and hotels), transportation and commercial real estate, remains
uncertain and may lead to significant credit losses on specific
exposures, which may not be fully captured in ECL estimates. In
addition, in times of stress, fraudulent activity is often more
prevalent, leading to potentially significant credit or operational
losses.
As economic conditions improve, and the UK Government support
measures come to an end, there is a risk that the outputs of IFRS 9
models may have a tendency to underestimate loan losses. Model
outputs and management adjustments are closely monitored and
independently reviewed for reliability and appropriateness prior to
inclusion in the financial results.
The operational support functions on which HSBC UK relies are
based in a number of countries worldwide, some of which, notably
India, have been particularly affected by the Covid-19 pandemic
over the course of 2021. As a result of the Covid-19 pandemic,
business continuity responses have been embedded and services
have been maintained in those locations where we operate. We
continue to monitor the situation closely in particular in those
countries where the level of Covid-19 infections is most prevalent.
Despite the ongoing economic recovery, significant uncertainties
remain in assessing the duration and impact of the Covid-19
outbreak, including whether any subsequent outbreaks result in a
re-imposition of the UK Government restrictions, or a further
lockdown. We continue to monitor the situation closely, and given
the novel and prolonged nature of the outbreak, there may still be
a requirement for additional mitigating actions including further
use of adjustments, overlays and model redevelopment.
The UK Government and the BoE have deployed extensive
measures to support the UK population. The UK economy recovery
gathered pace after the rapid Covid-19 vaccine rollout, however in
response to increasing inflationary pressures, interest rate rises
have been seen in both December 2021 and February 2022. The
UK Government is also expected to reduce the level of fiscal
support they offer households and businesses as the appetite for
lockdowns and public health restrictions decrease. The UK
Government debt has risen and is expected to remain high into the
medium term. This could eventually pose a dilemma for the BoE,
as it faces the conflicting aims of keeping debt servicing costs
contained while preventing a steep rise in inflation. Our Central
scenario used to calculate impairment assumes that economic
activity will continue to recover through 2022, surpassing peak
pre-pandemic levels of GDP. It is assumed that private sector
expenditure growth accelerates, ensuring a strong recovery is
sustained even as pandemic related fiscal support is rolled back.
Higher inflation in the UK is assumed to be driven by supply
disruptions and pandemic related base effects that peak in the first
half of the year. There is a high degree of uncertainty associated
with economic forecasts in the current environment and there are
significant risks to our Central scenario related to the uncertainty
around the evolution of the pandemic in the UK, associated policy
responses and ongoing impacts felt from the Trade and
Cooperation Agreement in place between the UK and the EU from
1 January 2021. For further details of our Central and other
scenarios, see ‘Measurement uncertainty and sensitivity analysis
of ECL estimates’ on page 34.
Mitigating actions
•We continue to support our customers through specific
measures initiated during the Covid-19 pandemic, including our
relief programmes. See page 29.
•We continue to monitor those industry sectors most impacted
by the pandemic and undertake scenario analysis. This enables
us to take portfolio actions where necessary, including
enhanced monitoring, amending our risk appetite and/or
reducing limits and exposures.
•We have successfully embedded business continuity plans to
effectively manage our operations under the constraints posed
by the UK Government in response to the pandemic.
•We have built up our operational capacity rapidly in response to
UK Government support measures aimed at combating the
impacts of the Covid-19 pandemic and have been responding
to complex conduct considerations and heightened risk of
fraud related to these programmes, including as these
programmes are unwound.
Geopolitical risk
We continually assess the impact of geopolitical events on our
businesses and exposures across HSBC UK, and take steps to
mitigate them, where required and possible, to help ensure we
remain within our risk appetite.
The EU and the UK agreed a TCA at the end of 2020, following the
UK’s withdrawal from the EU. The agreement mainly focuses on
goods and services but also covers a wide range of other areas,
including competition, state aid, tax, fisheries, transport, data and
security. It addressed financial services in a limited manner and, as
a result, did not change our planning in relation to the UK’s
withdrawal from the EU. Work on the creation of a framework for
voluntary regulatory cooperation in financial services between the
UK and EU has stalled in 2021 as the broader relationship is beset
by several disagreements that may escalate further, most notably
over the Northern Ireland Protocol.
Alongside increased tensions between the UK and the EU, the
likelihood of Scotland leaving the UK is viewed as having
increased since the Scottish Parliament elections in May 2021
produced an overall pro-independence majority across the political
parties.
Tensions between Russia and the US and a number of European
states have heightened significantly following the escalation of
hostilities between Russia and Ukraine. While negotiations are
ongoing to seek a resolution, a continuation of or any further
deterioration to the situation could have significant geopolitical
implications, including economic, social and political
repercussions on the group and its customers. In addition, the US,
the UK and the EU have threatened a significant expansion of
sanctions and trade restrictions against Russia in the event of a
Russian incursion into Ukraine, and Russian countermeasures are
also possible.
In 2021, there was an escalation of diplomatic tensions between
China and the US, and increasingly extending to the UK, the EU,
India and other countries. The US, with its traditional allies
including the UK, the EU, and Canada, has increasingly instituted
sanctions in response to allegations of human rights abuses in
Xinjiang. China in turn has announced a number of its own
sanctions and trade restrictions that target foreign individuals or
companies.
Mitigating actions
•We continually monitor the geopolitical outlook and undertake
regular reviews of key portfolios to help ensure that individual
customer or portfolio risks are understood and our ability to
manage the level of facilities offered through any downturn is
appropriate.
•We continue to carry out contingency planning following the
UK’s withdrawal from the EU and we are assessing the
potential impact on our portfolios, operations and staff. This
includes the possibility of disputes arising from differing
interpretations of the TCA and other aspects of the bilateral
relationship.
•We are monitoring the debate of Scottish independence
closely, whilst ensuring that any possible impacts on the UK
and our customers are actively considered in new and existing
change programmes.
•We continue to monitor geopolitical tensions involving Russia
and Ukraine and any potential impacts on HSBC UK or its
customers.