008
£m
3,692
1,917
61
770
5,652
5,543
6,440
(1,221)
4,431
(3,121)
1,310
(1,600)
3,943
(2,968)
975
(1,095)
5,345
(3,214)
2,131
3
13
8
1,313
988
2,139
UK Retail Banking reported strong profit before
tax of £1,313 million in the period, compared with £988
million in 2009, an increase of 33 per cent. This was
primarily as a result of significantly lower loan
impairment charges in both the personal and
commercial sectors. The lower charge was as a result of
actions taken to improve collections performance,
together with the change in mix of new business
towards secured and away from unsecured lending. The
continuing low interest environment in the UK has also
allowed many customers to reduce debt levels.
On an underlying basis, adjusting for the disposal
of the residual stake in the UK card acquiring joint
venture in June 2009 and UK Retail Banking’s element
of the disposal of the Insurance Brokers business in
April 2010, profit before tax was £1,265 million in
2010, an increase of 60 per cent.
The above is on a reported basis.
14
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Net fee income increased by £58 million or 3 per
cent as the group earned higher levels of fee income
from insurance and both domestic and international
payments flows. This was partially offset by reduced
income from overdraft fees as the portfolio mix
continued to move away from unsecured lending.
In understanding the comparison for UK Retail
Banking, the following items are significant:
•
a change in the basis of delivering death-in-service,
ill health and early retirement benefits which
generated an accounting gain of £264 million in
June 2009;
•
a loss of £179 million for HSBC Insurance (UK)
Limited in 2009, as the motor insurance
underwriter was adversely impacted by claims
experience, compared with a £7 million profit in
2010.
Other income was £131 million higher primarily
due to the non-recurrence of losses in HSBC
Insurance (UK) Limited in 2009 relating to the
deterioration of motor claims experience.
Loan impairment charges and other credit risk
provisions decreased by £379 million or 24 per cent.
In the personal sector, loan impairment charges
decreased by £257 million due to lower levels of
delinquencies across both the secured and unsecured
portfolios as a result of actions taken to improve
collections performance and improve the quality of
new business booked, coupled with the effect of low
interest rates. In Commercial Banking, loan
impairment charges decreased by £121 million with
the improvement spread across most industry sectors.
In UK Personal Financial Services, Premier
customers increased by 18 per cent, while Advance
attracted 55,000 new customers to the group as the
business focused on building long term sustainable
relationships and wealth management revenues with
these customer groups. The investment business
continued to grow and increased its sales of HSBC
World Selection which rose by 112 per cent to £2
billion in the year. The group’s share of new UK
residential mortgage lending in 2010 was 9 per cent,
above the group’s total market share of 5 per cent. The
average loan to value ratio of this new lending was 54
per cent. The group continued to support the UK
housing market, advancing funds to allow 63,000
customers to purchase properties, including 29,000 first
time buyers.
Given the weakened state of some commercial and
consumer customers, continuing positive impairment
trends remain sensitive to general economic activity,
interest rates, employment levels and house prices.
Total operating expenses increased by £242
million or 9 per cent but were broadly flat against prior
year after adjusting for the accounting gain of £264
million resulting from the change in delivery of certain
staff benefits in the UK main pension scheme. Cost
savings achieved by delivering sustainable long-term
reductions in the cost base by re-engineering business
processes funded strategic investment in people and
infrastructure to support customers. In Personal
Financial Services, the group recruited additional
wealth advisors, provided a new range of financial
planning tools and continued to invest in the branch
network, with 243 branches refurbished in 2010. In
Commercial Banking, 160 new international
relationship managers and 180 new local business
manager roles were created.
In Commercial Banking, progress continued to be
made towards becoming the leading bank of choice for
international business. The number of UK based
customers managed through the international
proposition grew by 25 per cent and related income
grew 14 per cent. The number of import and export
transactions increased by 5 per cent and 10 per cent,
respectively, with international trade income increasing
23 per cent on prior year. The group opened accounts
for over 125,000 customers starting new businesses,
and increased gross new lending to SMEs by 19 per
cent over 2009.
Financial performance
The commentary that follows is on an underlying basis.
2009 compared with 2008
Net interest income increased by £176 million or 5
per cent mainly driven by growth in mortgage balances
and wider asset margins. This was partly offset by a
narrowing of liability spreads. The group built on its
strong deposit base, despite fierce competition for
liability balances, with personal customer deposits
increasing by 9 per cent. In Commercial Banking, net
lending balances grew 3 per cent, with new advances up
17 per cent, despite increased customer propensity to
reduce borrowing.
Overview
UK Retail Banking reported a profit of £988 million for
2009, against £2,139 million in 2008.
Underlying basis is adjusted for the £180 million
gain on the disposal of the residual 49 per cent stake in
the UK card acquiring joint venture with Global
Payments Inc. in June 2009 and adjustments in relation
to the Insurance Brokers business. The 2008 results
included a £215 million gain realised on the sale of the
first tranche.
15
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Net fee income remained flat. In line with strategy
the bank continues to grow the Premier customer base.
In Commercial Banking, significant growth was seen in
trade revenues which increased 18 per cent on 2008
where the bank responded to the challenge of the
recession by increasing the availability of Trade
Finance to companies trading internationally. However,
fees declined overall following the part disposal of the
card-acquiring business to a joint venture in 2008,
lower overdraft fees as a result of reduced utilisation
and higher operational liquidity costs.
For UK Retail Banking, the following items are
significant in a comparison of 2009’s underlying results
to 2008:
•
a change in the basis of delivering death-in-service,
ill health and early retirement benefits for some
UK employees generated an accounting gain;
•
a loss of £179 million for HSBC Insurance (UK)
Limited, compared with a loss of £19 million in
2008 as the UK motor insurance underwriter was
very significantly affected by adverse claims
experience during the year.
Other income decreased by 89 per cent primarily
due to the income realised as a result of the sale of
MasterCard and Visa shares in 2008 of £191 million not
being repeated in 2009, a decline in income of £134
million in the insurance brokers business driven by
adverse motor insurance claims experience mentioned
above, sale and leaseback profits made in 2008 and not
2009 and the ongoing impacts of the decision in
December 2007 to cease selling Payment Protection
Insurance (‘PPI’) products.
In a challenging year, and despite a domestic
economy in recession, HSBC’s financial strength
enabled the bank to continue to support personal and
commercial customers in the UK throughout 2009
making available £15 billion in residential mortgages,
and helping 121,000 business start-ups in the
commercial sector.
HSBC continued to build its premium customer
base and the number of UK based international
customers in the commercial segment. Customer
deposit levels increased despite intense competition and
margin compression.
Loan impairment charges and other credit risk
provisions increased by 46 per cent to £1,600 million.
In Commercial Banking, loan impairment charges rose
by £285 million, reflecting the general economic
downturn with a small number of large cases having a
material impact. Exposure to the commercial property
portfolio in the UK declined by £0.8 billion to £10.3
billion during 2009, reflecting HSBC’s efforts to reduce
risk in this sector.
On an underlying basis, and excluding the losses
from HSBC Insurance (UK) Limited and the accounting
gain for some UK employee benefits in 2009, UK
Retail Banking pre-tax profits fell by 63 per cent. This
was primarily driven by higher impairments in both the
personal and commercial segments due to deterioration
in the economic environment, margin compression
impacting liability spreads and lower fee income,
partially as a result of strategic re-positioning.
In the personal sector, loan impairment charges
rose by £222 million. Stresses were most evident in
cards and other unsecured lending, as unemployment
rose. However unsecured lending at £13.4 billion is
only 18.4 per cent of the aggregate portfolio, as the bulk
of the portfolio is residential mortgage. Despite declines
in property values from the peak in 2007, residential
sector impairment charges as a percentage of total
lending remained low at 0.157 per cent, reflecting the
bank’s conservative lending approach.
Financial performance
The commentary that follows is on an underlying basis.
Net interest income decreased by 9 per cent,
mainly driven by the narrowing of liability spreads
following interest rate cuts. The bank has however built
on its strong deposit base in 2009, despite fierce
competition for liability balances. Mortgage balances
also increased as the bank gained market share in the
UK through the success of a new Rate Matcher
mortgage promotion and other campaigns launched in
line with the secured lending growth strategy. New
mortgage sales were in line with the commitment to
lend made in December 2008. In Commercial Banking,
net lending has reduced from prior year as a result of
muted customer demand. Customer utilisation of
committed overdraft facilities was only 40 per cent at
the end of 2009. Asset spreads widened in the UK as
funding costs reduced in a low interest rate environment
and the pricing of corporate lending increased.
Total operating expenses decreased by 8 per cent
to £2,968 million. Excluding an accounting gain of
£264 million following a change in the basis of
delivering death-in-service, ill health and early
retirement benefits for some UK employees, operating
expenses were 3 per cent lower than 2008. The UK
business has leveraged global scale and technology
platforms to re-engineer the business. This has
improved the customer experience and has allowed a
reduction of the core operating expenses in the UK
Retail businesses.
16
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
the Advance proposition was launched in Turkey,
Poland, France, Malta and Greece.
Commercial Banking continued to focus on
expanding relationships with international businesses.
Growth was seen in trade finance as the region showed
tentative signs of business revival particularly in
Germany, Turkey and Poland which resulted in an
increase in transaction flows. The group launched
Business Direct, a new delivery channel, in Poland
during the first half of the year and maintains a leading
position in receivables finance across the region.
Continental Europe Retail Banking
Net interest income .................
Net fee income ........................
Trading income .......................
Other income ...........................
Net operating income
before impairments and
provisions............................
Loan impairment charges
and other credit risk
provisions............................
Net operating income ............
Total operating expenses.........
Operating profit ....................
Share of profit in associates
and joint ventures................
Profit on ordinary
activities before tax ...........
2010
£m
1,725
465
22
(4)
2009
£m
1,681
423
28
6
2008
£m
1,505
532
11
(14)
2,208
2,138
2,034
(195)
2,013
(1,691)
322
(338)
1,800
(1,603)
197
(279)
1,755
(1,519)
236
–
–
–
322
197
236
Financial Performance
The comments that follow are on an underlying basis.
Net interest income increased by £44 million or 3
per cent. In Personal Financial Services, asset margins
improved in France and Malta partially offset by
narrowing margins in Turkey following the imposition
of a government-regulated cap on credit card interest
rates. The severe deposit spread compression seen in
Malta in 2009 eased in 2010 and deposit spreads
widened as maturing fixed rate deposits rolled over at
lower interest rates. The strategic re-focus of the
group’s personal banking business depressed net
interest income but the resultant sharp increase in the
number of target segment customers acquired across the
region provides a good revenue base going forward.
Profit on ordinary Activities before tax - by country
France .....................................
Germany ..................................
Turkey ....................................
Malta........................................
Other........................................
Profit on ordinary
activities before tax ..........
2010
£m
159
21
135
59
(52)
2009
£m
101
14
125
58
(101)
2008
£m
154
16
64
68
(66)
322
197
236
In Commercial Banking, net interest income
increased compared with 2009. Revenue growth in
France was offset by strong competition in Turkey,
where margins were lower than in 2009. Corporate
lending expanded in a number of markets following the
downturn in 2009. The pipeline of transactions showed
signs of revival, with particularly strong growth in the
last two months of the year, providing a firm base for
growth in 2011. By focusing on the shipping business
and larger international clients, revenue grew in Greece
and a number of smaller European sites.
These tables are on a reported basis.
2010 compared with 2009
Overview
Continental Europe Retail Banking reported a profit of
£322 million in 2010, against £197 million in 2009, an
increase of 63 per cent. Increased revenues and lower
loan impairment charges were partly offset by rising
costs, driven largely by investment to achieve business
growth. There was no difference between profits on a
reported and underlying basis.
Net fee income increased £42 million or 10 per cent
compared with 2009. Fee income in Personal Financial
Services was 30 per cent higher as growth in France,
Turkey and Malta reflected the success of the
penetration of the target segment and wealth
management business. Growth in Greece, Ireland,
Czech Republic and Spain boosted fee income in
Commercial Banking.
Following the restructuring of a number of the
group’s Personal Financial Services businesses in 2009,
focus has increasingly centred on wealth management,
reflecting the demographics of the region. Increased
investment resulted in increased customer numbers,
with 65,000 new-to-bank Premier customers acquired in
2010. Customer growth was particularly strong in
Poland, Turkey and France, where the group opened
two of HSBC’s largest Premier centres. The total
number of Premier customers in the region rose by 43
per cent to 518,000 by the end of 2010. During the year
Loan impairment charges and other credit risk
provisions decreased by £143 million or 42 per cent
compared with 2009. In Personal Financial Services,
impairments were sharply lower in Turkey where limit
reductions, changes in approval thresholds and a strong
focus on collections yielded substantial improvements
in recoveries and a reduction in delinquency rates. The
closure of Consumer Finance business in Continental
17
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Europe in 2009 also contributed to the fall in the 2010
impairment charges.
and by losses of income resulting from the closure of
the Consumer Finance businesses in Eastern Europe.
In Commercial Banking, lower impairment charges
were a feature of a number of markets with sharp
decrease in France, Turkey and Germany. The fall was
partially offset by the raising of a provision against a
single exposure in Ireland.
Net fee income decreased by 15 per cent mainly
driven by an increase in fee expense due to a rise in
business written in HSBC Reinsurance through the
HSBC Preferred Strategic partner network, which is
used for certain products in locations where HSBC does
not have a manufacturing presence. This was partially
offset by higher service and arrangement fees in Turkey
due to increased personal banking card volumes.
Total operating expenses increased by £88 million
or 5 per cent. The higher cost levels were principally
due to expansion of the Personal Financial Services
business in France, Turkey and Poland; and
Commercial Banking business in Turkey and Germany.
The acquisition of a retail business in Kazakhstan also
added to the cost base.
Loan impairment charges and other credit risk
provisions increased by 23 per cent to £338 million.
Loan impairment charges for commercial loans rose by
£35 million reflecting the general economic downturn
and a small number of larger cases having a material
impact. Loan impairment charges were £27 million
higher in the personal banking sector, due in part to a
£16 million write-off relating to a fraud case in France.
Despite uncertainty in European property markets,
impairment charges from the residential sector
remained relatively low, benefiting from the bank’s
conservative approach to lending.
2009 compared with 2008
Overview
Continental Europe Retail Banking reported a profit of
£197 million for 2009, against £236 million in 2008.
On an underlying basis, adjusting for £80 million
operating profit from the seven regional banks in France
that were disposed of in July 2008, and excluding
foreign exchange movements, profit before tax
increased by £22 million. Commercial Banking profits
increased by 31 per cent as a result of improved lending
margins. This was partially offset by higher loan
impairment charges, with a small number of larger
cases having a material impact reflecting the general
economic downturn. The bank continued to support
small business through the economic cycle, lending
£165 million to the SME sector in France and Malta.
Despite sharp falls in international trade volumes across
the region, the group’s trade business continued to grow
with revenues up 4 per cent on 2008 with particularly
strong growth in key markets such as Poland and
Turkey, and record results in Spain, Armenia, Israel and
Ireland. Despite steady net interest income growth,
Personal Banking losses increased in 2009 due to a
large re-insurance loss of £49 million in Ireland and an
increase in impairment charges.
Total operating expenses increased by 8 per cent to
£1,603 million. Excluding the impact of foreign
exchange movements, £12 million additional
investment spend in Russia and £18 million write-off
costs relating to a number of personal banking and
Consumer Finance withdrawals from Eastern Europe,
operating expenses remained flat reflecting tight cost
control across the region.
Global Banking and Markets
2010
£m
1,914
1,053
1,711
927
Net interest income1 ................
Net fee income.........................
Trading income .......................
Other income ...........................
Net operating income
before impairments and
provisions ............................
5,605
Loan impairment charges
and other credit risk
provisions ............................
(518)
Net operating income ............
5,087
Total operating expenses......... (3,213)
Operating profit.....................
1,874
Share of profit in associates
and joint ventures................
2
Profit on ordinary activities
before tax................................
1,876
Financial performance
Net interest income increased by 15 per cent. Adjusting
for the impact of foreign exchange movements, net
interest income increased by 6 per cent. Net interest
spreads improved in Commercial Banking although the
impact was reduced by lower asset balances reflecting a
decline in customer demand for credit and a change in
investor preference from bank lending to debt issuance.
Personal banking net interest income increased due to a
significant growth in the Premier customer base,
predominantly in France, in line with the premium
banking strategy. However this was largely offset by
the group’s diminished appetite for unsecured lending
18
2009
£m
2,849
1,060
1,972
708
2008
£m
1,963
845
318
(110)
6,589
3,016
(1,405)
5,184
(2,674)
2,510
(453)
2,563
(2,442)
121
1
1
2,511
122
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Management revenues fell against the exceptional
performance of 2009 driven by the maturity of higher
yielding positions, low interest rates and flatter yield
curves. In Global Banking, the continuation of margin
compression resulted in lower levels of income in the
credit and lending business.
Profit on ordinary Activities before tax - by country
UK ...........................................
France ......................................
Germany ..................................
Turkey .....................................
Other........................................
Profit on ordinary
activities before tax ..........
2010
£m
1,231
257
139
79
170
2009
£m
1,523
594
127
92
175
2008
£m
(188)
107
93
83
27
1,876
2,511
122
Net fee income was broadly in line with 2009. Fee
income received for management services provided by
the group to its structured investment conduits was
mostly offset by lower fees from equity capital markets
due to a decrease in client activity.
1 The bank’s Balance Sheet Management business, reported
within Global Banking and Markets, provides funding to the
trading businesses. To report Global Banking and Markets
Trading income on a fully funded basis, Net interest income
and Trading income are grossed up to reflect internal
funding transactions prior to their elimination in the Inter
Segment column (refer to Note 12).
Trading income was £261 million or 13 per cent
lower than 2009. Credit and Rates reported lower
income as a result of the unfavourable market
conditions caused by the impact of the European
sovereign debt crisis. This was partly mitigated by a net
release of previous write-downs on legacy positions and
on monoline exposures. Foreign exchange revenues
declined, reflecting margin compression from increased
competition. This was partly offset by lower net fair
value losses reported on structured liabilities of £18
million compared with losses of £215 million in 2009.
Foreign exchange gains were reported on trading assets
held as economic hedges of foreign currency debt
designated at fair value, compared with losses reported
in 2009. The offset is reported in Other income.
These tables are on a reported basis.
2010 compared with 2009
Overview
Global Banking and Markets reported a pre-tax profit of
£1,876 million in the period compared with £2,511
million in 2009, a decrease of 25 per cent. The 2010
results, however, remained strong by historical
standards and were second only to the exceptional
performance of 2009.
Other income increased by £38 million or 5 per
cent due to higher realisations and lower impairment
charges in Principal Investments as market conditions
improved. This was partly offset by foreign exchange
losses on debt designated at fair value, compared with a
gain reported in 2009. The offset is reported in Trading
income.
On an underlying basis, adjusting for the Global
Banking and Markets’ element of the disposal of the
Insurance Brokers’ business in April 2010 and the
disposal of Eversholt Rail Group in December 2010,
profit before tax was £1,699 million, 32 per cent lower
than 2009.
Revenues slowed in 2010, due to less favourable
market conditions caused by the impact of the European
sovereign debt crisis and the anticipated lower revenues
in Balance Sheet Management. Operating expenses
included a £207 million charge from the one-off UK
and French bonus and payroll taxes applied on certain
2009 bonus payments.
Loan impairment charges and other credit risk
provisions decreased by £887 million or 63 per cent.
Loan impairment charges fell by £459 million as
significant loan impairments taken in relation to a small
number of clients in 2009 did not recur. Impairments on
available-for-sale debt securities fell by £428 million
compared with 2009, mainly related to asset-backed
securities, due to a slowing of anticipated losses in the
underlying collateral pools..
Loan impairment charges and other credit risk
provisions decreased significantly by £887 million. The
fall reflected improved credit conditions which,
together with capital raising and debt restructuring
activity, strengthened the credit quality of the portfolio.
Credit risk provisions on certain available-for-sale asset
backed securities also decreased due to a slowing in the
rate of anticipated losses in the underlying collateral
pools.
Total operating expenses increased by £574
million or 22 per cent due to the inclusion of £207
million payroll taxes on certain bonuses and continued
investment in strategic initiatives to drive future
revenue growth, including the development of Prime
Services and equity market capabilities and expansion
of the Rates and foreign exchange e-commerce
platforms. This was compounded by the non-recurrence
of a £58 million pension accounting gain recorded in
2009.
Financial performance
The commentary that follows is on an underlying basis.
Net interest income decreased by £935 million, or
33 per cent against 2009. As anticipated, Balance Sheet
19
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Total operating expenses increased by 10 per cent
to £2,674 million as efficiency benefits were offset by
higher performance-related awards made to reflect
exceptional revenue and profit growth.
2009 compared with 2008
Overview
Global Banking and Markets recorded an exceptional
pre-tax profit of £2,511 million in 2009, primarily
resulting from an outstanding performance in Rates and
Balance Sheet Management.
Private Banking
Financial performance
Net interest income.................
Net fee income........................
Trading income.......................
Other income ..........................
Net operating income
before impairments and
provisions ...........................
Loan impairment charges
and other credit risk
provisions ...........................
Net operating income............
Total operating expenses ........
Operating profit ....................
Share of profit in associates
and joint ventures ...............
Profit on ordinary
activities before tax...........
Net interest income increased by 45 per cent. Balance
Sheet Management revenues increased due to early
positioning of the balance sheet in anticipation of
decisions by central banks to preserve a low base rate
environment. Conversely, the payments and cash
management business was adversely affected by margin
compression following interest rate reductions in late
2008 and early 2009.
Net fee income increased by 25 per cent due to a
rise in underwriting fees from an increase in
government and corporate debt issuances, and higher
revenues in equity capital markets driven by the return
of client activity and gains in market share.
Trading income increased by £1,654 million. A
particularly strong performance in Rates reflected
increases in market share and client trading volumes,
coupled with wider bid-offer spreads. Similarly,
revenue in the Credit trading business rose as credit
prices improved and client activity increased with the
return of liquidity to the market. Foreign exchange
revenue fell, however, reflecting a combination of
reduced customer volumes and relatively lower market
volatility when compared with the exceptional
experience of 2008. Trading income benefited from the
non-recurrence of write-downs on legacy positions in
credit trading, leveraged and acquisition financing and
monoline exposures, and from the non-recurrence of a
£585 million charge in 2008 following the fraud at
Madoff Securities. This was partly offset by losses on
tightening of credit spreads on structured liabilities,
compared to gains in 2008. The tightening of credit
spreads led to a reduction in the carrying value of credit
default swap transactions held as hedges in parts of the
Global Banking portfolio. In 2008, gains were reported
on these credit default swaps following widening credit
spreads.
2010
£m
724
650
253
22
2009
£m
815
626
210
28
2008
£m
746
627
212
49
1,649
1,679
1,634
(17)
1,632
(1,016)
616
(19)
1,660
(932)
728
(31)
1,603
(877)
726
–
–
–
616
728
726
This table is on a reported basis, there is no difference
between reported and underlying bases.
2010 compared with 2009
Overview
Private Banking reported pre-tax profit of £616 million
in 2010 compared with £728 million in 2009, a decrease
of 15 per cent. This was mainly due to lower net interest
income driven by the narrowing of deposit spreads,
offset by an increase in fee and trading income in 2010.
Private Banking has continued to focus on
providing excellent client experience and global
connections with the ability to offer tailor made services
including trust and family office services. A Family
Office Partnership was launched with Global Banking
and Markets, targeting ultra high net worth clients and
family offices seeking quasi-institutional services.
Financial performance
The commentary that follows is on an underlying basis.
Net interest income decreased by £91 million or 11 per
cent against 2009 as the continued low interest rate
environment continued to effect deposit spreads.
Loan impairment charges and other credit risk
provisions increased by £952 million to £1,405 million
with charges concentrated among a small number of
clients. The emergence in the year of cash flow
impairment on certain asset-backed debt securities held
within the available-for-sale portfolios added £745
million to the charge. Impairment booked on these
exposures reflects mark-to-market losses which the
bank judges to be significantly in excess of the likely
ultimate cash losses.
Net fee income increased by £24 million or 4 per
cent as market sentiment drove a rise in client activity
levels. Net new money amounted to £7.1 billion
resulting from strong inflows in Asia and other
emerging markets and increased client leverage.
Trading income increased by £43 million or 20 per
cent in 2010 driven by higher client transaction volumes
20
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
as client risk appetite returned, particularly in foreign
exchange and debt securities trading.
Net interest income.................
Net fee income........................
Trading income.......................
Other income ..........................
Net operating income
before impairments and
provisions ...........................
Loan impairment charges
and other credit risk
provisions ...........................
Net operating income............
Total operating expenses ........
Operating profit ....................
Share of profit in associates
and joint ventures ...............
Profit on ordinary
activities before tax...........
Total operating expenses increased by £84 million
compared to 2009 reflecting the hiring of front-line staff
to cover emerging markets as part of a long-term
strategy to further the international network and higher
compliance costs resulting from the evolving regulatory
environment.
2009 compared with 2008
Overview
Private Banking reported pre-tax profit of £728 million
for 2009, in line with 2008. Client-related income
decreased as a result of the lower average value of
funds under management and increased client aversion
to risk. However, strong cost control and reduced
performance-related costs mitigated the impact.
£m
(100)
20
(8)
73
£m
(192)
55
(35)
(152)
£m
(108)
36
264
1,082
(15)
(324)
1,274
–
(15)
(101)
(116)
(2)
(326)
(84)
(410)
(3)
1,271
(128)
1,143
–
–
–
(116)
(410)
1,143
This table is on a reported basis.
2010 compared with 2009
Financial performance
The reported loss before tax in Other was £116 million,
compared with a loss of £410 million in 2009.
Net interest income increased by 9 per cent to £815
million, due to foreign currency movements. Excluding
these movements net interest income declined by 3 per
cent in 2009 due mainly as a result of tighter spreads
and reduced deposit volumes following aggressive
deposit price competition.
Other includes:
•
the change in own credit spread on long-term debt
which resulted in a loss of £122 million in 2010
compared with a loss of £439 million in 2009;
Net fee income and Trading income were both
broadly unchanged.
•
Other income decreased by 43 per cent, primarily
due to the sale of investment in Hermitage Fund in
2008.
the gain of £125 million on the sale and leaseback
of the Paris headquarters building in February
2010; and
•
a gain of £353 million on the sale of the Group’s
London headquarters building in 2009.
Total operating expenses increased by 6 per cent to
£932 million. Excluding unfavourable movements on
foreign exchange, operating expenses were 7 per cent
lower due to a reduction in performance-related costs,
lower staff numbers and savings on discretionary costs.
These were partially offset by £12 million of integration
costs relating to the merger of HSBC’s two Swiss
private banks and £8 million of redundancy costs.
2009 compared with 2008
The reported loss before tax in Other was £410 million,
compared with a profit of £1,143 million in 2008.
Other includes:
Other
2010
2009
2008
21
•
the change in own credit spread on long-term debt
which resulted in a £439 million loss in 2009
compared with a gain of £477 million for 2008;
•
the £644 million gain on the disposal of seven
regional banks in France in July 2008; and
•
the gain of £353 million on the sale of the Group’s
London headquarters building. In 2008 the group
reported a gain of £265 million from the
cancellation of an agreement to sell this building.
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Other information
Average balance sheet and net interest income
the income statement by the average interest-earning
assets from which interest income is reported within the
“Net interest income” line of the income statement.
Interest income and interest expense arising from trading
assets and liabilities and the funding thereof is included
within “Net trading income” in the income statement
Average balances are based on daily averages of the
group’s banking activities with monthly or less frequent
averages used elsewhere. Net interest margin numbers are
calculated by dividing net interest income as reported in
Assets
2010
Interest
income
£m
Yield
%
Average
balance
£m
2009
Interest
income
£m
Yield
%
Average
balance
£m
2008
Interest
income
£m
Yield
%
1,111
1.45%
61,378
1,307
2.13
70,342
2,508
3.57
7,891
3.23%
242,776
8,720
3.59
226,366
13,089
5.78
97,264
2,101
2.16%
91,624
2,604
2.84
75,168
3,375
4.49
642
7
1.09%
1,006
12
1.19
2,327
26
1.12
Total interest-earning assets ... 419,115
11,110
2.65%
396,784
12,643
3.19
374,203
18,998
5.08
Trading assets
138,639
Financial assets designated
at fair value .........................
7,558
2,492
1.80%
150,491
3,548
2.36
163,239
6,376
3.91
253
3.35%
8,763
285
3.25
8,219
192
2.34
(4,134)
-
-
(3,302)
-
-
(1,965)
-
-
Non-interest-earning assets..... 313,626
Total assets and interest
income................................. 874,804
-
-
311,518
-
-
237,027
-
-
13,855
1.58%
864,254
16,476
1.91
780,723
25,566
3.27
2009
Interest
expense
£m
Cost
%
Average
balance
£m
2008
Interest
expense
£m
Cost
%
Average
balance
£m
Short-term funds and loans
and advances to banks ........ 76,665
Loans and advances to
customers ............................ 244,544
Financial investments .............
Other interest-earning
assets ...................................
Impairment provisions ............
Total equity and liabilities
Average
balance
£m
2010
Interest
expense
£m
Cost
%
Average
balance
£m
Deposits by banks....................
Financial liabilities
designated at fair value
own debt issued ..................
62,060
553
0.89%
62,187
928
1.49
65,264
2,263
3.47
14,431
247
1.71%
8,233
211
2.56
5,840
331
5.67
Customer accounts .................
268,034
1,834
0.68%
283,204
2,412
0.85
247,462
7,944
3.21
Debt securities in issue ........... 54,427
Other interest-bearing
liabilities ............................
1,423
Total interest-bearing
liabilities ............................ 400,375
725
1.33%
62,744
947
1.51
69,713
2,690
3.86
57
4.01%
1,245
54
4.34
4,812
73
1.52
3,416
0.85%
417,613
4,552
1.09
393,091
13,301
3.38
Trading liabilities................ 72,690
Financial liabilities
designated at fair value
(excluding own debt
issued) ................................. 10,580
Non-interest bearing current
accounts .............................. 36,831
Total equity and other noninterest-bearing liabilities ... 354,328
1,585
2.18%
91,033
1,892
2.08
112,233
4,574
4.08
181
1.71%
9,002
185
2.06
10,251
181
1.77
-
-
32,520
-
-
21,296
-
-
-
-
314,086
-
-
243,852
-
-
Total equity and liabilities ........ 874,804
5,182
0.59%
864,254
6,629
0.77
780,723
18,056
2.31
22
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Net interest margin
2010
%
1.84
Net interest margin ......................................................................................................................................
2009
%
2.04
2008
%
1.52
Analysis of changes in net interest income
The following table allocates changes in net interest income between volume and rate for 2010 compared to 2009, and for
2009 compared to 2008.
2010
£m
Interest income
Short-term funds and loans and advances to banks .....
Loans and advances to customers.................................
Financial investments ...................................................
Interest expense
Deposits by banks .........................................................
Customer accounts........................................................
Financial liabilities designated at fair value – own
debt issued ................................................................
Debt securities in issue .................................................
Increase/(decrease)
in 2010 compared
with 2009
Volume
Rate
£m
£m
2009
£m
Increase/(decrease)
in 2009 compared
with 2008
Volume
Rate
£m
£m
2008
£m
1,111
7,891
2,101
326
64
160
(522)
(893)
(663)
1,307
8,720
2,604
(320)
949
739
(881)
(5,318)
(1,510)
2,508
13,089
3,375
553
1,834
(2)
(129)
(373)
(449)
928
2,412
(107)
1,147
(1,228)
(6,679)
2,263
7,944
247
725
159
(126)
(123)
(96)
211
947
136
(269)
(256)
(1,474)
331
2,690
Deposits
balance sheet), together with the average interest rates paid
thereon for each of the past three years. The Other
category includes securities sold under agreements to
repurchase.
The following table summarises the average amount of
bank deposits, customer deposits and certificates of
deposit (‘CDs’) and other money market instruments
(which are included within Debt securities in issue in the
2010
2009
2008
Average
Average
rate
balance
%
£m
Average
balance
£m
Average
rate
%
Average
balance
£m
Average
rate
%
Deposits by banks .................................................
Demand and other – non-interest bearing ..............
Demand – interest bearing......................................
Time ........................................................................
Other .......................................................................
80,944
4,360
8,913
18,310
49,361
–
0.6
0.9
0.7
66,330
4,143
9,019
19,169
33,999
–
1.0
1.7
1.5
70,471
5,207
11,361
26,149
27,754
–
2.9
3.5
3.7
Customer accounts ...............................................
Demand and other – non-interest bearing ..............
Demand – interest bearing......................................
Savings....................................................................
Time ........................................................................
Other .......................................................................
296,930
43,419
140,666
33,514
49,017
30,314
–
0.4
1.8
1.1
0.6
320,010
36,806
141,965
36,642
56,013
48,584
–
0.4
2.2
1.3
0.6
271,804
24,342
125,634
41,377
58,621
21,830
–
2.7
4.2
3.5
3.1
CDs and other money market
instruments........................................................
37,006
0.4
41,564
1.0
43,237
4.2
23
HSBC BANK PLC
Report of the Directors: Operating and Financial Review (continued)
Certificates of deposit and other time deposits
At 31 December 2010, the maturity analysis of CDs and other wholesale time deposits, by remaining maturity, was as
follows:
Certificates of deposit .............................................
Time deposits..........................................................
- banks.....................................................................
- customers ..............................................................
3 months
or less
£m
After 3
months but
within 6
months
£m
After 6
months but
within 12
months
£m
After 12
months
£m
Total
£m
9,117
4,934
3,877
–
17,928
19,449
50,928
1,640
6,859
1,105
5,458
1,472
3,779
23,666
67,024
Contractual obligations
The table below provides details of selected known contractual obligations of the group as at 31 December 2010.
Total
£m
Long-term debt obligations..........................................
Term deposits and certificates of deposit ....................
Capital (finance) lease obligations ..............................
Operating lease obligations..........................................
Purchase obligations ....................................................
Short positions in debt securities and equity shares ....
Current tax liability......................................................
Pension/healthcare obligation......................................
70,543
108,618
307
2,082
4
51,941
153
7,118
240,766
24
Payments due by period
Less than 1 year
1-5 years
£m
£m
24,206
103,367
12
189
4
35,401
153
564
163,896
26,240
4,391
52
680
–
4,606
–
2,446
38,415
More than 5 years
£m
20,097
860
243
1,213
–
11,934
–
4,108
38,455
HSBC BANK PLC
Report of the Directors: Risk
Risk Management
The group is subject to legal and compliance risks that
could have an adverse affect on its business
(Unaudited)
Legal and compliance risks arise from a variety of sources
with the potential to cause harm to the group and its ability
to operate. These issues require the group to deal
appropriately with potential conflicts of interest, regulatory
requirements, ethical issues, anti-money laundering laws
and regulations, privacy laws, information security
policies, sales and trading practices, and the conduct of
companies with which it is associated. Failure to address
these issues appropriately may give rise to additional legal
and compliance risk to the group, with an increase in the
number of litigation claims and the amounts of damages
asserted against the group, or subject the group to
regulatory enforcement actions, fines or penalties or
reputational damage.
The group’s risk management framework is designed to
provide appropriate monitoring and assessment.
The bank's Risk Committee was established in 2010
to increase the focus on risk governance and to provide an
increasingly forward-looking view of risks and their
mitigation.
The Risk Committee is accountable to the Board and
has responsibility for oversight and advice to the Board on,
inter alia, the Bank’s risk appetite, tolerance and strategy,
systems of risk management, internal control and
compliance, the alignment of the Bank’s risk appetite and
reward structures and the maintenance and development of
a supportive culture, in relation to the management of risk,
appropriately embedded through procedures, training and
leadership actions.
The group is subject to tax-related risks in the
countries in which it operates
In carrying out its responsibilities, the Risk
Committee is closely supported by the Chief Risk Officer,
the Chief Financial Officer, the Head of Internal Audit and
the Head of Compliance, together with other business
functions on risks within their respective areas of
responsibility.
The group is subject to the substance and interpretation of
tax laws in all countries in which it operates. Failure to
respond to changes in tax law or the interpretation of tax
law and changes in tax rates and not complying with
procedures required by tax authorities could lead to
increased tax charges, including financial or operating
penalties.
Challenges and Uncertainties
Liquidity and funding risks are inherent in the group’s
business
(Unaudited)
Business operations, governance and control
The group’s business model is founded upon having ready
access to financial resources, whenever required, to meet
its obligations and grow its business. To this end, the
group entities seek to maintain a diversified and stable
funding base comprising core retail and corporate
customer deposits and institutional balances. In certain
entities, this is augmented with amounts of long-term
wholesale funding. In addition, the group holds portfolios
of highly liquid assets to enable it to respond to unusual
liquidity requirements.
Operational risks are inherent in the group’s business
The group is exposed to many types of operational risk,
including fraudulent and other criminal activities (both
internal and external), breakdowns in processes or
procedures, systems failure or non-availability, and
regulatory compliance and legal risks. The group is also
subject to the risk of disruption to its business arising from
events that are wholly or partially beyond its control (for
example: natural disasters, acts of terrorism, epidemics,
and transport or utility failures) which may give rise to
losses in service to customers and/or economic losses to
the group. All of these risks are also applicable where the
group is reliant on suppliers or vendors to provide services
to it and its customers.
Where markets become illiquid, the value at which
financial instruments can be realised is highly uncertain,
and capital resources may shrink as valuations decline.
Rating agency downgrades of instruments, to which the
group has exposure, can exacerbate the effect. The
liquidity of those group entities that utilise long-term
wholesale markets could be constrained by an inability to
access them due to a variety of unforeseen market
dislocations or interruptions.
The reliability and security of information technology
infrastructure and customer databases are crucial to
maintaining the service availability of banking applications
and processes and to protecting the group brand. Critical
system failure, any prolonged loss of service availability or
any material breach of data security, particularly involving
confidential customer data, could cause serious damage to
the group’s ability to service its clients. Subsequently, this
could cause a breach in regulations under which the group
operates and could cause long-term damage to the group’s
business and brand.
The market conditions that the financial services
industry experienced during the recent financial crisis
highlighted the significant benefits of a diversified core
deposit base, leading to increased competition for such
deposits and the greater risk of deposit migration between
competitors.
25
HSBC BANK PLC
Report of the Directors: Risk (continued)
•
The group’s Global Banking and Markets business
operates in many markets affected by illiquidity and is
subject to the threat of extreme price volatility, either
directly or indirectly, through exposures to securities,
loans, derivatives and other commitments. At the height of
the financial crisis during 2008, the group made substantial
write-downs and recognised impairments on illiquid
legacy credit and structured credit positions. Although
2010 continued to reflect a moderation in market
conditions, it is difficult to predict if this trend will
continue and, if conditions worsen, which of the group’s
markets, products and other businesses will be impacted.
Any repeat of these factors could have an adverse effect on
the group’s results.
The group is subject to political and economic risks in
the countries in which it operates
As an organisation which operates in multiple countries,
the group’s results are subject to the risk of loss from
unfavourable political developments, currency
fluctuations, social instability and changes in government
policies on such matters as expropriation, authorisations,
international ownership, interest-rate caps, foreign
exchange transferability and tax in the jurisdictions in
which we operate. The ability of the group’s subsidiaries
and affiliates to pay dividends could be restricted by
changes in official banking measures, exchange controls
and other requirements.
Macro-economic and geopolitical
Current economic and market conditions may
adversely affect the group’s results
The group’s earnings are affected by global and local
economic and market conditions. The dislocations in
financial markets and the broad economy in 2007-8 were
eased by concerted government actions to boost liquidity
and confidence in financial systems, stimulate lending,
support institutions judged to be at risk of failure, and
extend stimulus programmes. The general economic
environment improved further in 2010, although recovery
was variable between regions, with Eurozone economies
coming under greater pressure, the dominant concern
being over sovereign debt. The financial services industry
continued to face an unusually high degree of uncertainty.
The group has significant exposure to counterparty
risk within its portfolio
The group is exposed to virtually all major industries and
counterparties, and it routinely executes transactions with
counterparties in financial services, including brokers and
dealers, commercial banks, investment banks, mutual and
hedge funds, and other institutional clients. Many of these
transactions expose the group to credit risk in the event of
default by its counterparty or client. Financial institutions
are necessarily interdependent because of trading, clearing,
counterparty or other relationships. As a consequence, a
default by, or decline in market confidence in, individual
institutions, or anxiety about the financial services industry
generally, can lead to further individual and/or systemic
losses. The group’s credit risk may remain high if the
collateral taken to mitigate counterparty risk cannot be
realised or has to be liquidated at prices which are
insufficient to recover the full amount of its loan or
derivative exposure.
With unemployment remaining high and consumer
confidence weak in developed markets, amid signs of
emerging inflationary pressures, economic conditions
remain fragile and volatile.
There is a risk that, in some countries, recovery to
past levels of growth will be slow, with the possibility of a
return to recessionary conditions in more sluggish
economies. Others, which are growing very rapidly, may
need to undertake major adjustments. This could have an
adverse effect on the operating results of the group. In
particular, the group may face the following challenges in
connection with these events:
•
the demand for borrowing from creditworthy
customers may diminish, especially if economic
activity slows;
•
trade and capital flows may contract as a result of
protectionist measures being introduced in certain
markets;
•
a prolonged period of low interest rates will constrain
net interest income;
•
the group’s ability to borrow from other financial
institutions or to engage in funding transactions could
be adversely affected;
market developments may depress consumer and
business confidence causing adverse changes in asset
prices and payment patterns, leading to increases in
delinquencies and default rates, write-offs and loan
impairment charges.
Macro-prudential and regulatory
Current challenges in regulation and supervision
Recent regulatory and supervisory developments have
largely been shaped by the leaders, Finance Ministers and
Central Bank Governors of the Group of Twenty nations
(‘the G20’), who delegated the development and issuance
of standards to the Basel Committee. The G20 also
established the Financial Stability Board (‘FSB’) to assess
vulnerabilities affecting the financial system as a whole, as
well as to monitor and advise on market developments and
best practice in meeting regulatory standards. In looking to
address the systemic failures that caused the financial
crisis, the authorities highlighted the following priorities:
•
26
a stronger international framework for prudential
regulation, ensuring significantly increased liquidity
HSBC BANK PLC
Report of the Directors: Risk (continued)
and regulatory capital buffers and enhanced quality of
capital;
•
convergence towards a single set of high quality,
global, independent accounting standards on financial
instruments, loan loss provisioning, off-balance sheet
exposures and the impairment and valuation of
financial assets;
•
strengthening of the regulation of hedge funds and
credit rating agencies, and an improved infrastructure
for derivative transactions, including central
counterparty clearing of over-the-counter derivatives;
•
design and implementation of a system which will
allow for the restructuring or resolution of financial
institutions, without taxpayers ultimately bearing the
burden;
•
an increased role for colleges of supervisors to
coordinate oversight of systemically significant
institutions such as the group, and effective
coordination of resolution regimes for failed banks;
•
measures on financial sector compensation
arrangements to prevent excessive short-term risk
taking and mitigate systematic risk on a globally
consistent basis;
•
a fair and substantial contribution by the financial
sector towards paying for any burden associated with
government interventions, where they occur, to repair
and reduce risks from the financial system or to fund
the resolution of problems.
Governments and regulators have embarked on significant
change in the regulatory structure of the financial system
with two primary objectives: establishing a resilient
system to reduce substantially the risks of failure of
financial institutions and, in case failure should in the end
prove unavoidable, to have in place measures to achieve
orderly resolution without cost to taxpayers.
•
Quality of capital: there is renewed emphasis on
common equity as the principal component of core
tier 1 equity, with increased deductions from
shareholders’ equity (calculated on an accounting
basis) to determine the level of regulatory capital. The
phasing-in periods for these new deductions will start
in 2014, with full implementation by 2018.
•
Minimum ratios: a new minimum common equity
requirement of 4.5% is to be implemented by 1
January 2015. An additional capital conservation
buffer of 2.5% in common equity will effectively
trigger restrictions on corporate activity (such as the
payment of dividends or bonuses) if breached, so that
the capital structure can be rebuilt. This will be
phased in between 1 January 2016 and
1 January 2019. Additional requirements from the
Basel Committee for tier 1 capital of 1.5% and tier 2
capital of 2.0%, by 2019, will lift the minimum total
capital requirement for banks to around 10.5%.
•
Countercyclical buffer: the Basel Committee has
finalised its proposals for a countercyclical buffer of
up to 2.5% in common equity, to be built up in
periods during which credit growth exceeds GDP
growth. It is not clear how such buffers may operate
in practice, since they may be required only once
every 10-20 years, and there is uncertainty over
whether supervisors or the market would support the
release of a buffer when the economic cycle had
turned.
•
Total leverage: the Committee has proposed a
leverage ratio of 3% of total non-risk weighted assets
to constrain aggregate size relative to the capital base.
An observation period of parallel running will start in
2013, with the aim of a minimum standard becoming
mandatory in 2018.
•
Liquidity and funding: a new minimum standard,
the Liquidity Coverage Ratio, has been proposed for
liquidity to extend, under stressed conditions, the
period during which a bank can continue to
This extensive programme of regulatory change carries
significant implementation risks for authorities and
industry participants alike.
operate when it is unable to dispose of assets to repay
withdrawals. Proposals are also being introduced for a
Net Stable Funding Ratio. Although these have yet to
be finalised, they are expected to require banks to
match more accurately the maturities of liabilities to
assets held. As it is not clear what secondary effects
these measures may have, they will be phased in after
observation periods, in 2015 and 2018 respectively.
Regulation and supervision
(Unaudited)
Measures proposed by the Basel Committee to
increase resilience in the financial system
The Basel Committee, following consultation, impact
analysis and draft proposals during 2010, issued final
proposals in December 2010 on the twin areas of capital
and liquidity, the key aspects of which are set out below:
•
•
Risk weightings: increased weightings for the trading
book, securitisations, off-balance sheet exposures and
derivatives are to be implemented by the end of 2011.
27
The Basel Committee is also considering proposals to
define Global Systemically Important Financial
Institutions (‘G-SIFI’s), introduce more rigorous
oversight and co-ordinated assessment of their risks
through international supervisory colleges, provide
for higher levels of capital and liquidity resilience and
require mandatory recovery and resolution plans with
HSBC BANK PLC
Report of the Directors: Risk (continued)
derivative contracts would need to be reported to trade
repositories subject to new capital requirements and
rules on structure and governance. The proposal
discourages derivative contracts which are not eligible
for central clearing by proposing that they will attract
higher capital requirements. It currently holds no
exemption for foreign exchange, though this is being
considered.
institution-specific crisis cooperation agreements
between cross-border crisis management groups. It is
proposed that the additional capital requirements
could be met through a variety of instruments such as
a core tier 1 surcharge, contingent capital or debt
securities with specific bail-in provisions. Further
measures may include liquidity surcharges, tighter
large exposure restrictions, levies, and structural
measures to reduce the risks that a G-SIFI poses.
Studies will be completed by mid-2011 and final
recommendations presented by December 2011. US
regulators are conducting a related study of the
relationship between bank size and systemic risk, the
results of which are expected to lead to new rules
requiring enhanced prudential standards, including
capital, liquidity and leverage requirements for the
largest financial institutions.
•
Markets in financial instruments: the European
Commission is conducting a major Review of the
Markets in Financial Instruments Directive,
potentially to extend its scope beyond equities to
other asset classes including bonds, exchange-traded
funds and other equity-like and non-equity
instruments, and to promote their trading on
exchanges and other markets that will be subject to
regulation. It also proposes giving additional power to
regulators to ban trading in products that are eligible
to be cleared but for which no clearing solution is
currently available
•
The UK Independent Commission on Banking: this
Commission has been established to examine issues
of banking activity and competition, including the
potential impact on financial markets of a number of
options to separate the retail and wholesale activities
of universal banks. A paper setting out the
Commission's thinking is expected in early 2011, with
further consultation prior to a final report in
September 2011. The UK government is not bound to
adopt the Commission's recommendations.
•
Recovery and resolution plans: such plans are
considered a key element in improving the ability of
regulators to rescue (or ‘resolve’) firms when they get
into difficulties without putting taxpayer monies at
risk. Studies and pilots have been initiated by various
official bodies on the resolution of financial firms and
the international coordination of such exercises; the
UK authorities have been at the forefront of work to
develop approaches to this subject. The EU has
consulted on a new framework for crisis management,
focused on expanded supervisory powers, a crossborder coordination framework; a network of national
resolution funds and harmonised resolution tools,
including so called ‘bail-in’ creditor write-down
resolution. Legislative proposals are expected in the
middle of 2011. There is currently no consistent
approach globally and a number of key areas need to
be addressed, including an international legal
framework for addressing competing creditor claims
and the application of collateral.
Other measures
•
•
•
Remuneration: the Financial Stability Board has
issued principles on remuneration designed to guide
regional and national authorities in establishing
appropriate regimes to align remuneration in a riskbased manner with the long-term interests of
stakeholders. The EU has implemented rule changes
in the Capital Requirements Directive (‘CRD’) 3
which impact the balance between fixed and variable
remuneration, establishing limits on the percentage of
bonus which can be paid in cash. Approaches to the
issue, however, remain inconsistent globally.
Other taxes: other areas of financial sector taxation
being considered by the authorities are a Financial
Activities Tax (FAT) – a tax on profit and
remuneration, and a Financial Transaction Tax (FTT)
– applied to a specified range of financial
transactions. An IMF report for the G20 in 2010 saw
merit in a FAT but did not recommend a FTT as it
was felt not to address the key issues within the G20
mandate and might have unintended economic and
regulatory consequences. In its Seoul 2010
communique the G20 did not promote any one
approach for adoption. Both the EU Commission and
the UK Government are considering a FAT, which the
former believes can work at EU level. The EU also
sees merit in a FTT but, recognising the dependency
on an international consensus, will continue to work
within the G20 for its adoption.
Central counterparties: the authorities seek to
reduce systemic risk and volatility through greater
control and transparency in the clearing and
information requirements relating to derivatives
trading in Europe. In September 2010, the EU
Commission presented proposals, currently in
negotiation, for all eligible standardised over-thecounter (‘OTC’) derivatives to be cleared through
central counterparties by the end of 2012. All OTC
Restructuring of regulatory bodies
In the EU, new authorities for segments of the financial
services sector took up their powers with effect from 1
January 2011: the European Banking Authority, the
European Securities Markets Authority and the European
28
HSBC BANK PLC
Report of the Directors: Risk (continued)
are likely to cause a temporary period of higher consumer
price inflation in early 2011.
Insurance and Occupational Pension Authority. In
addition, a European Systemic Risk Board will consider
emerging macro-prudential risks.
Credit risk
In the UK, the FSA’s prudential supervisory
responsibilities will be transferred in 2012 to a Bank of
England agency, the Prudential Regulatory Authority,
while the Financial Conduct Authority will act as a single
regulator of conduct of business for both retail and
wholesale firms.
(Audited)
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet an obligation under a contract. It
arises principally from direct lending, trade finance and
leasing business, but also from off-balance sheet products
such as guarantees and credit derivatives, and from the
group’s holdings of debt securities. Of the risks in which
the group engages, credit risk generates the largest
regulatory capital requirements.
Bank Levies
A number of levies are being raised on banks, notably by
the UK, Germany and France. These are calculated with
reference to measures of stability of funding in order to
encourage more stable structures. For example, in the UK,
the levy is to be charged at a rate of 0.075% on all
liabilities, excluding insured deposits and certain other
elements but with a lower rate of charge for longer term
liabilities and uninsured deposits. Germany will
hypothecate levy income to create resolution funds to
support failing banks, while in others it will accrue to
general tax revenues. Under the draft legislation the charge
for the UK levy is not a deductible expense for the
purposes of calculating the Group’s UK tax liability and it
does not meet the definition of an income tax for income
statement purposes. For indicative purposes only, the UK
levy that would be payable based on the closing 2010
Group balance sheet, after taking into account announced
changes to deposit protection schemes in 2011, is
estimated at £0.4bn. The portion of the levy charge that
will be attributable to the group using the balance sheet at
the 31 December 2010 is estimated to be £0.2bn.
The principal objectives of the group’s credit risk
management are:
•
to maintain across the group a strong culture of
responsible lending and a robust risk policy and
control framework.
•
to both partner and challenge businesses in defining,
implementing, and continually re-evaluating the
group’s risk appetite under actual and scenario
conditions; and
ƒ
to ensure there is independent, expert scrutiny of
credit risks, their costs and their mitigation.
Within the bank, the Credit Risk function is headed by the
European Chief Risk Officer and reports to the Chief
Executive Officer, with a functional reporting line to the
Group Chief Risk Officer. Its responsibilities include:
•
formulating credit policy. Compliance, subject to
approved dispensations, is mandatory for all operating
companies which must develop local credit policies
consistent with group policies;
•
guiding operating companies on the group’s appetite
for credit risk exposure to specified market sectors,
activities and banking products and controlling
exposures to certain higher-risk sectors;
•
undertaking an independent review and objective
assessment of risk. Credit risk assesses all commercial
non-bank credit facilities and exposures over
designated limits, prior to the facilities being
committed to customers or transactions being
undertaken;
•
monitoring the performance and management of
portfolios across the group;
•
controlling exposure to sovereign entities, banks and
other financial institutions, as well as debt securities
which are not held solely for the purpose of trading;
•
setting policy on large credit exposures, ensuring that
concentrations of exposure by counterparty, sector or
geography do not become excessive in relation to the
Outlook
(Unaudited)
The bank expects global economic conditions to improve
during the course of 2011, although the pace of recovery is
expected to remain uneven across the regions.
The bank expects UK GDP to rise by some 1.7 per
cent in 2011. The effects of fiscal consolidation and
subdued recovery in the labour markets are expected to
constrain the growth of domestic demand, while only
modest growth is expected from exports. Consumer price
inflation is expected to remain at an elevated level during
2011, reflecting the rise in global commodity prices and
the further increase in the rate of VAT.
Eurozone GDP is expected to grow by some 1.5 per
cent in 2011. The impact of fiscal austerity is likely to be
felt, especially in the Eurozone periphery, and concerns
surrounding the sovereign debt levels in these countries are
likely to persist in 2011. However, a continuation of
economic recovery can be expected for the core Eurozone
countries including Germany and France, led by the reacceleration in the global trade cycle as well as improving
domestic labour markets that will support consumer
spending over 2011. Rising global food and energy prices
29
HSBC BANK PLC
Report of the Directors: Risk (continued)
Periodic risk-based audits of operating companies’
credit processes and portfolios are undertaken by the
Internal Audit function. Internal Audit discusses with
management any risk ratings it considers to
be inappropriate; following which its final
recommendations for revised ratings must be adopted.
group’s capital base, and remain within internal and
regulatory limits;
•
•
•
maintaining and developing the group’s risk rating
framework and systems through the Credit Risk
Analytics Oversight Committee, which reports to the
Risk Management Meeting (‘RMM’) and oversees
risk rating system governance for both wholesale and
retail business;
Impairment Assessment
(Audited)
It is the group’s policy that each operating company
creates allowances for impaired loans promptly and
consistently.
reporting on retail portfolio performance, high risk
portfolios, risk concentrations, large impaired
accounts, impairment allowances and stress testing
results and recommendations to the group’s RMMs,
the group’s Audit Committee and the Board; and
Impairment allowances may be assessed and created
either for individually significant accounts or, on a
collective basis, for groups of individually significant
accounts for which no evidence of impairment has been
individually identified or for high-volume groups of
homogeneous loans that are not considered individually
significant.
acting on behalf of the group as the primary interface,
for credit-related issues, with the Bank of England, the
FSA, local regulators, rating agencies, analysts and
counterparts in major banks and non-bank financial
institutions.
When impairment losses occur, the group reduces the
carrying amount of loans and advances through the use of
an allowance account. When impairment of available-forsale financial assets and held-to-maturity financial
investments occurs, the carrying amount of the asset is
reduced directly. For further details on the accounting
policy for impairment of available-for-sale debt and equity
securities, see accounting policies in Note 2.
Credit quality
(Audited)
The group’s credit risk rating systems and processes
differentiate exposures in order to highlight those with
greater risk factors and higher potential severity of loss. In
the case of individually significant accounts, risk ratings
are reviewed regularly and any amendments are
implemented promptly. Within the group’s retail business,
risk is assessed and managed using a wide range of risk
and pricing models to generate portfolio data.
Maximum exposure to credit risk
(Audited)
The following table presents the maximum exposure to
credit risk from balance sheet and off-balance sheet
financial instruments, before taking account of any
collateral held or other credit enhancements (unless such
credit enhancements meet offsetting requirements). For
financial assets recognised on the balance sheet, the
maximum exposure to credit risk equals their carrying
amount; for financial guarantees granted, it is the
maximum amount that the group would have to pay if the
guarantees were called upon. For loan commitments and
other credit-related commitments that are irrevocable over
the life of the respective facilities, it is generally the full
amount of the committed facilities.
The group’s risk rating system facilitates the internal
ratings-based (‘IRB’) approach under Basel II adopted by
the Group to support calculation of our minimum credit
regulatory capital requirement. For further details, see
‘Credit quality of financial instruments’ on page 36.
Special attention is paid to problem exposures in order
to accelerate remedial action. Where appropriate, operating
companies use specialist units to provide customers with
support in order to help them avoid default wherever
possible.
The Credit Risk Review team reviews the robustness
and effectiveness of key measurement, monitoring and
control activities.
30
HSBC BANK PLC
Report of the Directors: Risk (continued)
The group
At 31 December 2010
At 31 December 2009
Maximum
exposure
£m
Offset
£m
Exposure
to credit
risk (net)
£m
Cash and balances at central banks......
Items in the course of collection from
other banks ......................................
24,495
1,932
–
–
24,495
1,932
Trading assets .....................................
treasury and other eligible bills ..........
debt securities ....................................
loans and advances to banks ..............
loans and advances to customers .......
135,047
2,529
73,771
26,525
32,222
(2,401)
–
–
–
(2,401)
Financial assets designated at fair value
treasury and other eligible bills ..............
debt securities .....................................
loans and advances to banks................
loans and advances to customers .........
7,717
20
7,161
27
509
Derivatives .............................................
Maximum
exposure
£m
Offset
£m
Exposure to
credit risk (net)
£m
14,274
–
14,274
2,082
–
2,082
132,646
2,529
73,771
26,525
29,821
145,604
789
75,566
30,857
38,392
(3,800)
–
–
–
(3,800)
141,804
789
75,566
30,857
34,592
–
–
–
–
–
7,717
20
7,161
27
509
9,480
35
8,706
214
525
–
–
–
–
–
9,480
35
8,706
214
525
129,158
(86,254)
42,904
118,516
(81,508)
37,008
Loans and advances held at amortised
cost......................................................
loans and advances to banks...............
loans and advances to customers........
342,245
57,027
285,218
(54,588)
(1,996)
(52,592)
287,657
55,031
232,626
321,653
46,994
274,659
(52,530)
(67)
(52,463)
269,123
46,927
222,196
Financial investments .............................
treasury and other similar bills...........
debt securities .....................................
100,660
9,354
91,306
–
–
–
100,660
9,354
91,306
84,379
2,349
82,030
–
–
–
84,379
2,349
82,030
Other assets.............................................
endorsements and acceptances ..........
accrued income and other ..................
7,837
494
7,343
–
–
–
7,837
494
7,343
9,449
352
9,097
–
–
–
9,449
352
9,097
Financial guarantees ..............................
Loan commitments and other creditrelated commitments ..............................
14,631
–
14,631
17,992
–
17,992
114,043
–
114,043
877,765
(143,243)
734,522
116,083
839,512
–
(137,838)
116,083
701,674
31
HSBC BANK PLC
Report of the Directors: Risk (continued)
The bank
At 31 December 2010
Exposure to
credit risk
Maximum
(net)
exposure
Offset
£m
£m
£m
At 31 December 2009
Exposure to
credit risk
Maximum
(net)
exposure
Offset
£m
£m
£m
Cash and balances at central banks ........................
22,357
–
22,357
13,130
–
13,130
Items in the course of collection from other banks
1,030
–
1,030
1,071
–
1,071
Trading assets .........................................................
treasury and other eligible bills...........................
debt securities .....................................................
loans and advances to banks ..............................
loans and advances to customers .......................
102,704
945
39,202
33,011
29,546
(2,401)
–
–
–
(2,401)
100,303
945
39,202
33,011
27,145
105,164
741
35,314
34,111
34,998
(3,800)
–
–
–
(3,800)
101,364
741
35,314
34,111
31,198
Financial assets designated at fair value ................
debt securities .....................................................
loans and advances to banks ...............................
4,505
4,428
77
–
–
–
4,505
4,428
77
6,592
6,515
77
–
–
–
6,592
6,515
77
Derivatives ..............................................................
108,905
(93,503)
15,402
100,800
(52,553)
48,247
Loans and advances held at amortised cost ............
loans and advances to banks ...............................
loans and advances to customers ........................
236,408
27,860
208,548
(42,962)
–
(42,962)
193,446
27,860
165,586
229,398
20,729
208,669
(38,748)
–
(38,748)
190,650
20,729
169,921
Financial investments..............................................
treasury and other similar bills ...........................
debt securities......................................................
40,788
3,296
37,492
–
–
–
40,788
3,296
37,492
26,452
799
25,653
–
–
–
26,452
799
25,653
Other assets..............................................................
endorsements and acceptances ..........................
accrued income and other ..................................
3,880
231
3,649
–
–
–
3,880
231
3,649
4,696
191
4,505
–
–
–
4,696
191
4,505
Financial guarantees ...............................................
Loan commitments and other credit-related
commitments ......................................................
10,388
–
10,388
12,181
–
12,181
82,916
–
82,916
83,531
–
83,531
613,881
(138,866)
475,015
583,015
(95,101)
487,914
Collateral and other credit enhancements
Collateral held against financial instruments presented in
the above table is described in more detail below.
covered by an agreement if either party defaults or other
pre agreed termination events occur. It is common, and the
group’s preferred practice, for the parties to execute a
Credit Support Annex (‘CSA’) in conjunction with the
ISDA Master Agreement. Under a CSA, collateral is
passed between the parties to mitigate the marketcontingent counterparty risk inherent in the outstanding
positions. The majority of the group’s CSAs are within
financial institutional clients.
Items in the course of collection from other banks
The group substantially mitigates settlement risk on many
transactions, particularly those involving securities and
equities, by settling through assured payment systems, or
on a delivery-versus-payment basis.
Treasury, other eligible bills and debt securities
Debt securities, treasury and other eligible bills are
generally unsecured, except for ABSs and similar
instruments, which are secured by pools of financial assets.
Loans and advances
Although collateral can be an important mitigant of credit
risk, it is the group’s policy to lend on the basis of the
customer’s capacity to repay rather than rely on the value
of security offered. Depending on the customer’s standing
and the type of product, facilities may be provided
unsecured. The principal collateral types employed by the
group are as follows:
Derivatives
The International Swaps and Derivatives Association
(‘ISDA’) Master Agreement is the group’s preferred
agreement for documenting derivatives activity. It
provides the contractual framework within which dealing
activity across a full range of over-the-counter products is
conducted, and contractually binds both parties to apply
close-out netting across all outstanding transactions
32
•
in the personal sector, mortgages over residential
properties;
•
in the commercial and industrial sector, charges over
business assets such as premises, stock and debtors;
HSBC BANK PLC
Report of the Directors: Risk (continued)
•
in the commercial real estate sector, charges over the
properties being financed; and
•
in the financial sector, charges over financial
instruments such as debt securities and equities in
support of trading facilities.
concentration of exposure in the group’s portfolios across
industry, country and customer groups. These include
portfolio and counterparty limits, approval and review
controls, and stress testing.
Wrong-way risk is an aggravated form of concentration
risk and arises when there is a strong correlation between
the counterparty’s probability of default and the mark-tomarket value of the underlying transaction. The group uses
a range of procedures to monitor and control wrong-way
risk, including requiring entities to obtain prior approval
before undertaking wrong-way risk transactions outside
pre-agreed guidelines.
In addition, credit derivatives and securitisation
structures are used to hedge or transfer credit risk in the
group’s loan portfolio.
The loans and advances offset adjustment in the table
above primarily relates to customer loans and deposits, and
balances arising from repo and reverse repo transactions.
The offset relates to balances where there is a legally
enforceable right of offset in the event of counterparty
default, and where, as a result, there is a net exposure for
credit risk management purposes. However, as there is no
intention to settle these balances on a net basis under
normal circumstances, they do not qualify for net
presentation for accounting purposes.
Exposure to selected countries in the eurozone
(Unaudited)
Intervention by government to stabilise and re-capitalise
banks and other financial intermediaries during the
financial crisis helped to reduce the possibility of a
systemic threat to financial markets by transferring risk
from the private sector to sovereign bodies. In 2010, this
contributed to the creation of large fiscal imbalances in
some industrialised economies and as a result, market
concerns about sovereign credit risk in these countries
intensified. Credit spreads for the affected sovereign and
bank credit markets remained volatile during most of the
2010. Risk aversion resurfaced, and the assumption of
higher sovereign risk premia in private securities prices
trigger portfolio reallocation to safer assets and a
tightening of market liquidity. Initial concerns over
liquidity and funding spread to doubts about solvency in a
number of cases. The table below summarises the group’s
exposures to governments and central banks of selected
eurozone countries, and near/quasi government agencies
and banks domiciled in those countries.
The group does not disclose the fair value of collateral
held as security or other credit enhancements on loans and
advances past due but not impaired, or on individually
assessed impaired loans and advances, as it is not
practicable to do so.
Concentrations of credit risk exposure
(Audited)
Concentrations of credit risk arise when a number of
counterparties or exposure have comparable economic
characteristics, or such counterparties are engaged in
similar activities, or operate in the same geographical areas
or industry sectors, so that their collective ability to meet
contractual obligations is uniformly affected by changes in
economic, political or other conditions. The group uses a
number of controls and measures to minimise undue
Exposure to selected countries in the eurozone
(Unaudited)
31 December 2010
Total
Held for trading .........................................................
Not held for trading ...................................................
Sovereign & Agencies
Held for trading .........................................................
Not held for trading ...................................................
Banks
Held for trading .........................................................
Not held for trading ...................................................
Belgium
Greece
Ireland
Italy
Portugal
Spain
Total
£m
£m
£m
£m
£m
£m
£m
1,348
4,649
5,997
890
234
1,124
745
590
1,335
1,305
1,648
2,953
90
376
466
1,360
947
2,307
5,738
8,444
14,182
387
398
785
525
211
736
60
188
248
1,157
583
1,740
20
70
90
432
394
826
2,581
1,844
4,425
961
4,251
5,212
365
23
388
685
402
1,087
148
1,065
1,213
70
306
376
928
553
1,481
3,157
6,600
9,757
33
HSBC BANK PLC
Report of the Directors: Risk (Continued)
Loans and advances to customers by industry sector
(Audited)
The group
At 31 December 2010
Gross loans by
industry sector as
Gross loans and
a % of total
advances to
gross loans
customers
£m
%
Personal
Residential mortgages ............................................
Other personal ........................................................
At 31 December 2009
Gross loans by
industry sector as
Gross loans and
a % of total
advances to
gross loans
customers
£m
%
72,327
35,008
25.05%
12.12%
68,028
33,588
24.45%
12.07%
107,335
37.17%
101,616
36.52%
72,006
19,970
4,125
1,452
33,771
24.94%
6.92%
1.43%
0.49%
11.70%
69,211
20,987
3,840
1,357
29,858
24.88%
7.54%
1.38%
0.48%
10.73%
131,324
45.48%
125,253
45.01%
46,087
612
15.96%
0.21%
47,008
502
16.89%
0.18%
46,699
16.17%
47,510
17.07%
Other ...........................................................................
3,390
1.18%
3,872
1.40%
Total gross loans and advances ..................................
288,748
100.00%
278,251
100.00%
Corporate and commercial
Commercial, industrial and international trade .....
Commercial real estate ...........................................
Other property-related ............................................
Government ............................................................
Other commercial....................................................
Financial
Non-bank financial institutions ..................................
Settlement accounts ....................................................
The bank
At 31 December 2010
Gross loans by
industry sector as
Gross loans and
a % of total
advances to
gross loans
customers
£m
%
Personal
Residential mortgages ..............................................
Other personal ..........................................................
Corporate and commercial
Commercial, industrial and international trade .......
Commercial real estate .............................................
Other property-related ..............................................
Government ..............................................................
Other commercial......................................................
Financial
Non-bank financial institutions ....................................
Settlement accounts ......................................................
At 31 December 2009
Gross loans by
industry sector as
Gross loans and
a % of total
advances to
gross loans
customers
£m
%
65,304
9,894
30.87%
4.68%
60,642
11,097
28.66%
5.25%
75,198
35.55%
71,739
33.91%
52,115
12,090
3,120
845
25,134
24.64%
5.71%
1.47%
0.40%
11.88%
51,242
12,981
2,852
858
21,115
24.22%
6.13%
1.35%
0.41%
9.98%
93,304
44.10%
89,048
42.09%
39,616
50
18.73%
0.02%
46,839
47
22.15%
0.02%
39,666
18.75%
46,886
22.17%
Other .............................................................................
3,390
1.60%
3,872
1.83%
Total gross loans and advances ....................................
211,558
100.00%
211,545
100.00%
34
HSBC BANK PLC
Report of the Directors: Risk (continued)
Mortgage lending products
(Unaudited)
The following table shows the levels of personal mortgage lending products in the various portfolios in the UK and the
rest of Europe.
At 31 December 2010
Total residential mortgage lending ...........................................................................................................
Total impairment allowances on residential mortgage lending................................................................
Interest-only (including endowment) mortgages......................................................................................
Affordability mortgages, including adjustable rate mortgages ................................................................
Other..........................................................................................................................................................
Total interest-only and affordability mortgages .......................................................................................
As a percentage of total mortgage lending ...............................................................................................
Negative equity mortgages1 2 ....................................................................................................................
Other loan to value ratios greater than 90 per cent2..................................................................................
-as a percentage of total mortgage lending ...............................................................................................
At 31 December 2009
Total residential mortgage lending ...........................................................................................................
Total impairment allowances on residential mortgage lending................................................................
Interest-only (including endowment) mortgages......................................................................................
Affordability mortgages, including ARMs...............................................................................................
Other..........................................................................................................................................................
Total interest-only and affordability mortgages .......................................................................................
As a percentage of total mortgage lending ..............................................................................................
Negative equity mortgages1 2 ....................................................................................................................
Other loan to value ratios greater than 90 per cent2..................................................................................
as a percentage of total mortgage lending ................................................................................................
UK
£m
Continental
Europe
£m
66,368
(177)
29,012
644
66
29,722
44.8%
1,569
3,738
5,307
8.0%
5,959
(37)
77
210
287
4.8%
3
168
171
2.9%
62,037
(92)
28,024
1,566
71
29,661
47.8%
3,842
6,133
9,975
16.1%
5,991
(26)
47
668
–
715
11.9%
3
–
3
0.1%
1 Negative equity arises when the value of the loan exceeds the value of available equity.
2 Loan to value ratios are generally based on estimated values at the balance sheet date.
Forbearance strategies and renegotiated loans
(Audited)
customer relationships through the occurrence of
exceptional events.
A range of forbearance strategies are employed in order to
improve the management of customer relationship,
maximise collection opportunities and, if possible, avoid
foreclosure or repossession. The policies and practices are
based on criteria which, in the judgement of local
management, indicate that repayment is likely to continue.
Loans that are subject to restructuring may only be
classified as restructured and up to date once a specified
number and/or amount of qualifying payments have been
received. These qualifying payments are set at a level
appropriate to the nature of the loan and the customer’s
ability to make the repayment going forward. Typically the
receipt of two or more qualifying payments is required
within a certain period, generally 60 days. Loans that have
been restructured and would otherwise have been past due
or impaired are classified as renegotiated
Forbearance arrangements include extended payment
terms, a reduction in interest or principal repayments,
approved external debt management plans, the deferral of
foreclosure, other modifications and loan restructures.
These management policies and practices typically product
the customer with terms and conditions that are more
favourable than those provided initially. Such
arrangements could include cases where an account is
brought up-to-date without full repayment of all arrears.
Renegotiated loans are segregated from other parts of
the loan portfolio for collective impairment assessment, to
reflect the higher rates of losses often encountered in this
segment of the portfolio. When empirical evidence
indicates an increased propensity to default and higher
losses on such accounts, the use of roll rate methodology
ensures this factor is taken into account when calculating
impairment allowances. The carrying amount of loans that
have been classified as renegotiated retain this
classification until maturity or derecognition. Interest is
The group’s credit risk management policy sets out
restrictions on the number and frequency of restructures,
the minimum period an account must have been opened
before any restructure can be considered and the number
of qualifying payments that must be received before an
account may be considered restructured and up to date.
The application of this policy varies according to the
nature of the market, the product, and the management of
35
HSBC BANK PLC
Report of the Directors: Risk (continued)
recorded on renegotiated loans on the basis of the new
contractual terms following renegotiation.
Renegotiated loans that would otherwise be past due or impaired
The group
The bank
At 31 December
2010
2009
£m
£m
Loans and advances to customers .................
1,424
At 31 December
2010
2009
£m
£m
1,545
Loans and advances to customers ..................
1,302
1,423
Credit quality of financial instruments
(Audited)
agencies to debt securities. There is no direct correlation
between the internal and external ratings at granular level,
except to the extent each falls within a single quality
classification.
The five credit quality classifications defined below each
encompass a range more granular, internal credit rating
grades assigned to wholesale and retail lending business,
as well as the external rating, attributed by external
Credit quality
Quality classification
Strong .......................................
Good .........................................
Satisfactory...............................
Sub – standard ..........................
Impaired....................................
Debt securities
and other bills
External credit
rating
Wholesale lending and derivatives
Internal credit
Probability of
rating
default %
A- and above
CRR1 to CRR2
BBB+ to BBBCRR3
BB+ to B+ and unrated CRR4 TO CRR5
B and below CRR6 TO CRR8
Impaired CRR9 TO CRR10
0 – 0.169
0.170 – 0.740
0.741 – 4.914
4.915 - 99.999
100
Retail lending
Expected loss %
Internal credit
rating
EL1 TO EL2
EL3
EL4 TO EL5
EL6 TO EL8
EL9 TO EL10
0 – 0.999
1.000 – 4.999
5.000 – 19.999
20.000 – 99.999
100+ or defaulted1
1 The EL percentage is derived through a combination of PD and LGD and may exceed 100 per cent in circumstances where the LGD is above
100 per cent reflecting the cost of recoveries.
Quality classification definitions
‘Impaired’: Exposures have been assessed, individually or
collectively, as impaired.
(Audited)
‘Strong’: Exposures demonstrate a strong capacity to meet
financial commitments, with negligible or low probability
of default and/or low levels of expected loss. Retail
accounts operate within product parameters and only
exceptionally show any period of delinquency.
Risk rating scales
(Audited)
The Customer Risk Rating (‘CRR’) 10-grade scale above
summarises a more granular underlying 23-grade scale
(2009: 22-grade scale) of obligor probability of default
(‘PD’). The 23-grade scale was introduced in September
2010 following the harmonisation of PDs for three asset
classes (banks, sovereigns and corporate) into one scale
which required an additional PD band. All distinct HSBC
customers are rated using one of these two PD scales,
depending on the degree of sophistication of the Basel II
approach adopted for the exposure.
‘Good’: Exposures require closer monitoring and
demonstrate a good capacity to meet financial
commitments, with low default risk. Retail accounts
typically show only short periods of delinquency, with any
losses expected to be minimal following the adoption of
recovery processes.
‘Satisfactory’: Exposures require closer monitoring and
demonstrate an average to fair capacity to meet financial
commitments, with moderate default risk. Retail accounts
typically show only short periods of delinquency, with any
losses expected to be minor following the adoption of
recovery processes.
The Expected Loss (‘EL’) 10-grade scale for retail
business summarises a more granular underlying EL scale
for these customer segments; this combines obligor and
facility/product risk factors in a composite measure.
For debt securities and certain other financial
instruments, external ratings have been aligned to the five
quality classifications. The ratings of Standard and Poor’s
are cited, with those of other agencies being treated
equivalently. Debt securities with short-term issue ratings
are reported against the long-term rating of the issuer of
those securities. If major rating agencies have different
‘Sub-standard’: Exposures require varying degrees of
special attention and default risk is of greater concern.
Retail portfolio segments show longer delinquency periods
of generally up to 90 days past due and/or expected losses
are higher due to a reduced ability to mitigate these
through security realisation or other recovery processes.
36
HSBC BANK PLC
Report of the Directors: Risk (continued)
otherwise classified as EL9 or EL10, are not disclosed
within the EL grade to which they relate, but are separately
classified as past due but not impaired. The following
tables set out the group’s distribution of financial
instruments by measures of credit quality.
ratings for the same debt securities, a prudent rating
selection is made in line with regulatory requirements.
For the purpose of the following disclosure, retail
loans which are past due up to 89 days and are not
Distribution of financial instruments by credit quality
(Audited)
The group
31 December 2010
Neither past due nor impaired
Strong
£m
Cash and balances at
central banks ................
Items in the course of
collection from other
banks ............................
Trading assets ...................
– treasury and other
eligible bills .............
– debt securities ..........
– loans and advances
to banks ....................
– loans and advances
to customers .............
Financial assets
designated at fair value .
– treasury and other
eligible bills .............
– debt securities ..........
– loans and advances
to banks ....................
– loans and advances
to customers .............
Derivatives .......................
Loans and advances held
at amortised cost ..........
– loans and advances
to banks ....................
– loans and advances
to customers .............
Financial investments .......
– treasury and other
eligible bills .............
– debt securities ..........
Other assets .......................
– endorsements and
acceptances ..............
– accrued income and
other .........................
Medium
Good Satisfactory
£m
£m
SubStandard
£m
Past
due not
impaired
£m
Impaired
£m
Impairment
allowances
£m
Total
£m
24,495
–
–
–
–
–
–
24,495
1,932
–
–
–
–
–
–
1,932
107,068
12,142
15,411
426
–
–
–
135,047
2,278
65,242
127
2,398
124
5,715
–
416
–
–
–
–
–
–
2,529
73,771
19,245
4,270
3,000
10
–
–
–
26,525
20,303
5,347
6,572
–
–
–
–
32,222
3,530
260
3,927
–
–
–
–
7,717
20
2,977
–
260
–
3,924
–
–
–
–
–
–
–
–
20
7,161
24
–
3
–
–
–
–
27
509
–
–
–
–
–
–
509
103,241
18,840
6,675
402
–
–
–
129,158
207,339
69,053
50,281
10,855
1,514
6,783
(3,580)
342,245
51,290
5,170
366
180
–
71
(50)
57,027
156,049
63,883
49,915
10,675
1,514
6,712
(3,530)
285,218
91,289
2,559
3,040
2,134
–
1,638
–
100,660
9,250
82,039
–
2,559
74
2,966
25
2,109
–
–
5
1,633
–
–
9,354
91,306
4,459
520
2,338
503
12
5
436
14
44
–
–
–
–
494
4,023
506
2,294
503
12
5
–
7,343
37
–
7,837
HSBC BANK PLC
Report of the Directors: Risk (continued)
The group
31 December 2009
Neither past due nor impaired
Strong
£m
Cash and balances at
central banks ..............
Items in the course of
collection from other
banks .........................
Trading assets ................
– treasury and other
eligible bills ..........
– debt securities .......
– loans and advances
to banks .................
– loans and advances
to customers ..........
Medium
Good Satisfactory
£m
£m
SubStandard
£m
Past
due not
impaired
£m
Impaired
£m
Impairment
allowances
£m
Total
£m
14,274
–
–
–
–
–
–
14,274
2,082
–
–
–
–
–
–
2,082
115,484
13,436
16,202
482
–
–
–
145,604
747
66,516
42
2,781
–
5,877
–
392
–
–
–
–
–
–
789
75,566
22,268
5,754
2,807
28
–
–
–
30,857
25,953
4,859
7,518
62
–
–
–
38,392
Financial assets
designated at fair
value ...........................
– treasury and other
eligible bills ..........
– debt securities .......
– loans and advances
to banks .................
– loans and advances
to customers ..........
5,217
63
4,200
–
–
–
–
9,480
35
4,450
–
63
–
4,193
–
–
–
–
–
–
–
–
35
8,706
207
–
7
–
–
–
–
214
525
–
–
–
–
–
–
525
Derivatives .....................
82,706
27,368
6,465
1,977
–
–
–
118,516
186,225
69,142
49,533
11,625
2,154
6,623
(3,649)
321,653
36,545
7,546
2,443
420
–
97
(57)
46,994
149,680
61,596
47,090
11,205
2,154
6,526
(3,592)
274,659
76,591
1,790
3,260
1,336
–
1,402
–
84,379
2,345
74,246
–
1,790
–
3,260
1
1,335
–
–
3
1,399
–
–
2,349
82,030
5,846
894
2,238
405
16
50
190
64
98
–
–
–
–
352
5,656
830
2,140
405
16
50
–
9,097
Loans and advances
held at amortised cost
– loans and advances
to banks .................
– loans and advances
to customers ..........
Financial investments.....
– treasury and other
eligible bills ..........
– debt securities .......
Other assets.....................
– endorsements and
acceptances ...........
– accrued income
and other ...............
38
–
9,449
HSBC BANK PLC
Report of the Directors: Risk (continued)
The bank
31 December 2010
Neither past due nor impaired
Strong
£m
Cash and balances at
central banks ................
Items in the course of
collection from other
banks ............................
Trading assets ..................
– treasury and other
eligible bills ............
– debt securities .........
– loans and advances
to banks ...................
– loans and advances
to customers ............
Financial assets
designated at fair value
– debt securities .........
– loans and advances
to banks ...................
Derivatives ......................
Loans and advances held
at amortised cost .........
– loans and advances
to banks ...................
– loans and advances
to customers ............
Financial investments ......
– treasury and other
similar bills .............
– debt securities .........
Other assets ......................
– endorsements and
acceptances .............
– accrued income and
other ........................
22,357
Medium
Good Satisfactory
£m
£m
–
–
SubStandard
£m
Past
due not
impaired
£m
Impaired
£m
Impairment
allowances
£m
Total
£m
–
–
–
–
22,357
1,030
–
–
–
–
–
–
1,030
79,973
10,734
11,582
415
–
–
–
102,704
831
33,801
–
1,731
114
3,255
–
415
–
–
–
–
–
–
945
39,202
26,450
3,803
2,758
–
–
–
–
33,011
18,891
5,200
5,455
–
–
–
–
29,546
602
602
77
–
3,826
3,826
–
–
–
–
–
–
–
–
4,505
4,428
–
77
–
–
–
–
–
77
88,490
14,859
5,196
360
–
–
–
108,905
148,707
45,098
30,636
9,343
702
4,953
(3,031)
236,408
22,998
2,801
362
951
–
769
(21)
27,860
125,709
42,297
30,274
8,392
702
4,184
(3,010)
208,548
39,561
189
594
288
–
156
–
40,788
3,222
36,339
–
189
74
520
–
288
–
–
–
156
–
–
3,296
37,492
3,019
497
358
6
–
–
–
3,880
182
13
36
–
–
–
–
231
2,837
484
322
6
–
–
–
3,649
39
HSBC BANK PLC
Report of the Directors: Risk (continued)
The bank
31 December 2009
Neither past due nor impaired
Strong
£m
Cash and balances at
central banks ..............
Items in the course of
collection from other
banks ..........................
Trading assets ................
– treasury and other
eligible bills ..........
– debt securities .......
– loans and advances
to banks .................
– loans and advances
to customers ..........
Medium
Good Satisfactory
£m
£m
SubStandard
£m
Past
due not
impaired
£m
Impaired
£m
Impairment
allowances
£m
Total
£m
13,130
–
–
–
–
–
–
13,130
1,071
–
–
–
–
–
–
1,071
80,457
11,015
13,224
468
–
–
–
105,164
699
29,121
42
1,443
–
4,360
–
390
–
–
–
–
–
–
741
35,314
26,657
4,844
2,594
16
–
–
–
34,111
23,980
4,686
6,270
62
–
–
–
34,998
Financial assets
designated at fair
value ...........................
– debt securities .......
– loans and advances
to banks .................
2,788
2,788
77
–
3,727
3,727
–
–
–
–
–
–
–
–
6,592
6,515
–
77
–
–
–
–
–
77
Derivatives .....................
80,403
14,782
3,964
1,651
–
–
–
100,800
139,798
44,485
32,231
9,985
797
4,293
(2,191)
229,398
14,882
4,261
1,254
324
–
35
(27)
20,729
124,916
40,224
30,977
9,661
797
4,258
(2,164)
208,669
24,246
266
1,600
221
–
119
–
26,452
799
23,447
–
266
–
1,600
–
221
–
–
–
119
–
–
799
25,653
3,338
779
573
6
–
–
–
4,696
33
61
97
–
–
–
–
191
3,305
718
476
6
–
–
–
4,505
Loans and advances
held at amortised cost
– loans and advances
to banks .................
– loans and advances
to customers ..........
Financial investments ....
– treasury and other
similar bills ...........
– debt securities .......
Other assets.....................
– endorsements and
acceptances ...........
– accrued income
and other ...............
40
HSBC BANK PLC
Report of the Directors: Risk
collateral is sufficient to repay both the principal debt and
all potential interest for at least one year; and short-term
trade facilities past due more than 90 days for technical
reasons such as delays in documentation, but where there
is no concern over the creditworthiness of the
counterparty.
Past due but not impaired gross financial instruments
Examples of exposures past due but not impaired include
overdue loans fully secured by cash collateral; mortgages
that are individually assessed for impairment and that are
in arrears more than 90 days, but where the value of
Ageing analysis of days past due but not impaired gross financial instruments
(Audited)
The group
Up to
29 days
£m
30-59
days
£m
60-89
days
£m
90-179
days
£m
Over
180 days
£m
Total
£m
944
3
947
290
4
294
239
–
239
19
3
22
22
2
24
1,514
12
1,526
1,518
4
1,522
366
–
366
235
8
243
19
3
22
16
1
17
2,154
16
2,170
Up to
29 days
£m
30-59
days
£m
60-89
days
£m
90-179
days
£m
Over
180 days
£m
Total
£m
At 31 December 2010
Loans and advances held
at amortised cost ........................................
399
171
125
7
–
702
At 31 December 2009
Loans and advances held
at amortised cost ........................................
440
204
152
1
–
797
At 31 December 2010
Loans and advances held
at amortised costs.......................................
Other assets....................................................
At 31 December 2009
Loans and advances held
at amortised cost ........................................
Other assets ....................................................
The bank
Impaired loans and advances to customers and banks by industry sector
(Audited)
Impaired loans and advances at
31 December 2010
Individually
Collectively
assessed
assessed
Total
£m
£m
£m
Banks...................................................
Customers............................................
Personal...........................................
Corporate and commercial..............
Financial..........................................
Impaired loans and advances at
31 December 2009
Individually
Collectively
assessed
assessed
£m
£m
Total
£m
71
5,651
895
4,174
582
–
1,061
1,010
51
–
71
6,712
1,905
4,225
582
97
5,438
801
4,280
357
–
1,088
1,035
53
–
97
6,526
1,836
4,333
357
5,722
1,061
6,783
5,535
1,088
6,623
Collateral and other credit enhancements obtained
(Audited)
The group
2010
£m
Nature of assets
Residential property .....................................................
61
41
2009
£m
75
The bank
2010
£m
58
2009
£m
72
HSBC BANK PLC
Report of the Directors: Risk
funds arise after the debt has been repaid, they are made
available either to repay other secured lenders with lower
priority or are returned to the customer. The group does
not generally occupy the repossessed properties for its
business use.
The group obtained assets by taking possession of
collateral held as security, or calling upon other credit
enhancements. Repossessed properties are made available
for sale in orderly fashion, with the proceeds used to
reduce or repay the outstanding indebtedness. If excess
Impairment allowances and charges on loans and advances to customers
(Audited)
individually assessed or collectively assessed, and
collective impairment allowances on loans and advances
classified as not impaired.
The table below analyses the impairment allowances
recognised for impaired loans and advances that are either
As at 31 December
2010
£m
Gross loans and advances
Individually assessed impaired loans1....................................................................................................
2009
£m
5,651
5,438
283,097
1,061
282,036
272,813
1,088
271,725
288,748
278,251
Impairment allowances
Individually assessed..............................................................................................................................
Collectively assessed..............................................................................................................................
2,248
1,282
2,312
1,280
Total impairment allowances .................................................................................................................
3,530
3,592
Individually assessed allowances as a percentage of individually assessed loans and advances .........
Collectively assessed allowances as a percentage of collectively assessed loans and advances..........
39.8%
0.45%
42.5%
0.47%
2
Collectively assessed ............................................................................................................................
Impaired loans1 .......................................................................................................................................
Non-Impaired loans3 ..............................................................................................................................
Total gross loans and advances..............................................................................................................
1
2
Impaired loans and advances are those classified as CRR 9, CRR 10, EL 9 or EL 10 and all retail loans 90 days or more past due.
Collectively assessed loans and advances comprise homogeneous groups of loans that are not considered individually significant, and loans
subject to individual assessment where no impairment has been identified on an individual basis, but on which a collective impairment
allowances has been calculated to reflect losses which have been incurred but not yet identified.
3 Collectively assessed loans and advances not impaired are those classified as CRR1 to CRR8 and EL1 to EL8 but excluding retail loans 90
days past due.
Impairment allowances on loans and advances to customers and banks by industry sector
(Audited)
At 31 December 2010
Individually
Collectively
assessed
assessed
allowances
allowances
£m
£m
Banks
Customers.....................................
Personal .....................................
Corporate and commercial ........
Financial ....................................
Total
allowances
£m
Individually
assessed
allowances
£m
At 31 December 2009
Collectively
assessed
allowances
£m
Total
allowances
£m
50
2,248
313
1,665
270
–
1,282
1,005
271
6
50
3,530
1,318
1,936
276
57
2,312
246
1,926
140
–
1,280
969
306
5
57
3,592
1,215
2,232
145
2,298
1,282
3,580
2,369
1,280
3,649
42
HSBC BANK PLC
Report of the Directors: Risk (continued)
Impairment allowances as a percentage of gross loans and advances1
(Audited)
The group
At 31 December
2010
%
2009
%
Banks
Individually assessed impairment allowances ..........................................................................
0.19
0.26
Customers
Individually assessed impairment allowances .......................................................................
Collectively assessed impairment allowances .......................................................................
0.87
0.50
0.95
0.52
1.56
1.73
The bank
At 31 December
2010
%
2009
%
Banks
Individually assessed impairment allowances ..........................................................................
0.08
0.19
Customers
Individually assessed impairment allowances .......................................................................
Collectively assessed impairment allowances .......................................................................
1.19
0.31
1.17
0.31
1.58
1.67
Collectively
assessed
£m
Total
£m
1
Net of reverse repo transactions, settlement accounts and stock borrowings.
Movement in impairment allowances on loans and advances to customers and banks
(Audited)
The group
Banks
Individually
assessed
£m
Customers
Individually
assessed
£m
At 1 January 2010.......................................................
Amounts written off ..................................................
Recoveries of loans and advances written off in
previous years ........................................................
Charge to income statement ......................................
Foreign exchange and other movements ...................
57
(6)
2,312
(933)
1,280
(885)
3,649
(1,824)
1
2
(4)
21
877
(29)
137
754
(4)
159
1,633
(37)
At 31 December 2010 ...............................................
50
2,248
1,282
3,580
At 1 January 2009 ......................................................
Amounts written off ..................................................
Recoveries of loans and advances written off in
previous years.........................................................
Charge to income statement .......................................
Foreign exchange and other movements ...................
43
(21)
1,380
(440)
1,122
(1,119)
2,545
(1,580)
4
35
(4)
40
1,408
(76)
126
1,176
(25)
170
2,619
(105)
At 31 December 2009 ................................................
57
2,312
1,280
3,649
43
HSBC BANK PLC
Report of the Directors: Risk (continued)
The bank
Banks
Individually
assessed
£m
Customers
Individually
assessed
£m
Collectively
assessed
£m
Total
£m
At 1 January 2010 .......................................................
Amounts written off ...................................................
Recoveries of loans and advances written off in
previous years .........................................................
Charge to income statement........................................
Foreign exchange and other movements ....................
28
(6)
2,267
(826)
608
(707)
2,903
(1,539)
1
(1)
(1)
19
951
(22)
132
588
–
152
1,538
(23)
At 31 December 2010................................................
21
2,389
621
3,031
At 1 January 2009 .......................................................
Amounts written off....................................................
Recoveries of loans and advances written off in
previous years .........................................................
Charge to income statement........................................
Foreign exchange and other movements ...................
43
(20)
808
(314)
560
(964)
1,411
(1,298)
4
5
(4)
49
1,754
(30)
132
883
(3)
185
2,642
(37)
At 31 December 2009 .................................................
28
2,267
608
2,903
44
HSBC BANK PLC
Report of the Directors: Risk (continued)
Movement in impairment allowances by industry sector
(Unaudited)
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
3,649
2,545
1,796
1,766
1,885
Amounts written off ....................................................................................... (1,824)
(1,580)
(1,150)
(1,297)
(1,238)
Personal ...........................................................................................................
– residential mortgages ............................................................................
– other personal .......................................................................................
(834)
(31)
(803)
(1,012)
(25)
(987)
(859)
(2)
(857)
(1,031)
(1)
(1,030)
(880)
(1)
(879)
Corporate and commercial .........................................................................
– commercial, industrial and international trade......................................
– commercial real estate and other property-related................................
– other commercial...................................................................................
Financial1 .....................................................................................................
(980)
(247)
(648)
(85)
(10)
(508)
(275)
(93)
(140)
(60)
(280)
(200)
(42)
(38)
(11)
(264)
(183)
(36)
(45)
(2)
(348)
(245)
(37)
(66)
(10)
Recoveries of amounts written off in previous years .....................................
159
170
157
268
227
Personal ......................................................................................................
– residential mortgages ............................................................................
– other personal .......................................................................................
136
19
117
133
17
116
150
–
150
231
–
231
194
–
194
Corporate and commercial .........................................................................
– commercial, industrial and international trade......................................
– commercial real estate and other property-related................................
– other commercial ..................................................................................
Financial1 ....................................................................................................
22
11
4
7
1
32
30
2
–
5
7
4
3
–
–
34
8
9
17
3
33
13
8
12
–
Charge to income statement ...........................................................................
1,633
2,619
1,716
1,043
935
Personal ......................................................................................................
– residential mortgages ............................................................................
– other personal .......................................................................................
803
99
704
1,130
100
1,030
876
11
865
789
4
785
776
13
763
Corporate and commercial .........................................................................
– commercial, industrial and international trade......................................
– commercial real estate and other property-related................................
– other commercial ..................................................................................
Financial1 ....................................................................................................
Governments ..............................................................................................
709
322
232
155
121
–
1,329
543
626
160
160
–
749
304
304
141
91
–
248
176
60
12
7
(1)
169
133
20
16
(3)
(7)
Exchange and other movements ....................................................................
(37)
(105)
26
16
(43)
Impairment allowances at 31 December.....................................................
3,580
3,649
2,545
1,796
1,766
Impairment allowances at 1 January ..............................................................
Impaired allowances against banks:
– individually assessed ............................................................................
Impaired allowances against customers
– individually assessed .............................................................................
– collectively assessed..............................................................................
50
57
43
3
4
2,248
1,282
2,312
1,280
1,380
1,122
920
873
878
884
Impairment allowances at 31 December ........................................................
3,580
3,649
2,545
1,796
1,766
Impairment allowances against customers as a percentage of loans
and advances to customers ........................................................................
– individually assessed .............................................................................
– collectively assessed..............................................................................
%
0.78
0.45
%
0.84
0.47
%
0.46
0.38
%
0.40
0.38
%
0.44
0.44
1.23
1.31
0.84
0.78
0.88
At 31 December ............................................................................................
1 Includes movements in impairment allowances against banks.
45
HSBC BANK PLC
Report of the Directors: Risk (continued)
Individually and collectively assessed charge to impairment allowances by industry segment
(Unaudited)
Individually
assessed
£m
2010
Collectively
assessed
£m
Total
£m
1
98
60
38
662
286
213
163
118
879
–
705
39
666
47
36
19
(8)
2
754
1
803
99
704
711
322
232
155
120
1,633
Individually
assessed
£m
2009
Collectively
assessed
£m
Total
£m
35
125
89
36
1,153
434
559
160
130
1,443
–
1,005
11
994
176
109
67
(5)
1,176
35
1,130
100
1,030
1,329
543
626
160
125
2,619
Banks ...................................................................................................
Personal ...............................................................................................
– Residential mortgages ................................................................
– Other personal ............................................................................
Corporate and commercial .................................................................
– Commercial, industrial and international trade .........................
– Commercial real estate and other property-related ....................
– Other commercial ......................................................................
Financial1 ............................................................................................
Total charge to income statement ......................................................
Banks ...................................................................................................
Personal ...............................................................................................
– Residential mortgages ................................................................
– Other personal ............................................................................
Corporate and commercial .................................................................
– Commercial, industrial and international trade .........................
– Commercial real estate and other property-related ....................
– Other commercial ......................................................................
Financial1 ............................................................................................
Total charge to income statement ......................................................
1 Includes movements in impairment allowances against banks.
Net loan impairment charge to the income statement
(Unaudited)
Individually assessed impairment allowances
New allowances ......................................................................................
Release of allowances no longer required...............................................
Recoveries of amounts previously written off ........................................
Collectively assessed impairment allowances ...........................................
New allowances net of allowance required ...........................................
Release of allowances no longer required .............................................
Recoveries of amounts previously written off ......................................
Total charge for impairment losses ...........................................................
Banks ......................................................................................................
Customers ..............................................................................................
Charge for impairment losses as a percentage of closing gross loans
and advances............................................................................................
At 31 December.......................................................................................
Impaired loans ........................................................................................
Impairment allowances ..........................................................................
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
1,157
(256)
(22)
879
1,654
(167)
(44)
1,443
893
(180)
(22)
691
390
(194)
(21)
175
388
(240)
(19)
129
1,008
(117)
(137)
754
1,633
2
1,631
1,445
(143)
(126)
1,176
2,619
35
2,584
1,266
(106)
(135)
1,025
1,716
35
1,681
1,228
(113)
(247)
868
1,043
–
1,043
1,123
(109)
(208)
806
935
–
935
0.47
£m
6,783
3,580
0.81
£m
6,623
3,649
0.49
£m
3,744
2,545
0.36
£m
2,959
1,796
0.38
£m
2,773
1,766
Charge for impairment losses as a percentage of average gross loans and advances to customers
(Unaudited)
2010
%
2009
%
2008
%
2007
%
2006
%
Net allowances net of allowances releases .............................................
Recoveries................................................................................................
0.72
(0.06)
1.11
(0.07)
0.78
(0.07)
0.72
(0.15)
0.71
(0.14)
Total charge for impairment losses ........................................................
Amount written off net of recoveries .....................................................
0.66
0.67
1.04
0.63
0.71
0.48
0.57
0.71
0.57
0.75
46
HSBC BANK PLC
Report of the Directors: Risk (continued)
Liquidity and funding
compliance with practices and limits set by the RMM.
These limits vary according to the depth and liquidity of
the market in which the entities operate. It is the group’s
general policy that each banking entity should be selfsufficient when funding its own operations. Exceptions are
permitted for certain short-term treasury requirements and
start-up operations or for branches which do not have
access to local deposit markets. These entities are funded
from the group’s largest banking operations and within
clearly defined internal and regulatory guidelines and
limits. The limits serve to place formal restrictions on the
transfer of resources between group entities and reflect the
range of currencies, markets and time zones within which
the group operates.
(Audited)
Liquidity risk is the risk that the group does not have
sufficient financial resources to meet its obligations as they
fall due, or will access to such resources only at an
excessive cost. This risk arises from mismatches in the
timing of cash flows. Funding risk (a form of liquidity
risk) arises when the liquidity needed to fund illiquid asset
positions cannot be obtained on the expected terms and
when required.
The objective of the group’s liquidity and funding
management framework is to ensure that all foreseeable
funding commitments can be met when due, and that
access to the wholesale markets is co-ordinated and costeffective. To this end, the group maintains a diversified
funding base comprising core retail and corporate
customer deposits and institutional balances. This is
augmented with wholesale funding and portfolios of
highly liquid assets diversified by currency and maturity
which are held to enable the group to respond quickly and
smoothly to unforeseen liquidity requirements.
The group’s liquidity and funding management
process includes:
The group requires its operating entities to maintain
strong liquidity positions and to manage the liquidity
profiles of their assets, liabilities and commitments with
the objective of ensuring that their cash flows are balanced
appropriately and that all their anticipated obligations can
be met when due.
The group adapts its liquidity and funding risk
management framework in response to changes in the mix
of business that it undertakes, and to changes in the nature
of the markets in which it operates. The group also seeks
to continuously evolve and strengthen its liquidity and
funding risk management framework. As part of this
process, the group has refined the way in which it
characterises core deposits. The characterisation takes into
account the activities and operating environment in the
entity originating the deposit, the nature of the customer
and the size and pricing of the deposit. This exercise has
resulted in a revised internal calculation of advances to
core funding ratio (discussed more fully below), and
comparatives have been restated accordingly.
•
projecting cash flows by major currency under
various stress scenarios and considering the level of
liquid assets necessary in relation thereto;
•
monitoring balance sheet liquidity and advances to
core funding ratios against internal and regulatory
requirements;
•
maintaining a diverse range of funding sources with
back-up facilities;
•
managing the concentration and profile of debt
maturities;
•
managing contingent liquidity commitment exposures
within pre-determined caps;
•
maintaining debt financing plans;
•
monitoring depositor concentration in order to avoid
undue reliance on large individual depositors and
ensure a satisfactory overall funding mix; and
•
maintaining liquidity and funding contingency plans.
These plans identify early indicators of stress
conditions and describe actions to be taken in the
event of difficulties arising from systemic or other
crises, while minimising adverse long-term
implications for the business.
Primary sources of funding
The group employs a number of measures to monitor
liquidity risk. The emphasis on the ratio of net liquid assets
to customer deposits, as reported in the Annual Report and
Accounts 2009, has been reduced and a ‘stressed one
month coverage ratio’, an extension of the group’s
projected cash flow scenario analysis, is now used by the
RMM as a simple and more useful metric to express
liquidity risk.
(Audited)
Current accounts and savings deposits payable on demand
or at short notice form a significant part of the group’s
funding, and the group places considerable importance on
maintaining their stability. For deposits, stability depends
upon preserving depositor confidence in the group’s
capital strength and liquidity, and on competitive and
transparent pricing.
Maturity analyses of assets and liabilities are provided
in Note 33.
The group also accesses professional markets in order
to provide funding for non-banking subsidiaries that do not
accept deposits, to maintain a presence in local money
The management of liquidity and funding is primarily
undertaken locally in the group’s operating entities in
47
HSBC BANK PLC
Report of the Directors: Risk (continued)
banking entities which restrict their ability to increase
loans and advances to customers without corresponding
growth in core customer deposits or long term debt
funding. This measure is referred to as the ‘advances to
core funding’ ratio (previously referred to as the ‘advances
to deposits’ ratio). Advances to core funding ratio limits
are set by the RMM. The ratio expresses loans and
advances to customers as a percentage of the total of core
customer deposits and term funding with a remaining term
to maturity in excess of one year. Loans and advances to
customers which are part of reverse repurchase
arrangements, and where the group receives securities
which are deemed to be liquid, are excluded from the
advances to core funding ratio.
markets and to optimise the funding of asset maturities not
naturally matched by core deposit funding.
Of total liabilities of £766 billion at 31 December
2010, funding from customers amounted to £344 billion,
of which £338 billion was contractually repayable within
one year.
An analysis of cash flows payable by the group and
bank under financial liabilities by remaining contractual
maturities at the balance sheet date is included in Note 33
Maturity Analysis of assets and liabilities.
Assets available to meet these liabilities, and to cover
outstanding commitments to lend (£798 billion), included
cash, central bank balances, items in the course of
collection and treasury and other bills (£38 billion); loans
to banks (£57 billion, including £54 billion repayable
within one year); and loans to customers (£285 billion,
including £140 billion repayable within one year). In the
normal course of business, a proportion of customer loans
contractually repayable within one year will be extended.
In addition, the group held debt securities marketable at a
value of £172 billion. Of these assets, £112 billion of debt
securities and treasury and other bills had been pledged to
secure liabilities.
The group would meet any unexpected net cash
outflows by selling securities and accessing additional
funding sources such as interbank or collateralised lending
markets.
The group also uses measures other than the advances
to core funding ratio to manage liquidity risk, including
projected cash flow scenario analyses.
Stressed one month coverage ratio
(Unaudited)
The stressed one month coverage ratios tabulated below
are derived from these scenario analyses, and express the
stressed cash inflows as a percentage of stressed cash
outflows over a one month time horizon. Entities of the
group are required to target a ratio of 100 per cent or
greater.
Advances to core funding ratio
(Audited)
The group emphasises the importance of core customer
deposits as a source of funds to finance lending to
customers, and discourages reliance on short-term
professional funding. This is achieved by placing limits on
Advances to core funding ratios
(Audited)
Year end ..................................................................
Maximum ................................................................
Minimum.................................................................
Average ...................................................................
The group
2010
(%)
2009
(%)
The bank
2010
(%)
2009
(%)
95.7
97.9
94.5
96.3
96.5
109.2
92.3
99.3
103.0
109.7
102.6
106.0
105.0
116.0
105.0
110.6
The group
2010
(%)
2009
(%)
The bank
2010
(%)
2009
(%)
106.7
110.4
106.1
107.9
111.1
111.3
103.2
108.2
103.2
108.1
101.3
103.9
Stressed one month coverage ratio
(Unaudited)
Year end ..................................................................
Maximum ................................................................
Minimum.................................................................
Average ...................................................................
111.7
114.3
106.7
110.9
Projected cash flow scenario analyses
of deposit withdrawals and drawdowns on committed
lending facilities are varied and the ability to access
interbank funding and term debt markets and generate
funds from asset portfolios is restricted. The scenarios are
modelled by all group banking entities. The
(Audited)
The group uses a number of standard projected cash flow
scenarios designed to model both group-specific and
market-wide liquidity crises, in which the rate and timing
48
HSBC BANK PLC
Report of the Directors: Risk (continued)
Contingent Liquidity risk
(Audited)
appropriateness of the assumptions under each scenario is
regularly reviewed. In addition to the group’s standard
projected cash flow scenarios, individual entities are
required to design their own scenarios tailored to reflect
specific local market conditions, products and funding
bases.
In the normal course of business, the group provides
customers with committed facilities, including committed
backstop lines to conduit vehicles sponsored by the group
and standby facilities to corporate customers. These
Limits for cumulative net cash flows under stress
facilities increase the funding requirements of the group
scenarios are set for each banking entity.
when customers choose to raise drawdown levels over and
above their normal utilisation rates. The liquidity risk
Both ratio and cash flow limits reflect the local market
consequences of increasing levels of drawdown are
place, the diversity of funding sources available and the
analysed in the form of projected cash flows under
concentration risk from large depositors. Compliance with
different stress scenarios. The RMM also sets limits for
entity level limits is monitored and reported regularly to
non-cancellable contingent funding commitments by
the RMM.
group entity after due consideration of each entity’s ability
to fund them. The limits are split according to the
borrower, the liquidity of the underlying assets and the
size of the committed line.
The group’s contractual exposures as at 31 December monitored under the contingent liquidity risk limit structure
(Audited)
The group
2010
£bn
2009
£bn
The bank
2010
£bn
2009
£bn
Conduits
Client-originated assets1
– total lines.......................................................
– largest individual lines..................................
Assets managed by the group2 .............................
5.1
0.4
16.5
4.6
0.6
17.9
3.5
0.4
16.5
3.1
0.6
17.9
Single-issuer liquidity facilities
– five largest3 ...................................................
– largest market sector4 ....................................
2.7
5.4
2.8
4.8
2.7
5.4
2.8
4.8
1 These exposures relate to consolidated multi-seller conduits. These vehicles provide funding to group customers by issuing debt secured by a
diversified pool of customer-originated assets.
2 These exposures relate to consolidated securities investment conduits, primarily Solitaire and Mazarin. These vehicles issue debt secured by
asset-backed securities which are managed by the group.
3 These figures represent the five largest committed liquidity facilities provided to customers, other than those facilities to conduits.
4 These figures represent the total of all committed liquidity facilities provided to the largest market sector, other than those facilities to
conduits.
Market risk
(Audited)
For market risk arising in the group’s insurance
business, refer to page 59.
Market risk is the risk that movements in market
factors, including foreign exchange rates and
commodity prices, interest rates, credit spreads and
equity prices will reduce the group’s income or the
value of its portfolios.
Monitoring and limiting market risk exposure
(Audited)
The group separates exposures to market risk into
trading or non-trading portfolios. Trading portfolios
include positions arising from market-making, positiontaking and others designated as marked-to-market.
The group’s objective is to manage and control market
risk exposures in order to optimise return on risk while
maintaining a market profile consistent with our status
as one of the world’s largest banking and financial
services organisations.
Non-trading portfolios include positions that
primarily arise from the interest rate management of the
group’s retail and commercial banking assets and
liabilities, financial investments designated as availablefor-sale and held-to-maturity, and exposures arising
from the group’s insurance operations.
The management of market risk is principally
undertaken in Global Markets using risk limits
approved by the Group Management Board. Limits are
set for portfolios, products and risk types, with market
liquidity being a primary factor in determining the level
of limits set. Group Risk, an independent unit within the
49
HSBC BANK PLC
Report of the Directors: Risk (continued)
The group routinely validates the accuracy of its
VAR models by back-testing the actual daily profit and
loss results, adjusted to remove non-modelled items
such as fees and commissions, against the
corresponding VAR numbers. Statistically, the group
would expect to see losses in excess of VAR only 1 per
cent of the time over a one-year period. The actual
number of excesses over this period can therefore be
used to gauge how well the models are performing.
Group Management Office, is responsible for HSBC’s
market risk management policies and measurement
techniques. Each major operating entity has an
independent market risk management and control
function which is responsible for measuring market risk
exposures in accordance with the policies defined by
Group Risk, and monitoring and reporting these
exposures against the prescribed limits on a daily basis.
Each operating entity is required to assess the
market risks which arise on each product in its business
and to transfer them to either its local Global Markets
unit for management, or to separate books managed
under the supervision of the local Asset and Liability
Management Committee (‘ALCO’). The aim is to
ensure that all market risks are consolidated within
operations which have the necessary skills, tools,
management and governance to manage them
professionally. In certain cases where the market risks
cannot be fully transferred, simulation modelling is
used to identify the impact of varying scenarios on
valuations and net interest income.
Although a valuable guide to risk, VAR should always
be viewed in the context of its limitations:
The group uses a range of tools to monitor and
limit market risk exposures. These include value at risk
(‘VAR’), sensitivity analysis and stress testing.
•
the use of historical data as a proxy for estimating
future events may not encompass all potential
events, particularly those which are extreme in
nature;
•
the use of a one-day holding period assumes that
all positions can be liquidated or the risks offset in
one day. This may not fully reflect the market risk
arising at times of severe illiquidity, when a oneday holding period may be insufficient to liquidate
or hedge all positions fully;
•
the use of a 99 per cent confidence level, by
definition, does not take into account losses that
might occur beyond this level of confidence;
(Unaudited)
•
Sensitivity measures are used to monitor the market risk
positions within each risk type, for example, the present
value of a basis point movement in interest rates, for
interest rate risk. Sensitivity limits are set for portfolios,
products and risk types, with the depth of the market
being one of the principal factors in determining the
level of limits set.
VAR is calculated on the basis of exposures
outstanding at the close of business and therefore
does not necessarily reflect intra-day exposures;
and
•
VAR is unlikely to reflect loss potential on
exposures that only arise under significant market
movements.
Value at risk (‘VAR’)
(Audited)
Sensitivity analysis
Stress testing
(Audited)
In recognition of VAR’s limitations, the group
augments VAR with stress testing to evaluate the
potential impact on portfolio values of more extreme,
although plausible, events or movements in a set of
financial variables. The process is governed by the
‘Stress Testing Review Group’ forum which, in
conjunction with regional risk managers determines the
scenarios to be applied at portfolio and consolidated
level, as follows:
VAR is a technique that estimates the potential losses
on risk positions as a result of movements in market
rates and prices over a specified time horizon and to a
given level of confidence.
The VAR models used by the group are
predominantly based on historical simulation. These
models derive plausible future scenarios from past
series of recorded market rates and prices, taking into
account inter-relationships between different markets
and rates such as interest rates and foreign exchange
rates. The models also incorporate the effect of option
features on the underlying exposures.
The historical simulation models used by the group
assess potential market movements with reference to
data from the past two years and calculate VAR to a 99
per cent confidence level and for a one-day holding
period.
50
•
sensitivity scenarios consider the impact of any
single risk factor or a set of factors that are unlikely
to be captured within the VAR models, such as the
break of a currency peg;
•
technical scenarios consider the largest move in
each risk factor, without consideration of any
underlying market correlation;
HSBC BANK PLC
Report of the Directors: Risk (continued)
•
hypothetical scenarios consider potential macro
economic events, for example, a global flu pandemic;
and
•
historical scenarios incorporate historical observations
of market movement during previous periods of stress
which would not be captured within VAR.
Value at risk of the trading and non-trading
portfolios
The VAR, both trading and non-trading, for the group was
as follows:
Value at risk
(Audited)
Stress testing results provide senior management with
an assessment of the financial impact such events would
have on the profit of the bank.
At 31 December (excluding nontrading credit spread VAR) .....
Trading and non-trading portfolios
The following table provides an overview of the reporting
of risks within this section:
VAR
VAR
VAR
VAR
2009
£m
95.0
53.5
The rise in interest rate volatility, coupled with a
modest increase in underlying interest exposure, resulted
in a higher VAR and the end of 2010 compared with the
end of 2009.
Portfolio
Trading Non-trading
Risk type
Foreign exchange and commodity ........
Interest rate ...........................................
Equity ...................................................
Credit spread .........................................
2010
£m
With effect from 21 May 2010, the basis of the VAR
computation was changed to include non-trading credit
spread VAR. At 31 December 2010, the total VAR
(including non-trading credit spread VAR for availablefor-sale positions) was £169.2 million. The 2010 average,
minimum and maximum calculations, included in the table
below, include the impact of non-trading credit spread
VAR from 21 May 2010.
VAR¹
VAR
Sensitivity
VAR²
1 The reporting of commodity risk is consolidated with foreign
exchange risk and is not applicable to non-trading portfolios.
2 Non-trading credit spread for AFS positions only.
Average .......................................
Minimum .....................................
Maximum ....................................
2010
£m
2009
£m
211.3
147.5
279.4
89.6
49.7
166.1
Trading portfolios
(Audited)
Risk measurement and control
The group’s control of market risk in the trading portfolios
is based on a policy of restricting individual operations to
trading within a list of permissible instruments authorised
for each site by Group Risk, of enforcing rigorous new
product approval procedures, and of restricting trading in
the more complex derivative products only to offices with
appropriate levels of product expertise and robust control
systems.
The VAR for such trading activity within Global
Markets at 31 December 2010 was £43.0 million (2009:
£42.0 million). This is analysed below by risk type:
Total trading VAR by risk type
At 31 December 2010 .........................................
At 31 December 2009 .........................................
Average
2010 .....................................................................
2009 .....................................................................
Minimum
2010 .....................................................................
2009 .....................................................................
Maximum
2010 .....................................................................
2009 .....................................................................
Foreign
exchange and
commodity
£m
12.0
11.0
Interest rate
£m
27.6
34.4
Equity
£m
7.5
11.3
Credit
£m
20.8
25.4
Total1
£m
43.0
42.0
16.4
12.0
31.5
37.1
5.5
7.1
26.6
28.5
56.7
48.9
3.6
6.4
18.3
24.1
1.6
2.9
14.7
14.5
26.3
28.4
41.0
33.0
53.2
68.6
12..8
13.4
41.3
55.3
85.1
85.7
1 The total VAR is non-additive across risk types due to diversification effects.
The VAR for the overall trading activity as at 31 December 2010 is relatively unchanged from 2009.
51
HSBC BANK PLC
Report of the Directors: Risk (continued)
Credit spread risk
The risk associated with movements in credit spreads is
primarily managed through sensitivity limits, stress
testing, and VAR for those portfolios where VAR is
calculated. We have introduced credit spread as a separate
risk type within the group’s VAR models on a global
basis. The VAR shows the effect on income from a oneday movement in credit spreads over a two-year period,
calculated to a 99 per cent confidence interval.
Credit spread risk
Credit spread risk also arises on credit derivative
transactions entered into by Global Banking in order to
manage the risk concentrations within the group’s
corporate loan portfolio and so enhance capital efficiency.
The mark-to-market of these transactions is reflected in the
income statement.
At 31 December 2010, the credit VAR on the credit
derivatives transactions entered into by Global Banking
was £20.8 million (2009 £25.4 million).
At 31 December 2010, the sensitivity of equity capital
to the effect of movements in credit spreads based on
credit spread VAR, on the group’s available-for-sale debt
securities was £157.1 million (2009: £207.8 million). The
sensitivity was calculated on the same basis as for the
trading portfolio. It increased to £181.3 million after
including the gross exposure for the SICs consolidated
within the group’s balance sheet. This sensitivity is
calculated before taking into account losses which would
have been absorbed by the capital note holders. At 31
December 2010, the capital note holders can absorb the
first US$2.2 billion (2009: US$2.2 billion) of any losses
incurred by the SICs prior to us incurring any equity
losses.
Gap risk
Even for transactions that are structured to render the risk
to the group negligible under a wide range of market
conditions or events, there exists a possibility that a
significant gap event could lead to loss. A gap event could
arise from a significant change in market price with no
accompanying trading opportunity, with the result that the
threshold is breached beyond which the risk profile
changes from having no risk to full exposure to the
underlying structure. Such movements may occur, for
example, when, in reaction to an adverse event or
unexpected news announcements, the market for a specific
investment becomes illiquid, making hedging impossible.
The notable decrease in this sensitivity at 31
December 2010 compared with 31 December 2009 was
due to the effect of lower volatility in credit spreads
observed during 2010.
Given their characteristics, these transactions make
little or no contribution to VAR or to traditional market
risk sensitivity measures. The group captures the risks
within the stress testing scenarios and monitors gap risk on
an ongoing basis. The group regularly considers the
probability of gap loss and fair value adjustments are
booked against this risk. We have not incurred any
material gap loss in respect of such transactions in the 12
months ended 31 December 2010.
Fixed-rate securities
The principal non-trading risk which is not included in the
VAR reported for Global Banking and Markets arises out
of Fixed Rate Subordinated Notes. The VAR related to
these instruments was £26.2 million at 31 December 2010
(2009: £30.6 million); whilst the average, minimum and
maximum during the year was £31.4 million, £19.0
million and £36.8 million respectively (2009: £31.6
million, £29.4 million and £34.7 million).
Non-trading portfolios
(Audited)
Risk measurement and control
The principal objective of market risk management of nontrading portfolios is to optimise net interest income.
Interest rate risk in non-trading portfolios arises
principally from mismatches between the future yield on
assets and their funding cost, as a result of interest rate
changes. Analysis of this risk is complicated by having to
make assumptions on embedded optionality within certain
product areas such as the incidence of mortgage
prepayments, and from behavioural assumptions regarding
the economic duration of liabilities which are contractually
repayable on demand such as current accounts.
Equity securities held as available-for-sale
Market risk arises on equity securities held as availablefor-sale. The fair value of these securities at 31 December
2010 was £1,426 million (2009: £2,316 million).
The fair value of the constituents of equity securities
held as available-for-sale can fluctuate considerably. A 10
per cent reduction in the value of the available-for-sale
equities at 31 December 2010 would have reduced equity
by £143 million (2009: £203 million). For details of the
impairment incurred on available-for-sale equity securities
see the accounting policies in Note 2(j).
The group’s control of market risk in non-trading
portfolios is based on transferring the risks to the books
managed by Global Markets or the local ALCO. The net
exposure is typically managed through the use of interest
rate swaps within agreed limits. The VAR for these
portfolios is included within the group VAR (see ‘Value at
risk of the trading and non-trading portfolios’ above).
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent net
investments in subsidiaries, branches and associates, the
functional currencies of which are currencies other than
the sterling. An entity’s functional currency is the currency
52
HSBC BANK PLC
Report of the Directors: Risk (continued)
consolidated to illustrate the combined pro forma effect on
the group’s consolidated portfolio valuations and net
interest income.
of the primary economic environment in which the entity
operates.
Exchange differences on structural exposures are
recognised in other comprehensive income.
Defined benefit pension scheme
(Audited)
The group hedge structural foreign currency
exposures only in limited circumstances. The group’s
structural foreign exchange exposures are managed with
the primary objective of ensuring, where practical, that the
group’s consolidated capital ratios and the capital ratios of
individual banking subsidiaries are largely protected from
the effect of changes in exchange rates. This is usually
achieved by ensuring that, for each subsidiary bank, the
ratio of structural exposures in a given currency to riskweighted assets denominated in that currency is broadly
equal to the capital ratio of the subsidiary in question.
Market risk also arises within the group’s defined benefit
pension schemes to the extent that the obligations of the
schemes are not fully matched by assets with determinable
cash flows. Pension scheme obligations fluctuate with
changes in long-term interest rates, inflation, salary
increases and the longevity of scheme members. Pension
scheme assets will include equities and debt securities, the
cash flows of which change as equity prices and interest
rates vary. There are risks that market movements in
equity prices and interest rates could result in assets which
are insufficient over time to cover the level of projected
obligations and these, in turn, could increase with a rise in
inflation and members living longer. Management,
together with the trustees who act on behalf of the pension
scheme beneficiaries, assess these risks using reports
prepared by independent external actuaries and takes
action and, where appropriate, adjust investment strategies
and contribution levels accordingly.
The group may also transact hedges where a currency
in which the group have structural exposures is considered
to be significantly overvalued and it is possible in practice
to transact a hedge. Any hedging is undertaken using
forward foreign exchange contracts which are accounted
for under IFRSs as hedges of a net investment in a foreign
operation, or by financing with borrowings in the same
currencies as the functional currencies involved. No
forward foreign exchange hedges were in place during
2010 or at the end of 2009.
The present value of the group’s defined benefit
pension schemes’ liabilities was £15.6 billion at 31
December 2010 compared with £14.1 billion at 31
December 2009. Assets of the defined benefit schemes at
31 December 2010 comprised: equity investments 16 per
cent (17 per cent at 31 December 2009); debt securities 69
per cent (70 per cent at 31 December 2009) and other
(including property) 15 per cent (13 per cent at 31
December 2009).
For details of structural foreign exchange exposures
see Note 34 Foreign exchange exposures.
Sensitivity of net interest income
(Unaudited)
A principal element of the group’s management of market
risk in non-trading portfolios is monitoring the sensitivity
of projected net interest income under varying interest rate
scenarios (simulation modelling). The group aims to
mitigate the effect of prospective interest rate movements
which could reduce future net interest income, while
balancing the cost of hedging such activities on the current
revenue stream.
Concentrations of market risk exposures
(Audited)
Analysis of asset-backed securities
During the period a total valuation increase of £2,914
million on available-for-sale assets was recognised in
other comprehensive income. This primarily relates to
valuation gains on asset-backed securities. The table
shows the group’s market risk exposure to asset-backed
securities (including those carried at fair value through
profit and loss and those classified as available-for-sale).
For simulation modelling, businesses use a
combination of scenarios relevant to them and their local
markets and standard scenarios which are required
throughout the group. The standard scenarios are
53
HSBC BANK PLC
Report of the Directors: Risk (continued)
Asset Backed Securities
31 December 2009
31 December 2010
Carrying
Amount5,6
£m
Gross
principal
£m
CDS gross
protection
£m
Net
Principal
exposure6
£m
Carrying
Amount6
£m
Gross
principal2
£m
CDS gross
protection3
£m
Net
Principal
exposure4,6
£m
High grade1 .............................
rated C to A ............................
not publicly rated ....................
22,313
16,295
493
4,145
141
-
18,168
16,154
493
15,631
9,850
215
28,161
14,696
121
5,367
564
–
22,794
14,132
121
18,466
6,832
62
Total asset-backed securities...
39,101
4,286
34,815
25,696
42,978
5,931
37,047
25,360
1 High grade assets rated AA or AAA.
2 The gross principal is the redemption amount on maturity or, in the case of an amortising instrument, the sum of the future redemption
amounts through the residual life of the security.
3 A CDS is a credit default swap. CDS protection principal is the gross principal of the underlying instrument that is protected by CDSs.
4 Net principal exposure is the gross principal amount of assets that are not protected by CDSs. It includes assets that benefit from monoline
protection, except where this protection is purchased with a CDS.
5 Carrying amount of the net principal exposure.
6 The asset backed securities are primarily US dollar (‘USD’) denominated. Principal and carrying amounts are converted into sterling
(‘GBP’) at the prevailing exchange rates at 31 December (2010: 1GBP:USD 1.552; 2009: 1GBP:USD 1.560).
Included in the above table is carrying amount of £8,752
million (2009: £8,642 million) held through SPEs that are
consolidated by the group. Although the group includes
these assets in full on its balance sheet, significant first
loss risks are borne by third party investors, through the
investors’ holdings of capital notes subordinate to the
group’s holdings. The carrying amount of the capital note
liabilities has been reduced by impairment charges of £265
million for the year ended 31 December 2010 (2009: £408
million).
Special purpose entities
These vehicles were established for the purpose of
providing access to flexible market-based sources of
finance for the group’s clients.
(Audited)
The group enters into certain transactions with customers
in the ordinary course of business which involve the
establishment of special purpose entities (‘SPEs’) to
facilitate or secure customer transactions.
Money market funds
The group has established and manages a number of
money market funds which provide customers with
tailored investment opportunities within narrow and welldefined objectives.
The group structures that utilise SPEs are authorised
centrally when they are established to ensure appropriate
purpose and governance. The activities of SPEs
administered by the group are closely monitored by senior
management.
Non-money market investment funds
The group has established a large number of non-money
market investment funds to enable customers to invest in a
range of assets, typically equities and debt securities.
SPEs are assessed for consolidation in accordance with the
accounting policy set out in Note 1(c).
Securitisations
Conduits
The group uses SPEs to securitise customer loans and
advances it has originated, mainly in order to diversify its
sources of funding for asset origination and for capital
efficiency purposes. The SPEs are not consolidated when
the group is not exposed to the majority of risks and
rewards of ownership.
The group sponsors and manages two types of conduits:
securities investment conduits (‘SICs’) and multi-seller
conduits.
Securities investment conduits
Solitaire, the group’s principal SIC, purchases highly rated
asset-backed securities (‘ABSs’) to facilitate tailored
investment opportunities. The group’s other SICs,
Mazarin, Barion and Malachite, evolved from the
restructuring of the group’s sponsored structured
investment vehicles (‘SIVs’) in 2008.
Other
The group also establishes, in the normal course of
business for a number of purposes, for example, structured
credit transactions for customers to provide finance to
public and private sector infrastructure projects, and for
asset and structured finance transactions.
Multi-seller conduits
54
HSBC BANK PLC
Report of the Directors: Risk (continued)
Third party sponsored SPEs
The group’s Regional Operational Risk and Internal
Control team supports the European Chief Financial
Officer and Chief Risk Officer through continuing
oversight and assurance over the management of
operational risk by businesses and operations. Operational
Risk and Internal Control teams have also been established
in all countries in the region with responsibility for
coordinating and providing oversight over implementation
of the Operational Risk Management Framework within
their respective countries.
Through standby liquidity facility commitments, the group
has exposure to third party sponsored SIVs, conduits and
securitisations under normal banking arrangements on
standard market terms. These exposures are not considered
significant to the group’s operations.
Additional off-balance sheet arrangements and
commitments
Additional off-balance sheet commitments such as
financial guarantees, letters of credit and commitments to
lend are disclosed in Note 38.
Business managers are responsible for maintaining an
acceptable level of internal control, commensurate with
the scale and nature of operations across Europe. They are
responsible for identifying and assessing risks, designing
controls and monitoring the effectiveness of these controls.
The operational risk management framework assists
managers to fulfil these responsibilities by defining a
standard risk assessment methodology and providing a
tool for the systematic reporting of operational loss data.
Central Operational Risk and Internal Control teams
within the country and at the regional level provide
assurance and oversight over the business control activities
through a programme of risk and control reviews during
the year.
Leveraged finance transactions
Loan commitments in respect of leveraged finance
transactions are accounted for as derivatives where it is the
group’s intention to sell the loan after origination.
Operational risk
(Unaudited)
Operational risk is relevant to every aspect of the group’s
business and covers a wide spectrum of issues. Losses
arising through fraud, unauthorised activities, errors,
omission, inefficiency, systems failure or from external
events all fall within the definition of operational risk.
A centralised database is used to record the results of
the operational risk management process. Operational risk
control assessments are input and maintained by business
units. To ensure that operational risk losses are
consistently reported and monitored at country, regional
and group level, all group companies are required to report
individual losses when the net loss is expected to exceed
US$10,000.
The objective of the group’s operational risk
management is to manage and control operational risk in a
cost effective manner within targeted levels of operational
risk consistent with the Group’s risk appetite, as defined
by the Group Management Board.
A formal group-wide governance structure provides
oversight over the management of operational risk. A
Global Operational Risk and Internal Control Committee
(‘GORICC’), which reports to the Group RMM, meets at
least quarterly to discuss key risk issues and review the
effective implementation of the Group’s operational risk
management framework. Regions are responsible for
ensuring that country and business unit Operational Risk
and Internal Control Committees (‘ORICC’) are
established within the Region and Global Business
consistent with the need to maintain oversight over all
businesses and operations. Accordingly, at the regional
level, the group’s Operational Risk and Internal Control
Committee (‘HBEU ORICC’) meets monthly to ensure
that the operational risks inherent in the regional activities
are identified, assessed and controlled in accordance with
the regional risk appetite. Local country and business line
ORICCs feed into the HBEU ORICC and are held at least
quarterly. In addition, output and significant issues from
the regional, country and business line ORICCs are fed
into the group’s Risk Management Meeting and the
group’s Board as appropriate. The HBEU ORICC also
reports to the GORICC.
Legal risk
Each operating company is required to implement
procedures to manage legal risk that conform to the
Group’s standards. Legal risk falls within the definition of
operational risk and includes contractual risk, dispute risk,
legislative risk and non-contractual rights risk.
55
•
Contractual risk is the risk that the rights and/or
obligations of a group company within a contractual
relationship are defective.
•
Dispute risk is made up of the risks that a group
company is subject to when it is involved in or
managing a potential or actual dispute.
•
Legislative risk is the risk that a group company fails
to adhere to the laws of the jurisdictions in which it
operates.
•
Non-contractual rights risk is the risk that a group
company’s assets are not properly owned or are
infringed by others, or a group company infringes
another party’s rights.
HSBC BANK PLC
Report of the Directors: Risk (continued)
Group security and fraud risk
The group has a legal function, headed by the General
Counsel for Europe, to assist management in controlling
legal risk. The function provides legal advice and support
in managing claims against the group’s companies, as well
as in respect of non-routine debt recoveries or other
litigation against third parties. There are legal departments
in a number of countries in which the group operates.
Security and Fraud Risk, Europe, which has responsibility
for physical risk, fraud, information and contingency risk,
is fully integrated within the group's Technology and
Services function, but with functional direction from
Group Security and Fraud Risk. All group companies
manage their risk in accordance with standards set by
Security and Fraud Risk, Europe, which also provides
expert advice and support..
The group’s operating companies must notify the
appropriate legal department immediately any litigation is
either threatened or commenced against the group or an
employee. Any claims which exceed £1 million or
equivalent must be advised to the General Counsel for
Europe. The General Counsel for Europe must also be
immediately advised of any action by a regulatory
authority, where the proceedings are criminal, or where the
claim might materially affect the group’s reputation.
Data security
In March 2010 HSBC Private Bank (Suisse) SA
announced that it had been the victim of a significant data
theft. In 2010, HSBC Private Bank (Suisse) SA conducted
a comprehensive review of its information security
procedures, formulated and implemented major security
upgrade programmes and continued a multi-million franc
investment programme in systems to ensure industryleading security standards. It also reviewed and
strengthened risk management and operational controls
and will continue to invest in these areas. In March 2010,
the Swiss Financial Market Supervisory Authority
(‘FINMA’) launched an investigation into the
circumstances of the data theft. On 22 February 2011, a
notice of decision with a declaratory ruling was received
from FINMA following such investigation which found
that, because of deficiencies in its internal organisation and
oversight of its IT activities, HSBC Private Bank (Suisse)
SA had breached various supervisory requirements. HSBC
Private Bank (Suisse) SA is currently considering the
details of the notice of decision and actions required by
FINMA.
In addition, the group’s operating companies are
required to submit semi annual returns detailing
outstanding claims where the claim (or group of similar
claims) exceeds £6.5 million, where the action is by a
regulatory authority, where the proceedings are criminal or
where the claim might materially affect the group’s
reputation. These returns are used for reporting to various
committees within the group.
Compliance risk
Compliance risk falls within the definition of operational
risk. All group companies are required to observe the letter
and spirit of all relevant laws, codes, rules, regulations and
standards of good market practice. These rules,
regulations, other standards and group policies include
those relating to anti-money laundering, counter terrorist
financing and sanctions compliance.
Risk management of insurance
operations
(Audited)
The Group Compliance function supports line
management in ensuring that there are adequate policies,
procedures and resources to mitigate compliance risk. The
Regional Compliance Officer, Europe oversees
compliance teams in all of the countries where the group
operates. Additionally, Global Compliance Officers
oversee compliance arrangements within large and
complex businesses such as the bank and Global Banking
and Markets.
The group operates a bancassurance model which provides
insurance products for customers with whom the group has
a banking relationship. Insurance products are sold to all
customer groups, mainly utilising retail branches, the
internet and phone centres. Personal Financial Services
customers attract the majority of sales and comprise the
majority of policyholders.
Many of these insurance products are manufactured
by group subsidiaries. This allows the group to retain the
risks and rewards associated with writing insurance
contracts, which includes both the underwriting profit and
the commission paid by the manufacturer to the bank
distribution channel within the group.
Group Compliance policies and procedures require the
prompt identification and escalation of all actual and
suspected breaches of any law, rule, regulation, Group
policy or other relevant requirement. These escalation
procedures are supplemented by a requirement for the
submission of compliance certificate at the half-year and
year-end by all group companies detailing any known
breaches. The contents of these escalation and certification
processes are used for reporting to the RMM, the Risk
Committee and the Board and disclosure in the Annual
Report and Accounts and Interim Report, if appropriate.
Where it is considered operationally more effective,
third parties are engaged to manufacture insurance
products for sale through the group’s banking network.
The group works with a limited number of market-leading
partners to provide the products. These arrangements earn
the group a commission.
56
HSBC BANK PLC
Report of the Directors: Risk (continued)
The majority of the risk in the group’s insurance
business derives from manufacturing activities and can be
categorised as insurance risk and financial risks. The
insurance manufacturers set their own control procedures
in addition to complying with guidelines issued by the
Group Insurance Head Office.
A principal tool used by the group to manage its exposure
to insurance risk, in particular for life insurance contracts,
is asset and liability matching. Of particular importance is
the need to match the expected pattern of cash inflows
with the benefits payable on the underlying contracts,
which can extend for many years.
The control framework for monitoring risk includes the
UK, European and Middle East Insurance Regional Risk
Committee, which oversees the status of the significant
risk categories in the insurance operations. Four
subcommittees of this Committee focus on products and
pricing, market, liquidity risk and credit risk, operational
risk and insurance risk, respectively. In addition, local
ALCOs and Risk Management Committees monitor
certain risk exposures, mainly for life business where the
duration and cash flow matching of insurance assets and
liabilities are reviewed.
The following tables analyse the group’s insurance risk
exposures by type of business.
Analysis of life insurance risk – liabilities to
policyholders
(Audited)
Life (non-linked)
– Insurance contracts with DPF 1 .................
– Credit life ...................................................
– Annuities ....................................................
Term assurance and other long-term
contracts .........................................................
Total life (non-linked) ........................................
Life (linked) .......................................................
Investment contracts with DPF 1, 2 ......................
Insurance liabilities to policyholders ............
All insurance products, whether manufactured internally or
by a third party, are subjected to a product approval
process. Approval is provided by the UK, European and
Middle East Regional Insurance Head Office or Group
Insurance Head Office depending on the type of product
and its risk profile. The approval process is formalised
through the Product and Pricing Committee, which
comprises the heads of the relevant risk functions within
insurance.
2010
£m
2009
£m
211
169
304
695
247
278
204
888
1,464
14,205
16,557
286
1,506
1,310
12,930
15,746
1 Insurance contracts and investment contracts with discretionary
participation features (‘DPF’) give policyholders the contractual
right to receive, as a supplement to their guaranteed benefits,
additional benefits that are likely to be a significant portion of the
total contractual benefits, but whose amount or timing is
contractually at the discretion of the group. These additional
benefits are contractually based on the performance of a specified
pool of contracts or assets, or the profit of the company issuing the
contracts.
2 Although investment contracts with DPF are financial investments,
the group continues to account for them as insurance contracts as
permitted by IFRS 4.
Insurance risk of insurance operations
(Audited)
Insurance risk is the risk, other than financial risk,
transferred from the holder of the insurance contract to the
issuer (the group). The principal insurance risk faced by
the group is that, over time, the cost of acquiring and
administering a contract, claims and benefits may exceed
the aggregate amount of premiums received and
investment income.
Insurance risk arising from life insurance depends on the
type of business, and varies considerably. The principal
drivers of insurance risks are mortality, morbidity, lapse,
surrender and expense levels. The liabilities for long-term
contracts are set by reference to a range of assumptions
around these drivers, typically reflecting each entity’s own
experience. Economic assumptions, such as investment
returns and interest rates, are usually based on observable
market data. Changes in underlying assumptions affect the
liabilities.
The cost of claims and benefits can be influenced by many
factors, including mortality and morbidity experience,
lapse and surrender rates and, if the policy has a savings
element, the performance of the assets held to support the
liabilities.
The insurance contracts sold by the group relate, primarily,
to core underlying banking activities, such as savings,
investment and/or credit life products. Life and non-life
business insurance risks are controlled by high level
policies and procedures set centrally, taking into account,
where appropriate, local market conditions and regulatory
requirements.
Non-life insurance risk – net written insurance
premiums
(Audited)
Non-life insurance contracts include motor, fire and other
damage to property, accident and health, and repayment
protection. Credit non-life insurance is originated in
conjunction with the provision of loans.
Reinsurance is also used as a means of mitigating
exposure, in particular to aggregation of catastrophe risk.
Although reinsurance provides a means of managing
insurance risk, such contracts expose the group to
counterparty risk, the risk of default by the reinsurer.
Net written insurance premiums amounted to: Accident
and health: £53 million (2009: £60 million), Motor: £nil
(2009: £82 million), Fire and other damage: £25m (2009:
£46 million), Credit: £16 million (2009: £22 million) and
Marine, aviation and other: £14 million (2009: £22
million).
57
HSBC BANK PLC
Report of the Directors: Risk (continued)
Financial risks of insurance operations
manufacturing subsidiaries must maintain to meet
insurance liabilities. These requirements complement
Group-wide policies.
(Audited)
The group’s insurance businesses are exposed to a range of
financial risks, including market risk, credit risk and
liquidity risk. The nature and management of these risks is
described below.
The following table analyses the assets held in the group’s
insurance manufacturing subsidiaries as at 31 December
2010 by type of contract, and provides a view of the
exposure to financial risk.
Manufacturing subsidiaries are exposed to financial risk
when, for example, the proceeds from financial assets are
not sufficient to fund the obligations arising from nonlinked insurance and investment contracts.
Local regulatory requirements prescribe the type, quality
and concentration of assets that the group’s insurance
Financial assets held by insurance manufacturing subsidiaries
(Audited)
At 31 December 2010
Financial assets designated at fair value
Treasury bills ........................................................
Debt securities .....................................................
Equity securities ...................................................
Financial investments - available-for-sale
Treasury bills ........................................................
Other eligible bills ................................................
Debt securities ......................................................
Equity securities ...................................................
Derivatives...............................................................
Other financial assets .............................................
Life linked
contracts
£m
Life non-linked
contracts
£m
Non-life
insurance
£m
Other assets
£m
Total
£m
8
1,679
4,082
5,769
5
730
3,280
4,015
–
–
–
–
6
220
383
609
19
2,629
7,745
10,393
–
–
–
–
–
–
23
9,454
–
9,477
–
90
86
–
176
–
140
757
16
913
–
253
10,297
16
10,566
5
427
6,201
147
710
14,349
–
278
454
2
244
1,768
154
1,659
22,772
At 31 December 2009
Financial assets designated at fair value
Treasury bills ...........................................................
Debt securities ........................................................
Equity securities ......................................................
Financial investments - available-for-sale
Treasury bills ...........................................................
Other eligible bills ...................................................
Debt securities .........................................................
Equity securities ......................................................
Derivatives..................................................................
Other financial assets ................................................
Life linked
contracts
£m
Life non-linked
contracts
£m
Non-life
insurance
£m
Other assets
£m
Total
£m
28
1,145
3,645
4,818
5
808
2,769
3,582
–
–
–
–
2
156
531
689
35
2,109
6,945
9,089
–
–
–
–
–
–
16
9,217
–
9,233
130
78
–
–
208
51
78
716
18
863
181
172
9,933
18
10,304
185
293
5,296
89
817
13,721
–
400
608
1
281
1,834
275
1,791
21,459
58
HSBC BANK PLC
Report of the Directors: Risk (continued)
•
as far as possible, matching assets to liabilities;
•
using derivatives to a limited extent;
•
In life linked insurance, premium income less charges
levied is invested in a portfolio of assets. The group
manages the financial risks of this product on behalf of the
policyholders by holding appropriate assets in segregated
funds or portfolios to which the liabilities are linked.
for new products with investment guarantees,
considering the cost when determining the level of
premiums or the price structure;
•
These assets represented 27 per cent of the total financial
assets of the group’s insurance manufacturing subsidiaries
at the end of 2010 (2009: 25 per cent).
periodically reviewing products identified as higher
risk, which contain guarantees and embedded
optionality features linked to savings and investment
products;
•
including features designed to mitigate market risk in
new products; and
Market risk of insurance operations
•
exiting, to the extent possible, investment portfolios
whose risk is considered unacceptable.
Approximately 57 per cent of financial assets were
invested in debt securities at 31 December 2010 (2009: 56
per cent), with 34 per cent invested in equity securities
(2009: 32 per cent).
(Audited)
Market risk arises when mismatches occur between
product liabilities and the investment assets which back
them. For example, mismatches between asset and liability
yields and maturities give rise to interest rate risk.
The group’s insurance manufacturing subsidiaries monitor
exposures against mandated limits regularly and report
these quarterly to the Regional Insurance Head Office.
Exposures are aggregated and reported to senior risk
management forums, including the Regional Insurance
Market, Liquidity and Credit Risk Committee, the
Regional Insurance Risk Committee and the Regional
Stress Testing Committee.
The main features of products manufactured by the
group’s insurance manufacturing subsidiaries which
generate market risk, and the market risk to which these
features expose the subsidiaries, are discussed below.
Long-term insurance or investment products may
incorporate either investment return or capital repayment
guarantees or both. Subsidiaries manufacturing products
with guarantees are usually exposed to falls in market
interest rates as they result in lower yields on the assets
supporting guaranteed investment returns payable to
policyholders.
Standard measures for quantifying market risks are as
follows:
The proceeds from insurance and investment products
with DPF are primarily invested in bonds with a
proportion allocated to equity securities in order to provide
customers with the potential for enhanced returns.
Subsidiaries with portfolios of such products are exposed
to the risk of falls in the market prices when they cannot
be fully reflected in the discretionary bonuses. An increase
in market volatility could also result in an increase in the
value of the guarantee to the policyholder.
for interest rate risk, the sensitivities of the net present
values of asset and expected liability cash flows, in
total and by currency, to a one basis point parallel
upward shift in the discount curves used to calculate
the net present values;
•
for equity price risk, the total market value of equity
holdings and the market value of equity holdings by
region and country; and
•
for foreign exchange risk, the total net short foreign
exchange position and the net foreign exchange
positions by currency.
The standard measures are relatively straightforward to
calculate and aggregate, but have limitations. The most
significant is that a parallel shift in yield curves of one
basis point does not capture the non-linear relationships
between the values of certain assets and liabilities and
interest rates. Non-linearity arises, for example, from
investment return guarantees and product features which
enable policyholders to surrender their policies.
Long-term insurance and investment products typically
permit the policyholder to surrender the policy or let it
lapse at any time. When the surrender value is not linked
to the value realised from the sale of the associated
supporting assets, the subsidiary is exposed to market risk.
For unit-linked contracts, market risk is substantially borne
by the policyholder, but the group typically remains
exposed to market risk as the market value of the linked
assets influences the fees earned for managing them.
The group recognises these limitations and augments its
standard measures with stress tests which examine the
effect of a range of market rate scenarios on the aggregate
annual profits and total equity of the insurance
manufacturing subsidiaries after taking into consideration
tax and accounting treatments where material and relevant.
The results of these stress tests are reported to the
Regional Insurance Head Office and risk committees
every quarter.
Each insurance manufacturing subsidiary manages
market risk by using some or all of the following
techniques:
•
•
for products with DPF, adjusting bonus rates to
manage the liabilities to policyholders;
59
HSBC BANK PLC
Report of the Directors: Risk (continued)
non-linear and, therefore, the results disclosed cannot be
extrapolated to measure sensitivities to different levels of
stress. The sensitivities are stated before allowance for the
effect of management actions which may mitigate changes
in market rates, and for any factors such as policyholder
behaviour that may change in response to changes in
market risk.
The following table illustrates the effect of various interest
rates, equity price and credit spread scenarios on the
profits for the year and total equity of insurance
manufacturing subsidiaries. Where appropriate, the impact
of the stress on the present value of the in-force long-term
insurance business asset (‘PVIF’) is included in the results
of the stress tests. The relationship between the values of
certain assets and liabilities and the risk factors may be
Sensitivity of the group’s insurance subsidiaries to risk factors
(Audited)
+ 100 basis points parallel shift in yield curves....................
– 100 basis points parallel shift in yield curves ....................
10 per cent increase in equity prices .....................................
10 per cent decrease in equity prices ....................................
Sensitivity to credit spread increases ....................................
2010
Effect on profit
for the year
£m
12
(17)
10
(10)
(1)
Effect on total
equity
£m
(6)
2
10
(10)
(5)
2009
Effect on profit
for the year
£m
10
(14)
7
(7)
(1)
Effect on total
equity
£m
(12)
10
7
(7)
(5)
aggregated by the Regional Insurance Head Office and
reported to the Regional Insurance Market, Liquidity and
Credit Risk Committee and the Regional Insurance Risk
Committee. Stress testing is performed by the Regional
Insurance Head Office on the investment credit exposures
using credit spread sensitivities and default probabilities.
The stresses are reported to the Regional Insurance
Market, Liquidity and Credit Risk Committee.
Credit risk of insurance operations
(Audited)
Credit risk can give rise to losses through default and can
lead to volatility in income statement and balance sheet
figures through movements in credit spreads, principally
on the £11.5 billion (2009: £11.3 billion) non-linked bond
portfolio.
As tabulated above, the exposure of the income statement
to the effect of changes in credit spreads is small; this is
because 92 per cent of the financial assets held by
insurance manufacturing subsidiaries are classified as
available-for-sale, and consequently any changes in the
fair value of these financial investments would have no
A number of tools are used to manage and monitor credit
risk. These include an Early Warning Report and a watch
list of investments with current credit concerns which are
circulated fortnightly to senior management in the
Regional Insurance Head Office and to the Regional Chief
Risk Officer to identity investments which may be at risk
of future impairment.
impact on the profit after tax, to the extent that the
financial assets are not deemed impaired. The sensitivity is
calculated using simplified assumptions based on a oneday movement in credit spreads over a two-year period. A
confidence level of 99 per cent, consistent with the
Group’s VAR, has been applied.
Credit quality
(Audited)
The following table presents an analysis of treasury bills,
other eligible bills and debt securities within the group’s
insurance business by measures of credit quality. Only
assets supporting liabilities under non-linked insurance
and investment contracts and supporting shareholders’
funds are included in the table, as financial risk on assets
supporting linked liabilities is predominantly borne by the
policyholder.
Management of the group’s insurance manufacturing
subsidiaries is responsible for the credit risk, quality and
performance of their investment portfolios. The
assessment of creditworthiness of issuers and
counterparties is based primarily upon internationally
recognised credit ratings and other publicly available
information.
Investment credit exposures are monitored against limits
by the local insurance manufacturing subsidiaries, and are
60
HSBC BANK PLC
Report of the Directors: Risk (continued)
Treasury bills, other eligible bills and debt securities in the group’s insurance subsidiaries
(Audited)
At 31 December 2010
Good/
Satisfactory
Strong
Total1,2.3
£m
£m
£m
At 31 December 2009
Good/
Satisfactory
Strong
£m
£m
Total1,2,3
£m
Financial assets designated at fair value .....................
– Treasury and other eligible bills ........................
– debt securities .....................................................
840
13
827
123
–
123
963
13
950
509
7
502
462
–
462
971
7
964
Financial investments ..................................................
– treasury and other similar bills ...........................
– debt securities .....................................................
10,273
253
10,020
277
–
277
10,550
253
10,297
10,009
353
9,656
277
–
277
10,286
353
9,933
11,113
400
11,513
10,518
739
11,257
1
2
No treasury bills, other eligible bills or debt securities were classified as sub-standard, past due not impaired or impaired.
Impairment is not measured for debt securities designated at fair value, as assets in such portfolios are managed according to movements in
fair value, and the fair value movement is taken directly through the income statement.
3 Total is the maximum exposure to credit risk on the treasury bills, other eligible bills and debt securities in the group’s insurance
subsidiaries.
Issuers of treasury bills, other eligible bills and debt securities in the group’s insurance subsidiaries
(Audited)
Treasury
bills
£m
At 31 December 2010
Governments and local authorities .................................
Corporates and other .......................................................
At 31 December 2009
Governments and local authorities .................................
Corporates and other .......................................................
Other eligible
bills
£m
Debt
securities
£m
Total
£m
13
78
3,713
3,804
–
13
175
253
7,534
11,247
7,709
11,513
106
82
188
4
168
172
3,371
7,526
10,897
3,481
7,776
11,257
shown below. The group’s exposure to third parties under
the reinsurance agreements is included in this table.
Credit risk also arises when part of the insurance risk
incurred by the group is assumed by reinsurers. The split
of liabilities ceded to reinsurers and outstanding
reinsurance recoveries, analysed by credit quality, is
Reinsurers’ share of liabilities under insurance contracts
(Audited)
Neither past due nor impaired
Good/
Past due not
impaired
Strong Satisfactory Sub-standard
£m
£m
£m
£m
Total1,2
£m
At 31 December 2010
Linked insurance contracts .....................................................................
Non-linked insurance contracts ..............................................................
Total........................................................................................................
Reinsurance debtors ................................................................................
28
395
423
14
–
4
4
–
–
5
5
–
–
–
–
–
28
404
432
14
At 31 December 2009
Linked insurance contracts .....................................................................
Non-linked insurance contracts ..............................................................
Total.........................................................................................................
Reinsurance debtors ................................................................................
17
380
397
9
–
8
8
–
–
2
2
–
–
–
–
1
17
390
407
10
1 No amounts reported within Reinsurers’ share of liabilities under insurance contracts were classified as impaired.
2 Total is the maximum exposure to credit risk in respect of reinsurers’ share of liabilities under insurance contracts.
61
HSBC BANK PLC
Report of the Directors: Risk (continued)
Liquidity risk of insurance operations
•
matching cash inflows with expected cash outflows
using specific cash flow projections or more general
asset and liability matching techniques such as
duration matching;
•
maintaining sufficient cash resources;
•
investing in good credit-quality investments with deep
and liquid markets to the degree to which they exist;
•
monitoring investment concentrations and restricting
them where appropriate, for example, by debt issues
or issuers; and
•
establishing committed contingency borrowing
facilities.
(Audited)
It is an inherent characteristic of almost all insurance
contracts that there is uncertainty over the amount of
claims liabilities that may arise, and the timing of their
settlement, and this creates liquidity risk.
There are three aspects to liquidity risk of insurance
operations. The first arises in normal market conditions
and is referred to as funding liquidity risk; specifically, the
capacity to raise sufficient cash when needed to meet
payment obligations. Secondly, market liquidity risk arises
when the size of a particular holding may be so large that a
sale cannot be completed around the market price. Finally,
standby liquidity risk refers to the capacity to meet
payment terms in abnormal conditions.
Each of these techniques contributes to mitigating the
three types of liquidity risk described above.
The group’s insurance manufacturing subsidiaries
primarily fund cash outflows arising from claim liabilities
from the following sources of cash inflows:
•
premiums from new business, policy renewals and
recurring premium products;
•
interest and dividends on investments and principal
repayments of maturing debt investments;
•
cash resources; and
•
the sale of investments.
Every quarter, the group’s insurance manufacturing
subsidiaries are required to complete and submit liquidity
risk reports to the Regional Insurance Head Office for
collation and review by the Regional Insurance Market,
Liquidity and Credit Risk Committee.
The following tables show the expected undiscounted
cash flows for insurance contract liabilities and the
remaining contractual maturity of investment contract
liabilities.
They manage liquidity risk by utilising some or all of
the following techniques:
Expected maturity of insurance contract liabilities
(Audited)
Within 1 year
£m
Expected cash flows (undiscounted)
1-5 years
5-15 years
Over 15 years
£m
£m
£m
Total
£m
At 31 December 2010
Non-life insurance .....................................................
Life insurance (non-linked).......................................
Life insurance (linked) ..............................................
235
123
35
270
197
205
12
458
614
42
181
617
559
959
1,471
Total
393
672
1,084
840
2,989
At 31 December 2009
Non-life insurance .....................................................
Life insurance (non-linked).......................................
Life insurance (linked) ..............................................
396
364
90
336
600
248
27
445
562
–
268
628
759
1,677
1,528
Total
850
1,184
1,034
896
3,964
62
HSBC BANK PLC
Report of the Directors: Risk (continued)
Remaining contractual maturity of investment contract liabilities
(Audited)
Liabilities under investment contracts by insurance underwriting subsidiaries
Total
Within 1 year
1-5 years
5-10 years Over 10 years
Undated1
£m
£m
£m
£m
£m
£m
At 31 December 2010
Linked investment contracts .....................................
Non-linked investment contracts ..............................
Investment contracts with DCF ................................
249
–
–
606
–
–
735
–
–
1,374
–
–
1,777
–
14,205
4,741
–
14,205
Total...........................................................................
249
606
735
1,374
15,982
18,946
At 31 December 2009
Linked investment contracts .....................................
Non-linked investment contracts ..............................
Investment contracts with DCF ................................
287
–
–
558
–
–
400
–
–
1,290
–
–
1,445
26
12,930
3,980
26
12,930
Total...........................................................................
287
558
400
1,290
14,401
16,936
1 In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies. These
may be significantly lower than the amounts shown above.
A deficit in a defined benefit plan may arise from a
number of factors, including:
Present value of in-force long-term insurance business
(Audited)
The group’s life insurance business is accounted for using
the embedded value approach which, inter alia, provides a
comprehensive risk and valuation framework. The
sensitivity of the present value of the in-force long-term
(‘PVIF’) asset to changes in economic and non-economic
assumptions is described in Note 21 of the Notes on the
Financial Statements.
Other material risks
Pension risk
(Unaudited)
The group operates a number of pension plans throughout
Europe. Some of them are defined benefit plans, of which
the largest is the HSBC Bank (UK) Pension Scheme (‘the
principal plan’).
•
investments delivering a return below that required to
provide the projected plan benefits. This could arise,
for example, when there is a fall in the market value
of equities, or when increases in long-term interest
rates cause a fall in the value of fixed income
securities held;
•
the prevailing economic environment leading to
corporate failures, thus triggering write-downs in
asset values (both equity and debt);
•
a change in either interest rates or inflation which
causes an increase in the value of the scheme
liabilities; and
•
scheme members living longer than expected (known
as longevity risk).
A plan’s investment strategy is determined after
taking into consideration the market risk inherent in the
investments and its consequential impact on potential
future contributions. The long-term investment objectives
of both the group and, where relevant and appropriate, the
trustees are:
In order to fund the benefits associated with these
plans, group companies (and, in some instances,
employees) make regular contributions in accordance with
advice from actuaries and in consultation with the
scheme’s trustees (where relevant). The defined benefit
plans invest these contributions in a range of investments
designed to meet their long-term liabilities.
The level of these contributions has a direct impact on
the group’s cash flow and would normally be set to ensure
that there are sufficient funds to meet the cost of the
accruing benefits for the future service of active members.
However, higher contributions will be required when plan
assets are considered insufficient to cover the existing
pension liabilities as a deficit exists. Contribution rates are
typically revised annually or triennially, depending on the
plan. The agreed contributions to the principal plan are
revised triennially.
•
to limit the risk of the assets failing to meet the
liabilities of the plans over the long-term; and
•
to maximise returns consistent with an acceptable
level of risk so as to control the long-term costs of the
defined benefit plans.
In pursuit of these long-term objectives, a benchmark
is established for the allocation of the defined benefit plan
assets between asset classes. In addition, each permitted
asset class has its own benchmarks, such as stock market
or property valuation indices and, where relevant, desired
levels of out-performance. The benchmarks are reviewed
63
HSBC BANK PLC
Report of the Directors: Risk (continued)
reputational risks to its business. Reputational risks can
arise from a wide variety of causes, including
Environmental, Social and Governance (‘ESG’) issues and
operational risk events. The group’s good reputation
depends upon the way in which the bank conducts
business, but it can also be affected by the way in which
clients, to whom the group provides financial services,
conduct themselves; accordingly second order reputational
risks are also regularly reviewed within the group.
at least triennially within 18 months of the date at which
an actuarial valuation is made, or more frequently if.
required by local legislation or circumstances. The process
generally involves an extensive asset and liability review.
Ultimate responsibility for investment strategy rests
with either the trustees or, in certain circumstances, a
management committee. The degree of independence of
the trustees from the group varies in different jurisdictions.
For example, the principal plan, which accounts for
approximately 94% of the obligations of our defined
benefit pension plans, is overseen by a corporate trustee
who regularly monitors the market risks inherent in the
scheme.
Standards on all major aspects of business are set for
the Group and for individual subsidiaries, businesses and
functions. Reputational risks, including ESG matters, are
considered and assessed by regional and local committees
and management during the formulation of policy and the
establishment of the Group’s standards. These policies,
which form an integral part of the internal control system,
are communicated through manuals and statements of
policy and are promulgated through internal
communications and training. The policies cover ESG
issues and set out operational procedures in all areas of
reputational risk, including money laundering and terrorist
financing deterrence, environmental impact, anticorruption measures and employee relations. Group
policies and procedures for safeguarding against
reputational and operational risks are regularly reviewed
and updated. This is an evolutionary process which takes
account of relevant developments and industry guidance
on best practice when responding to ESG risks.
The principal plan holds a diversified portfolio of
investments to meet future cash flow liabilities arising
from accrued benefits as they fall due to be paid. The
Trustee of the principal plan is required to produce a
written Statement of Investment Principles which governs
decision-making about how investments are made.
In 2006, the bank and the trustee of the principal plan
agreed to change the investment strategy in order to reduce
the investment risk. The target asset allocations for this
strategy at that time and as revised in 2010 is shown
below. The strategy is to hold the majority of assets in
bonds, with the reminder in a more diverse range of
investments, and includes a commitment to undertake a
programme of swap arrangements (see Note 41 on the
Financial Statements) by which the principal plan makes
LIBOR-related interest payments in exchange for the
receipt of cash flows which are based on projected future
benefit payments to be made from the principal plan.
2010
A Reputational Risk Committee (‘HRCC’) exists to
manage reputational risks across HSBC Bank plc. The
HRRC meets on a regular basis, and includes regular
consideration of issues relating to communications and
corporate sustainability, significant customer complaints
and any new products and business initiatives. Minutes
from the HRRC are tabled at GRRC. In addition, all
businesses are required to perform a Risk and Control
Assessment (‘RCA’) at least annually that covers all
material activities within their businesses. The RCA
requires an assessment of operational risk exposures,
including specific consideration of reputational impacts, to
determine whether additional mitigating controls should be
implemented.
2006
%
%
Equities ...........................................................
15.5
15.0
Bonds ..............................................................
56.5
50.0
Alternative assets1 ..........................................
10.5
10.0
Property ..........................................................
9.0
10.0
Cash.................................................................
8.5
15.0
100.0
100.0
1 In 2010, alternative assets include ABSs, MBSs and infrastructure
assets. In 2006, alternative assets included loans and
infrastructure assets.
Reputational risk
(Unaudited)
All employees must safeguard the reputation of the group
by maintaining the highest standards of conduct at all
times and by being aware of issues, activities or
associations that might pose a threat to the reputation of
the group. The long-term success of the group is closely
linked to the confidence of its stakeholders. Safeguarding
and building upon the group’s reputation is the
responsibility of every employee. Any lapse in standards
of integrity, compliance, customer service or operating
efficiency represents a potential reputational risk.
The group always aspires to the highest standards of
conduct and, as a matter of routine, takes account of
64
HSBC BANK PLC
Report of the Directors: Capital Management
Capital management and allocation
using their prescribed assumptions. The group takes into
account the results of all such regulatory stress testing
when undertaking its internal capital management
assessment.
(Audited)
Capital management
The group’s capital management approach is driven by its
strategic and organisational requirements, taking into
account the regulatory, economic and commercial
environment in which it operates.
The group’s capital management process is articulated
in an annual capital plan which is approved by the Board.
Capital measurement
The group manages its own capital within the context
of an approved capital plan that determines the optimal
amount and mix of capital required to support planned
business growth and meet local regulatory capital
requirements. Capital generated in excess of planned
requirements is returned to the Group in the form of
dividends.
The FSA is the supervisor of the bank and lead supervisor
of the group. The FSA sets capital requirements and
receives information on the capital adequacy for the bank
and the group. The bank and the group complied with the
FSA’s capital adequacy requirements throughout 2010 and
2009.
Individual banking subsidiaries are directly regulated
by their local banking supervisors, who set and monitor
local capital adequacy requirements.
The group’s policy is underpinned by its capital
management framework, which enables the group to
manage its capital in a consistent manner. The framework
incorporates a number of capital measures which govern
the management and allocation of capital within the group.
These capital measures include invested capital, economic
capital and regulatory capital defined by the group as
follows:
•
invested capital is the equity capital provided to the
group by HSBC;
•
economic capital is the internally calculated capital
requirement which is deemed necessary by the group
to support the risks to which it is exposed at a
confidence level consistent with a target credit rating
of AA; and
•
The group calculates capital using the Basel II
framework of the Basel Committee on Banking
Supervision. Basel II is structured around three ‘pillars’:
Pillar 1: minimum capital requirements, Pillar 2:
Supervisory Review and Evaluation Process and Pillar 3:
market discipline. The Capital Requirements Directive
(‘CRD’) implemented Basel II in the EU and the FSA then
gave effect to the CRD by including the requirements of
the CRD in its own rulebooks.
It is the group’s policy to maintain a strong capital
base to support the development of its business and to
meet regulatory capital requirements at all times.
Regulatory capital
regulatory capital is the minimum level of capital
which the group is required to hold in accordance
with the rules set by the FSA for the bank and the
consolidated group and by the local regulators for
individual subsidiary companies.
The group’s capital is comprised of tier 1 capital and tier 2
capital:
•
tier 1 capital is divided into core tier 1 and other tier 1
capital. Core tier 1 capital is comprised of
shareholders’ equity from which are deducted the
book values of goodwill and intangible assets and
other regulatory adjustments for items reflected in
shareholders’ equity which are treated differently for
the purposes of capital adequacy. Qualifying capital
instruments such as non-cumulative perpetual
preference shares and hybrid capital securities are
included in other tier 1 capital; and
•
tier 2 capital comprises qualifying subordinated loan
capital, allowable collective impairment allowances
and unrealised gains arising on the fair valuation of
equity instruments held as available for-sale. Tier 2
capital also includes reserves arising from the
revaluation of properties.
Through the capital management framework the group
manages the following identified material risks: credit,
market, operational, interest rate risk in the banking book,
pension fund, insurance and residual risks.
Stress testing is incorporated into the capital
management framework and is an important component of
understanding the sensitivities of the core assumptions in
the group’s capital plans to the adverse effect of extreme,
but plausible, events. Stress testing allows senior
management to formulate its response, including risk
mitigating actions, before the conditions starting to reflect
the stress scenarios identified. The actual market stresses
experienced by the financial system in recent years have
been used to inform the capital planning process and
further develop the stress scenarios employed by the
group.
To ensure the overall quality of the capital base, the
FSA’s rules set limits on the amount of hybrid capital
instruments that can be included in tier 1 capital relative to
Other stress tests are also carried out, both at the
request of regulators and by the regulators themselves
65
HSBC BANK PLC
Report of the Directors: Capital Management (continued)
core tier 1 capital and also limits total tier 2 capital to no
more than tier 1 capital.
both local and consolidated group reporting, leaving a
small residue of exposures on the standardised approach.
The basis of consolidation for financial accounting
purposes is described on page 90 and differs from that
used for regulatory purposes. Investments in banking
associates, which are equity accounted in the financial
accounting consolidation, are proportionally consolidated
for regulatory purposes. Subsidiaries and associates
engaged in insurance and non-financial activities are
excluded from the regulatory consolidation and are
deducted from regulatory capital. The regulatory
consolidation also excludes Special Purpose Entities
(‘SPEs’) where significant risk has been transferred to
third parties. Exposures to these SPEs are risk weighted as
securitisation positions for regulatory purposes.
Counterparty credit risk
Pillar 1 capital requirements
The group uses the mark-to-market and internal model
method approaches for counterparty credit risk. Its longerterm aim is to migrate more positions from mark-to-market
to the internal model method approach.
Counterparty credit risk arises for over-the-counter
derivatives and securities financing transactions. It is
calculated in both the trading and non-trading books and is
the risk that the counterparty to a transaction may default
before completing the satisfactory settlement of the
transaction. Three approaches to determining counterparty
credit risk exposure values are defined by Basel II:
standardised, mark-to-market and internal model method.
These exposure values are used to determine capital
requirements under one of the credit risk approaches:
standardised, IRB foundation and IRB advanced.
Pillar 1 covers the capital resources requirements for credit
risk (including counterparty credit risk and securitisations),
market risk and operational risk. These requirements are
expressed in terms of risk-weighted assets.
Securitisation
Basel II specifies two methods for calculating credit risk
requirements for securitisation positions in the non-trading
book, being the standardised and IRB approaches. Both
approaches rely on the mapping of rating agency credit
ratings to risk weights which range between 7% and
1,250%. Positions that would otherwise be weighted at
1,250% are deducted from capital.
Credit risk capital requirements
Basel II applies three approaches of increasing
sophistication to the calculation of pillar 1 credit risk
capital requirements. The most basic, the standardised
approach, requires banks to use external credit ratings to
determine the risk weightings applied to rated
counterparties and group other counterparties into broad
categories and apply standardised risk weightings to these
categories. The next level, the internal ratings-based
(‘IRB’) foundation approach, allows banks to calculate
their credit risk capital requirement on the basis of their
internal assessment of the probability that a counterparty
will default (‘PD’), but subjects their quantified estimates
of exposure at default (‘EAD’) and loss given default
(‘LGD’) to standard supervisory parameters. Finally, the
IRB advanced approach allows banks to use their own
internal assessment in both determining PD and
quantifying EAD and LGD.
Within the IRB approach, the group uses the Ratings
Based Method for the majority of its non-trading book
securitisation positions, and the Internal Assessment
Approach for unrated liquidity facilities and programme
wide enhancements for asset-backed securitisations.
The group uses the IRB approach for the majority of
its non-trading book securitisation positions, while those in
the trading book are treated like other market risk
positions.
Market risk capital requirement
Market risk is the risk that movements in market risk
factors, including foreign exchange, commodity prices,
interest rates, credit spread and equity prices will reduce
group’s income or the value of its portfolios. The market
risk capital requirement is measured, with FSA
permission, using VAR models, or the standard rules
prescribed by the FSA.
The capital resources requirement, which is intended to
cover unexpected losses, is derived from a formula
specified in the regulatory rules, which incorporates these
factors and other variables such as maturity and
correlation. Expected losses under the IRB approaches are
calculated by multiplying PD by EAD and LGD. Expected
losses are deducted from capital to the extent that they
exceed accounting impairment allowances.
The group uses both VAR and standard rules
approaches for market risk. Its aim is to migrate more
positions from standard rules to VAR.
For credit risk, with the FSA’s approval, the group has
adopted the IRB advanced approach for the majority of its
business, with the remainder on either IRB foundation or
standardised approaches or under exemption from IRB
treatment. A rollout plan is in place, over the next few
years, to extend coverage of the advanced approaches, for
Operational risk capital requirement
Basel II includes a capital requirement for operational risk,
again utilising three levels of sophistication. The capital
required under the basic indicator approach is a simple
66
HSBC BANK PLC
Report of the Directors: Capital Management (continued)
requirement from 1 January 2018. The Basel Committee
has increased the capital requirements for the trading book
and complex securitisation exposures, which must be
implemented by the 31 December 2011. They will
continue to conduct the fundamental review of the trading
book, which is targeted for completion by the end of 2011.
In addition to the reforms discussed above, identified
Global Systemically Important Financial Institutions
(‘GSIFIs’) may be subjected to a further capital
requirement, which has not yet been announced. On 13
January 2011, the Basel Committee issued ‘Further
minimum requirements to ensure that all classes of capital
instruments fully absorb losses at the point of non-viability
before taxpayers are exposed to loss’. Instruments issued
on or after 1 January 2013 may only be included in
regulatory capital if the new requirements are met. The
regulatory capital recognition of securities issued prior to 1
January 2013 will decline from 1 January 2013 in line with
Basel III grandfathering rules.
percentage of gross revenues, whereas under the
standardised approach it is one of three different
percentages of gross revenues allocated to each of eight
defined business lines. Both these approaches use an
average of the last three financial years’ revenues. Finally,
the advanced measurement approach uses banks’ own
statistical analysis and modelling of operational risk data
to determine capital requirements.
The group has adopted the standardised approach in
determining its operational risk capital requirements.
Pillar 2 capital requirement
The second pillar of Basel II (Supervisory Review and
Evaluation Process) involves both firms and regulators
taking a view on whether a firm should hold additional
capital against risks not covered in pillar 1. Part of the
pillar 2 process is the Internal Capital Adequacy
Assessment Process which is the firm’s self assessment of
the levels of capital that it needs to hold. The pillar 2
process culminates in the FSA providing firms with
Individual Capital Guidance (‘ICG’). The ICG is set as a
capital resources requirement higher than that required
under pillar 1. In 2011, this will be supplemented by an
additional Capital Planning Buffer, set by the FSA, to
cover capital demand should economic conditions worsen
considerably against current outlook.
Pillar 3 disclosure requirements
Pillar 3 of Basel II is related to market discipline and aims
to make firms more transparent by requiring them to
publish specific details of their risks, capital and risk
management under the Basel II framework. Pillar 3
disclosures are published as a separate document on the
bank’s website.
Future developments
The regulation and supervision of financial institutions
continues to undergo significant change in response to the
global financial crisis. In December 2010, the Basel
Committee issued final rules in two documents ‘A global
regulatory framework for more resilient banks and banking
systems’ and ‘International framework for liquidity risk
measurement, standards and monitoring’, which together
are commonly referred to as ‘Basel III’. The new
minimum capital requirements will be phased in from 1
January 2013, with full implementation required by 1
January 2019. The capital conservation buffer and the
countercyclical capital buffer will be phased-in in parallel
from 1 January 2016 becoming fully effective on 1
January 2019. The leverage ratio will be subject to a
supervisory monitoring period, which commenced 1
January 2011; and a parallel run period which will run
from 1 January 2013 until 1 January 2017. Further
calibration of the leverage ratio will be carried out in the
first half of 2017, with a view to migrate to a Pillar 1
67
HSBC BANK PLC
Report of the Directors: Capital Management (continued)
Capital structure at 31 December
31 Dec
2010
£m
31 Dec
2009
£m
Shareholders’ equity .................................................................................................................................................
Shareholders’ equity per balance sheet ......................................................................................................................
Preference share & related premium ..........................................................................................................................
Other equity instruments.............................................................................................................................................
2, 4
Deconsolidation of special purpose entities ..........................................................................................................
31,379
31,825
(431)
(1,750)
1,735
32,248
27,787
(431)
(1,750)
6,642
Non controlling interests ............................................................................................................................................
Non-controlling interests per balance sheet ...............................................................................................................
Of which representing non-controlling interests in preference shares ......................................................................
382
532
(150)
491
641
(150)
Regulatory adjustments to the accounting basis ........................................................................................................
3, 4
............................................................................
Unrealised (gains)/losses on available-for-sale debt securities
Own credit spread .......................................................................................................................................................
5
Defined benefit pension fund adjustment ................................................................................................................
Cash flow hedging reserve..........................................................................................................................................
Reserves arising from revaluation of property & unrealised gains on available-for-sale equities............................
Other regulatory adjustments......................................................................................................................................
748
1,545
(170)
288
(190)
(373)
(352)
(562)
(109)
(168)
695
(350)
(480)
(150)
Deductions ..................................................................................................................................................................
Goodwill capitalised & intangible assets ...................................................................................................................
50% of securitisation positions...................................................................................................................................
50% of excess expected losses over impairment allowances.....................................................................................
50% of tax credit adjustment for excess expected losses...........................................................................................
(11,428)
(10,436)
(679)
(439)
126
(11,518)
(10,560)
(514)
(616)
172
Core tier 1 capital .....................................................................................................................................................
21,081
20,659
Other tier 1 capital before deductions ........................................................................................................................
Preference shares & related premium.........................................................................................................................
Hybrid capital securities .............................................................................................................................................
2,374
581
1,793
2,391
581
1,810
Deductions ..................................................................................................................................................................
6
Unconsolidated investments .....................................................................................................................................
50% of tax credit adjustment for excess expected losses ..........................................................................................
(500)
(626)
126
(343)
(515)
172
Tier 1 capital ............................................................................................................................................................
22,955
22,707
Total qualifying tier 2 capital before deductions........................................................................................................
Reserves arising from unrealised gains on revaluation of property & available-for-sale equities............................
7
Collective impairment allowances ...........................................................................................................................
Perpetual subordinated debt........................................................................................................................................
Term subordinated debt .............................................................................................................................................
11,758
373
338
2,762
8,285
11,272
480
368
3,320
7,104
Total deductions other than from tier 1 capital .........................................................................................................
6
Unconsolidated investments .....................................................................................................................................
50% of securitisation positions...................................................................................................................................
50% of excess expected losses over impairment allowances.....................................................................................
Other deductions .........................................................................................................................................................
(2,302)
(1,177)
(679)
(439)
(7)
(2,139)
(1,004)
(514)
(616)
(5)
Total regulatory capital ...........................................................................................................................................
32,411
31,840
Risk-weighted assets (Unaudited)
Credit and counterparty risk .......................................................................................................................................
Market risk ..................................................................................................................................................................
Operational risk...........................................................................................................................................................
164,372
12,762
24,586
167,259
12,655
23,367
Total ............................................................................................................................................................................
201,720
203,281
Capital ratios (Unaudited)
Core tier 1 ratio ...........................................................................................................................................................
Tier 1 ratio...................................................................................................................................................................
Total capital ratio ........................................................................................................................................................
%
10.5
11.4
16.1
%
10.2
11.2
15.7
Composition of regulatory capital (Audited)
1
1 Includes externally verified profits for the year to 31 December 2010. Does not include the interim dividend of £915 million declared by the
Board of Directors after 31 December 2010.
2 Mainly comprises unrealised losses on available-for-sale debt securities owned by deconsolidated special purpose entities.
3 Under FSA rules unrealised gains/losses on available-for-sale debt securities must be excluded from capital resources.
4 In December 2010, the bank agreed with the FSA that, going forward for regulatory purposes it would consolidate one of its special purpose
entities.
5 FSA rules permit banks to replace a liability in a defined benefit pension scheme by the additional funding that will be paid into the scheme
over a 5 year period.
6 Mainly comprise investments in insurance entities.
7 Under Basel II rules collective impairment allowances on loan portfolios under the standardised approach may be included in tier 2 capital.
68
HSBC BANK PLC
Report of the Directors: Governance
Directors
A A Flockhart, Chairman
Dame Mary Marsh**
Age 59. Chairman since 1 January 2011 and a Director
since July 2010. An executive Director of HSBC
Holdings plc and Chairman, Europe, Middle East,
Africa, Latin America and Commercial Banking.
Joined HSBC in 1974.
Age 64. A Director since January 2009. A member of
the Corporate Sustainability Committee of HSBC
Holdings plc. Director of the Clore Social Leadership
Programme. Governor and Chair of the International
Alumni Council, London Business School. Formerly
Chief Executive of the NSPCC.
B Robertson, Chief Executive
R E S Martin**
Age 56. Chief Executive and a Director since
December 2010. A Group Managing Director since
2008. Group Chief Risk Officer from September 2007
to December 2010. Joined HSBC in 1975.
Age 50. A Director since 2005. General Counsel &
Company Secretary, Vodafone Group plc. Member of
the Legal Services Board.
P W Boyles
A R D Monro-Davies**
Age 55. Chief Executive Officer, Continental Europe,
and a Director since July 2010. A Group General
Manager since 2006. Joined HSBC in 1975.
Age 70. A Director since 2004. A member of the Audit
and Risk Committees. A Director and member of the
Audit Committee of HSBC Bank Middle East Limited.
Formerly Chief Executive Officer, Fitch Ratings.
J D Garner
P M Shawyer**
Age 41. Deputy Chief Executive and Head of UK
Retail Bank and a Director since December 2010. A
Group General Manager since 2006. General Manager,
Customer Propositions from 2004 to 2006. Joined
HSBC in 2004.
Age 60. A Director since 2004. A member of the Audit
and Risk Committees. A Director and a member of the
Audit Committee of HSBC France. Formerly a
Managing Partner of Deloitte.
P J C Houzé**
P A Thurston
Age 63. A Director since October 2010. Chief
Executive Officer of Galeries Lafayette Group and
Chief Executive of Monoprix SA. A Director and
Chairman of the Nomination and Remuneration
Committees of HSBC France. A member of the
Supervisory Board of BHV (2002) and Casino SA and
a director of Cofinoga.
Age 57. A Director since 2008. Chief Executive, Retail
Banking and Wealth Management, HSBC Holdings
plc. A Group Managing Director since 2008 and Chief
Executive, HSBC Bank plc, from 2009 to December
2010. Joined HSBC in 1975.
J F Trueman**
Dame Denise Holt**
Age 61. A Director since 1 February 2011. Formerly a
senior British Ambassador with 40 years’ experience of
working in Government, including postings in Ireland,
Mexico, Brazil and, most recently, as British
Ambassador to Spain from 2007 until her retirement in
2009.
Age 68. A Director since 2004. Chairman of the Audit
and Risk Committees. Formerly Deputy Chairman of S
G Warburg & Co.
*
**
Non-Executive Director
Independent Non-Executive Director
Secretary
J H McKenzie
J W Leng*
Age 57. Joined HSBC in 1987.
Age 65. A Director since October 2010. A member of
the HSBC European Advisory Council. European
Chairman of American European Associates and a
non-executive Director of TNK-BP and Alstom SA.
Lead non-executive of the Departmental Board of the
UK Government’s Ministry of Justice. A Governor at
Ashridge College and the National Institute of
Economic & Social Research. Former Chairman of
Corus Group and former Chief Executive of Laporte
plc.
Registered Office: 8 Canada Square, London E14 5HQ
69
HSBC BANK PLC
Report of the Directors: Governance (continued)
Board of Directors
Audit Committee
The objectives of the management structures within the
bank, headed by the Board of Directors and led by the
Chairman, are to deliver sustainable value to
shareholders. Implementation of the strategy set by the
Board is delegated to the bank’s Executive Committee.
The Audit Committee meets regularly with the bank’s
senior financial management and the external auditor to
consider, inter alia, the bank’s financial reporting, the
nature and scope of audit reviews and the effectiveness
of the systems of internal control.
The Board meets regularly and Directors receive
information between meetings about the activities of
committees and developments in the bank’s business.
All Directors have full and timely access to all relevant
information and may take independent professional
advice if necessary.
The members of the Audit Committee are J F
Trueman (Chairman), A R D Monro-Davies, and P M
Shawyer. All of the members of the Audit Committee
who served during 2010 are independent non-executive
Directors.
Risk Committee
The names of Directors serving at the date of this
report and brief biographical particulars for each of
them are set out on page 69.
The bank's Risk Committee was established in 2010,
following publication of the final recommendations of
Sir David Walker’s ‘Review of Corporate Governance
in UK Banks and other Financial Industry Entities’, to
increase focus on risk governance and to provide an
increasingly forward-looking view of risks and their
mitigation. The responsibilities of the Risk Committee
were previously undertaken by the Audit Committee.
All Directors, including those appointed by the
Board to fill a casual vacancy, are subject to annual reelection at the bank’s Annual General Meeting. Nonexecutive Directors have no service contracts.
S K Green retired as Chairman on 21 April 2010
and as a Director on 3 December 2010. S T Gulliver
was appointed as Chairman on 21 April 2010 and
resigned as a Director and Chairman on 31 December
2010. A A Flockhart was appointed a Director on 22
July 2010 and as Chairman on 1 January 2011.
The Risk Committee meets regularly with the
bank’s senior financial, risk, internal audit and
compliance management and the external auditor to
consider, inter alia, risk reports and internal audit
reports and the effectiveness of compliance.
B Robertson was appointed as a Director and
Chief Executive on 3 December 2010.
The members of the Risk Committee are J F
Trueman (Chairman), A R D Monro-Davies, and P M
Shawyer. All of the members of the Risk Committee
who served during 2010 are independent non-executive
Directors.
P W Boyles and J D Garner were appointed as
Directors on 22 July 2010 and 20 December 2010
respectively. J W Leng was appointed as a nonexecutive Director on 12 October 2010. P J C Houzé
and Dame Denise Holt were appointed as independent
non-executive Directors on 1 October 2010 and 1
February 2011, respectively.
Executive Committee
The Executive Committee meets regularly and operates
as a general management committee under the direct
authority of the Board, exercising all of the powers,
authorities and discretions of the Board in so far as they
concern the management and day to day running of the
bank, in accordance with such policies and directions
as the Board may from time to time determine. The
members of the Executive Committee include the
bank's Executive Directors: A A Flockhart (Committee
Chairman), B Robertson, P W Boyles and J D Garner.
S P O’Sullivan and D C Budd resigned as
Directors on 31 January 2011 and 24 February 2011
respectively.
Directors’ emoluments
Details on the emoluments of the Directors of the bank
for 2010, disclosed in accordance with the Companies
Act, are shown in Note 7 ‘Employee compensation and
benefits’ in the Notes on the Financial statements.
Remuneration Committee
The functions of the Remuneration Committee are
fulfilled by the Remuneration Committee of the Board
of the bank's parent company, HSBC Holdings plc.
Board committees
The Board has appointed a number of committees
consisting of certain Directors and senior executives.
Internal control
As at the date of this report, the following are the
principal committees:
The Directors are responsible for internal control in the
group and for reviewing its effectiveness. Procedures
70
HSBC BANK PLC
Report of the Directors: Governance (continued)
executive committees in subsidiaries. The bank’s
Risk Management Meeting (‘RMM’) is held in
each month to address asset, liability and risk
management issues. The minutes of this meeting
are submitted to the Group RMM.
have been designed for safeguarding assets against
unauthorised use or disposition; for maintaining proper
accounting records; and for the reliability and
usefulness of financial information used within the
business or for publication. Such procedures are
designed to manage rather than eliminate the risk of
failure to achieve business objectives and can only
provide reasonable and not absolute assurance against
material misstatement, errors, losses or fraud. The
procedures also enable the bank to discharge its
obligations under the Handbook of Rules and Guidance
issued by the Financial Services Authority, the bank’s
lead regulator.
The key procedures that the Directors have
established are designed to provide effective internal
control within the group and accord with the Internal
Control: Revised Guidance for Directors on the
Combined Code issued by the Financial Reporting
Council. Such procedures for the ongoing
identification, evaluation and management of the
significant risks faced by the group have been in place
throughout the year and up to 28 February 2011, the
date of approval of the Annual Report and Accounts
2010. In the case of companies acquired during the
year, the internal controls in place are being reviewed
against the group’s benchmarks and integrated into the
group’s processes.
•
The group’s financial reporting process for
preparing the consolidated Annual Report and
Accounts 2010 is controlled using documented
accounting policies and reporting formats,
supported by a chart of accounts with detailed
instructions and guidance on reporting
requirements, issued by Group Finance to the bank
and all reporting entities within the Group in
advance of each reporting period end. The
submission of financial information from each
reporting entity is subject to certification by the
responsible financial officer, and analytical review
procedures at reporting entity and group levels.
•
Processes are in place to identify new risks from
changes in market conditions/practices or customer
behaviours, which could expose the group to
heightened risk of loss or reputational damage.
During 2010, attention was focused on refinement
and operation of the stress testing framework; the
roll-out of enhanced counterparty risk aggregation,
risk management information, portfolio and crisis
management processes; the mitigation of
information risks; enhancement of policies and
practices relevant to the prevention of financial
crimes; greater focus by risk review and audit
functions on global thematic risks with effect from
January 2011; and changes in the regulation and
public policy towards the financial services
industry.
•
Periodic strategic plans are prepared for key
customer groups, global product groups, support
functions and certain geographies within the
framework of the Group Strategic Roadmap. The
bank prepares rolling operating plans which set out
the key business initiatives and the likely financial
effects of those initiatives, which are informed by
detailed analysis of risk appetite describing the
types and quantum of risk that the group is prepared
to take in executing its strategy.
•
Governance arrangements are in place to provide
oversight of, and advice to the Board on, material
risk-related matters including assurance that risk
analytical models are fit for purpose, used
accordingly and complemented by both modelspecific and enterprise-wide stress tests that
evaluate the impact of severe yet plausible events
and other unusual circumstances not fully captured
by quantitative models.
Key internal control procedures include the following:
•
•
•
Authority to operate the bank and responsibility for
financial performance against plans and capital
expenditure, is delegated to the Chairman who has
responsibility for overseeing the establishment and
maintenance of systems of control appropriate to
the business and who has the authority to delegate
such duties and responsibilities as he sees fit. The
appointment of executives to the most senior
positions within the group requires the approval of
the Board of Directors of HSBC Holdings.
Functional, operating, financial reporting and
certain management reporting standards are
established by the HSBC Holdings Group
Management Office management committees, for
application across the whole of HSBC. These are
supplemented by operating standards set by the
bank as required.
Systems and procedures are in place in the group to
identify, control and report on the major risks
including credit, market, liquidity and operational
risk (including accounting, tax, legal, compliance,
fiduciary, information, physical security, business
continuity fraud, systems and people risk).
Exposure to these risks is monitored by the bank’s
or other major subsidiaries’ risk management
committees, asset and liability committees and
71
HSBC BANK PLC
Report of the Directors: Governance (continued)
•
Centralised functional control is exercised over all
IT developments and operations. Common systems
are employed for similar business processes
wherever practicable. Credit and market risks are
measured and reported on in subsidiaries and
aggregated for review of risk concentrations on a
HSBC Group-wide basis.
•
HSBC Holdings sets policies, procedures and
standards for the following risks to which the group
adheres: credit; market; liquidity; operations; IT;
fraud; business continuity; security; information;
insurance; accounting; tax; legal; regulatory
compliance; fiduciary; human resources;
reputational; sustainability; residual value; shariah
and strategic risks. Responsibility for exposure to
market risk and to credit risk with specified risk
characteristics is delegated with limits to line
management.
•
Policies have been established to guide the bank,
subsidiary companies and management at all levels
in the conduct of business to avoid reputational
risks which can arise from environmental, social or
governance issues, or as a consequence of
operational risk events. As a banking group,
HSBC’s good reputation depends upon the way in
which it conducts its business but it can also be
affected by the way in which clients, to which it
provides financial services, conduct their business
or use financial products and services.
•
•
reviews include: regular business and operational risk
assessments; regular reports from the heads of key risk
functions; the production annually of reviews of key
internal controls measured against group benchmarks,
which cover all internal controls, both financial and
non-financial; semi-annual confirmations from senior
executives that there have been no material losses,
contingencies or uncertainties caused by weaknesses in
internal controls; internal audit reports; external audit
reports; prudential reviews; and regulatory reports. The
Risk Committee keeps under review a ‘Risk Map’ of
the status of key risk areas which impact the group and
considers whether the mitigating actions put in place
are appropriate. In addition, when unexpected losses
have arisen or when incidents have occurred which
indicate gaps in the control framework or in adherence
to HSBC Group policies, the Audit Committee reviews
special reports, prepared at the instigation of
management, which analyse the cause of the issue, the
lessons learned and the actions proposed by
management to address the issue.
The Directors, through the Audit Committee, have
conducted an annual review of the effectiveness of the
group’s system of internal control covering all material
controls, including financial, operational and
compliance controls and risk management systems, the
adequacy of resources, qualifications and experience of
staff of the issuer’s accounting and financial reporting
function, and their training programmes and budget.
The Audit Committee has received confirmation that
executive management has taken or is taking the
necessary actions to remedy any failings or weaknesses
identified through the operation of the group’s
framework of controls.
The establishment and maintenance of appropriate
systems of internal control is primarily the
responsibility of business management. The
Internal Audit function, which is centrally
controlled, monitors the effectiveness of internal
control structures across the whole of the HSBC
Group focusing on the areas of greatest risk to
HSBC as determined by a risk-based grading
approach.
Executive management is responsible for ensuring
that recommendations made by the Internal Audit
function are implemented within an appropriate and
agreed timetable. Confirmation to this effect must
be provided to Internal Audit. Executive
management must also confirm annually as part of
the Internal Audit process that offices under their
control have taken, or are in the process of taking,
the appropriate actions to deal with all significant
recommendations made by external auditors in
management letters or by regulators following
regulatory inspections.
Internal controls are an integral part of how the
group conducts its business. HSBC Holdings plc’s
manuals and statements of policy are the foundation of
these internal controls. There is a strong process in
place to ensure controls operate effectively. Any
significant failings are reported through the control
mechanisms, internal audit and compliance functions to
the Audit Committee, which keeps under review the
effectiveness of the system of internal controls and
reports regularly to the Board.
The financial risk management objectives and
policies of the bank and its subsidiaries, including those
in respect of financial instruments, together with an
analysis of the exposure to such risks, as required under
the Companies Act and International Financial
Reporting Standards are set out on pages 25 to 64.
The reliability and security of HSBC's information
and technology infrastructure and its customer
databases are crucial to maintaining the service
availability of banking applications and processes and
to protecting the HSBC brand. Critical system failure,
The Audit Committee has kept under review the
effectiveness of this system of internal control and has
reported regularly to the Board of Directors. The key
processes used by the Committee in carrying out its
72
HSBC BANK PLC
Report of the Directors: Governance (continued)
Employees with disabilities
any prolonged loss of service availability or any
material breach of data security, particularly involving
confidential customer data, could cause serious damage
to the Group's ability to service its clients, could breach
regulations under which HSBC operates and could
cause long term damage to its business and brand.
The group continues to recruit, train and develop
disabled employees and make reasonable adjustments
where employees become disabled during their
employment. The bank continues to support the
commitments of the two tick symbol employability
campaign to interview disabled candidates who meet
the minimum job criteria.
Health and safety
The maintenance of appropriate health and safety
standards throughout the bank remains a key
responsibility of all managers and the bank is
committed actively to managing all health and safety
risks associated with its business. The bank’s
objectives are to identify, remove, reduce or control
material risks of fires and of accidents or injuries to
employees and visitors.
The symbol is a recognition given by Jobcentre
Plus to employers who have agreed to make certain
positive commitments regarding the employment,
retention, training and career development of disabled
people.
Corporate sustainability
HSBC recognises that environmental, social and
economic issues can impact on the Group’s long term
success as a business. Corporate Sustainability means
achieving sustainable profit growth so that HSBC can
continue to reward shareholders and employees, build
long-lasting relationships with customers and suppliers,
pay taxes and duties in those countries where it
operates, and invest in communities for future growth.
Group standards, instructions and related policies
and procedures are set by the Group Corporate Real
Estate function of HSBC Holdings plc and are
implemented by Health, Safety and Fire Coordinators
based in each country in which the Group operates.
Despite the considerable international pressure on
terrorist networks over the past few years, the global
threat from terrorism persists. HSBC remains
committed to maintaining its preparedness and to
ensuring the highest standards of health and safety
wherever in the world it operates.
As a whole, HSBC Holdings plc reports on its
progress in developing and implementing its
sustainability strategy annually in the HSBC
Sustainability Report, which is subject to third party
assurance. The HSBC Sustainability Report 2010 will
be issued on 27 May 2011 and will be available at
www.hsbc.com/sustainability.
HSBC Group Security provides regular risk
assessments in areas of increased risk to assist
management in judging the level of terrorist threat. In
addition, Regional Security functions conduct regular
security reviews to ensure measures to protect HSBC
staff, buildings, assets and information are appropriate
for the level of threat.
The bank manages its business in accordance with
overarching Group policies and adopts the same longterm approach to managing economic, social and
environmental issues which present a risk or
opportunity to the business. These can affect HSBC’s
reputation, drive employee engagement, help manage
the risks of lending, leverage savings through ecoefficiency and secure new revenue streams. These
generally fall into one or more of the following four
broad areas:
Diversity and inclusion
The group continues to be committed to providing
equal opportunities to employees and to proactively
encourage an inclusive workplace in line with the
group’s brand promise.
Progress in this area is measured by our Diversity
& Inclusion Index which is part of our Global People
Survey. All survey items in the Diversity & Inclusion
Index performed above the UK&I best Class Index and
the Financial Services norm.
•
Sustainable finance
•
Operational environmental management
•
Community investment
•
Employee issues
Sustainable Finance
83 per cent of staff feel they are treated with
respect and dignity at work, 84 per cent feel that they
work in an environment where people from diverse
perspectives can succeed.
HSBC aims to build long term customer relationships
around the world through the provision of a consistent
and high quality service and customer experience.
HSBC uses the benefits of its scale, financial strength,
geographic reach and strong brand value to achieve
this.
73
HSBC BANK PLC
Report of the Directors: Governance (continued)
As an HSBC Group member, the bank has a well
established framework for employees to provide
feedback and develop action plans at local and national
level to improve the working experience and
engagement.
HSBC aims to take advantage of the opportunities
and manage the risks presented by emerging global
trends by leading the development of sustainable
business models to address them. As an HSBC Group
member, the bank considers factors such as increased
longevity, the relative growth rates of emerging and
mature economies and the need to move to a lowercarbon economy when setting its strategy and
considering its product offerings.
Operational Environmental Management
HSBC focuses its environmental initiatives primarily
on addressing and responding to issues associated with
climate change, including energy use, water and waste
management and biodiversity. Climate change has the
potential to materially affect HSBC’s customers and, by
extension, HSBC’s long-term success, introducing new
risks to business activity. However, it also has the
potential to stimulate a new era of low carbon growth,
innovation and development. In response to this
opportunity, a new role was created in 2010 to lead
climate business development in the UK Commercial
Bank.
In 2010, the UK Bank received a Leader and a
Platinum Award, as part of the Mayor of London Green
500 Awards, which focuses on initiatives to reduce
carbon emissions.
In the HSBC Group annual employee engagement
survey undertaken in June 2010, the UK achieved a
response rate of 85 per cent. The UK employee
engagement score fell from 72 per cent in 2009 to 68
per cent in 2010. However, this remains above the UK
and Ireland external 'Best in Class' average. The
strongest performing areas against external 'Best in
Class' average are corporate sustainability and
leadership provided by employees’ direct manager.
The key objective for 2011 is sustaining this high
level of engagement, and priorities for action include
managing and developing people and supporting career
development.
In the UK, the bank has continued to use numerous
complementary programmes to involve employees –
‘Best Place to Discuss’; ‘Best Place to Workout’; ‘Best
Place to Blog’; ‘Best Place to Meet’ and ‘Best Place to
Bank for Employees’.
Sustainability risk
Community Investment
HSBC has a long record of support for the communities
in which it operates and aims to encourage social and
economic opportunity through its community
investment activity. HSBC supports a wide variety of
initiatives with the main focus being education and the
environment.
During 2010, the bank gave £5 million in
charitable donations to support community activities in
the UK. UK employees volunteered 43,865 hours in
work time. Outside the UK, since the launch in 2006,
HSBC France’s Foundation for Education has
supported more than 10,000 children and 70 Nongovernmental organisations. In 2010, £2 million was
donated to various charities on behalf of the Staff
Charity Scheme.
Assessing the environmental and social impacts of
providing finance to the bank’s customers has been
firmly embedded into its overall risk management
processes. Sustainability risks arise from the provision
of financial services to companies or projects which run
counter to the needs of sustainable development; in
effect this risk arises when the environmental and
social effects outweigh economic benefits. HSBC has
adopted The Equator Principles for project finance
lending and sector-based sustainability policies
covering those sectors with high environmental
or social impacts (forestry, freshwater infrastructure,
chemicals, energy, mining and metals, and defencerelated lending). Where sustainability risks are assessed
to be high, an independent review of transactions is
undertaken.
Sustainability Governance
The Corporate Sustainability Committee of the HSBC
Holdings Board is responsible for advising on
corporate sustainability policies across the Group
including environmental, social and ethical issues.
Dame Mary Marsh, an independent Non-Executive
Director of the Bank is a member of the Corporate
Sustainability Committee.
Employee Engagement
‘Employee engagement’ describes employees’
emotional and intellectual commitment to any
organisation. For the bank, employee engagement is
critical to its long term ability to deliver the highest
quality of financial services. HSBC’s annual surveys of
employees show that they value HSBC’s commitment
to sustainable business practices and view the bank as
being a leader in this regard.
Implementation of these policies is managed
primarily by the Human Resources, Risk, Compliance
and Corporate Sustainability functions. At Group level,
Corporate Sustainability exists as a business function,
74
HSBC BANK PLC
Report of the Directors: Governance (continued)
with senior executives charged with implementing
sustainable business practice in all major regions,
through inclusion in the HSBC Group Standards
Manuals, and through induction and developmental
training. Local teams are in charge of embedding
corporate sustainability strategies within banking
activities. In the UK, the head of Corporate
Sustainability sits on the UK Bank Management
Committee and reports to the Deputy CEO and Head of
UK Retail Bank. In France, the head of Corporate
Sustainability reports to the Chief Executive of HSBC
France and sits on the executive management board.
Conflicts of interest and
indemnification of Directors
Valuation of freehold and leasehold
land and buildings
The Articles of Association of the Bank provide
that Directors are entitled to be indemnified out of the
assets of the company against claims from third parties
in respect of certain liabilities arising in connection
with the performance of their functions, in accordance
with the provisions of the UK Companies Act 2006.
Such indemnity provisions have been in place during
the financial year but have not been utilised by the
Directors.
The bank’s Articles of Association give the Board
authority to approve Directors’ conflicts and potential
conflicts of interest. The board has adopted a policy
and procedures for the approval of Director’s conflicts
or potential conflicts of interest. The Board’s powers to
authorise conflicts are operating effectively and the
procedures are being followed. A review of situational
conflicts which have been authorised, including the
terms of authorisation, is undertaken annually.
The group’s freehold and long leasehold properties
were valued in 2010. The value of these properties was
£237 million in excess of their carrying amount in the
consolidated balance sheet. The group no longer
revalues freehold and long leasehold properties under
IFRSs.
Going concern basis
Share capital
The Financial Statements are prepared on a going
concern basis, as the Directors are satisfied that the
group and bank have the resources to continue in
business for the foreseeable future. In making this
assessment, the Directors have considered a wide range
of information relating to present and future conditions.
Further information relevant to the assessment is
provided in the Report of the Directors, in particular:
There were no changes to the issued ordinary or
preference share capital of the bank in the year ended
31 December 2010.
Supplier payment policy
The Company does not currently subscribe to any code
or standard on payment practice. It is the Company’s
policy, however, to settle the terms of payment with
those suppliers when agreeing the terms of each
transaction, to ensure that those suppliers are made
aware of the terms of payment, and to abide by the
terms of payment.
A description of the group’s principal activities,
strategic direction and challenges and uncertainties.
A summary of financial performance and review of
business performance.
The group’s approach to capital management and
allocation.
The amount due to the bank’s trade creditors at
31 December 2010 represented 27 days’ average daily
purchases of goods and services received from those
creditors, calculated in accordance with the Companies
Act 2006, as amended by Statutory Instrument
2008/410.
In addition, the objectives, policies and processes
for managing credit, liquidity and market risk are set
out in the ‘Report of the Directors: Risk’.
The Directors have also considered future
projections of profitability, cash flows and capital
resources in making their assessment.
Auditor
KPMG Audit Plc has expressed its willingness to
continue in office and the Board recommends that it be
reappointed. A resolution proposing the reappointment
of KPMG Audit Plc as auditor of the bank and giving
authority to the Directors to determine its remuneration
will be submitted to the forthcoming Annual General
Meeting.
75
HSBC BANK PLC
Report of the Directors: Governance (continued)
Disclosure of information to the
Auditor
The Directors who held office at the date of approval of
this Directors’ report confirm that, so far as they are
each aware, there is no relevant audit information of
which the bank’s auditors are unaware; and each
Director has taken all the steps that he ought to have
taken as a Director to make himself aware of any
relevant audit information and to establish that the
company’s auditors are aware of that information.
On behalf of the Board
J H McKenzie, Secretary
28 February 2011
76
HSBC BANK PLC
Statement of Directors’ Responsibilities in Respect of the Annual Report and
Accounts 2010 and the Financial Statements
The following statement, which should be read in conjunction with the Auditor’s statement of their responsibilities set out
in their report on the next page, is made with a view to distinguishing for shareholders the respective responsibilities of
the Directors and of the Auditors in relation to the financial statements.
The Directors are responsible for preparing the Annual Report, the consolidated financial statements of HSBC Bank
plc and its subsidiaries (the ‘group’) and parent company financial statements for HSBC Bank plc (the ‘bank’) in
accordance with applicable law and regulations.
Company law requires the Directors to prepare group and parent company financial statements for each financial
year. The Directors are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU
and have elected to prepare the bank financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In
preparing each of the group and parent company financial statements, the directors are required to:
•
select suitable accounting policies and then apply them consistently;
•
make judgments and estimates that are reasonable and prudent; and
•
state whether they have been prepared in accordance with IFRSs as adopted by the EU.
The Directors are required to prepare the financial statements on the going concern basis unless it is not appropriate.
Since the Directors are satisfied that the group has the resources to continue in business for the foreseeable future, the
financial statements continue to be prepared on a going concern basis.
The Directors have responsibility for ensuring that sufficient accounting records are kept that disclose with
reasonable accuracy at any time the financial position of the bank and enable them to ensure that its financial statements
comply with the Companies Act 2006.
The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets
of the group and to prevent and detect fraud and other irregularities.
The Directors have responsibility for the maintenance and integrity of the Annual Report and Accounts as they
appear on the bank’s website. Legislation in the UK governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
On behalf of the Board
J H McKenzie, Secretary
28 February 2011
77
HSBC BANK PLC
Independent Auditor’s Report to the Members of the HSBC Bank plc
We have audited the group and parent company financial statements of HSBC Bank plc (‘the bank’) for the year ended 31
December 2010 set out on pages 79 to 195. The financial reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the EU, as applied in accordance
with the provisions of the Companies Act 2006.
This report is made solely to the bank's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. Our audit work has been undertaken so that we might state to the bank's members those matters we are required
to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the bank and the bank's members, as a body, for our audit work, for this report,
or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors' Responsibilities Statement set out on page 77, the directors are responsible for
the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is
to audit and express an opinion on the financial statements in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical
Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB's web-site at
www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion:
•
the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at
31 December 2010 and of the group's profit for the year then ended;
•
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
•
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU
and as applied in accordance with the provisions of the Companies Act 2006; and
•
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as
regards the group financial statements, Article 4 of the IAS Regulation.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors' Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you
if, in our opinion:
•
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
•
the parent company financial statements are not in agreement with the accounting records and returns; or
•
certain disclosures of directors' remuneration specified by law are not made; or
•
we have not received all the information and explanations we require for our audit.
P McIntyre, Senior Statutory Auditor
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
London, England
28 February 2011
78
HSBC BANK PLC
Financial Statements
Consolidated income statement for the year ended 31 December 2010
2010
£m
2009
£m
Interest income .........................................................................................................
Interest expense ........................................................................................................
11,110
(3,416)
12,643
(4,552)
Net interest income ..................................................................................................
7,694
8,091
Fee income ...............................................................................................................
Fee expense ..............................................................................................................
5,311
(1,271)
5,560
(1,483)
Net fee income .........................................................................................................
4,040
4,077
Trading income excluding net interest income ........................................................
Net interest income on trading activities .................................................................
1,210
907
970
1,656
Net trading income ...................................................................................................
2,117
2,626
Net income from financial instruments designated at fair value .............................
Gains less losses from financial investments ...........................................................
Dividend income ......................................................................................................
Net earned insurance premiums ............................................................................... 4
Other operating income ............................................................................................
276
537
18
2,635
782
543
(73)
29
2,716
1,093
18,099
19,102
(3,023)
(3,540)
Net operating income before loan impairment charges and other credit risk
provisions ............................................................................................................
15,076
15,562
Loan impairment charges and other credit risk provisions .....................................
(1,951)
(3,364)
Notes
Total operating income ..........................................................................................
Net insurance claims incurred and movement in liabilities to policyholders ..........
Net operating income .............................................................................................
5
6
13,125
12,198
Employee compensation and benefits ...................................................................... 7
General and administrative expenses .......................................................................
Depreciation and impairment of property, plant and equipment ............................. 22
Amortisation and impairment of intangible assets .................................................. 21
(4,961)
(3,536)
(460)
(162)
(4,452)
(3,114)
(482)
(150)
Total operating expenses .......................................................................................
(9,119)
(8,198)
Operating profit .....................................................................................................
4,006
4,000
Share of profit in associates and joint ventures .......................................................
5
14
Profit before tax ......................................................................................................
4,011
4,014
Tax expense .............................................................................................................. 10
(996)
(856)
Profit for the year ...................................................................................................
3,015
3,158
Profit attributable to shareholders of the parent company .......................................
Profit attributable to non-controlling interests .........................................................
2,959
56
3,092
66
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the
Directors: Capital Management’ on pages 65 to 68 form an integral part of these financial statements.
79
HSBC BANK PLC
Financial Statements (continued)
Consolidated statement of comprehensive income for the year ended 31 December 2010
2010
£m
2009
£m
3,015
3,158
2,914
(419)
721
(254)
4,666
49
1,317
(248)
307
(530)
63
133
(91)
(19)
179
(63)
(114)
(2,396)
676
(848)
Other comprehensive income/ (expense) for the year, net of tax....................................
2,804
3,239
Total comprehensive income/ (expense) for the year......................................................
5,819
6,397
5,777
42
5,819
6,352
45
6,397
Profit for the year .............................................................................................................
Other comprehensive income
Available-for-sale investments
– fair value gains/ (losses) ..........................................................................................
– fair value losses/ (gains) transferred to income statement on disposal ....................
– amounts transferred to the income statement in respect of impairment losses........
– income taxes..............................................................................................................
Cash flow hedges
– fair value gains .........................................................................................................
– fair value gains transferred to income statement......................................................
– income taxes..............................................................................................................
Actuarial losses on defined benefit plans
– before income taxes ..................................................................................................
– income taxes..............................................................................................................
Exchange differences and other .......................................................................................
Total comprehensive income/ (expense) for the year attributable to:
– shareholders of the parent company .........................................................................
– non – controlling interests.........................................................................................
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the
Directors: Capital Management’ on pages 65 to 68 form an integral part of these financial statements.
80
HSBC BANK PLC
Financial Statements (continued)
Consolidated statement of financial position at 31 December 2010
2010
£m
2009
£m
24,495
1,932
159,552
15,467
129,158
57,027
285,218
102,086
6,118
216
3,568
76
11,143
2,108
330
14,274
2,082
165,008
16,435
118,516
46,994
274,659
86,695
8,013
172
3,357
79
11,199
4,090
355
798,494
751,928
48,287
344,123
1,411
132,360
27,935
129,204
48,119
4,860
153
17,116
3,950
425
54
733
7,407
57,729
332,896
1,477
118,881
18,164
118,689
39,340
5,867
197
16,505
3,752
368
158
2,678
6,799
766,137
723,500
Equity
Called up share capital ....................................................................................... 36
Share premium account ......................................................................................
Other equity instruments .................................................................................... 36
Other reserves .....................................................................................................
Retained earnings ...............................................................................................
797
20,025
1,750
(220)
9,473
797
20,025
1,750
(2,920)
8,135
Total equity attributable to shareholders of the parent company ......................
Non-controlling interests ....................................................................................
31,825
532
27,787
641
Notes
ASSETS
Cash and balances at central banks ....................................................................
Items in the course of collection from other banks ...........................................
Trading assets .....................................................................................................
Financial assets designated at fair value ............................................................
Derivatives .........................................................................................................
Loans and advances to banks .............................................................................
Loans and advances to customers ......................................................................
Financial investments .........................................................................................
Other assets ........................................................................................................
Current tax assets ...............................................................................................
Prepayments and accrued income ......................................................................
Interests in associates and joint ventures ...........................................................
Goodwill and intangible assets ..........................................................................
Property, plant and equipment ...........................................................................
Deferred tax assets .............................................................................................
15
16
17
32
32
18
24
20
21
22
10
Total assets .........................................................................................................
LIABILITIES AND EQUITY
Liabilities
Deposits by banks ..............................................................................................
Customer accounts .............................................................................................
Items in the course of transmission to other banks ............................................
Trading liabilities ...............................................................................................
Financial liabilities designated at fair value ......................................................
Derivatives .........................................................................................................
Debt securities in issue .......................................................................................
Other liabilities ...................................................................................................
Current tax liability ............................................................................................
Liabilities under insurance contracts issued ......................................................
Accruals and deferred income ...........................................................................
Provisions ............................................................................................................
Deferred tax liability ..........................................................................................
Retirement benefit liabilities ..............................................................................
Subordinated liabilities ......................................................................................
32
32
25
26
17
32
27
28
29
10
7
30
Total liabilities ...................................................................................................
Total equity ........................................................................................................
32,357
28,428
Total equity and liabilities ..................................................................................
798,494
751,928
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the
Directors: Capital Management’ on pages 65 to 68 form an integral part of these financial statements.
A A Flockhart, Chairman
28 February 2011
81
HSBC BANK PLC
Financial Statements (continued)
Consolidated cash flow statement for the year ended 31 December 2010
2010
£m
2009
£m
4,011
4,014
Adjustments for:
– non-cash items included in profit before tax .............................................. 37
– change in operating assets ............................................................................... 37
– change in operating liabilities ......................................................................... 37
– elimination of exchange differences1 ..............................................................
– net gain from investing activities ....................................................................
– share of profits in associates and joint ventures .............................................
– distributions from associates ...........................................................................
– contributions paid to defined benefit plans .....................................................
– tax paid ............................................................................................................
2,837
17,225
20,868
(3,613)
(925)
(5)
(1,985)
(1,087)
4,224
25,222
(53,082)
9,707
(657)
(14)
8
(258)
(923)
Net cash (used in)/generated from operating activities .................................
37,326
(11,759)
(68,653)
57,569
(511)
141
(184)
3
–
–
517
–
(73,475)
87,764
(613)
897
(162)
–
(247)
(16)
–
215
–
(15)
Net cash generated from/(used in) investing activities ......................................
(11,118)
14,348
Cash flows from financing activities
Issue of share capital ..........................................................................................
Issue of preference share capital ........................................................................
Subordinated loan capital repaid ........................................................................
Subordinated loan capital issued.........................................................................
Dividends paid to shareholders ..........................................................................
Dividends paid to minority interests ..................................................................
Net cash outflow from acquisition of and increase in stake of subsidiaries.......
–
25
–
633
(1,874)
(22)
(194)
2,776
–
(101)
–
(1,067)
(7)
–
Net cash generated from financing activities
(1,432)
1,601
Net increase/(decrease) in cash and cash equivalents ...............................
Cash and cash equivalents at 1 January .............................................................
Effect of exchange rate changes on cash and cash equivalents .........................
24,776
60,806
423
4,190
60,855
(4,239)
Cash and cash equivalents at 31 December ....................................................... 37
86,005
60,806
Notes
Cash flows from operating activities
Profit before tax ..................................................................................................
Cash flows from investing activities
Purchase of financial investments ......................................................................
Proceeds from the sale and maturity of financial investments ..........................
Purchase of property, plant and equipment .......................................................
Proceeds from the sale of property, plant and equipment .................................
Purchase of intangible assets ..............................................................................
Proceeds from the sale of intangible assets .......................................................
Net cash outflow from acquisition of and increase in stake of subsidiaries ......
Net cash outflow from acquisition of and increase in stake of associates
Proceeds from disposal of subsidiaries ..............................................................
Proceeds from disposal of associates .................................................................
Purchases of HSBC Holdings plc shares to satisfy share based payment
transactions .....................................................................................................
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.
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the
Directors: Capital Management’ on pages 65 to 68 form an integral part of these financial statements.
82
83
Retained
earnings
£m
Availablefor-sale
fair value
reserve
£m
Cash flow
hedging
reserve2
£m
Foreign
exchange
reserve
£m
Total
shareholders’
equity
£m
Noncontrolling
interests
£m
Total
equity
£m
1,750
–
8,135
2,959
(5,911)
–
350
–
2,641
–
27,787
2,959
641
56
28,428
3,015
–
–
–
–
–
–
–
–
–
–
118
–
–
118
2,962
2,962
–
–
(160)
–
(160)
–
–
(102)
–
–
–
(102)
2,818
2,962
(160)
118
(102)
14
–
–
(2)
(12)
2,804
2,962
(160)
116
(114)
–
–
–
3,077
2,962
(160)
(102)
5,777
42
5,804
Dividends to shareholders..........................................................................
Net impact of equity-settled share-based payments .................................
Other movements ......................................................................................
Change in ownership interest in subsidiaries1 ..........................................
Tax on items taken directly to equity ........................................................
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,868)
163
–
(56)
22
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,868)
163
–
(56)
22
(22)
–
–
(129)
–
(1,890)
163
–
(185)
22
At 31 December .......................................................................................
797
20,025
1,750
9,473
(2,949)
190
(2,539)
31,825
532
32,357
Called up
share
capital
£m
Share
premium
£m
Other equity
instruments
£m
At 1 January ..............................................................................................
Profit for the year ......................................................................................
797
–
20,025
–
Other comprehensive income (net of tax) .................................................
Available-for-sale investments ..................................................................
Cash flow hedges ......................................................................................
Actuarial gains/(losses) on defined benefit plans .....................................
Exchange differences and other ................................................................
–
–
–
–
–
Total comprehensive income for the year..................................................
1 Relates to the purchase of non-controlling interests in HSBC Europe B.V. See Note 41 for further details.
2 Movements in the cash flow hedging reserve include amounts transferred to the income statement of £530 million comprising a £514 million loss taken to ‘Net interest income’ and a £16 million loss taken to
‘Net trading income’.
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the Directors: Capital Management’ on pages 65 to 68 form an integral
part of these financial statements.
HSBC BANK PLC
2010
Other reserves
Financial Statements (continued)
Consolidated statement of changes in equity for the year ended 31 December 2010
Cash flow
hedging
reserve3
£m
Foreign
exchange
reserve
£m
Total
shareholders’
equity
£m
Noncontrolling
interests
£m
Total equity
£m
17,249
–
1,750
–
7,969
3,092
(11,627)
–
327
–
3,458
–
19,923
3,092
738
66
20,661
3,158
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,716)
–
–
(1,721)
5
5,770
5,770
–
–
–
23
–
23
–
–
(817)
–
–
–
(817)
3,260
5,770
23
(1,721)
(812)
(21)
14
–
1
(36)
3,239
5,784
23
(1,720)
(848)
Total comprehensive income for the year..................................................
–
–
–
1,376
5,770
23
(817)
6,352
45
6,397
Share capital issued, net of costs1 .............................................................
Dividends to shareholders .........................................................................
Net impact of equity-settled share-based payments ..................................
Other movements ......................................................................................
Change in ownership interest in subsidiaries2 ...........................................
–
–
–
–
–
2,776
–
–
–
–
–
–
–
–
–
–
(1,067)
(190)
(7)
54
–
–
–
–
(54)
–
–
–
–
–
–
–
–
–
–
2,776
(1,067)
(190)
(7)
–
–
(42)
–
–
(100)
2,776
(1,109)
(190)
(7)
(100)
At 31 December ........................................................................................
797
20,025
1,750
8,135
(5,911)
350
2,641
27,787
641
28,428
Share
premium
£m
Other equity
Instruments
At 1 January ..............................................................................................
Profit for the year ......................................................................................
797
–
Other comprehensive income (net of tax) .................................................
–
Available-for-sale investments .................................................................
Cash flow hedges ......................................................................................
Actuarial gains/(losses) on defined benefit plans .....................................
Exchange differences and other ................................................................
84
1 All new capital subscribed in the year was issued to HSBC Holdings plc. See note 36 for further details.
2 Relates to the purchase of non-controlling interest in HSBC Private Bank (Suisse) SA. See Note 41 for further details.
3 Movements in the cash flow hedging reserve include amounts transferred to the income statement of £91 million comprising a £120 million loss taken to ‘Net interest income’ and a £29 million gain taken to
‘Net trading income’.
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the Directors: Capital Management’ on pages 65 to 68 form an integral
part of these financial statements.
HSBC BANK PLC
£m
Retained
earnings
£m
Availablefor-sale
fair value
reserve
£m
Called up
share
capital
£m
Financial Statements (continued)
2009
Other reserves
HSBC BANK PLC
Financial Statements (continued)
HSBC Bank plc statement of financial position at 31 December 2010
2010
£m
2009
£m
22,357
1,030
126,493
4,505
108,905
27,860
208,548
41,338
3,354
216
1,557
63
15,459
686
1,343
617
13,130
1,071
123,957
6,592
100,800
20,729
208,669
27,389
4,230
160
1,263
63
15,226
632
1,280
779
564,331
525,970
38,873
230,795
577
98,412
18,334
108,786
29,417
2,221
11
1,955
229
2
575
7,562
39,346
223,652
595
96,821
10,675
101,161
14,636
2,636
8
1,852
176
2
2,524
6,955
537,749
501,039
797
20,025
1,750
42
3,968
797
20,025
1,750
(356)
2,715
Total equity ....................................................................................................
26,582
24,931
Total equity and liabilities ..............................................................................
564,331
525,970
Notes
ASSETS
Cash and balances at central banks ................................................................
Items in the course of collection from other banks .......................................
Trading assets .................................................................................................
Financial assets designated at fair value ........................................................
Derivatives .....................................................................................................
Loans and advances to banks .........................................................................
Loans and advances to customers ..................................................................
Financial investments .....................................................................................
Other assets ....................................................................................................
Current tax assets ...........................................................................................
Prepayments and accrued income ..................................................................
Interests in associates and joint ventures .......................................................
Investments in subsidiary undertakings .........................................................
Goodwill and intangible assets ......................................................................
Property, plant and equipment .......................................................................
Deferred tax assets .........................................................................................
15
16
17
32
32
18
24
20
23
21
22
10
Total assets .....................................................................................................
LIABILITIES AND EQUITY
Liabilities
Deposits by banks ..........................................................................................
Customer accounts .........................................................................................
Items in the course of transmission to other banks ........................................
Trading liabilities ...........................................................................................
Financial liabilities designated at fair value ..................................................
Derivatives .....................................................................................................
Debt securities in issue ...................................................................................
Other liabilities ...............................................................................................
Current taxation ..............................................................................................
Accruals and deferred income .......................................................................
Provisions ........................................................................................................
Deferred tax liability ......................................................................................
Retirement benefit liabilities ..........................................................................
Subordinated liabilities ..................................................................................
32
32
25
26
17
32
27
29
10
7
30
Total liabilities ...............................................................................................
Equity
Called up share capital ...................................................................................
Share premium account ..................................................................................
Other equity instruments ................................................................................
Other reserves .................................................................................................
Retained earnings ...........................................................................................
36
36
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the
Directors: Capital Management’ on pages 65 to 68 form an integral part of these financial statements.
A A Flockhart, Chairman
28 February 2011
85
HSBC BANK PLC
Financial Statements (continued)
HSBC Bank plc cash flow statement for the year ended 31 December 2010
2010
£m
2009
£m
3,396
2,967
2,215
(5,523)
28,734
(1,189)
(329)
(1,933)
(674)
3,126
14,404
(26,542)
377
(535)
(236)
(461)
Net cash (used in)/generated from operating activities .................................
24,697
(6,900)
Cash flows from investing activities
Purchase of financial investments ..................................................................
Proceeds from the sale of financial investments ............................................
Purchase of property, plant and equipment ...................................................
Proceeds from the sale of property, plant and equipment .............................
Purchase of goodwill and intangible assets ...................................................
Net cash outflow from acquisition of and increase in stake of associates
Proceeds from disposal of associates .............................................................
(27,066)
14,849
(316)
5
(163)
–
2
(31,309)
50,482
(312)
791
(133)
(16)
188
Net cash generated from/(used in) investing activities
(12,689)
19,691
Cash flows from financing activities
Issue of ordinary share capital .......................................................................
Net cash outflow from acquisition of and increase in stake of subsidiaries ..
Subordinated loan capital issued.....................................................................
Dividends paid ................................................................................................
–
(442)
633
(1,868)
2,776
–
–
(1,067)
Net cash generated from financing activities
(1,677)
1,709
Net increase in cash and cash equivalents .................................................
10,331
14,500
Cash and cash equivalents at 1 January .........................................................
Effect of exchange rate changes on cash and cash equivalents .....................
40,702
326
27,791
(1,589)
51,359
40,702
Notes
Cash flows from operating activities
Profit before tax ..............................................................................................
Adjustments for:
– non-cash items included in profit before tax ..........................................
– change in operating assets .......................................................................
– change in operating liabilities .................................................................
– elimination of exchange differences1 ......................................................
– net gain from investing activities ............................................................
– contributions paid to defined benefit plans ............................................
– tax paid ....................................................................................................
Cash and cash equivalents at 31 December ...................................................
37
37
37
37
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.
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the
Directors: Capital Management’ on pages 65 to 68 form an integral part of these financial statements.
86
Other reserves
Called up
share capital
£m
Share
premium
£m
Other equity
instruments
£m
Retained
earnings
£m
Availablefor-sale fair
value reserve
£m
Cash flow
hedging
reserve1
£m
Foreign
exchange
reserve
£m
Total equity
£m
797
–
20,025
–
1,750
–
2,715
2,858
(664)
–
332
–
(24)
–
24,931
2,858
Other comprehensive income (net of tax) .................................................
–
Available-for-sale investments ..................................................................
Cash flow hedges ......................................................................................
Actuarial gains on defined benefit plans ...................................................
Exchange differences and other .................................................................
–
–
–
–
–
–
–
–
–
–
–
–
–
–
140
–
–
140
–
596
596
–
–
–
(202)
–
(202)
–
–
4
–
–
–
4
538
596
(202)
140
4
Total comprehensive income for the year .................................................
–
–
–
2,998
596
(202)
4
3,396
Dividends to shareholders..........................................................................
Net impact of equity-settled share-based payments .................................
Tax on items taken directly to equity ........................................................
–
–
–
–
–
–
–
–
–
(1,868)
101
22
–
–
–
–
–
–
–
–
–
(1,868)
101
22
At 31 December .......................................................................................
797
20,025
1,750
3,968
(68)
130
(20)
26,582
At 1 January ..............................................................................................
Profit for the year ......................................................................................
87
1 Movements in the cash flow hedging reserve include an amount transferred to the income statement of £558 million loss taken to ‘Net interest income’.
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the Directors: Capital Management’ on pages 65 to 68 form an integral
part of these financial statements.
HSBC BANK PLC
2010
Financial Statements (continued)
HSBC Bank plc statement of changes in equity for the year ended 31 December 2010
88
Called up
share capital
£m
Share
premium
£m
Other equity
Instruments
£m
Retained
earnings
£m
Available- forsale fair value
reserve
£m
Cash flow
hedging
reserve2
£m
Foreign
exchange
reserve
£m
Total equity
£m
At 1 January ..............................................................................................
Profit for the year ......................................................................................
797
–
17,249
–
1,750
–
3,081
2,531
(977)
–
407
–
(52)
–
22,255
2,531
Other comprehensive income (net of tax) .................................................
Available-for-sale investments .................................................................
Cash flow hedges .......................................................................................
Actuarial losses on defined benefit plans .................................................
Exchange differences and other .................................................................
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,764)
–
–
(1,769)
5
313
313
–
–
–
(75)
–
(75)
–
–
28
–
–
–
28
(1,498)
313
(75)
(1,769)
33
Total comprehensive income for the year..................................................
–
–
–
767
313
(75)
28
1,033
Share capital issued, net of costs 1 .............................................................
Dividends to shareholders .........................................................................
Net impact of equity-settled share-based payments ..................................
Other movements ......................................................................................
–
–
–
2,776
–
–
–
–
–
–
(1,067)
(66)
–
–
–
–
–
–
–
–
–
2,776
(1,067)
(66)
At 31 December ........................................................................................
797
20,025
1,750
2,715
(664)
332
(24)
24,931
1 All new capital subscribed in the year was issued to HSBC Holdings plc. See note 36 for further details.
2 Movements in the cash flow hedging reserve include an amount transferred to the income statement of a £148 million loss taken to ‘Net interest income’.
The accompanying notes on pages 89 to 195 and the audited sections of ‘Report of the Directors: Risk’ on pages 25 to 64 and ‘Report of the Directors: Capital Management’ on pages 65 to 68 form an integral
part of these financial statements.
HSBC BANK PLC
Other reserves
Financial Statements (continued)
2009
HSBC BANK PLC
Notes on the Financial Statements (continued)
1
Basis of preparation
(a) Compliance with International Financial Reporting Standards
The consolidated financial statements of the group and the separate financial statements of HSBC Bank plc have
been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the
International Accounting Standards Board (‘IASB’) and as endorsed by the EU. EU-endorsed IFRSs may differ
from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by
the EU. At 31 December 2010, there were no unendorsed standards effective for the year ended 31 December
2010 affecting these consolidated and separate financial statements, and there was no difference between IFRSs
endorsed by the EU and IFRSs issued by the IASB in terms of their application to the group. Accordingly, the
group’s financial statements for the year ended 31 December 2010 are prepared in accordance with IFRSs as
issued by the IASB.
IFRSs comprise accounting standards issued by the IASB and its predecessor body as well as interpretations
issued by the IFRS Interpretations Committee (‘IFRIC’) and its predecessor body. During 2010, the group
adopted the following major revisions and amendments to standards:
The group adopted the revised IFRS 3 ‘Business Combinations’ and amendments to IAS 27 ‘Consolidated and
Separate Financial Statements’. The main changes under the standards are that:
•
acquisition-related costs are recognised as an expense in the income statement in the period in which they
are incurred;
•
all consideration transferred, including contingent consideration, is recognised and measured at fair value at
the acquisition date;
•
equity interests held prior to control being obtained are remeasured to fair value at the date of obtaining
control, and any gain or loss is recognised in the income statement;
•
an option is available, on a transaction-by-transaction basis, to measure any non-controlling (previously
referred to as minority) interests in the entity acquired either at fair value, or at the non-controlling interests’
proportionate share of the net identifiable assets of the entity acquired; and
•
changes in a parent’s ownership interest in a subsidiary that do not result in a change of control are treated
as transactions between equity holders and are reported in equity.
In terms of their application to the group, the revised IFRS 3 and the amendments to IAS 27 apply prospectively
to acquisitions and transactions taking place on or after 1 January 2010, and have no significant effect on these
consolidated financial statements of the group and the separate financial statements of HSBC Bank plc.
During 2010, in addition to the above, the group adopted a number of standards, interpretations and amendments
to standards which had an insignificant effect on the consolidated financial statements of the group and the
separate financial statements of HSBC Bank plc.
(b) Presentation of information
Disclosures under IFRS 4 ‘Insurance Contracts’ (‘IFRS 4’) and IFRS 7 ‘Financial Instruments: Disclosures’
(‘IFRS 7’) concerning the nature and extent of risks relating to insurance contracts and financial instruments
have been included in the audited sections of the ‘Report of the Directors: Risk’ on pages 56 to 63.
Certain partnerships have taken advantage of the exemption under Regulation 7 of the Partnership (Accounts)
Regulations 2008 from preparing their own financial statements by virtue of being consolidated with these group
financial statements.
Capital disclosures under IAS 1 ‘Presentation of Financial Statements’ (‘IAS 1’) have been included in the
audited sections of the ‘Report of the Directors: Capital Management’ on pages 65 to 68.
Disclosures relating to the group’s securitisation activities and structured products have been included in the
audited section of ‘Report of the Directors: Risk’ on pages 54 to 55.
In accordance with the group’s policy to provide meaningful disclosures that help investors and other
stakeholders understand the group’s performance, financial position and changes thereto, the information
provided in the Notes on the Financial Statements and the Report of the Directors goes beyond the minimum
89
HSBC BANK PLC
Notes on the Financial Statements (continued)
levels required by accounting standards, statutory and regulatory requirements. In particular, the group has
adopted the British Bankers’ Association Code for Financial Reporting Disclosure (‘the BBA Code’). The BBA
Code aims to increase the quality and comparability of banks’ disclosures and sets out five disclosure principles
together with supporting guidance. In line with the principles of the BBA Code, the group assesses good practice
recommendations issued from time to time by relevant regulators and standard setters, and will assess the
applicability and relevance of such guidance, enhancing disclosures where appropriate.
In publishing the parent company financial statements here together with the Group financial statements, HSBC
Bank has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its
individual income statement, individual statement of comprehensive income and related notes that form a part of
these financial statements.
The functional currency of the bank is Sterling, which is also the presentation currency of the consolidated
financial statements of the group.
(c) Consolidation
The consolidated financial statements of the group comprise the financial statements of HSBC Bank plc and its
subsidiaries made up to 31 December.
Subsidiaries are consolidated from the date that the group gains control. The acquisition method of accounting is
used when subsidiaries are acquired by the group. The cost of an acquisition is measured at the fair value of the
consideration, including contingent consideration, given at the date of exchange. Acquisition-related costs are
recognised as an expense in the income statement in the period in which they are incurred. The acquired
identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition.
Goodwill is measured as the excess of the aggregation of the consideration transferred, the amount of noncontrolling interest and the fair value of the acquirer’s previously held equity interest, if any, over the net of the
amounts of the identifiable assets acquired and the liabilities assumed. The amount of non-controlling interest is
measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable
net assets. In a business combination achieved in stages, the previously held equity interest is remeasured at the
acquisition-date fair value with the resulting gain or loss recognised in the income statement. In the event that the
amounts of net assets acquired is in excess of the aggregate of the consideration transferred, the amount of noncontrolling interest and the fair value of the group’s previously held equity interest, the difference is recognised
immediately in the income statement.
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are treated as
transactions between equity holders and are reported in equity.
Entities that are controlled by the group are consolidated until the date that control ceases.
In the context of Special Purpose Entities (‘SPEs’), the following circumstances may indicate a relationship in
which, in substance, the group controls and, consequently, consolidates an SPE:
•
the activities of the SPE are being conducted on behalf of the group according to its specific business needs
so that the group obtains benefits from the SPE’s operation;
•
the group has the decision-making powers to obtain the majority of the benefits of the activities of the SPE
or, by setting up an ‘autopilot’ mechanism, the group has delegated these decision-making powers;
•
the group has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks
incident to the activities of the SPE; or
•
the group retains the majority of the residual or ownership risks related to the SPE or its assets in order to
obtain benefits from its activities.
The group performs a re-assessment of consolidation whenever there is a change in the substance of the
relationship between the group and an SPE. All intra-group transactions are eliminated on consolidation.
The consolidated financial statements of the group also include the attributable share of the results and reserves
of joint ventures and associates. These are based on financial statements made up to dates not earlier than three
months prior to 31 December, adjusted for the effect of any significant transactions or events that occur between
that date and the group’s reporting date.
90
HSBC BANK PLC
Notes on the Financial Statements (continued)
(d) Future accounting developments
At 31 December 2010, a number of standards and interpretations, and amendments thereto, had been issued by
the IASB, which are not effective for the group’s consolidated financial statements or the separate financial
statements of HSBC Bank plc as at 31 December 2010. Those which are expected to have a significant effect on
the group’s consolidated financial statements and the separate financial statements of HSBC Bank plc are
discussed below.
Standards and Interpretations issued by the IASB but not endorsed by the EU
In November 2009, the IASB issued IFRS 9 ‘Financial Instruments’ (‘IFRS 9’) which introduced new
requirements for the classification and measurement of financial assets. In October 2010, the IASB issued
additions to IFRS 9 relating to financial liabilities. Together, these changes represent the first phase instalments
in the IASB’s planned phased replacement of ‘IAS 39 Financial Instruments: Recognition and Measurement’
(‘IAS 39’) with a less complex and improved standard for financial instruments.
The standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted.
IFRS 9 is required to be applied retrospectively. If the standard is adopted prior to 1 January 2012, an entity will
be exempt from the requirement to restate prior period comparative information. IFRS 9 is subject to EU
endorsement, the timing of which is uncertain. Accordingly, the group is unable to provide a date by which it
plans to apply IFRS 9.
The main changes to the requirements of IAS 39 are summarised below.
•
all financial assets that are currently in the scope of IAS 39 will be classified as either amortised cost or fair
value. The available-for-sale, held-to-maturity and loans and receivables categories will no longer exist.
•
classification of financial assets is based on an entity’s business model for managing the financial assets and
their contractual cash flow characteristics. Reclassifications between the two categories are prohibited
unless there is a change in the entity’s business model.
•
a financial asset is measured at amortised cost if two criteria are met: i) the objective of the business model
is to hold the financial asset for the collection of the contractual cash flows; and ii) the contractual cash
flows of the instrument are solely payments of principal and interest on the principal outstanding. All other
financial assets are measured at fair value. Movements in the fair value of financial assets classified at fair
value are recognised in profit or loss, except for equity investments where an entity takes the option to
designate an equity instrument that is not held for trading at fair value through other comprehensive income.
If this option is taken, all subsequent changes in fair value are recognised in other comprehensive income
with no recycling of gains or losses to the income statement. Dividend income would continue to be
recognised in the income statement.
•
an entity is only permitted to designate a financial asset otherwise meeting the amortised cost criteria at fair
value through profit or loss if doing so significantly reduces or eliminates an accounting mismatch. This
designation is made on initial recognition and is irrevocable.
•
financial assets which contain embedded derivatives are to be classified in their entirety either at fair value
or amortised cost depending on whether the contracts as a whole meet the relevant criteria under IFRS 9.
•
most of IAS 39’s requirements for financial liabilities are retained, including amortised cost accounting for
most financial liabilities. The guidance on separation of embedded derivatives will continue to apply to host
contracts that are financial liabilities. However, fair value changes attributable to changes in own credit risk
for financial liabilities designated under the fair value option other than loan commitments and financial
guarantee contracts are to be presented in the statement of other comprehensive income unless the treatment
would create or enlarge an accounting mismatch in profit or loss. These amounts are not subsequently
reclassified to the income statement but may be transferred within equity.
The second and third phases in the IASB’s project to replace IAS 39 will address the impairment of financial
assets measured at amortised cost and hedge accounting. The IASB has indicated that it expects to finalise the
replacement of IAS 39 by June 2011. In addition, the IASB is working with the US Financial Accounting
Standards Board to reduce inconsistencies between US GAAP and IFRS in accounting for financial instruments.
The impact of IFRS 9 may change as a consequence of further developments resulting from the IASB’s financial
instruments project. As a result, it is impracticable to quantify the impact of IFRS 9 as at the date of publication
of these financial statements.
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Notes on the Financial Statements (continued)
2
Summary of significant accounting policies
(a) Interest income and expense
Interest income and expense for all financial instruments except for those classified as held-for-trading or
designated at fair value (other than debt securities issued by the group and derivatives managed in conjunction
with such debt securities issued) are recognised in ‘Interest income’ and ‘Interest expense’ in the income
statement using the effective interest method. The latter is a way of calculating the amortised cost of a financial
asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the interest
income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through
the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of
the financial asset or financial liability. When calculating the effective interest rate, the group estimates cash
flows considering all contractual terms of the financial instrument but not future credit losses. The calculation
includes all amounts paid or received by the group that are an integral part of the effective interest rate of a
financial instrument, including transaction costs and all other premiums or discounts.
Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows
for the purpose of measuring the impairment loss.
(b) Non interest income
Fee income is earned from a diverse range of services provided by the group to its customers. Fee income is
accounted for as follows:
•
income earned on the execution of a significant act is recognised as revenue when the act is completed (for
example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third party,
such as an arrangement for the acquisition of shares or other securities);
•
income earned from the provision of services is recognised as revenue as the services are provided (for
example, asset management, portfolio and other management advisory and service fees); and
•
income which forms an integral part of the effective interest rate of a financial instrument is recognised as
an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in
‘Interest income’ (Note 2(a)).
Net trading income comprises all gains and losses from changes in the fair value of financial assets and
financial liabilities held for trading, together with related interest income, expense and dividends.
Net income from financial instruments designated at fair value includes all gains and losses from changes in
the fair value of financial assets and financial liabilities designated at fair value through profit or loss. Interest
income and expense and dividend income arising on those financial instruments are also included in ‘Net income
from financial instruments designated at fair value’, except for interest arising from debt securities issued, and
derivatives managed in conjunction with those debt securities, which is recognised in ‘Interest expense’ (Note
2(a)).
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for
equity securities, and usually the date when shareholders have approved the dividend for unlisted equity
securities.
(c) Operating Segments
The group’s operating segments are organised as follows: UK Retail Banking, Continental Europe Retail, Global
Banking and Markets, Private Banking and Other. Due to the nature of the group, the chief operating decisionmaker regularly reviews operating activity on a number of bases, including by geography, by customer group,
and by retail businesses and global businesses. The group’s operating segments were determined using the same
measure reported to the chief operating decision-maker for the purpose of making decisions about allocating
resources and assessing performance.
Measurement of segment assets, liabilities, income and expenses is based on the group’s accounting policies.
Segment income and expenses include transfers between segments and these transfers are conducted on arm’s
length terms and conditions. Shared costs are included in segments on the basis of the actual recharges made.
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Notes on the Financial Statements (continued)
(d) Determination of fair value
All financial instruments are recognised initially at fair value. In the normal course of business, the fair value of
a financial instrument on initial recognition is the transaction price (that is, the fair value of the consideration
given or received). In certain circumstances, however, the fair value will be based on other observable current
market transactions in the same instrument, without modification or repackaging, or on a valuation technique
whose variables include only data from observable markets, such as interest rate yield curves, option volatilities
and currency rates. When such evidence exists, the group recognises a trading gain or loss on inception of the
financial instrument, being the difference between the transaction price and the fair value. When unobservable
market data have a significant impact on the valuation of financial instruments, the entire initial difference in fair
value indicated by the valuation model from the transaction price is not recognised immediately in the income
statement but is recognised over the life of the transaction on an appropriate basis, or when the inputs become
observable, or the transaction matures or is closed out, or when the group enters into an offsetting transaction.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value are measured in
accordance with the group’s valuation methodologies, which are described in Note 31 Fair value of financial
instruments.
(e) Reclassification of financial assets
Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial
recognition) may be reclassified out of the fair value through profit or loss category in the following
circumstances:
•
financial assets that would have met the definition of loans and receivables at initial recognition (if the
financial asset had not been required to be classified as held for trading) may be reclassified out of the fair
value through profit or loss category if there is the intention and ability to hold the financial asset for the
foreseeable future or until maturity; and
•
financial assets (except financial assets that would have met the definition of loans and receivables at initial
recognition) may be reclassified out of the fair value through profit or loss category and into another
category in rare circumstances.
When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at
its fair value on the date of reclassification. Any gain or loss already recognised in the income statement is not
reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortised
cost, as applicable.
(f) Loans and advances to banks and customers
Loans and advances to banks and customers include loans and advances originated by the group which are not
classified either as held for trading or designated at fair value. Loans and advances are recognised when cash is
advanced to borrowers. They are derecognised when either borrower repays their obligations, or the loans are
sold or written off, or substantially all the risks and rewards of ownership are transferred. They are initially
recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised
cost using the effective interest method, less impairment losses. Where exposures are hedged by derivatives
designated and qualifying as fair value hedges, the carrying value of the loans and advances so hedged includes a
fair value adjustment for the hedged risk only.
The group may commit to underwrite loans on fixed contractual terms for specified periods of time, where the
drawdown of the loan is contingent upon certain future events outside the control of the group. Where the loan
arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a
trading derivative and measured at fair value through profit and loss. On drawdown, the loan is classified as held
for trading and measured at fair value through profit and loss. Where it is not the group’s intention to trade the
loan, a provision on the loan commitment is only recorded where it is probable that the group will incur a loss.
This may occur, for example, where a loss of principal is probable or the interest rate charged on the loan is
lower than the cost of funding. On inception the loan, the hold portion is recorded at its fair value and
subsequently measured at amortised cost using the effective interest method. However, where the initial fair
value is lower than the cash amount advanced (for example, due to the rate of interest charged on the loan being
below the market rate of interest), the write down is charged to the income statement. The write down will be
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HSBC BANK PLC
Notes on the Financial Statements (continued)
recovered over the life of the loan, through the recognition of interest income using the effective interest method,
unless the loan becomes impaired. The write down is recorded as a reduction to other operating income.
Financial assets which have been reclassified out of the fair value through profit and loss category into the loans
and receivables category are initially recorded at the fair value at the date of reclassification. The reclassified
assets are subsequently measured at amortised cost, using the effective interest rate determined at the date of
reclassification.
(g) Impairment of loans and advances
Losses for impaired loans are recognised promptly when there is objective evidence that impairment of a loan or
portfolio of loans has occurred. Impairment losses are calculated on individual loans and on groups of loans
assessed collectively. Impairment losses are recorded as charges to the income statement. The carrying amount
of impaired loans on the balance sheet is reduced through the use of impairment allowance accounts. Losses
expected from future events are not recognised.
Individually assessed loans and advances
For all loans that are considered individually significant, the group assesses on a case-by-case basis at each
balance sheet date whether there is any objective evidence that a loan is impaired. The criteria used by the group
to determine that there is such objective evidence include:
•
known cash flow difficulties experienced by the borrower;
•
past due contractual payments of either principal or interest;
•
breach of loan covenants or conditions;
•
the probability that the borrower will enter bankruptcy or other financial realisation; and
•
a significant downgrading in credit rating by an external credit rating agency
.
For those loans where objective evidence of impairment exists, impairment losses are determined considering the
following factors:
•
the group’s aggregate exposure to the customer;
•
the viability of the customer’s business model and its capability to trade successfully out of financial
difficulties and generate sufficient cash flow to service its debt obligations;
•
the amount and timing of expected receipts and recoveries;
•
the likely dividend available on liquidation or bankruptcy;
•
the extent of other creditors’ commitments ranking ahead of, or pari passu with, the group and the
likelihood of other creditors continuing to support the company;
•
the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to
which legal and insurance uncertainties are evident;
•
the realisable value of security (or other credit mitigants) and likelihood of successful repossession;
•
the likely deduction of any costs involved in recovery of amounts outstanding;
•
the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in
local currency; and
•
when available, the secondary market price of the debt.
Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective
interest rate, and comparing the resultant present value with the loan’s current carrying amount. The impairment
allowances on individually significant accounts are reviewed at least quarterly, and more regularly when
circumstances require. This normally encompasses re-assessment of the enforceability of any collateral held and
the timing and amount of actual and anticipated receipts. Individually assessed impairment allowances are only
released when there is reasonable and objective evidence of a reduction in the established loss estimate.
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HSBC BANK PLC
Notes on the Financial Statements (continued)
Collectively assessed loans and advances
Impairment is assessed on a collective basis in two circumstances:
•
to cover losses which have been incurred but have not yet been identified on loans subject to individual
assessment; and
•
for homogeneous groups of loans that are not considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of loss has been specifically identified on an individual basis
are grouped together according to their credit risk characteristics for the purpose of calculating an estimated
collective loss. This reflects impairment losses that the group has incurred as a result of events occurring before
the balance sheet date, which the group is not able to identify on an individual loan basis, and that can be reliably
estimated. These losses will only be individually identified in the future. As soon as information becomes
available which identifies losses on individual loans within the group, those loans are removed from the group
and assessed on an individual basis for impairment.
The collective impairment allowance is determined after taking into account:
•
historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector,
loan grade or product);
•
the estimated period between impairment occurring and the loss being identified and evidenced by the
establishment of an appropriate allowance against the individual loan; and
•
management’s experienced judgement as to whether current economic and credit conditions are such that
the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested
by historical experience.
The period between a loss occurring and its identification is estimated by local management for each identified
portfolio.
Homogeneous groups of loans and advances
Statistical methods are used to determine impairment losses on a collective basis for homogeneous groups of
loans that are not considered individually significant, because individual loan assessment is impracticable.
Losses in these groups of loans are recorded on an individual basis when individual loans are written off, at
which point they are removed from the group. Two alternative methods are used to calculate allowances on a
collective basis:
•
when appropriate empirical information is available, the group uses roll-rate methodology. This
methodology employs statistical analyses of historical data and experience of delinquency and default to
estimate the amount of loans that will eventually be written off as a result of the events occurring before the
balance sheet date which the group is not able to identify on an individual loan basis, and that can be
reliably estimated. Under this methodology, loans are grouped into ranges according to the number of days
past due, and statistical analysis is used to estimate the likelihood that loans in each range will progress
through the various stages of delinquency and ultimately prove irrecoverable. Current economic conditions
are also evaluated when calculating the appropriate level of allowance required to cover inherent loss. The
estimated loss is the difference between the present value of expected future cash flows, discounted at the
original effective interest rate of the portfolio, and the carrying amount of the portfolio. In certain highly
developed markets, sophisticated 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 rollrate methodology, the group adopts a basic approach based on historical experience.
In normal circumstances, historical experience provides the most objective and relevant information from which
to assess inherent loss within each portfolio, though sometimes it provides less relevant information about the
inherent loss in a given portfolio at the balance sheet date, for example, when there have been changes in
economic, regulatory or behavioural conditions which result in the most recent trends in portfolio risk factors
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Notes on the Financial Statements (continued)
being not fully reflected in the statistical models. In these circumstances, the risk factors are taken into account
by adjusting the impairment allowances derived solely from historical loss experience.
These additional portfolio risk factors may include recent loan portfolio growth and product mix, unemployment
rates, bankruptcy trends, geographic concentrations, loan product features (such as the ability of borrowers to
repay adjustable-rate loans where reset interest rates give rise to increases in interest charges), economic
conditions such as national and local trends in housing markets and interest rates, portfolio seasoning, account
management policies and practices, current levels of write-offs, changes in laws and regulations and other items
which can affect customer payment patterns on outstanding loans, such as natural disasters. These risk factors,
where relevant, are taken into account when calculating the appropriate level of impairment allowances by
adjusting the impairment allowances derived solely from historical loss experience.
Roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual
outcomes to ensure they remain appropriate.
Write-off of loans and advances
Loans (and the related impairment allowance account) are normally written off, either partially or in full, when
there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds
from the realisation of security. In circumstances where the net realisable value of any collateral has been
determined and there is no reasonable expectation of further recovery, write off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively
to an event occurring after the impairment was recognised, the excess is written back by reducing the loan
impairment allowance account accordingly. The write-back is recognised in the income statement.
Reclassified loans and advances
Where financial assets have been reclassified out of the fair value through profit or loss category to the loans and
receivables category, the effective interest rate determined at the date of reclassification is used to calculate any
impairment losses.
Following reclassification, where there is a subsequent increase in the estimates of future cash receipts as a result
of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the
effective interest rate from the date of change in the estimate rather than as an adjustment to the carrying amount
of the asset at the date of change in the estimate.
Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans as part of an orderly realisation are recorded as assets held
for sale and reported in ‘Other assets’ if the carrying amounts of the assets are recovered principally through
sale, the assets are available for sale in their present condition and their sale is highly probable. The asset
acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan (net of
impairment allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Any
subsequent write-down of the acquired asset to fair value less costs to sell is recognised in the income statement,
in ‘Other operating income’. Any subsequent increase in the fair value less costs to sell, to the extent this does
not exceed the cumulative write down, is also recognised in ‘Other operating income’, together with any realised
gains or losses on disposal.
Renegotiated loans
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered
past due, but are treated as up to date loans for measurement purposes once the minimum numbers of payments
required under the new arrangements have been received. These renegotiated loans are segregated from other
parts of the loan portfolio for the purpose of collective impairment assessment, to reflect their risk profile. Loans
subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review
to determine whether they remain impaired or should be considered past due. The carrying amount of loans that
have been classified as renegotiated retain this classification until maturity or derecognition. Interest is recorded
on renegotiated loans taking into account the new contractual terms following renegotiation.
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Notes on the Financial Statements (continued)
(h) Trading assets and trading liabilities
Treasury bills, debt securities, equity shares, loans, deposits, debt securities in issue, and short positions in
securities are classified as held for trading if they have been acquired principally for the purpose of selling or
repurchasing in the near term, or they form part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent pattern of short-term profit-taking. These financial
assets or financial liabilities are recognised on trade date, when the group enters into contractual arrangements
with counterparties to purchase or sell financial instruments, and are normally derecognised when either sold
(assets) or extinguished (liabilities). Measurement is initially at fair value, with transaction costs taken to the
income statement. Subsequently their fair values are remeasured, and gains and losses from changes therein are
recognised in the income statement in ‘Net trading income’.
(i) Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of
the criteria set out below, and are so designated by management. The group may designate financial instruments
at fair value when the designation:
•
eliminates or significantly reduces measurement or recognition inconsistencies that would otherwise arise
from measuring financial assets or financial liabilities, or recognising gains and losses on them, on different
bases. Under this criterion, the main classes of financial instruments designated by the group are:
Long-term debt issues – The interest payable on certain fixed rate long-term debt securities issued has been
matched with the interest on ‘receive fixed/pay variable’ interest rate swaps as part of a documented interest
rate risk management strategy. An accounting mismatch would arise if the debt securities issued were
accounted for at amortised cost, because the related derivatives are measured at fair value with changes in
the fair value recognised in the income statement. By designating the long-term debt at fair value, the
movement in the fair value of the long-term debt will also be recognised in the income statement.
Financial assets and financial liabilities under investment contracts – Liabilities to customers under
linked contracts are determined based on the fair value of the assets held in the linked funds, with changes
recognised in the income statement. If no designation was made for the assets relating to the customer
liabilities they would be classified as available-for-sale and the changes in fair value would be recorded
directly in other comprehensive income. These financial instruments are managed on a fair value basis and
information is provided to management on that basis. Designation at fair value of the financial assets and
liabilities under investment contracts allows the changes in fair values to be recorded in the income
statement and presented in the same line.
•
applies to groups of financial assets, financial liabilities or combinations thereof that are managed, and their
performance evaluated, on a fair value basis in accordance with a documented risk management or
investment strategy, and where information about the groups of financial instruments is reported to
management on that basis. Under this criterion, certain financial assets held to meet liabilities under
insurance contracts are the main class of financial instrument so designated. The group has documented risk
management and investment strategies designed to manage such assets at fair value, taking into
consideration the relationship of assets to liabilities in a way that mitigates market risks. Reports are
provided to management on the fair value of the assets. Fair value measurement is also consistent with the
regulatory reporting requirements under the appropriate regulations for these insurance operations.
•
relates to financial instruments containing one or more embedded derivatives that significantly modify the
cash flows resulting from those financial instruments, including certain debt issues and debt securities held.
The fair value designation, once made, is irrevocable. Designated financial assets and financial liabilities are
recognised when the group enters into the contractual provisions of the arrangements with counterparties, which
is generally on trade date, and are normally derecognised when sold (assets) or extinguished (liabilities).
Measurement is initially at fair value, with transaction costs taken directly to the income statement.
Subsequently, the fair values are remeasured, and gains and losses from changes therein are recognised in the
income statement in ‘Net income from financial instruments designated at fair value’.
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Notes on the Financial Statements (continued)
(j) Financial investments
Treasury bills, debt securities and equity shares intended to be held on a continuing basis, other than those
designated at fair value, are classified as available-for-sale or held-to-maturity. Financial investments are
recognised on trade date, when the group enters into contractual arrangements with counterparties to purchase
securities, and are normally derecognised when either the securities are sold or the borrowers repay their
obligations.
(i) Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction
costs. They are subsequently remeasured at fair value, and changes therein are recognised in other
comprehensive income in “Available-for-sale investments – fair value gains/ (losses)” until the financial
assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative
gains or losses previously recognised in other comprehensive income are recognised in the income statement
as ‘Gains less losses from financial investments’.
Interest income is recognised on available-for-sale debt securities using the effective interest method,
calculated over the asset’s expected life. Premiums and/or discounts arising on the purchase of dated
investment securities are included in the calculation of their effective interest rates. Dividends are
recognised in the income statement when the right to receive payment has been established.
At each balance sheet date an assessment is made of whether there is any objective evidence of impairment
in the value of a financial asset. Impairment losses are recognised if, and only if, there is objective evidence
of impairment as a result of one or more events that occurred after the initial recognition of the financial
asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the
financial asset that can be reliably estimated.
If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition
cost (net of any principal repayments and amortisation) and the current fair value, less any previous
impairment loss recognised in the income statement, is removed from other comprehensive income and
recognised in the income statement.
Impairment losses for available-for-sale debt securities are recognised within ‘Loan impairment charges and
other credit risk provision’ in the income statement and impairment losses for available-for-sake equity
securities are recognised within ‘Gains less losses from financial investments’ in the income statement. The
impairment methodologies for available-for-sale financial assets are set out in more detail below.
–
Available-for-sale debt securities: When assessing available-for-sale debt securities for objective
evidence of impairment at the reporting date, the group considers all available evidence, including
observable data or information about events specifically relating to the securities which may result in a
shortfall in recovery of future cash flows. These events may include a significant financial difficulty of
the issuer, a breach of contract such as a default, bankruptcy or other financial reorganisation, or the
disappearance of an active market for the debt security because of financial difficulties relating to the
issuer.
These types of specific event and other factors such as information about the issuers’ liquidity, business
and financial risk exposures, levels of and trends in default for similar financial assets, national and
local economic trends and conditions, and the fair value of collateral and guarantees may be considered
individually, or in combination, to determine if there is objective evidence of impairment of a debt
security.
In addition, when assessing available-for-sale asset-backed securities (‘ABS’s) for objective evidence of
impairment, the group considers the performance of underlying collateral and the extent and depth of
market price declines. Changes in credit ratings are considered but a downgrade of a security’s credit
rating is not, of itself, evidence of impairment. The primary indicators of potential impairment are
considered to be adverse fair value movements, and the disappearance of an active market for a
security.
–
Available-for-sale equity securities: Objective evidence of impairment for available-for sale equity
securities may include specific information about the issuer as detailed above, but may also include
information about significant changes in technology, markets, economics or the law that provides
evidence that the cost of the equity securities may not be recovered.
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Notes on the Financial Statements (continued)
A significant or prolonged decline in the fair value of the asset below its cost is also objective evidence
of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the
original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is
evaluated against the period in which the fair value of the asset has been below its original cost at initial
recognition.
Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent
accounting treatment for changes in the fair value of that asset differs depending on the nature of the
available-for-sale financial asset concerned:
•
for an available-for-sale debt security, a subsequent decline in the fair value of the instrument is
recognised in the income statement when there is further objective evidence of impairment as a result of
further decreases in the estimated future cash flows of the financial asset. Where there is no further
objective evidence of impairment, the decline in fair value of the financial asset is recognised in other
comprehensive income. If the fair value of the debt security increases in a subsequent period, and the
increase can be objectively related to an event occurring after the impairment loss was recognised in the
income statement, the impairment loss is reversed through the income statement to the extent of the
increase in fair value.
•
for an available-for-sale equity security, all subsequent increases in the fair value of the instrument are
treated as a revaluation and are recognised directly in other comprehensive income. Impairment losses
recognised on the equity security are not reversed through the income statement. Subsequent decreases in
the fair value of the available-for-sale equity security are recognised in the income statement, to the extent
that further cumulative impairment losses have been incurred in relation to the acquisition cost of the
equity security.
(ii) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that the group positively intends, and is able, to hold until maturity. Held-to-maturity
investments are initially recorded at fair value plus any directly attributable transaction costs, and are
subsequently measured at amortised cost using the effective interest method, less any impairment losses.
(k) Sale and repurchase agreements (including stock lending and borrowing)
When securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they
remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities
purchased under commitments to sell (‘reverse repos’) are not recognised on the balance sheet and the
consideration paid is recorded in ‘Loans and advances to banks’ or ‘Loans and advances to customers’ as
appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the
life of the agreement.
Securities lending and borrowing transactions are generally secured, with collateral taking the form of securities
or cash advanced or received. The transfer of securities to counterparties under these agreements is not normally
reflected on the balance sheet. Cash collateral advanced or received is recorded as an asset or a liability
respectively.
Securities borrowed are not recognised on the balance sheet. If they are sold on to third parties, an obligation to
return the securities is recorded as a trading liability and measured at fair value, and any gains or losses are
included in ‘Net trading income’.
(l) Derivatives and hedge accounting
Derivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values of exchangetraded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are
obtained using valuation techniques, including discounted cash flow models and option pricing models.
Derivatives may be embedded in other financial instruments, for example, a convertible bond with an embedded
conversion option. Embedded derivatives are treated as separate derivatives when their economic characteristics
and risks are not clearly and closely related to those of the host contract; the terms of the embedded derivative
would meet the definition of a stand-alone derivative if they were contained in a separate contract, and the
combined contract is not held for trading nor designated at fair value. These embedded derivatives are measured
at fair value with changes therein recognised in the income statement.
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Notes on the Financial Statements (continued)
Derivatives are classified as assets when their fair value is positive, or as liabilities when their fair value is
negative. Derivative assets and liabilities arising from different transactions are offset only if the transactions are
with the same counterparty, a legal right of offset exists, and the parties intend to settle the cash flows on a net
basis.
The method of recognising fair value gains or losses depends on whether derivatives are held for trading or are
designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses
from changes in the fair value of derivatives held for trading are recognised in the income statement. When
derivatives are designated as hedges, the group classifies them as either: (i) hedges of the change in fair value of
recognised assets or liabilities or firm commitments (‘fair value hedges’); (ii) hedges of the variability in highly
probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (‘cash flow
hedges’). Hedge accounting is applied to derivatives designated as hedging instruments in a fair value, cash flow
or net investment hedge provided certain criteria are met.
Hedge accounting
At the inception of a hedging relationship, the group documents the relationship between the hedging
instruments and hedged items, its risk management objective and its strategy for undertaking the hedge. The
group also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or
not the hedging instruments, primarily derivatives, that are used in hedging transactions are highly effective in
offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items.
Interest on designated qualifying hedges is included in ‘Net interest income’.
Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are
recorded in the income statement, along with changes in the fair value of the hedged assets, liabilities or group
thereof that are attributable to the hedged risk.
If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the
carrying amount of the hedged item is amortised to the income statement based on a recalculated effective
interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case it
is released to the income statement immediately.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow
hedges is recognised in other comprehensive income within the “Cash flow hedging reserve”. Any gain or loss in
fair value relating to an ineffective portion is recognised immediately in the income statement.
The accumulated gains and losses recognised in other comprehensive income are reclassified to the income
statement in the periods in which the hedged item will affect profit or loss. However, when the forecast
transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains
and losses previously recognised in other comprehensive income are reclassified are removed from equity and
included in the initial measurement of the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting,
any cumulative gain or loss existing in other comprehensive income at that time remains separately in equity
until the forecast transaction is eventually recognised in the income statement. When a forecast transaction is no
longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is
immediately reclassified to the income statement.
Hedge effectiveness testing
To qualify for hedge accounting, the group requires that at the inception of the hedge and throughout its life,
each hedge must be expected to be highly effective (prospective effectiveness) and demonstrate actual
effectiveness (retrospective effectiveness) on an ongoing basis.
The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The
method a group entity adopts for assessing hedge effectiveness will depend on its risk management strategy.
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Notes on the Financial Statements (continued)
For prospective effectiveness the hedging instrument must be expected to be highly effective in offsetting
changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is
designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each other
in the range of 80 per cent to 125 per cent.
Hedge ineffectiveness is recognised in the income statement in ‘Net trading income’.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are
recognised immediately in the income statement. These gains and losses are reported in ‘Net trading income’,
except where derivatives are managed in conjunction with financial instruments designated at fair value (other
than derivatives managed in conjunction with debt securities issued by the group), in which case gains and losses
are reported in ‘Net income from financial instruments designated at fair value’. The interest on derivatives
managed in conjunction with debt securities issued by the group which are designated at fair value is recognised
in ‘Interest expense’. All other gains and losses on these derivatives are reported in ‘Net income from financial
instruments designated at fair value’.
(m) Derecognition of financial assets and liabilities
Financial assets are derecognised when the contractual right to receive cash flows from the assets has expired; or
when the group has transferred its contractual right to receive the cash flows of the financial assets, and either:
•
substantially all the risks and rewards of ownership have been transferred; or
•
the group has neither retained nor transferred substantially all the risks and rewards, but has not retained
control.
Financial liabilities are derecognised when they are extinguished, that is when the obligation is discharged,
cancelled or expires.
(n) Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there
is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
(o) Subsidiaries, associates and joint ventures
The group classifies investments in entities which it controls as subsidiaries. Where the group is a party to a
contractual arrangement whereby, together with one or more parties, it undertakes an economic activity that is
subject to joint control, the group classifies its interest in the venture as a joint venture. The group classifies
investments in entities over which it has significant influence, and that are neither subsidiaries nor joint ventures,
as associates. For the purpose of determining this classification, control is considered to be the power to govern
the financial and operating policies of an entity so as to obtain benefits from its activities.
The bank’s investments in subsidiaries are stated at cost less any impairment losses. An impairment loss
recognised in the prior period shall be reversed through profit and loss if, and only if, there has been a change in
the estimates used to determine the investment in subsidiary’s recoverable amount since the last impairment loss
was recognised.
Investments in associates and interests in joint ventures are recognised using the equity method. Under this
method, such investments are initially stated at cost, including attributable goodwill, and are adjusted thereafter
for the post-acquisition change in the group’s share of net assets.
Profits on transactions between the group and its associates and joint ventures are eliminated to the extent of the
group’s interest in the respective associates or joint ventures. Losses are also eliminated to the extent of the
group’s interest in the associates or joint ventures unless the transaction provides evidence of an impairment of
the asset transferred.
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Notes on the Financial Statements (continued)
(p) Goodwill and intangible assets
(i) Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration
transferred, the amount of any non-controlling interest and the fair value of any previously held equity
interests in the acquiree exceed the amounts of the identifiable assets and liabilities acquired. If they do not
exceed the amounts of the identifiable assets and liabilities of an acquired business, the difference is
recognised immediately in the income statement. Goodwill arises on the acquisition of interests in joint
ventures and associates when the cost of investment exceeds the group’s share of the net fair value of the
associate’s or joint venture’s identifiable assets and liabilities.
Intangible assets are recognised separately from goodwill when they are separable or arise from contractual
or other legal rights, and their fair value can be measured reliably.
Goodwill is allocated to cash-generating units for the purpose of impairment testing, which is undertaken at
the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is
performed at least annually, and whenever there is an indication that the cash-generating unit may be
impaired, by comparing the recoverable amount from a cash-generating unit with the carrying amount of its
net assets, including attributable goodwill. The recoverable amount of an asset is the higher of its fair value
less cost to sell and its value in use. Value in use is the present value of the expected future cash flows from
a cash-generating unit. If the recoverable amount is less than the carrying value, an impairment loss is
charged to the income statement. Goodwill is stated at cost less accumulated impairment losses.
Goodwill on acquisitions of interests in joint ventures and associates is included in ‘Interests in associates
and joint ventures’ and is not tested separately for impairment.
At the date of disposal of a business, attributable goodwill is included in the group’s share of net assets in
the calculation of the gain or loss on disposal.
(ii) Intangible assets include the present value of in-force long-term insurance business, computer software,
trade names, mortgage service rights, customer lists, core deposit relationships, credit card customer
relationships and merchant or other loan relationships. Intangible assets are subject to impairment review if
there are events or changes in circumstances that indicate that the carrying amount may not be recoverable.
Where:
– intangible assets that have an indefinite useful life, or are not yet ready for use, are tested for impairment
annually. This impairment test may be performed at any time during the year, provided it is performed at
the same time every year. An intangible asset recognised during the current period is tested before the
end of the current year; and
– intangible assets that have a finite useful life, except for the present value of in-force long-term insurance
business, are stated at cost less amortisation and accumulated impairment losses and are amortised over
their estimated useful lives. Estimated useful life is the lower of legal duration and expected useful life.
The amortisation of mortgage servicing rights is included within ‘Net fee income’.
For the accounting policy governing the present value of in-force long-term insurance businesses, see
note 2(y).
(iii) Intangible assets with finite useful lives are amortised, generally on a straight-line basis, over their useful
lives as follows:
Trade names ...........................................................................................................................
Mortgage service rights ..........................................................................................................
Internally generated software ................................................................................................
Purchased software ................................................................................................................
Customer/merchant relationships ..........................................................................................
Other ......................................................................................................................................
10 years
generally between 5 and 12 years
between 3 and 5 years
between 3 and 5 years
between 3 and 10 years
generally 10 years
(q) Property, plant and equipment
Land and buildings are stated at historical cost, or fair value at the date of transition to IFRSs (‘deemed costs’),
less any impairment losses and depreciation calculated to write off the assets over their estimated useful lives as
follows:
•
freehold land is not depreciated;
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Notes on the Financial Statements (continued)
•
freehold buildings are depreciated at the greater of 2% per annum on a straight-line basis or over their
remaining useful lives; and
•
leasehold buildings are depreciated over the shorter of their unexpired terms of the leases or over their
remaining useful lives.
Equipment, fixtures and fittings (including equipment on operating leases where the group is the lessor) are
stated at cost less any impairment losses and depreciation calculated on a straight-line basis to write off the
assets over their useful lives, which run to a maximum of 35 years but are generally between 5 years and 20
years.
Property, plant and equipment is subject to an impairment review if there are events or changes in circumstances
which indicate that the carrying amount may not be recoverable.
The group holds certain properties as investments to earn rentals or for capital appreciation, or both. Investment
properties are included in the balance sheet at fair value with changes therein recognised in the income statement
in the period of change. Fair values are determined by independent professional valuers who apply recognised
valuation techniques.
(r) Finance and operating leases
Agreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of
assets, but not necessarily legal title, are classified as finance leases. When the group is a lessor under finance
leases the amounts due under the leases, after deduction of unearned charges, are included in ‘Loans and
advances to banks’ or ‘Loans and advances to customers’, as appropriate. The finance income receivable is
recognised in ‘Net interest income’ over the periods of the leases so as to give a constant rate of return on the net
investment in the leases.
When the group is a lessee under finance leases, the leased assets are capitalised and included in ‘Property, plant
and equipment’ and the corresponding liability to the lessor is included in ‘Other liabilities’. A finance lease and
its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of
the minimum lease payments. Finance charges payable are recognised in ‘Net interest income’ over the period of
the lease based on the interest rate implicit in the lease so as to give a constant rate of interest on the remaining
balance of the liability.
All other leases are classified as operating leases. When acting as lessor, the group includes the assets subject to
operating leases in ‘Property, plant and equipment’ and accounts for them accordingly. Impairment losses are
recognised to the extent that residual values are not fully recoverable and the carrying value of the assets is
thereby impaired. When the group is the lessee, leased assets are not recognised on the balance sheet. Rentals
payable and receivable under operating leases are accounted for on a straight-line basis over the periods of the
leases and are included in ‘General and administrative expenses’ and ‘Other operating income’ respectively.
A sale and leaseback transaction involves the sale of an asset followed by the leasing back of the same asset. The
resulting lease is classified either as a finance lease or an operating lease and it is accounted for accordingly. If a
sale and leaseback transaction results in the recognition of a finance lease, any excess of sales proceeds over the
carrying amount is deferred and amortised over the lease term. If a sale and leaseback transaction results in an
operating lease, and it is clear that the transaction is established at fair value, any profit or loss is recognised
immediately. If the sale price is below fair value, any profit or loss is recognised immediately except that, if the
loss is compensated for by future lease payments below market price, it is deferred and amortised in proportion
to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair
value, the excess over fair value is deferred and amortised over the period for which the asset is expected to be
used.
(s) Income tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to
the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it
is recognised in the same statement in which the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted
or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous
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Notes on the Financial Statements (continued)
years. Current tax assets and liabilities are offset when the group intends to settle on a net basis and the legal
right to offset exists.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the
balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are
generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent
that it is probable that future taxable profits will be available against which deductible temporary differences can
be utilised.
Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised
or the liabilities settled based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.
Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income
taxes levied by the same taxation authority, and when the group has a legal right to offset.
Deferred tax relating to actuarial gains and losses on post-employment benefits is recognised directly in other
comprehensive income. Deferred tax relating to share-based payment transaction is recognised directly in other
comprehensive income to the extent that the amount of the estimated future tax deduction exceeds the amount of
the related cumulative remuneration expense. Deferred tax relating to fair value remeasurement of available-forsale investments and cash flow hedging instruments which are charged or credited directly to other
comprehensive income, is also credited or charged directly to other comprehensive income and is subsequently
recognised in the income statement when the deferred fair value gain or loss is recognised in the income
statement.
(t) Pension and other post-employment benefits
The group operates a number of pension and other post-employment benefit plans. These plans include both
defined benefit and defined contribution plans and various other post-employment benefits such as postemployment healthcare.
Payments to defined contribution plans and state-managed retirement benefit plans, where the group’s
obligations under the plans are equivalent to a defined contribution plan, are charged as an expense as they fall
due.
The defined benefit pension costs and the present value of defined benefit obligations are calculated at the
reporting date by the scheme’s actuaries using the Projected Unit Credit Method. The net charge to the income
statement mainly comprises the current service cost, plus the unwinding of the discount rate on plan liabilities,
less the expected return on plan assets, and is presented in operating expenses. Past service costs are charged
immediately to the income statement to the extent that the benefits have vested, and are otherwise recognised on
a straight-line basis over the average period until the benefits vest. Actuarial gains and losses comprise
experience adjustments (the effects of differences between the previous actuarial assumptions and what has
actually occurred), as well as the effects of changes in actuarial assumptions. Actuarial gains and losses are
recognised in other comprehensive income in the period in which they arise.
The defined benefit liability recognised in the balance sheet represents the present value of defined benefit
obligations adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Any net
defined benefit surplus is limited to unrecognised past service costs plus the present value of available refunds
and reductions in future contributions to the plan.
The costs of obligations arising from other defined post-employment benefits plans, such as defined benefit
health-care plans, are accounted for on the same basis as defined benefit pension plans.
(u) Share-based payments
The cost of share-based payment arrangements with employees is measured by reference to the fair value of
equity instruments on the date they are granted, and recognised as an expense on a straight-line basis over the
vesting period, with a corresponding credit to ’Retained Earnings’. The vesting period is the period during which
all the specified vesting conditions of a share-based payment arrangement are to be satisfied. The fair value of
equity instruments that are made available immediately, with no vesting period attached to the award, are
expensed immediately.
Fair value is determined by using appropriate valuation models, taking into account the terms and conditions
upon which the equity instruments were granted. Vesting conditions include service conditions and performance
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Notes on the Financial Statements (continued)
conditions. Market performance conditions are taken into account when estimating the fair value of equity
instruments at the date of grant, so that an award is treated as vesting irrespective of whether the market
performance condition or non-vesting condition is satisfied, provided all other conditions are satisfied.
Vesting conditions, other than market performance conditions, are not taken into account in the initial estimate
of the fair value at the grant date. They are taken into account by adjusting the number of equity instruments
included in the measurement of the transaction, so that the amount recognised for services received as
consideration for the equity instruments granted shall be based on the number of equity instruments that
eventually vest. On a cumulative basis, no expense is recognised for equity instruments that do not vest because
of a failure to satisfy non-market performance or service conditions.
Where an award has been modified, as a minimum, the expense of the original award continues to be recognised
as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or
increase the number of equity instruments, the incremental fair value of the award or incremental fair value of
liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate
of the expenditure required to settle the obligation.
A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognised
immediately for the amount that would otherwise have been recognised for services over the vesting period.
HSBC Holdings is the grantor of its equity instrument for all share awards and share options across the group.
The credit to 'Retained earnings' on expensing an award represents the effective capital contribution from HSBC
Holdings. To the extent the group will be, or has been, required to fund a share-based payment arrangement, this
capital contribution is reduced and the fair value of shares expected to be released to employees is recorded
within 'Other liabilities'.
(v) Foreign currencies
Items included in the financial statements of each of the group’s entities are measured using the currency of the
primary economic environment in which the entity operates (‘the functional currency’).
Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into
the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange
differences are included in the income statement. Non-monetary assets and liabilities that are measured at
historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the
date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are
translated into the functional currency using the rate of exchange at the date the fair value was determined. Any
exchange component of a gain or loss on a non-monetary item is recognised in other comprehensive income if
the gain or loss on the non-monetary item is recognised in other comprehensive income. Any exchange
component of a gain or loss on a non-monetary item is recognised in the income statement if the gain or loss on
the non-monetary item is recognised in the income statement
In the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of
branches, subsidiaries, joint ventures and associates whose functional currency is not sterling, are translated into
the group’s presentational currency at the rate of exchange ruling at the balance sheet date. The results of
branches, subsidiaries, joint ventures and associates whose function currency is not sterling are translated into
sterling at the average rates of exchange for the reporting period. Exchange differences arising from the
retranslation of opening foreign currency net investments, and exchange differences arising from retranslation of
the result for the reporting period from the average rate to the exchange rate prevailing at the period end, are
recognised in other comprehensive income. Exchange differences on a monetary item that is part of a net
investment in a foreign operation are recognised in the income statement of the separate financial statements. In
consolidated financial statements these exchange differences are recognised in other comprehensive income. On
disposal of a foreign operation, exchange differences relating thereto and previously recognised in other
comprehensive income are recognised in the income statement.
(w) Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a
current legal or constructive obligation, which has arisen as a result of past events, and for which a reliable
estimate can be made of the amount of the obligation.
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Notes on the Financial Statements (continued)
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, are
possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or
non-occurrence, of one or more uncertain future events not wholly within the control of the group; or are present
obligations that have arisen from past events but are not recognised because it not probable that settlement will
require outflow of economic benefits, or because the amount of the obligations cannot be reliably measured.
Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of
settlement is remote.
(x) Financial guarantee contracts
Liabilities under financial guarantee contracts not classified as insurance contracts are recorded initially at their
fair value, which is generally the fee received or receivable. Subsequently, the financial guarantee liabilities are
measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the
expenditure required to settle the obligations.
The group has issued financial guarantees and similar contract to other group entities. Where it has previously
asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to
insurance contracts, the group may elect to account for guarantees as insurance contracts. This election is made
on a contract by contract basis, but the election for each contract is irrevocable. Where these guarantees have
been classified as insurance contracts, they are measured and recognised as insurance liabilities.
Where the group is the recipient of a guarantee, including from other HSBC Group companies, amounts
receivable under a claim are recognised when their receipt is virtually certain. Any fees payable to the guarantor
are expensed over the period of the guarantee contract.
(y) Insurance contracts
Through its insurance subsidiaries, the group issues contracts to customers that contain insurance risk, financial
risk or a combination thereof. A contract under which the group accepts significant insurance risk from another
party by agreeing to compensate that party on the occurrence of a specified uncertain future event is classified as
an insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance
contract if the insurance risk is significant. While investment contracts with discretionary participation features
are financial instruments, they continue to be treated as insurance contracts as permitted by IFRS 4.
Insurance contracts are accounted for as follows:
Premiums
Gross insurance premiums for non-life insurance business are reported as income over the term of the insurance
contract based on the proportion of risks borne during the accounting period. The unearned premium (the
proportion of the business underwritten in the accounting year relating to the period of risk after the balance
sheet date) is calculated on a daily or monthly pro rata basis.
Premiums for life assurance are accounted for when receivable, except in unit-linked insurance contracts where
premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance
contracts to which they relate.
Claims and reinsurance recoveries
Gross insurance claims for non-life insurance contracts include paid claims and movements in outstanding
claims liabilities.
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year,
including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
Claims arising in the year include maturities, surrenders and death claims.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date
on which, following notification, the policy ceases to be included within the calculation of the related insurance
liabilities. Death claims are recognised when notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
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Notes on the Financial Statements (continued)
Liabilities under insurance contracts
Outstanding claims liabilities for non-life insurance contracts are based on the estimated ultimate cost of all
claims incurred but not settled at the balance sheet date, whether reported or not, together with related claimhandling costs and a reduction for the expected value of salvage and other recoveries. Liabilities for claims
incurred but not reported are made on an estimated basis, using appropriate statistical techniques.
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on
local actuarial principles.
Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value
which is calculated by reference to the value of the relevant underlying funds or indices.
A liability adequacy test is carried out on insurance liabilities to ensure that the carrying amount of the liabilities
is sufficient in the light of current estimates of future cash flows. When performing the liability adequacy test, all
contractual cash flows are discounted and compared with the carrying value of the liability. When a shortfall is
identified it is charged immediately to the income statement.
Present value of in-force long-term insurance business
The value placed on insurance contracts that are classified as long-term insurance business or long term
investment contracts with discretionary participating features (“DPF”) and are in force at the balance sheet date
is recognised as an asset. The asset represents the present value of the equity holders’ interest in the profits
expected to emerge from these contracts written at the balance sheet date.
The present value of in-force long-term insurance business and long term investment contracts with DPF,
referred to as ‘PVIF’, is determined by discounting the equity holders’ interest in future profits expected to
emerge from business currently in force using appropriate assumptions in assessing factors such as future
mortality, lapse rates and levels of expenses and a risk discount rate that reflects the risk premium attributable to
the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial
options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements
in the PVIF asset are included in “Other operating income’ on a gross of tax basis.
Future profit participation
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts
include provisions for the future discretionary benefits to policyholders. These provisions reflect actual
performance of the investment portfolio to date and management expectation on the future performance in
connection with the assets backing the contracts, as well as other experience factors such as mortality, lapses and
operational efficiency, where appropriate. This benefit may arise from the contractual terms, regulation, or past
distribution policy.
In the case of net unrealised investment gain on contracts whose discretionary benefit principally reflect the
actual performance of the portfolio, the corresponding increase in the liabilities is recognised in either the
income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant
assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its
recoverability is highly probable. Movement in the liabilities arising from realised gains and losses on relevant
assets are recognised in the income statement.
Investment contracts
Customer liabilities under linked and certain non-linked investment contracts and the corresponding financial
assets are designated at fair value. Movements in fair value are recognised in ‘Net expense/income from
financial instruments designated at fair value’. Premiums receivable and amounts withdrawn are accounted for as
increases or decreases in the liability recorded in respect of investment contracts.
Liabilities under linked investment contracts are at least equivalent to the surrender or transfer value which is
calculated by reference to the value of the relevant underlying funds or indices.
Investment management fees receivable are recognised in the income statement over the period of the provision
of the investment management services, in ‘Net fee income’.
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Notes on the Financial Statements (continued)
The incremental costs directly related to the acquisition of new investment contracts or renewing existing
investment contracts are deferred and amortised over the period during which the investment management
services are provided.
(z) Debt securities in issue and deposits by customers and banks
Financial liabilities are recognised when the group enters into the contractual provisions of the arrangements
with counterparties, which is generally on trade date, and initially measured at fair value, which is normally the
proceeds received net of directly attributable transaction costs incurred. Subsequent measurement of financial
liabilities, other than those measured at fair value through profit or loss and financial guarantees, is at amortised
cost, using the effective interest rate method to amortise the difference between proceeds received, net of directly
attributable transaction costs incurred, and the redemption amount over the expected life of the instrument.
(aa)Share capital and other equity instruments
Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets.
Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from
the proceeds, net of tax.
(bb) Cash and cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents include highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.
Such investments are normally those with less than three months’ maturity from the date of acquisition, and
include cash and balances at central banks, treasury bills and other eligible bills, loans and advances to banks,
items in the course of collection from or in transmission to other banks and certificates of deposit.
3
Critical accounting policies
The results of the group are sensitive to the accounting policies, assumptions and estimates that underlie the
preparation of its consolidated financial statements. The accounting policies used in the preparation of the
consolidated financial statements are described in detail in Note 2.
When preparing the financial statements, it is the Directors’ responsibility under UK company law to select suitable
accounting policies and to make judgements and estimates that are reasonable and prudent.
The accounting policies that are deemed critical to the group’s results and financial position, in terms of the
materiality of the items to which the policy is applied, or which involve a high degree of judgement including the use
of assumptions and estimation, are disclosed below:
Impairment of loans and advances
The group’s accounting policy for losses arising from the impairment of customer loans and advances is described in
Note 2(g). Further information can be found in the Report of the Directors: Risk (Credit Risk). Loan impairment
allowances represent management’s best estimate of losses incurred in the loan portfolios at balance sheet date.
Management is required to exercise judgement in making assumptions and estimations when calculating loan
impairment allowances on both individually and collectively assessed loans and advances. The most significant
judgemental area is the calculation of collective impairment allowances.
The methods used to calculate collective impairment allowances on homogeneous groups of loans that are not
considered individually significant are disclosed in Note 2(g). They are subject to estimation uncertainty, in part
because it is not practicable to identify losses on an individual loan basis because of the large number of individually
insignificant loans in the portfolio.
The method involve the use of statistically assessed historical information is supplemented with significant
management judgement to assess whether current economic and credit conditions are such that the actual level of
inherent losses is likely to be greater or less than that suggested by historical experience. In normal circumstances,
historical experience provides the most objective and relevant information from which to assess inherent loss within
each portfolio. In certain circumstances, historical loss experience provides less relevant information about the
inherent loss in a given portfolio at the balance sheet date, for example, where there have been changes in economic,
108
HSBC BANK PLC
Notes on the Financial Statements (continued)
regulatory or behavioural conditions such that the most recent trends in the portfolio risk factors are not fully
reflected in the statistical models. In these circumstances, such risk factors are taken into account when calculating
the appropriate levels of impairment allowances, by adjusting the impairment allowances derived solely from
historical loss experience.
Risk factors include loan portfolio growth, product mix, unemployment rates, bankruptcy trends, geographic
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 factors that can affect customer payment patterns. Different factors are applied in different
regions and countries to reflect different economic conditions and 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.
However, the exercise of judgement requires the use of assumptions which are highly sensitive to the risk factors, in
particular, to changes in economic and credit conditions across geographical areas. Many of the factors have a high
degree of interdependency and there is no one single factor to which the group’s loan impairment allowances as a
whole are sensitive. It is possible that the outcomes within the next financial year could be different from the
assumptions built into the models, resulting in a material adjustment to the carrying amount of loans and advances.
Goodwill impairment
The group’s accounting policy for goodwill is described in Note 2(p). The review of goodwill impairment represents
management’s best estimate of the factors below:
•
the future cash flows of the cash-generating units (‘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 necessarily and appropriately reflect management’s view of future business prospects at the time of the
assessment; and
•
the discount rate used to discount the future expected cash flows is based on the cost of capital assigned to an
individual CGU, and can have a significant effect on their valuation. 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 inherent
risk of the business being evaluated. These variables are subject to fluctuations in external market rates and
economic conditions beyond management’s control and are therefore require the exercise of significant
management judgment and are consequently subject to uncertainty.
A decline in a CGU’s expected cash flows and/ or an increase in its cost of capital reduces the CGU’S estimated
recoverable amount. If this is lower than the carrying value of the CGU, a charge for impairment of goodwill is
recognised in the income statement for the year.
The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. In such
market conditions, management retests goodwill for impairment more frequently than annually to ensure 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.
Management reviewed the current and expected performance of the CGUs as at 31 December 2010 and determined
that there was no indication of potential impairment of the goodwill allocated to the CGUs. However, in the event of
further significant deterioration in the economic and credit conditions beyond the levels already reflected by
management in the cash flow forecasts for the CGUs, a material adjustment to a CGU’s recoverable amount may
occur which may result in the recognition of an impairment charge in the income statement.
Note 21 includes details of the CGUs with significant balances of goodwill, states the key assumptions used to assess
the goodwill in each CGU for impairment, and provides a discussion of the sensitivity of the carrying value of
goodwill to changes in key assumptions.
Valuation of financial instruments
The group’s accounting policy for valuation of financial instruments is described in Note 2(d) on the Financial
Statement. The best evidence of fair value is a quoted price in an actively traded market. In the event that the market
109
HSBC BANK PLC
Notes on the Financial Statements (continued)
for a financial instrument is not active, a valuation technique is used. The majority of valuation techniques employ
only observable market data, and so the reliability of the fair value measurement is high. However, certain financial
instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are
unobservable. Valuation techniques that rely to a greater extent on unobservable inputs require a higher level of
management judgement to calculate a fair value than those based wholly on observable inputs.
Valuation techniques used to calculate fair values are discussed in Note 31. The main assumptions and estimates
which management considers when applying a model with valuation techniques are:
•
the likelihood and expected timing of future cash flows on the instrument. These cash flows are usually governed
by the terms of the instrument, although management judgment may be required when the ability of the
counterparty to service the instrument in accordance with the contractual terms is in doubt. Future cash flows
may be sensitive to changes in market rates; selecting an appropriate discount rate for the instrument.
Management bases the determination of this rate on its assessment of what a market participant would regard as
the appropriate spread of the rate for the instrument over the appropriate risk-free rate; and
•
judgment to determine what model to use to calculate fair value in areas where the choice of valuation model is
particularly subjective, for example, when valuing complex derivative products.
When applying a model with unobservable inputs, estimates are made to reflect uncertainties in fair values resulting
from a lack of market data inputs, for example, as a result of illiquidity in the market. For these instruments, the fair
value measurement is less reliable. Inputs into valuations based on unobservable data are inherently uncertain
because there are little or no current market data available from which to determine the level at which an arm’s length
transaction would occur under normal business conditions. However, in most cases there are some market data
available on which to base a determination of fair value, for example historical data, and the fair values of most
financial instruments will be based on some market observable inputs even where the unobservable inputs are
significant.
Disclosure of types and amounts of fair value adjustments made in determining the fair value of financial instruments
measured at fair value using valuation techniques is provided in Note 31. In addition a sensitivity analysis of fair
value for financial instruments with significant unobservable inputs to reasonably possibly alternative assumption
and a range of assumption can be found in Note 31. Given the uncertainty and subjective nature of valuing financial
instruments at fair value, it is possible that the outcomes within the next financial year could differ from the
assumptions used, and this would result in a material adjustment to the carrying amount of financial instruments
measured at fair value.
Impairment of available-for-sale financial assets
The group’s accounting policy for impairment on available-for-sale financial assets is described in Note 2(j) on the
Financial Statements.
Management is required to exercise judgement in determining whether there is objective evidence that an impairment
loss has occurred. Once an impairment has been identified, the amount of impairment is measured in relation to the
fair value of the asset. More information on assumptions and estimates requiring management judgement relating to
the determination of fair values of financial instruments is provided above in ‘Valuation of financial instruments’.
Deciding whether an available-for-sale debt security is impaired requires objective evidence of both the occurrence
of a loss event and a related decrease in estimated future cash flows. The degree of judgment involved is less when
cash flows are readily determinable, but increases when estimating future cash flows requires consideration of a
number of variances, some of which may be unobservable in current market conditions.
The most significant judgements concern more complex instruments, such as asset-backed securities (‘ABSs’), where
it is necessary to consider factors such as the estimated future cash flows on underlying pools of collateral, the extent
and depth of market price declines and changes in credit ratings. The review of estimated future cash flows on
underlying collateral is subject to estimation uncertainties where the assessment is based on historical information on
pools of assets, and judgement is required to determine whether historical performance is likely to be representative
of current economic and credit conditions.
There is no single factor to which the group’s charge for impairment of available-for-sale debt securities is
particularly sensitive, because of the range of different types of securities held, the range of geographical areas in
which those securities are held, and the wide range of factors which can affect the occurrence of loss events and the
cash flows of securities, including different types of collateral.
110
HSBC BANK PLC
Notes on the Financial Statements (continued)
It is reasonably possible that outcomes in the next financial year could be different from the assumptions and
estimates used in identifying impairment on available-for-sale debt securities, as a result of which, evidence of
impairment may be identified in available-for-sale debt securities which had previously been determined not to be
impaired. It is possible that this could result in the recognition of material impairment losses in the next financial
year.
Pensions
The group’s accounting policy for pension and other post-employment benefits is described in Note 2(t) on the
Financial Statements.
The most significant judgments in measuring the present value of defined benefit obligations relate to the
determination of actuarial and financial assumptions. These assumptions include the nominal discount rate, rate of
inflation over the period of projected cash flows and member longevity. Management reviews these assumptions in
conjunction with its actuarial advisors and benchmarks its conclusions against market practice.
Judgment is also required in selecting the expected rate of return on plan assets which determines the net expense
recognised. The expected rate of return on plan assets represents the best estimate of long-term future asset returns,
which takes into account historical market returns plus additional factors such as the current rate of inflation and
interest rates. The expected rates of return are weighted on the basis of the fair value of the plan assets.
The key assumptions used, and the sensitivity to changes in these assumptions, are disclosed in Note 7 Employee
compensation and benefits. It is reasonably possible that asset returns in the next financial year, and the actuarial and
financial assumptions determined at the end of the next year, are significantly different to these assumptions. This
could result in the group recording material actuarial gains or losses in the next financial year.
111
HSBC BANK PLC
Notes on the Financial Statements (continued)
4
Net earned insurance premiums
Non-life
insurance
£m
Life insurance
(non-linked)
£m
Life
insurance
(linked)
£m
Investment
contracts with
discretionary
participation
features
£m
2010
Gross written premiums ....................................
Movement in unearned premiums ....................
113
93
339
78
257
–
1,910
–
2,619
171
Gross earned premiums ....................................
206
417
257
1,910
2,790
Gross written premiums ceded to reinsurers ....
Reinsurers’ share of movement in unearned
premiums ......................................................
(5)
(125)
(5)
–
(135)
(5)
(15)
–
–
(20)
Reinsurers’ share of gross earned premiums ....
(10)
(140)
(5)
–
(155)
Net earned insurance premiums .......................
196
277
252
1,910
2,635
2009
Gross written premiums ....................................
Movement in unearned premiums ....................
275
143
551
(43)
198
–
1,784
–
2,808
100
Gross earned premiums .....................................
418
508
198
1,784
2,908
Gross written premiums ceded to reinsurers ....
Reinsurers’ share of movement in unearned
premiums .......................................................
(43)
(134)
(6)
–
(183)
(10)
1
–
–
(9)
Reinsurers’ share of gross earned premiums ....
(53)
(133)
(6)
–
(192)
Net earned insurance premiums ........................
365
375
192
1,784
2,716
Total
£m
Total
£m
5 Net insurance claims incurred and movement in liabilities to policyholders
Non-life
insurance
£m
Life insurance
(non-linked)
£m
Life
insurance
(linked)
£m
Investment
contracts with
discretionary
participation
features
£m
2010
Claims, benefits and surrenders paid.................
Movement in liabilities ......................................
229
(93)
256
(20)
133
273
1,299
1,096
1,917
1,256
Gross claims incurred and movement in
liabilities ........................................................
136
236
406
2,395
3,173
Reinsurers’ share of claims, benefits and
surrenders paid...............................................
Reinsurers’ share of movement in liabilities ...
(24)
(3)
(78)
(29)
(4)
(12)
–
–
(106)
(44)
Reinsurers’ share of claims incurred and
movement in liabilities ..................................
(27)
(107)
(16)
–
(150)
Net insurance claims incurred and movement
in liabilities to policyholders .........................
109
129
390
2,395
3,023
112
HSBC BANK PLC
Notes on the Financial Statements (continued)
6
Non-life
insurance
£m
Life insurance
(non-linked)
£m
Life
insurance
(linked)
£m
Investment
contracts with
discretionary
participation
features
£m
2009
Claims, benefits and surrenders paid .............
Movement in liabilities ..................................
358
159
802
(561)
134
266
1,154
1,331
2,448
1,195
Gross claims incurred and movement in
liabilities .....................................................
517
241
400
2,485
3,643
Reinsurers’ share of claims, benefits and
surrenders paid ...........................................
Reinsurers’ share of movement in liabilities .
(45)
1
(79)
35
(5)
(10)
–
–
(129)
26
Reinsurers’ share of claims incurred and
movement in liabilities ..............................
(44)
(44)
(15)
–
(103)
Net insurance claims incurred and movement
in liabilities to policyholders .....................
473
197
385
2,485
3,540
Total
£m
Net operating income
Net operating income is stated after the following items of income, expense, gains and losses:
Income
Interest recognised on impaired financial assets ...........................................................................
Fees earned on financial assets or liabilities not held for trading nor designated at fair value,
other than fees included in effective interest rate calculations on these types of assets and
liabilities .....................................................................................................................................
Fees earned on trust and other fiduciary activities where the group holds or invests assets on
behalf of its customers ...............................................................................................................
Expense
Interest on financial instruments, excluding interest on financial liabilities held for trading
or designated at fair value ..........................................................................................................
Fees payable on financial assets or liabilities not held for trading nor designated at fair value,
other than fees included in effective interest rate calculations on these types of assets and
liabilities .....................................................................................................................................
Fees payable on trust and other fiduciary activities where the group holds or invests assets on
behalf of its customers ..............................................................................................................
Gains/(losses)
(Loss)/gain on disposal of assets held for sale ..............................................................................
Impairment of available-for-sale equity shares .............................................................................
Gain on disposal or settlement of loans and advances ..................................................................
Gain on financial liabilities measured at amortised cost ................................................................
Gains on disposal of property, plant and equipment, intangible assets and non-financial
investments:
– Gain on disposal of HSBC Asset Finance (UK) Ltd Rail subsidiaries .......................................
– Gain on disposal of HSBC France headquarters .........................................................................
– Gain on disposal of HSBC Merchant Services LLP ..................................................................
– Gain on disposal of 8 Canada Square ..........................................................................................
– Other ............................................................................................................................................
Loan impairment charge and other credit risk provisions
Net impairment charge on loans and advances .............................................................................
Net impairment of available-for-sale debt securities .....................................................................
Net impairment in respect of other credit risk provisions .............................................................
113
2010
£m
2009
£m
39
53
2,926
3,065
730
684
3,158
4,325
536
614
2
2
–
(8)
34
(1)
(11)
(164)
8
110
163
125
–
–
89
–
–
180
353
33
(1,633)
(317)
(1)
(1,951)
(2,619)
(745)
–
(3,364)
HSBC BANK PLC
Notes on the Financial Statements (continued)
7
Employee compensation and benefits
Total employee compensation
Wages and salaries..........................................................................................................................
Social security costs .......................................................................................................................
Post-employment benefits .............................................................................................................
One-off bonus tax ..........................................................................................................................
2010
£m
2009
£m
3,804
535
404
218
3,853
542
57
–
4,961
4,452
2010
2009
40,110
15,157
9,764
5,604
7,297
41,969
17,827
10,597
5,436
6,467
Average number of persons employed by the group during the year1
UK Retail .......................................................................................................................................
Continental Europe Retail .............................................................................................................
Global Banking and Markets .........................................................................................................
Private Banking .............................................................................................................................
Other1 .............................................................................................................................................
Total ...............................................................................................................................................
77,932
1 Employees included within ‘Other’ are employees of central functions who provide services to a number of the group business
segments.
82,296
In December 2009, the governments of the UK and France introduced one-off taxes in respect of certain bonuses
payable by banks and banking groups. In both countries the tax was levied at 50 per cent on bonuses awarded during
a certain period and over a threshold amount. The taxes were liabilities of the employer and were payable on awards
of both cash and shares. The amount payable and paid in 2010 in respect of the relevant taxes was £218 million
(£191 million in the UK and £27 million in France).
Post-employment benefit plans
Income statement charge
Defined benefit pension plans
– HSBC Bank (UK) Pension Scheme ............................................................................................
– Other plans ...................................................................................................................................
Defined contribution pension plans ................................................................................................
Defined benefit healthcare plans ....................................................................................................
114
2010
£m
2009
£m
200
32
165
397
7
(116)
31
136
51
6
404
57
HSBC BANK PLC
Notes on the Financial Statements (continued)
Defined benefit post-employment benefit plans
Net assets/(liabilities) recognised on balance sheet in respect of defined benefit plans
2010
£m
2009
£m
Defined benefit pension plans ........................................................................................................
(569)
(2,525)
– HSBC Bank (UK) Pension Scheme ............................................................................................
Fair value of plan assets ..............................................................................................................
Present value of defined benefit obligations................................................................................
(395)
14,317
(14,712)
(2,354)
10,908
(13,262)
– Other plans ...................................................................................................................................
Fair value of plan assets ..............................................................................................................
Present value of defined benefit obligations ...............................................................................
Effect of limit on plan surpluses .................................................................................................
Unrecognised past service cost ...................................................................................................
(174)
738
(912)
(5)
5
(171)
649
(805)
(21)
6
Defined benefit healthcare plans ....................................................................................................
Fair value of plan assets ..............................................................................................................
Present value of defined benefit obligations ...............................................................................
Unrecognised past service cost ...................................................................................................
(164)
–
(164)
–
(153)
–
(153)
–
Fair value of plan assets .................................................................................................................
Present value of defined benefit obligations ...................................................................................
Effect of limit on plan surpluses ....................................................................................................
Unrecognised past service cost .......................................................................................................
15,055
(15,788)
(5)
5
11,557
(14,220)
(21)
6
(733)
(2,678)
Pension plans
The extant plans are funded defined benefit plans with assets held in trust or similar funds separate from the group.
The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries.
The actuarial assumptions used to calculate the defined benefit obligations and related current service costs vary
according to the economic conditions of the countries in which the plans are situated.
Defined benefit pension arrangements for bank employees who are members of defined benefit pension plans, as well
as certain other employees of the group and HSBC, are provided principally by the HSBC Bank (UK) Pension
Scheme (the ‘Scheme’), the assets of which are held in a separate trust fund. The Pension Scheme is administered by
a corporate trustee, HSBC Bank Pension Trust (UK) Limited (the ‘Trustee’), whose Board is comprised of 13
Directors, four of whom are elected by employees and two by pensioners. The Trustee Directors of the Pension
Scheme are required to act in the best interest of the Scheme's beneficiaries.
Healthcare benefit plans
The group provides post-employment healthcare benefits under plans in the United Kingdom, which are unfunded.
Post-employment healthcare benefit plans are accounted for in the same manner as pension plans. The plans are
reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial
assumptions used to calculate the defined benefit obligation and related current service cost vary according to the
economic conditions of the countries in which they are situated. The group’s total healthcare cost for the year was £7
million (2009: £6 million).
Post-employment defined benefit plans’ principal actuarial assumptions
The principal actuarial financial assumptions used to calculate the group’s obligations under its defined benefit
pension and post-employment healthcare plans at 31 December 2010 were as follows. These assumptions will also
form the basis for measuring periodic costs under the plans in 2011:
Discount
rate
%
UK ........................................................................
France ..................................................................
Switzerland ..........................................................
Germany ..............................................................
Rate of
increase for
pensions in
payment and
deferred
Inflation
pensions
rate
%
%
5.40
4.75
2.60
5.00
3.70
2.00
1.50
2.00
115
3.50
2.00
n/a
2.00
Deferred Rate of pay
revaluation
increase
%
%
3.70
2.00
n/a
2.00
4.20
3.00
2.50
3.00
Healthcare
cost trend
rates
%
7.70
n/a
n/a
n/a
HSBC BANK PLC
Notes on the Financial Statements (continued)
The principal actuarial financial assumptions used to calculate the group’s obligations under its defined benefit
pension and post-employment healthcare plans at 31 December 2009, were as follows. These assumptions also
formed the basis for measuring periodic costs under the plans in 2010:
Discount
rate
%
UK ........................................................................
France ...................................................................
Switzerland ..........................................................
Germany ...............................................................
5.70
5.50
3.25
5.50
Rate of
increase for
pensions in
payment and
deferred
Inflation
pensions
rate
%
%
3.70
2.00
1.50
2.00
Deferred Rate of pay
revaluation
increase
%
%
3.50
2.00
n/a
2.00
3.70
2.00
n/a
2.00
4.20
3.00
2.50
3.00
Healthcare
cost trend
rates
%
7.70
n/a
n/a
n/a
The group determines the discount rates to be applied to its obligations in consultation with the plans’ local actuaries,
on the basis of the current average yield of high quality (AA rated or equivalent) debt instruments, with maturities
consistent with those of the defined benefit obligations.
The mortality tables and average life expectancy at 65 used at 31 December 2010 were as follows:
Mortality table
Life expectancy at
age 65 for a male
member currently:
Aged 65
Aged 45
UK .....................................................SAPS MC1
France ................................................TG 05
Switzerland .......................................BVG 2005
Germany ............................................Heubeck 2005 G
22.4
23.4
17.9
18.4
24.3
26.1
17.9
21.1
Life expectancy at
age 65 for a female
member currently:
Aged 65
Aged 45
23.4
26.8
21.0
22.5
25.3
29.7
21.0
25.1
1 Adjusted SAPS MC with medium cohort improvements and a 1 per cent minimum annual improvement. Light table with 1.08 rating for
male pensioners and standard table with 1.06 rating for female pensioners. (Standard table with 1.08 rating for male dependants and
light table with 1.10 rating for female dependants.)
The mortality tables and average life expectancy at 65 used at 31 December 2009 were as follows:
Mortality table
Life expectancy at
age 65 for a male
member currently:
Aged 65
Aged 45
UK .....................................................SAPS MC1
France ................................................TG 05
Switzerland .......................................BVG 2005
Germany ............................................Heubeck 2005 G
22.3
23.2
17.9
18.3
24.2
26.0
17.9
21.0
Life expectancy at
age 65 for a female
member currently:
Aged 65
Aged 45
23.3
26.7
21.0
22.4
25.2
29.6
21.0
25.0
1 Adjusted SAPS MC with medium cohort improvements and a 1 per cent minimum annual improvement
Actuarial assumption sensitivities
The discount rate is sensitive to changes in market conditions arising during the reporting period. The mortality rates
used are sensitive to experience from the plan member profile. The following table shows the effect of changes in
these and the other key assumptions on the principal plan:
116
HSBC BANK PLC
Notes on the Financial Statements (continued)
HSBC Bank(UK) Pension Scheme
2010
2009
£m
£m
Discount rate
Change in pension obligation at year end from a 25bps increase ...............................................
Change in pension obligation at year end from a 25bps decrease ..............................................
Change in following year pension cost from a 25bps increase ...................................................
Change in following year pension cost from a 25bps decrease ..................................................
(606)
646
(6)
6
(542)
583
(8)
8
Rate of inflation
Change in pension obligation at year end from a 25bps increase ...............................................
Change in pension obligation at year end from a 25bps decrease ..............................................
Change in following year pension cost from a 25bps increase ...................................................
Change in following year pension cost from a 25bps decrease ..................................................
663
(630)
43
(41)
594
(559)
40
(39)
Rate of increase for pensions in payment and deferred revaluation
Change in pension obligation at year end from a 25bps increase ...............................................
Change in pension obligation at year end from a 25bps decrease ..............................................
Change in following year pension cost from a 25bps increase ...................................................
Change in following year pension cost from a 25bps decrease ..................................................
524
(499)
31
(29)
493
(472)
31
(30)
Rate of pay increase
Change in pension obligation at year end from a 25bps increase ...............................................
Change in pension obligation at year end from a 25bps decrease ..............................................
Change in following year pension cost from a 25bps increase ...................................................
Change in following year pension cost from a 25bps decrease ..................................................
139
(131)
13
(11)
120
(107)
11
(10)
Investment return
Change in following year pension cost from a 25bps increase....................................................
Change in following year pension cost from a 25bps decrease ...................................................
(35)
35
(27)
27
Mortality
Change in pension obligation from each additional year of longevity assumed ........................
320
300
The following table shows the effect of changes in the mortality rates on defined benefit pension plans other than the
principal plan:
Other Plans
2010
£m
Increase in pension obligation from each additional year of longevity assumed .......................
15
2009
£m
12
Defined benefit pension plans
Value recognised on the balance sheet
HSBC Bank (UK) Pension Scheme
2010
Expected rates
of return
%
Fair value of plan assets ...................................
Equities .............................................................
Bonds ................................................................
Property .............................................................
Other .................................................................
8.4
5.3
7.6
4.0
Defined benefit obligation (funded) .................
1
Net liability ......................................................
117
Value
£m
14,317
2,200
10,067
926
1,124
2009
Expected rates
of return
%
8.4
5.3
7.7
5.3
Value
£m
10,908
1,707
7,762
926
513
(14,712)
(13,262)
(395)
(2,354)
HSBC BANK PLC
Notes on the Financial Statements (continued)
Other plans
2010
Expected rates
of return2
%
Fair value of plan assets ....................................
Equities .............................................................
Bonds ................................................................
Property .............................................................
Other .................................................................
7.2
3.7
5.2
5.3
Value
£m
2009
Expected rates
of return2
%
738
239
305
30
164
7.4
4.0
5.4
4.6
Value
£m
649
216
312
16
105
Defined benefit obligation ................................
Present value of funded obligations .................
Present value of unfunded obligations .............
(912)
(797)
(115)
(805)
(681)
(124)
Effect of limit on plan surpluses .......................
Unrecognised past service cost .........................
(5)
5
(21)
6
Net liability1 ......................................................
(174)
1
£411 million of the net liability for defined benefit pension plans relates to the bank (2009: £2,371 million).
2
The expected rates of return are weighted on the basis of the fair value of the plan assets.
(171)
The principal plan has entered into derivative transactions with the bank to manage the risks arising from its
portfolio. These derivatives comprise interest rate (London Interbank Offered Rate – ‘LIBOR’) swaps and inflation
(UK Retail Prices Index – ‘RPI’) swaps. Under the terms of these swaps, the plan is committed to making LIBORrelated interest payments in exchange for cash flows paid into the Scheme based on a projection of the future benefit
payments to the Scheme members. Further details of these swap arrangements are included in Note 41 ‘Related party
transactions’.
In December 2010, the HSBC Insurance Pension Scheme was merged into the HSBC Bank (UK) Pension Scheme,
resulting in assets of £30 million and liabilities of £26 million being transferred out of Other plans and into the HSBC
Bank (UK) Pension Scheme. Also, in December 2010, the HFC Bank Limited defined benefit pension plans, the
HFC Beneficial Bank Retirement Benefit Plan and the HFC Pension Plan (defined benefit section) were merged into
the HSBC Bank (UK) Pension Scheme, resulting in assets of £58 million and liabilities of £62 million being
transferred into the HSBC Bank (UK) Pension Scheme. These transfers are recognised in the transfers line in the
table below, along with other smaller scheme merges and transfers.
118
HSBC BANK PLC
Notes on the Financial Statements (continued)
2010
HSBC Bank
(UK) Pension
Scheme
Fair value of plan assets
Other plans
2009
HSBC Bank
(UK) Pension
Scheme
Other plans
£m
£m
£m
£m
At 1 January .............................................................
Expected return on plan assets ................................
Normal contributions by the group .........................
Special contributions by the group ..........................
Contributions by employees ....................................
Experience gains/(losses) ........................................
Benefits paid ............................................................
Assets distributed on settlements .............................
Transfers ..................................................................
Exchange differences ...............................................
10,908
706
173
1,760
15
1,150
(483)
–
88
–
649
32
52
–
9
(4)
(26)
(7)
(7)
40
10,191
613
236
–
3
424
(559)
–
–
–
617
30
22
–
9
41
(33)
–
–
(37)
At 31 December .......................................................
14,317
738
10,908
649
At 1 January .............................................................
Current service cost .................................................
Interest cost ..............................................................
Contributions by employees ....................................
Actuarial (gains)/losses ...........................................
Benefits paid ............................................................
Past service cost
– vested immediately ...............................................
Reduction in liabilities resulting from curtailments.
Liabilities extinguished on settlements ...................
Transfers ..................................................................
Exchange differences ...............................................
13,262
163
743
15
924
(483)
805
30
31
9
50
(40)
10,460
168
651
3
2,861
(559)
889
31
32
9
(40)
(57)
–
–
–
88
–
3
–
(7)
(5)
36
–
–
(322)
–
–
2
(4)
–
–
(57)
At 31 December .......................................................
14,712
912
13,262
805
Present value of defined benefit obligations
The actual return on plan assets for the year ended 31 December 2010 was a positive return £1,883 million (2009:
positive return of £1,108 million). The group expects to make £191 million of contributions to defined benefit
pension plans during 2011.
Total expense recognised in the income statement in ‘Employee compensation and benefits’
2010
2009
Other plans
£m
HSBC Bank
(UK) Pension
Scheme
£m
Other plans
£m
163
743
(706)
–
–
–
30
31
(32)
3
–
–
168
651
(613)
–
–
(322)
31
32
(30)
2
(4)
–
200
32
(116)
31
HSBC Bank
(UK) Pension
Scheme
£m
Current service cost .................................................
Interest cost ..............................................................
Expected return on plan assets ................................
Past service cost .......................................................
Gains on curtailments ..............................................
Gains on settlements ................................................
Total (gain)/ expense ...............................................
119
HSBC BANK PLC
Notes on the Financial Statements (continued)
Total net actuarial gains/(losses)
2010
HSBC Bank
(UK) Pension
Scheme
£m
Other plans
£m
2009
HSBC Bank
(UK) Pension
Scheme
£m
Other plans
£m
Experience (losses)/gains on plan liabilities .......
Experience gains/(losses) on plan assets .............
(Losses)/gains from changes in actuarial
assumptions ..........................................................
(207)
1,150
11
(4)
(143)
424
15
41
(717)
(61)
(2,718)
25
Total net actuarial gains/(losses) .........................
226
(54)
(2,437)
81
Total net actuarial losses recognised in other comprehensive income since transition to IFRSs are £1,611 million. The
total effect of the limit on plan surpluses recognised within actuarial losses in other comprehensive income during
2010 was a gain of £16 million (2009: loss of £20 million).
UK regulation requires pension schemes be valued formally every three years and a funding plan agreed between the
trustee and scheme sponsor. The most recent triennial actuarial valuation of the UK Scheme performed by the
Scheme Actuary on behalf of the Trustee has been carried out as at 31 December 2008. At that date, the market value
of the Scheme’s assets was £10.2 billion. The market value of the plan represented 76 per cent of the amount
expected to be required, on the basis of the assumptions adopted, to provide the benefits accrued to members after
allowing for expected future increases in earnings, and the resulting deficit amounted to £3.2 billion. The method
adopted for this valuation was the projected unit method.
The expected cash flows from the plan were projected by reference to the UK Retail Prices Index (‘RPI’) swap
break-even curve at 31 December 2008. Salary increases were assumed to be 0.5 per cent per annum above RPI and
inflationary pension increases, subject to a minimum of 0 per cent per annum and a maximum of 5 per cent per
annum (maximum of 3 per cent per annum in respect of service accrued since 1 July 2009) were assumed to be in
line with RPI. The projected cash flows were discounted at the LIBOR swap curve at 31 December 2008 plus a
margin for the expected return on the investment strategy of 190 basis points per annum.
The mortality experience of the Scheme’s pensioners over the three year period since the previous valuation was
analysed and the mortality assumption set on the basis of this, using the SAPS S1 series of tables with adjustment for
the specific mortality experience of the Scheme. Allowance for future improvements in longevity was made in line
with the medium cohort effect with minimum improvements of 1.75 per cent for males and 1.25 per cent for females.
In February 2010, the bank agreed with the Trustee of the Scheme to reduce the deficit of the plan by meeting a
schedule of future funding payments, On 17 June 2010, the bank agreed with the Trustee to accelerate the reduction
of the deficit of the plan with a special contribution of £1,760 million in 2010 followed by a revised payment
schedule in the following years, as shown below:
Additional future funding payments to the principal plan
2010
2011
2012
2013
2014
2015
2016
2017
2018
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
............................................................................................................................
Original plan
£m
465
465
465
630
630
630
630
Revised plan
£m
1,760
495
630
630
On the same day, the bank made the £1,760 million contribution and the Scheme used the contribution to acquire
debt securities with a fair value of £1,760 million from the bank in a transaction at an arm’s length value determined
by the Scheme’s independent third party advisors. The debt securities sold comprised supranational, agency and
government-guaranteed securities, asset-backed securities, corporate subordinated debt, and auction rate securities.
The group considers that the contribution set out above, together with investment returns at an expected level of 240
basis points above the LIBOR swap curve, would be sufficient to meet the deficit as at 31 December 2008 over the
agreed period. At each subsequent actuarial valuation, the group has agreed with the Trustees that any shortfall in
120
HSBC BANK PLC
Notes on the Financial Statements (continued)
investment returns relative to this expected level, subject to a maximum of 50 basis points per annum, will be
eliminated by payment of equal cash instalments over the remaining years to the end of this recovery plan period.
The bank is also making ongoing contributions to the Scheme in respect of future benefit accrual for defined benefit
section members at the rate of 34 per cent of pensionable salaries from April 2010 until the completion of the next
actuarial valuation, to be calculated as at 31 December 2011. During 2009 and the first quarter of 2010, the bank paid
contributions at the rate of 38 per cent of pensionable salaries.
As part of the 31 December 2008 valuation, calculations were also carried out as to the amount of assets that might
be needed to meet the liabilities if the Scheme was discontinued and the members’ benefits bought out with an
insurance company (although in practice this may not be possible for a plan of this size) or the Trustee continued to
run the plan without the support of the bank. The amount required under this approach was estimated to be £19,400
million as at 31 December 2008. In estimating the solvency position for this purpose, a more prudent assumption
about future mortality was made than for the assessment of the ongoing position and it was assumed that the Trustee
would alter the investment strategy to be an appropriately matched portfolio of cash and interest and inflation swaps.
An explicit allowance for expenses was also included.
Move to using the Consumer Prices Index
The expected cash flows of the principal plan were projected by reference to the Retail Prices Index (‘RPI’) swap
curve in calculating the liability recognised. The Occupational Pensions (Revaluation) Order 2010 confirmed the UK
government's intention to move to using the Consumer Prices Index (‘CPI’) rather than RPI as the inflation measure
for determining the minimum pension increases to be applied to the statutory index-linked features of retirement
benefits. Historical annual CPI increases have generally been lower than annual RPI increases. The rules of the
principal plan prescribe that annual increases will be in line with RPI for pensions in payment and statutory indexlinked prior to retirement for deferred pensions. In respect of deferred pensioners, consistent with communications to
Scheme members, the bank continued to use RPI in calculating the liability recognised as at 31 December 2010.
Using CPI to value the Scheme’s liabilities in respect of deferred pensioners would result in a reduction in the
principal plan’s liabilities of approximately £250 million based on the financial and demographic assumptions as at
31 December 2010.
Summary
2010
£m
HSBC Bank (UK) Pension Scheme
2009
2008
£m
£m
2007
£m
2006
£m
Defined benefit obligation ..................................
Fair value of plan assets .....................................
(14,712)
14,317
(13,262)
10,908
(10,460)
10,191
(11,719)
11,316
(12,392)
10,485
Net deficit ...........................................................
(395)
(2,354)
(269)
(403)
(1,907)
Experience gains/(losses) on plan liabilities
Experience gains/(losses) on plan assets
Gains/(losses) from changes in actuarial
assumptions ........................................................
(207)
1,150
(143)
424
(7)
(1,643)
(30)
6
300
–
(717)
(2,718)
1,671
1,238
(298)
Total net actuarial gains/(losses) ........................
226
(2,437)
21
1,214
2
2010
£m
2009
£m
Other plans
2008
£m
2007
£m
2006
£m
Defined benefit obligation ..................................
(912)
(805)
(889)
(643)
(627)
Fair value of plan assets .....................................
Effect of limit on plan surpluses ........................
738
(5)
649
(21)
617
–
557
(21)
460
2
Net deficit ...........................................................
(179)
(177)
(272)
(107)
(165)
Experience gains/(losses) on plan liabilities
11
15
(6)
(4)
1
Experience gains/(losses) on plan assets
Gains/(losses) from changes in actuarial
assumptions ........................................................
(4)
41
(130)
3
7
(61)
25
(47)
53
14
Total net actuarial gains/(losses) ........................
(54)
81
(183)
52
22
121
HSBC BANK PLC
Notes on the Financial Statements (continued)
Defined benefit healthcare plans
Liability recognised on the balance sheet
Present value of unfunded obligations ............................................................................
1
Net liability ......................................................................................................................
2010
£m
2009
£m
164
153
164
153
1 £164 million of the net liability for defined benefit healthcare plans relates to the bank (2009: £153 million).
Present value of defined benefit healthcare obligations
2010
£m
2009
£m
At 1 January .....................................................................................................................
Interest cost ......................................................................................................................
Actuarial gains .................................................................................................................
Benefits paid ....................................................................................................................
153
7
9
(5)
130
6
20
(3)
At 31 December ...............................................................................................................
164
153
Total expense recognised in the income statement in ‘Employee compensation and benefits’
2010
£m
2009
£m
Interest cost ......................................................................................................................
7
6
Total expense ...................................................................................................................
7
6
Total net actuarial (losses)/gains
Year ended 31 December
2010
£m
2009
£m
Experience gains/(losses) on healthcare plan liabilities ..................................................
(Losses)/gains from changes in actuarial assumptions ....................................................
(3)
(6)
4
(24)
Total net actuarial (losses)/gains .....................................................................................
(9)
(20)
The actuarial assumptions of the healthcare cost trend rates have a significant effect on the amounts recognised. A
one percentage point change in assumed healthcare cost trend rates would have the following effects on amounts
recognised in 2010:
1 per cent increase
£m
1 per cent decrease
£m
Increase/(decrease) of the aggregate of the current service cost and interest cost .........
1
(1)
Increase/(decrease) of defined benefit healthcare obligation ..........................................
20
(17)
122
HSBC BANK PLC
Notes on the Financial Statements (continued)
Directors’ emoluments
The aggregate emoluments of the Directors of the bank, computed in accordance with the Companies Act 2006 as
amended by statutory instrument 2008 No.410, were:
Fees ...............................................................................................................................................................
Salaries and other emoluments......................................................................................................................
Bonuses ..........................................................................................................................................................
2010
£000
2009
£000
334
1,317
1,0441
335
1,114
1,6282
2,695
3,077
Gains on the exercise of share options .........................................................................................................
1
–
Vesting of Restricted Share Plan awards .....................................................................................................
256
248
1 Awards of £2,607,857 made to executive Directors in respect of 2010 performance will be 60 per cent deferred. 50 per cent of both the
deferred and non-deferred components will be in the form of Restricted Shares issued under the HSBC Share Plan. The remaining 50
per cent will be delivered as cash.
2 Includes the sum of £1,176,800 deferred into shares which were not subject to performance conditions but were subject to a restricted
period.
No awards were made to Directors under long-term incentive plans in respect of qualifying services rendered in 2010
(2009: no awards).
Retirement benefits accrue to two Directors under a defined benefit scheme and to two Directors under a money
purchase scheme. There were no contributions during the year to money purchase arrangements in respect of
Directors’ qualifying services (2009: £nil).
In addition, there were payments under retirement benefit agreements with former Directors of £763,666 (2009:
£771,849), including payments in respect of unfunded pension obligations to former Directors of £644,954 (2009:
£653,137). The provision as at 31 December 2010 in respect of unfunded pension obligations to former Directors
amounted to £10,870,922 (2009: £10,806,455).
Discretionary bonuses for Directors are based on a combination of individual and corporate performance and are
determined by the Remuneration Committee of the bank’s parent company, HSBC Holdings plc. The cost of any
conditional awards under the HSBC Holdings Restricted Share Plan 2000 and The HSBC Share Plan are recognised
through an annual charge based on the fair value of the awards and the likely level of vesting of shares, apportioned
over the period of service to which the award relates. Details of The HSBC Share Plan and performance conditions
are contained within the Directors’ Remuneration Report of HSBC Holdings plc.
Of these aggregate figures, the following amounts are attributable to the highest paid Director:
2010
£000
2009
£000
Fees ...............................................................................................................................................................
–
Salaries and other emoluments .....................................................................................................................
501
483
Bonuses .........................................................................................................................................................
1,2081
1,0002
1 The awards made to the highest paid Director in respect of 2010 performance will be 60 per cent deferred and 40 per cent nondeferred. 50 per cent of both the deferred and non-deferred components will be in the form of Restricted Shares issued under the HSBC
Share Plan. The remaining 50 per cent will be delivered as cash.
2 Includes the sum of £0.8 million deferred into shares which are not subject to performance conditions but are subject to a restricted
period
The highest paid Director received 39,164 shares as the result of awards under long-term incentive plans that vested
during the year. The highest paid Director did not exercise any share options over HSBC Holdings plc ordinary
shares during the year.
No pension contributions were made by the bank in respect of services by the highest paid Director during the year.
The Remuneration Committee of the bank's parent company, HSBC Holdings plc, has decided that the highest paid
Director will not receive a conditional award of HSBC Holdings plc ordinary shares under the HSBC Share Plan in
respect of services rendered as a Director during the year.
123
HSBC BANK PLC
Notes on the Financial Statements (continued)
8
Auditors’ remuneration
Auditors’ remuneration in relation to the statutory audit amounted to £9.5 million (2009: £10.2 million).
The following fees were payable by the group to the group’s principal auditor, KPMG Audit Plc and its associates
(together ‘KPMG’):
2010
£m
2009
£m
2.5
0.3
2.3
0.1
2.8
2.4
6.9
0.1
4.6
0.4
7.5
0.4
4.5
0.4
–
1.0
0.2
0.7
13
13.7
15.8
16.1
Audit fees for HSBC Bank plc statutory audit:
– fees relating to current year ......................................................................................................................
– fees relating to prior year ..........................................................................................................................
Fees payable to KPMG for other services provided to the group
Audit-related services:
– audit of the group’s subsidiaries, pursuant to legislation .........................................................................
– audit of pension schemes associated with the group, pursuant to legislation ..........................................
– other services pursuant to legislation .......................................................................................................
Tax services .................................................................................................................................................
Other services:
– services relating to information technology .............................................................................................
– all other services .......................................................................................................................................
Total fees payable ........................................................................................................................................
‘Audit fees for HSBC Bank plc statutory audit’ is fees payable to KPMG Audit plc for the statutory audit of the
consolidated financial statements of the group and the separate financial statements of HSBC Bank plc. It excludes
amounts payable for the statutory audit of HSBC Bank plc’s subsidiaries, which have been included in ‘Fees payable
to KPMG for other services provided to the group’.
Fees payable to KPMG for non-audit services for HSBC Bank plc are not disclosed separately because such fees are
disclosed on a consolidated basis for the group.
9
Share-based payments
During 2010, £246 million was charged to the income statement in respect of equity-settled share-based payment
transactions (2009: £191 million). This expense, which was computed from the fair values of the share-based
payment transactions when contracted, arose under employee share awards made in accordance with the HSBC
Group’s reward structures.
Calculation of fair values
Fair values of share options/awards, measured at the date of grant of the option/award, are calculated using a BlackScholes model. When modelling options/share awards with vesting dependent on HSBC's Total Shareholder Return
(‘TSR’) over a period, the TSR performance targets are incorporated into the model using Monte-Carlo simulation.
The expected life of options depends on the behaviour of option holders, which is incorporated into the option model
on the basis of historic observable data. The fair values calculated are inherently subjective and uncertain due to the
assumptions made and the limitations of the model used.
Significant weighted average assumptions used to estimate the fair value of the options granted were as follows:
Savings-Related Share Option Plans
1-year plan
3-year plans
2010
Risk-free interest rate1 (%) ..................................................
Expected life2 (years) ..........................................................
Expected volatility3 (%) ......................................................
Share price at grant date (£) ................................................
0.7
1
30
6.82
124
1.9
3
30
6.82
5-year plans
2.9
5
30
6.82
HSBC BANK PLC
Notes on the Financial Statements (continued)
Savings-Related Share Option Plans
1-year plan
3-year plans
5-year plans
2009
Risk-free interest rate1 (%) ..................................................
Expected life2 (years) ..........................................................
Expected volatility3 (%) ......................................................
Share price at grant date (£) ................................................
0.7
1
50
4.65
2.1
3
35
4.65
2.4
5
30
4.65
1 The risk-free rate was determined from the UK gilts yield curve for the UK Savings-Related Share Option Plans. A similar yield curve
was used for the Overseas Savings-Related Share Option Schemes.
2 Expected life is not a single input parameter but a function of various behavioural assumptions.
3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded
options over HSBC shares of similar maturity to those of the employee options.
The expected US dollar denominated dividend yield was determined to be 4.5 per cent per annum in line with
consensus analyst forecasts (2009: 4.5 per cent). Prior to 2009, HSBC adopted a dividend growth model and
incorporated expected dividends into the valuation model for share options and awards and in 2009, the expected
dividend growth was determined to be 8 per cent.
The HSBC Share Plan
The HSBC Share Plan was adopted by the Group in 2005. Under this plan, Performance Share awards, restricted
share awards and share option awards may be made. The aim of the HSBC Share Plan is to align the interests of
executives with the creation of shareholder value and recognise individual performance and potential. Awards are
also made under this plan for recruitment and retention purposes.
In 2009, the remuneration committee agreed to make adjustments to all unexercised share options and share awards
under HSBC’s various share plans and share schemes as a consequence of the Group’s rights issue. The adjustments
were based on a theoretical ex-rights price, which was considered to be the most appropriate methodology to reflect
the rights issue. The adjustments under certain share plans and share schemes were approved by the relevant tax
authorities, where necessary. In the case of the HSBC France and HSBC Private Bank France share plans, similar
adjustments were made by these subsidiaries as a consequence of the rights issue. The adjustments were to the ratios
at which the subsidiary company shares are exchangeable for HSBC Holdings ordinary shares of US$0.50 following
the exercise of options.
Performance Share awards
Performance share awards are awarded to executive Directors and other senior executives after taking into account
individual performance in the previous year. Each award is divided into two equal parts for testing attainment against
pre-determined benchmarks. One half of the reward is subject to a TSR measure, based on HSBC’s ranking against a
comparator group of 28 major banks; the other half of the award is subject to an earnings per share target. For each
element of the award, shares are released to the employee on a sliding scale from 30 to 100 per cent of the award,
depending on the scale of achievement against the benchmarks, providing that the minimum criteria for each
performance measure have been met. These shares vest after three years to the extent that the vesting conditions are
satisfied.
2010
Number
(000’s)
2009
Number
(000’s)
Outstanding at 1 January .................................................................................................
Adjustment for rights issue ..............................................................................................
Granted in the year ..........................................................................................................
Released in the year ........................................................................................................
Forfeited in the year ........................................................................................................
200
–
58
(21)
(138)
1,228
156
–
(354)
(830)
Outstanding at 31 December1 .........................................................................................
99
200
1 The above table includes the bank employee awards of 52,160 (2009: 111,349).
The weighted average fair value of shares awarded by the group for Performance Share Awards in 2010 was £6.47.
No performance shares were awarded by HSBC in 2009.
Restricted share awards
Restricted shares are awarded to other employees on the basis of their performance, potential and retention
requirements, to aid recruitment or as a part-deferral of annual bonuses. Shares are awarded without corporate
125
HSBC BANK PLC
Notes on the Financial Statements (continued)
performance conditions and generally vest between one and three years from the date of award, providing the
employees have remained continuously employed by the group for this period.
2010
Number
(000’s)
2009
Number
(000’s)
Outstanding at 1 January ................................................................................................
Adjustment for rights issue .............................................................................................
Granted in the year .........................................................................................................
Released in the year .......................................................................................................
Forfeited in the year .......................................................................................................
71,780
–
51,434
(19,143)
(9,064)
42,881
9,343
48,750
(19,997)
(9,197)
Outstanding at 31 December ..........................................................................................
95,007
71,780
The weighted average fair value of shares awarded by the group for Restricted Share Awards in 2010 was £6.81
(2009: £4.00).
Share options
A small number of discretionary share options were granted in 2005 exclusively to individuals employed by HSBC
France under the HSBC Share Plan rules after the expiry of the Group share option plan rules.
Nil-cost share options were granted to senior executives on the basis of their performance in the previous year. The
share options were subject to the achievement of the same corporate performance conditions as the 2005
Performance Share awards The options vested after three years in the same proportion as the 2005 performance
shares but were only exercisable up to the forth anniversary of the date of grant. These options have now lapsed and
there are currently no options with outstanding performance conditions.
Share options were also awarded to a number of employees under the HSBC share plan rules. These options may
vest after three years and are exercisable up to the tenth anniversary of the grant, after which they will lapse.
2010
2009
Number
(000’s)
Weighted average
exercise price
£
Number
(000’s)
Weighted average
exercise price
£
Outstanding at 1 January.....................................
Adjustment for rights issue .................................
Forfeited in the year ...........................................
86
–
–
7.99
–
–
300
44
(258)
8.89
7.75
7.66
Outstanding at 31 December ..............................
86
7.99
86
7.99
No options were granted in 2010 or 2009. The weighted average remaining contractual life of options outstanding at
the balance sheet date was 4.8 years. (2009: 5.8 years). All of the options were exercisable.
Savings-related share option plans
Savings-related share option plans invite eligible employees to enter into savings contracts to save up to £250 per
month, with the option to use the savings to acquire shares. The aim of the plans is to align the interests of all
employees with the creation of shareholder value. The options are exercisable within three months following the first
anniversary of the commencement of a one-year savings contract or within six months following either the third or
the fifth anniversary of the commencement of three-year or five-year contracts, respectively. The exercise price is set
at 20 per cent (2009: 20 per cent) discount to the market value immediately preceding the date of invitation.
126
HSBC BANK PLC
Notes on the Financial Statements (continued)
Movement in savings-related share options
2010
2009
Number
(000’s)
Weighted average
exercise price
£
Number
(000’s)
Weighted average
exercise price
£
Outstanding at 1 January ................................
Adjustment for rights issue..............................
Granted in the year .........................................
Exercised in the year ......................................
Transferred in the year ...................................
Expired and cancelled in the year ..................
77,340
–
7,084
(4,795)
(113)
(8,980)
5.24
–
5.43
5.46
4.00
5.58
37,115
4,276
64,018
(3,116)
84
(25,037)
6.94
7.00
3.30
5.49
6.25
6.33
Outstanding at 31 December1,2 .......................
70,536
3.77
77,340
5.24
1 The above table includes the bank employee options of 69,911,144 outstanding at 1 January 2010 (2009: 33,404,227), 5,979,608
options granted in the year (2009: 57,743,478) and 63,583,389 options outstanding at 31 December 2010 (2009: 69,911,144).
2 The weighted average exercise price for bank employees at 1 January 2010 was £5.19 (2009: £6.94) and at 31 December 2010 was
£3.77 (2009: £5.19).
The weighted average fair value of options granted during the year was £1.64 (2009: £1.37). The weighted average
share price at the dates the share options were exercised was £6.65 (2009: £5.86). The weighted average exercise
price, and the weighted average remaining contractual life for options outstanding at the balance sheet date,
analysed by exercise price range, were as follows:
The group
Exercise price range (£)...............................................................................................
Weighted average remaining contractual life (years) ................................................
Of which exercisable:
– number (000’s) ....................................................................................................
– weighted average exercise price (£) ....................................................................
2010
2009
£3.13-£9.08
2.51
£5.34-£9.77
3.10
868
6.14
4,007
6.23
2010
2009
£3.13-£9.08
2.61
£5.34-£9.77
3.12
756
6.08
3,793
6.21
The bank
Exercise price range (£)...............................................................................................
Weighted average remaining contractual life (years) ................................................
Of which exercisable:
– number (000’s) ....................................................................................................
– weighted average exercise price (£) ....................................................................
HSBC Holdings Restricted Share Plan 2000
Restricted share awards made under the HSBC Holdings Restricted Share Plan 2000
Restricted share awards under the Restricted Share Plan were granted to eligible employees from 2000 to 2005,
after taking into account the employees’ performance in the previous year, their potential and retention
requirements. Restricted shares were also awarded as part-deferral of annual bonuses or for recruitment purposes.
Shares are awarded without corporate performance conditions and generally vest between one and three years
from the date of award, providing the employees have remained continuously employed by the group for the
period.
127
HSBC BANK PLC
Notes on the Financial Statements (continued)
Movement on Restricted Share awards under the HSBC Holdings Restricted Share Plan
2010
Number
(000’s)
2009
Number
(000’s)
Outstanding at 1 January ................................................................................................
Adjustment for rights issue .............................................................................................
Additions during the year1 .............................................................................................
Released in the year .......................................................................................................
Forfeited in the year .......................................................................................................
Transferred in the year ...................................................................................................
28
–
412
–
(440)
–
153
21
3
(164)
–
15
Outstanding at 31 December2 ........................................................................................
–
28
1 Additions during the year comprised reinvested scrip dividends.
2 The above table includes bank employee shares of 27,868 outstanding at 1 January 2010 (2009: 85,051), nil shares granted in the year
(2009: nil) and Nil outstanding at 31 December 2010 (2009: 27,868).
The HSBC Holdings Group Share Option Plan
The HSBC Holdings Group Share Option Plan was a long-term incentive plan under which certain group employees
between 2000 and 2005 were awarded share options. The aim of the plan was to align the interests of those higherperforming employees with the creation of shareholder value. This was achieved by setting certain TSR targets
which would normally have to be attained in order for the awards to vest. Options were granted at market value and
are normally exercisable between the third and tenth anniversaries of the date of grant, subject to vesting conditions.
Options granted after May 2005 are made under the HSBC Share Plan.
Movement on the HSBC Holdings Group Share Option Plan awards
2010
Weighted average
exercise price
Number
(000’s)
£
2009
Number
(000’s)
Weighted average
exercise price
£
Outstanding at 1 January ................................................
Adjustment for rights issue .............................................
Exercised in the year ......................................................
Transferred in the year ...................................................
Forfeited and expired in the year ...................................
44,392
–
(679)
(320)
(695)
6.85
–
6.05
7.08
6.95
40,223
6,014
(779)
661
(1,727)
7.87
7.86
6.26
7.94
7.34
Outstanding at 31 December ..........................................
42,698
6.86
44,392
6.85
The weighted average share price at the date the share options were exercised was £6.86 (2009: £6.85). No share
options were awarded by the group for the Group Share Option Plan in 2010 (2009: nil). The number of options,
weighted average exercise price, and the weighted average remaining contractual life for options outstanding at the
balance sheet date, analysed by exercise price range, were as follows:
The group
2010
2009
Exercise price range (£) .............................................
£6.00-£6.99
£7.00-£7.99
£6.00-£6.99
£7.00-£7.99
Number (000’s) ..........................................................
Weighted average exercise price (£) ..........................
Of which exercisable:
– number (000’s) ....................................................
– weighted average exercise price (£) ...................
37,413
6.79
5,285
7.30
13,934
6.02
30,458
7.23
37,413
6.79
5,285
7.30
13,934
6.02
30,458
7.23
128
HSBC BANK PLC
Notes on the Financial Statements (continued)
The bank
2010
2009
Exercise price range (£) ..........................................
£6.00-£7.24
£7.25-£8.50
£6.00-£6.99
£7.00-£7.99
Number (000’s) ......................................................
Weighted average exercise price (£) ......................
Of which exercisable:
– number (000’s) ................................................
– weighted average exercise price (£) ................
20,261
6.84
271
7.36
6,823
6.02
14,568
7.22
20,261
6.84
271
7.36
6,823
6.02
14,568
7.22
HSBC France and subsidiary company plans
Before its acquisition by the group in 2000, HSBC France and certain of its subsidiaries operated employee share
plans under which share options were granted over their respective shares.
Options over HSBC France shares granted between 1994 and 1999 vested upon announcement of the group’s
agreement to acquire HSBC France and were therefore included in the valuation of HSBC France.
HSBC France granted 909,000 options in 2000 after the public announcement of the acquisition and these options
did not vest as a result of the change in control. The options were subject to continued employment and vested on
1 January 2002. The HSBC France shares obtained on exercise of the options are exchangeable for HSBC’s
ordinary shares of US$0.50. Options were granted at market value and are exercisable within 10 years of the date
of grant.
Movement on HSBC France share options
2010
Number
(000’s)
Exercise price
€
2009
Number
(000’s)
Exercise price
€
Outstanding at 1 January .........................................
Expired in the year ..................................................
604
(604)
142.50
142.50
604
–
142.50
142.50
Outstanding and exercisable at 31 December .........
–
–
604
142.50
At the date of its acquisition in 2000, certain of HSBC France’s subsidiary companies also operated employee
share option plans under which options could be granted over their respective shares. On exercise of certain of
these options, the subsidiary shares are exchanged for HSBC ordinary shares. The total number of HSBC Holdings
ordinary shares exchanged under such arrangements in 2010 was 9,282(2009: 70,257).
Pre-IFRS 2 awards
Detailed below are the share-based payment awards made before the date of application of IFRS 2 on 7 November
2002 and therefore not accounted for within the balance sheet or income statement.
The HSBC Holdings Group Share Option Plan
2010
2009
Number
(000’s)
Weighted average
exercise price
£
Number
(000’s)
Weighted average
exercise price
£
Outstanding at 1 January ................................
Adjustment for rights issue..............................
Exercised in the year ......................................
Transferred in the year ...................................
Expired in the year ..........................................
32,162
–
(1,414)
(125)
(1,488)
7.38
–
6.50
7.51
7.04
30,942
4,626
(773)
881
(3,514)
8.30
8.31
7.44
8.38
6.08
Outstanding at 31 December1, 2 ......................
29,135
7.44
32,162
7.38
1 The above includes the bank employee awards of 17,324,442 options outstanding at 1 January 2010 (2009: 17,857,524), and
14,767,030 options outstanding at 31 December 2010 (2009: 17,324,442).
2 The weighted average exercise price for bank employees was £7.35 at 1 January 2010 (2009: £8.17) and £7.45 at 31 December 2010
(2009: £7.35).
129
HSBC BANK PLC
Notes on the Financial Statements (continued)
The number of options, weighted average exercise price, and the weighted average remaining contractual life for
options outstanding at the balance sheet date, analysed by exercise price range, were as follows:
The group
2010
2009
Exercise price range (£) ..............................................
£5.56-£6.50
£6.51-£8.40
£5.56-£6.50
£6.51-£8.40
Number (000’s) ...........................................................
Weighted average exercise price (£) ...........................
Of which exercisable:
– number (000’s) .....................................................
– weighted average exercise price (£) ....................
320
6.50
28,816
7.45
2,553
6.50
29,609
7.46
592
6.50
29,012
7.45
2,553
6.50
29,609
7.46
The bank
2010
Exercise price range (£) .............................................
2009
£5.56-£6.50
£6.51-£8.40
£5.56-£6.50
£6.51-£8.40
42
6.50
14,725
7.45
2,002
6.50
15,322
7.46
42
6.50
14,725
7.45
2,001
6.50
15,322
7.46
Number (000’s) .........................................................
Weighted average exercise price (£) ...........................
Of which exercisable:
– number (000’s) .....................................................
– weighted average exercise price (£) ....................
10 Tax expense
Current taxation
UK corporation tax charge – on current year profit .................................................................
UK corporation tax charge – adjustments in respect of prior years .........................................
Overseas tax – on current year profit .......................................................................................
Overseas tax – adjustment in respect of prior years .................................................................
Deferred taxation
Origination and reversal of temporary differences ..................................................................
Effect of changes in the tax rates ..............................................................................................
Adjustment in respect of prior years ........................................................................................
Tax expense ........................................................................................................................... ..
2010
£m
2009
£m
536
6
371
37
446
14
409
(4)
950
865
29
–
17
(24)
(3)
18
46
(9)
996
856
The UK corporation tax rate applying to HSBC Bank plc and its subsidiaries was 28 per cent (2009: 28 per cent).
Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in
which they operate.
The following table reconciles the tax expense which would apply if all profits had been taxed at the UK corporation
tax rate:
2010
Taxation at UK corporation tax rate of 28 per cent ....
Effect of taxing overseas profit at different rates .......
Gains subject to tax at a lower rate..............................
Adjustment in respect of prior years ...........................
Effect of profits in associates and joint ventures .......
Deferred tax temporary differences not provided ........
Release of deferred tax consequent on the disposal of
group properties .......................................................
Non taxable income .....................................................
Effect of UK bank payroll tax ......................................
Permanent disallowables………. .................................
Other items ...................................................................
Tax expense………………………………….............
130
2009
£m
Percentage of
overall tax charge
%
Percentage of
overall tax charge
£m
%
1,123
(47)
(133)
60
(1)
16
28.0
(1.2)
(3.4)
1.5
–
0.4
1,124
(50)
(116)
28
(4)
5
28.0
(1.2)
(2.9)
0.7
(0.1)
0.1
(18)
(18)
53
23
(62)
996
(0.4)
(0.4)
1.3
0.6
(1.6)
24.8
(90)
(15)
6
(32)
856
(2.3)
(0.4)
0.1
(0.7)
21.3
HSBC BANK PLC
Notes on the Financial Statements (continued)
On 22 June 2010, the UK Government announced its intention to reduce the main rate of corporation tax from 28 per
cent to 24 per cent. It is proposed that the fall will be phased in over a period of four years with a 1 per cent reduction
in the main corporation tax rate for each year starting on 1 April 2011. As at 31 December 2010 only the initial phase
to reduce the main rate of corporation tax from 28 per cent to 27 per cent has been substantively enacted and
therefore only this change has been reflected in the amounts recognised as at that date. It is not expected that the
proposed future rate changes will have a significant effect on the net UK deferred tax position.
The UK Government have announced its intention to allow UK resident entities to elect to exempt foreign branches
from UK taxation. It is expected that if such an election is made, it will apply from the bank’s accounting period
beginning 1 January 2012. The bank will await the final legislation before making any decisions on whether to elect
to exempt its branches. However it is not expected that such an election will have a material effect on the bank’s tax
position.
In addition to the amount charged to the income statement, the aggregate amount of current and deferred taxation
relating to items that are taken directly to equity was a £247 million decrease in other comprehensive income (2009:
£414 million increase in other comprehensive income).
131
132
Retirement
benefits
£m
Loan
impairment
allowances
£m
Unused tax
losses
£m
Property,
plant and
equipment
£m
Availablefor-sale
investments
£m
Cash flow
hedges
£m
Assets...........................................................
Liabilities .....................................................
735
–
116
(30)
–
–
76
(2)
13
(16)
10
(131)
63
(7)
–
(438)
At 1 January 2010........................................
735
86
–
74
(3)
(121)
56
Income statement.........................................
Other comprehensive income:
- available-for-sale investments .............
- cash flow hedges ...................................
- actuarial movements .............................
Equity:
- share-based payments ...........................
Acquisitions and disposals .........................
Foreign exchange and other adjustments ....
(134)
(24)
–
(15)
–
–
–
–
(67)
–
–
–
–
–
–
–
–
–
9
–
–
–
–
–
–
–
(10)
–
–
4
–
–
–
Share-based Assets leased Revaluation of
payments to customers
property
£m
£m
£m
Other
£m
Total
£m
–
(78)
298
(412)
1,311
(1,114)
(438)
(78)
(114)
197
31
133
55
(92)
(46)
–
63
–
–
–
–
–
–
–
–
–
–
–
–
–
9
63
(67)
–
(6)
(4)
–
–
(1)
(10)
–
(1)
–
99
12
–
–
1
–
15
21
(10)
108
22
(201)
(34)
4
(15)
(1)
62
20
244
56
(56)
79
Assets...........................................................
Liabilities .....................................................
534
–
52
–
4
–
60
(1)
7
(11)
–
(59)
76
–
–
(194)
–
(22)
–
(170)
733
(457)
At 31 December 2010..................................
534
52
4
59
(4)
(59)
76
(194)
(22)
(170)
276
HSBC BANK PLC
The group
Notes on the Financial Statements (continued)
Movement of net deferred tax assets before offsetting balances within countries
Loan
impairment
allowances
£m
Unused tax
losses
£m
Property,
plant and
equipment
£m
Availablefor-sale
investments
£m
Cash flow
hedges
£m
Assets...........................................................
Liabilities .....................................................
194
–
137
–
3
–
9
(39)
116
(16)
61
(160)
40
–
At 1 January 2009........................................
Income statement.........................................
Other comprehensive income:
- available-for-sale investments .............
- cash flow hedges ...................................
- actuarial movements .............................
Equity:
- share-based payments ...........................
Foreign exchange and other adjustments ....
194
(135)
137
(51)
3
(3)
(30)
104
100
44
(99)
(3)
–
–
676
–
–
–
–
–
–
–
–
–
(147)
–
–
–
–
–
–
–
–
–
–
541
(51)
(3)
Assets...........................................................
Liabilities .....................................................
735
–
116
(30)
At 31 December 2009..................................
735
86
Share-based Assets leased
payments to customers
£m
£m
Revaluation
of property
£m
Other
£m
Total
£m
–
(499)
–
(82)
238
(332)
798
(1,128)
40
11
(499)
57
(82)
4
(94)
(19)
(330)
9
–
(19)
–
–
–
–
–
–
–
–
–
–
–
–
–
(147)
(19)
676
–
–
–
–
5
–
–
4
–
–
–
(1)
5
3
104
(103)
(22)
16
61
4
(20)
527
–
–
76
(2)
13
(16)
10
(131)
63
(7)
–
(438)
–
(78)
298
(412)
1,311
(1,114)
-
74
(3)
(121)
56
(438)
(78)
(114)
197
HSBC BANK PLC
133 Retirement
benefits
£m
Notes on the Financial Statements (continued)
Movement of net deferred tax assets before offsetting balances within countries
The group
Retirement
benefits
£m
Loan
impairment
allowances
£m
Property,
plant and
equipment
£m
Availablefor-sale
investments
£m
Cash flow
hedges
£m
Share-based
payments
£m
Revaluation
of property
£m
Other
£m
Total
£m
Assets...........................................................
Liabilities .....................................................
698
–
44
–
65
–
–
(1)
–
(131)
46
–
–
(11)
69
(2)
922
(145)
At 1 January 2010........................................
698
44
65
(1)
(131)
46
(11)
67
777
Income statement.........................................
Other comprehensive income:
- cash flow hedges ...................................
- actuarial movements .............................
Equity:
- share-based payments ...........................
Foreign exchange and other adjustments ....
(172)
(9)
3
–
–
35
–
(14)
(157)
–
(77)
–
–
–
–
–
–
81
–
–
–
–
–
–
–
81
(77)
–
–
–
–
–
(10)
–
–
–
–
(10)
–
–
11
–
–
(10)
1
134
(249)
(9)
(7)
–
81
25
11
(14)
(162)
Assets...........................................................
Liabilities .....................................................
449
–
35
–
58
–
–
(1)
–
(50)
71
–
–
–
55
(2)
668
(53)
At 31 December 2010..................................
449
35
58
(1)
(50)
71
–
53
615
HSBC BANK PLC
The bank
Notes on the Financial Statements (continued)
Movement of net deferred tax assets before offsetting balances within countries
Property,
plant and
equipment
£m
Availablefor-sale
investments
£m
Cash flow
hedges
£m
Share-based
payments
£m
Revaluation of
property
£m
Other
£m
Total
£m
Assets...........................................................
Liabilities .....................................................
135
–
56
–
–
(37)
–
(2)
–
(160)
24
–
–
(11)
133
(2)
348
(212)
At 1 January 2009........................................
135
56
(37)
(2)
(160)
24
(11)
131
136
Income statement.........................................
Other comprehensive income:
- cash flow hedges ...................................
- actuarial movements .............................
Equity:
- share-based payments ...........................
Foreign exchange and other adjustments ....
(125)
(12)
102
1
–
17
–
(62)
(79)
–
688
–
–
–
–
–
–
29
–
–
–
–
–
–
–
29
688
–
–
–
–
–
–
–
–
–
–
5
–
–
–
–
(2)
5
(2)
563
(12)
102
1
29
22
–
(64)
641
Assets...........................................................
Liabilities .....................................................
698
–
44
–
65
–
–
(1)
–
(131)
46
–
–
(11)
69
(2)
922
(145)
At 31 December 2009..................................
698
44
65
(1)
(131)
46
(11)
67
777
HSBC BANK PLC
Loan
impairment
allowances
£m
135 Retirement
benefits
£m
Notes on the Financial Statements (continued)
Movement of net deferred tax assets before offsetting balances within countries
The bank
HSBC BANK PLC
Notes on the Financial Statements (continued)
After netting off balances within countries, the balances as disclosed in the accounts are as follows:
The group
2010
£m
Deferred tax assets ......................................................
Deferred tax liabilities ................................................
2009
£m
The bank
2010
£m
2009
£m
330
(54)
355
(158)
617
(2)
779
(2)
276
197
615
777
For the group, the amount of temporary differences for which no deferred tax asset is recognised in the balance sheet is
£576 million (2009: £36 million). This amount is in respect of losses where the recoverability of potential benefits is not
considered likely.
For the bank, there are no temporary differences for which no deferred tax asset is recognised in the balance sheet (2009:
Nil).
Deferred tax is not recognised in respect of the group’s investments in subsidiaries and branches where remittance is not
contemplated, and for associates and interests in joint ventures where it has been determined that no additional tax will
arise. The aggregate amount of temporary differences associated with such investments is nil (2009: Nil). Following the
change in the UK tax treatment of dividends on 1 July 2009, no UK tax is expected to arise on distributions from group
entities and no temporary difference exists except where withholding tax or other foreign tax could arise on the
investments. No meaningful amount of temporary differences associated with such investments can be disclosed.
11 Dividends
Dividends to shareholders of the parent company were as follows:
Dividends declared on ordinary shares
2010
£ per share
Third interim dividend in respect of previous year ........
First interim dividend in respect of current year .............
Second interim dividend in respect of current year ........
Dividends on preference shares classified as equity
Total £m
850
900
–
–
0.55
0.63
–
441
500
2.20
1,750
1.18
941
Total £m
2009
£ per share
Total £m
1.18
41
1.13
40
1.18
41
1.13
40
2010
£m
2009
£m
4
63
5
5
11
66
5
4
77
86
Coupons on capital securities classified as equity
Coupon in respect of the first quarter of the year ....................................................................................
Coupon in respect of the second quarter of the year ...............................................................................
Coupon in respect of the third quarter of the year ...................................................................................
Coupon in respect of the fourth quarter of the year .................................................................................
136
2009
£ per share
1.07
1.13
–
2010
£ per share
Dividend on HSBC Bank plc non-cumulative
third dollar preference shares.......................................
Total £m
HSBC BANK PLC
Notes on the Financial Statements (continued)
12 Segment analysis
The factors used in identifying the group’s reporting segments are discussed in Note 2(c) Operating Segments.
The types of products ands services from which each reportable segment derives its revenue are discussed in the Report
of the Directors: Operating and Financial Review – Business segments.
Profit/(loss) for the year
Continental
Europe
UK Retail
Retail
£m
£m
Year ended 31 December 2010
Global
Banking
and
Private
Markets
Other
Banking
£m
£m
£m
Inter
Segment
£m
Total
£m
Net interest income ...........................................
Net fee income ..................................................
Net trading income ............................................
Net (expense)/income from financial
instruments designated at fair value ..............
Gains less losses from financial investments1 ..
Net earned insurance premiums ........................
Other operating income .....................................
3,536
1,852
9
157
1,725
465
22
222
1,914
1,053
1,711
(24)
724
650
253
–
(100)
20
(8)
(54)
(105)
–
130
(25)
7,694
4,040
2,117
276
–
380
145
18
2,260
67
467
(4)
488
15
–
7
37
(1)
117
–
–
(24)
537
2,635
800
Total operating income ...................................
6,079
4,779
5,605
1,649
11
(24)
18,099
Net insurance claims incurred and movement
in liabilities to policyholders .........................
(427)
(2,571)
–
–
(26)
1
(3,023)
Net operating income before loan
impairment charges and other credit risk
provisions .....................................................
5,652
2,208
5,605
1,649
(15)
(23)
15,076
Loan impairment charges and other credit risk
provisions1 .....................................................
(1,221)
(195)
(518)
(17)
–
–
(1,951)
Net operating income ......................................
4,431
2,013
5,087
1,632
(15)
(23)
13,125
Employee compensation and benefits ...............
General and administrative expenses ................
Depreciation and impairment of property,
plant and equipment1 ....................................
Amortisation and impairment of intangible
assets1 ............................................................
(1,210)
(1,783)
(23)
(614)
(1,008)
(57)
(1,596)
(1,475)
(109)
(656)
(338)
(22)
(885)
1,045
(249)
–
23
–
(4,961)
(3,536)
(460)
(105)
(12)
(33)
–
(12)
–
(162)
Total operating expenses ................................
(3,121)
(1,691)
(3,213)
(1,016)
(101)
23
(9,119)
Operating profit ..............................................
1,310
322
1,874
616
(116)
–
4,006
3
–
2
–
–
–
5
Profit before tax ...............................................
1,313
322
1,876
616
(116)
–
4,011
Tax expense .......................................................
(364)
(112)
(341)
(114)
(65)
–
(996)
Profit for the year ............................................
949
210
1,535
502
(181)
–
3,015
Share of profit in associates and joint ventures
1
Significant non-cash item.
137
HSBC BANK PLC
Notes on the Financial Statements (continued)
Year ended 31 December 2009
Global
Continental
Europe Banking and
Private
Markets
Banking
Retail
Other
UK Retail
£m
£m
£m
£m
£m
Inter
Segment
£m
Total
£m
Net interest income ..........................................
Net fee income .................................................
Net trading income ...........................................
Net (expense)/income from financial
instruments designated at fair value .............
Gains less losses from financial investments1
Dividend income ..............................................
Net earned insurance premiums .......................
Other operating income ....................................
3,361
1,913
28
1,681
423
28
2,849
1,060
1,972
815
626
210
(192)
55
(35)
(423)
–
423
8,091
4,077
2,626
181
(1)
2
468
311
509
15
2
2,250
49
227
39
19
(1)
424
–
(1)
6
–
23
(374)
(125)
–
(1)
349
–
–
–
–
(63)
543
(73)
29
2,716
1,093
Total operating income .....................................
6,263
4,957
6,589
1,679
(323)
(63)
19,102
Net insurance claims incurred and movement
in liabilities to policyholders.........................
(720)
(2,819)
–
–
(1)
–
(3,540)
Net operating income before loan impairment
charges and other credit risk provisions ......
5,543
2,138
6,589
1,679
(324)
(63)
15,562
Loan impairment charges and other credit risk
provisions2 ....................................................
(1,600)
(338)
(1,405)
(19)
(2)
–
(3,364)
Net operating income .......................................
3,943
1,800
5,184
1,660
(326)
(63)
12,198
Employee compensation and benefits ..............
General and administrative expenses ...............
Depreciation and impairment of property,
plant and equipment1.....................................
Amortisation and impairment of intangible
assets2 ...........................................................
(1,011)
(1,675)
(843)
(646)
(1,452)
(1,021)
(629)
(279)
(517)
444
–
63
(4,452)
(3,114)
(187)
(97)
(174)
(23)
(1)
–
(482)
(95)
(17)
(27)
(1)
(10)
–
(150)
Total operating expenses ..................................
(2,968)
(1,603)
(2,674)
(932)
(84)
63
(8,198)
Operating profit ................................................
975
197
2,510
728
(410)
–
4,000
Share of profit in associates and joint ventures
13
–
1
–
–
–
14
Profit before tax ................................................
988
197
2,511
728
(410)
–
4,014
Tax expense ......................................................
(192)
(20)
(531)
(86)
(27)
–
(856)
Profit for the year .............................................
796
177
1,980
642
(437)
–
3,158
1
Significant non-cash item.
138
HSBC BANK PLC
Notes on the Financial Statements (continued)
Other information about the profit/(loss) for the year
UK Retail
£m
Global
Continental
Europe Banking and
Markets
Retail
£m
£m
Private
Banking
£m
Other
£m
Inter
Segment
£m
Total
£m
Year ended 31 December 2010
Net operating income: .......................................
External .............................................................
Inter-segment ....................................................
4,431
4,344
87
2,013
2,040
(27)
5,087
5,405
(318)
1,632
1,427
205
(15)
(91)
76
(23)
–
(23)
13,125
13,125
–
Year ended 31 December 2009
Net operating income: .......................................
External .............................................................
Inter-segment.....................................................
3,943
4,004
(61)
1,800
1,760
40
5,184
5,384
(200)
1,660
1,311
349
(326)
(261)
(65)
(63)
–
(63)
12,198
12,198
–
Global
Continental
Europe Banking and
Markets
Retail
£m
£m
Private
Banking
£m
Other
£m
Inter
Segment
£m
Total
£m
Performance ratios
UK Retail
£m
Year ended 31 December 2010
Share of the group’s profit before tax ...............
Cost efficiency ratio ...........................................
1,313
55.22%
322
76.59%
1,876
57.32%
616
61.61%
(116)
–
–
–
4,011
60.49%
Year ended 31 December 2009
Share of the group’s profit before tax ...............
Cost efficiency ratio ...........................................
988
53.55%
197
74.98%
2,511
40.58%
728
55.51%
(410)
–
–
–
4,014
52.68%
Global
Continental
Europe Banking and
Markets
Retail
£m
£m
Private
Banking
£m
Other
£m
Inter
Segment
£m
Total
£m
Balance sheet information
UK Retail
£m
Year ended 31 December 2010
Loans and advances to customers (net) .............
Investment in associates and joint venture ........
Total assets .........................................................
Customer accounts .............................................
Total liabilities ...................................................
Capital expenditure incurred1.............................
115,950
28
169,604
139,168
145,266
299
35,505
3
61,403
31,907
56,152
64
110,691
35
608,229
117,727
601,486
241
22,436
1
69,748
55,321
64,320
26
636
9
12,007
–
17,574
24
–
–
(122,497)
–
(118,661)
–
285,218
76
798,494
344,123
766,137
654
Year ended 31 December 2009
Loans and advances to customers (net) .............
Investment in associates and joint venture ........
Total assets .........................................................
Customer accounts .............................................
Total liabilities ...................................................
Capital expenditure incurred1.............................
111,251
31
152,935
134,707
144,306
343
33,136
3
61,628
30,102
51,807
74
110,580
35
578,994
113,602
570,874
313
19,091
1
69,514
54,482
62,252
14
601
9
12,650
3
15,959
31
–
–
(123,793)
–
(121,698)
–
274,659
79
751,928
332,896
723,500
775
1
Expenditure incurred on property, plant and equipment and other intangible assets. Excludes assets acquired as part of business
combination and goodwill.
139
HSBC BANK PLC
Notes on the Financial Statements (continued)
Other financial information
Net operating income by customer group and global business
Commercial
Banking
£m
Global
Banking
and
Markets
£m
Private
Banking
£m
Other
£m
Inter
Segment
£m
Total
£m
4,117
4,118
(1)
2,327
2,266
61
5,087
5,405
(318)
1,632
1,427
205
(15)
(91)
76
(23)
–
(23)
13,125
13,125
–
3,441
3,544
(103)
2,302
2,220
82
5,184
5,384
(200)
1,660
1,311
349
(326)
(261)
(65)
(63)
–
(63)
12,198
12,198
–
Personal
Financial
Services
£m
Year ended 31 December 2010
Net operating income: ......................................
External .........................................................
Inter-segment ...............................................
Year ended 31 December 2009
Net operating income: ......................................
External .........................................................
Inter-segment ................................................
Information by country
31 December 2010
External net
operating income1 Non-current assets2
£m
£m
31 December 2009
External net
operating income1 Non-current assets2
£m
£m
United Kingdom............................................................
France ............................................................................
Switzerland ...................................................................
Other countries ..............................................................
8,381
2,072
514
2,158
3,596
6,385
2,612
1,003
7,594
2,119
512
1,973
5,327
6,579
2,590
1,001
TOTAL ..........................................................................
13,125
13,596
12,198
15,497
1
2
Net operating income is attributed to countries on the basis of the customers’ location.
Non current assets consist of property, plant and equipment, goodwill, other intangible assets and certain other assets expected to be
recovered more than twelve months after the reporting period.
13 Analysis of financial assets and liabilities by measurement basis
The following tables analyses the carrying amount of financial assets and liabilities by category as defined in IAS 39 and
by balance sheet heading:
140
Derivatives
designated
as cash flow
hedging
instruments
£m
Total
£m
Held for
trading
£m
Designated
at fair
value
£m
Held-tomaturity
securities
£m
Loans and
receivables
£m
Available-forsale
securities
£m
–
–
159,552
–
127,823
–
–
–
–
–
–
–
–
15,467
–
–
–
–
–
–
–
–
–
–
–
–
–
4,281
–
–
–
–
–
–
–
57,027
285,218
–
–
–
–
–
–
–
–
–
–
97,805
–
–
24,495
1,932
–
–
–
–
–
–
4,502
3,335
–
–
–
–
180
–
–
–
–
–
–
–
–
–
1,155
–
–
–
–
–
24,495
1,932
159,552
15,467
129,158
57,027
285,218
102,086
4,502
3,335
287,375
15,467
4,281
342,245
97,805
34,264
180
1,155
782,772
15,722
Total assets .......................................................................................
Financial liabilities
Deposits by banks ............................................................................
Customer accounts ...........................................................................
Items in the course of transmission to other banks ..........................
Trading liabilities .............................................................................
Financial liabilities designated at fair value ....................................
Derivatives .......................................................................................
Debt securities in issue .....................................................................
Other liabilities .................................................................................
Accruals ............................................................................................
Subordinated liabilities ....................................................................
Total financial liabilities ..................................................................
Total non-financial liabilities ...........................................................
Total liabilities ..................................................................................
798,494
–
–
–
132,360
–
127,852
–
–
–
–
–
–
–
–
27,935
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
48,287
344,123
1,411
–
–
–
48,119
4,334
3,630
7,407
–
–
–
–
–
705
–
–
–
–
–
–
–
–
–
647
–
–
–
–
48,287
344,123
1,411
132,360
27,935
129,204
48,119
4,334
3,630
7,407
260,212
27,935
–
–
–
457,311
705
647
746,810
19,327
766,137
HSBC BANK PLC
Total financial assets ........................................................................
Total non-financial assets ................................................................
Derivatives
designated
as fair value
hedging
instruments
£m
Financial
assets and
liabilities at
amortised
cost
£m
(continued)
141
Financial assets
Cash and balances at central banks ..................................................
Items in the course of collection from other banks .........................
Trading assets ...................................................................................
Financial assets designated at fair value ..........................................
Derivatives .......................................................................................
Loans and advances to banks ...........................................................
Loans and advances to customers ....................................................
Financial investments .......................................................................
Other assets ......................................................................................
Accrued income ...............................................................................
At 31 December 2010
Notes on the Financial Statements
The group
Total financial assets ............................................................
Total non-financial assets ....................................................
Derivatives
designated
as cash flow
hedging
instruments
£m
Total
£m
Held for
trading
£m
Designated
at fair
value
£m
Held-tomaturity
securities
£m
Loans and
receivables
£m
Available-forsale
securities
£m
–
–
165,008
–
116,845
–
–
–
–
–
–
–
–
16,435
–
–
–
–
–
–
–
–
–
–
–
–
–
4,851
–
–
–
–
–
–
–
46,994
274,659
–
–
–
–
–
–
–
–
–
–
81,844
–
–
14,274
2,082
–
–
–
–
–
–
6,282
3,167
–
–
–
–
55
–
–
–
–
–
–
–
–
–
1,616
–
–
–
–
–
14,274
2,082
165,008
16,435
118,516
46,994
274,659
86,695
6,282
3,167
281,853
16,435
4,851
321,653
81,844
25,805
55
1,616
734,112
17,816
Total assets ...........................................................................
Financial liabilities
Deposits by banks .............................................................................
Customer accounts ............................................................................
Items in the course of transmission to other banks ...........................
Trading liabilities ..............................................................................
Financial liabilities designated at fair value .....................................
Derivatives ........................................................................................
Debt securities in issue ......................................................................
Other liabilities ..................................................................................
Accruals .............................................................................................
Subordinated liabilities .....................................................................
Total financial liabilities ...................................................................
Total non-financial liabilities ............................................................
Total liabilities ..................................................................................
751,928
–
–
–
118,881
–
117,331
–
–
–
–
–
–
–
–
18,164
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
57,729
332,896
1,477
–
–
–
39,340
5,294
3,291
6,799
–
–
–
–
–
399
–
–
–
–
–
–
–
–
–
959
–
–
–
–
57,729
332,896
1,477
118,881
18,164
118,689
39,340
5,294
3,291
6,799
236,212
18,164
–
–
–
446,826
399
959
702,560
20,940
723,500
(continued)
142
Financial assets
Cash and balances at central banks ......................................
Items in the course of collection from other banks .............
Trading assets .......................................................................
Financial assets designated at fair value ..............................
Derivatives ...........................................................................
Loans and advances to banks ...............................................
Loans and advances to customers ........................................
Financial investments ...........................................................
Other assets ..........................................................................
Accrued income ...................................................................
Derivatives
designated
as fair value
hedging
instruments
£m
Financial
assets and
liabilities at
amortised
cost
£m
HSBC BANK PLC
At 31 December 2009
Notes on the Financial Statements
The group
Total financial assets .........................................................................
Total non-financial assets .................................................................
Derivatives
designated
as cash flow
hedging
instruments
£m
Total
£m
Held for
trading
£m
Designated
at fair
value
£m
Held-tomaturity
securities
£m
Loans and
receivables
£m
Available-forsale
securities
£m
–
–
126,493
–
107,991
–
–
–
–
–
–
–
–
4,505
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27,860
208,548
–
–
–
–
–
–
–
–
–
–
41,338
–
–
22,357
1,030
–
–
–
–
–
–
2,436
1,444
–
–
–
–
133
–
–
–
–
–
–
–
–
–
781
–
–
–
–
–
22,357
1,030
126,493
4,505
108,905
27,860
208,548
41,338
2,436
1,444
234,484
4,505
–
236,408
41,338
27,267
133
781
544,916
19,415
Total assets ........................................................................................
Financial liabilities
Deposits by banks .............................................................................
Customer accounts ............................................................................
Items in the course of transmission to other banks ...........................
Trading liabilities ..............................................................................
Financial liabilities designated at fair value .....................................
Derivatives ........................................................................................
Debt securities in issue ......................................................................
Other liabilities ..................................................................................
Accruals .............................................................................................
Subordinated liabilities .....................................................................
Total financial liabilities ...................................................................
Total non-financial liabilities ............................................................
Total liabilities ..................................................................................
564,331
–
–
–
98,412
–
108,028
–
–
–
–
–
–
–
–
18,334
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38,873
230,795
577
–
–
–
29,417
2,024
1,748
7,562
–
–
–
–
–
382
–
–
–
–
–
–
–
–
–
376
–
–
–
–
38,873
230,795
577
98,412
18,334
108,786
29,417
2,024
1,748
7,562
206,440
18,334
–
–
–
310,996
382
376
536,528
1,221
537,749
(continued)
143
Financial assets
Cash and balances at central banks ...................................................
Items in the course of collection from other banks ..........................
Trading assets ....................................................................................
Financial assets designated at fair value ...........................................
Derivatives ........................................................................................
Loans and advances to banks ............................................................
Loans and advances to customers .....................................................
Financial investments ........................................................................
Other assets .......................................................................................
Accrued income ................................................................................
Derivatives
designated
as fair value
hedging
instruments
£m
Financial
assets and
liabilities at
amortised
cost
£m
HSBC BANK PLC
At 31 December 2010
Notes on the Financial Statements
The bank
Held for
trading
£m
Total financial assets .................................................................
Total non-financial assets .........................................................
Loans and
receivables
£m
Available-forsale
securities
£m
Derivatives
designated
as fair value
hedging
instruments
£m
Derivatives
designated
as cash flow
hedging
instruments
£m
Total
£m
–
–
123,957
–
99,734
–
–
–
–
–
–
–
–
6,592
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
20,729
208,669
–
–
–
–
–
–
–
–
–
–
27,389
–
–
13,130
1,071
–
–
–
–
–
–
3,501
1,195
–
–
–
–
24
–
–
–
–
–
–
–
–
–
1,042
–
–
–
–
–
13,130
1,071
123,957
6,592
100,800
20,729
208,669
27,389
3,501
1,195
223,691
6,592
–
229,398
27,389
18,897
24
1,042
507,033
18,937
Total assets ................................................................................
Financial liabilities
Deposits by banks .....................................................................
Customer accounts ....................................................................
Items in the course of transmission to other banks ...................
Trading liabilities ......................................................................
Financial liabilities designated at fair value .............................
Derivatives ................................................................................
Debt securities in issue ..............................................................
Other liabilities ..........................................................................
Accruals .....................................................................................
Subordinated liabilities .............................................................
Total financial liabilities ...........................................................
Total non-financial liabilities ....................................................
Total liabilities ..........................................................................
525,970
–
–
–
96,821
–
100,673
–
–
–
–
–
–
–
–
10,675
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
39,346
223,652
595
–
–
–
14,636
2,513
1,601
6,955
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
487
–
–
–
–
39,346
223,652
595
96,821
10,675
101,161
14,636
2,513
1,601
6,955
197,494
10,675
–
–
–
289,298
1
487
497,955
3,084
501,039
(continued)
144
Financial assets
Cash and balances at central banks ...........................................
Items in the course of collection from other banks ..................
Trading assets ............................................................................
Financial assets designated at fair value ...................................
Derivatives ................................................................................
Loans and advances to banks ....................................................
Loans and advances to customers .............................................
Financial investments ................................................................
Other assets ...............................................................................
Accrued income ........................................................................
Designated
at fair Held-to-maturity
value
securities
£m
£m
Financial
assets and
liabilities at
amortised
cost
£m
HSBC BANK PLC
At 31 December 2009
Notes on the Financial Statements
The bank
HSBC BANK PLC
Notes on the Financial Statements (continued)
14 Reclassification of financial assets
Reclassification from Available-for-sale to Held-to-maturity
On 7 January 2009, the group reclassified £6.0 billion of financial assets from the available-for-sale category to the
held-to-maturity category. The reclassification was made as a result of the change in intention to hold the assets until
maturity.
Reclassification from Held for trading to Loans and receivables/Available-for-sale
In October 2008, the group and the bank reclassified £5.0 billion and £0.2 billion of financial assets classified as held
for trading assets into the loans and receivables and available-for-sale categories respectively, with effect from 1 July
2008. During November and December 2008, the group and the bank reclassified £0.9 billion and £1.4 billion of
financial assets classified as held for trading into loans and receivables and available-for-sale respectively. These
latter reclassifications took effect prospectively.
At 31 December 2010
At 31 December 2009
Carrying amount
Fair value
£m
£m
Carrying amount
£m
Fair value
£m
3,360
336
2,032
5,728
2,820
317
1,882
5,019
3,872
341
2,346
6,559
2,994
312
2,183
5,489
59
59
847
847
5,787
5,078
7,406
6,336
Reclassification to loans and receivables
ABSs ......................................................................
Trading loans – commercial mortgage loans ........
Leverage finance and syndicated loans.................
Reclassification to available for sale
Corporate debt and other securities.......................
The reclassifications were made as a result of significant reduction in market liquidity for these assets, and a change
in the group’s intention to hold the assets for the foreseeable future or to maturity. These circumstances form part of
the wider context of market turmoil and are considered a rare event and, as such, the reclassification is permitted
under the amendment to IAS 39. On the date of reclassification, the fair value of the asset is deemed to be the asset’s
new amortised cost, and the assets are thereafter tested for impairment.
If these reclassifications had not been made, the group’s profit before tax in 2010 would have been increased by £367
million from £4,011 million to £4,378 million (2009: an increase of £587 million from £4,014 million to £4,601
million). The changes in group profit would have been entirely in the Global Banking & Markets segment.
The following table shows the fair value gains and losses recognised in the income statement as a result of the
reclassification from Held for trading to Loans and receivables/Available-for-sale:
Effect on income statement for 2010
Effect on income statement for 2009
Net effect of Recorded in Assuming no
Recorded in Assuming no
Net effect of
the income reclassification reclassification the income reclassification reclassification
statement
statement
Financial asset reclassified to loans and
receivables
ABS .................................................................
Trading loans – commercial mortgage loans..
Leverage finance and syndicated loans ..........
Financial assets reclassified to available
for sale
Corporate debt and other securities ................
£m
£m
£m
£m
£m
£m
131
19
166
472
29
181
(341)
(10)
(15)
229
19
179
361
9
540
(132)
10
(361)
316
682
(366)
427
910
(483)
37
38
(1)
76
180
(104)
353
720
(367)
503
1,090
(587)
145
HSBC BANK PLC
Notes on the Financial Statements (continued)
15 Trading assets
The group
2010
£m
Trading assets:
– which may be repledged or resold by counterparties .........
– not subject to repledge or resale by counterparties ............
Treasury and other eligible bills ............................................
Debt securities ........................................................................
Equity securities .....................................................................
Loans and advances to banks .................................................
Loans and advances to customers ..........................................
2009
£m
The bank
2010
£m
27,466
2009
£m
55,281
104,271
55,528
109,480
99,027
24,013
99,944
159,552
165,008
126,493
123,957
2,529
73,771
24,505
26,525
32,222
789
75,566
19,404
30,857
38,392
945
39,202
23,789
33,011
29,546
741
35,314
18,793
34,111
34,998
159,552
165,008
126,493
123,957
Included within the above figures for the group are debt securities issued by banks and other financial institutions of
£19,307 million (2009: £21,952 million), of which £4,733 million (2009: £3,740 million) are guaranteed by various
governments.
Included within the above figures for the bank are debt securities issued by banks and other financial institutions of
£9,795 million (2009: £11,752 million), of which £1,244 million (2008: £1,113 million) are guaranteed by various
governments.
16 Financial assets designated at fair value through profit or loss
The group
2010
£m
2009
£m
The bank
2010
£m
2009
£m
Financial assets designated at fair value:
– not subject to repledge or resale by
counterparties ..............................................
15,467
16,435
4,505
6,592
Treasury and other eligible bills .........................
Debt securities .....................................................
Equity securities ..................................................
Loans and advances to banks ..............................
Loans and advances to customers .......................
20
7,161
7,750
27
509
35
8,706
6,955
214
525
–
4,428
–
77
–
–
6,515
–
77
–
15,467
16,435
4,505
6,592
146
HSBC BANK PLC
Notes on the Financial Statements (continued)
17 Derivatives
Fair values of derivatives by product contract type held
The group
At 31 December 2010
Foreign exchange ....................................................
Interest rate .............................................................
Equity .....................................................................
Credit ......................................................................
Commodity and other .............................................
Gross total fair values .............................................
Netting .....................................................................
Trading
£m
Assets
Hedging
£m
30,390
161,975
8,235
6,478
409
207,487
8
1,327
–
–
–
1,335
Total
£m
Trading
£m
Liabilities
Hedging
£m
30,398
163,302
8,235
6,478
409
208,822
(79,664)
(31,609)
(160,428)
(8,831)
(6,084)
(564)
(207,516)
(19)
(1,333)
–
–
–
(1,352)
129,158
Total.........................................................................
Total
£m
(31,628)
(161,761)
(8,831)
(6,084)
(564)
(208,868)
79,664
(129,204)
At 31 December 2009
Foreign exchange ....................................................
Interest rate .............................................................
Equity ......................................................................
Credit ......................................................................
Commodity and other .............................................
Gross total fair values .............................................
Netting .....................................................................
Trading
£m
Assets
Hedging
£m
25,056
114,875
9,388
8,345
348
158,012
–
1,671
–
–
–
1,671
Total
£m
Trading
£m
Liabilities
Hedging
£m
25,056
116,546
9,388
8,345
348
159,683
(41,167)
(25,713)
(114,452)
(10,487)
(7,563)
(272)
(158,487)
(9)
(1,349)
–
–
–
(1,358)
118,516
Total.........................................................................
Total
£m
(25,722)
(115,801)
(10,487)
(7,563)
(272)
(159,845)
41,156
(118,689)
The bank
At 31 December 2010
Foreign exchange ....................................................
Interest rate .............................................................
Equity .....................................................................
Credit ......................................................................
Commodity and other .............................................
Gross total fair values .............................................
Netting .....................................................................
Trading
£m
Assets
Hedging
£m
29,987
116,490
7,331
6,478
388
160,674
–
914
–
–
–
914
Total
£m
Trading
£m
Liabilities
Hedging
£m
29,987
117,404
7,331
6,478
388
161,588
(52,683)
(31,246)
(114,537)
(8,363)
(6,012)
(554)
(160,712)
–
(757)
–
–
–
(757)
108,905
Total.........................................................................
Total
£m
(31,246)
(115,294)
(8,363)
(6,012)
(554)
(161,469)
52,683
(108,786)
At 31 December 2009
Foreign exchange ....................................................
Interest rate .............................................................
Equity .....................................................................
Credit .....................................................................
Commodity and other .............................................
Gross total fair values .............................................
Netting .....................................................................
Trading
£m
Assets
Hedging
£m
24,479
89,253
8,240
8,350
451
130,773
–
1,066
–
–
–
1,066
Total
£m
Trading
£m
Liabilities
Hedging
£m
24,479
90,319
8,240
8,350
451
131,839
(31,039)
(25,757)
(87,984)
(10,144)
(7,449)
(378)
(131,712)
–
(488)
–
–
–
(488)
100,800
Total.........................................................................
147
Total
£m
(25,757)
(88,472)
(10,144)
(7,449)
(378)
(132,200)
31,039
(101,161)
HSBC BANK PLC
Notes on the Financial Statements (continued)
Use of derivatives
The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the
portfolio of risks arising from client business, and to manage and hedge the group’s own risks. Derivatives (except for
derivatives which are designated as effective hedging instruments as defined in IAS 39) are held for trading. The held for
trading classification includes two types of derivatives: those used in sales and trading activities, and those used for risk
management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The second
category includes derivatives managed in conjunction with financial instruments designated at fair value. These activities
are described more fully below.
The group’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions are
managed constantly to ensure that they remain within acceptable risk levels, with matching deals being used to achieve
this where necessary. When entering into derivative transactions, the group employs the same credit risk management
procedures to assess and approve potential credit exposures that are used for traditional lending.
Trading derivatives
Most of the group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and
marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks.
Trading activities in derivatives are entered into principally for the purpose of generating profits from short-term
fluctuations in price or margin. Positions may be traded actively or be held over a period of time to benefit from expected
changes in currency rates, interest rates, equity prices or other market parameters. Trading includes market-making,
positioning and arbitrage activities. Market-making entails quoting bid and offer prices to other market participants for
the purpose of generating revenues based on spread and volume; positioning means managing market risk positions in the
expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and
profiting from price differentials between markets and products.
As mentioned above, other derivatives classified as held-for-trading include non-qualifying hedging derivatives,
ineffective hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge
effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the
criteria for hedge accounting. These include derivatives managed in conjunction with financial instruments designated at
fair value.
Gains and losses from changes in the fair value of derivatives, including the contractual interest, that do not qualify for
hedge accounting are reported in ‘Net trading income’, except for derivatives managed in conjunction with financial
instruments designated at fair value, where gains and losses are reported in ‘Net income from financial instruments
designated at fair value’, together with the gains and losses on the hedged items. Where the derivatives are managed with
debt securities in issue, the contractual interest is shown in ‘interest expense’ together with the interest payable on the
issued debt. Substantially all of the group’s derivatives entered into with the group’s undertakings are managed in
conjunction with financial liabilities designated at fair value.
Notional contract amounts of derivatives held for trading purposes by product type
At 31 December
The group
2010
£m
2009
£m
The bank
2010
£m
2009
£m
Foreign exchange ..........................................................
Interest rate ...................................................................
Equity ...........................................................................
Credit ............................................................................
Commodity ...................................................................
1,617,429
9,723,176
171,061
317,373
41,696
1,250,874
7,428,567
162,637
400,712
22,666
1,590,774
6,491,919
163,737
317,378
40,834
1,204,294
5,587,747
144,659
403,569
21,947
Total derivatives ...........................................................
11,870,735
9,265,456
8,604,642
7,362,216
The notional or contractual amounts of these instruments indicate the nominal value of transactions outstanding at the
balance sheet date; they do not represent amounts at risk.
148
HSBC BANK PLC
Notes on the Financial Statements (continued)
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
derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent
releases, is as follows.
The group
2010
£m
Unamortised balance at 1 January ..................................
Deferral on new transactions1 ..........................................
Recognised in the income statement during the period:
– amortisation .............................................................
– subsequent to unobservable inputs becoming
observable ................................................................
– maturity or termination, or offsetting derivative.....
Exchange differences ......................................................
Unamortised balance at 31 December2 ...........................
1
2
2009
£m
The bank
2010
£m
2009
£m
101
199
98
85
94
198
54
76
(60)
(47)
(60)
(14)
(7)
(103)
–
(11)
(21)
(3)
(6)
(102)
(1)
(10)
(8)
(2)
130
101
123
96
The bank 2009 balance includes £40m on an intra-group business transfer to the bank.
This amount is yet to be recognised in the income statement.
Hedging instruments
The group uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables the group to optimise the overall cost to the group of accessing
debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of
hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow
hedges, or hedges in net investment of foreign operations. These are described under the relevant headings below.
Notional contract amounts of derivatives held for hedging purposes by product type
The notional contract amounts of these instruments indicate the nominal value of transactions outstanding at the balance
sheet date; they do not represent amounts at risk.
The group
At 31 December 2010
At 31 December 2009
Cash flow hedge
Fair value hedge
Cash flow hedge
Fair value hedge
£m
£m
£m
£m
Exchange rate ..............................................................
Interest rate....................................................................
351
123,244
86
18,920
182
97,749
444
11,083
The bank
At 31 December 2010
At 31 December 2009
Cash flow hedge
Fair value hedge
Cash flow hedge
Fair value hedge
£m
£m
£m
£m
Interest rate ...................................................................
53,475
11,326
47,038
1,398
Fair value hedges
The group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair
value of fixed-rate long-term financial instruments due to movements in market interest rates. For qualifying fair value
hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged
are recognised in the income statement. If the hedge relationship is terminated, the fair value adjustment to the hedged
item continues to be reported as part of the basis of the item and is amortised to the income statement as a yield
adjustment over the remainder of the hedging period.
149
HSBC BANK PLC
Notes on the Financial Statements (continued)
The group
At 31 December 2010
Assets
Liabilities
£m
£m
Foreign Exchange .........................................................
Interest rate ...................................................................
At 31 December 2009
Assets
Liabilities
£m
£m
3
177
–
(705)
–
55
–
(399)
180
(705)
55
(399)
The bank
At 31 December 2010
Assets
Liabilities
£m
£m
Interest rate ...................................................................
At 31 December 2009
Assets
Liabilities
£m
£m
133
(381)
24
(1)
133
(381)
24
(1)
Gains or losses arising from the change in fair value of fair value hedges
The group
2010
£m
Gains/ (losses)
– on hedging instruments ........................................
– on hedged items attributable to the hedged risk...
(255)
248
2009
£m
7
(28)
The bank
2010
£m
(231)
236
2009
£m
45
(57)
The gains and losses on ineffective portions of fair value hedges are recognised immediately in ‘Net trading income’.
Cash flow hedges
The group’s cash flow hedges consist principally of interest rate and cross-currency swaps that are used to protect against
exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable
rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows,
representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the
basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate
principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on
the effective portions of derivatives designated as cash flow hedges of forecast transactions. Gains and losses are initially
recognised in other comprehensive income, in the cash flow hedging reserve, and are transferred to the income statement
when the forecast cash flows affect the income statement.
Fair value of derivatives designated as cash flow hedges
The group
At 31 December 2010
Assets
Liabilities
£m
£m
Foreign exchange ..........................................................
Interest rate ...................................................................
At 31 December 2009
Assets
Liabilities
£m
£m
5
1,150
(19)
(628)
–
1,616
(9)
(950)
1,155
(647)
1,616
(959)
The bank
At 31 December 2010
Assets
Liabilities
£m
£m
Interest rate ...................................................................
781
150
(376)
At 31 December 2009
Assets
Liabilities
£m
£m
1,042
(487)
HSBC BANK PLC
Notes on the Financial Statements (continued)
Forecast principals balances on which interest cash flows are expected to arise
The group
3 months
or less
£m
At 31 December 2010
More than
5 years or less
3 months but
but more
less than 1 year
than 1 year
£m
£m
More than
5 years
£m
Assets ...........................................................................
Liabilities.......................................................................
68,844
(33,808)
45,548
(19,057)
28,345
(12,968)
97
(760)
Net cash inflow/(outflow) exposure ............................
35,036
26,491
15,377
(663)
At 31 December 2009
More than
5 years or less
3 months but
but more
less than 1 year
than 1 year
£m
£m
More than
5 years
£m
3 months
or less
£m
Assets ...........................................................................
Liabilities.......................................................................
43,520
(22,353)
46,485
(26,413)
25,874
(10,906)
24
(1,631)
Net cash inflow/(outflow) exposure ............................
21,167
20,072
14,968
(1,607)
At 31 December 2010
More than
5 years or less
3 months but
but more
less than 1 year
than 1 year
£m
£m
More than
5 years
£m
The bank
3 months
or less
£m
Assets ...........................................................................
Liabilities.......................................................................
42,600
(12,324)
35,332
(11,634)
21,112
(11,125)
–
(210)
Net cash inflow/(outflow) exposure ............................
30,276
23,698
9,987
(210)
At 31 December 2009
More than
5 years or less
3 months but
but more
less than 1 year
than 1 year
£m
£m
More than
5 years
£m
3 months
or less
£m
Assets ...........................................................................
Liabilities.......................................................................
35,006
(12,371)
32,478
(10,790)
20,190
(7,691)
–
(735)
Net cash inflow/(outflow) exposure ............................
22,635
21,688
12,499
(735)
The gains and losses on ineffective portions of such derivatives are recognised immediately in ‘Net trading income’.
During the year to 31 December 2010, a loss of £4 million (2009: loss of £4 million) was recognised due to hedge
ineffectiveness.
151
HSBC BANK PLC
Notes on the Financial Statements (continued)
18 Financial investments
The group
2010
£m
Financial investments:
– which may be repledged or resold by
counterparties .......................................................
– not subject to repledge or resale by
counterparties .......................................................
2009
£m
The bank
2010
£m
2009
£m
11,266
5,718
9,930
2,852
90,820
80,977
31,408
24,537
102,086
86,695
41,338
27,389
The group
2010
£m
2009
£m
The bank
2010
£m
Treasury and other eligible bills ...................................
– available-for-sale ..................................................
– held-to-maturity ....................................................
9,354
9,354
–
2,349
2,349
–
3,296
3,296
–
799
799
–
Debt securities ..............................................................
– available-for-sale ..................................................
– held-to-maturity ....................................................
91,306
87,025
4,281
82,030
77,179
4,851
37,492
37,492
–
25,653
25,653
–
Equity securities ............................................................
– available-for-sale ..................................................
1,426
1,426
2,316
2,316
550
550
937
937
Total financial investments ..........................................
102,086
86,695
41,338
27,389
2009
£m
For the group, £10,067 million (2009: £14,998 million), and for the bank, £3,707 million (2009: £10,045 million), of the
debt securities issued by banks and other financial institutions are guaranteed by various governments.
19 Repurchase agreements and securities lending agreements
The group enters into transactions in the normal course of business by which it transfers recognised financial assets
directly to third parties or to special purpose entities. These transfers may give rise to full or partial derecognition of the
financial assets concerned.
Transfers that do not qualify for derecognition
The majority of financial assets that do not qualify for derecognition are (i) debt securities held by counterparties under
repurchase agreements or (ii) equity securities lent under securities lending agreements. The following table analyses the
carrying amount of such financial assets as at 31 December that did not qualify for derecognition during the year and their
associated financial liabilities:
The group
2010
Carrying amount
Carrying amount
of assets
of associated
liabilities
£m
£m
2009
Carrying amount Carrying amount of
of assets associated liabilities
£m
£m
Nature of transaction
Repurchase agreements ................................................
Securities lending agreements ......................................
62,101
4,173
60,774
4,203
57,124
4,087
57,388
4,087
Total .............................................................................
66,274
64,977
61,211
61,475
152
HSBC BANK PLC
Notes on the Financial Statements (continued)
The bank
2010
Carrying amount
Carrying amount
of associated
of assets
liabilities
£m
£m
2009
Carrying amount
of assets
£m
Carrying amount of
associated liabilities
£m
Nature of transaction
Repurchase agreements ................................................
Securities lending agreements ......................................
33,471
4,173
32,144
4,203
22,778
4,087
23,048
4,087
Total .............................................................................
37,644
36,347
26,865
27,135
20 Interests in associates and joint ventures
Principal associates of the group and the bank
VocaLink Holdings Ltd (VocaLink) is a principal associate of the bank and the group. VocaLink is incorporated in
England and its principal activity is that of providing electronic payments and transaction services.
At 31 December 2010 and 31 December 2009, the group had a 15.22% interest in the £133 million issued equity capital
of VocaLink. The carrying amount of group’s interest at 31 December 2010 was £52 million (2009: £54 million).
VocaLink is accounted for as an associate due to the group’s involvement in the operational activities, policy making
decisions and representation on the board of directors.
Summarised financial information on associates
The group’s share of:
2010
£m
Assets .......................................................................................................................................
Liabilities ..................................................................................................................................
Revenue ....................................................................................................................................
Profit after tax ...........................................................................................................................
2009
£m
92
65
57
(1)
115
58
42
4
Interests in significant joint ventures
Vaultex UK Limited is a significant joint venture of the bank and the group. Vaultex UK Limited is incorporated in
England and its principal activity is that of cash management services. At 31 December 2010 and 31 December 2009, the
group had a 50% interest in the £10 million issued equity capital.
Holmwood Termtime Credit Limited was disposed of as part of the sale of HSBC Insurance Brokers Limited. Further
disclosure on this disposal is provided in Note 23.
On 12 June 2009, the bank sold its remaining 49% stake in HSBC Merchant Services LLP to Global Payments Inc, the
joint venture partner. The joint venture commenced in 2008 when the bank and Global Payments Inc commenced the
card processing joint venture, with the bank retaining a 49% stake in this previously wholly-owned business.
Summarised financial information on joint ventures
The group’s share of:
2010
£m
Current assets ...........................................................................................................................
Non current assets ....................................................................................................................
Current liabilities ......................................................................................................................
Non current liabilities................................................................................................................
Income .......................................................................................................................................
Expense .....................................................................................................................................
2009
£m
91
12
85
11
46
(45)
Details of all associates and joint ventures, as required under S.409 Companies Act 2006, will be annexed to the next
Annual Return of the bank filed with the UK Registrar of Companies.
153
130
13
125
10
51
(49)
HSBC BANK PLC
Notes on the Financial Statements (continued)
21 Goodwill and intangible assets
The group
2010
£m
Goodwill .......................................................................
Present value of in-force long-term assurance
business (‘PVIF’) .....................................................
Other intangible assets .................................................
2009
£m
The bank
2010
£m
2009
£m
9,860
10,015
298
299
710
573
630
554
–
388
–
333
686
632
11,143
11,199
Goodwill
The group
2010
£m
2009
£m
Gross amount and Carrying amount
At 1 January .............................................................................................................................
Additions ...................................................................................................................................
Disposals ...................................................................................................................................
Exchange differences ...............................................................................................................
Other changes ...........................................................................................................................
10,015
–
–
(140)
(15)
10,649
157
–
(762)
(29)
At 31 December ......................................................................................................................
9,860
10,015
2010
£m
2009
£m
Gross amount and Carrying amount
At 1 January .............................................................................................................................
Additions ...................................................................................................................................
Other changes............................................................................................................................
299
–
(1)
296
3
–
At 31 December ......................................................................................................................
298
299
The bank
During 2010, no goodwill impairment was recognised (2009: nil). Impairment testing in respect of goodwill is performed
at least annually by comparing the recoverable amount of cash-generating units (‘CGUs’) determined as at 1 July 2010
based on a value-in-use calculation. That calculation uses cash flow estimates based on management’s cash flow
projections, extrapolated in perpetuity using a nominal long-term growth rate based on current market assessments of
GDP and inflation for the countries within which the CGU operates. Cash flows are extrapolated in perpetuity due to the
long-term perspective within the group of the business units making up the CGUs. The discount rate used is based on the
cost of capital the group allocates to investments in the countries within which the CGU operates.
The cost of capital assigned to an individual CGU and used to discount its future cash flows can have a significant effect
on its valuation. The cost of capital percentage is generally derived from an appropriate capital asset pricing model, which
itself depends on inputs reflecting a number of financial and economic variables including the risk-free rate in the country
concerned and a premium or discount to reflect the inherent risk of the business being evaluated. These variables are
established on the basis of management judgement and current market assessments of economic variables.
The review of goodwill impairment represents management’s best estimates of the factors set out in Note 3. These values
are sensitive to the cash flows projected for the periods for which detailed forecasts are available, and to assumptions
regarding the long-term sustainable pattern of cash flows thereafter. While the acceptable range within which underlying
assumptions can be applied is governed by the requirement for resulting forecasts to be compared with actual
performance and verifiable economic data in future years, the cash flow forecasts necessarily and appropriately reflect
management’s view of future business prospects. The process of identifying and evaluating goodwill impairment is
inherently uncertain because it requires significant management judgement in making a series of estimations, the results
of which are highly sensitive to the assumptions used.
154
HSBC BANK PLC
Notes on the Financial Statements (continued)
The following CGUs include in their carrying value goodwill that is a significant proportion of total goodwill reported by
the group. These CGUs do not carry on their balance sheet any intangible assets with indefinite useful lives, other than
goodwill.
Goodwill at
1 July 2010
£m
Discount rate
%
Nominal growth rate
beyond initial cash
flow projections
%
Global Banking and Markets ........................................................
Private Banking ............................................................................
5,368
2,980
11.0
11.0
3.3
2.6
Total goodwill in the CGUs listed above ....................................
8,348
As at 1 July 2010, aggregate goodwill of £1,175 million (1 July 2009: £1,214 million) had been allocated to CGUs that
were not considered individually significant. These CGUs do not carry on their balance sheets any significant intangible
assets with indefinite useful lives other than goodwill.
Nominal long-term growth rate: external data that reflects the market’s assessment of GDP and inflation for the
countries within which the CGU operates. The rates used for 2009 and 2010 are taken as an average of the last 10 years.
Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU,
which is derived using a Capital Asset Pricing Model (‘CAPM’). The CAPM depends on inputs reflecting a number of
financial and economic variables including the risk-free rate in the country concerned and a premium to reflect the
inherent risk of the business being evaluated. These variables are based on the market’s assessment of the economic
variables and management’s judgement. In addition, for the purposes of testing goodwill for impairment, management
supplements this process by comparing the discount rates derived using the internally generated CAPM with cost
of capital rates produced by external sources. The group uses the externally-sourced cost of capital rates where, in
management’s judgement, those rates reflect more accurately the current market and economic conditions.
The present value of in-force long-term assurance business
Movement on the PVIF
The group
2010
£m
2009
£m
At 1 January .............................................................................................................................
Addition from current year new business ................................................................................
Movement from in-force business (including investment return variances and changes in
investment assumptions).......................................................................................................
Exchange differences and other movements ...........................................................................
630
102
579
104
(9)
(13)
(34)
(19)
At 31 December .......................................................................................................................
710
630
The group’s life insurance business is accounted for using the embedded value approach which, inter alia, provides a
comprehensive risk and valuation framework. The PVIF asset represents the present value of the shareholders’ interest in
the profits expected to emerge from the book of in-force policies.
PVIF-specific assumptions
The key assumptions used in the computation of PVIF for the group’s main life insurance operations were:
2010
France
Risk free rate ..............................................................
Risk discount rate .......................................................
Expenses inflation ......................................................
3.15%
8.00%
2.00%
UK Life
3.46%
7.00%
3.76%
2009
France
3.46%
8.00%
2.00%
UK Life
3.50%
7.00%
3.50%
The calculation of the PVIF is based upon assumptions that take into account risk and uncertainty. To project these cash
flows, a variety of assumptions regarding future experience is made by each insurance operation which reflects local
market conditions and management’s judgement of local future trends.
155
HSBC BANK PLC
Notes on the Financial Statements (continued)
The following table shows the effect on the PVIF of reasonably possible changes in the main economic assumptions,
namely the risk-free and risk discount rates, across all insurance manufacturing subsidiaries.
Sensitivity of PVIF to changes in economic assumptions
PVIF at
31 December
2010
2009
£m
£m
+ 100 basis points shift in risk-free rate ........
– 100 basis points shift in risk-free rate ........
+ 100 basis points shift in risk discount rate .
– 100 basis points shift in risk discount rate .
11
(19)
(29)
33
17
(18)
(22)
27
Due to certain characteristics of the contracts, the relationships may be non-linear and the results of the stress-testing
disclosed above should not be extrapolated to higher levels of stress. In calculating the various scenarios, all assumptions
are held stable except when testing the effect of the shift in the risk-free rate, when resultant changes to investment
returns, risk discount rates and bonus rates are also incorporated. The sensitivities shown are before actions that could be
taken by management to mitigate effects and before resultant changes in policyholder behaviour.
Non-economic assumptions
The policyholder liabilities and PVIF are determined by reference to non-economic assumptions which include, for nonlife manufacturers, claims costs and expense rates and, for life manufacturers, mortality and/or morbidity, lapse rates and
expense rates. The table below shows the sensitivity of profit for the year to, and total equity at, 31 December 2010 to
reasonably possible changes in these non-economic assumptions at that date across all insurance manufacturing
subsidiaries, with comparatives for 2009.
The cost of claims is a risk associated with non-life insurance business. An increase in claims costs would have a negative
effect on profit.
Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in
mortality or morbidity on profit depends on the type of business being written.
Sensitivity to lapse rates is dependent on the type of contracts being written. For insurance contracts, the cost of claims is
funded by premiums received and income earned on the investment portfolio supporting the liabilities. For a portfolio of
term assurance, an increase in lapse rates typically has a negative effect on profit due to the loss of future premium
income on the lapsed policies.
Expense rate risk is the exposure to a change in expense rates. To the extent that increased expenses cannot be passed on
to policyholders, an increase in expense rates will have a negative impact on profits.
Sensitivity to changes in non-economic assumptions
Effect on profit for the year
to 31 December
2010
2009
£m
£m
20% increase in claims costs............................................................................
20% decrease in claims costs ...........................................................................
10% increase in mortality and/or morbidity rates ..........................................
10% decrease in mortality and/or morbidity rates ..........................................
50% increase in lapse rates ..............................................................................
50% decrease in lapse rates..............................................................................
10% increase in expense rates .........................................................................
10% decrease in expense rates ........................................................................
156
(48)
48
(14)
13
(110)
173
(21)
21
(69)
69
(15)
15
(107)
169
(19)
20
Effect on total equity
at 31 December
2010
2009
£m
£m
(48)
48
(14)
13
(110)
173
(21)
21
(69)
69
(15)
14
(107)
170
(20)
20
HSBC BANK PLC
Notes on the Financial Statements (continued)
Other intangible assets
The analysis of the movement of other intangible assets was as follows:
The group
Trade
Names
£m
Internally
generated
software
£m
Purchased
Software
£m
Customer/
merchant
relationships
£m
Other
£m
Total
£m
Cost
At 1 January 2010 ......................................................
Additions1 ...................................................................
Disposals ...................................................................
Amounts written off ..................................................
Exchange differences ................................................
Other changes ............................................................
At 31 December 2010 ..............................................
15
–
–
–
–
1
16
1,071
172
–
(1)
(3)
8
1,247
162
12
(3)
(1)
(4)
(5)
161
207
–
–
–
–
–
207
21
–
–
–
–
(18)
3
1,476
184
(3)
(2)
(7)
(14)
1,634
Accumulated amortisation and impairment
At 1 January 2010 .....................................................
Amortisation charge for the year2 .............................
Disposals ...................................................................
Amounts written off ..................................................
Exchange differences ................................................
Other changes ............................................................
At 31 December 2010 ..............................................
(11)
(2)
–
–
–
–
(13)
(712)
(121)
(1)
1
4
6
(823)
(105)
(17)
2
1
3
5
(111)
(91)
(23)
–
–
–
–
(114)
(3)
1
–
–
–
2
–
(922)
(162)
1
2
7
13
(1,061)
3
424
50
93
3
Cost
At 1 January 2009 ......................................................
Additions1 ...................................................................
Amounts written off ...................................................
Exchange differences ................................................
Other changes ............................................................
At 31 December 2009 ...............................................
16
–
–
(1)
–
15
949
135
(3)
(10)
–
1,071
160
17
(1)
(12)
(2)
162
209
–
–
(1)
(1)
207
12
10
–
(1)
–
21
1,346
162
(4)
(25)
(3)
1,476
Accumulated amortisation and impairment
At 1 January 2009 ......................................................
Amortisation charge for the year2 ..............................
Impairment charge for the year2.................................
Amounts written off ..................................................
Exchange differences ................................................
Other changes ............................................................
At 31 December 2009 ................................................
(8)
(2)
–
–
1
(2)
(11)
(624)
(103)
–
3
10
2
(712)
(90)
(20)
(3)
1
7
–
(105)
(71)
(21)
–
–
–
1
(91)
(1)
(1)
–
–
–
(1)
(3)
(794)
(147)
(3)
4
18
–
(922)
Net carrying amount at 31 December 2009...............
4
359
57
116
18
Net carrying amount at 31 December 2010
1
2
573
554
At 31 December 2010, the group did not have any contractual commitments to acquire intangible assets (2009: nil).
The amortisation and impairment charges for the year are recognised within the income statement under ‘Amortisation and impairment of
intangible assets’.
157
HSBC BANK PLC
Notes on the Financial Statements (continued)
The bank
Internally
generated
software
£m
Other
£m
Total
£m
902
162
(5)
5
1
–
907
163
(5)
1,059
–
6
–
1,065
–
Accumulated amortisation and impairment
At 1 January 20010 ......................................................
Amortisation charge for the year2 ................................
Other changes ...............................................................
(570)
(108)
6
(4)
–
(1)
(574)
(108)
5
At 31 December 2010 .................................................
(672)
(5)
(677)
Net carrying amount at 31 December 2010 .............
387
1
388
Cost
At 1 January 2009 ........................................................
Additions1 .....................................................................
Amounts written off .....................................................
780
125
(3)
–
5
–
780
130
(3)
At 31 December 2009 ..................................................
902
5
907
Accumulated amortisation and impairment
At 1 January 2009 ........................................................
Amortisation charge for the year2 ................................
Impairment charge for the year2....................................
Amounts written off .....................................................
(478)
(95)
–
3
–
–
(4)
–
(478)
(95)
(4)
3
At 31 December 2009 ..................................................
(570)
(4)
(574)
Net carrying amount at 31 December 2009 .................
332
1
333
Cost
At 1 January 2010 ........................................................
Additions1 .....................................................................
Other changes ...............................................................
At 31 December 2010 .................................................
1
2
At 31 December 2010, the bank did not have any contractual commitments to acquire intangible assets (2009: nil).
The amortisation and impairment charges for the year are recognised within the income statement under ‘Amortisation and impairment of
intangible assets’.
158
HSBC BANK PLC
Notes on the Financial Statements (continued)
22 Property, plant and equipment
The group
Short
leasehold Equipment,
Equipment
land and
fixtures on operating
buildings and fittings1
leases
£m
£m
£m
Freehold
land and
buildings4
£m
Long
leasehold
land and
buildings
£m
Cost or fair value
At 1 January 2010 .......................................
Additions at cost3 .........................................
Reclassified to held for sale ........................
Fair value adjustments ................................
Disposals5 ...................................................
Exchange differences ..................................
842
69
(32)
4
(10)
(8)
26
6
–
–
–
1
492
30
–
–
(15)
(6)
3,251
364
2
–
(56)
(10)
3,227
42
–
–
(3,235)
1
7,838
511
(30)
4
(3,316)
(22)
At 31 December 2010 .................................
865
33
501
3,551
35
4,985
(119)
(13)
10
3
(6)
5
(120)
(11)
(5)
–
–
–
–
(16)
(237)
(40)
–
14
–
(1)
(264)
(2,225)
(298)
(1)
53
–
9
(2,462)
(1,156)
(98)
–
1,237
–
2
(15)
(3,748)
(454)
9
1,307
(6)
15
(2,877)
745
17
237
1,089
20
2,108
Accumulated depreciation and impairment
At 1 January 2010 .......................................
Depreciation charge for the year ...............
Reclassified to held for sale ........................
Disposals ....................................................
Impairment losses recognised .....................
Exchange differences ..................................
At 31 December 2010 .................................
Net carrying amount at
31 December 2010..................................
1 Including assets held on finance leases with a carrying amount of £21 million (2009: £151 million).
2 Including assets with a carrying amount of £20 million (2009: £160 million) pledged as security for liabilities.
3 At 31 December 2010, the group had £3 million (2009: £232 million) of contractual commitments to acquire property, plant and
equipment.
4 Including the investment properties on page 161.
5 Includes assets with a carrying value of £1,992 million disposed of in the sale of Eversholt Rail Group in the year. For more
information see Note 23 Investments in subsidiaries.
159
Total2
£m
HSBC BANK PLC
Notes on the Financial Statements (continued)
Cost or fair value
At 1 January 2009 .......................................
Additions at cost3 .........................................
Reclassified to held for sale.........................
Acquisition of subsidiaries ..........................
Fair value adjustments ................................
Disposals .....................................................
Transfers ......................................................
Exchange differences ..................................
At 31 December 2009 .................................
Accumulated depreciation and impairment
At 1 January 2009 .......................................
Depreciation charge for the year ...............
Reclassified to held for sale ........................
Disposals......................................................
Transfers ......................................................
Impairment losses recognised .....................
Exchange differences ..................................
At 31 December 2009 .................................
Net carrying amount at
31 December 2009 .................................
Freehold
land and
buildings4
£m
Long
leasehold
land and
buildings
£m
Short
leasehold
land and
buildings
£m
Equipment,
fixtures
and fittings1
£m
Equipment
on
operating
leases
£m
Total2
£m
1,044
117
(243)
323
3
–
453
38
–
3,323
268
(38)
3,117
187
–
8,260
613
(281)
(5)
(29)
–
(295)
–
(7)
–
(218)
–
(77)
(5)
(626)
(42)
(5)
8
(84)
–
(123)
842
26
492
3,251
3,227
7,838
(119)
(19)
17
7
(33)
(7)
–
28
(204)
(39)
–
6
(2,157)
(298)
18
162
(1,050)
(107)
–
1
(3,563)
(470)
35
204
(9)
4
(119)
–
1
(11)
(1)
1
(237)
(2)
52
(2,225)
–
–
(1,156)
(12)
58
(3,748)
723
15
255
1,026
2,071
4,090
The bank
Freehold
land and
buildings
£m
Long
leasehold
land and
buildings
£m
Short
leasehold
land and
buildings
£m
Equipment,
fixtures
and fittings
£m
Total
£m
Cost or fair value
At 1 January 2010 .......................................
Additions at cost1 ........................................
Reclassified from held for sale....................
Disposals......................................................
Exchange differences...................................
431
26
–
(8)
(4)
29
6
–
–
(1)
405
12
–
(11)
(4)
2,411
272
2
(37)
1
3,276
316
2
(56)
(8)
At 31 December 2010 .................................
445
34
402
2,649
3,530
Accumulated depreciation and impairment
At 1 January 2010........................................
Depreciation charge for the year ................
Reclassified from held for sale....................
Disposals .....................................................
Impairment losses recognised .....................
Exchange differences ..................................
(74)
(7)
–
2
(4)
2
(11)
(5)
–
–
–
–
(197)
(29)
–
10
–
–
(1,714)
(190)
(2)
32
–
–
(1,996)
(231)
(2)
44
(4)
2
At 31 December 2010 .................................
(81)
(16)
(216)
(1,874)
(2,187)
Net carrying amount at 31 December 2010
364
18
186
775
1,343
160
HSBC BANK PLC
Notes on the Financial Statements (continued)
Cost or fair value
At 1 January 2009........................................
Additions at cost1 ........................................
Reclassified from held for sale....................
Disposals......................................................
Transfers ......................................................
Exchange differences...................................
Freehold
land and
buildings
£m
Long
leasehold
land and
buildings
£m
Short
leasehold
land and
buildings
£m
Equipment,
fixtures
and fittings
£m
Total
£m
322
111
1
(7)
328
1
–
(295)
373
22
–
(5)
2,408
178
(1)
(173)
3,431
312
–
(480)
4
(5)
15
(1)
13
At 31 December 2009..................................
431
29
405
2,411
3,276
Accumulated depreciation and impairment
At 1 January 2009........................................
Depreciation charge for the year ................
Disposals .....................................................
Impairment losses recognised ....................
Transfers ......................................................
Exchange differences ..................................
(63)
(8)
(33)
(7)
(169)
(29)
(1,651)
(183)
(1,916)
(227)
2
(5)
28
–
3
(1)
122
(3)
155
(9)
–
1
(1)
1
1
At 31 December 2009..................................
(74)
(11)
(197)
(1,714)
(1,996)
Net carrying amount at 31 December 2009
357
18
208
697
1,280
1 At 31 December 2010, the bank had £2 million (2009: £42 million) of contractual commitments to acquire property, plant and
equipment.
Investment properties
The composition of the investment properties at fair value in the year was as follows:
The group
Freehold land and
buildings1
£m
Fair value
At 1 January 2010 .....................................................................................................................................................
Additions at cost .......................................................................................................................................................
Fair value adjustments ..............................................................................................................................................
Exchange and other changes ....................................................................................................................................
86
41
4
9
At 31 December 2010 ...............................................................................................................................................
Fair value
At 1 January 2009......................................................................................................................................................
Fair value adjustments ..............................................................................................................................................
Exchange and other changes ....................................................................................................................................
140
105
(5)
(14)
At 31 December 2009 ...............................................................................................................................................
86
1 Included in ‘Property, plant and equipment’ on page 159.
Investment properties are valued on an open market value basis as at 31 December each year by independent
professional valuers who have recent experience in the location and type of properties.
Included within ‘Other operating income’ was rental income of £1 million (2009: £3 million) earned by the group on
its investment properties. Direct operating expenses of £nil (2009: nil) incurred in respect of the investment
properties during the year were recognised in ‘General and administrative expenses’. Direct operating expenses
arising in respect of investment properties that did not generate rental income during the year amounted to £ nil
million (2009: nil). Net exchange differences on translation of investment properties were £1 million (2009: £10
million).
The bank
The bank had no investment properties at 31 December 2010 or 2009.
161
HSBC BANK PLC
Notes on the Financial Statements (continued)
23 Investments in subsidiaries
Principal subsidiary undertakings of HSBC Bank plc
Country of
Incorporation or
registration
HSBC Bank plc’s
interest in
equity capital
%
Share
class
HSBC France ...................................................................................
HSBC Asset Finance (UK) Limited................................................
HSBC Bank A.S. .............................................................................
France
England
Turkey
99.99
100.00
100.00
HSBC Bank International Limited ..................................................
HSBC Bank Malta p.l.c. ..................................................................
HSBC Invoice Finance (UK) Limited.............................................
HSBC Life (UK) Limited................................................................
HSBC Private Bank (C.I.) Limited .................................................
Jersey
Malta
England
England
Guernsey
100.00
70.03
100.00
100.00
99.87
HSBC Private Bank (Suisse) S.A....................................................
HSBC Private Bank (UK) Limited..................................................
HSBC Trinkaus & Burkhardt AG ...................................................
HSBC Trust Company (UK) Limited .............................................
Marks and Spencer Retail Financial Services Holdings Limited ...
Switzerland
England
Germany
England
England
100.00
100.00
80.40
100.00
100.00
Ordinary €5.00
Ordinary £1
A-Common TRL1
B-Common TRL1
Ordinary £1
Ordinary €0.30
Ordinary £1
Ordinary £1
Ordinary US$1
Preference US$0.10
Ordinary CHF1,000
Ordinary £10
Shares of no par value
Ordinary £5
Ordinary £1
Details of all HSBC Bank plc subsidiaries will be annexed to the next Annual Return of HSBC Bank plc filed with
the UK Registrar of Companies.
Special purpose entities (‘SPEs’) consolidated where the group owns less than 50 per cent of the voting rights:
Carrying value of total
consolidated assets
£bn
Barion Funding Limited ..................................................................
Bryant Park Funding LLC ...............................................................
Malachite Funding Limited .............................................................
Mazarin Funding Limited................................................................
Metrix Funding plc ..........................................................................
Metrix Securities plc........................................................................
Regency Assets Limited ..................................................................
Solitaire Funding Limited ...............................................................
2.9
1.9
2.6
6.6
0.9
0.6
4.1
8.7
Nature of SPE
Securities investment conduit
Conduit
Securities investment conduit
Securities investment conduit
Securitisation vehicle
Securitisation vehicle
Conduit
Securities investment conduit
All the above make their financial statements up to 31 December.
Details of all subsidiaries, as required under S.409 Companies Act 2006, will be annexed to the next Annual Return
of the bank filed with the UK Registrar of Companies.
Acquisitions
The group made no acquisitions of subsidiary undertakings but increased its investment in existing subsidiary
undertakings during 2010, where no goodwill arose (2009: £157 million).
Disposals
In November 2010, HSBC agreed to sell Eversholt Rail Group (‘Eversholt’), a subsidiary of HSBC Rail (UK)
Limited to Eversholt Investment Group, a consortium consisting of investment funds managed by 3i Infrastructure
plc, Morgan Stanley Infrastructure Partners and STAR Capital Partners. The sale was completed in December 2010
resulting in a gain on sale of £163 million.
162
HSBC BANK PLC
Notes on the Financial Statements (continued)
In December 2009, HSBC entered into an agreement to sell part of its global insurance business, HSBC Insurance
Brokers Limited and related entities, to Marsh and & McLennan Companies for total consideration of £135 million,
comprising cash and shares. The sale was completed in April 2010 resulting in a gain on sale of £83 million.
On 1 December 2009, the group completed the sale of HSBC Actuaries and Consultants Limited to Jardine Lloyd
Thompson UK Holdings Ltd for £27 million. On 30 November 2009, the aggregate total asset attribute to HSBC
Actuaries and Consultants Limited were £15 million, and the entity generated a net loss after tax of £3 million for the
period to 30 November 2009. The group’s pre-tax profit on sale was £12 million.
24 Other assets
The group
2010
£m
Bullion ..........................................................................
Assets held for sale .......................................................
Reinsurers’share of liabilities under insurance
contracts....................................................................
Endorsements and acceptances ...................................
Other accounts .............................................................
2009
£m
The bank
2010
£m
2009
£m
979
56
432
778
297
407
880
38
–
688
40
–
494
4,157
352
6,179
231
2,205
191
3,311
6,118
8,013
3,354
4,230
The group
2010
£m
2009
£m
The bank
2010
£m
Assets held for sale
2009
£m
Non-current assets held for sale
Property, plant and equipment .....................................
Financial assets .............................................................
Other ............................................................................
54
–
2
294
1
2
38
–
–
40
–
–
Total assets classified as held for sale .........................
56
297
38
40
On 21 December 2009, the group entered into a contract for the sale of 103 Champs-Elysées and 15 rue Vernet in
Paris for a combined consideration of EUR 400 million. Under the terms of the arrangement, the group would lease
the buildings back for a period of 9 years. The carrying amount included in assets held for sale at 31 December 2009
was EUR 257 million (£228 million). The transaction completed on 25 February 2010. Neither a gain nor a loss was
recognised on reclassifying these assets as held for sale during 2009. A gain on disposal of EUR 141 million (£125
million) was recognised in the group’s operating profit during 2010, within ‘Other operating income’.
Also included within property plant and equipment classified as held for sale is repossessed property that had been
pledged as collateral by customers. These repossessed assets are expected to be disposed of within 12 months of
acquisition.
25 Trading Liabilities
The group
2010
£m
Deposits by banks ........................................................
Customer accounts .......................................................
Other debt securities in issue .......................................
Other liabilities – net short positions ...........................
2009
£m
The bank
2010
£m
2009
£m
26,050
36,915
17,454
51,941
29,661
29,038
19,306
40,876
29,631
30,559
13,978
24,244
36,723
24,900
16,088
19,110
132,360
118,881
98,412
96,821
163
HSBC BANK PLC
Notes on the Financial Statements (continued)
26 Financial liabilities designated at fair value
The group
2010
£m
Deposits by banks and customer accounts ...................
Liabilities to customers under investment contracts ...
Debt securities in issue ................................................
Subordinated liabilities ................................................
Preference shares .........................................................
2009
£m
The bank
2010
£m
2009
£m
4,040
4,775
15,460
3,381
279
3,911
4,039
6,597
3,363
254
3,859
–
10,813
3,662
–
3,749
–
3,304
3,622
–
27,935
18,164
18,334
10,675
The group
The carrying amount at 31 December 2010 of financial liabilities designated at fair value was £95 million higher
(2009: £194 million higher) than the contractual amount at maturity. At 31 December 2010, the accumulated amount
of change in fair value attributable to changes in credit risk was a gain of £118 million (2009: £233 million gain).
The bank
The carrying amount at 31 December 2010 of financial liabilities designated at fair value was £144 million lower
(2009: £48 million lower) than the contractual amount at maturity. At 31 December 2010, the accumulated amount of
change in fair value attributable to changes in credit risk was a gain of £175 million (2009: £323 million gain).
27 Other liabilities
The group
2010
Amounts due to investors in funds consolidated by
the group ...................................................................
Obligations under finance leases ..................................
Endorsements and acceptances .....................................
Share based payment liability to HSBC Holdings ........
Other liabilities ..............................................................
2009
The bank
2010
2009
£m
£m
£m
£m
341
171
494
344
3,510
4,860
491
291
352
221
4,512
5,867
–
–
231
197
1,793
2,221
–
–
191
123
2,322
2,636
28 Liabilities under insurance contracts
Non-life insurance liabilities
Unearned premium provision .......................................................
Notified claims .............................................................................
Claims incurred but not reported .................................................
Other .............................................................................................
Life insurance liabilities to policyholders
Life (non-linked)...........................................................................
Investment contracts with discretionary participation features1 ..
Life (linked) .................................................................................
Total liabilities under insurance contracts ...................................
164
Gross
£m
At 31 December 2010
Reinsurers’ share
£m
Net
£m
73
257
215
14
(4)
(94)
(12)
(2)
69
163
203
12
559
(112)
447
888
14,205
1,464
(292)
–
(28)
596
14,205
1,436
16,557
(320)
16,237
17,116
(432)
16,684
HSBC BANK PLC
Notes on the Financial Statements (continued)
At 31 December 2009
Reinsurers’ share
£m
Net
£m
168
342
201
48
(9)
(89)
(12)
(2)
159
253
189
46
759
(112)
647
1,506
12,930
1,310
(278)
–
(17)
1,228
12,930
1,293
15,746
(295)
15,451
16,505
(407)
16,098
Gross
£m
Non-life insurance liabilities
Unearned premium provision.......................................................
Notified claims ............................................................................
Claims incurred but not reported .................................................
Other .............................................................................................
Life insurance liabilities to policyholders
Life (non-linked) ..........................................................................
Investment contracts with discretionary participation features1 ..
Life (linked) .................................................................................
Total liabilities under insurance contracts ................................
1 Though investment contracts with discretionary participation features are financial instruments, the group continued to treat them as
insurance contracts as permitted by IFRS 4.
Movement on non-life insurance liabilities
Gross
£m
2010
Reinsurers’ share
£m
Net
£m
Unearned premium reserve (‘UPR’)
At 1 January .................................................................................
Changes in UPR recognised as (income)/expense.......................
− gross written premiums........................................................
− gross earned premiums ........................................................
Exchange differences and other movements ...............................
168
(93)
113
(206)
(2)
(9)
5
(5)
10
–
159
(88)
108
(196)
(2)
At 31 December ...........................................................................
73
(4)
69
Notified and incurred but not reported claims
At 1 January .................................................................................
− notified claims .....................................................................
− claims incurred but not reported .........................................
543
342
201
(101)
(89)
(12)
442
253
189
Claims paid in current year ..........................................................
Claims incurred in respect of current year ...................................
Claims incurred in respect of prior years ....................................
Exchange differences and other movements ...............................
(229)
76
61
21
24
(21)
7
(15)
(205)
55
68
6
At 31 December ...........................................................................
− notified claims .....................................................................
− claims incurred but not reported .........................................
472
257
215
(106)
(94)
(12)
366
163
203
Other .............................................................................................
14
(2)
12
Total non-life insurance liabilities ...............................................
559
(112)
447
165
HSBC BANK PLC
Notes on the Financial Statements (continued)
£m
2009
Reinsurers’
share
£m
Unearned premium reserve (‘UPR’)
At 1 January ...................................................................................................................................
Changes in UPR recognised as (income)/expense .........................................................................
− gross written premiums................................................................
− gross earned premiums.................................................................
Exchange differences and other movements .................................................................................
445
(143)
275
(418)
(134)
(71)
10
(43)
53
52
374
(133)
232
(365)
(82)
At 31 December .............................................................................................................................
168
(9)
159
Notified and incurred but not reported claims
At 1 January ...................................................................................................................................
− notified claims .............................................................................
− claims incurred but not reported .................................................
422
345
77
(128)
(109)
(19)
294
236
58
Claims paid in current year
Claims incurred in respect of current year ....................................................................................
Claims incurred in respect of prior years ......................................................................................
Exchange differences and other movements .................................................................................
(358)
277
240
(38)
45
(44)
–
26
(313)
233
240
(12)
At 31 December .............................................................................................................................
− notified claims .............................................................................
− claims incurred but not reported .................................................
543
342
201
(101)
(89)
(12)
442
253
189
Other ...............................................................................................................................................
48
(2)
46
Total non-life insurance liabilities .................................................................................................
759
(112)
647
Gross
Net
£m
Life insurance liabilities to policyholders
Gross
£m
2010
Reinsurers’ share
£m
Net
£m
Life (non-linked)
At 1 January ...........................................................................
Benefits paid ..........................................................................
Increase in liabilities to policyholders ...................................
Exchange differences and other movements .........................
1,506
(256)
236
(598)
(278)
78
(107)
15
1,228
(178)
129
(583)
At 31 December .....................................................................
888
(292)
596
Investment contracts with discretionary participation
features
At 1 January ...........................................................................
Benefits paid ..........................................................................
Increase in liabilities to policyholders ...................................
Exchange differences and other movements1 ........................
12,930
(1,299)
2,395
179
–
–
–
–
12,930
(1,299)
2,395
179
At 31 December .....................................................................
14,205
–
14,205
Life (linked)
At 1 January ...........................................................................
Benefits paid ..........................................................................
Increase in liabilities to policyholders....................................
Exchange differences and other movements2 ........................
1,310
(133)
406
(119)
(17)
4
(16)
1
1,293
(129)
390
(118)
At 31 December .....................................................................
1,464
(28)
1,436
Total liabilities to policyholders ............................................
16,557
(320)
16,237
166
HSBC BANK PLC
Notes on the Financial Statements (continued)
Gross
£m
2009
Reinsurers’ share
£m
Net
£m
Life (non-linked)
At 1 January ...........................................................................
Benefits paid ..........................................................................
Increase in liabilities to policyholders ...................................
Exchange differences and other movements .........................
2,031
(802)
241
36
(411)
79
(44)
98
1,620
(723)
197
134
At 31 December .....................................................................
1,506
(278)
1,228
Investment contracts with discretionary participation
features
At 1 January ...........................................................................
Benefits paid ..........................................................................
Increase in liabilities to policyholders ...................................
Exchange differences and other movements1 .......................
12,157
(1,154)
2,485
(558)
–
–
–
–
12,157
(1,154)
2,485
(558)
At 31 December .....................................................................
12,930
–
12,930
Life (linked)
At 1 January ...........................................................................
Benefits paid ..........................................................................
Increase in liabilities to policyholders....................................
Exchange differences and other movements2 .......................
1,061
(134)
400
(17)
(7)
5
(15)
–
1,054
(129)
385
(17)
At 31 December .....................................................................
1,310
(17)
1,293
Total liabilities to policyholders ............................................
15,746
(295)
15,451
1 Includes movement in liabilities relating to discretionary profit participation benefits due to policyholders arising from net unrealised
investment gains recognised in other comprehensive income.
2 Includes amounts arising under reinsurance agreements.
The increase in liabilities to policyholders represents the aggregate of all events giving rise to additional liabilities to
policyholders in the year. The key factors contributing to the movement in policyholder liabilities include death
claims, surrenders, lapses, the setting up of policyholder liabilities at the initial inception of the policy, the
declaration of bonuses and other amounts attributable to policyholders.
29
Provisions
The group
2010
At 1 January ..................................................................
Additional provisions/increase in provisions1 ...............
Provisions utilised .........................................................
Amounts reversed ..........................................................
Exchange differences and other movements ................
At 31 December ..........................................................
2009
The bank
2010
2009
£m
£m
£m
£m
368
237
(174)
(35)
29
428
103
(94)
(62)
(7)
176
102
(43)
(6)
–
158
49
(19)
(16)
4
425
368
229
176
1 Includes unwinding of discounts of £3 million (2009: £2 million) in relation to vacant space provisions.
Points (i) and (ii) below relate to both the group and bank and point (iii) below relates only to bank:
(i) A provision of £44 million (2009: £35 million) for the possible cost of redress relating to the sale of certain
personal pension plans and mortgage endowment policies and a provision for indemnity clawbacks. The
provision is based on an actuarial calculation extrapolated from a sample of cases. The timing of the expenditure
depends on settlement of individual claims.
(ii) Provisions of £62 million (2009: £78 million) for the estimated cost of redress in relation to provision of services
to a number of trusts by a subsidiary of the bank. The bank has undertaken to reimburse the subsidiary in respect
167
HSBC BANK PLC
Notes on the Financial Statements (continued)
of the initial estimated cost of redress. The total provision is based on a calculation extrapolated from a sample
of cases. Uncertainties arise from factors affecting the timing of notifying and reimbursing those affected.
(iii) Included in the above are provisions for onerous property contracts of £50 million (2009: £38 million) relating
to the discounted future costs associated with leasehold properties that have became vacant. The provisions
cover rent voids while finding new tenants, shortfalls in expected rent receivable compared with rent payable,
and the cost of refurbishing the buildings to attract tenants. Uncertainties arise from movements in market rents,
delays in finding new tenants and the timing of rental reviews.
30 Subordinated liabilities
The group
2010
£m
2009
£m
The bank
2010
£m
2009
£m
Subordinated liabilities:
– At amortised cost ...................................................
Subordinated liabilities ........................................
Preference shares ..................................................
7,407
5,070
2,337
6,799
4,412
2,387
7,562
7,562
–
6,955
6,955
–
– Designated at fair value .........................................
Subordinated liabilities ........................................
Preference shares ..................................................
3,660
3,381
279
3,617
3,363
254
3,662
3,662
–
3,622
3,622
–
11,067
10,416
11,224
10,577
Subordinated borrowings of the group
Carrying amount
2010
£m
US$300m
€250m
€600m
€800m
£350m
€1,000m
£500m
€500m
US$1,000m
£350m
£300m
US$300m
£350m
£500m
£390m
US$977m
€900m
£225m
£600m
£700m
£300m
US$750m
US$500m
US$300m
£350m
£250m
6.95% Subordinated Notes 2011 .......................................................................
Floating Rate Subordinated Loan 2015 ............................................................
4.25% Callable Subordinated Notes 20161 .......................................................
Callable Subordinated Floating Rate Notes 20162 ............................................
Callable Subordinated Variable Coupon Notes 20173 ......................................
Floating Rate Subordinated Loan 2017 ............................................................
4.75% Callable Subordinated Notes 20204 .......................................................
Callable Subordinated Floating Rate Notes 2020 .............................................
Floating Rate Subordinated Loan 2020 ............................................................
5% Callable Subordinated Notes 20235 ............................................................
6.5% Subordinated Notes 2023 .........................................................................
7.65% Subordinated Notes 2025 .......................................................................
5.375% Callable Subordinated Step-up Notes 20306 .......................................
5.375% Subordinated Notes 2033 .....................................................................
6.9% Subordinated Loan 2033 ..........................................................................
Floating Rate Subordinated Loan 2040 ............................................................
7.75% Non-cumulative Subordinated Notes 2040 ...........................................
6.25% Subordinated Notes 2041 .......................................................................
4.75% Subordinated Notes 2046 .......................................................................
5.844% Non-cumulative Step-up Perpetual Preferred Securities7 ...................
5.862% Non-cumulative Step-up Perpetual Preferred Securities8 ...................
Undated Floating Rate Primary Capital Notes ..................................................
Undated Floating Rate Primary Capital Notes ..................................................
Undated Floating Rate Primary Capital Notes (Series 3) .................................
7.9% Perpetual Subordinated Debt ...................................................................
7.991% Perpetual Subordinated Debt ................................................................
Other subordinated liabilities less than £100m .................................................
2009
£m
200
215
530
689
362
862
499
381
644
353
297
220
329
469
390
629
775
224
592
700
279
483
322
193
–
–
430
198
222
557
710
375
888
484
394
–
339
298
192
327
478
390
–
799
224
592
700
254
462
308
185
350
250
440
11,067
10,416
1 On 15 February 2011, the bank gave notice to holders of its 4.25% Callable Subordinated Notes 2016 that it will call and redeem the
notes at par on 18 March 2011.
2 On 15 February 2011, the bank gave notice to holders of its Callable Subordinated Floating Rate Notes 2016 that it will call and
redeem the notes at par on 29 March 2011.
168
HSBC BANK PLC
Notes on the Financial Statements (continued)
3 The interest rate on the Callable Subordinated Variable Coupon Notes 2017 is fixed at 5.75% until June 2012. Thereafter, the rate per
annum is the sum of the gross redemption yield of the then prevailing five year UK gilt plus 1.70%.
4 The interest rate on the 4.75% Callable Subordinated Notes 2020 changes in September 2015 to three month sterling LIBOR plus
0.82%.
5 The interest rate on the 5% Callable Subordinated Notes 2023 changes in March 2018 to become the rate per annum which is the sum
of the gross redemption yield of the then prevailing five year UK gilt plus 1.80%.
6 The interest rate on the 5.375% Callable Subordinated Step-up Notes 2030 changes in November 2025 to three month sterling LIBOR
plus 1.50%.
7 The distribution rate on the 5.844% Non-cumulative Step-up Perpetual Preferred Securities changes in November 2031 to six month
sterling LIBOR plus 1.76%.
8 The distribution rate on the 5.862% Non-cumulative Step-up Perpetual Preferred Securities changes in April 2020 to six month sterling
LIBOR plus 1.85%.
Footnotes 3 to 8 all relate to notes that are repayable at the option of the borrower on the date of the change of the interest rate, and at
subsequent interest rate reset dates and interest payment dates in some cases, subject to prior notification to the Financial Services
Authority.
31 Fair value of financial instruments
The classification of financial instruments is determined in accordance with the accounting policies set out in Note
2(i) Financial instruments designated at fair value. The use of assumption and estimation in valuing financial
instrument is described in Note 3 Critical accounting policies. Fair value is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The
following table sets out the financial instrument carried at fair value.
The group
Of which are classified in the following valuation hierarchy
Level 1
Level 2
Level 3
Quoted market
using observable with significant unprice
inputs
observable inputs
£m
£m
£m
Total
£m
At 31 December 2010
Assets
Trading assets .....................................................
Financial assets designated at fair value ............
Derivatives ..........................................................
Financial investments: available-for-sale ...........
110,369
9,674
783
61,199
47,635
5,793
127,115
34,796
1,548
–
1,260
1,810
159,552
15,467
129,158
97,805
Liabilities
Trading liabilities ................................................
Financial liabilities at fair value .........................
Derivatives ..........................................................
71,744
3,932
601
57,440
24,003
126,543
3,176
–
2,060
132,360
27,935
129,204
At 31 December 2009
Assets
Trading assets .....................................................
Financial assets designated at fair value ............
Derivatives ..........................................................
Financial investments: available-for-sale............
107,883
10,870
795
33,163
55,615
5,565
116,121
50,258
1,510
–
1,600
3,274
165,008
16,435
118,516
86,695
Liabilities
Trading liabilities ................................................
Financial liabilities at fair value .........................
Derivatives ..........................................................
60,735
6,694
714
55,362
11,470
114,963
2,784
–
3,012
118,881
18,164
118,689
169
HSBC BANK PLC
Notes on the Financial Statements (continued)
The bank
Of which are classified in the following valuation hierarchy
Level 1
Level 2
Level 3
Quoted market
using observable with significant unprice
inputs
observable inputs
£m
£m
£m
Total
£m
At 31 December 2010
Assets
Trading assets .....................................................
Financial assets designated at fair value .............
Derivatives ..........................................................
Financial investments: available-for-sale ...........
76,983
608
605
34,135
47,983
3,897
106,919
3,411
1,527
–
1,381
3,792
126,493
4,505
108,905
41,338
Liabilities
Trading liabilities.................................................
Financial liabilities at fair value .........................
Derivatives ..........................................................
40,205
40
537
54,776
18,294
105,940
3,431
–
2,309
98,412
18,334
108,786
At 31 December 2009
Assets
Trading assets .....................................................
Financial assets designated at fair value .............
Derivatives ..........................................................
Financial investments: available-for-sale ...........
57,888
2,820
246
9,463
63,383
3,772
99,030
15,248
2,686
–
1,524
2,678
123,957
6,592
100,800
27,389
Liabilities
Trading liabilities ................................................
Financial liabilities at fair value .........................
Derivatives ..........................................................
32,093
3,298
173
61,944
7,377
97,767
2,784
–
3,221
96,821
10,675
101,161
Control framework
Fair values are subject to a control framework designed to ensure that they are either determined, or validated, by a
function independent of the risk-taker.
For all financial instruments where fair values are determined by reference to externally quoted prices or observable
pricing inputs to models, independent price determination or validation is utilised. In inactive markets, direct
observation of a traded price may not be possible. In these circumstances, the group will source alternative market
information to validate the financial instrument’s fair value, with greater weight given to information that is
considered to be more relevant and reliable. The factors that are considered in this regard are, inter alia:
•
•
•
•
•
•
the extent to which prices may be expected to represent genuine traded or tradeable prices;
the degree of similarity between financial instruments;
the degree of consistency between different sources;
the process followed by the pricing provider to derive the data;
the elapsed time between the date to which the market data relates and the balance sheet date; and
the manner in which the data was sourced.
For fair values determined using a valuation model, the control framework may include, as applicable, independent
development or validation of (i) the logic within valuation models; (ii) the inputs to those models; (iii) any
adjustments required outside the valuation models; and, (iv) where possible, model outputs. Valuation models are
subject to a process of due diligence and calibration before becoming operational and are calibrated against external
market data on an ongoing basis.
Determination of fair value
Fair values are determined according to the following hierarchy:
(a) Level 1 – quoted market price: financial instruments with quoted prices for identical instruments in active
markets.
(b) 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.
170
HSBC BANK PLC
Notes on the Financial Statements (continued)
(c) Level 3 – valuation technique with significant unobservable inputs: financial instruments valued using models
where one or more significant inputs are unobservable.
The best evidence of fair value is a quoted price in an actively traded market. The fair values of financial instruments
that are quoted in active markets are based on bid prices for assets held and offer prices for liabilities issued. Where a
financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the portfolio is
calculated as the product of the number of units and quoted price and no block discounts are made. In the event that
the market for a financial instrument is not active, a valuation technique is used.
The judgement as to whether a market is active may include, but is not restricted to, the consideration of factors such
as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. The
bid/offer spread represents the difference in prices at which a market participant would be willing to buy compared
with the price at which they would be willing to sell. In inactive markets, obtaining assurance that the transaction
price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to
measure the fair value of the instrument requires additional work during the valuation process.
Valuation techniques incorporate assumptions about factors that other market participants would use in their
valuations, including interest rate yield curves, exchange rates, volatilities and prepayment and default rates. During
the year, as a result of evolving market practice in the pricing of certain interest rate derivatives, the group has, for
single currency swaps with collateralised counterparties and in significant major currencies, adopted a discounting
curve that reflects the overnight interest rate typically earned or paid in respect of the collateral posted or received.
Previously, in line with market practice, discount curves did not reflect this overnight interest rate but were based on
a term LIBOR rates. The financial effect of this change was not significant.
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 inputs that are unobservable, and for
them, the derivation 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 carrying
amount and/or inception profit (‘day 1 gain or loss’) 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 market data available at all
upon which to base a determination of fair value (consensus pricing data may, for example, be used).
In certain circumstances, primarily where debt is hedged with interest rate derivatives, the group records its own debt
in issue at fair value, based on quoted prices in an active market for the specific instrument concerned, if available.
When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for
which are either based upon quoted prices in an inactive market for the instrument, or are estimated by comparison
with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of
applying the credit spread which is appropriate to the group’s liability. The change in fair value of issued debt
securities attributable to the group’s own credit spread is computed as follows: for each security at each reporting
date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities for the
same issuer. Then, using discounted cash flow, each security is valued using a LIBOR-based discount curve. The
difference in the valuations is attributable to the group’s own credit spread. This methodology is applied consistently
across all securities.
Structured notes issued and certain other hybrid instrument liabilities are included within trading liabilities and are
measured at fair value. The credit spread applied to these instruments is derived from the spreads at which the group
issues structured notes. These market spreads are smaller than credit spreads observed for plain vanilla debt or in the
credit default swap markets. Gains and losses arising from changes in the credit spread of liabilities issued by the
group reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.
Credit risk adjustment methodology
A separate credit risk adjustment is calculated for each legal entity of the group, and within each entity for each
counterparty to which the entity has exposure. The calculation of the monoline credit risk adjustment and sensitivity
to different assumptions is described below. The credit risk adjustment is calculated by applying the probability of
default of the counterparty to the expected positive exposure to the counterparty, and multiplying the result by the
loss expected in the event of default. The calculation is performed over the life of the potential exposure.
171
HSBC BANK PLC
Notes on the Financial Statements (continued)
The probability of default is based on the group’s internal credit rating for the counterparty, taking into account how
credit ratings may deteriorate over the duration of the exposure through the use of historic rating transition matrices.
For most products, to calculate the expected positive exposure to a counterparty, a simulation methodology is used to
incorporate the range of potential exposures across the portfolio of transactions with the counterparty over the life of
an instrument. The simulation methodology includes credit mitigants such as counterparty netting agreements and
collateral agreements with the counterparty. A standard loss given default assumption of 60% is generally adopted.
The group does not adjust derivative liabilities for the group’s own credit risk, such an adjustment is often referred to
as a ‘debit valuation adjustment’.
For certain types of exotic derivatives where the products are not currently supported by the simulation, or for
derivative exposures in smaller trading locations where the simulation tool is not yet available, the group adopts
alternative methodologies. These may involve mapping to the results for similar products from the simulation tool or
where such a mapping approach is not appropriate, a simplified methodology is used, generally following the same
principles as the simulation methodology. The calculation is applied at a trade level, with more limited recognition of
credit mitigants such as netting or collateral agreements than used in the simulation methodology described
previously.
The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk arises where the underlying
value of the derivative prior to any credit risk adjustment is positively correlated to the probability of default of the
counterparty. Where there is significant wrong-way risk, a trade specific approach is applied to reflect the wrongway risk within the valuation.
All third party counterparties are included in the credit risk adjustment calculation and credit risk adjustments are not
netted across group entities.
During 2010, no material changes were made to the methodologies used to calculate the credit risk adjustment.
Consideration of other methodologies for calculation of credit risk adjustments
The group’s credit risk adjustment methodology, in the opinion of management, appropriately quantifies the group’s
exposure to counterparty risk on the OTC derivative portfolio and appropriately reflects the risk management strategy
of the business.
It is recognised that a variety of credit risk adjustment methodologies are adopted within the banking industry.
Some of the key attributes that may differ between these methodologies are:
•
the PD may be calculated from historical market data, or implied from current market levels for certain
transaction types such as CDSs, either with or without an adjusting factor;
•
some entities derive their own PD from a nonzero spread, which has the effect of reducing the overall
adjustment;
•
differing loss assumptions in setting the level of LGD, which may utilise levels set by regulators for capital
calculation purposes; and
•
counterparty exclusions, whereby certain counterparty types (for example collateralised counterparties) are
excluded from the calculation.
The group’s monoline credit risk adjustment calculation utilises a range of approaches dependent upon the credit
quality of the monoline.
172
HSBC BANK PLC
Notes on the Financial Statements (continued)
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs –
Level 3
The group
Available
for sale
£m
At 31 December 2010
Private equity investments........................
Asset-backed securities ............................
Leverage finance.......................................
Structured notes ........................................
Derivatives with monolines......................
Other derivatives.......................................
Other portfolio ..........................................
At 31 December 2009
Private equity investments........................
Asset-backed securities ............................
Leverage finance.......................................
Structured notes ........................................
Derivatives with monolines......................
Other derivatives.......................................
Other portfolio ..........................................
Assets
Designated
at fair value
through
profit or
Held for
loss Derivatives
Trading
£m
£m
£m
Liabilities
Designated
at fair value
through
profit or
Held for
loss Derivatives
trading
£m
£m
£m
492
1,228
–
–
–
–
90
1,810
51
58
–
–
–
–
1,439
1,548
–
–
–
–
–
–
–
–
–
–
–
–
144
1,116
–
1,260
–
–
–
3,147
–
–
29
3,176
–
–
–
–
–
–
–
–
–
–
7
–
–
2,048
5
2,060
1,115
2,092
–
–
–
–
67
3,274
–
128
42
–
–
–
1,340
1,510
–
–
–
–
–
–
–
–
–
–
–
–
164
1,436
–
1,600
–
–
–
2,097
–
–
687
2,784
–
–
–
–
–
–
–
–
–
–
15
–
–
2,997
–
3,012
The bank
Available
for sale
£m
At 31 December 2010
Private equity investments........................
Asset-backed securities ............................
Leverage finance.......................................
Structured notes ........................................
Derivatives with monolines......................
Other derivatives.......................................
Other portfolio ..........................................
At 31 December 2009
Private equity investments........................
Asset-backed securities ............................
Leverage finance.......................................
Structured notes ........................................
Derivatives with monolines......................
Other derivatives.......................................
Other portfolio ..........................................
•
Assets
Designated
at fair value
through
profit or
Held for
loss Derivatives
Trading
£m
£m
£m
Liabilities
Designated
at fair value
through
profit or
Held for
loss Derivatives
trading
£m
£m
£m
354
3,348
–
–
–
–
90
3,792
51
47
–
–
–
–
1,429
1,527
–
–
–
–
–
–
–
–
–
–
–
–
144
1,237
–
1,381
–
–
–
3,147
–
284
–
3,431
–
–
–
–
–
–
–
–
–
–
7
–
–
2,297
5
2,309
708
1,903
–
–
–
–
67
2,678
–
1,304
42
–
–
–
1,340
2,686
–
–
–
–
–
–
–
–
–
–
–
–
164
1,360
–
1,524
–
–
–
2,097
–
–
687
2,784
–
–
–
–
–
–
–
–
–
–
15
–
–
3,206
–
3,221
Private equity
The group’s private equity positions are generally classified as available-for-sale and are not traded in active
markets. In financial position and results, risk profile, prospects and other factors, as well as by reference to
market valuations for similar entities quoted in an active market, or the price at which similar companies have
changed ownership.
173
HSBC BANK PLC
Notes on the Financial Statements (continued)
•
Asset-backed securities (ABSs)
Illiquidity and a lack of transparency in the market for ABSs have resulted in less observable data being
available. While quoted market prices are generally used to determine the fair value of these securities, valuation
models are used to substantiate the reliability of the limited market data available and to identify whether any
adjustments to quoted market prices are required. For ABSs including residential MBSs, the valuation uses an
industry standard model and the assumptions relating to prepayment speeds, default rates and loss severity based
on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency
against observable data for securities of a similar nature.
•
Loan including leveraged finance and loans held for securitisation
Loans held at fair value are valued from broker quotes and/or market data consensus providers when available.
In the absence of an observable market, the fair value is determined using valuation techniques. These
techniques include discounted cash flow models, which incorporate assumptions regarding an appropriate credit
spread for the loan, derived from other market instruments issued by the same or comparable entities.
•
Structured notes
The fair value of structured notes valued using a valuation technique is derived from the fair value of the
underlying debt security, and the fair value of the embedded derivative is determined as described in the
paragraph below on derivatives.
•
Derivatives
OTC (i.e. non-exchange traded) derivatives are valued using valuation models. Valuation models calculate the
present value of expected future cash flows, based upon ‘no-arbitrage’ principles. For many vanilla derivative
products, such as interest rate swaps and European options, the modelling approaches used are standard across
the industry. For more complex derivative products, there may be some differences in market practice. Inputs to
valuation models are determined from observable market data wherever possible, including prices available from
exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the
market directly, but can be determined from observable prices via model calibration procedures or estimated
from historical data or other sources. Examples of inputs that may be unobservable include volatility surfaces, in
whole or in part, for less commonly traded option products, and correlations between market factors such as
foreign exchange rates, interest rates and equity prices. The valuation of derivatives with monolines is discussed
on pages 171 to 172.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy:
The group
Assets
Liabilities
Designated
Designated
at fair value
at fair value
through
through
profit or
profit or
Held for
Available Held for
loss Derivatives
loss Derivatives trading
for sale Trading
£m
£m
£m
£m
£m
£m
£m
At 1 January 2010......................................................
Total gains or losses recognised in profit or loss ......
Total gains or losses recognised in other
comprehensive income ..........................................
Purchases ...................................................................
Issues..........................................................................
Sales ...........................................................................
Settlements.................................................................
Transfer out................................................................
Transfer in..................................................................
Exchange differences.................................................
3,274
156
173
1,510
112
–
–
–
–
1,600
110
5
2,784
(36)
–
–
–
–
3,012
455
3
200
–
(921)
(133)
(2,012)
973
100
16
–
(24)
(10)
(124)
70
(2)
–
–
–
–
–
–
–
–
–
–
(63)
(153)
(214)
(25)
(227)
800
–
(314)
(381)
552
(2)
–
–
–
–
–
–
–
–
–
–
(701)
(1,078)
199
170
At 31 December 2010...............................................
1,810
1,548
–
1,260
3,176
–
2,060
Total gains or losses recognised in profit or loss
relating to those assets and liabilities held at the
end of the reporting period ....................................
(4)
113
–
302
(46)
–
694
174
HSBC BANK PLC
Notes on the Financial Statements (continued)
The bank
Assets
Liabilities
Designated
Designated
at fair value
at fair value
through
through
profit or
profit or
Held for
Available Held for
loss Derivatives
loss Derivatives trading
for sale Trading
£m
£m
£m
£m
£m
£m
£m
At 1 January 2010......................................................
Total gains or losses recognised in profit or loss ......
Total gains or losses recognised in other
comprehensive income..........................................
Purchases ...................................................................
Issues..........................................................................
Sales ...........................................................................
Settlements.................................................................
Transfer out................................................................
Transfer in..................................................................
Exchange differences.................................................
2,678
563
(34)
2,686
111
–
–
–
–
1,524
163
7
2,784
(54)
–
–
–
–
3,221
788
4
120
–
(531)
(35)
(195)
1,300
(74)
16
–
(24)
(11)
(1,306)
100
(45)
–
–
–
–
–
–
–
–
–
–
52
(171)
(163)
(31)
(227)
800
–
(314)
(381)
831
(8)
–
–
–
–
–
–
–
–
–
–
(412)
(1,682)
220
170
At 31 December 2010...............................................
3,792
1,527
–
1,381
3,431
–
2,309
Total gains or losses recognised in profit or loss
relating to those assets and liabilities held at the
end of the reporting period....................................
402
112
–
326
(74)
–
958
Available-for-sale securities: greater pricing certainty of valuation in the ABS market (particularly MBS) has resulted
in the transfer of assets out of Level 3 during 2010.
Trading assets: greater pricing certainty of valuation of certain ABS resulted in the transfer of assets out of Level 3
during 2010. Transfers into Level 3 were driven by ABS and certain other corporate bonds for which pricing
certainty decreased.
Trading liabilities: transfers out of and in to Level 3 relate primarily to increased/ decreased observability of
structured notes with embedded equity derivatives. New issuances relate to structured notes particularly those with
embedded equity and foreign exchange derivatives.
Derivative liabilities: the increased observability in certain OTC equity derivative markets led to transfers out of
Level 3
During 2010, there were no significant transfers between Level 1 and 2.
Effects of changes in significant unobservable assumptions to reasonably possible alternatives
As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation
techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions
in the same instrument and are not based on observable market data. The following table shows the sensitivity of fair
values to reasonably possible alternative assumptions:
The group
Reflected in profit/(loss)
Favourable
Unfavourable
changes
changes
£m
£m
Reflected in OCI
Favourable
Unfavourable
changes
changes
£m
£m
At 31 December 2010
Derivatives/trading assets/trading liabilities1 ....................
Financial investments: available-for-sale..........................
232
–
(217)
–
–
180
–
(166)
At 31 December 2009
Derivatives/trading assets/trading liabilities1 ....................
Financial investments: available-for-sale..........................
292
–
(153)
–
–
543
–
(543)
175
HSBC BANK PLC
Notes on the Financial Statements (continued)
The bank
Reflected in profit/(loss)
Favourable
Unfavourable
changes
changes
£m
£m
Reflected in OCI
Favourable
Unfavourable
changes
changes
£m
£m
At 31 December 2010
Derivatives/trading assets/trading liabilities1 ....................
Financial investments: available-for-sale..........................
242
–
(231)
–
–
159
–
(145)
At 31 December 2009
Derivatives/trading assets/trading liabilities1 ....................
Financial investments: available-for-sale..........................
415
–
(277)
–
–
465
–
(465)
1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial
instruments are risk-managed.
Sensitivity of fair values to reasonably possible alternate assumptions by Level 3 instrument type
Reflected in profit or loss
Favourable
Unfavourable
changes
changes
£m
£m
At 31 December 2010
Private equity investments.................................................
Asset-backed securities......................................................
Structured notes .................................................................
Derivatives with monolines...............................................
Other derivatives................................................................
Other portfolio ...................................................................
52
5
11
35
111
18
(25)
(5)
(10)
(32)
(116)
(29)
Reflected in profit or loss
Favourable
Unfavourable
changes
changes
£m
£m
At 31 December 2009
Private equity investments.................................................
Asset-backed securities......................................................
Leverage finance................................................................
Derivatives with monolines...............................................
Other derivatives................................................................
Other portfolio ...................................................................
–
15
–
56
101
120
–
(16)
–
3
(96)
(44)
Reflected in OCI
Favourable
Unfavourable
changes
changes
£m
£m
37
114
–
–
–
29
(36)
(116)
–
–
–
(14)
Reflected in OCI
Favourable
Unfavourable
changes
changes
£m
£m
112
418
–
–
–
13
(112)
(418)
–
–
–
(13)
Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a
result of varying the levels of the unobservable parameters using statistical techniques. When parameters are not
amenable to statistical analysis, quantification of uncertainty is judgemental.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table
reflects the most favourable or most unfavourable change from varying the assumptions individually.
In respect of private equity investments, in many of the methodologies, the principal assumption is the valuation
multiple to be applied to the main financial indicators. This may be determined with reference to multiples for
comparable listed companies and includes discounts for marketability.
For ABSs, the principal assumptions in the models are based on benchmark information about prepayment speeds,
default rates, loss severities and the historical performance of the underlying assets.
For leveraged finance, loans held for securitisation and derivatives with monolines the principal assumption concerns
the appropriate value to be attributed to the counterparty credit risk. This requires estimation of exposure at default,
probability of default and recovery in the event of default. For loan transactions, assessment of exposure at default is
straightforward. For derivative transactions, a future exposure profile is generated on the basis of current market
data. Probabilities of default and recovery levels are estimated using market evidence, which may include financial
information, historical experience, CDS spreads and consensus recovery levels.
For structured notes and other derivatives, principal assumptions concern the value to be attributed to future volatility
of asset values and the future correlation between asset values. These principal assumptions include credit volatilities
176
HSBC BANK PLC
Notes on the Financial Statements (continued)
and correlations used in the valuation of structured credit derivatives (including leveraged credit derivatives). For
such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy
method to derive volatility or a correlation from comparable assets for which market data is more readily available,
and/or an examination of historical levels.
32 Fair values of financial instruments not carried at fair value
The classification of financial instruments is determined in accordance with the accounting policies set out in Note 2.
The following financial instruments are not carried at fair value on the balance sheet, their fair values are, however,
provided for information and are calculated as described below.
The group
At 31 December 2010
Carrying
amount
£m
Fair
value
£m
At 31 December 2009
Carrying
amount
£m
Fair
value
£m
Assets
Loans and advances to banks .................................
Loans and advances to customers .........................
Financial investments: Debt securities...................
57,027
285,218
4,281
57,019
281,853
4,548
46,994
274,659
4,851
46,970
269,542
5,235
Liabilities
Deposits by banks1..................................................
Customer accounts..................................................
Debt securities in issue ...........................................
Subordinated liabilities...........................................
48,287
344,123
48,119
7,407
48,287
344,176
47,991
6,948
57,729
332,896
39,340
6,799
57,730
333,039
38,702
6,381
The bank
At 31 December 2010
Carrying
amount
£m
Fair
value
£m
At 31 December 2009
Carrying
amount
£m
Fair
value
£m
Assets
Loans and advances to banks ................................
Loans and advances to customers .........................
27,860
208,548
27,860
205,163
20,729
208,669
20,729
203,855
Liabilities
Deposits by banks...................................................
Customer accounts..................................................
Debt securities in issue ...........................................
Subordinated liabilities...........................................
38,873
230,795
29,417
7,562
38,873
230,795
29,414
7,075
39,346
223,652
14,636
6,955
39,346
224,363
14,638
6,516
1 The carrying amounts of these instruments are equal to the fair value because they are short-term in nature or reprice to current
market rates frequently.
(i) Loans and advances to banks and customers
The fair value of loans and advances is based on observable market transactions, where available. In the absence
of observable market transactions, fair value is estimated using discounted cash flow models.
Performing loans are grouped, as far as possible, into homogeneous pools segregated by maturity and coupon
rates. In general, contractual cash flows are discounted using the group’s estimate of the discount rate that a
market participant would use in valuing instruments with similar maturity, repricing and credit risk
characteristics.
The fair value of a loan portfolio reflects both loan impairments at the balance sheet date and estimates of market
participants’ expectations of credit losses over the life of the loans. For impaired loans, fair value is estimated by
discounting the future cash flows over the time period in which they are expected to be recovered.
(ii) Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted
financial investments are determined using valuation techniques that take into consideration the prices and future
earnings streams of equivalent quoted securities.
177
HSBC BANK PLC
Notes on the Financial Statements (continued)
(iii) Deposits by banks and customer accounts
For the purposes of estimating fair value, deposits by banks and customer accounts are grouped by residual
maturity. Fair values are estimated using discounted cash flows, applying current rates offered for deposits of
similar remaining maturities. The fair value of a deposit repayable on demand is assumed to be the amount
payable on demand at the balance sheet date.
(iv) Debt securities in issue and subordinated liabilities
Fair values are determined using quoted market prices at the balance sheet date where available, or by reference
to quoted market prices for similar instruments.
The fair values in this note are stated at a specific date and may be significantly different from the amounts which
will actually be paid on the maturity or settlement dates of the instruments. In many cases, it would not be possible to
realise immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values
do not represent the value of these financial instruments to the group as a going concern.
33 Maturity analysis of assets and liabilities
The following is an analysis, by remaining contractual maturities at the balance sheet date, of undiscounted cash
flows payable under financial liabilities.
The group
At 31 December 2010
Deposits by banks .........................................
Customer accounts ........................................
Trading liabilities...........................................
Financial liabilities designated
at fair value ................................................
Derivatives .....................................................
Debt securities in issue ..................................
Subordinated liabilities ..................................
Other financial liabilities ...............................
Loan commitments ........................................
Financial guarantee contracts ........................
At 31 December 2009
Deposits by banks .........................................
Customer accounts ........................................
Trading liabilities...........................................
Financial liabilities designated
at fair value ................................................
Derivatives .....................................................
Debt securities in issue ..................................
Subordinated liabilities ..................................
Other financial liabilities ...............................
Loan commitments1 .......................................
Financial guarantee contracts ........................
Due
between
1 and 5
years
£m
Due after
5 years
£m
Total
£m
On demand
£m
Due within
3 months
£m
Due
between
3 and 12
months
£m
13,018
234,438
132,360
39,150
86,053
–
4,759
31,709
–
3,204
4,564
–
658
641
–
60,789
357,405
132,360
4,762
129,204
652
22
1,795
857
200
22,033
737
4,628
1,855
649
15,301
68
1,874
11,153
814
10,776
724
553
14,810
202
411
7,850
411
33,437
131,069
49,173
9,401
9,261
516,251
112,718
571
153,658
717
4,092
56,215
386
5,263
31,788
204
3,146
24,983
19
1,559
782,895
114,044
14,631
629,540
158,467
61,864
35,138
26,561
911,570
14,476
227,086
118,881
48,265
105,528
–
8,989
17,347
–
2,203
2,631
–
705
1,000
–
74,638
353,592
118,881
4,107
119,345
–
27
1,646
161
22
22,290
47
5,942
367
347
8,817
79
1,452
8,315
287
8,962
1,724
571
10,815
10
228
7,610
499
23,765
120,011
40,297
9,487
10,110
485,568
114,711
–
182,255
700
6,943
37,398
227
5,418
24,693
401
3,487
20,867
44
2,144
750,781
116,083
17,992
600,279
189,898
43,043
28,581
23,055
884,856
1 2009 comparative data have been re-presented in line with the classification used in 2010. This resulted in an increase in the ‘On
demand’ time band of £81,248, for ‘Loan commitments’. There was an equivalent reduction across the other time bands.
178
HSBC BANK PLC
Notes on the Financial Statements (continued)
The bank
At 31 December 2010
Deposits by banks............................................
Customer accounts...........................................
Trading liabilities.............................................
Financial liabilities designated
at fair value..................................................
Derivatives.......................................................
Debt securities in issue ....................................
Subordinated liabilities....................................
Other financial liabilities .................................
Loan commitments ..........................................
Financial guarantee contracts .........................
At 31 December 2009
Deposits by banks............................................
Customer accounts...........................................
Trading liabilities.............................................
Financial liabilities designated
at fair value..................................................
Derivatives.......................................................
Debt securities in issue ....................................
Subordinated liabilities....................................
Other financial liabilities .................................
Loan commitments1 .........................................
Financial guarantee contracts .........................
Due
between
1 and 5
years
Due after
5 years
Total
On demand
Due within
3 months
Due
between
3 and 12
months
11,619
186,133
98,412
24,858
18,386
–
2,311
23,088
–
2,067
3,252
–
135
187
–
40,990
231,046
98,412
4
108,786
652
–
186
857
199
7,285
735
2,380
1,730
627
13,918
25
739
7,398
461
7,962
1,353
166
12,432
196
63
6,458
156
22,421
110,269
29,880
8,571
3,627
405,792
82,267
–
54,700
282
3,729
42,438
225
3,816
22,659
124
2,031
19,627
18
812
545,216
82,916
10,388
488,059
58,711
46,479
24,814
20,457
638,520
12,746
185,937
96,821
24,554
26,788
–
1,897
9,577
–
138
1,170
–
49
610
–
39,384
224,082
96,821
83
101,161
–
–
184
119
21
4,667
46
3,943
330
340
5,733
829
318
4,483
106
4,361
2,227
124
10,236
3
–
4,911
117
15,251
101,631
14,761
8,013
4,686
396,932
83,093
–
60,138
188
4,654
19,024
162
4,074
12,609
86
1,992
15,926
2
1,461
504,629
83,531
12,181
480,025
64,980
23,260
14,687
17,389
600,341
1 2009 comparative data have been re-presented in line with the classification used in 2010. This resulted in an increase in the ‘On
demand’ time band of, £69,482 for ‘Loan commitments’. There was an equivalent reduction across the other time bands.
Trading liabilities and trading derivatives have been included in the ‘On demand’ time bucket, and not by contractual
maturity, because trading liabilities are typically held for short periods of time. The undiscounted cash flows on
hedging derivative liabilities are classified according to their contractual maturity. The undiscounted cash flows
potentially payable under financial guarantee contracts are classified on the basis of the earliest date they can be
drawn down.
The following is an analysis by remaining contractual maturities at the balance sheet date, of assets and liability line
items that combine amounts expected to be recovered or settled within one year and after more than one year.
Trading assets and liabilities are excluded because they are not held for collection or settlement over the period of
contractual maturity.
179
HSBC BANK PLC
Notes on the Financial Statements (continued)
The group
Due within
one year
£m
At 31 December 2010
Due after more than
one year
£m
Total
£m
556
54,356
140,227
27,312
5,070
14,911
2,671
144,991
74,774
1,360
15,467
57,027
285,218
102,086
6,430
227,521
238,707
466,228
48,686
338,438
2,860
37,332
4,627
22
(399)
5,685
25,075
10,787
1,159
7,385
48,287
344,123
27,935
48,119
5,786
7,407
431,965
49,692
481,657
Assets
Financial assets designated at fair value...............................
Loans and advances to banks ..............................................
Loans and advances to customers ........................................
Financial investments ...........................................................
Other financial assets............................................................
Liabilities
Deposits by banks .................................................................
Customer accounts................................................................
Financial liabilities designated at fair value.........................
Debt securities in issue .........................................................
Other financial liabilities ......................................................
Subordinated liabilities .........................................................
Due within
one year
£m
At 31 December 2009
Due after more than
one year
£m
Total
£m
Assets
Financial assets designated at fair value...............................
Loans and advances to banks ...............................................
Loans and advances to customers ........................................
Financial investments ...........................................................
Other financial assets............................................................
774
45,278
139,453
15,428
7,565
15,661
1,716
135,206
71,267
2,068
16,435
46,994
274,659
86,695
9,633
208,498
225,918
434,416
56,456
329,146
642
31,286
5,565
5
1,273
3,750
17,522
8,054
1,511
6,794
57,729
332,896
18,164
39,340
7,076
6,799
423,100
38,904
462,004
Liabilities
Deposits by banks .................................................................
Customer accounts................................................................
Financial liabilities designated at fair value.........................
Debt securities in issue .........................................................
Other financial liabilities ......................................................
Subordinated liabilities .........................................................
180
HSBC BANK PLC
Notes on the Financial Statements (continued)
The bank
Due within
one year
£m
At 31 December 2010
Due after more than
one year
£m
Total
£m
84
26,760
99,035
8,995
2,561
4,421
1,100
109,513
32,343
1,076
4,505
27,860
208,548
41,338
3,637
137,435
148,453
285,888
38,514
224,655
2,493
21,334
2,334
–
359
6,140
15,841
8,083
583
7,562
38,873
230,795
18,334
29,417
2,917
7,562
289,330
38,568
327,898
Assets
Financial assets designated at fair value ...........................
Loans and advances to banks ............................................
Loans and advances to customers .....................................
Financial investments ........................................................
Other financial assets.........................................................
Liabilities
Deposits by banks..............................................................
Customer accounts.............................................................
Financial liabilities designated at fair value......................
Debt securities in issue ......................................................
Other financial liabilities ...................................................
Subordinated liabilities......................................................
Due within
one year
£m
At 31 December 2009
Due after more than
one year
£m
Total
£m
Assets
Financial assets designated at fair value ...........................
Loans and advances to banks ............................................
Loans and advances to customers .....................................
Financial investments ........................................................
Other financial assets.........................................................
153
19,178
105,397
4,833
3,914
6,439
1,551
103,272
22,556
1,588
6,592
20,729
208,669
27,389
5,502
133,475
135,406
268,881
38,455
218,493
267
10,316
2,800
799
891
5,159
10,408
4,320
582
6,156
39,346
223,652
10,675
14,636
3,382
6,955
271,130
27,516
298,646
Liabilities
Deposits by banks..............................................................
Customer accounts.............................................................
Financial liabilities designated at fair value......................
Debt securities in issue ......................................................
Other financial liabilities ...................................................
Subordinated liabilities......................................................
Further discussion of the group’s liquidity and funding management can be found in the risk section of the Report of
the Directors.
34 Foreign exchange exposures
The group’s structural foreign currency exposure is represented by the net asset value of its foreign currency equity
and subordinated debt investments in subsidiary undertakings, branches, joint ventures and associates.
The group’s management of structural foreign currency exposures is discussed in risk section in the Report of
Directors.
181
HSBC BANK PLC
Notes on the Financial Statements (continued)
Net structural currency exposures
Currency of structural exposure
2010
£m
2009
£m
Euro............................................................................................................................................
US dollars ..................................................................................................................................
Swiss francs ...............................................................................................................................
Turkish lira.................................................................................................................................
Russian rouble ...........................................................................................................................
Others, each less than £100 million...........................................................................................
12,313
2,558
2,162
1,194
166
221
12,743
1,916
1,792
1,073
182
155
Total ...........................................................................................................................................
18,614
17,861
35 Assets charged as security for liabilities and collateral accepted as security for assets
Financial assets pledged to secure liabilities are as follows:
Group assets pledged at 31 December
Bank assets pledged at 31 December
2010
2009
2010
2009
£m
£m
£m
£m
Treasury bills and other eligible securities...................
Loans and advances to banks .......................................
Loans and advances to customers ................................
Debt securities ..............................................................
Equity shares.................................................................
Other .............................................................................
532
6,467
23,077
110,978
4,231
84
–
3,381
31,901
108,383
4,173
–
29
6,432
12,439
61,721
4,173
–
–
3,168
22,688
54,635
4,087
–
145,369
147,838
84,794
84,578
These transactions are conducted under terms that are usual and customary to standard securities lending and
repurchase agreements.
Collateral accepted as security for assets
The fair value of financial assets accepted as collateral that the group is permitted to sell or repledge in the absence of
default is £157,462 million (2009: £175,084 million) (the bank: 2010 £83,643 million; 2009 £95,662 million). The
fair value of financial assets accepted as collateral that have been sold or repledged is £93,643 million (2009:
£100,631 million) (the bank: 2010 £29,208 million; 2009 £31,189 million). The group is obliged to return these
assets.
These transactions are conducted under terms that are usual and customary to standard stock borrowing and lending
activities.
36 Called up share capital and other equity instruments
Authorised
The concept of authorised share capital was abolished under the UK Companies Act 2006 with effect from 1 October
2009 and amendments to the Company’s Articles of Association were approved by shareholders at a General
Meeting on 1 October 2009.
Issued
HSBC Bank plc ordinary shares
Number
£m
At 1 January 2010............................................................................................................
Shares issued ...................................................................................................................
796,969,107
–
797
–
At 31 December 2010.....................................................................................................
796,969,107
797
At 1 January 2009............................................................................................................
Shares issued ...................................................................................................................
796,969,104
3
797
–
At 31 December 2009......................................................................................................
796,969,107
797
182
HSBC BANK PLC
Notes on the Financial Statements (continued)
HSBC Bank plc non-cumulative third dollar preference shares
Number
£’000
At 1 January and 31 December 2010.........................................................................
35,000,000
172
At 1 January and 31 December 2009 ............................................................................
35,000,000
172
The bank has no obligation to redeem the preference shares but may redeem them in part or in whole at any time,
with prior notification to the FSA. Dividends on the preference shares in issue are paid annually at the sole and
absolute discretion of the Board of Directors. The Board of Directors will not declare a dividend on the preference
shares in issue if payment of the dividend would cause the bank not to meet the capital adequacy requirements of the
FSA or the profit of the bank, available for distribution as dividends, is not sufficient to enable the bank to pay in full
both dividends on the preference shares in issue and dividends on any other shares that are scheduled to be paid on
the same date and have an equal right to dividends or if payment of the dividend is prohibited by the rights attached
to any class of shares in the capital of the bank, excluding ordinary shares. The preference shares in issue carry no
rights to conversion into ordinary shares of the bank. Holders of the preference shares in issue will be able to attend
any general meetings of shareholders of the bank and to vote on any resolution proposed to vary or abrogate any of
the rights attaching to the preference shares or any resolution proposed to reduce the paid up capital of the preference
shares. If the dividend payable on the preference shares in issue has not been paid in full for the most recent dividend
period or any resolution is proposed for the winding-up of the bank or the sale of its entire business then, in such
circumstances, holders of preference shares will be entitled to vote on all matters put to general meetings. In the case
of unpaid dividends the holders of preference shares in issue will be entitled to attend and vote at any general
meetings until such time as dividends on the preference shares have been paid in full, or a sum set aside for such
payment in full, in respect of one dividend period.
All shares in issue are fully paid.
HSBC Bank plc perpetual subordinated debt
£m
At 1 January and 31 December 2010................................................................................................................................
1,750
At 1 January and 31 December 2009 ...................................................................................................................................
1,750
Interest on HSBC Bank plc perpetual subordinated debt is paid quarterly at the sole and absolute discretion of the
Board of Directors. The perpetual subordinated debt may only be redeemed at the option of the bank and carries no
rights to conversion into ordinary shares of the bank.
183
HSBC BANK PLC
Notes on the Financial Statements (continued)
37 Notes on the cash flow statement
Non‐cash items included in profit before tax Depreciation, amortisation and impairment .......................
Share-based payment expense ...........................................
Credit-related impairment losses gross of recoveries ........
Provisions raised ................................................................
Impairment of investments .................................................
Credit charge for defined benefit plans ..............................
Accretion of discounts and amortisation of premiums ......
The group
2010
£m
2009
£m
The bank
2010
£m
2009
£m
622
246
1,952
202
8
239
(432)
632
191
3,364
40
164
(79)
(88)
343
166
1,614
95
156
208
(367)
336
107
2,784
33
65
(108)
(91)
2,837
4,224
2,215
3,126
The group
2010
£m
2009
£m
The bank
2010
£m
2009
£m
Change in operating assets Change in prepayments and accrued income .....................
Change in net trading securities and net derivatives..........
Change in loans and advances to banks .............................
Change in loans and advances to customers ......................
Change in financial assets designated at fair value ............
Change in other assets ........................................................
(214)
22,388
1,229
(10,482)
951
3,353
2,162
(6,301)
8,339
22,527
(2,516)
1,011
(294)
(1,260)
(5,783)
(1,205)
2,087
932
1,336
(5,852)
14,389
7,049
(2,000)
(518)
17,225
25,222
(5,523)
14,404
Change in operating liabilities The group
2010
£m
Change in accruals and deferred income............................
Change in deposits by banks ..............................................
Change in customer accounts .............................................
Change in debt securities in issue.......................................
Change in financial liabilities designated at fair value ......
Change in other liabilities...................................................
2009
£m
The bank
2010
£m
2009
£m
214
(9,443)
11,232
8,974
9,770
121
(1,703)
(3,702)
(36,984)
(12,938)
2,982
(737)
103
(473)
7,152
14,781
7,659
(488)
(733)
(15,640)
(16,831)
5,966
1,246
(550)
20,868
(53,082)
28,734
(26,542)
Cash and cash equivalents The group
2010
£m
2009
£m
The bank
2010
£m
2009
£m
Cash and balances at central banks ...................................
Items in the course of collection from other banks ...........
Loans and advances to banks of one month or less ..........
Treasury bills, other bills and certificates of deposit less
than three months ..........................................................
Less: items in the course of transmission to other banks...
24,495
1,932
53,557
14,274
2,082
42,076
22,357
1,030
26,086
13,130
1,071
24,802
7,432
(1,411)
3,851
(1,477)
2,463
(577)
2,294
(595)
Total cash and cash equivalents1 .....................................
86,005
60,806
51,359
40,702
1 Total cash and cash equivalents include the following amounts that are not available for use by the group: Nil held by foreign
subsidiaries and subject to foreign exchange control restrictions (2009: £13 million); and £1,459 million subject to other restrictions
(2009: £1,451 million).
Total interest paid by the group during the year was £4,062 million (2009: £7,626 million). Total interest received by
the group during the year was £12,401 million (2009: £18,153 million). Total dividends received by the group during
the year were £259 million (2009: £567 million).
184
HSBC BANK PLC
Notes on the Financial Statements (continued)
38 Contingent liabilities, contractual commitments and guarantees
The group
2010
£m
Guarantees and other contingent liabilities
Guarantees and irrevocable letters of credit pledged as collateral
security ..........................................................................................
Other contingent liabilities ...............................................................
2009
£m
The bank
2010
£m
2009
£m
17,324
32
20,971
32
11,293
–
13,507
–
17,356
21,003
11,293
13,507
1,809
19
1,515
492
725
–
495
–
112,215
114,076
82,191
83,036
114,043
116,083
82,916
83,531
1
Commitments
Documentary credits and short-term trade-related transactions .......
Forward asset purchases and forward deposits placed......................
Undrawn formal standby facilities, credit lines and other
commitments to lend2 ...................................................................
1 Excluding capital commitments, which are separately disclosed below.
2 Based on original contractual maturity.
The table above discloses the nominal principal amounts of commitments, guarantees and other contingent liabilities.
They are mainly credit-related instruments which include both financial and non-financial guarantees and
commitments to extend credit. Nominal principal amounts represent the amounts at risk should contracts be fully
drawn upon and clients default. As a significant portion of guarantees and commitments is expected to expire without
being drawn upon, the total of these nominal principal amounts is not representative of future liquidity requirements.
Contingent liabilities arising from litigation against the group are disclosed in Note 40.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (‘FSCS’) has provided compensation to consumers following the
collapse of a number of deposit takers. The compensation paid out to consumers is currently funded through loans
from the Bank of England and HM Treasury. The bank could be liable to pay a proportion of the outstanding
borrowings that the FSCS has borrowed from HM Treasury which at 31 March 2010 stood at approximately £20
billion. Currently, the levy paid by the bank represents its share of the interest on these borrowings.
The ultimate FSCS levy to the industry as a result of the collapses cannot currently be estimated reliably as it is
dependent on various uncertain factors including the potential recoveries of assets by the FSCS and changes in the
interest rate, the level of protected deposits and the population of FSCS members at the time.
Guarantees
The group provides guarantees and similar undertakings on behalf of both third party customers and other entities
within the group. These guarantees are generally provided in the normal course of the group’s banking business. The
principal types of guarantees provided, and the maximum potential amount of future payments which the group could
be required to make at 31 December, were as follows:
185
HSBC BANK PLC
Notes on the Financial Statements (continued)
The group
At 31 December 2010
Guarantees by
the group in
Guarantees in
favour of third favour of other
parties Group entities
Guarantees type
Financial guarantee contracts1 .....................................................
Standby letters of credit which are financial guarantee
contracts2 ..................................................................................
Other direct credit substitutes3 .....................................................
Performance bonds4 .....................................................................
Bid bonds4 ....................................................................................
Standby letters of credit related to particular
transactions4 .............................................................................
Other transaction-related guarantees4 ..........................................
Other items ...................................................................................
Total ..............................................................................................
At 31 December 2009
Guarantees by the
Guarantees in group in favour of
favour of third
other Group
parties
entities
£m
£m
£m
£m
7,920
1,171
10,051
927
456
546
2,018
46
8
68
62
2
1,791
314
2,048
45
1
39
51
3
561
4,393
84
–
21
–
444
4,803
468
–
18
–
16,024
1,332
19,964
1,039
The bank
At 31 December 2010
Guarantees by
the bank in
Guarantees in
favour of favour of other
Group entities
third parties
Guarantees type
Financial guarantee contracts1 ......................................................
Standby letters of credit which are financial guarantee
contracts2 ...................................................................................
Performance bonds4 ......................................................................
Bid bonds4 .....................................................................................
Standby letters of credit related to particular
transactions4 ..............................................................................
Other transaction-related guarantees4 ..........................................
Other items ....................................................................................
Total ..............................................................................................
At 31 December 2009
Guarantees by the
Guarantees in bank in favour of
favour of third
other Group
parties
entities
£m
£m
£m
£m
5,486
2,242
7,535
2,311
7
701
16
–
76
12
5
734
12
–
48
3
128
2,174
–
–
451
–
107
2,290
436
–
26
–
8,512
2,781
11,119
2,388
1 Financial guarantees contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss
incurred because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt
instrument. The amounts in the above table are nominal principal amounts.
2 Standby letters of credit which are financial guarantee contracts are irrevocable obligations on the part of the group and/or the bank
to pay third parties when customers fail to make payments when due.
3 Other direct credit substitutes include reinsurance letters of credit and trade-related letters of credit issued without provision for the
issuing entity to retain title to the underlying shipment.
4 Performance bonds, bid bonds, standby letters of credit and other transaction-related guarantees are undertakings by which the
obligation on the group and/or the bank to make payment depends on the outcome of a future event.
The amounts disclosed in the above table reflect the group’s maximum exposure under a large number of individual
guarantee undertakings. The risks and exposures arising from guarantees are captured and managed in accordance
with the group’s overall credit risk management policies and procedures. Guarantees with terms of more than one
year are subject to the group’s annual credit review process.
Other commitments
In addition to the commitments disclosed above, at 31 December 2010 the group had contractual commitments to
purchase, within one year, land and buildings and other fixed assets from a number of suppliers for a value of £4
million (2009: £239 million).
The group had no contingent liabilities or commitments in relation to joint ventures or associates, incurred jointly or
otherwise.
186
HSBC BANK PLC
Notes on the Financial Statements (continued)
39 Lease commitments
Finance lease commitments
The group leases land and buildings (including branches) and equipment from third parties under finance lease
arrangements to support its operations.
2010
No later than one year ....................................................
Later than one year and no later than five years ............
Later than five years ......................................................
2009
Total future
minimum
Present
value
payments
Total future
minimum
payments
Interest
charges
£m
£m
£m
12
53
242
(11)
(51)
(74)
307
(136)
Interest
charges
Present
value
£m
£m
£m
1
2
168
22
103
372
(19)
(77)
(110)
3
26
262
171
497
(206)
291
At 31 December 2010 future minimum sublease payments of £281 million (2009: £315 million) were expected to be
received under non-cancellable subleases at the balance sheet date.
Operating lease commitments
At 31 December 2010, the group was obligated under a number of non-cancellable operating leases for properties,
plant and equipment for which the future minimum lease payments extend over a number of years.
Land and buildings
2010
Future minimum lease payments under non-cancellable operating leases expiring
No later than one year ................................................................................................................
Later than one year and no later than five years ........................................................................
Later than five years ..................................................................................................................
2009
£m
£m
189
680
1,213
173
608
1,182
2,082
1,963
In 2010, £162 million (2009: £113 million) was charged to ‘General and administrative expenses’ in respect of lease
and sublease agreements, all of which related to minimum lease payments.
Finance lease receivables
HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft),
property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for
further terms. Lessees may participate in any sales proceeds achieved. Lease rentals arising during the lease terms
will either be fixed in quantum or be varied to reflect changes in, for example, tax or interest rates. Rentals are
calculated to recover the cost of assets less their residual value, and earn finance income.
2010
Lease receivables
No later than one year .....................................................
Later than one year and no later than five years .............
Later than five years .......................................................
2009
Total future
minimum
Present
value
payments
Total future
minimum
payments
Interest
charges
£m
£m
£m
1,049
2,938
2,766
(138)
(438)
(762)
6,753
(1,338)
Interest
charges
Present
value
£m
£m
£m
911
2,500
2,004
987
2,996
3,264
(111)
(486)
(951)
876
2,510
2,313
5,415
7,247
(1,548)
5,699
At 31 December 2010, unguaranteed residual values of £114 million (2009: £110 million) had been accrued, and the
accumulated allowance for uncollectible minimum lease payments receivable amounted to £2 million (2009: £8
million).
In 2010, £42 million (2009: £51 million) was paid as contingent rents and recognised in the income statement.
187
HSBC BANK PLC
Notes on the Financial Statements (continued)
Operating lease receivables
The group leases a variety of different assets to third parties under operating lease arrangements, including property,
aircraft and general plant and machinery.
Equipment
2010
Future minimum lease payments under non-cancellable operating leases expiring
No later than one year ................................................................................................................
Later than one year and no later than five years ........................................................................
Later than five years ...................................................................................................................
2009
£m
£m
10
14
1
267
565
276
25
1,108
In 2010, nil (2009: £2 million) was received as contingent rents and recognised in ‘Other operating income’.
40 Legal proceedings and regulatory matters
Bernard L. Madoff Investment Securities LLC
In December 2008, Bernard L. Madoff (‘Madoff’) was arrested for running a Ponzi scheme and a trustee was
appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC (‘Madoff Securities’), an
SEC-registered broker-dealer and investment adviser. Since his appointment, the trustee has been recovering assets
and processing claims of Madoff Securities customers. Madoff subsequently pleaded guilty to various charges and is
serving a 150 year prison sentence. He has acknowledged, in essence, that while purporting to invest his customers’
money in securities and, upon request, return their profits and principal, he in fact never invested in securities and
used other customers’ money to fulfil requests for the return of profits and principal. The relevant US authorities are
continuing their investigations into his fraud, and have brought charges against others.
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds
incorporated outside the US whose assets were invested with Madoff Securities.
Based on information provided by Madoff Securities, as at 30 November 2008, the purported aggregate value of
these funds was US$8.4 billion, an amount that includes fictitious profits reported by Madoff. Based on information
available to HSBC to date, we estimate that the funds’ actual transfers to Madoff Securities minus their actual
withdrawals from Madoff Securities during the time that HSBC serviced the funds totalled approximately US$4.3
billion.
Plaintiffs (including funds, fund investors, and the Madoff Securities trustee) have commenced Madoff-related
proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named
as defendants in suits in the US, Ireland, Luxembourg, and other jurisdictions. The suits (which include US class
actions) allege that the HSBC defendants knew or should have known of Madoff’s fraud and breached various duties
to the funds and fund investors. In December 2010, the Madoff Securities trustee commenced suits against various
HSBC companies in the US bankruptcy court and in the English High Court. The US action (which also names
certain funds, investment managers, and other entities and individuals) seeks US$9 billion in damages and additional
recoveries from HSBC and the various co-defendants. It seeks damages against HSBC for allegedly aiding and
abetting Madoff’s fraud and breach of fiduciary duty. It also seeks, pursuant to US bankruptcy law, recovery of
unspecified amounts received by HSBC from funds invested with Madoff, including amounts that HSBC received
when it redeemed units HSBC held in various funds. HSBC acquired those fund units in connection with financing
transactions HSBC had entered into with various clients. The trustee’s US bankruptcy law claims also seek recovery
of fees earned by HSBC for providing custodial, administration and similar services to the funds. The trustee’s
English action seeks recovery of unspecified transfers of money from Madoff Securities to or through HSBC, on the
ground that the HSBC defendants actually or constructively knew of Madoff’s fraud.
Between October 2009 and July 2010, Fairfield Sentry Limited and Fairfield Sigma Limited (“Fairfield”), funds
whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British
Virgin Islands and the US against numerous fund shareholders, including various HSBC companies that acted as
nominees for clients of HSBC’s private banking business and other clients who invested in the Fairfield funds. The
Fairfield actions seek restitution of amounts paid to the defendants in connection with share redemptions, on the
ground that such payments were made by mistake, based on inflated values resulting from Madoff’s fraud.
188
HSBC BANK PLC
Notes on the Financial Statements (continued)
There are many factors which may affect the range of possible outcomes, and the resulting financial impact of
various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple
jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in
such proceedings. The cases where HSBC companies are named as a defendant are at an early stage. For theses
reasons, among others, it is not practicable at this time for HSBC to estimate reliably the aggregate liabilities, or
ranges of liabilities that might arise as a result of all such claims but they could be significant. In any event, HSBC
considers that it has good defences to these claims and will continue to defend them vigorously.
Payment Protection Insurance
Following an extensive period of consultation, on 10 August 2010 the Financial Services Authority (‘FSA’)
published Policy Statement 10/12 (‘PS 10/12’) on the assessment and redress of Payment Protection Insurance
(‘PPI’) complaints. This included (i) new handbook guidance setting out how complaints are to be handled, and
‘redressed fairly’ where appropriate; (ii) an explanation of when and why firms should analyse their past complaints
to identify if there are serious flaws in sales practices that may have affected complainants and non-complainants;
and (iii) an Open Letter setting out common sales failings to help firms identify bad practices.
After extensive consideration, the British Bankers Association (‘BBA’), as the representative body of UK banks, sent
a formal pre-action protocol letter to the FSA and the Financial Ombudsman Service (‘FOS’) setting out its concerns
and what it considered to be the flaws identified in PS 10/12 and Guidance issued by FOS on the handling of PPI
complaints. The letter indicated that, absent a satisfactory reply, it was the BBA’s intention to apply to the High
Court for a Judicial Review of both PS 10/12 and the FOS Guidance. The FSA and FOS responded on 28 September
2010 denying that they had acted unlawfully in introducing the Policy Statement or relying on the Guidance.
On 8 October 2010, an application for Judicial Review was issued by the BBA seeking an order to quash PS 10/12
and the FOS Guidance. The FSA subsequently issued a statement on 24 November 2010 seeking to clarify aspects of
PS 10/12 and the Open Letter. The FSA and FOS filed defences to the Judicial Review application on 10 December
2010. The Judicial Review application was heard by the Court on 25 – 28 January 2011, and Judgement is currently
awaited.
HSBC believes that the BBA has a strongly arguable case against both the FSA and the FOS. If the Court ultimately
concludes, however, after any appeals of the Judgement that may follow from any of the parties, that PS 10/12 and
the FOS Guidance stand, in whole or in part, then these would need to be taken into consideration when determining
complaints alleging the mis-sale of PPI.
If, contrary to HSBC’s current assessment, a decision is reached in the case that results in a potential liability for
HSBC, a large number of different outcomes is possible, each of which would have a different financial impact.
There are many factors affecting the range of possible outcomes, and the resulting financial impact, including the
extent to which one or both of PS 10/12 and the FOS Guidance are upheld, and the underlying rationale for each
decision; the ways in which PS 10/12 and or the FOS Guidance are found to impose additional requirements over and
above the common law and the FSA Conduct of Business rules in force at the time relating to the sale of general
insurance products, and in the handling of firms’ PPI complaints; the effect of any decision on the nature and volume
of customer complaints; and the extent to which, if at all, HSBC might be required to take action, and the nature of
any such action, in relation to non-complainants. The extent of any redress that may be required as a result of a
decision to uphold PS 10/12 and the FOS Guidance, in whole or in part, would also depend on the facts and
circumstances of each individual customer’s case. For these reasons, among others, HSBC does not at this time
consider it practicable to provide a reliable estimate or range of estimates of the potential financial impact of an
adverse decision.
Pending resolution of the dispute, HSBC continues to review all complaints received which allege that PPI has been
mis-sold and, where possible, seeks to resolve them. Where HSBC considers it is not in a position to reach a final
decision on a complaint until the conclusion of the application for Judicial Review of PS 10/12 and the FOS
Guidance and any subsequent appeals, it informs the complainant that this is the case.
In December 2007, HSBC decided to cease selling PPI products in the UK and a phased withdrawal was completed
across the HSBC, first direct and M&S Money brands during 2008. During the consultation process in 2009, the FSA
reported that it had obtained agreement from firms representing 40 per cent of the market for face to face single
premium PPI sales to review all such sales since July 2007. No HSBC subsidiary or associate was included in that
group of firms.
189
HSBC BANK PLC
Notes on the Financial Statements (continued)
41 Related party transactions
The ultimate parent company of the group is HSBC Holdings plc, which is incorporated in England.
Copies of the Group financial statements may be obtained from the following address:
HSBC Holdings plc
8 Canada Square
London
E14 5HQ
The group’s related parties include the parent, fellow subsidiaries, associates, joint ventures, post-employment
benefit plans for HSBC employees, key management personnel, close family members of Key Management
Personnel and entities which are controlled, jointly controlled or significantly influenced by Key Management
Personnel or their close family members.
(a) Transactions with Directors and other Key Management Personnel
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing
and controlling the activities of HSBC Bank plc and the group and includes members of the Board of Directors of
HSBC Bank plc and HSBC Holdings plc and Group Managing Directors of HSBC Holdings plc.
Compensation of Key Management Personnel
The following represents the compensation paid to the Key Management Personnel of the bank in exchange for
services rendered to the bank.
Short-term employee benefits .............................................................................................
Post-employment benefits ...................................................................................................
Termination benefits ...........................................................................................................
Share-based payments .........................................................................................................
2010
2009
£000
£000
1,651
–
–
1,425
1,900
–
–
1,177
3,076
3,077
Shareholdings and options of Directors’ and other Key Management Personnel
Balance at
31 December 2010
Balance at
31 December 2009
688,652
1,033,662
14,552,607
20,094,864
Number of share options from equity participation plans held by Directors and other
key management personnel (and their connected persons) ...........................................
Number of shares held by Directors and other key management personnel (and their
connected persons)..........................................................................................................
Transactions, arrangements and agreements including Directors and other Key Management
Personnel
The table below set out transactions which fall to be disclosed under IAS 24 ‘Related Party Disclosures’ between the
group and the Key Management Personnel of both the bank and its parent company, HSBC Holdings plc, and their
connected persons or controlled companies.
2010
2009
Highest balance
during the year1
Balance at
31 December1
Highest balance
during the year1
Balance at
31 December1
£000
£000
£000
£000
1,217,401
8,798
19,904
700,616
319
17,512
877,944
3,453
20,984
453,707
224
19,589
Key Management Personnel and connected persons and
companies controlled by them
Loans .........................................................................................
Credit cards ................................................................................
Guarantees .................................................................................
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
The above transactions were made in the ordinary course of business and on substantially the same terms, including
interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable,
190
HSBC BANK PLC
Notes on the Financial Statements (continued)
with other employees. The transactions did not involve more than the normal risk of repayment or present other
unfavourable features.
Transactions, arrangements and agreements including Directors (Companies Act 2006)
In addition to the requirements of IAS 24, particulars of transactions, arrangements and agreements entered into by
HSBC Bank plc and its subsidiaries with Directors of HSBC Bank plc are required to be disclosed pursuant to section
413 of the Companies Act 2006. Under the Companies Act there is no requirement to disclose transactions with the
Key Management Personnel of the bank’s parent company, HSBC Holdings plc.
The table below sets out transactions which fall to be disclosed under section 413 of Companies Act 2006.
The group
Balance at
31 December 2010
Balance at
31 December 2009
£000
£000
127,868
101
6
2,242
52
–
Directors
Loans ..................................................................................................................................
Credit cards .........................................................................................................................
Guarantees ..........................................................................................................................
(b) Transactions with other related parties
Associates and joint ventures
The group
2010
Balance at
Highest balance
31 December1
during the year1
Amounts due from joint ventures – unsubordinated .......................
Amounts due from associates – unsubordinated .............................
Amounts due to joint ventures.........................................................
Amounts due to associates...............................................................
2009
Highest balance
Balance at
during the year1
31 December1
£m
£m
£m
£m
208
45
8
–
208
25
2
–
170
45
12
–
170
45
8
–
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
The bank
2010
Balance at
Highest balance
31 December1
during the year1
Amounts due from joint ventures – unsubordinated .......................
Amounts due from associates – unsubordinated .............................
Amounts due to joint ventures.........................................................
Amounts due to associates...............................................................
2009
Highest balance
Balance at
during the year1 31 December1
£m
£m
£m
£m
208
45
–
–
208
25
–
–
170
45
10
–
170
45
–
–
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
The above outstanding balances arose from the ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable transactions with third party counterparties.
Transactions of the group with HSBC Holdings plc and fellow subsidiaries of HSBC Holdings plc
Transactions detailed below include amounts due to/from HSBC Holdings plc.
2010
Balance at
Highest balance
31 December1
during the year1
Assets
Trading assets ..................................................................................
Financial assets designated at fair value..........................................
Loans and advances to customers....................................................
191
2009
Highest balance
Balance at
during the year1
31 December1
£m
£m
£m
£m
567
26
228
36
26
–
53
28
798
39
20
102
HSBC BANK PLC
Notes on the Financial Statements (continued)
Financial investments......................................................................
78
74
68
63
Liabilities
Trading liabilities ............................................................................
Deposits by banks ...........................................................................
Customer accounts ..........................................................................
Subordinated amounts due..............................................................
17
35
8,693
-
16
–
7,318
-
40
15,020
3,047
15
8,693
–
Guarantees.......................................................................................
-
-
–
–
For the year ended
31 December 2010
For the year ended
31 December 2009
£m
£m
1
81
1
5
9
(39)
111
1
117
13
5
17
114
Income Statement
Interest income ...................................................................................................................
Interest expense ..................................................................................................................
Fee income .........................................................................................................................
Dividend income ................................................................................................................
Trading income ..................................................................................................................
Other operating income ......................................................................................................
General and administrative expenses .................................................................................
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
Transactions detailed below include amounts due to/from fellow subsidiaries of HSBC Holdings plc
2010
Highest
balance during
the year1
£m
Balance at the
year end1
£m
2009
Highest
balance during
the year1
£m
Balance at the
year end1
£m
Assets
Trading assets.......................................................
Derivatives ...........................................................
Financial assets designated at fair value..............
Loans and advances to banks...............................
Loans and advances to customers........................
Financial investments...........................................
9,653
360,117
12
6,832
2,758
6,120
5,384
14,424
11
6,150
961
5,295
8,369
30,669
9,881
3,252
7,484
4,473
11,770
4,093
1,757
5,685
Liabilities
Trading liabilities .................................................
Financial liabilities designated at fair value ........
Deposits by banks ...............................................
Customer accounts ...............................................
Derivatives ...........................................................
17,299
35
6,061
2,576
330,808
12,362
34
5,599
1,365
14,784
29,662
34
8,632
1,585
29,022
10,562
34
4,176
952
12,218
Guarantees............................................................
1,171
1,171
1,009
927
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
Income Statement
Interest income ..............................................................................................................................
Interest expense .............................................................................................................................
Fee income ....................................................................................................................................
Fee expense ...................................................................................................................................
Trading income .............................................................................................................................
Other operating income .................................................................................................................
General and administrative expenses ............................................................................................
192
For the year ended
31 December 2010
£m
For the year ended
31 December 2009
£m
141
99
93
210
48
4
201
263
156
175
197
42
13
206
HSBC BANK PLC
Notes on the Financial Statements (continued)
The above outstanding balances arose from the ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable transactions with third party counterparties.
Transactions between HSBC Bank plc and its subsidiaries, HSBC Holdings plc and fellow
subsidiaries of HSBC Holdings plc
Transactions detailed below include amounts due to/from HSBC Bank plc and its subsidiaries.
2010
Highest
balance during
the year1
£m
Balance at the
year end1
£m
2009
Highest
balance during
the year1
£m
Balance at the
year end1
£m
Assets
Trading assets.......................................................
Derivatives ...........................................................
Financial assets designated at fair value..............
Loans and advances to banks...............................
Loans and advances to customers........................
Financial investments ..........................................
23,756
25,580
87
10,157
21,307
3,309
16,245
14,897
77
8,287
20,425
3,309
34,081
32,375
–
6,595
21,106
2,670
16,390
20,311
–
4,046
21,106
1,680
Liabilities
Trading liabilities ................................................
Deposits by banks ...............................................
Customer accounts ..............................................
Derivatives ..........................................................
Subordinated amounts due...................................
21,946
12,918
11,243
22,495
–
9,244
10,906
7,085
11,597
–
18,683
21,560
11,849
33,368
622
14,222
12,918
11,243
18,255
–
Guarantees ...........................................................
1,896
1,273
2,139
1,474
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
Transactions detailed below include amounts due to/from HSBC Bank plc and HSBC Holdings plc.
2010
Highest
balance during
the year1
£m
Balance at the
year end1
£m
2009
Highest
balance during
the year1
£m
Balance at the
year end1
£m
Assets
Trading assets ......................................................
Loans and advances to customers .......................
567
228
36
–
53
798
39
102
Liabilities
Trading liabilities ................................................
Deposits by banks ...............................................
Customer accounts ..............................................
Subordinated amounts due...................................
17
35
8,378
–
16
–
7,541
–
40
–
15,011
3,047
15
–
8,378
–
Guarantees ...........................................................
–
–
–
–
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
In December 2010, the bank received two guarantees from HSBC Holdings plc in respect of monies owing to the
bank by its structured investment conduits (‘SICs’). The first guarantee renewed an existing contract and covers due
but unpaid monies owed by the bank’s principal SIC, Solitaire, up to a maximum amount of US$16 billion, to the
extent that unpaid liabilities exceed US$1 billion. A second guarantee covers losses on unpaid monies owed by the
bank’s other SICs, Mazarin, Barion and Malachite, up to a maximum amount of US$22 billion, to the extent that
unpaid liabilities exceed US$200 million.
The bank pays no fee to its parent company for the provision of these guarantees.
193
HSBC BANK PLC
Notes on the Financial Statements (continued)
Transactions detailed below include amounts due to/from HSBC Bank plc and fellow subsidiaries of HSBC
Highest balance
during the year1
£m
2010
Balance at the
year end1
£m
Highest balance
during the year1
£m
2009
Balance at the
year end1
£m
Assets
Trading assets....................................................................
Derivatives ........................................................................
Loans and advances to banks............................................
Loans and advances to customers.....................................
9,081
17,496
5,408
2,052
5,138
14,030
4,096
864
7,486
24,290
8,437
3,085
4,166
11,220
2,763
1,640
Liabilities
Trading liabilities ..............................................................
Deposits by banks .............................................................
Customer accounts ............................................................
Derivatives ........................................................................
Guarantees.........................................................................
16,813
4,798
2,198
17,327
969
11,949
4,351
557
14,577
969
27,857
5,130
1,371
21,599
933
10,348
3,585
819
11,435
837
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
The above outstanding balances arose from the ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable transactions with third party counterparties.
Pension funds
At 31 December 2010, fees of £6 million (2009: £5 million) were earned by group companies for management
services related to the group’s pension funds held under management. The group’s pension funds had placed deposits
of £1,163 million (2009: £531 million) with its banking subsidiaries.
The above outstanding balances arose from the ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable transactions with third party counterparties.
In the first half of 2009, a gain of £322 million was recognised by the bank following a restructuring of the basis of
delivery of death in service and ill health early retirement benefits to certain UK employees. These benefits were
provided by the HSBC Bank (UK) Pension Scheme (the ‘Scheme’) but will now be provided outside of the scheme.
The Scheme entered into swap transactions with the bank to manage the inflation and interest rate sensitivity of the
liabilities. At 31 December 2010, the gross notional value of the swaps was £14,686 million (2009: £14,617 million),
the swaps had a negative fair value of £1,400 million to the bank (2009: negative fair value of £647 million) and the
bank had delivered collateral of £2,136 million (2009: £1,729 million) to the Scheme in respect of these swaps. All
swaps were executed at prevailing market rates and within standard market bid/offer spreads.
In order to satisfy diversification requirements, the Trustee has requested special collateral provisions for the swap
transactions between the bank and the Scheme. The collateral agreement stipulates that the Scheme never posts
collateral to the bank. Collateral is posted to the Scheme by the bank at an amount that the Trustee is highly confident
would be sufficient to replace the swaps in the event of default by the bank. Under the terms of the agreement,
increases in collateral when required, are posted by the bank on a daily basis and any reductions of collateral are
repaid to the bank on a monthly basis.
With the exception of the special collateral arrangements detailed above, all other aspects of the swap transactions
between the bank and the Scheme are on substantially the same terms as comparable transactions with third party
counterparties.
Purchase of non-controlling interests
In June 2010, the group purchased the minority interest in HSBC Europe B.V. which was owned by HSBC Holdings
(Luxembourg) S.A., a direct subsidiary of HSBC Overseas Holdings (UK) Limited, for a cash consideration of
£176m.
In March 2009, the group purchased the minority interests in HSBC Private Bank (Suisse) SA which was owned by
HSBC Investor PBRS Corporation (Delaware), a direct subsidiary of HSBC Bank USA, National Association, for a
cash consideration of £247m.
194
HSBC BANK PLC
Notes on the Financial Statements (continued)
42 Events after the balance sheet date
A second interim dividend for 2010 of £915 million to shareholders of the parent company was declared by the
Directors after 31 December 2010.
195
HSBC Bank plc
Incorporated in England with limited liability. Registered in England: number 14259
REGISTERED OFFICE
8 Canada Square, London E14 5HQ, United Kingdom
Web: www.hsbc.co.uk
© Copyright HSBC Bank plc 2011
All rights reserved
No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC
Bank plc.
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HSBC Bank plc
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London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
Facsimile: 44 020 7992 4880
www.hsbc.co.uk
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