2HI3YI5320L3RW6NJ957-2022-12-31-T01


Contents
		Page
Certain defined terms		1
Cautionary statement regarding forward-looking statements		1
Chinese translation		1
Financial Highlights		2
Report of the Directors		3
Environmental, Social and Governance Review		9
Financial Review		16
Risk		20
Statement of Directors’ Responsibilities		73
Independent Auditor’s Report		74

Consolidated Financial Statements
Consolidated income statement		79
Consolidated statement of comprehensive income		80
Consolidated balance sheet		81
Consolidated statement of cash flows		82
Consolidated statement of changes in equity		83

Notes on the Consolidated Financial Statements
1	Basis of preparation and significant accounting policies	85
2	Operating profit	95
3	Insurance business	97
4	Employee compensation and benefits	98
5	Tax	101
6	Dividends	102
7	Trading assets	103
8	Derivatives	103
9	Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	106
10	Loans and advances to customers	106
11	Financial investments	107
12	Assets pledged, assets transferred and collateral received	108
13	Investments in subsidiaries	109
14	Interests in associates and joint ventures	109
15	Goodwill and intangible assets	112
16	Property, plant and equipment	113
17	Prepayments, accrued income and other assets	114
18	Customer accounts	115
19	Trading liabilities	115
20	Financial liabilities designated at fair value	115
21	Debt securities in issue	115
22	Accruals and deferred income, other liabilities and provisions	115
23	Subordinated liabilities	116
24	Share capital	116
25	Other equity instruments	117
26	Maturity analysis of assets and liabilities	117
27	Analysis of cash flows payable under financial liabilities by remaining contractual maturities	120
28	Contingent liabilities, contractual commitments and guarantees	121
29	Other commitments	121
30	Offsetting of financial assets and financial liabilities	121
31	Segmental analysis	123
32	Related party transactions	124
33	Fair values of financial instruments carried at fair value	127
34	Fair values of financial instruments not carried at fair value	133
35	Structured entities	134
36	Bank balance sheet and statement of changes in equity	136
37	Business acquisitions	138
38	Legal proceedings and regulatory matters	138
39	Ultimate holding company	139
40	Events after the balance sheet date	139
41	Approval of financial statements	139
Additional information		140

Certain defined terms

This document comprises the Annual Report and Accounts 2022

for The Hongkong and Shanghai Banking Corporation Limited (‘the

Bank’) and its subsidiaries (together ‘the group’). References to

‘HSBC’, ‘the Group’ or ‘the HSBC Group’ within this document

mean HSBC Holdings plc together with its subsidiaries. Within this

document the Hong Kong Special Administrative Region of the

People’s Republic of China is referred to as ‘Hong Kong’. The

abbreviations ‘HK$m’ and ‘HK$bn’ represent millions and billions

(thousands of millions) of Hong Kong dollars respectively.

Cautionary statement regarding forward-

looking statements

This Annual Report and Accounts contains certain forward-looking

statements with respect to the financial condition, results of

operations and business of the group.

Statements that are not historical facts, including statements

about the Bank’s beliefs and expectations, are forward-looking

statements. Words such as ‘expects’, ‘anticipates’, ‘intends’,

‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably

possible’, variations of these words and similar expressions 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.

Please see page 140 for the additional cautionary statement

regarding environmental, social and governance, as well as

climate-related data, metrics and forward-looking statements.

Chinese translation

A Chinese translation of the Annual Report and Accounts 2022 is

available upon request from: Communications (Asia), Level 32,

HSBC Main Building, 1 Queen’s Road Central, Hong Kong. The

report is also available, in English and Chinese, on the Bank’s

website at www.hsbc.com.hk.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	1

Financial Highlights


	2022	2021
	HK$m	HK$m
For the year
Net operating income before change in expected credit losses and other credit impairment charges	205,692	178,658
Profit before tax	97,611	86,563
Profit attributable to shareholders	78,245	67,348
At the year-end
Total shareholders’ equity	875,320	856,809
Total equity	941,263	923,511
Total capital1	607,312	590,478
Customer accounts	6,113,709	6,177,182
Total assets	10,324,152	9,903,393
Ratios	%	%
Return on average ordinary shareholders’ equity	9.3	8.0
Post-tax return on average total assets	0.8	0.7
Cost efficiency ratio	53.7	58.7
Net interest margin	1.67	1.37
Advances-to-deposits ratio	60.6	62.2
Capital ratios
Common equity tier 1 capital	15.3	15.4
Tier 1 capital	16.9	16.8
Total capital	18.8	18.7

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

of the Banking Ordinance.

Established in Hong Kong and Shanghai in 1865, The Hongkong and Shanghai Banking Corporation Limited is the founding member of

the HSBC Group – one of the world’s largest banking and financial services organisations. It is the largest bank incorporated in Hong

Kong and one of Hong Kong’s three note-issuing banks. It is a wholly-owned subsidiary of HSBC Holdings plc, the holding company of

the HSBC Group, which has an international network covering Europe, Asia, the Middle East and North Africa, North America and Latin

America.

The Hongkong and Shanghai Banking Corporation Limited

Incorporated in the Hong Kong SAR with limited liability

Registered Office and Head Office: HSBC Main Building, 1 Queen’s Road Central, Hong Kong

Telephone: (852) 2822 1111Web: www.hsbc.com.hk.

Financial Highlights | Report of the Directors


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

Report of the Directors

Principal Activities

The group provides a comprehensive range of domestic and

international banking and related financial services, principally in

the Asia–Pacific region.

Asia Strategy

Asia’s growth story remains at the heart of HSBC’s future. Based

on the region’s strong and sustained underlying fundamentals of

economic growth, trade, and wealth creation, HSBC’s strategy in

the region remains aligned to the biggest opportunities to create

further shareholder value. We are well positioned to further extend

the strengths of our leading Hong Kong franchise across the

Greater Bay Area, and in other key growth markets, including India

and Southeast Asian markets. By increasing investment in our

people and technology, we will further grow our top tier Asia

Wealth Management business, while maintaining our distinct

position as the leading international bank for our corporate and

commercial clients. We remain focused on connecting Asian

markets to each other and the world through HSBC’s global

network, supporting the ongoing transition to a low-carbon

economy with Sustainable Finance, continually streamlining our

organisation to realise greater operating efficiencies, and

improving service for our domestic, regional, and global clients

through our technology, talent, and 157 years of experience in the

region.

Consolidated Financial Statements

The consolidated financial statements of the group are set out on

pages 79 to 139.

Subordinated Liabilities, Share Capital and Other

Equity Instruments

Details on subordinated liabilities issued by the group are set out

in Notes 23 and 32. Details on share capital and other equity

instruments of the Bank are set out in Notes 24 and 25 on the

Consolidated Financial Statements.

Dividends

The interim dividends paid in respect of 2022 are set out in Note 6

on the Consolidated Financial Statements.

Directors

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

Peter Tung Shun WONG, GBS, JP

Non-executive Chairman (since June 2021)

He is also an advisor to the Group Chairman and the Group Chief

Executive of HSBC Holdings plc, and Chairman and a non-executive

Director of HSBC Bank (China) Company Limited. He holds a Bachelor of

Arts, a Master of Business Administration and a Master of Science from

Indiana University.

Before his retirement as an HSBC employee in June 2021, he was an

executive Director, Chief Executive and Deputy Chairman of the Bank. He

was also a non-executive Director of Hang Seng Bank Limited.

David Gordon ELDON, GBS, CBE, JP

Non-executive Deputy Chairman (since June 2021)

He holds an Honorary Doctor of Business Administration from City

University of Hong Kong and is a Fellow of the UK Chartered Institute of

Bankers and the Hong Kong Institute of Bankers.

Before his retirement as an HSBC employee in 2005, he was an executive

Director, Chief Executive Officer and Chairman of the Bank. He was also

non-executive Chairman of Hang Seng Bank Limited and a Director of

HSBC Holdings plc. He was non-executive Chairman of HSBC Bank

Middle East Limited from 2011 to 2021. He was non-executive Chairman

and a Director of Octopus Holdings Limited, Octopus Cards Limited and

Octopus Cards Client Funds Limited from 2016 until the end of 2022.

David Yi Chien LIAO

Co-Chief Executive Officer (since June 2021)

He is also a member of the Group Executive Committee of HSBC Holdings

plc and a non-executive Director of Hang Seng Bank Limited and Bank of

Communications Co., Ltd. He holds a Bachelor of Arts (major in Japanese

and Economics) from the University of London.

He has previously held a number of senior positions within the Group,

including the Head of Global Banking Coverage for Asia-Pacific and a

Director and Chief Executive Officer of HSBC Bank (China) Company

Limited.

Surendranath Ravi ROSHA

Co-Chief Executive Officer (since June 2021)

He is also a member of the Group Executive Committee of HSBC Holdings

plc and an executive Director of HSBC Bank Malaysia Berhad. He holds a

Bachelor of Commerce from Sydenham College of Commerce &

Economics, Bombay University and a Master of Business Administration

from the Indian Institute of Management, Ahmedabad.

He has previously held a number of senior positions within the Group,

including the Chief Executive Officer of HSBC India and Regional Head of

Financial Institutions Group, Asia-Pacific.

Sonia Chi Man CHENG

Independent non-executive Director (since November 2020)

She is also the Chief Executive Officer of Rosewood Hotel Group. She is

the Vice-Chairman and executive Director of Chow Tai Fook Jewellery

Group Limited, an executive Director of New World Development

Company Limited and a Director of New World China Land Limited. She

holds a Bachelor of Arts with a field of concentration in Applied

Mathematics from Harvard University.

Yiu Kwan CHOI

Independent non-executive Director (since October 2017)

He holds a higher certificate in Accountancy from The Hong Kong

Polytechnic University and is a Fellow member of The Hong Kong Institute

of Bankers.

He was an independent non-executive Director of HSBC Bank (China)

Company Limited from December 2016 to December 2022. He was

Deputy Chief Executive of the Hong Kong Monetary Authority (‘HKMA’) in

charge of Banking Supervision when he retired in January 2010. Before

this, he was Deputy Chief Executive of the HKMA in charge of Monetary

Policy and Reserves Management from June 2005 to August 2007 and

held various senior positions in the HKMA including Executive Director

(Banking Supervision), Head of Administration, and Head of Banking

Policy from 1993 to 2005.

Andrea Lisa DELLA MATTEA

Independent non-executive Director (since 11 March 2022)

She is also the Asia Pacific President of Microsoft Operations Pte Ltd. She

holds a Bachelor of Engineering and an Honorary Doctor of Engineering

from James Cook University of North Queensland, Australia.

She has previously held senior leadership roles at Insight Enterprises, Inc

from 2007 to 2017, including Asia Pacific Managing Director, and at

Software Spectrum Inc from 1996 to 2006.

Rajnish KUMAR

Independent non-executive Director (since August 2021)

He is also non-executive Chairman of Resilient Innovations Pvt. Ltd., an

independent non-executive Director of Larsen & Toubro Infotech Limited

and Ambuja Cements Limited, an advisor to Kotak Investment Advisors

Ltd., a Director of Lighthouse Communities Foundation, and a member of

the Board of Governors of the Management Development Institute in

India. He is also a senior advisor to Baring Private Equity Asia Pte Ltd. in

Singapore. He holds a Master of Science in Physics from Meerut

University and a Post Graduate Certificate in Business Management from

XLRI Jamshedpur in India. He is an Associate of the Indian Institute of

Bankers.

He was previously Chairman of the State Bank of India until he retired in

October 2020.

Beau Khoon Chen KUOK

Independent non-executive Director (since August 2020)

He is also Chairman and Managing Director of Kerry Group Limited. He

holds a Bachelor of Economics from Monash University. He was

previously Chairman and Chief Executive Officer of Shangri-La Asia

Limited, Chairman of Kerry Properties Limited, and a non-executive

Director of Wilmar International Limited.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	3

Irene Yun-lien LEE

Independent non-executive Director (since October 2013)

She is also executive Chairman of Hysan Development Company Limited.

She is also independent non-executive Chairman of Hang Seng Bank

Limited and an independent non-executive Director of Alibaba Group

Holding Limited. She holds a Bachelor of Arts (Distinction) in History of Art

from Smith College, Northampton, Massachusetts, USA. She is also a

member of the Honourable Society of Gray’s Inn, UK and a Barrister-at-

Law in England and Wales.

She was an independent non-executive Director of HSBC Holdings plc

from 2015 to 2022.

Victor Tzar Kuoi LI

Non-executive Director (since May 1992)

He is also Chairman and Managing Director of CK Asset Holdings Limited,

Chairman and a Group Co-Managing Director of CK Hutchison Holdings

Limited, Chairman of CK Infrastructure Holdings Limited and CK Life

Sciences Int’l., (Holdings) Inc., a non-executive Director of Power Assets

Holdings Limited and HK Electric Investments Manager Limited, and a

non-executive Director and Deputy Chairman of HK Electric Investments

Limited. He is also Deputy Chairman of Li Ka Shing Foundation Limited, Li

Ka Shing (Global) Foundation and Member Deputy Chairman of Li Ka

Shing (Canada) Foundation. He holds a Bachelor of Science in Civil

Engineering and a Master of Science in Civil Engineering, both received

from Stanford University; and a Doctor of Laws, honoris causa (LL.D.)

from The University of Western Ontario.

Annabelle Yu LONG

Independent non-executive Director (since 17 August 2022)

She is also the Founding and Managing Partner of BAI Capital Fund I, L.P.

and a Group Management Committee Member of Bertelsmann SE & Co.

KGaA. She is an independent Director of Tapestry Inc., LexinFintech

Holdings Ltd., Nio Inc. and Linmon Media Limited. She holds a Master in

Business Administration from Stanford Graduate School of Business,

United States and a Bachelor of Science in Electrical Engineering from

University of Electronic Science and Technology, China.

Kevin Anthony WESTLEY, BBS

Independent non-executive Director (since September 2016)

He is also an independent non-executive Director of Fu Tak Iam

Foundation Limited and a member of the investment committee of the

West Kowloon Cultural District Authority. He holds a Bachelor of Arts

(Hons) from the University of London (LSE) and is a Fellow of the Institute

of Chartered Accountants in England and Wales.

He was Chairman (from 1996) and Chief Executive (from 1992) of HSBC

Investment Bank Asia Limited (formerly named Wardley Limited) until his

retirement in 2000 and subsequently acted as an advisor to the Bank and

the Group in Hong Kong. He was an independent non-executive Director

of the Bank from 2013 to 2015 and rejoined the Board in September 2016.

During the year, Andrea Lisa Della Mattea and Annabelle Yu Long

were appointed independent non-executive Directors with effect

from 11 March and 17 August 2022 respectively. At the

conclusion of the 2022 Annual General Meeting (‘AGM’) held on

1 June 2022, Graham John Bradley, Christopher Wai Chee Cheng

and Francis Sock Ping Yeoh stepped down as Directors. Ewen

James Stevenson stepped down as Director with effect from

25 October 2022. Save for the above, all the Directors served

throughout the year.

A list of the directors of the Bank’s subsidiary undertakings

(consolidated in the financial statements) during the period from

1 January 2022 to the date of this report will be available on the

Bank’s website www.hsbc.com.hk/legal/regulatory-disclosures/.

Secretary

Paul Stafford is the Corporation Secretary.

Permitted Indemnity Provision

The Bank’s Articles of Association provide that the Directors and

other officers of the Bank shall be indemnified out of the Bank’s

assets against any liability incurred by them or any of them as the

holder of any such office or appointment to a person other than

the Bank or an associated company of the Bank in connection

with any negligence, default, breach of duty or breach of trust in

relation to the Bank or associated company. In addition, the

Bank’s ultimate holding company, HSBC Holdings plc, has

maintained directors’ and officers’ liability insurance providing

appropriate cover for the directors and officers within the Group,

including the Directors of the Bank and its subsidiaries.

Directors’ Interests in Transactions,

Arrangements or Contracts

Save as disclosed in Note 32 on the Consolidated Financial

Statements, no transactions, arrangements or contracts that were

significant in relation to the Bank’s business and in which a

Director or his or her connected entities had, directly or indirectly,

a material interest were entered into by or subsisted with the

Bank, its holding companies, its subsidiaries or subsidiaries of its

holding companies during the year.

Directors’ Rights to Acquire Shares or Debentures

To help align the interests of employees with shareholders,

executive Directors of the Bank and HSBC Holdings plc are eligible

to be granted conditional awards over ordinary shares in HSBC

Holdings plc by that company (being the ultimate holding

company) under the HSBC Share Plan 2011 and the HSBC

International Employee Share Purchase Plan.

Executive Directors of the Bank and HSBC Holdings plc are eligible

to receive an annual incentive award based on the outcome of the

performance measures (financial and non-financial) set out in their

annual performance scorecard. Annual incentive awards are

normally delivered in cash and/or shares, and these generally have

a deferral rate of 60% or 40% if the annual incentive award is

below GBP500,000. The period over which annual incentive

awards would be deferred is determined in accordance with the

requirements of the Prudential Regulation Authority (‘PRA’)

Remuneration Rules, i.e. seven years for Senior Managers

(individuals in PRA and Financial Conduct Authority (‘FCA’)

designated Senior Management Functions), five years for Risk

Managers, and four years for other Material Risk Takers (‘MRTs’).

From January 2017 onwards, all share awards granted to MRTs

are subject to a minimum retention period of one year as opposed

to six months previously. However, for certain individuals whose

variable pay awards will be deferred for at least five years and who

are not considered to be members of senior management, their

retention period may be kept at six months.

From 2022 to incentivise sustainable long-term performance and

alignment with shareholder interests, Senior Management of

Holdings plc including the Co-Chief Executives of the Bank are

eligible to receive Long-Term Incentive (LTI) Share Award. These

awards which have been made to executive Directors of Holdings

plc are subject to three-year forward-looking performance

measures and a seven-year vesting period with a one-year post-

vesting retention period, which is not accelerated on departure.

The weighted average holding period of an LTI award within HSBC

is therefore six years, in excess of the five-year holding period

typically implemented by FTSE-listed companies. When the

individual ceases employment, if they are treated as a good leaver

under our policy, any LTI awards granted will continue to be

released over a period of up to eight years, subject to the outcome

of performance conditions. For more details on the operation of

the plan, please refer to HSBC Holdings plc annual report and

accounts.

All unvested deferred awards made under the HSBC Share Plan

2011 are subject to the application of malus, i.e. the cancellation

and reduction of unvested deferred awards. All paid or vested

variable pay awards made to identified staff and MRTs will be

subject to clawback for a period of seven years from the date of

award. For Senior Managers, this may be extended to 10 years in

the event of an ongoing internal or regulatory investigation at the

end of the seven-year period.

Executive Directors and other senior executives of HSBC Holdings

plc are subject to Group minimum shareholding requirements.

Individuals are given five years from 2014 or (if later) their

appointment to build up the recommended levels of shareholding.

HSBC operates an anti-hedging policy for Group, sectorial and

local MRTs including executive Directors in accordance with the

PRA Rules, who are required to certify each year via the Bank's

Report of the Directors


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

Global Personal Account Dealing system that they have not

entered into any personal hedging strategies in relation to their

holdings of HSBC shares as part of the Global Personal Account

Dealing Certification.

The HSBC International Employee Share Purchase Plan is an

employee share purchase plan offered to employees in Hong Kong

since 2013 and has been extended to further countries in the

HSBC Group from 2014. For every three shares in HSBC Holdings

plc purchased by an employee (‘Investment Shares’), a conditional

award to acquire one share is granted (‘Matching Shares’). The

employee becomes entitled to the Matching Shares subject to

continued employment with HSBC and retention of the Investment

Shares until the third anniversary of the start of the relevant plan

year. HSBC Holdings Savings-Related Share Option Plan (UK) is an

all employee share plan under which eligible employees may be

granted options to acquire HSBC Holdings ordinary shares.

Employees may make monthly contributions, up to a maximum

defined limit, over a period of three or five years and shares are

exercisable within six months following either the third or fifth

anniversary of the commencement. The exercise price is set at a

20% discount to the market value immediately preceding the date

of invitation.

During the year, Ewen Stevenson, Surendra Rosha and David Liao

acquired or were awarded shares of HSBC Holdings plc under the

terms of the HSBC Share Plan 2011. Peter Wong in his former

capacity as executive Director in 2021 received a 2021

performance year variable pay award in March 2022 to which part

of the award was made in share-linked instruments of HSBC

Holding plc.

Apart from these arrangements, at no time during the year was

the Bank, its holding companies, its subsidiaries or any fellow

subsidiaries a party to any arrangements to enable the Directors to

acquire benefits by means of the acquisition of shares in or

debentures of the Bank or any other body corporate.

Donations

Donations made by the Bank and its subsidiaries during the year

amounted to HK$439m (2021: HK$380m).

Compliance with the Banking (Disclosure) Rules

The Directors are of the view that the Annual Report and Accounts

2022 and Banking Disclosure Statements 2022 fully comply with

the Banking (Disclosure) Rules made under section 60A of the

Banking Ordinance and the Financial Institutions (Resolution)

(Loss-absorbing Capacity Requirements – Banking Sector) Rules

(‘LAC Rules’) made under section 19(1) of the Financial Institutions

(Resolution) Ordinance ('FIRO').

Auditor

The Consolidated Financial Statements have been audited by

PricewaterhouseCoopers (‘PwC’). A resolution to reappoint PwC

as auditor of the Bank will be proposed at the forthcoming AGM.

Corporate Governance

The Bank is committed to high standards of corporate governance.

As an Authorised Institution, the Bank is subject to and complies

with the HKMA Supervisory Policy Manual CG-1 ‘Corporate

Governance of Locally Incorporated Authorised Institutions’ ('SPM

CG-1') except that the membership of the Bank’s Nomination

Committee does not comprise a majority of independent non-

executive Directors. The Bank’s Nomination Committee currently

comprises an equal number of independent non-executive

Directors and non-executive Directors.

As a principal subsidiary of the HSBC Group, the Bank operates in

accordance with the Group’s Subsidiary Accountability Framework

including its responsibility for overseeing the implementation of

the framework for all Group companies in Asia-Pacific. The

Subsidiary Accountability Framework, which was refreshed in

2022, set out high-level principles to promote effective governance

and improve communications and connectivity between HSBC

Holding plc and its subsidiaries.

Board of Directors

The Board, led by the Chairman, provides entrepreneurial

leadership of the Bank within a framework of prudent and

effective controls which enables risks to be assessed and

managed. The Board is collectively responsible for the long-term

success of the Bank and delivery of sustainable value to

shareholders. The Board sets the strategy and risk appetite for the

group and approves capital and operating plans presented by

management for the achievement of the strategic objectives it has

set.

Directors

The Bank has a unitary Board. The authority of each Director is

exercised in Board meetings where the Board acts collectively. As

at the date of this report, the Board comprises: the non-executive

Chairman; the non-executive Deputy Chairman; two executive

Directors who are the co-Chief Executive Officers; one other non-

executive Director; and eight independent non-executive Directors.

Independent non-executive Directors

Independent non-executive Directors do not participate in the daily

business management of the Bank. They bring an external

perspective, constructively challenge and help develop proposals

on strategy, scrutinise the performance of management in

meeting agreed goals and objectives, and monitor the risk profile

and reporting of performance of the Bank. The independent non-

executive Directors bring experience from a number of industries

and business sectors, including the leadership of large complex

multinational enterprises. The Board has determined that there are

eight independent non-executive Directors. In making this

determination, it was agreed that there are no relationships or

circumstances likely to affect the judgement of the independent

non-executive Directors, with any relationships or circumstances

that could appear to do so not considered to be material.

Chairman and co-Chief Executive Officers

The roles of the Chairman and co-Chief Executive Officers are

separate and held respectively by an experienced non-executive

Director and two full-time employees of the HSBC Group. There is

a clear division of responsibilities between leading the Board and

the executive responsibility for running the Bank’s business.

The Chairman provides leadership to the Board in promoting the

overall effectiveness of the Bank, in particular the development of

strategy and monitoring of the execution and delivery of Board

approved strategies and plans by the co-Chief Executive Officers

and management. The Chairman’s role includes promoting an

open and inclusive culture on the Board to facilitate open and

critical discussion and challenge and leading the Board in setting

an appropriate ‘tone from the top’ and in the oversight of the

Bank’s corporate culture. The Chairman also leads an annual

evaluation of the performance of the Board, its Committees and

individual Directors. The role also involves maintaining external

relationships with key stakeholders and communicating their

views to the Board.

The co-Chief Executive Officers are responsible for ensuring

implementation of the strategy and policies as established by the

Board and the day-to-day running of operations. The co-Chief

Executive Officers are co-Chairmen of the Executive Committee.

The heads of Global Businesses and Global Functions and country/

territory Chief Executive Officers in Asia-Pacific report to the co-

Chief Executive Officers.

Role profiles for the Chairman and co-Chief Executive Officers

were approved by the Board in May 2021.

Deputy Chairman

The role of the Deputy Chairman is to deputise formally for the

Chairman of the Board in his absence and support the Chairman in

the exercise of his responsibilities. The Deputy Chairman also acts

as an intermediary for other non-executive Directors when

necessary and leads the non-executive directors in the annual

performance evaluation of the Chairman and in ensuring a clear

division of responsibility between the Chairman and co-Chief


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	5

Executive Officers. The role also involves maintaining external

relationships with key stakeholders and communicating their

views to the Board.

The role profile for the Deputy Chairman was approved by the

Board in April 2021.

Board Committees

The Board has established various committees consisting of

Directors and senior management. The committees include the

Executive Committee, Audit Committee, Risk Committee,

Nomination Committee, Remuneration Committee and Chairman's

Committee. The co-Chairmen of the Executive Committee and the

Chairman of each Board committee that includes independent

non-executive Directors report to each subsequent Board meeting

on the relevant committee’s proceedings.

The Board has also established an Asset, Liability and Capital

Management Committee and a Risk Management Meeting. The

Executive Committee has the delegated authority to approve any

changes in the membership and terms of reference of the Asset,

Liability and Capital Management Committee and the Risk

Management Meeting.

The Board and each Board committee have terms of reference to

document their responsibilities and governance procedures. The

key roles of the Board committees are described in the paragraphs

below.

Executive Committee

The Executive Committee is responsible for the exercise of all of

the powers, authorities and discretions of the Board in so far as

they concern the management, operations and day-to-day running

of the group, in accordance with such policies and directions as

the Board may from time to time determine, with power to sub-

delegate. A schedule of items that require the approval of the

Board is maintained.

The Bank’s co-Chief Executive Officers, David Liao and

Surendranath Rosha, are co-Chairmen of the Committee. The

current members of the Committee are: Justin Chan (Head of

Markets & Securities Services, Greater China); Hitendra Dave

(Chief Executive Officer, India); Philip Fellowes (Chief of Staff,

Asia-Pacific); Darren Furnarello (Chief Compliance Officer, Asia-

Pacific); David Grimme (Chief Operating Officer, Asia-Pacific);

Martin Haythorne (Chief Risk Officer, Asia-Pacific); Gregory

Hingston (Chief Executive Officer, HSBC Global Insurance and

Partnerships and Interim Head of Wealth and Personal Banking,

South Asia); Ming Lau (Chief Financial Officer, Asia-Pacific and

Global Commercial Banking); Stuart Lea (Head of Global Banking,

South-Asia); Luanne Lim (Chief Executive Officer, Hong Kong);

Amanda Murphy (Head of Commercial Banking, Southeast Asia

and South Asia); Susan Sayers (Regional General Counsel, Asia-

Pacific); Antony Shaw (Chief Executive Officer, Australia); Omar

Siddiq (Chief Executive Officer, Malaysia); Monish Tahilramani

(Global Head of Markets & Securities Services Emerging Markets,

Japan, Australia); David Thomas (Regional Head of Human

Resources, Asia-Pacific); Mark Wang (President and Chief

Executive Officer China) and Kee Joo Wong (Chief Executive

Officer, Singapore). Paul Stafford (Corporation Secretary) is the

Committee Secretary. In attendance are: Astor Law (Head of

Global Internal Audit, Asia-Pacific) and Jessica Lee (Regional Head

of Communications, Asia-Pacific). The Committee met ten times in

2022. In between Committee meetings, there were periodic

‘check-in’ sessions held by the Committee co-Chairmen with

members to discuss urgent or important matters and to support

effective communication.

Asset, Liability and Capital Management

Committee

The Asset, Liability and Capital Management Committee (‘ALCO’)

is chaired by the Chief Financial Officer and is an advisory

committee to provide recommendations and advice to support the

Chief Financial Officer's individual accountability for the efficient

management of the Bank’s assets, liabilities and capital within the

constraints of liquidity and funding ratios, capital ratios, and key

balance sheet risks such as interest rate risk, market risk and

equity risk. The Committee also has responsibilities for the Bank's

recovery and resolution planning activities, and the oversight of

treasury sustainability related matters in support of the Group’s

sustainability objectives.

The Committee consists of Ming Lau (Chief Financial Officer, Asia-

Pacific and Global Commercial Banking), David Liao and

Surendranath Rosha (co-Chief Executive Officers), the Regional

Treasurer, Asia Pacific, the Regional Head of Asset and Liability

Management, Asia-Pacific, the Regional Head of Capital

Management, Asia-Pacific, the Head of Markets Treasury, Asia-

Pacific, and other senior executives of the Bank most of whom are

members of the Executive Committee. The Committee met ten

times in 2022.

Risk Management Meeting

The Risk Management Meeting is chaired by the Chief Risk Officer

and is a formal governance forum established to support the Chief

Risk Officer’s individual accountability for the oversight of

enterprise risk and provide recommendations and advice to the

Chief Risk Officer on enterprise-wide management of all risks,

including key policies and frameworks for the management of risk

within the Bank. The Risk Management Meeting consists of Martin

Haythorne (Chief Risk Officer, Asia-Pacific), David Liao and

Surendranath Rosha (co-Chief Executive Officers), the Head of

Global Internal Audit, Asia-Pacific, the Chief Executive Officer of

Hang Seng Bank Limited, the Head of Wholesale Credit and

Market Risk, Asia-Pacific and other senior executives of the Bank

most of whom are members of the Executive Committee. The Risk

Management Meeting met six times in 2022.

Audit Committee

The Audit Committee has non-executive responsibility for

oversight of and advice to the Board on matters relating to

financial reporting and internal financial controls. The current

members of the Committee are Kevin Westley (Chairman of the

Committee), Yiu Kwan Choi, David Eldon, Rajnish Kumar and Irene

Lee. Except for David Eldon, who is a non-executive Director, all

members are independent non-executive Directors. The

Committee met four times in 2022.

The Audit Committee monitors the integrity of the Consolidated

Financial Statements, banking disclosure statements, and

disclosures relating to financial performance, the effectiveness of

the internal audit function and the external audit process, and the

effectiveness of internal financial control systems. The Committee

reviews the adequacy of resources and expertise as well as

succession planning for the finance function. It reviews, and

considers changes to, the Bank’s accounting policies. The

Committee advises the Board on the appointment, re-

appointment, or removal of the external auditor and reviews and

monitors the external auditor’s independence and objectivity. The

Committee reviews matters escalated for its attention by

subsidiaries’ audit committees and receives minutes of meetings

of the ALCO.

Risk Committee

The Risk Committee has non-executive responsibility for oversight

of and advice to the Board on risk-related matters impacting the

Bank and its subsidiaries, including risk governance and internal

control systems (other than internal controls over financial

reporting). The current members of the Committee are Yiu Kwan

Choi (Chairman of the Committee), Sonia Cheng, David Eldon,

Rajnish Kumar, Irene Lee, Annabelle Long and Kevin Westley.

Except for David Eldon, who is a non-executive Director, all

members are independent non-executive Directors. The

Committee met four times in 2022.

All of the Bank’s activities involve, to varying degrees, the

identification, assessment, monitoring and management of risk or

combinations of risks. The Board, advised by the Risk Committee,

requires and encourages a strong risk culture which shapes the

Bank’s attitude to risk. The Bank’s risk governance is supported by

the Group’s risk management framework which provides a clear

policy of risk ownership and accountability of all staff for

identifying, assessing and managing risks within the scope of their

Report of the Directors


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

assigned responsibilities. This personal accountability, reinforced

by clear and consistent employee communication on risk that sets

the tone from senior leadership, the governance structure,

mandatory learning and remuneration policy, helps to foster a

disciplined and constructive culture of risk management and

control throughout the group.

The Board and the Risk Committee oversee the maintenance and

development of a strong risk management framework by

continually monitoring the risk environment, top and emerging

risks facing the group and mitigating actions planned and taken.

The Risk Committee reviews certain Group risk management

policies and procedures at least annually and advises the Board if

these are appropriate for the circumstances of the Bank. It also

reviews local risk management policies at least annually, and

approves or recommends any changes to the Board for approval.

The Committee reviews any revisions to the group’s risk appetite

statement twice a year and recommends any proposed changes to

the Board for approval. The Committee reviews management’s

assessment of risk against the risk appetite statement and

provides scrutiny of management’s proposed mitigating actions.

The Committee monitors the risk profiles for all of the risk

categories within the group’s business. The Committee also

monitors the effectiveness of the Bank’s risk management and

internal controls other than those over financial reporting. Regular

reports from the Risk Management Meeting are also presented at

each Risk Committee meeting to report on the ongoing

monitoring, assessment and management of the risk environment

and the effectiveness of the risk management framework. The

Committee reviews matters escalated for its attention by

subsidiaries’ risk committees and receives minutes of meetings of

the Risk Management Meeting.

Nomination Committee

The Nomination Committee is responsible for leading the process

for Board appointments and for identifying and approving, or

nominating for the approval of the Board, candidates for

appointment to the Board and certain senior management roles.

Appointments to the Board and certain senior management roles

are subject to the approval of the HKMA. The Committee

considers plans for orderly succession to the Board and the

appropriate balance of skills, knowledge and experience on the

Board, and undertakes an annual review of the time commitment

and any potential conflicts of interests of each Director. The

Committee also reviews the board succession plans of certain

subsidiaries of the Bank and considers and endorses appointments

to boards of directors of specified subsidiaries.

The current members of the Committee are Beau Kuok (Chairman

of the Committee), Peter Wong (Chairman of the Board), David

Eldon (Deputy Chairman of the Board) and Kevin Westley. Beau

Kuok and Kevin Westley are independent non-executive Directors

and Peter Wong and David Eldon are non-executive Directors. The

Committee met seven times in 2022.

A rigorous selection process, overseen by the Nomination

Committee and based upon agreed requirements using an external

search consultancy when appropriate, is followed in relation to the

appointment of non-executive Directors. Before recommending an

appointment of a Director to the Board, the Committee evaluates

the Board composition including the balance of skills, knowledge

and experience, as well as diversity and the role and capabilities

required. In identifying suitable Board candidates, the Committee

considers candidates’ backgrounds, knowledge and experience to

promote diversity of views, and takes into account the required

time commitment and any potential conflicts of interest.

Chairman’s Committee

The Chairman’s Committee acts on behalf of the Board either in

accordance with authority delegated by the Board from time to

time or as specifically set out within its terms of reference. The

Committee meets with such frequency and at such times as it may

determine and can implement previously agreed strategic

decisions by the full Board, approve specified matters subject to

their prior review by the full Board, and act exceptionally on urgent

matters within its terms of reference.

The current members of the Committee comprise the Chairman of

the Board, the Deputy Chairman of the Board, the co-Chief

Executive Officers and the Chairmen of the Audit and Risk

Committees. The Committee met two times in 2022.

Remuneration Committee

The Group Remuneration Committee is responsible for setting the

principles, parameters and governance framework for the Group‘s

Remuneration Strategy applicable to all Group employees, which

is adopted by the Bank. The Remuneration Committee of the Bank

is responsible for the oversight of matters related to remuneration

impacting the Bank and its subsidiaries, in particular, overseeing

the implementation and operation of the Group’s Remuneration

Strategy and satisfying itself that the remuneration framework

complies with local laws, rules or regulations; is in line with the

risk appetite, business strategy, culture and values, and long-term

interests of the Bank; and is appropriate to attract, retain and

motivate employees to support the success of the Bank. The

current members of the Committee, all being independent non-

executive Directors, are Irene Lee (Chairman of the Committee),

Beau Kuok and Sonia Cheng.

The Committee met six times in 2022. The following is a summary

of the Committee's key activities during 2022:

Details of the Committee’s key activities

Senior Management*

•Reviewed and approved senior management's remuneration and pay

proposals

•Reviewed and approved the performance scorecards for the Co-Chief

Executive and Executive Committee members of the Bank

All employees

•Approved 2021/2022 performance year pay review matters

•Reviewed remuneration framework effectiveness

•Received updates on notable events and regulatory and corporate

governance matters

•Reviewed and approved 2022 Material Risk Taker (‘MRT’) identification

approaches and outcomes

•Reviewed attrition data and plans to address area of concerns

•Approved 2022 remuneration related regulatory submissions

* Senior Management includes the Co-Chief Executives of the Bank,

Chief Executive of Hang Seng Bank Limited, Executive Committee

members, Alternate Chief Executives and Managers as registered

with HKMA.

Remuneration Strategy

Our performance and pay framework is underpinned by our

Group’s Remuneration Strategy and principles aims to

competitively reward long-term sustainable performance. Our goal

is to attract, motivate and retain the very best people, regardless

of gender, ethnicity, age, disability or any other factor unrelated to

performance or experience. This supports the long-term interests

of our stakeholders, which includes the customers and the

communities we serve, our shareholders and our regulators.

Our approach to performance and pay in 2022 for the broader

workforce was underpinned by the below principles designed to

support a fair and appropriate pay and performance approach,

whilst recognizing the need for flexibility in a hybrid workplace.

These include:

•Ensuring that the decisions made are fair, appropriate and free

from bias towards an individual’s ethnicity, gender, age, or any

other characteristic and making sure employees are fairly

rewarded and recognized. Managers are encouraged to

challenge their assessment by questioning whether they were

objective and based on facts;


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	7

•Rewarding and recognizing our people for sustainable

performance and values aligned behavior. As such, subject to

local law, employee receive a behavior rating as well as a

performance rating. Analytical reviews were also completed to

ensure there is a clear differentiation across both performance

and behavior ratings;

•Supporting a culture of continuous feedback through manager

and employee empowerment. Focusing to obtain feedback

from colleagues to learn what was going well, learn and

improve from experience and discover the skills and behavior

colleagues need to grow; and

•Delivering a balanced, simple and transparent total reward

package that supports employee well-being.

More details of the Bank’s remuneration strategy are contained

within the Annual Report and Accounts 2022 of HSBC Holdings

plc.

The Bank as an Authorised Institution under the Banking

Ordinance is required by HKMA Supervisory Policy Manual CG-5

'Guideline on a Sound Remuneration System' (the Guideline) to

assess whether their existing remuneration systems and policy are

in line with the principles in the Guideline, independently of

management and at least annually. The annual review for 2021

was commissioned externally to Deloitte LLP and the results were

approved by the Remuneration Committee in April 2022. The

review confirmed that the Bank’s remuneration strategy as

adopted from the Group is consistent with the principles set out in

the Guideline.

Recovery and Resolution Planning

The group is subject to recovery and resolution requirements in

many of the jurisdictions in which it operates.

Recovery

The group maintains recovery plans that are designed to outline

credible actions that could be implemented in the event of stress

in order to restore capital and its business to a stable and

sustainable condition. The Bank typically submits recovery plan on

an annual basis to the HKMA and submits local recovery plans to

other host regulators where local requirements are in place. The

Bank’s recovery plans are continually re-appraised to meet

regulatory and internal feedback, and this involves stress testing

and ‘fire drill’ tests.

Resolution

In general terms, resolution refers to the exercise of statutory

powers where a financial institution and/or its parent or other

group company is deemed by its regulators to be failing, or likely

to fail and it is not reasonably likely that recovery action could be

taken that would result in the institution recovering.

In view of HSBC Group’s corporate structure, which comprises a

group of locally regulated operating banks, the preferred

resolution strategy for the HSBC Group, as confirmed by its

regulators, is multiple point of entry (‘MPE’) bail-in strategy. This

provides flexibility for HSBC Group to be resolved either (i) through

a bail-in at the HSBC Holdings plc level, which enables the

recapitalisation of operating bank subsidiaries in the HSBC Group

(as required) while restructuring actions are undertaken, with the

HSBC Group remaining together; or (ii) at a local subsidiary level

pursuant to the application of statutory resolution powers by local

resolution authorities.

The group is part of the HSBC Group-wide Resolvability

Assessment Framework (‘RAF’) implementation along with

continued efforts to work bilaterally with the HKMA and the other

principal Asian regulators in addressing any identified

impediments to resolvability of the group, ensuring resolvability

capabilities being developed are in line with the local requirements

and regulatory expectations. The group is already compliant with

HKMA issued Financial Institutions (Resolution) (Loss-absorbing

Capacity Requirements – Banking Sector) Rules (‘LAC Rules’), and

in the process to comply with new policies on Operational

Continuity in Resolution (‘OCIR-1’), Financial Institutions

(Resolution) (Contractual Recognition of Suspension of

Termination Rights – Banking Sector) Rules (‘Stay Rules’) and

Liquidity and Funding in Resolution (‘LFIR-1’) within the regulatory

timeline.

As part of the RAF issued by the Bank of England ('BoE') and

Prudential Regulation Authority (‘PRA’) which places the onus on

firms to demonstrate their own resolvability, HSBC Group,

including the group was required to have capabilities as of

1 January 2022 to achieve the resolvability outcomes: (i) have

adequate resources in resolution; (ii) be able to continue business

through resolution and restructuring; and (iii) be able to co-

ordinate its resolution and communicate effectively with

stakeholders. The RAF requires HSBC Group to prepare a report on

the assessment of its preparedness for resolution, which must be

submitted to the PRA on a biennial basis. HSBC Group submitted

its first such report to the BoE in October 2021 summarising the

progress in terms of BoE’s RAF, followed by an additional

addendum in February 2022. On 10 June 2022 HSBC Group made

its first public disclosure on its resolvability, which summarised

the key findings from its RAF self-assessment. Alongside this

report, the BoE publicly disclosed its own assessment of HSBC

Group’s resolvability. Certain shortcomings and areas of further

enhancement were identified under the first RAF cycle and HSBC

Group, including the group is currently addressing these to ensure

it meets the objectives of the RAF. Regular engagement with the

BoE and PRA will continue as HSBC Group prepares for the

second RAF cycle, whereby the Group’s next Self-assessment is

due in 2023.

Business Review

The Bank is exempt from the requirement to prepare a business

review under section 388(3) of the Companies Ordinance Cap. 622

since it is an indirect wholly-owned subsidiary of HSBC Holdings

plc.

On behalf of the Board

Peter Wong, Chairman

21 February 2023

Report of the Directors


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

Environmental, Social and Governance

(unaudited)

The Group is on a journey to incorporate environmental, social and

governance ('ESG') principles throughout the organisation, and

has taken significant steps to embed sustainability into its purpose

and corporate strategy.

Approach to ESG Reporting

The information set out in the ESG Review, taken together with

other information relating to ESG issues included in the Annual

Report and Accounts 2022, provides key ESG information and data

relevant to the group’s operations for the year ended 31 December

2022. The data is compiled for the financial year 1 January to

31 December 2022 unless otherwise specified. Measurement

techniques and calculations are explained next to data tables

where necessary. The group is guided by the Group’s

consideration of material ESG topics. For Group’s material ESG

topics and how they decide what to measure, see the Group’s

Annual Report and Accounts 2022.

The group has considered its ‘comply or explain’ obligation under

the Hong Kong Monetary Authority’s ('HKMA') Supervisory Policy

Manual ('SPM') GS-1 on Climate Risk Management issued in

December 2021. The group has made disclosures consistent with

the Task Force on Climate-related Financial Disclosures ('TCFD')

Recommendations and Recommended Disclosures, issued in July

2017 and its updated guidance in October 2021, in this Annual

Report and Accounts save for certain items, which are described

on pages 12 to 15. Further details have been included in this

section and the Risk Review section on pages 61 to 64. Our TCFD

disclosures are highlighted with the following symbol: TCFD

How ESG is governed TCFD

The Board takes overall responsibility for ESG and approved the

climate strategy in 2022, overseeing executive management in

developing the approach, execution and associated reporting. The

group’s developments in relation to its strategies was reviewed

through Board discussions at six meetings in 2022. In addition,

Board members received a training on global and regional

developments in climate and sustainability, as part of their

ongoing development. The 2022 annual incentive scorecards of

the Co-CEOs of Asia-Pacific and most of the Executive Committee

members include outcomes linked to realisation of different ESG

metrics such as customer satisfaction, employee sentiment,

carbon reduction and sustainable finance measures. Governance

structures exist to ensure executive oversight of the group’s

progress in ESG performance, including involvement of the group

Risk Committee (‘RC’). The RC reviews the effectiveness of the

group’s conduct framework, which is designed to deliver fair

outcomes for customers, and to preserve the orderly and

transparent operation of financial markets, as well as to oversee

and advise the Board on risk-related matters, including both

financial and non-financial risks. In addition, the Executive

Committee reviews an ESG dashboard including key metrics such

as sustainable finance and own operations emissions on a

quarterly basis.

The group Sustainability Committee and the group Climate Risk

Oversight Forum ('CROF') are governance forums established in

Asia-Pacific to support the Group’s climate ambition. The group

Sustainability Committee, chaired by the Co-CEOs of Asia-Pacific,

oversees the group’s contribution to the Group’s climate plan,

which was announced in October 2020. This includes overseeing

delivery across Asia-Pacific of the Group’s ambition to provide and

facilitate a share of the global target of between US$750bn and

US$1tn of sustainable finance and investment for its customers in

Asia-Pacific in their transition to net zero and a sustainable future

by 2030. The group CROF is a sub-committee of the Risk

Management Meeting. These committees, forums and meetings

govern the group's performance in Asia-Pacific and provide

oversight of all risk activities relating to the group’s approach to

climate and nature related risk management.

The group’s ESG governance approach is expected to continue to

develop, in line with its evolving approach to ESG matters and

stakeholder expectations.

Environmental - Transition to net zero TCFD

One of the Group’s strategic pillars is to support the transition to a

net zero global economy. The Group’s ambition is to align its

financed emissions to the Paris Agreement goal to achieve net

zero by 2050 or sooner. The Paris Agreement aims to limit the rise

in global temperatures to well below 2°C, preferably to 1.5°C,

above pre-industrial levels.

The transition to net zero is one of the biggest challenges for our

generation. Success will require governments, customers and

finance providers to work together. The Group’s global footprint

means that many of its clients operate in high-emitting sectors and

regions that face the greatest challenge in reducing emissions.

This means that the Group's transition will be challenging but is an

opportunity to make an impact.

The Group recognises that to achieve its climate ambition it needs

to be transparent on the opportunities, challenges, related risks

and progress it makes. To deliver on the ambition, it requires

enhanced processes and controls, and new sources of data. The

Group continues to invest in climate resources and skills, and

develop its business management process to integrate climate

impacts. Until systems, processes, controls and governance are

enhanced, certain aspects of the Group’s reporting will rely on

manual sourcing and categorisation of data. In 2023, the Group

will continue to review its approach to disclosures. Reporting will

need to evolve to keep pace with market developments.

Explaining scope 1, 2 and 3 emissions

To measure and manage the group’s greenhouse gas emissions,

the group follows the Greenhouse Gas Protocol global framework,

which identifies three scopes of emissions. Scope 1 represents the

direct emissions the group creates. Scope 2 represents the indirect

emissions resulting from the use of electricity and energy to run a

business. Scope 3 represents indirect emissions attributed to

upstream and downstream activities taking place to provide

services to customers. The group’s upstream activities include

business travel and emissions from its supply chain including

transport, distribution and waste. The group’s downstream

activities include those related to investments and financed

emissions.

Under the protocol, scope 3 emissions are broken down into 15

categories. The group provides reporting emissions data in relation

to business travel (category 6), an upstream activity. More

information in relation to the group’s greenhouse gas emissions is

set out on page 10.

Supporting customers through net zero transition TCFD

The group’s ability to steer financing for the transformation of

businesses and infrastructure will be key in helping to enable the

transition to a net zero global economy. The group, as a financial

institution, has a critical role to play in facilitating the transition to

net zero. The most significant contribution the group can make is

by mobilising finance to support its customers to enable

decarbonisation in the real economy.

Given the Group’s global presence and relationships with clients

across industries and client groups, it recognises the role it can

play to encourage the global transition to net zero. The Board

endorsed a climate strategy, which includes the ‘transition to net

zero’ strategic pillar and key enablers to support its

implementation, also highlights the Board’s continued role in

overseeing the implementation of the Group’s strategic climate

objectives in Asia-Pacific. For details of the Group’s climate

strategy, please refer to https://www.hsbc.com/who-we-are/our-

climate-strategy.

Mobilising sustainable finance and investments

The group’s sustainable finance ambition has contributed to

sustainable infrastructure and energy systems, promoted

decarbonisation efforts across the real economy, and enhanced

investor capital through sustainable investment. The group

continues to identify financing and investing opportunities and

prioritizes the themes necessary to support the net-zero transition.

These opportunities look to direct capital, financing solutions and

resource allocation towards the themes which will maximize


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	9

climate and commercial impact at scale. They are designed to

support clients in their transition journey and to address financing

needs to accelerate the infrastructure, technologies, and new

business models critical for industries to transition to net zero. The

group offers a broad suite of sustainable finance capabilities

across its global businesses, enabling customers to manage risk

and pursue ESG-related opportunities.

In 2022, the group continued to expand the horizons of

sustainable finance, channeling capital to enable emissions

reduction in the real economy. An example is the US$5bn Greater

Bay Area ('GBA') Sustainable Finance Scheme to support business

of all sizes, including manufacturing and real estate, to transition

to low carbon operations in the GBA. In addition, the group

initiated green mortgage offerings to retail customers in mainland

China, Hong Kong and India.

The Group was recognised by Euromoney as the Best Bank for

Sustainable Finance in Asia for the fifth time in 2022. It also

secured the Asia-Pacific Triple A: Sustainable Infrastructure

Awards 2022 for Export Credit Agency Coordinator Bank of the

Year, Asia-Pacific Loan Market Association for Green and

Sustainability advisor of the year, and FinanceAsia for Best

Sustainable Bank in Hong Kong.

The group’s sustainable finance and investment progress is set out

below, with detailed definitions available in the Group’s

Sustainable Finance and Investment Data Dictionary (see

www.hsbc.com/who-we-are/esg-and-responsible-business/esg-

reporting-centre). Green finance taxonomies are not consistent

globally, and evolving taxonomies and practices could result in

revisions in the Group's sustainable finance reporting going

forward. The Group recognises that there can be differing views of

external stakeholders in relation to these evolving taxonomies, and

will seek to align to enhanced industry standards as they are

further developed.


Sustainable finance summary – Asia-Pacific1
	2022
	HK$m
Balance sheet-related transactions provided	126,845
Capital markets/advisory (facilitated)	45,301
Total contribution	172,146

1 This table has been prepared in accordance with the Group’s

Sustainable Finance and Investment Data Dictionary 2022, which

includes green, social and sustainability activities. The amounts

provided and facilitated include: the limits agreed for balance sheet-

related transactions provided, the proportional share of facilitated

capital markets/advisory activities.

Working with customers

The Group’s net zero ambition is underpinned by its relationships

with customers. The Group is setting targets on a sector by sector

basis that are consistent with net zero outcomes by 2050. In

assessing financed emissions, the Group focuses on those parts of

the sector that are most material in terms of greenhouse gas

emissions, and where it believes engagement and climate action

have the greatest potential to effect change, taking into account

industry and scientific guidance. In 2021, the Group defined

targets for the oil and gas, and power and utilities sectors to be

achieved by 2030. The group will continue to request and assess

relevant client transition plans, and to unlock transition solutions

for its portfolio of customers. The group considers reporting and

emissions disclosure, level of ambition and targets set, detail of

plans to achieve targets and evidence of activities to achieve

objectives.

Our approach to our own operations TCFD

Part of the Group’s ambition to be a net zero bank is to achieve net

zero carbon emissions in its operations and supply chain by 2030

or earlier.

The Group has three elements to its strategy: reduce, replace and

remove. The first focus is to reduce carbon emissions from

consumption, and then subsequently replace remaining emissions

with low-carbon alternatives in line with the Paris Agreement.

Finally, the Group plans to remove the remaining emissions that

cannot be reduced or replaced by procuring, in accordance with

prevailing regulatory requirements, high-quality offsets at a later

stage.

In October 2020, the Group announced its ambition to reduce

energy consumption by 50% by 2030 against a 2019 baseline. This

will be achieved by optimising the utilisation of the Group’s real

estate portfolio, and strategically reducing office space and data

centres. In addition, the Group is adopting new technologies and

emerging products to make its spaces more energy efficient.

As part of the Group's ambition to achieve 100% renewable power

across its operations by 2030, it continues to look for opportunities

to procure green energy in each of its markets. A key challenge

remains the limited opportunity to pursue power purchase

agreements or green tariffs in key markets.

Business travel and employee commuting

The group’s travel emissions were relatively low in 2022, with

international travel restrictions in key markets limiting business

travel. The Group is closely managing the gradual resumption of

travel through internal reporting and review of emissions, and

through the introduction of internal carbon budgets, in line with its

aim to halve travel emissions by 2030, compared with pre-

pandemic levels. With hybrid working embedded across the

group, technology has reduced to some extent the need to travel

to meet with colleagues and customers face to face.

The group reports its emissions following the Greenhouse Gas

Protocol, which incorporates the scope 2 market-based emissions

methodology. The group reports greenhouse gas emissions

resulting from the energy used in its buildings and employees’

business travel. Due to the nature of the group's primary business,

carbon dioxide is the main type of greenhouse gas applicable to its

operations. While the amount is immaterial, the group's current

reporting also incorporates methane and nitrous oxide for

completeness. The group does not report employee home working

emissions in its scope 1 and 2 performance data. The

environmental data for the group’s own operations is based on a

12-month period to 30 September each year.

In 2022, the group collected data on energy use and business

travel for its own operations in 12 markets across the region,

which accounted for approximately 87% of its full-time equivalent

employees ('FTEs').



Greenhouse gas emissions in tonnes CO2e1,2
	2022
Scope 1 - direct	915
Scope 2 - indirect	104,162
Scope 3 - indirect (upstream activities - business travel)	11,120
Total	116,197
Greenhouse gas emissions in tonnes CO2e per FTE	2.16

1 The data of the group's operations in some countries and territories

where it has operational control and a small presence may have not

been included due to the data collection challenges.

2 CO2e refers to carbon dioxide equivalent.

Engaging with supply chain

As the majority of the Group’s emissions are within its supply

chain, it is recognised that it cannot achieve the net zero goal

without its suppliers joining the journey. In 2020, the Group began

a three-year process of encouraging its largest suppliers to make

their own carbon commitments, and to disclose their emissions

via the CDP (formerly Carbon Disclosure Project) supply chain

programme. The Group will continue to engage with its supply

chain through CDP and direct supplier discussions on how they

can further support the Group’s transition to net zero.

Environmental, Social and Governance


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

Approach to climate risk TCFD

Managing risk for stakeholders

Climate risk relates to the financial and non-financial impacts that

may arise from climate change and the move to a greener

economy. The group manages climate risk across all its

businesses and is taking into account climate considerations in its

risk taxonomy in line with the Group-wide risk management

framework. The group’s most material exposure to climate risk

relates to corporate and retail client financing activity within its

banking portfolio, and in its responsibilities in relation to asset

ownership by its insurance and asset management businesses.

In the table below, the group sets out its duties to its stakeholders

in the three most material roles. For further details of the group's

approach to climate risk, see Climate risks on page 61.




Banking The group manages the climate risk in its banking portfolios through its risk appetite and policies for financial and non-financial risks.	Asset management The group’s asset management operations’ investment solutions are increasingly considering both physical and transition risks.	Insurance The group’s insurance operations consider climate risk in their portfolio of assets.
ê	ê	ê
	Climate Risk
ê	ê	ê
This helps the group to identify opportunities to support its customers, while continuing to meet stakeholder expectations.	A key approach to managing climate risk is by engaging with investees on topics related to climate change.	HSBC Life has established an evolving ESG programme to meet changing external expectations and customer demands.

Banking

The group’s banking business is well positioned to support its

customers to manage their own climate risk through financing. For

wholesale customers, the group uses a transition and physical risk

questionnaire as part of its transition and physical risk framework

to understand their climate strategies and risk. The Group has set

out a suite of policies to guide the management of climate risk,

including the recently updated energy policy and thermal coal

phase-out policy (see page 62). Climate scenario analysis is used

as a risk assessment tool to provide insights on the long-term

effects of transition and physical risks across the Group’s

corporate and retail banking portfolios, as well as its own

operations.

Asset management

When assessing the impact of climate-related risk to its portfolios,

the group’s asset management operations are increasingly

considering both physical and transition risks. As a result, ESG and

climate analysis is integrated into the group's assessment of the

risks faced by investees throughout the investment decision-

making process. Investment teams use portfolio management

tools to assess, examine and determine the level of potential ESG

risks that could impact the current and future value of issuers.

In September 2022, the Group's asset management operations

published their thermal coal phase-out policy, which will not hold

listed securities of issuers with more than de minimis revenue

exposure to thermal coal in its actively managed portfolios beyond

2030 for EU and OECD markets, and 2040 for all other markets.

One of the key approaches for the group’s asset management

operations to manage climate risk is to engage with the

companies in which they invest. The HSBC Asset Management

Stewardship Plan outlines their approach to engaging with issuers,

including on the topic of climate change.

Insurance

The group’s insurance operations updated their sustainability

policy in 2022 to align with the Group’s thermal coal phase-out

policy. An ESG policy on corporate underwriting was also

introduced. Risk appetite was reviewed with respect to ESG risks,

and ESG standards were embedded into insurance product

development processes and operational capabilities.

Insights from scenario analysis TCFD

Introduction

Scenario analysis supports the Group’s strategy by assessing its

position under a range of climate scenarios. This helps to build the

Group’s awareness of climate change and future planning

including in the context of evolving regulatory requirements.

Following the first Group-wide climate change scenario analysis

and the pilot climate risk stress test for Hong Kong Monetary

Authority, the Group has performed stress tests for a number of

regulators in Asia-Pacific including the Monetary Authority of

Singapore in 2022.

The Group's scenario analysis considers separately:

•transition risk arising from the process of moving to a net zero

economy, including changes in policy, technology, customer

behaviour and stakeholder perception, which could each

impact borrowers’ operating income, financing requirements

and asset values; and

•physical risk arising from the increased frequency and severity

of weather events, such as hurricanes and floods, or chronic

shifts in weather patterns, which could impact property values

and repair costs and lead to business interruptions.

The Group will continue to enhance its climate scenario analysis to

enable a more comprehensive understanding of climate

headwinds, risks and opportunities that will support its strategic

planning and actions.

Our climate scenarios

In 2022, the Group undertook its internal climate scenario analysis

exercise using four bespoke scenarios that were designed to

articulate a view of the range of potential outcomes for global

climate change between the 2022 and 2050-time period.

These internal scenarios were formed with reference to external

publicly available climate scenarios, including those produced by

the Network for Greening the Financial System, the

Intergovernmental Panel on Climate Change and the International

Energy Agency. The Group adapted these scenarios by

incorporating its unique climate risks and vulnerabilities to which

the organisation and customers across different global businesses

and geographies are exposed. This resulted in the following four

scenarios:

•Net Zero scenario, which aligns with the Group's net zero

strategy and is consistent with the Paris Agreement;

•Current Commitments scenario, which assumes that climate

action is limited to the current governmental commitments and

pledges;

•Downside Transition Risk scenario, which assumes that climate

action is delayed until 2030, but will be rapid enough to limit

global temperature by the end of the century; and

•Downside Physical Risk scenario, which assumes climate

action is limited to current governmental policies, leading to

extreme global warming.

The group follows the Group's four scenarios, which reflect

different levels of physical and transition risks, underpinned by

various assumptions of governmental climate policy changes,

macroeconomic factors and technological developments.

Developments in climate science, data, methodology, and

scenario analysis techniques will help further enhance the


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	11

approach in the future. Consequentially, the view of risk is

expected to change over time.

Analysing the outputs of the climate scenario analysis

Climate scenario analysis allows the Group to model how different

potential climate pathways may affect its customers and

portfolios, particularly in respect of credit losses. Climate-related

losses could be expected within sectors with higher carbon

emitting activities due to the possibility of carbon reduction

policies. These carbon reduction policies will help to dictate the

pace of the transition to net zero and will vary by geography and

sector. Customers' climate transition plans will help to mitigate the

group's climate and credit risks.

In terms of physical risk, the Group assessed perils that could

impact the value of properties in selected entities, including

tropical cyclones and related storm surges. The defaults within the

retail mortgage portfolio are expected to remain low through to

2050 in Hong Kong due to buildings being designed to withstand

high wind speeds and investment into sea defences. Similarly,

losses in Singapore were low in all the scenarios due to its

geographical location and strong sea defences.

The analysis generated insights of the underlying drivers of risk

and how the group can navigate through this complex and

evolving landscape. The group explored strategic responses to the

results of the climate scenario analysis, which allow it to identify

and prioritise the sectors and sub-sectors that require the greatest

support to transition. This also allows the group to test the impact

of actions that can support customers’ transition and its net zero

ambition.

Use of outputs and next steps

Climate scenario analysis informs the Group's strategy and

supports how opportunities are captured while minimising risks,

and enabling the Group to navigate through the climate transition.

The Group will continue to enhance its capabilities in relation to

climate scenario analysis and use the results for decision making,

particularly in respect of strategy, client engagement and risk

appetite.

Social matters

The Group aims to play an active role in opening up a world of

opportunity for its customers, colleagues and communities as it

brings the benefits of connectivity and the global economy to

more people around the world.

To achieve its purpose and deliver its strategy in a way that is

sustainable, the Group is guided by its values: we value difference;

we succeed together; we take responsibility; and we get it done.

Human rights

Details of the Group’s commitment to respecting human rights are

set out in the Group's Statement on Human Rights, which is

available on www.hsbc.com/our-approach/measuring-our-impact.

Anti-bribery and corruption policy

The Group requires compliance with all applicable anti-bribery and

corruption laws in all markets and jurisdictions in which it

operates. These include, but are not limited to, the UK Bribery Act,

the US Foreign Corrupt Practices Act, the Hong Kong Prevention

of Bribery Ordinance and France's 'Sapin II' law. The Group has a

global anti-bribery and corruption policy, which gives practical

effect to these laws and regulations, but also requires compliance

with the spirit of laws and regulations to demonstrate its

commitment to ethical behaviours and conduct as part of the

environmental, social and corporate governance approach.

Task Force on Climate-related Financial Disclosures

(‘TCFD’) index table TCFD

The table below sets out the 11 TCFD recommendations and

summarises where additional information can be found.

Where the group has not included climate-related financial

disclosures consistent with all of the TCFD recommendations and

recommended disclosures, the reasons for this and steps being

undertaken are set out accordingly. The group will continue to

develop and refine its reporting and disclosures on ESG matters in

line with the group's obligations under the HKMA SPM GS-1.

With respect to the group's obligations under HKMA SPM GS-1 as

part of considering what to measure and publicly report, the group

performs an assessment to ascertain the appropriate level of detail

to be included in the TCFD that is set out in its Annual Report and

Accounts. The assessment takes into account factors such as the

level of the group's exposure to climate-related risks and

opportunities, the scope and objectives of its climate-related

strategy, transitional challenges, and the nature, size and

complexity of its business.


Recommendation	Response	Disclosure location
Governance
a) Describe the Board’s oversight of climate-related risks and opportunities
Process, frequency and training	The Board takes overall responsibility for ESG. The group’s developments in relation to its strategies was reviewed through Board discussions at six meetings in 2022. In addition, Board members received a training on global and regional developments in climate and sustainability, as part of their ongoing development. The Board is updated on wider topics in relation to the evolving climate agenda as appropriate.	Page 9
Sub-committee accountability, processes and frequency	The group RC receives regular updates on the climate risk profile, top and emerging climate risks, and climate risk programme.	Page 62
Examples of the Board and relevant Board committees taking climate into account	The Board approved the climate strategy in 2022, overseeing executive management in developing the approach, execution, financial planning and associated reporting. The 2022 annual incentive scorecards of the Co-CEOs of Asia-Pacific and of most of the Executive Committee members include outcomes linked to the realisation of different ESG metrics such as customer satisfaction, employee sentiment, carbon reduction and sustainable finance measures.	Page 62 Page 9
b) Describe management’s role in assessing and managing climate-related risks and opportunities

Environmental, Social and Governance


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


Task Force on Climate-related Financial Disclosures ‘TCFD’ (continued)
Recommendation	Response	Disclosure location
Who manages climate-related risks and opportunities	The group Sustainability Committee, chaired by the Co-CEOs of Asia-Pacific, oversees the delivery of the Group’s climate plan announced in October 2020 in Asia-Pacific. The group CROF oversees all risk activities relating to climate risk management and escalation of climate risks.	Page 9
How management reports to the Board	The Co-CEOs of Asia-Pacific reported to the Board six times on ESG and climate matters during 2022.	Page 9
Processes used to inform management	The Executive Committee reviews an ESG dashboard including key metrics such as sustainable finance and own operations emissions on a quarterly basis.	Page 9
Strategy
a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term
Processes used to determine material risks and opportunities	For wholesale customers in the six high climate transition risk sectors, the group rolled out the transition and physical risk questionnaire to assess and improve its understanding of the impact of climate changes on certain customers' business models. Relationship managers worked with customers to record questionnaire responses, which also help to identify potential business opportunities to support customers’ transition. The Group completed a detailed asset-level analysis of the retail mortgage business in Hong Kong, Singapore and Australia which represent three of the group’s largest residential mortgage portfolios in Asia-Pacific.	Page 62 Page 63
Relevant short, medium, and long term time horizons	The group continues to contribute to the Group’s ambitions to achieve net zero in its financed emissions by 2050, in its own operations and supply chain by 2030, and to provide and facilitate a share of the global target of between US$750bn and US$1tn of sustainable finance and investment for its customers in Asia-Pacific in their transition to net zero and a sustainable future by 2030. The group aligns with the Group’s definition of short, medium, and long term time horizon: short term up to 2025; medium term between 2026 to 2035; and long term between 2036 to 2050. The group is part of the Group’s climate scenario analysis exercise and formed part of the Group’s result of the expected credit losses and physical risk impacts on the Group’s premises between the 2022 and 2050 time period. For details, see the Group’s Annual Report and Account 2022.	Page 10 Page 11
Transition or physical climate- related issues identified	Transition or physical climate-related risk, together with greenwashing risk exist across the Group’s risk taxonomy. The group is supporting its customers in their transition through its sustainable finance and investment ambition. The Group's sustainable finance and investment data dictionary includes a detailed definition of contributing activities.	Page 61 Page 10
Risks and opportunities by sector and/or geography	Scenario analysis supports the group’s risks and opportunities under a range of climate scenarios. It helps to build the group’s awareness of the impact of climate change and future planning. The Group completed a detailed asset-level analysis of the retail mortgage business in Hong Kong, Singapore and Australia, which represent three of the group’s largest residential mortgage portfolios in Asia-Pacific. The group does not currently fully disclose the impacts of transition and physical risk quantitatively by sector/geography, due to transitional challenges including data limitations and evolving science and methodologies. The group is working to address these challenges in the medium term.	Page 11 page 63
Concentrations of credit exposure to carbon-related assets (supplemental guidance for banks)	The Group has identified six sectors where wholesale credit customers have the highest climate risk, based on their carbon emissions. These are automotive, chemicals, construction and building materials, metals and mining, oil and gas, and power and utilities. The group internally reports its exposure to the six high transition risk sectors in the wholesale portfolio, and will further enhance its disclosure as more data becomes available.	Page 62
Climate-related risks in lending and other financial intermediary business activities (supplemental guidance for banks)	The group’s material exposure to climate risk relates to corporate and retail client financing activity within its banking portfolio, and in its responsibilities in relation to asset ownership by its insurance and asset management businesses.	Page 11
b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning
Impact on strategy, business, and financial planning	Transition to net zero represents one of the Group's four strategic pillars. The Group aims to be net zero in its operations and supply chain by 2030 and in financed emissions by 2050. The group does not currently fully disclose the impacts of climate-related issues on financial planning, and particularly the impact of climate-related issues on its financial performance (for example, revenues and costs) and financial position (for example, assets and liabilities), acquisitions/divestments or access to capital, in each case due to lack of data and systems for compiling the relevant financial impacts. In 2022, the group incorporated certain aspects of sustainable finance and financed emissions within its financial planning process. This will be further enhanced in the medium term as more data is available.	Page 9
Impact on products and services	The group supports the Group's ambition in helping its customers’ transition to net zero and a sustainable future through providing and facilitating a share of the global target of between US$750bn and US$1tn of sustainable finance and investment for its customers in Asia-Pacific by 2030.	Page 9
Impact on supply chain and/or value chain	The group has started working with its largest suppliers to encourage them to make their own carbon commitments, and to disclose their emissions. The Group’s third-party risk management process incorporates climate-related risks.	Page 10
Impact on operations	The group is developing a deeper understanding of the risks to which its properties are subject, and necessary mitigants to ensure ongoing operational resilience.	Page 63


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	13

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


Recommendation	Response	Disclosure location
Impact on adaptation and mitigation activities	The Group announced its ambition to achieve 100% renewable power across its operations by 2030, and continues to look for opportunities to procure green energy. The Group regularly reviews and enhances its building selection process and global engineering standards to help ensure they reflect the potential impacts of climate change.	Page 10
Impact on operations	The group is developing a deeper understanding of the risks to which its properties are subject, and necessary mitigants to ensure ongoing operational resilience.	Page 63
Impact on investment in research and development	The Group is working with the World Resources Institute and World Wide Fund For Nature, focusing its collective efforts on climate-related innovation, nature-based solutions and energy efficiency initiatives in Asia-Pacific.
Transition plan to a low-carbon economy	The Group has committed to publish its own climate transition plan in 2023. The plan will outline, in one place, not only the Group's commitments, targets and approach to net zero across the sectors and markets that it serves, but also how the Group is transforming to embed net zero and help finance the transition. The group will be guided by this transition plan once published.
c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario
Embedding climate into scenario analysis	In 2022, the Group enhanced the approach to analysing climate scenarios and delivered the internal climate scenario analysis ('ICSA') exercise applying four bespoke climate scenarios: Net Zero, Current Commitments, Downside Transition Risk, and Downside Physical Risk. The four scenarios used in the Group’s ICSA exercise were designed to articulate the Group’s view of the range of potential outcomes for global climate change between the 2022 and 2050- time period. The relevant assumptions are detailed in Group Annual Report and Accounts 2022.	Page 11
Key drivers of performance and how these have been taken into account	The ICSA scenarios reflect different levels of physical and transition risk and, underpinned by various assumptions of governmental climate policy changes, macroeconomic factors and technological developments.	Page 11
Scenarios used and how they factored in government policies	The ICSA scenarios reflect external publicly available climate scenarios, including those produced by the Network for Greening the Financial System, the Intergovernmental Panel on Climate Change and the International Energy Agency.	Page 11
How our strategies may change and adapt	The Group will continue to enhance its capabilities for climate scenario analysis and use the results for decision making, particularly in respect of strategy, client engagement and risk appetite.	Page 12
Risk management
a) Describe the organisation’s processes for identifying and assessing climate-related risks
Traditional banking risk types considered	The Group's approach to identifying and assessing climate-related risks is initially focused on understanding physical and transition impacts across five priority risk types: wholesale credit risk, retail credit risk, resilience risk, regulatory compliance risk and reputational risk.	Page 61
Process	For wholesale customers, the group uses a transition and physical risk questionnaire as part of its transition and physical risk framework to understand their climate strategies and risk. Climate scenario analysis is used as a risk assessment tool to provide insights on the long-term effects of transition and physical risks across the Group’s corporate and retail banking portfolios, as well as its own operations. The group does not currently fully disclose the detailed impacts of transition and physical risk, due to transitional challenges including data limitations and evolving science and methodologies.	Page 11
Integration into policies and procedures	The Group is integrating climate risk into the policies, processes and controls across many of its global businesses and functions, and will continue to enhance these as its climate risk management capabilities mature. In 2022, the Group has published its updated energy policy, covering oil and gas, power and utilities, hydrogen, renewables, nuclear and biomass sectors, as well as updating its thermal coal phase- out policy after its initial publication in 2021.	Page 62
Consider climate-related risks in traditional banking industry risk categories (supplementary guidance for banks)	In 2022, the Group broadened its climate risk approach to include all risk types (including treasury risk and traded risk) in its risk taxonomy.	Page 64
b) Describe the organisation’s processes for managing climate-related risks
Process and how we make decisions	The group Risk Management Meeting and group RC receive regular updates on the climate risk profile, and the top and emerging climate risks. The group’s initial risk appetite has focused on the oversight and management of climate risks across the five priority risk types, including exposure to high transition risk sectors in its wholesale portfolio and physical risk exposures in retail portfolio. These metrics have been implemented at group level and locally where appropriate. The group continues to review its risk appetite regularly to capture the material climate risks and will enhance its metrics over time.	Page 62
c) Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management framework
How we have aligned and integrated our approach	The group's approach to climate risk management is aligned to the Group-wide risk management framework and three lines of defence model.	Page 61
How we take into account interconnections between entities, functions	The group’s dedicated climate risk programme drives the development of its climate risk management capabilities, taking into account relevant interconnections within the group's businesses, functions and entities.	Page 62
Metrics and targets
a) Disclose the metrics used by the organisation to assess climate-related risk and opportunities in line with its strategy and risk management process

Environmental, Social and Governance


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

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


Recommendation	Response	Disclosure location
Metrics used to assess the impact of climate-related risks on our loan portfolio	The group monitors wholesale loan exposure to the Group's six highest climate risk sectors. In 2022, the group developed new climate risk metrics to assess the impact of physical risk on its retail mortgage portfolio in Hong Kong, as detailed on page 63. The group’s climate risk management information dashboard incorporates key climate risk metrics, and is reported to the group CROF.	Page 62
Metrics used to assess progress against opportunities	The Group tracks its net zero progress using multiple metrics, tailoring methodologies to the specific measures. The group contributes to the Group’s energy consumption, water consumption, waste management, and land use. For details, see the Group’s Annual Report and Account 2022 and ESG Data Pack. The group disclosed its contribution in 2022 to the Group’s sustainable finance ambition of providing and facilitating a share of the global target of between US$750bn to US$1tn for its customers in Asia-Pacific. The group does not currently fully disclose the proportion of revenue or proportion of assets, capital deployment or other business activities aligned with climate-related opportunities, including revenue from products and services, internal carbon prices, forward-looking metrics consistent with its business or strategic planning time horizons. In relation to sustainable finance revenue and assets, the Group is disclosing certain elements. The group expects climate related metrics to be further integrated into financial planning and forecasting as data and system limitations are addressed.	Page 9
Board or senior management incentives	The 2022 annual incentive scorecards of the Co-CEOs of Asia-Pacific and most of the Executive Committee members include outcomes linked to the realisation of different ESG metrics such as customer satisfaction, employee sentiment, carbon reduction and sustainable finance measures.	Page 9
Metrics used to assess the impact of climate risk on lending and financial intermediary business (supplemental guidance for banks)	The group does not fully disclose metrics used to assess the impact of physical and transition climate- related risks on retail lending, wholesale lending and other business activities (specifically credit exposure, equity and debt holdings, or trading positions, each broken down by industry, geography, credit quality, average tenor). This is due to data and system limitations which the group is working to address.
b) Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas emissions and the related risks
GHG emissions for lending and financial intermediary business (supplemental guidance for Banks)	In relation to financed emissions, the Group has disclosed on-balance sheet financed emissions for certain sectors. The Group does not fully disclose financed emissions data. Further disclosure on scope 3 financed emissions and related risks in relation to customers is reliant on the Group’s customers publicly disclosing their carbon emissions and related risks. The Group's approach to disclosure of financed emissions can be found on: www.hsbc.com/who-we-are/ esg-and-responsible-business/esg-reporting-centre.
c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets
Details of targets set and whether they are absolute or intensity based	The Group's ambition is to achieve net zero financed emissions by 2050 or sooner, and has set interim 2030 targets for on-balance sheet financed emissions for certain sectors. The Group aims to support its customers’ transition to net zero through providing and facilitating a share of the global target of between US$750bn and US$1tn of sustainable finance and investment for its customers in Asia-Pacific by 2030. In addition, the Group targets to achieve net zero carbon emissions in its operations and supply chain by 2030 or sooner. In addition to the above mentioned, the group contributes to the Group’s other ambitions such as land use, waste management, energy consumption and percentage of renewable electricity sourced. For details of Group’s ambitions, please refer to the Group’s Annual Report and Accounts 2022. The group does not currently disclose its targets used to measure and manage physical and transition risk, or capital deployment, or climate-related opportunities due to transitional challenges such as data and system limitations which the group is working to address in the medium term. Taking into account the nature of its business, the group does not consider water usage to be a material target for its business and, therefore, the group has not included a target in this year’s disclosure.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	15

Financial Review

Results for 2022

(Unaudited)

Profit before tax for 2022 reported by The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries

(together ‘the group’) increased by HK$11,048m, or 13%, to HK$97,611m.


(Audited)
	Wealth and Personal Banking	Commercial Banking	Global Banking	Markets and Securities Services	Corporate Centre1	Other (GBM- other)	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Year ended 31 Dec 2022
Net interest income/(expense)	71,397	43,087	18,703	4,370	(12,718)	2,013	126,852
Net fee income/(expense)	17,895	9,727	5,086	3,701	247	(56)	36,600
Net income/(expense) from financial instruments measured at fair value through profit or loss	(9,603)	3,728	(110)	22,372	11,079	345	27,811
Gains less losses from financial investments	(34)	64	—	—	—	17	47
Net insurance premium income/(expense)	76,848	3,997	—	—	(430)	—	80,415
Other operating income/(expense)	2,329	(189)	369	1,208	315	(251)	3,781
Total operating income/(expense)	158,832	60,414	24,048	31,651	(1,507)	2,068	275,506
Net insurance claims and benefits paid and movement in liabilities to policyholders	(66,206)	(3,968)	—	—	360	—	(69,814)
Net operating income/(expense) before change in expected credit losses and other credit impairment charges	92,626	56,446	24,048	31,651	(1,147)	2,068	205,692
– of which: external	76,344	58,916	26,413	40,870	(8,191)	11,340	205,692
inter-segment	16,282	(2,470)	(2,365)	(9,219)	7,044	(9,272)	—
Change in expected credit losses and other credit impairment charges	(1,326)	(11,953)	(3,070)	22	1	(39)	(16,365)
Net operating income/(expense)	91,300	44,493	20,978	31,673	(1,146)	2,029	189,327
Operating expenses	(52,773)	(20,972)	(10,513)	(13,897)	(9,521)	(2,832)	(110,508)
Operating profit/(loss)	38,527	23,521	10,465	17,776	(10,667)	(803)	78,819
Share of profit in associates and joint ventures	140	—	—	—	18,652	—	18,792
Profit/(loss) before tax	38,667	23,521	10,465	17,776	7,985	(803)	97,611
Balance sheet data at 31 Dec 2022
Loans and advances to customers (net)	1,536,664	1,231,972	880,581	40,563	1,403	13,966	3,705,149
Customer accounts	3,443,694	1,665,463	805,600	195,775	11	3,166	6,113,709

Year ended 31 Dec 2021
Net interest income/(expense)	50,632	29,106	15,070	3,497	(2,640)	2,448	98,113
Net fee income/(expense)	23,827	9,828	5,746	5,730	243	(78)	45,296
Net income from financial instruments measured at fair value through profit or loss	22,195	3,551	39	19,363	214	513	45,875
Gains less losses from financial investments	956	368	—	—	—	343	1,667
Net insurance premium income/(expense)	58,645	3,499	—	—	(422)	—	61,722
Other operating income/(expense)	202	39	237	1,113	599	(157)	2,033
Total operating income/(expense)	156,457	46,391	21,092	29,703	(2,006)	3,069	254,706
Net insurance claims and benefits paid and movement in liabilities to policyholders	(72,658)	(3,743)	—	—	353	—	(76,048)
Net operating income/(expense) before change in expected credit losses and other credit impairment charges	83,799	42,648	21,092	29,703	(1,653)	3,069	178,658
– of which: external	80,570	43,398	20,539	29,644	(2,284)	6,791	178,658
inter-segment	3,229	(750)	553	59	631	(3,722)	—
Change in expected credit losses and other credit impairment charges	(1,224)	(3,295)	(2,013)	(10)	(6)	9	(6,539)
Net operating income/(expense)	82,575	39,353	19,079	29,693	(1,659)	3,078	172,119
Operating expenses	(49,429)	(20,839)	(10,152)	(14,629)	(7,332)	(2,495)	(104,876)
Operating profit/(loss)	33,146	18,514	8,927	15,064	(8,991)	583	67,243
Share of profit in associates and joint ventures	137	—	—	—	19,183	—	19,320
Profit before tax	33,283	18,514	8,927	15,064	10,192	583	86,563
Balance sheet data at 31 Dec 2021
Loans and advances to customers (net)	1,544,449	1,315,961	927,542	49,887	1,540	1,560	3,840,939
Customer accounts	3,407,789	1,659,464	891,994	211,621	28	6,286	6,177,182

1 Includes inter-segment elimination.

Financial Review


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

Financial Review

The commentary in this financial review compares the group's

financial performance for the year ended 31 December 2022 with

the year ended 31 December 2021.

Results Commentary

(Unaudited)

The group reported profit before tax of HK$97,611m, an increase

of HK$11,048m, or 13%. Net operating income before change in

expected credit losses and other credit impairment charges

increased by HK$27,034m, or 15%, primarily driven by higher net

interest income. Operating expenses increased by HK$5,632m, or

5%, from investment in technology.

Net interest income increased by HK$28,739m, or 29%.

Excluding the unfavourable foreign exchange impact, net interest

income increased by HK$30,715m, or 32%, primarily driven by

Hong Kong with wider customer deposit spreads and higher

reinvestment yields as market interest rates increased, coupled

with balance sheet growth. Net interest income in Singapore also

increased, reflecting the favourable impact of the higher market

interest rates.

Net fee income decreased by HK$8,696m, or 19%. Excluding the

unfavourable foreign exchange impact, net fee income decreased

by HK$7,928m, or 18%, driven by Wealth and Personal Banking

('WPB') in Hong Kong with lower transaction volumes resulting in

decreases in unit trust income and brokerage income, coupled

with lower funds under management fees reflecting the

unfavourable market performance. To a lesser extent, net fee

income in Markets and Securities Services ('MSS') also decreased,

mainly from lower global custody and securities brokerage fees

coupled with a drop in underwriting fees.

Net income from financial instruments measured at fair

value through profit or loss decreased by HK$18,064m, or

39%.

Net income from assets and liabilities of insurance businesses,

including related derivatives, measured at fair value through profit

or loss decreased by HK$31,374m, mainly in Hong Kong and

driven from losses on the equity portfolio held to support

insurance and investment contracts, due to unfavourable equity

market performance. To the extent that these losses are

attributable to policyholders, there is an offsetting movement

reported under ‘Net insurance claims and benefits paid and

movement in liabilities to policyholders’.

Net income from financial instruments held for trading or

managed on a fair value basis increased by HK$13,315m, or 47%,

most notably in Hong Kong from higher gains on derivatives

principally benefitting from rising interest rates, partly offset by

lower equity trading income attributable to unfavourable market

conditions. Mainland China also increased due to the favourable

movement on foreign currency position held locally.

Net insurance premium income increased by HK$18,693m, or

30%, driven from higher sales volumes mainly in Hong Kong, and

in Singapore with the acquisition of AXA Insurance Pte Limited

('AXA Singapore') during 2022.

Other operating income increased by HK$1,748m, or 86%,

driven by the favourable movement in the present value of in-force

long-term insurance business ('PVIF') of HK$1,038m, reflecting

increases in Hong Kong from the value of new business written

and the one-off gain from a pricing update for policyholder funds

held on deposit to reflect the cost of provision of these services.

This was partly offset by adverse assumption changes and

experience variances in Hong Kong and Singapore, primarily due

to interest rates movements.

The net movement in PVIF was partly offset by a corresponding

movement in ‘Net insurance claims and benefits paid and

movement in liabilities to policyholders’ to the extent gains or

losses are attributable to the policy holders.

The overall increase also included a gain of HK$665m on

completion of our acquisition of AXA Singapore.

Net insurance claims and benefits paid and movement in

liabilities to policyholders decreased by HK$6,234m, or 8%,

primarily due to a decline in returns on financial assets supporting

contracts where the policyholder is subject to part or all of the

investment risk, mainly in Hong Kong. This decrease was partially

offset by higher sales volumes in Hong Kong.

Change in expected credit losses and other credit

impairment charges increased by HK$9,826m, or 150%, notably

in Commercial Banking ('CMB') and to a lesser extent in Global

Banking ('GB'), mainly reflecting increases in allowances relating

to exposures to the mainland China commercial real estate ('CRE')

sector.

Total operating expenses increased by HK$5,632m, or 5%.

Excluding the favourable foreign exchange impact, operating

expenses increased by HK$7,459m, or 7%, reflecting an increase

in investment in technology, including our digital capabilities to

support business growth. Employee compensation and benefits

also increased, mainly from higher performance-related pay and

wage inflation.

Share of profit in associates and joint ventures decreased by

HK$528m, or 3%. Excluding the unfavourable foreign exchange

impact, the share of profit in associates and joint ventures

increased by HK$32m, mainly from Bank of Communications Co.,

Limited.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	17

Net interest income

(Unaudited)


	2022	2021
	HK$m	HK$m
Net interest income	126,852	98,113
Average interest-earning assets	7,589,538	7,173,973
	%	%
Net interest spread	1.55	1.32
Contribution from net free funds	0.12	0.05
Net interest margin	1.67	1.37

Net interest income (‘NII’) increased by HK$28,739m, or 29%.

Excluding the unfavourable foreign exchange impact, net interest

income increased by HK$30,715m, or 32%, primarily driven by

Hong Kong with wider customer deposit spreads and higher

reinvestment yields as market interest rates increased, coupled

with balance sheet growth. Net interest income in Singapore also

increased, reflecting the favourable impact of the higher market

interest rates.

Average interest-earning assets increased by HK$416bn, or

6%, driven by Hong Kong, from growth in financial investments

and reverse repurchase agreements.

Net interest margin ('NIM') increased by 30 basis points ('bps'),

with increases noted across the region, including Hong Kong,

Singapore and Malaysia with higher market interest rates

compared to the prior year.

As a result, the NIM at the Bank's operations in Hong Kong

increased by 34 bps to 1.09%, and at Hang Seng Bank, the NIM

increased by 30 bps to 1.89%.

Insurance manufacturing

(Unaudited)

The following table shows the results of our insurance manufacturing operations by income statement line item, and separately the

insurance distribution income earned by the group's bank channels.


Results of insurance manufacturing operations and insurance distribution income earned by the group's bank channels
	2022	2021
	HK$m	HK$m
Insurance manufacturing operations1
Net interest income	17,701	16,527
Net fee expense	(4,272)	(3,617)
Net income/(expense) from financial instruments measured at fair value	(14,599)	18,036
Net insurance premium income	80,839	62,135
Change in present value of in-force long-term insurance business	(256)	(1,294)
Other operating income	887	719
Total operating income	80,300	92,506
Net insurance claims and benefits paid and movement in liabilities to policyholders	(70,170)	(76,361)
Net operating income before change in expected credit losses and other credit impairment charges	10,130	16,145
Change in expected credit losses and other credit impairment charges	(36)	(216)
Net operating income	10,094	15,929
Total operating expenses	(5,798)	(3,464)
Operating profit	4,296	12,465
Share of profit in associates and joint ventures	139	137
Profit before tax	4,435	12,602
Annualised new business premiums of insurance manufacturing operations	15,420	19,136
Distribution income earned by the group's bank channels	4,437	4,135

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

insurance operations.

Insurance manufacturing

Profit before tax from insurance manufacturing operations

decreased by HK$8,167m, or 65%, driven by unfavourable equity

markets in the year compared to favourable markets in 2021,

partially offset by higher new business volumes.

NII increased by 7% from growth in invested funds, reflecting net

new business and renewal premium inflows on life insurance

contracts.

Net income from financial instruments measured at fair value

decreased, mainly from losses on the equity portfolio held to

support insurance and investment contracts in Hong Kong, due to

the unfavourable equity markets.

Net insurance premium income increased from higher sales

volumes mainly in Hong Kong which included a higher proportion

of single premium business in its product mix, and in Singapore

following the acquisition of AXA Singapore during 2022.

The favourable movement of HK$1,038m in PVIF compared to

2021 reflected increases in Hong Kong from the value of new

business written and the one-off gain from a pricing update for

policyholder funds held on deposit to reflect the cost of provision

of these services. This was partly offset by the adverse assumption

changes and experience variances in Hong Kong and Singapore,

primarily due to interest rates movements.

To the extent losses are attributable to policyholders, there is an

offsetting movement reported under ‘Net insurance claims and

benefits paid and movement in liabilities to policyholders'.

Net insurance claims and benefits paid and movement in liabilities

to policyholders decreased by HK$6,191m, or 8%, primarily due to

a decline in returns on financial assets supporting contracts where

the policyholder is subject to part or all of the investment risk,

mainly in Hong Kong. This was partially offset by higher new

business volumes in Hong Kong.

Annualised new business premiums ('ANP') decreased by

HK$3,716m, or 19%, mainly in Hong Kong due to a change in

product mix towards single premium new business, partially offset

by higher ANP from business growth in mainland China and the

inclusion of the results of AXA Singapore.

Financial Review


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

Balance sheet commentary compared with

31 December 2021

(Unaudited)

The consolidated balance sheet as at 31 December 2022 is set out

in the Consolidated Financial Statements.

Gross loans and advances to customers decreased by

HK$128bn, or 3%. Excluding the unfavourable foreign exchange

translation effects of HK$90bn, gross loans and advances to

customers decreased by HK$38bn. This was driven by a decrease

in corporate and commercial lending of HK$88bn, primarily in

Hong Kong, partly offset by increases in Australia, Japan and

mainland China. The residential mortgage book increased by

HK$35bn, mainly in Hong Kong and Australia, coupled with

increases in lending to non-bank financial institutions of HK$29bn

mainly in Korea, Hong Kong and India.

Total gross impaired loans and advances as a percentage of gross

loans and advances stood at 1.69% at the end of 2022 (2021:

1.11%). The change in expected credit losses as a percentage of

average gross customer advances was 0.40% for 2022 (2021:

0.18%), reflecting the impact of the deterioration in quality in the

mainland China CRE portfolio.

Interests in associates and joint ventures

At 31 December 2022, an impairment review on the group’s

investment in Bank of Communications Co., Ltd (‘BoCom’) was

carried out and it was concluded that the investment was not

impaired based on our value-in-use calculation (see Note 14 on the

Consolidated Financial Statements for further details). As set out in

that note, in future periods, the value in use may increase or

decrease depending on the effect of changes to model inputs. It is

expected that the carrying amount will continue to increase due to

retained profits earned by BoCom. Impairment, if determined,

would be recognised in the income statement. The impact on

group’s common equity tier 1 ratio is expected to be minimal in

the event of an impairment, as the adverse impact on common

equity tier 1 capital from the impairment would be partly offset by

the favourable impact from a lower carrying amount. The group

would continue to recognise its share of BoCom’s profit or loss,

but the carrying amount would be reduced to equal the value in

use, with a corresponding reduction in the income statement. An

impairment review would continue to be performed at each

subsequent reporting period, with the carrying amount and

income adjusted accordingly.

Customer deposits decreased by HK$63bn, or 1%, to

HK$6,114bn. Excluding the unfavourable foreign exchange

translation effects of HK$110bn, customer deposits increased by

HK$47bn. The advances-to-deposits ratio was 60.6% at the end of

the year (2021: 62.2%).

Shareholders’ equity grew by HK$19bn to HK$875bn at

31 December 2022, mainly reflecting the current year’s profit, net

of dividend payments, coupled with the issuance of new ordinary

shares and additional tier 1 capital instruments. These were partly

offset by a decrease in foreign exchange reserves due to

depreciation of various foreign currencies against the Hong Kong

dollar.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	19

Risk

Our approach to risk

(Unaudited)

Our risk appetite

We recognise the importance of a strong culture, which refers to

our shared attitudes, beliefs, values and standards that shape

behaviours including those related to risk awareness, risk taking

and risk management. All our people are responsible for the

management of risk, with the ultimate accountability residing with

the Board.

We seek to build our business for the long term by balancing

social, environmental and economic considerations in the

decisions we make. Our strategic priorities are underpinned by our

endeavour to operate in a sustainable way. This helps us to carry

out our social responsibility and manage the risk profile of the

business. We are committed to managing and mitigating climate-

related risks, both physical and transition risks, and continue to

incorporate consideration of these into how we manage and

oversee risks internally and with our customers.

The following principles guide the group’s overarching appetite for

risk and determine how our businesses and risks are managed.

Financial position

•We aim to maintain a strong capital position, defined by

regulatory and internal capital ratios.

•We carry out liquidity and funding management for each

operating entity, on a stand-alone basis.

Operating model

•We seek to generate returns in line with our risk appetite and

strong risk management capability.

•We aim to deliver sustainable and diversified earnings and

consistent returns for shareholders.

Business practice

•We have no appetite for deliberately or knowingly causing

detriment to consumers, or incurring a breach of the letter or

spirit of regulatory requirements.

•We have no appetite for inappropriate market conduct by any

member of staff or by any group business.

•We are committed to managing the climate risks that have an

impact on our financial position, and delivering on our net zero

ambition.

•We consider and, where appropriate, mitigate reputational risk

that may arise from our business activities and decisions.

•We monitor non-financial risk exposure against risk appetite,

including inadequate or failed internal processes, people and

systems, or events that impact our customers or can lead to

sub-optimal returns to shareholders, censure, or reputational

damage.

Enterprise-wide application

Our risk appetite encapsulates the consideration of financial and

non-financial risks. We define financial risk as the risk of a

financial loss as a result of business activities. We actively take

these types of risks to maximise shareholder value and profits.

Non-financial risk is the risk to achieving our strategy or objectives

as the result of failed internal processes, people and systems or

from external events.

Our risk appetite is expressed in both quantitative and qualitative

terms and applied at the global business level and to material

banking entities. It continues to evolve and expand its scope as

part of our regular review process.

The Board reviews and approves the group’s risk appetite regularly

to make sure it remains fit for purpose. The group’s risk appetite is

considered, developed and enhanced through:

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

needs;

•trends highlighted in other group risk reports;

•communication with risk stewards on the developing risk

landscape;

•strength of our capital, liquidity and balance sheet;

•compliance with applicable laws and regulations;

•effectiveness of the applicable control environment to mitigate

risk, informed by risk ratings from risk control assessments;

•functionality, capacity and resilience of available systems to

manage risk; and

•the level of available staff with the required competencies to

manage risks.

We formally articulate our risk appetite through our risk appetite

statement (‘RAS’), which is approved by the Board on the

recommendation of the group Risk Committee ('RC'). Setting out

our risk appetite ensures that we agree a suitable level of risk for

our strategy. In this way, risk appetite informs our financial

planning process and helps senior management to allocate capital

to business activities, services and products.

The RAS is applied to the development of business line strategies,

strategic and business planning, and remuneration. At a group

level, performance against the RAS is reported to the group Risk

Management Meeting (‘RMM’) alongside key risk indicators to

support targeted insight and discussion on breaches of risk

appetite and any associated mitigating actions. This reporting

allows risks to be promptly identified and mitigated, and informs

risk-adjusted remuneration to drive a strong risk culture.

Most global businesses and material banking entities are required

to have their own RAS, which is monitored to help ensure it

remains aligned with the group’s RAS. Each RAS and business

activity is guided and underpinned by qualitative principles and/or

quantitative metrics.

Risk management

We recognise that the primary role of risk management is to

protect our customers, business, colleagues, shareholders and the

communities that we serve, while ensuring we are able to support

our strategy and provide sustainable growth. This is supported

through our three lines of defence model described on page 22.

The implementation of our business strategy remains a key focus.

As we implement change initiatives, we actively manage the

execution risks. We also perform periodic risk assessments,

including against strategies,to help ensure retention of key

personnel for our continued effective operation.

We aim to use a comprehensive risk management approach

across the organisation and across all risk types, underpinned by

the group's culture and values. This is outlined in our risk

management framework, including the key principles and

practices that we employ in managing material risks, both

financial and non-financial.

The framework fosters continual monitoring, promotes risk

awareness and encourages a sound operational and strategic

decision making and escalation process. It also supports a

consistent approach to identifying, assessing, managing and

reporting the risks we accept and incur in our activities, with clear

accountabilities. We actively review and enhance our risk

management framework and our approach to managing risk,

through our activities with regard to people and capabilities,

governance, reporting and management information, credit risk

management models and data.

Our risk management framework

The following diagram and descriptions summarise key aspects of

the risk management framework, including governance, structure,

risk management tools and our culture, which together help align

employee behaviour with risk appetite.

Risk


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


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

Risk governance	Non-executive risk governance	The Board approves the group's risk appetite, plans and performance targets. It sets the ‘tone from the top’ and is advised by the group's Risk Committee.




	Executive risk governance	Our executive risk governance structure is responsible for the enterprise- wide management of all risks, including key policies and frameworks for the management of risk within the group.





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




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

	Enterprise-wide risk management tools

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


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

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

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

Risk governance

The Board has ultimate responsibility for the effective

management of risk and approves our risk appetite. It is advised

on risk-related matters by the RC.

The group's Chief Risk Officer, supported by the RMM, holds

executive accountability for the ongoing monitoring, assessment

and management of the risk environment and the effectiveness of

the risk management framework.

The management of regulatory compliance risk and financial crime

risk resides with the group's Chief Compliance Officer. Oversight is

maintained by the group's Chief Risk Officer, in line with his

enterprise risk oversight responsibilities, through the RMM.

Day-to-day responsibility for risk management is delegated to

senior managers with individual accountability for decision

making. All our people have a role to play in risk management.

These roles are defined using the three lines of defence model,

which takes into account the group’s business and functional

structures as described in the following commentary, 'Our

responsibilities’.

We use a defined executive risk governance structure to help

ensure there is appropriate oversight and accountability of risk,

which facilitates reporting and escalation to the RMM. This

structure is summarised in the following table.


Governance structure for the management of risk
Authority	Membership	Responsibilities include:
Risk Management Meeting of the group	group Chief Risk Officer group General Counsel group Co-Chief Executive Officers group Chief Financial Officer group Chief Compliance Officer group Head of Internal Audit Chief Executive Officer of Hang Seng Bank Limited All other group Executive Committee members	•Supporting the group Chief Risk Officer in exercising Board-delegated risk management authority. •Overseeing the implementation of risk appetite and the risk management framework. •Forward-looking assessment of the risk environment, analysing possible risk impacts and taking appropriate action. •Monitoring all categories of risk and determining appropriate mitigating action. •Promoting a supportive group culture in relation to risk management and conduct.
Global business/Site risk management meetings	Global business/Site Chief Risk Officer Global business/Site Chief Executive Global business/Site Chief Financial Officer Global business/Site heads of global functions	•Supporting the Chief Risk Officer in exercising Board-delegated risk management authority. •Forward-looking assessment of the risk environment, analysing the possible risk impact and taking appropriate action. •Implementation of risk appetite and the risk management framework. •Monitoring all categories of risk and determining appropriate mitigating actions. •Embedding a supportive culture in relation to risk management and controls.

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


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	21

Our responsibilities

All our people are responsible for identifying and managing risk

within the scope of their roles. Roles are defined using the three

lines of defence model, which takes into account our business and

functional structures as described below.

Three lines of defence

To create a robust control environment to manage risks, we use

an activity-based three lines of defence model. This model

delineates management accountabilities and responsibilities for

risk management and the control environment.

The model underpins our approach to risk management by

clarifying responsibility and encouraging collaboration, as well as

enabling efficient coordination of risk and control activities.

The three lines of defence are summarised below:

•The first line of defence owns the risks and is responsible for

identifying, recording, reporting and managing them in line

with risk appetite, and ensuring that the right controls and

assessments are in place to mitigate them.

•The second line of defence challenges the first line of defence

on effective risk management, and provides advice and

guidance in relation to the risk.

•The third line of defence is our Global Internal Audit function,

which provides independent assurance that our risk

management approach and processes are designed and

operating effectively.

Risk and Compliance function

The group’s Risk sub-function, headed by the group’s Chief Risk

Officer, is responsible for the group’s risk management

framework. This responsibility includes establishing and

monitoring of risk profiles, and identifying and managing forward-

looking risk. The group’s Risk sub-function is made up of sub-

functions covering all risks to our business. Forming part of the

second line of defence, the group's Risk sub-function is

independent from the global businesses, including sales and

trading functions, to provide challenge, appropriate oversight and

balance in risk/return decisions.

Responsibility for minimising both financial and non-financial risk

lies with our people. They are required to manage the risks of the

business and operational activities for which they are responsible.

We maintain adequate oversight of our risks through our various

specialist risk stewards and the collective accountability held by

our Chief Risk Officers at sites and global businesses.

We have continued to strengthen the control environment and our

approach to the management of non-financial risk, as set out in

our risk management framework. The management of non-

financial risk focuses on governance and risk appetite, and

provides a single view of the non-financial risks that matter the

most and the associated controls. It incorporates a risk

management system designed to enable the active management

of non-financial risk. Our ongoing focus is on simplifying our

approach to non-financial risk management, while driving more

effective oversight and better end-to-end identification and

management of non-financial risks. This is overseen by the

Operational and Resilience Risk sub-function, headed by the group

Head of Operational and Resilience Risk.

Stress testing and recovery planning

The group operates a wide-ranging stress testing programme that

is a key part of our risk management and capital and liquidity

planning. Stress testing provides management with key insights

into the impact of severely adverse events on the group, and

provides confidence to regulators on the group’s financial stability.

Our stress testing programme assesses our capital and liquidity

strength through a rigorous examination of our resilience to

external shocks. As well as undertaking regulatory-driven stress

tests, we conduct our own internal stress tests in order to

understand the nature and level of all material risks, quantify the

impact of such risks and develop plausible business-as-usual

mitigating actions.

Internal stress tests

Our internal capital assessment uses a range of stress scenarios

that explore risks identified by management. They include

potential adverse macroeconomic, geopolitical and operational

risk events, as well as other potential events that are specific to

the group.

The selection of stress scenarios is based upon the output of our

identified top and emerging risks and our risk appetite. Stress

testing analysis helps management understand the nature and

extent of vulnerabilities to which the group is exposed. Using this

information, management decides whether risks can or should be

mitigated through management actions or, if they were to

crystallise, be absorbed through capital and liquidity. This in turn

informs decisions about preferred capital and liquidity levels and

allocations.

In addition to the group-wide stress testing scenarios, each major

subsidiary and branch conducts regular macroeconomic and

event-driven scenario analysis specific to its region. They also

participate, as required, in the regulatory stress testing

programmes of the jurisdictions in which they operate, and the

stress tests required by the HKMA. Global functions and

businesses also perform bespoke stress testing to inform their

assessment of risks to potential scenarios.

We also conduct reverse stress tests each year at a group level

and, where required, at subsidiary entity level to understand

potential extreme conditions that would make our business model

non-viable. Reverse stress testing identifies potential stresses and

vulnerabilities we might face, and helps inform early warning

triggers, management actions and contingency plans designed to

mitigate risks.

The group stress testing programme is overseen by the RC and

results are reported, where appropriate, to the RMM and RC.

Recovery and resolution plans

Recovery and resolution plans form part of the integral framework

safeguarding the group’s financial stability. The group's recovery

plan, together with stress testing, helps us understand the likely

outcomes of adverse business or economic conditions and in the

identification of mitigating actions.

Risk


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

Key developments in 2022

We actively manage the risks related to macroeconomic

uncertainties including inflation, fiscal and monetary policy, the

Russia-Ukraine war, broader geopolitical uncertainties, the

continued risks resulting from the Covid-19 pandemic, as well as

other key risks described in this section.

In addition, we enhanced our risk management in the following

areas:

•We continued to improve our risk governance decision making,

particularly with regard to the governance of treasury risk to

ensure senior executives have appropriate oversight and

visibility of macroeconomic trends around inflation and interest

rates.

•We adapted our interest rate risk management strategy as

market and official interest rates increased in reaction to

inflationary pressures.

•We began a process of enhancement of our country credit risk

management framework in order to strengthen our control of

risk tolerance and appetite at a country level.

•We continued to develop our approach to emerging risk

identification and management, including the use of forward-

looking indicators to support our analysis.

•We enhanced our enterprise risk reporting processes to place a

greater focus on our emerging risks, including by capturing the

materiality, oversight and individual monitoring of these risks.

•We further strengthened our third-party risk policy and

processes to improve control and oversight of our material third

parties to maintain our operational resilience, and to meet new

and evolving regulatory requirements.

•We made progress with our comprehensive regulatory

reporting programme to strengthen our global processes,

improve consistency, and enhance controls.

•We have progressed with the simplification and reshaping of

initiatives to ensure the we have a sustainable cost base, a

resilient control environment and the skills and capabilities to

support the global businesses.

•We continued to embed, the governance and oversight around

model adjustments and related processes for HKFRS 9 models

and Sarbanes-Oxley controls.

•We commenced a programme to enhance our framework for

managing the risks associated with machine learning and

artificial intelligence (‘AI’).

•Through our dedicated climate risk programme, we continued

to embed climate considerations throughout the organisation,

including updating the scope of our programme to cover all risk

types, expanding the scope of climate related training and

developing new climate risk metrics to monitor and manage

exposures, and the development of our internal climate

scenario exercise.

•We continued to improve the effectiveness of our financial

crime controls, deploying advanced analytics capabilities into

new markets. We are refreshing our financial crime policies,

ensuring they remain up-to-date and address changing and

emerging risks. We continue to monitor regulatory changes.

Top and emerging risks

(Unaudited)

We use a top and emerging risks process to provide a forward-

looking view of issues with the potential to threaten the execution

of our strategy or operations over the medium to long term.

We proactively assess the internal and external risk environment,

as well as review the themes identified across our region and

global businesses, for any risks that may require global escalation.

We update our top and emerging risks as necessary.

Our current top and emerging risks are as follows:

Externally driven

Geopolitical and macroeconomic risks

(Unaudited)

The Russia-Ukraine war has had far-reaching geopolitical and

economic implications. The group is monitoring the impacts of the

war and continues to respond to the extensive sanctions and trade

restrictions that have been imposed, noting the challenges that

arise in implementing the complex, novel and ambiguous aspects

of certain of these sanctions. Sanctions were targeted against

numerous Russian government officials and politically exposed

individuals. Russia has implemented certain countermeasures in

response. Further sanctions and counter sanctions in connection

with Russia may adversely affect the group, its customers and the

markets in which the group operates by creating regulatory,

reputational and market risks.

Global commodity markets have been significantly impacted by

the Russia-Ukraine war and localised Covid-19 outbreaks, leading

to continued supply chain disruptions. This has resulted in product

shortages appearing across several regions, and increased prices

for both energy and non-energy commodities, such as food. We

do not expect these to ease significantly in the near term. In turn,

this has had a significant impact on global inflation.

Rising global inflation has prompted central banks to tighten

monetary policy. The combined pressure of inflation and interest

rate rises may lead to pressures on customers and their ability to

repay debt. During 2022, the US Federal Reserve Board (‘FRB’)

delivered a cumulative 425 basis points (‘bps’) increase in the

Federal Funds rate. The Hong Kong dollar ('HKD') exchange rate

peg against the US dollar means that HKD interest rates are

expected to rise in line with respective US rates, yet HKD

interbank rates lagged increases in US dollar interest rates during

2022 as the supply of local currency remained strong. The spread

between the two is expected to narrow as the Hong Kong

Aggregate Balance, a gauge of local interbank liquidity, fell below

the HKD 100 billion mark. Interest-rate futures suggest an

expectation that the FRB will ease monetary policy slightly beyond

the six-month horizon. However, should central banks remain on a

trajectory of continued monetary tightening, a realignment of

market expectations could cause turbulence in financial asset

prices.

We continue to monitor our risk profile closely in the context of

uncertainty over global macroeconomic policies. Higher inflation

and interest rate expectations around the world, and the resulting

economic uncertainty, have had an impact on ECL. Our Central

scenario used to calculate credit impairment assumes low growth

and a higher inflation environment across many of our key

markets. However, there is a high degree of risk and uncertainty

associated with economic forecasts in the current environment.

The degree of uncertainty varies by market, depending on

exposure to commodity price increases, supply chain constraints,

the monetary policy response to inflation and the public health

policy response to the Covid-19 pandemic. As a result, our Central

scenario for impairment has not been assigned an equal likelihood

of occurrence across our key markets.

For further details of our Central and other scenarios, see

‘Measurement uncertainty and sensitivity analysis of ECL estimates’

on page 37.

Global tensions over trade, technology and ideology are

manifesting themselves in divergent regulatory standards and

compliance regimes, presenting long-term strategic challenges for

multinational businesses.

The US-China relationship remains complex, with divisions over a

number of critical issues. The US, the UK, the EU, Canada and

other countries have imposed various sanctions and trade

restrictions on Chinese persons and companies. These include the

freezing of assets of government officials, and the implementation

of investment and import/export restrictions targeting certain

Chinese companies.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	23

There is a continued risk of additional sanctions being imposed by

the US and other governments in relation to human rights and

other issues with China, and this could create a more complex

operating environment for the group and its customers.

China has in turn announced a number of its own sanctions and

trade restrictions that target, or provide authority to target, foreign

individuals and companies. China has also promulgated laws that

provide a legal framework for imposing further sanctions and

export restrictions.

These and any future measures and countermeasures that may be

taken by the US, China and other countries may affect the group,

its customers, and the markets in which we operate.

As the geopolitical landscape evolves, compliance by multinational

corporations with their legal or regulatory obligations in one

jurisdiction may be seen as supporting the law or policy objectives

of that jurisdiction over another, creating additional compliance,

reputational and political risks for the group. We maintain dialogue

with our regulators in various jurisdictions on the impact of legal

and regulatory obligations on our business and customers.

Expanding data privacy, national security and cybersecurity laws

in a number of markets could pose potential challenges to intra-

group data sharing. These developments could increase financial

institutions’ compliance burdens in respect of cross-border

transfers of personal information, and degrade our enterprise-wide

financial crime risk management capabilities.

Mitigating actions

•We closely monitor geopolitical and economic developments in

key markets and sectors and undertake scenario analysis where

appropriate. This helps us to take portfolio actions where

necessary, including enhanced monitoring, amending our risk

appetite and/or reducing limits and exposures.

•We stress test portfolios of particular concern to identify

sensitivity to loss under a range of scenarios, with management

actions being taken to rebalance exposures and manage risk

appetite where necessary.

•We regularly review key portfolios to help ensure that individual

customer or portfolio risks are understood and our ability to

manage the level of facilities offered through any downturn is

appropriate.

•We continue to manage sanctions and trade restrictions

through the use of, and enhancements to, our existing controls.

•We have taken steps, where necessary, to enhance physical

security in geographical areas deemed to be at high risk from

terrorism and military conflicts.

Technology and cyber security risk

(Unaudited)

We operate an extensive and complex technology landscape,

which must remain resilient in order to support customers, the

group and markets in the region. Risks arise where technology is

not understood, maintained, or developed appropriately. Together

with other organisations, we continue to operate in an increasingly

hostile cyber threat environment. These threats include potential

unauthorised access to customer accounts, attacks on our

systems or those of our third-party suppliers and require ongoing

investment in business and technical controls to defend against

them.

Mitigating actions

•We continue to invest in transforming how software solutions

are developed, delivered and maintained. We invest both to

improve system resilience and test service continuity. We

continue to ensure security is built into our software

development life cycle and improve our testing processes and

tools.

•We continue to upgrade our IT systems, simplify our service

provision and replace older IT infrastructure and publications.

•We continually evaluate threat levels for the most prevalent

cyber-attack types and their potential outcomes. To further

protect the group and our customers and help ensure the safe

expansion of our global businesses, we continue to strengthen

our controls to reduce the likelihood and impact of advanced

malware, data leakage, exposure through third parties and

security vulnerabilities.

•We continue to enhance our cybersecurity capabilities,

including Cloud security, identity and access management,

metrics and data analytics, and third-party security reviews. An

important part of our defence strategy is ensuring our

colleagues remain aware of cybersecurity issues and know how

to report incidents.

•We report and review cyber risk and control effectiveness at

executive and non-executive Board level. We also report across

our global businesses, functions and markets to help ensure

appropriate visibility and governance of the risk and mitigating

actions.

•The Group participates globally in industry bodies and working

groups to collaborate on tactics employed by cyber-crime

groups and to collaborate in defending, detecting and

preventing cyber-attacks on financial organisations.

Financial crime risk

(Unaudited)

Financial institutions remain under considerable regulatory

scrutiny regarding their ability to prevent and detect financial

crime which continues to evolve. Challenges include managing

conflicting laws and approaches to legal and regulatory regimes,

and implementing the unprecedented volume and diverse set of

sanctions notably as a result of the Russia-Ukraine war.

Amid rising inflation and increasing cost of living pressures, we

face increasing regulatory expectations with respect to increases

in internal and external fraud and the abuse of vulnerable

customers.

The digitisation of financial services continues to have an impact

on the payments ecosystem, including new market entrants and

payment mechanisms, not all of which are subject to the same

level of regulatory scrutiny or regulations as financial institutions.

This presents ongoing challenges in terms of maintaining required

levels of payment transparency, notably where financial

institutions serve as intermediaries. Developments around digital

assets and currencies have continued at pace, with an increasing

regulatory and enforcement focus.

Expectations with respect to the intersection of ESG issues and

financial crime as our organisation, customers and suppliers

transition to net zero, continue to increase, focused on potential

‘greenwashing’, human rights issues and environmental crimes. In

addition, climate change itself could heighten risks linked to

vulnerable migrant populations in countries where financial crime

is already more prevalent.

We also continue to face increasing challenges presented by

national data privacy requirements, which may affect our ability to

manage financial crime risks holistically and effectively.

Mitigating actions

•We continue to manage sanctions and trade restrictions

through the use of, and enhancements to, our existing controls.

•We are strengthening our fraud controls, and investing in next

generation capabilities to fight financial crime through the

application of advanced analytics and artificial intelligence.

•We are looking at the impact of a rapidly changing payments

ecosystem, as well as risks associated with direct and indirect

exposure to digital assets and currencies, in an effort to ensure

our financial crime controls remain appropriate.

•We are assessing our existing policies and control framework

in an effort to ensure that developments in the ESG space are

considered and the risks mitigated.

•We work with jurisdictions and relevant international bodies to

address data privacy challenges through international

standards, guidance, and legislation.

Risk


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

Ibor transition

(Unaudited)

Interbank offered rates (‘Ibors’) have previously been used

extensively to set interest rates on different types of financial

transactions and for valuation purposes, risk measurement and

performance benchmarking.

The publication of sterling, Swiss franc, euro and Japanese yen

(JPY) London interbank offered rate ('Libor') interest rate

benchmarks, as well as Euro Overnight Index Average (‘Eonia’),

ceased from the end of 2021. Our Ibor transition programme,

which is tasked with the development of near risk-free

replacement rate (‘RFR’) products and the transition of legacy Ibor

products, has continued to support the transition of a limited

number of remaining contracts in sterling and JPY Libor, which

were published using a ‘synthetic’ interest rate methodology

during 2022. Following the publication of ‘synthetic’ JPY Libor

after 31 December 2022, and the announcements by the Financial

Conduct Authority ('FCA') in September and November 2022 that

‘synthetic’ sterling Libor rates will cease to be published on

31 March 2023 or 31 March 2024, depending on setting, we have

or are prepared to transition or remediate the remaining few

contracts outstanding as at 31 December 2022 in advance of

these dates.

For the cessation of the publication of US dollar Libor and other

regional rates demising at dates ('demising regional rates') from

30 June 2023, we have implemented the majority of required

processes, technology and RFR product capabilities in preparation

for upcoming market events, and continue to transition

outstanding legacy contracts through the first half of 2023. We

have completed the transition of the majority of our uncommitted

lending facilities and continue to make steady progress with the

transition of the outstanding legacy committed lending facilities.

Transition of our derivatives portfolio is progressing well with most

clients reliant on industry mechanisms to transition to RFRs. For

the limited number of bilateral derivatives trades where an

alternative transition path is required, client engagement is

continuing. For certain products and contracts, including bonds

and syndicated loans, we remain reliant on the continued support

of agents and third parties, but we continue to progress those

contracts requiring transition. We will continue to monitor

contracts that may be potentially more challenging to transition

and need to rely upon legislative solutions. Additionally, following

the FCA’s consultation in November 2022 proposing that US dollar

Libor is to be published using a 'synthetic' methodology for a

defined period, we will continue to work with our clients to

support them through the transition of their products if transition

is not completed by 30 June 2023.

For the group’s own debt securities issuances, we continue to

have non-capital loss absorbing capacity ('LAC') instruments in US

dollar and JPY where the terms provide for an Ibor benchmark to

be used to reset the coupon rate if the group chooses not to

redeem them on their call dates, the earliest of which is July 2023.

We remain mindful of the various factors that impact on the Ibor

remediation strategy for our non-capital LAC instruments,

including but not limited to timescales for cessation of relevant

Ibor rates, constraints relating to the governing law of outstanding

instruments, the potential relevance of legislative solutions and

industry best practice guidance.

For US dollar Libor, demising regional rates and other demising

Ibors, we continue to be exposed to, and actively monitor, risks

including:

•regulatory compliance and conduct risks, as the transition of

legacy contracts to RFRs or alternative rates, or sales of

products referencing RFRs, may not deliver fair client

outcomes;

•resilience and operational risks, as changes to manual and

automated processes, made in support of new RFR

methodologies, and the transition of large volumes of Ibor

contracts may lead to operational issues;

•legal risks, as issues arising from the use of legislative solutions

and from legacy contracts that the group is unable to transition

may result in unintended or unfavourable outcomes for clients

and market participants, which could potentially increase the

risk of disputes;

•model risk, as there is a risk that changes to our models to

replace Ibor-related data, adversely affect the accuracy of

model outputs; and

•market risk, because as a result of differences in Libor and

RFRs interest rates, we are exposed to basis risk resulting from

the asymmetric adoption of rates across assets, liabilities and

products.

We will monitor these risks through the remainder of the transition

of legacy contracts, with a focus on fair client outcomes. The level

of risk is diminishing in line with our process implementation and

continued transition of contracts. Throughout 2023, we continue

to be committed to engaging with our clients and investors to

complete an orderly transition of contracts that reference the

remaining demising Ibors.

Mitigating actions

•The Group's global Ibor transition programme, which is

overseen by the Group Chief Risk and Compliance Officer, will

continue to deliver IT and operational processes to meet its

objectives.

•We carry out extensive training, communication and client

engagement to facilitate appropriate selection of new rates and

products.

•We have dedicated teams in place to support the transition.

•We have actively transitioned legacy contracts and ceased new

issuance of Libor and demising regional rate based contracts,

other than those allowed under regulatory exemptions, with

implementation of associated monitoring and controls.

•We assess, monitor and dynamically manage risks arising from

Ibor transition, and implement specific mitigating controls

when required.

•We continue to actively engage with regulatory and industry

bodies to mitigate risks relating to 'tough legacy' contracts.

Financial instruments impacted by Ibor reform

(Audited)

Amendments to HKFRSs issued in October 2020 (Interest Rate

Benchmark Reform Phase 2) represent the second phase of the

project on the effects of interest rate benchmark reform,

addressing issues affecting financial statements when changes are

made to contractual cash flows and hedging relationships as a

result of reform.

Under these amendments, changes made to a financial instrument

measured at other than fair value through profit or loss that are

economically equivalent and required by interest rate benchmark

reform, do not result in the derecognition or a change in the

carrying amount of the financial instrument. Instead, they require

the effective interest rate to be updated to reflect the change in

the interest rate benchmark. In addition, hedge accounting will not

be discontinued solely because of the replacement of the interest

rate benchmark if the hedge meets other hedge accounting

criteria.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	25


(Audited)	Financial instruments yet to transition to alternative benchmarks, by main benchmark
	USD Libor	JPY Libor	Sibor	GBP Libor	Others1
At 31 Dec 2022	HK$m	HK$m	HK$m	HK$m	HK$m
Non-derivative financial assets2	172,370	—	30,338	938	4,474
Non-derivative financial liabilities	120,096	9,192	—	—	264
Derivative notional contract amount	8,506,925	—	—	—	435,263


At 31 Dec 2021
Non-derivative financial assets2	206,508	2,846	56,291	22,197	4,779
Non-derivative financial liabilities	147,198	10,930	—	—	—
Derivative notional contract amount	8,547,665	798,921	—	88,218	715,439

1Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (Euro Libor, Swiss franc

Libor, Mumbai Interbank Forward Offer Rate ('MIFOR'), SGD Swap Offer Rate ('SOR') and Thai baht Interest Rate Fixing ('THBFIX')).

Announcements were made by regulators during 2022 on the cessation of the Canadian dollar offered rate (‘CDOR’) and Mexican Interbank

equilibrium interest rate (‘TIIE’), which will eventually transition to the Canadian overnight repo rate average (‘CORRA’) and a new Mexican

overnight fall-back rate respectively. Therefore, CDOR and TIIE are included in the current period.

2Gross carrying amount excluding allowances for expected credit losses.

The amounts in the above table relate to the group's main operating entities where the group has material exposures impacted by Ibor

reform including Hong Kong, Singapore, Thailand, Australia, India and Japan. The amounts provide an indication of the extent of the

group's exposure to the Ibor benchmarks which are due to be replaced. Amounts are in respect of financial instruments that:

•contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark;

•have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and

•are recognised on the group's consolidated balance sheet.

Environmental, social and governance risk

(Unaudited)

We are subject to financial and non-financial risks associated with

environmental, social and governance ('ESG') related matters. Our

current areas of focus are climate risk, nature-related risks and

human rights risks. These can impact us both directly and

indirectly through our business activities and relationships. For

details on how we govern ESG, see page 9.

Focus on climate-related risk continued to increase during 2022,

owing to the pace and volume of policy and regulatory changes

globally, particularly on climate risk management, stress testing

and scenario analysis and disclosures. If we fail to meet evolving

regulatory expectations or requirements on climate risk

management, this could have regulatory compliance and

reputational impacts.

We could face direct impact, owing to the increase in frequency

and severity of weather events and chronic shifts in weather

patterns, which could affect our ability to conduct our day-to-day

operations.

Our customers may find that their business models fail to align to

a net zero economy or face disruption to their operations or

deterioration to their assets as a result of extreme weather.

We face increased reputational, legal and regulatory risk as we

make progress towards our net zero ambition, with stakeholders

likely to place greater focus on our actions such as the

development of climate-related policies, our disclosures and

financing and investment decisions relating to our ambition.

We will face additional risks if we are perceived to mislead

stakeholders in respect of our climate strategy, the climate impact

of a product or service, or the commitments of our customers.

Climate risk may also impact model risk, as the uncertain impacts

of climate change and data and methodology limitations present

challenges to creating reliable and accurate model outputs.

We also face reporting risk in relation to our climate disclosures,

as any data, methodologies and standards we have used may

evolve over time in line with market practice, regulation or owing

to developments in climate science. The use of inaccurate/

incomplete data and models could result in sub optimal decision

making. Any changes could result in revisions to our internal

frameworks and reported data, and could mean that reported

figures are not reconcilable or comparable year on year. We may

also have to reevaluate our progress towards our climate-related

targets in future and this could result in reputational, legal and

regulatory risks.

There is increasing evidence that a number of nature-related risks

beyond climate change, which include risks that can be

represented more broadly by impact and dependence on nature,

can and will have significant economic impact. These risks arise

when the provision of natural services, such as water availability,

air quality, and soil quality, is compromised by overpopulation,

urban development, natural habitat and ecosystem loss,

ecosystem degradation arising from economic activity and other

environmental stresses beyond climate change. They can show

themselves in various ways, including through macroeconomic,

market, credit, reputational, legal and regulatory risks, for both the

group and our customers. We continue to engage with investors,

regulators and customers on nature-related risks to evolve our

approach and understand best practice risk mitigation.

Regulation and disclosure requirements in relation to human

rights, and to modern slavery in particular, are increasing.

Businesses are expected to be transparent about their efforts to

identify and respond to the risk of negative human rights impacts

arising from their business activities and relationships.

Mitigating actions

•We continue to deepen our understanding of the drivers of

climate risk. A dedicated Climate Risk Oversight Forum is

responsible for shaping and overseeing our approach and

providing support in managing climate risk. For further details

on the group’s ESG governance structure, see page 9.

•The Group climate risk programme continues to support the

development of our climate risk management capabilities

across four key pillars – governance and risk appetite, risk

management, stress testing and scenario analysis, and

disclosures. We are also enhancing our approach to

greenwashing risk management.

•In December, the Group published our updated energy policy,

covering the oil and gas, power and utilities and hydrogen

sectors, as well as expanded our thermal coal phase-out policy,

in which we committed to not provide new finance or advisory

services specifically for the conversion of existing coal-to-gas-

fired power plants, or new metallurgical coal mines (see page

11).

•Climate stress tests and scenarios are being used to further

improve our understanding of our risk exposures for use in risk

management and business decision making.

•In 2022, building on an earlier review which had identified

modern slavery and discrimination as priority human rights

issues, the Group conducted the first comprehensive review to

refresh our salient human rights issues, which are the human

Risk


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

rights at risk of the most severe negative impact through our

business activities and relationships. The review identified five

salient human rights issues, including the right to decent work

and the right to equality and freedom from discrimination,

amongst others. The Group incorporated additional human

rights elements into our existing procurement processes and

supplier code of conduct, and will continue to develop our in-

house capability on human rights. For further details refer to

ESG review on page 9.

•In 2021, the Group joined several industry working groups

dedicated to helping assess and manage nature-related risks,

such as the Taskforce on Nature-Related Financial Disclosure

(‘TNFD’). In 2022, the Group's asset management business also

published its biodiversity policy to publicly explain how the

Group's analysts address nature-related issues.

•We continue to engage with our customers and regulators

proactively on the management of ESG risks. The Group also

engages with initiatives, including the Climate Financial Risk

Forum, Equator Principles, Taskforce on Climate-related

Financial Disclosures and CDP (formerly the Carbon Disclosure

Project) to drive best practice for climate risk management.

For further details on our approach to climate risk management, see ‘Climate

Risk’ on page 61.

For further details on ESG risk management, see ‘Financial crime risk

environment‘ on page 24 .

Our ESG review can be found on page 9.

Digitalisation and technological advances

(Unaudited)

Developments in technology and changes to regulations are

enabling new entrants to the industry. This challenges the group

to continue innovating and taking advantage of new digital

capabilities so that we improve how we serve our customers, drive

efficiency and adapt our products to attract and retain customers.

As a result, we may need to increase our investment in our

business to adapt or develop products and services to respond to

our customer evolving needs. We also need to ensure that new

digital capabilities do not weaken our resilience.

Mitigating actions

•We continue to monitor this emerging risk, as well as the

advances in technology, and changes in customer behaviours

to understand how these changes may impact our business.

•We assess new technologies to develop appropriate controls

and maintain resilience.

•We closely monitor and assess financial crime and the impact

on payment transparency and architecture.

Internally driven

Risks associated with workforce capability, capacity

and environmental factors with potential impact on

growth

(Unaudited)

Our global businesses and functions in all of our markets are

exposed to risks associated with workforce capacity challenges,

including challenges to retain, develop and attract high-performing

employees in key labour markets, and compliance with

employment laws and regulations. Changed working

arrangements, and the residual impact of local Covid-19

restrictions and health concerns during the pandemic have also

affected employee mental health and well-being.

Mitigating actions

•We promote a diverse and inclusive workforce and provide

active health and well-being support. We continue to build our

speak-up culture through active campaigns.

•We monitor the size and shape of our workforce and levels of

employee attrition, and each business and function have

workforce plans in place to ensure effective hiring and

forecasting to meet business demands.

•We monitor people risks that could arise due to organisational

restructuring, helping to ensure we manage redundancies

sensitively and support impacted employees. We encourage

our people leaders to focus on talent retention at all levels, with

an empathetic mindset and approach, while ensuring the whole

proposition of working at HSBC is well understood.

•Our Future Skills curriculum helps provide critical skills that will

enable employees and the group to be successful in the future.

•We continue to develop succession plans for key management

roles, with actions agreed and reviewed on a regular basis by

the group Executive Committee.

Risks arising from the receipt of services from third

parties

(Unaudited)

We use third parties to provide a range of goods and services.

Risks arising from the use of third party providers and their supply

chain may be harder to identify. It is critical that we ensure we

have appropriate risk management policies, processes and

practices over the selection, governance and oversight of third

parties and their supply chain, particularly for key activities that

could affect our operational resilience. Any deficiency in the

management of risks associated with our third parties could affect

our ability to support our customers and meet regulatory

expectations.

Mitigating actions

•We continue to monitor the effectiveness of the controls

operated by our third-party through obtaining third-party

control reports. We have made further enhancements to our

framework to ensure risks associated with these arrangements

are understood and managed effectively by our global

businesses, global functions and regions.

•We continue to enhance the effective management of our intra-

group arrangements as we have for external third-party

arrangements using the same control standards.

•We are implementing the changes required by the new

regulations as defined by our regulators.

Model risk

(Unaudited)

Model risk arises whenever business decision making includes

reliance on models. We use models in both financial and non-

financial contexts, as well as in a range of business applications

such as customer selection, product pricing, financial crime

transaction monitoring, creditworthiness evaluation and financial

reporting. Assessing model performance is a continuous

undertaking. Models can need redevelopment as market

conditions change. Significant increases in global inflation and

interest rates have impacted the reliability and accuracy of both

credit and traded risk models, such as the value at risk model and

HKFRS 17 models.

We continued to prioritise the redevelopment of internal ratings-

based (‘IRB’) and internal model methods (‘IMM’) models, in

relation to counterparty credit, as part of the IRB repair and Basel

III programmes with a key focus on enhancing the quality of data

used as model inputs. A number of these models have been

submitted to the UK’s Prudential Regulation Authority (‘PRA’), the

Hong Kong Monetary Authority ('HKMA') and other key regulators

for feedback and approval is in progress. Some IMM and internal

model approach (‘IMA’) models have been approved for use, and

feedback has been received for some IRB models. Climate risk

modelling is a key focus for the group as HSBC’s commitment to

sustainability has become a critical part of the group’s strategy.

Model risk remains a key area of focus as regulatory scrutiny in

this space remains strong with local regulatory exams taking place

in many jurisdictions and further developments in policy expected

from many regulators, including the PRA and HKMA.

Mitigating actions

•We have continued to embed the enhanced monitoring, review

and challenge of loss model performance through our Model


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	27

Risk Management sub-function as part of a broader quarterly

process to determine loss levels. The Model Risk Management

team aims to provide strong and effective review and challenge

of any future redevelopment of these models.

•Model Risk Management works closely with businesses to

ensure that IRB/IMM/IMA models in development meet risk

management, pricing and capital management needs. Global

Internal Audit provides assurance over the risk management

framework for models.

•Additional assurance work is performed by the model risk

governance teams, which act as second lines of defence. The

teams test whether controls implemented by model users

comply with model risk policy and if model risk standards are

adequate.

•The group engagement strategy was rolled out to enhance the

understanding of model inventory, model limitations and risk

controls across the region. Targeted briefing sessions were

conducted to strengthen the awareness of models used and the

engagement between the model user community and model

developing areas.

•Models using advanced machine learning techniques are

validated and monitored to ensure that risks that are

determined by the algorithms have adequate oversight and

review. A framework to manage the range of risks that are

generated by these advanced techniques is being developed

that recognises the multi-disciplinary nature of these risks.

Data risk

(Unaudited)

We use multiple systems and growing quantities of data to

support our customers. Risk arises if data is incorrect, unavailable,

misused, or unprotected. Along with other banks and financial

institutions, we need to meet external regulatory obligations and

laws that cover data, such as the Basel Committee on Banking

Supervision's 239 guidelines ‘Principles for effective risk data

aggregation and risk reporting’ and the General Data Protection

Regulation (‘GDPR’).

Mitigating actions

•Through our global data management framework, we

proactively monitor the quality, availability and security of data

that supports our customers and internal processes. We work

towards resolving any identified data issues in a timely manner.

•We have made improvements to our data policies. We are

implementing an updated control framework (including trusted

sources, data flows, and data quality) to enhance the end-to-

end management of data risk.

•The Group has established a global data utility and continue to

simplify and unify data management activities across the

Group.

•We protect customer data through our data privacy framework,

which establishes practices, design principles and guidelines

that enable us to demonstrate compliance with data privacy

laws and regulations.

•We continue to modernise our data and analytics infrastructure

through investments in Cloud technology, data visualisation,

machine learning and AI.

•We educate our employees on data risk and data management.

We delivered regular global mandatory training on how to

protect and manage data appropriately.

Change execution risk

(Unaudited)

We have continued investment in strategic change to support the

delivery of our strategic priorities and regulatory commitments.

This requires change to be executed safely and efficiently.

Mitigating actions

•In 2022, we added change execution risk to our risk taxonomy

and control library, so that it could be defined, managed,

reported and overseen in the same way as our other material

risks.

•The Group Transformation Oversight Executive Committee

oversees the prioritisation, strategic alignment and

management of execution risk for all change portfolios and

initiatives.

Areas of special interest

(Unaudited)

During 2022, a number of areas were identified and considered as

part of our top and emerging risks because of the effect they may

have on the group. While considered under the themes captured

under top and emerging risks, in this section we have placed a

particular focus on the Covid-19 pandemic and macroeconomic

outlook.

Risks related to Covid-19

Covid-19 remains a risk to our customers and organisation.

However, the policy for broad lockdowns and public health

restrictions has been eased following successful vaccine rollouts,

and as societies have adapted. Countries continue to differ to a

degree in their approach, although China has recently reversed

many restrictions on activity and mobility.

In most countries, high vaccination rates and acquired population

immunity have reduced the public health risks and the need for

restrictions. In mainland China and Hong Kong, however,

adherence to more stringent public health restrictions had adverse

economic implications through much of 2022. Government

imposed lockdowns of major cities in mainland China and

restrictions on travel, adversely affected global tourism and supply

chains.

With the relaxation of restrictions in December 2022, the prospect

of a sustained recovery has emerged, given the opportunity for the

persistent disruptions to activity to abate and for travel and

tourism to resume. Such a recovery would have global

implications given the size of the Chinese economy. Recovery in

China raises the prospect of stronger global growth, although that

could also lead to renewed inflationary pressures as demand for

commodities and other goods rises. There are still short term risks,

however, as the recent surge in infections may dampen

confidence and activity, while there are also fears that the surge in

infections risks giving opportunity for the emergence of a new

variant of the virus.

We continue to monitor the situation closely, and given the

continuing uncertainties related to the post-pandemic landscape,

additional mitigating actions may be required.

Mainland China real estate sector

The policy measures issued in the latter part of 2022 have

increased liquidity and the supply of credit to the mainland China

real estate sector. Recovery in the underlying domestic residential

demand and improved customer sentiment will be necessary to

support the ongoing health of the sector. We continue to monitor

the situation closely, notably the risk of further idiosyncratic real

estate defaults and associated impact on market, investor and

consumer sentiment.

Risk


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

Our material banking risks

(Unaudited)

The material risk types associated with our banking and insurance manufacturing operations are described in the following tables:


Description of risks – banking operations

Risks	Arising from	Measurement, monitoring and management of risk
Credit risk
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract.	Credit risk arises principally from direct lending, trade finance and leasing business, but also from certain other products such as guarantees and derivatives.	Credit risk is: •measured as the amount that could be lost if a customer or counterparty fails to make repayments; •monitored using various internal risk management measures and within limits approved by individuals within a framework of delegated authorities; and •managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance for risk managers.
Treasury risk
Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural foreign exchange exposures and changes in market interest rates, together with pension and insurance risk.	Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions, or the external environment.	Treasury risk is: •measured through risk appetite and more granular limits, set to provide an early warning of increasing risk, minimum ratios of relevant regulatory metrics, and metrics to monitor the key risk drivers impacting treasury resources; •monitored and projected against appetites and by using operating plans based on strategic objectives together with stress and scenario testing; and •managed through control of resources in conjunction with risk profiles, strategic objectives and cash flows.
Market risk
Market risk is the risk of adverse financial impact on trading activities arising from changes in market parameters such as interest rates, foreign exchange rates, asset prices, volatilities, correlations and credit spreads.	Exposure to market risk is separated into two portfolios: trading portfolios and non-trading portfolios. Market risk for non-trading portfolios is discussed in the Treasury risk section on page 53. Market risk exposures arising from our insurance operations are discussed on page 67.	Market risk is: •measured using sensitivities, value at risk (‘VaR’) and stress testing, giving a detailed picture of potential gains and losses for a range of market movements and scenarios, as well as tail risks over specified time horizons; •monitored using VaR, stress testing and other measures; and •managed using risk limits approved by the Board for the group and the various global businesses.
Climate risk
Climate risk relates to the financial and non-financial impacts that may arise as a result of climate change and the move to a greener economy.	Climate risk is likely to materialise through: •physical risk, which arises from the increased frequency and severity of weather events; •transition risk, which arises from the process of moving to a low- carbon economy; and •greenwashing risk, which arises from the act of knowingly or unknowingly misleading stakeholders regarding our strategy relating to climate, the climate impact/benefit of a produce or service, or the climate commitments or performance of our customers.	Climate risk is: •measured using a variety of risk appetite metrics and Key Management Indicators, which assess the impact of climate risk across the risk taxonomy; •monitored using stress testing; and •managed through adherence to risk appetite thresholds and via specific policies.
Resilience risk
Resilience risk is the risk of sustained and significant business disruption, execution, delivery or physical security or safety events, causing the inability to provide critical services to our customers, affiliates and counterparties.	Resilience risk arises from failures or inadequacies in processes, people, systems or external events.	Resilience risk is: •measured through a range of metrics with defined maximum acceptable impact tolerances, and against our agreed risk appetite; •monitored through oversight of enterprise processes, risks, controls and strategic change programmes; and •managed by continual monitoring and thematic reviews.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	29



Description of risks – banking operations (continued)
(Audited)
Risks	Arising from	Measurement, monitoring and management of risk
Regulatory compliance risk
Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct and breaching related financial services regulatory standards.	Regulatory compliance risk arises from the failure to observe the relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business.	Regulatory compliance risk is: •measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our regulatory compliance teams; •monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and •managed by establishing and communicating appropriate policies and procedures, training employees in them, and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.
Financial crime risk
Financial crime risk is the risk that HSBC’s products and services will be exploited for criminal activity. This includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing.	Financial crime risk arises from day- to-day banking operations involving customers, third parties and employees.	Financial crime risk is: •measured by reference to risk appetite, identified metrics, incident assessments, regulatory feedback and the judgement and assessment of our financial crime risk teams; •monitored against the first line of defence risk and control assessments, the results of the monitoring and control assurance activities of the second line of defence functions, and the results of internal and external audits and regulatory inspections; and •managed by establishing and communicating appropriate policies and procedures, training employees in them and monitoring activity to help ensure their observance. Proactive risk control and/or remediation work is undertaken where required.
Model risk
Model risk is the risk of inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or that the model does not perform in line with expectations and predictions.	Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models.	Model risk is: •measured by reference to model performance tracking and the output of detailed technical reviews, with key metrics including model review statuses and findings; •monitored against model risk appetite statements, insight from the independent review function, feedback from internal and external audits, and regulatory reviews; and •managed by creating and communicating appropriate policies, procedures and guidance, training colleagues in their application, and supervising their adoption to ensure operational effectiveness.

Our insurance manufacturing subsidiaries are regulated separately

from our banking operations. Risks in the insurance entities are

managed using methodologies and processes that are subject to

oversight at group level. Our insurance operations are also subject

to many of the same risks as our banking operations, and these

are covered by the group's risk management processes. However,

there are specific risks inherent to the insurance operations as

noted below.


Description of risks – insurance manufacturing operations
Risks	Arising from	Measurement, monitoring and management of risk
Financial risk
For insurance entities, financial risk includes the risk of not being able to match liabilities arising under insurance contracts with appropriate investments and that the expected sharing of financial performance with policyholders under certain contracts is not possible.	Exposure to financial risk arises from: •market risk affecting the fair values of financial assets or their future cash flows; •credit risk; and •liquidity risk of entities being unable to make payments to policyholders as they fall due.	Financial risk is: •measured (i) for credit risk, in terms of economic capital and the amount that could be lost if a counterparty fails to make repayments; (ii) for market risk, in terms of economic capital, internal metrics and fluctuations in key financial variables; and (iii) for liquidity risk, in terms of internal metrics including stressed operational cash flow projections; •monitored through a framework of approved limits and delegated authorities; and •managed through a robust risk control framework, which outlines clear and consistent policies, principles and guidance. This includes using product design, asset liability matching and bonus rates.
Insurance risk
Insurance risk is the risk that, over time, the cost of insurance policies written, including claims and benefits, may exceed the total amount of premiums and investment income received.	The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, as well as lapse and surrender rates.	Insurance risk is: •measured in terms of life insurance liabilities and economic capital allocated to insurance underwriting risk; •monitored through a framework of approved limits and delegated authorities; and •managed through a robust risk control framework which outlines clear and consistent policies, principles and guidance. This includes using product design, underwriting, reinsurance and claims- handling procedures.

Risk


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

Credit risk

Overview

(Audited)

Credit risk is the risk of financial loss if a customer or counterparty

fails to meet an obligation under a contract. Credit risk arises

principally from direct lending, trade finance and leasing business,

but also from other products, such as guarantees and credit

derivatives.

Credit risk management

Key developments in 2022

(Unaudited)

We made need based changes to the policies and practices for the

management of credit risk in 2022 to manage evolving situations.

We continued to apply the requirements of HKFRS 9 'Financial

Instruments' within the Credit Risk sub-function. For certain retail

portfolios we enhanced the significant increase in credit risk

(‘SICR’) approach to capture relative movements in PD since

origination.

For our retail portfolios, we adopted the European Banking

Authority ‘Guidelines on the application of definition of default’

during 2022 and, for our wholesale portfolios, these guidelines

were adopted during 2021. Adoption of these guidelines did not

have a material impact on our portfolios and comparative

disclosures have not been restated.

We actively managed the risks related to macroeconomic

uncertainties, including inflation, fiscal and monetary policy, the

Russia-Ukraine war, broader geopolitical uncertainties, and the

continued risks resulting from the Covid-19 pandemic and

developments in the mainland China CRE sector.

Governance and structure

(Unaudited)

We have established credit risk management and related HKFRS 9

processes throughout the group. We continue to assess the

impact of economic developments in key markets on specific

customers, customer segments or portfolios. As credit conditions

change, we take mitigating action, including the revision of risk

appetites or limits and tenors, as appropriate. In addition, we

continue to evaluate the terms under which we provide credit

facilities within the context of individual customer requirements,

the quality of the relationship, local regulatory requirements,

market practices and our local market position.

Credit risk sub-function

(Audited)

Credit approval authorities are delegated by the Board to the

group Co-Chief Executives together with the authority to sub-

delegate them. The Credit Risk sub-function in Global Risk and

Compliance is responsible for the key policies and processes for

managing credit risk, which include formulating group credit

policies and risk rating frameworks, guiding the group’s appetite

for credit risk exposures, undertaking independent reviews and

objective assessment of credit risk, and monitoring performance

and management of portfolios.

The principal objectives of our credit risk management are:

•to maintain a strong culture of responsible lending, and robust

risk policies and control frameworks;

•to both partner and challenge our businesses in defining,

implementing and continually re-evaluating our risk appetite

under actual and scenario conditions; and

•to ensure there is independent, expert scrutiny of credit risks,

their causes and their mitigation.

Key risk management processes

HKFRS 9 'Financial Instruments' process

(Unaudited)

The HKFRS 9 process comprises three main areas: modelling and

data; implementation; and governance.

Modelling and data

(Unaudited)

We have established HKFRS 9 modelling and data processes in

various geographies, which are subject to internal model risk

governance including independent review of significant model

developments.

Implementation

(Unaudited)

A centralised impairment engine performs the expected credit

losses ('ECL') calculation using data, which is subject to a number

of validation checks and enhancements, from a variety of client,

finance and risk systems. Where possible, these checks and

processes are performed in a globally consistent and centralised

manner.

Governance

(Unaudited)

Management review forums are established in key sites and at

group level in order to review and approve the impairment results.

Management review forums have representatives from Credit Risk

and Finance. The key site and group approvals at the group

Impairment Committee are subsequently reported to the global

business impairment committee for final approval of the Group’s

ECL for the period.

Required members of the group Impairment Committee are the

group's Chief Risk Officer, Chief Credit Officer, Wealth and

Personal Banking Chief Risk Officer, as well as the group's Chief

Financial Officer and Financial Controller.

Concentration of exposure

(Audited)

Concentrations of credit risk arise when a number of

counterparties or exposures that have comparable economic

characteristics, or such counterparties, are engaged in similar

activities or operate in the same geographical areas or industry

sectors. As such, their collective ability to meet contractual

obligations is uniformly affected by changes in economic, political

or other conditions. We use a number of controls and measures to

minimise undue concentration of exposure in our portfolios across

industries, countries and global businesses. These include portfolio

and counterparty limits, approval and review controls, and stress

testing.

Credit quality of financial instruments

(Audited)

Our risk rating system facilitates the internal ratings-based

approach under the Basel framework adopted by the group to

support the calculation of our minimum credit regulatory capital

requirement. The five credit quality classifications encompass a

range of granular internal credit rating grades assigned to

wholesale and retail customers, and the external ratings attributed

by external agencies to debt securities.

For debt securities and certain other financial instruments, external

ratings have been aligned to the five quality classifications based

upon the mapping of related customer risk rating (‘CRR’) to

external credit rating.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	31

Wholesale lending

(Unaudited)

A CRR 10-grade scale summarises a more granular underlying 23-

grade scale of obligor probability of default (‘PD’). All corporate

customers are rated using the 10 or 23-grade scale, depending on

the degree of sophistication of the Basel approach adopted for the

exposure.

Each CRR band is associated with an external rating grade by

reference to long-run default rates for that grade, represented by

the average of issuer-weighted historical default rates. This

mapping between internal and external ratings is indicative and

may vary over time.

Retail lending

(Unaudited)

Retail lending credit quality is based on a 12-month point-in-time

probability-weighted PD.


Credit quality classification
(Unaudited)
	Sovereign debt securities and bills	Other debt securities and bills	Wholesale lending and derivatives		Retail lending
	External credit rating	External credit rating	Internal credit rating	12-month Basel probability of default %	Internal credit rating	12 month probability- weighted PD %
Quality classification1, 2
Strong	BBB and above	A- and above	CRR 1 to CRR 2	0 – 0.169	Band 1 and 2	0.000 – 0.500
Good	BBB- to BB	BBB+ to BBB-	CRR 3	0.170 – 0.740	Band 3	0.501 – 1.500
Satisfactory	BB- to B and unrated	BB+ to B and unrated	CRR 4 to CRR 5	0.741 – 4.914	Band 4 and 5	1.501 – 20.000
Sub-standard	B- to C	B- to C	CRR 6 to CRR 8	4.915 – 99.999	Band 6	20.001 – 99.999
Credit impaired	Default	Default	CRR 9 to CRR 10	100	Band 7	100

1Customer risk rating (‘CRR’).

212-month Point-in-time ('PIT') Probability of Default ('PD').

Quality classification definitions

‘Strong’ exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of

expected loss.

‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk.

‘Satisfactory’ exposures require closer monitoring and demonstrate an average-to-fair capacity to meet financial commitments, with moderate default risk.

‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern.

‘Credit-impaired’ exposures have been assessed as described in Note 1.2(i) on the Consolidated Financial Statements.

Forborne loans and forbearance

(Audited)

Forbearance measures consist of concessions towards an obligor

that is experiencing or is about to experience difficulties in

meeting its financial commitments.

We continue to class loans as forborne when we modify the

contractual payment terms due to having significant concerns

about the borrowers’ ability to meet contractual payments when

they were due.

In 2022, we expanded our definition of forborne to capture non-

payment-related concessions, such as covenant waivers. For our

wholesale portfolio, we began identifying non-payment-related

concessions in 2021 when our internal policies were changed. For

our retail portfolios, we began identifying them during 2022.

For details of our policy on derecognised renegotiated loans, see

Note 1.2(i) on the financial statements.

Credit quality of forborne loans

(Unaudited)

For wholesale lending, where payment-related forbearance

measures result in a diminished financial obligation, or if there are

other indicators of impairment, the loan will be classified as credit

impaired if it is not already so classified. All facilities with a

customer, including loans that have not been modified, are

considered credit impaired following the identification of a

payment-related forborne loan. For retail lending, where a material

concession has been granted, the loan will be classified as credit

impaired. In isolation, non-payment forbearance measures may

not result in the loan being classified as credit impaired unless

combined with other indicators of credit impairment. These are

classed as performing forborne loans for both wholesale and retail

lending.

Wholesale and retail lending forborne loans are classified as

credit-impaired until there is sufficient evidence to demonstrate a

significant reduction in the risk of non-payment of future cash

flows, observed over a minimum one-year period, and there are no

other indicators of impairment. Any forborne loans not considered

credit impaired will remain forborne for a minimum of two years

from the date that credit impairment no longer applies. For

wholesale and retail lending, any forbearance measures granted

on a loan already classed as forborne results in the customer being

classed as credit impaired.

Forborne loans and recognition of expected credit losses

(Audited)

Forborne loans expected credit loss assessments reflect the higher

rates of losses typically experienced with these types of loans

such that they are in stage 2 and stage 3. The higher rates are

more pronounced in unsecured retail lending requiring further

segmentation. For wholesale lending, forborne loans are typically

assessed individually. Credit risk ratings are intrinsic to the

impairment assessments. The individual impairment assessment

takes into account the higher risk of the future non-payment

inherent in forborne loans.

Impairment assessment

(Audited)

For details of our impairment policies on loans and advances and

financial investments, see Note 1.2(i) on the financial statements.

Write-off of loans and advances

(Audited)

For details of our policy on the write-off of loans and advances,

see Note 1.2(i) on the financial statements.

Unsecured personal facilities, including credit cards, are generally

written off at between 150 and 210 days past due. The standard

period runs until the end of the month in which the account

becomes 180 days contractually delinquent. However, in

exceptional circumstances to achieve a fair customer outcome and

Risk


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

in line with regulatory expectations, they may be extended further.

For secured facilities, write-off should occur upon repossession of

collateral, receipt of proceeds via settlement, or determination that

recovery of the collateral will not be pursued.

Any secured assets maintained on the balance sheet beyond 60

months of consecutive delinquency-driven default require

additional monitoring and review to assess the prospect of

recovery.

There are exceptions in a few countries and territories where local

regulation or legislation constrains earlier write-off, or where the

realisation of collateral for secured real estate lending takes more

time. Write-off, either partially or in full, may be earlier when there

is no reasonable expectation of further recovery, for example, in

the event of a bankruptcy or equivalent legal proceedings.

Collection procedures may continue after write-off.

Summary of credit risk

The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in

HKFRS 9 are applied and the associated allowance for expected credit losses ('ECL').


Summary of financial instruments to which the impairment requirements in HKFRS 9 are applied
(Audited)
	2022		2021
	Gross carrying/ nominal amount	Allowance for ECL1	Gross carrying/ nominal amount	Allowance for ECL1
At 31 Dec	HK$m	HK$m	HK$m	HK$m
Loans and advances to customers at amortised cost	3,745,113	(39,964)	3,872,956	(32,017)
Loans and advances to banks	519,068	(44)	432,286	(39)
Other financial assets measured at amortised cost	2,768,171	(681)	2,114,301	(639)
– cash and balances at central banks	232,748	(8)	276,857	—
– items in the course of collection from other banks	28,557	—	21,632	—
– Hong Kong Government certificates of indebtedness	341,354	—	332,044	—
– reverse repurchase agreements – non-trading	927,976	—	803,775	—
– financial investments	975,174	(465)	502,997	(433)
– prepayments, accrued income and other assets2	262,362	(208)	176,996	(206)
Amounts due from Group companies	129,357	—	99,604	—
Total gross carrying amount on-balance sheet	7,161,709	(40,689)	6,519,147	(32,695)
Loans and other credit related commitments	1,892,401	(864)	1,826,335	(580)
Financial guarantee	35,646	(63)	34,302	(44)
Total nominal amount off-balance sheet3	1,928,047	(927)	1,860,637	(624)
	9,089,756	(41,616)	8,379,784	(33,319)

	Fair value	Allowance for ECL	Fair value	Allowance for ECL
	HK$m	HK$m	HK$m	HK$m
At 31 Dec
Debt instruments measured at Fair Value through Other Comprehensive Income (‘FVOCI’)4	1,239,527	(344)	1,541,909	(121)

1The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial

asset, in which case the ECL is recognised as a provision.

2Includes only those financial instruments that are subject to the impairment requirements of HKFRS 9. 'Prepayments, accrued income and other

assets', as presented within the consolidated balance sheet on page 81, which includes both financial and non-financial assets.

3Represents the maximum amount at risk should the contracts be fully drawn upon and client defaults.

4Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is

recognised in 'Change in expected credit losses and other credit impairment charges' in the consolidated income statement.

The following table provides an overview of the group’s credit risk by stage and industry, and the associated ECL coverage. The financial

assets recorded in each stage have the following characteristics:

•Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL

is recognised.

•Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime

ECL is recognised.

•Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise

credit impaired on which a lifetime ECL is recognised.

•POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a

lifetime ECL is recognised.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	33


Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector
(Audited)
	Gross carrying/nominal amount1					Allowance for ECL					ECL coverage %
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	%	%	%	%	%
Loans and advances to customers	3,219,645	462,083	62,763	622	3,745,113	(2,755)	(11,200)	(25,818)	(191)	(39,964)	0.1	2.4	41.1	30.7	1.1
– personal	1,448,675	68,001	8,708	—	1,525,384	(1,080)	(2,830)	(1,459)	—	(5,369)	0.1	4.2	16.8	—	0.4
– corporate2	1,492,792	370,199	53,141	620	1,916,752	(1,414)	(8,045)	(24,351)	(189)	(33,999)	0.1	2.2	45.8	30.5	1.8
– financial institutions3	278,178	23,883	914	2	302,977	(261)	(325)	(8)	(2)	(596)	0.1	1.4	0.9	100.0	0.2
Loans and advances to banks	516,934	2,134	—	—	519,068	(39)	(5)	—	—	(44)	0.0	0.2	—	—	0.0
Other financial assets	2,739,060	28,646	464	1	2,768,171	(391)	(231)	(59)	—	(681)	0.0	0.8	12.7	—	0.0
Loan and other credit- related commitments	1,821,355	65,288	5,758	—	1,892,401	(427)	(397)	(40)	—	(864)	0.0	0.6	0.7	—	0.0
– personal	1,321,908	22,721	4,940	—	1,349,569	(18)	(1)	—	—	(19)	0.0	0.0	—	—	0.0
– corporate2	383,717	39,191	818	—	423,726	(394)	(389)	(40)	—	(823)	0.1	1.0	4.9	—	0.2
– financial institutions3	115,730	3,376	—	—	119,106	(15)	(7)	—	—	(22)	0.0	0.2	—	—	0.0
Financial guarantee	30,738	4,840	68	—	35,646	(18)	(17)	(28)	—	(63)	0.1	0.4	41.2	—	0.2
– personal	4,176	6	1	—	4,183	—	—	—	—	—	—	—	—	—	—
– corporate2	24,093	4,483	67	—	28,643	(18)	(17)	(28)	—	(63)	0.1	0.4	41.8	—	0.2
– financial institutions3	2,469	351	—	—	2,820	—	—	—	—	—	—	—	—	—	—
At 31 Dec 2022	8,327,732	562,991	69,053	623	8,960,399	(3,630)	(11,850)	(25,945)	(191)	(41,616)	0.0	2.1	37.6	30.7	0.5

The above table does not include balances due from Group companies.

1Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

2Includes corporate and commercial.

3Includes non-bank financial institutions.

Unless identified at an earlier stage, all financial assets are

deemed to have suffered a significant increase in credit risk

when they are 30 days past due ('DPD') and are transferred

from stage 1 to stage 2. The following disclosure presents the

ageing of stage 2 financial assets by those less than 30 and

greater than 30 days past due and therefore presents those

amounts classified as stage 2 due to ageing (30 DPD) and those

identified at an earlier stage (less than 30 DPD).


Stage 2 days past due analysis for loans and advances to customers
(Audited)
	Gross carrying amount				Allowance for ECL				ECL coverage %
		of which:	of which:	of which:		of which:	of which:	of which:		of which:	of which:	of which:
	Stage 2	Up-to- date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to- date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to- date	1 to 29 DPD	30 and > DPD
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	%	%	%	%
At 31 Dec 2022
Loans and advances to customers at amortised cost	462,083	450,189	8,816	3,078	(11,200)	(10,645)	(198)	(357)	2.4	2.4	2.2	11.6
– personal	68,001	58,182	7,202	2,617	(2,830)	(2,308)	(172)	(350)	4.2	4.0	2.4	13.4
– corporate and commercial	370,199	368,249	1,491	459	(8,045)	(8,012)	(26)	(7)	2.2	2.2	1.7	1.5
– non-bank financial institutions	23,883	23,758	123	2	(325)	(325)	—	—	1.4	1.4	—	—

1Days past due ('DPD').

2The DPD amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.

Risk


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


Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector (continued)
(Audited)
	Gross carrying/nominal amount1					Allowance for ECL					ECL coverage %
	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total	Stage 1	Stage 2	Stage 3	POCI	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	%	%	%	%	%
Loans and advances to customers	3,349,434	480,632	41,332	1,558	3,872,956	(2,603)	(9,426)	(19,654)	(334)	(32,017)	0.1	2.0	47.6	21.4	0.8
– personal	1,461,358	60,795	10,158	—	1,532,311	(1,236)	(2,965)	(1,765)	—	(5,966)	0.1	4.9	17.4	—	0.4
– corporate2	1,626,514	398,273	31,068	1,556	2,057,411	(1,131)	(6,384)	(17,859)	(332)	(25,706)	0.1	1.6	57.5	21.3	1.2
– financial institutions3	261,562	21,564	106	2	283,234	(236)	(77)	(30)	(2)	(345)	0.1	0.4	28.3	100.0	0.1
Loans and advances to banks	431,079	1,207	—	—	432,286	(36)	(3)	—	—	(39)	0.0	0.2	—	—	0.0
Other financial assets	2,092,847	21,164	289	1	2,114,301	(482)	(140)	(17)	—	(639)	0.0	0.7	5.9	—	0.0
Loan and other credit- related commitments	1,782,353	43,711	271	—	1,826,335	(260)	(295)	(25)	—	(580)	0.0	0.7	9.2	—	0.0
– personal	1,245,694	6,976	154	—	1,252,824	—	—	—	—	—	—	—	—	—	—
– corporate2	417,349	30,978	117	—	448,444	(247)	(288)	(25)	—	(560)	0.1	0.9	21.4	—	0.1
– financial institutions3	119,310	5,757	—	—	125,067	(13)	(7)	—	—	(20)	0.0	0.1	—	—	0.0
Financial guarantee	30,214	4,048	40	—	34,302	(14)	(14)	(16)	—	(44)	0.0	0.3	40.0	—	0.1
– personal	4,000	—	1	—	4,001	(1)	—	(1)	—	(2)	0.0	—	100.0	—	0.0
– corporate2	22,995	4,011	39	—	27,045	(13)	(14)	(15)	—	(42)	0.1	0.3	38.5	—	0.2
– financial institutions3	3,219	37	—	—	3,256	—	—	—	—	—	—	—	—	—	—
At 31 Dec 2021	7,685,927	550,762	41,932	1,559	8,280,180	(3,395)	(9,878)	(19,712)	(334)	(33,319)	0.0	1.8	47.0	21.4	0.4

The above table does not include balances due from Group companies.

1Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

2Includes corporate and commercial.

3Includes non-bank financial institutions.


Stage 2 days past due analysis for loans and advances to customers (continued)
(Audited)
	Gross carrying amount				Allowance for ECL				ECL coverage %
		of which:	of which:	of which:		of which:	of which:	of which:		of which:	of which:	of which:
	Stage 2	Up-to- date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to- date	1 to 29 DPD1,2	30 and > DPD1,2	Stage 2	Up-to- date	1 to 29 DPD	30 and > DPD
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	%	%	%	%
At 31 Dec 2021
Loans and advances to customers at amortised cost	480,632	471,298	6,788	2,546	(9,426)	(8,862)	(226)	(338)	2.0	1.9	3.3	13.3
– personal	60,795	53,316	5,048	2,431	(2,965)	(2,460)	(173)	(332)	4.9	4.6	3.4	13.7
– corporate and commercial	398,273	396,420	1,738	115	(6,384)	(6,325)	(53)	(6)	1.6	1.6	3.0	5.2
– non-bank financial institutions	21,564	21,562	2	—	(77)	(77)	—	—	0.4	0.4	—	—

1Days past due ('DPD').

2The DPD amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	35

Credit exposure

Maximum exposure to credit risk

(Audited)

This section provides information on the maximum exposure to credit risk associated with balance sheet items as well as loan and other

credit-related commitments.

‘Maximum exposure to credit risk’ table

The following table presents our maximum exposure to credit risk before taking account of any collateral held or other credit enhancements (unless such

enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net

exposure to credit risk, and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the

maximum exposure to credit risk equals their carrying amount and is net of allowance for ECL. For financial guarantees and other guarantees granted, it is

the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments, it is

generally the full amount of the committed facilities.

Other credit risk mitigants

There are arrangements in place that reduce our maximum

exposure to credit risk. These include a charge over collateral on

borrowers’ specific assets, such as residential properties,

collateral held in the form of financial instruments that are not

held on the balance sheet and short positions in securities. In

addition, for financial assets held as part of linked insurance/

investment contracts the risk is predominantly borne by the

policyholder.

Collateral available to mitigate credit risk is disclosed in the

Collateral section on pages 49-52.


Maximum exposure to credit risk before collateral held or other credit enhancements
(Audited)
	2022	2021
	HK$m	HK$m
Cash and balances at central banks	232,739	276,857
Items in the course of collection from other banks	28,557	21,632
Hong Kong Government certificates of indebtedness	341,354	332,044
Trading assets	435,358	478,030
Derivatives	502,771	365,167
Financial assets designated at fair value	39,495	33,274
Reverse repurchase agreements – non-trading	927,976	803,775
Loans and advances to banks	519,024	432,247
Loans and advances to customers	3,705,149	3,840,939
Financial investments	2,214,236	2,044,473
Amounts due from Group companies	140,546	112,719
Other assets	267,972	180,757
Total on-balance sheet exposure to credit risk	9,355,177	8,921,914
Total off-balance sheet	3,587,491	3,506,253
Financial guarantees and other similar contracts	396,491	377,487
Loan and other credit-related exposure	3,191,000	3,128,766
At 31 Dec	12,942,668	12,428,167

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

Credit deterioration of financial instruments

(Audited)

A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2, stage 3 (credit impaired) and POCI

financial instruments can be found in Note 1.2(i) on the Consolidated Financial Statements.

Risk


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

Measurement uncertainty and sensitivity analysis

of ECL estimates

(Audited)

Amid a deterioration in the economic and geopolitical

environment, management judgements and estimates continued

to be subject to a high degree of uncertainty in relation to

assessing economic scenarios for impairment allowances in 2022.

Inflation, economic contraction and high interest rates combined

with an unstable geopolitical environment and the effects of global

supply chain disruption contributed to elevated levels of

uncertainty during the year.

At 31 December 2022, as a result of this uncertainty, additional

stage 1 and 2 allowances have been recognised; while

management judgement and estimates continue to reflect a

degree of caution both in the selection of economic scenarios and

their weightings, and in the use of management judgemental

adjustments, described in more detail below.

The recognition and measurement of ECL involve the use of

significant judgement and estimation. We form multiple economic

scenarios based on economic forecasts, apply these assumptions

to credit risk models to estimate future credit losses, and

probability-weight the results to determine an unbiased ECL

estimate. Management judgemental adjustments are used to

address late-breaking events, data and model limitations, model

deficiencies and expert credit judgements.

Methodology

Four global economic scenarios are used to capture the current

economic environment and to articulate management’s view of

the range of potential outcomes. Scenarios produced to calculate

ECL are aligned to HSBC’s top and emerging risks.

Three of the scenarios are drawn from consensus forecasts and

distributional estimates. The Central scenario is deemed the ‘most

likely’ scenario, and usually attracts the largest probability

weighting, while the outer scenarios represent the tails of the

distribution, which are less likely to occur. The Central scenario is

created using the average of a panel of external forecasters.

Consensus Upside and Downside scenarios are created with

reference to distributions for select markets that capture

forecasters’ views of the entire range of outcomes. In the later

years of the scenarios, projections revert to long-term consensus

trend expectations. In the consensus outer scenarios, reversion to

trend expectations is done mechanically with reference to

historically observed quarterly changes in the values of

macroeconomic variables.

The fourth scenario, Downside 2, is designed to represent

management’s view of severe downside risks. It is a globally

consistent narrative-driven scenario that explores more extreme

economic outcomes than those captured by the consensus

scenarios. In this scenario, variables do not, by design, revert to

long-term trend expectations. They may instead explore alternative

states of equilibrium, where economic activity moves permanently

away from past trends.

The consensus Downside and the consensus Upside scenarios are

each constructed to be consistent with a 10% probability. The

Downside 2 is constructed with a 5% probability. The Central

scenario is assigned the remaining 75%. This weighting scheme is

deemed appropriate for the unbiased estimation of ECL in most

circumstances. However, management may depart from this

probability-based scenario weighting approach when the

economic outlook is determined to be particularly uncertain and

risks are elevated.

In light of ongoing risks, management deviated from this

probability weighting in all markets in the fourth quarter of 2022.

Description of economic scenarios

The economic assumptions presented in this section have been

formed by HSBC with reference to external forecasts and

estimates, specifically for the purpose of calculating ECL.

Global economic growth is slowing and economic forecasts for

our main markets deteriorated in the fourth quarter. In North

America and Europe, high inflation and rising interest rates are

reducing real household incomes and raising business costs,

dampening consumption and investment and lowering growth

expectations. The effects of higher interest rate expectations and

lower growth are also evident in asset price expectations and

house prices forecasts, in particular, have been lowered

significantly.

In Asia, economic forecasts have also been lowered, with

expectations for Hong Kong and mainland China trimmed

following weaker than expected third quarter GDP growth and

mainland China’s adherence to stringent pandemic-related public

health policy response. That policy saw an abrupt reversal during

December, but amid a very high degree of uncertainty, to both the

upside and downside, forecasts are slow to adjust. The increased

uncertainty caused by the lifting of restrictions has been reflected

in management’s assessment of scenario probabilities.

Economic forecasts remain subject to a high degree of

uncertainty. In the fourth quarter, risks to the economic outlook

included the persistence of inflation and the consequences that

has for monetary policy. Rapid changes to public policy also

increased forecast uncertainty. In Asia, the removal of Chinese

public health restrictions is a key source of potential upside risk,

but with significant near term uncertainty relating to the surge of

infection. This policy change could also have global implications.

Geopolitical risks also remain significant and include the possibility

of a prolonged and escalating Russia-Ukraine war, and continued

differences between the US and other countries with China over a

range of economic and strategic issues.

The scenarios used to calculate ECL in the Annual Report and

Accounts 2022 are described below.

The consensus Central scenario

HSBC’s Central scenario reflects a low growth and higher inflation

environment across many of our key markets. The scenario

features an initial period of below-trend GDP growth in most of

our main markets as higher inflation and tighter monetary policy

causes a squeeze on business margins and households’ real

disposable income. Growth returns to its long term expected trend

in later years as central banks bring inflation back to target.

There are two exceptions: in Hong Kong and mainland China, GDP

growth is expected to be stronger in 2023 relative to 2022

following several quarters of negative GDP growth and the

suspension of Covid-19 restrictions.

Our Central scenario assumes that inflation peaked in most of our

key markets at the end of 2022 but remains high through 2023

before moderating as energy prices stabilise and supply chain

disruptions abate. Central banks are expected to keep raising

interest rates until midway through 2023. Inflation is forecast to

revert to target in most markets, by early 2024.

Global GDP is expected to grow by 1.6% in 2023 in the Central

scenario and the average rate of global GDP growth is 2.5% over

the five-year forecast period. This is below the average growth

rate over the five-year period prior to the onset of the pandemic.

The key features of our Central scenario are:

•Economic activity in European and North American markets

continues to weaken. Most major economies are forecast to

grow in 2023, but at very low rates. Hong Kong and mainland

China are expected to see a recovery in activity from 2022 as

Covid19 restrictions are lifted.

•In most markets, unemployment rises moderately from historic

lows as economic activity slows. Labour markets remain fairly

tight across our key markets.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	37

•Inflation is expected to remain elevated across many of our key

markets driven by energy and food prices. Inflation is

subsequently expected to converge back towards central banks

target rate over the next two years of the forecast.

•Policy interest rates in key markets will continue to rise in the

near term but at a slower pace. Interest rates will stay elevated

but start to ease as inflation returns to target.

•The West Texas Intermediate oil price is forecast to average

$72 per barrel over the projection period.

The Central scenario was first created with forecasts available in

November, and reviewed continuously until late December.

Probability weights assigned to the Central scenario vary from

55% to 70% and reflect relative differences in risk and uncertainty

across markets.

The following table describes key macroeconomic variables and

the probabilities assigned in the consensus Central scenario.


Central scenario 2023-2027
	Hong Kong	Mainland China
	%	%
GDP growth rate (annual average rate)
2023	2.7	4.6
2024	3.0	4.8
2025	2.7	4.7
5 Year average	2.7	4.6
Unemployment rate (annual average rate)
2023	3.7	5.2
2024	3.5	5.1
2025	3.4	5.0
5 Year average	3.4	5.0
House price growth (annual average rate)
2023	(10.0)	(0.1)
2024	(3.0)	2.9
2025	1.7	3.5
5 Year average	(1.0)	2.9
Inflation rate (annual average rate)
2023	2.1	2.4
2024	2.1	2.2
2025	2.0	2.2
5 Year average	2.1	2.2
Probability	55.0	55.0

The consensus Upside scenario

Compared with the Central scenario, the consensus Upside

scenario features stronger economic activity in the near term,

before converging to long-run trend expectations. It also

incorporates a faster pace of disinflation than incorporated in the

Central scenario.

The scenario is consistent with a number of key upside risk

themes. These include faster resolution of supply chain issues; a

rapid conclusion to the Russia-Ukraine war; de-escalation of

tensions between the US and China; and relaxation of Covid-19

policies in Asia.

The following table describes key macroeconomic variables and

the probabilities assigned in the consensus Upside scenario.


Consensus Upside scenario ‘best outcome’
	Hong Kong	Mainland China
	%	%
GDP growth rate (annual average rate)	9.0 (3Q23)	10.3 (2Q23)
Unemployment rate (annual average rate)	3.0 (4Q23)	4.7 (3Q24)
House price growth (annual average rate)	1.4 (4Q24)	6.9 (4Q24)
Inflation rate (annual average rate)	(0.1) (4Q23)	0.8 (4Q23)
Probability	20.0	20.0

Note: Extreme point in the consensus Upside is ‘best outcome’ in the

scenario, for example the highest GDP growth and the lowest

unemployment rate etc, in first two years of the scenario. For inflation,

lower inflation is interpreted as the ‘best’ outcome.

Downside scenarios

Downside scenarios explore the intensification and crystallisation

of a number of key economic and financial risks.

High inflation and a stronger monetary policy response have

become key concerns for global growth. In the downside

scenarios, supply chain disruptions intensify, exacerbated by an

escalation in the spread of Covid-19 and rising geopolitical

tensions drive inflation higher.

There also remains a risk that energy and food prices rise further

due to the Russia-Ukraine war, exacerbating global inflation and

further pressuring household budgets and firm costs.

The risk of inflation expectations becoming detached from Central

bank targets also remains a risk. A wage-price spiral triggered by

higher inflation and pandemic related labour supply shortages

across could put sustained upward pressure on wages,

aggravating cost pressures and the squeeze on household real

incomes and corporate margins. In turn, it raises the risk of a more

forceful policy response from central banks, a steeper trajectory

for interest rates and ultimately, deep economic recession.

The risks relating to Covid-19 are centred on the emergence of a

new variant with greater vaccine resistance that necessitates the

imposition of stringent public health policies. In Asia, despite the

re-opening of China in December, management of Covid-19

remains a key source of uncertainty, with the rapid spread of the

virus posing a heightened risk of a new variant emerging.

The geopolitical environment also present risks, including:

•a prolonged Russia-Ukraine war with escalation beyond

Ukraine’s borders; and

•continued differences between the US and other countries with

China, which could affect sentiment and restrict global

economic activity.

The consensus Downside scenario

In the consensus Downside scenario, economic activity is

considerably weaker compared with the Central scenario. In this

scenario, GDP growth weakens below the Central scenario,

unemployment rates rise and asset prices fall. The scenario

features a temporary supply side shock that keeps inflation higher

than the baseline, before the effects of weaker demand begin to

dominate leading to a fall in commodity prices and to lower

inflation.

The following table describes key macroeconomic variables and

the probabilities assigned in the consensus Downside scenario.


Consensus Downside scenario ‘worst outcome’
	Hong Kong	Mainland China
	%	%
GDP growth rate (annual average rate)	(2.2) (4Q23)	(1.2) (4Q23)
Unemployment rate (annual average rate)	5.2 (3Q24)	5.9 (4Q23)
House price growth (annual average rate)	(14.9) (2Q23)	(1.9) (1Q23)
Inflation rate (annual average rate) (min)	0.3 (4Q24)	0.7 (4Q24)
Inflation rate (annual average rate) (max)	3.7 (4Q23)	4.0 (4Q23)
Probability	20.0	20.0

Note: Extreme point in the consensus Downside is ‘worst outcome‘ in

the scenario, for example lowest GDP growth and the highest

unemployment rate, in the first two years of the scenario. Due to the

nature of the shock to inflation in the downside scenarios, both the

lowest and the highest point is shown in the tables.

Downside 2 scenario

The Downside 2 scenario features a deep global recession and

reflects managements view of the tail of the economic

distribution. It incorporates the crystallisation of a number of risks

simultaneously, including further escalation of the Russia-Ukraine

war, worsening of supply chain disruptions and the emergence of

a vaccine-resistant Covid-19 variant that necessitates a stringent

public health policy response globally.

This scenario features an initial supply-side shock that pushes up

inflation and interest rates higher. This impulse is expected to

Risk


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

prove short lived as a large downside demand pressures causes

commodity prices to correct sharply and global price inflation to

fall as a severe and prolonged recession takes hold.

The following table describes key macroeconomic variables and

the probabilities assigned in the Downside 2 scenario.


Downside 2 scenario ‘worst outcome’
	Hong Kong	Mainland China
	%	%
GDP growth rate (annual average rate)	(9.2) (4Q23)	(6.9) (4Q23)
Unemployment rate (annual average rate)	5.8 (1Q24)	6.8 (4Q24)
House price growth (annual average rate)	(18.2) (1Q24)	(18.5) (4Q23)
Inflation rate (annual average rate) (min)	0.6 (4Q24)	1.0 (4Q24)
Inflation rate (annual average rate) (max)	4.3 (4Q23)	4.6 (4Q23)
Probability	5.0	5.0

Note: Extreme point in the Downside 2 is ‘worst outcome‘ in the

scenario, for example lowest GDP growth and the highest

unemployment rate, in the first two years of the scenario. Due to the

nature of the shock to inflation in the downside scenarios, both the

lowest and the highest point is shown in the tables.

Scenario weighting

In reviewing the economic conjuncture, the level of risk and

uncertainty, management has considered both global and country-

specific factors. This has led management to assign scenario

probabilities that are tailored to its view of uncertainty in individual

markets.

Key consideration in the fourth quarter around uncertainty

attached to the Central scenario projections focused on:

•the progression of the Covid-19 pandemic in Asian countries

and announcement of removal of Covid-19 measures and travel

restrictions in mainland China and Hong Kong;

•further tightening of monetary policy and impact on borrowing

costs in interest rate sensitive sectors, such as housing;

•the risks to gas supply security in Europe and subsequent

impact on inflation and commodity prices and growth; and

•The ongoing risks to global supply chains.

In mainland China and Hong Kong, the announcement of

relaxation of Covid-19 measures and travel restrictions has led to

increased uncertainty around the Central scenario projection. It

was managements view that easing of policy could increase risks

to the upside in the form of increased spending and travel.

However, the continuing risks to the downside were also

acknowledged given the incipient surge in Covid-19 infections and

the potential for a new variant. This led management to assign a

combined weighting of 75% to the consensus Upside and Central

scenarios in both markets.

Critical accounting estimates and judgements

The calculation of ECL under HKFRS 9 involves significant

judgements, assumptions and estimates. The level of estimation

uncertainty and judgement has remained elevated since 31

December 2021, including judgements relating to:

•the selection and weighting of economic scenarios, given

rapidly changing economic conditions and a wide distribution

of economic forecasts. There is judgement in making

assumptions about the effects of inflation and interest, global

growth, supply chain disruption; and

•estimating the economic effects of those scenarios on ECL,

particularly as the historical relationship between

macroeconomic variables and defaults might not reflect the

dynamics of current macroeconomic conditions.

How economic scenarios are reflected in of ECL

calculations

Models are used to reflect economic scenarios on ECL estimates.

As described above, modelled assumptions and linkages based on

historical information could not alone produce relevant information

under the conditions experienced in 2022, and management

judgemental adjustments were still required to support modelled

outcomes.

We have developed globally consistent methodologies for the

application of forward economic guidance into the calculation of

ECL for wholesale and retail credit risk. These standard

approaches are described below, followed by the management

judgemental adjustments approach.

For our wholesale portfolios, a global methodology is used for the

estimation of the term structure of probability of default (‘PD’) and

loss given default (‘LGD’). For PDs, we consider the correlation of

forward economic guidance to default rates for a particular

industry in a country. For LGD calculations we consider the

correlation of forward economic guidance to collateral values and

realisation rates for a particular country and industry. PDs and

LGDs are estimated for the entire term structure of each

instrument.

For impaired loans, LGD estimates take into account independent

recovery valuations provided by external consultants where

available, or internal forecasts corresponding to anticipated

economic conditions and individual company conditions. In

estimating the ECL on impaired loans that are individually

considered not to be significant, we incorporate forward economic

guidance proportionate to the probability-weighted outcome and

the Central scenario outcome for non-stage 3 populations.

For our retail portfolios, the impact of economic scenarios on PD is

modelled at a portfolio level. Historical relationships between

observed default rates and macroeconomic variables are

integrated into HKFRS 9 ECL estimates by using economic

response models. The impact of these scenarios on PD is modelled

over a period equal to the remaining maturity of the underlying

asset or assets. The impact on LGD is modelled for mortgage

portfolios by forecasting future loan-to-value (‘LTV’) profiles for the

remaining maturity of the asset by using national level forecasts of

the house price index and applying the corresponding LGD

expectation.

These models are based largely on historical observations and

correlations with default rates. Management judgemental

adjustments are described below.

Management judgemental adjustments

In the context of HKFRS 9, management judgemental adjustments

are short-term increases or decreases to the ECL at either a

customer, segment or portfolio level to account for late-breaking

events, model and data limitations and deficiencies, and expert

credit judgement applied following management review and

challenge.

This includes refining model inputs and outputs and using

adjustments to ECL based on management judgement and higher-

level quantitative analysis for impacts that are difficult to model.

The effect of management judgmental adjustments are considered

for balances and ECL when determining whether or not a

significant increase in credit risk has occurred and are attributed or

allocated to a stage as appropriate. This is in accordance with the

internal adjustments framework.

Management judgmental adjustments are reviewed under the

governance process for HKFRS 9 (as detailed in the section 'Credit

risk management' on page 31). Review and challenge focuses on

the rationale and quantum of the adjustments with further review

by the second line of defence where significant. For some

management judgemental adjustments, internal frameworks

establish the conditions under which these adjustments should no

longer be required and as such are considered as part of the

governance process. This internal governance process allows

management judgemental adjustments to be reviewed regularly

and, where possible, to reduce the reliance on these through

model recalibration or redevelopment, as appropriate.

The drivers of management judgemental adjustments continue to

evolve with the economic environment, and as new risks emerge.

At 31 December 2022, management judgement adjustments

reduced by HK$1bn compared with 31 December 2021.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	39

Adjustments related to Covid-19 and for sector specific risks were

reduced as scenarios and modelled outcomes better reflected

management expectations at 31 December 2022.

Management judgemental adjustments made in estimating the

scenario-weighted reported ECL at 31 December 2022 are set out

in the following table.


Management judgemental adjustments to ECL as at 31 December 20221
	Retail	Wholesale	Total
	HK$bn	HK$bn	HK$bn
Banks, sovereigns government entities and low-risk counterparties2	(0.2)	0.2	—
Corporate lending adjustments		3.1	3.1
Retail lending Inflation-related adjustments	0.1		0.1
Other macroeconomic-related adjustments	0.4		0.4
Pandemic-related economic recovery adjustments	—		—
Other retail lending adjustments	0.3		0.3
Total	0.6	3.3	3.9


Management judgemental adjustments to ECL as at 31 December 20211

	Retail	Wholesale	Total
	HK$bn	HK$bn	HK$bn
Banks, sovereigns, government entities and low-risk counterparties)2	0.1	(0.2)	(0.1)
Corporate lending adjustments		4.1	4.1
Retail lending inflation-related adjustments	—		—
Other macroeconomic-related adjustments3	(0.4)		(0.4)
Pandemic-related economic recovery adjustments	0.6		0.6
Other retail lending adjustments3	0.7		0.7
Total	1.0	3.9	4.9

1Management judgemental adjustments presented in the table reflect

increases in ECL.

2Low-risk counterparties for Retail is comprised of adjustments

relating to WPB Insurance only.

3Retail lending probability of default adjustments are reported under

'Macroeconomic-related adjustments' and 'Other retail lending

adjustments'. Comparatives are re-presented to conform to the

current year's presentation.

Management judgemental adjustments at 31 December 2022

were an increase of ECL of HK$3.3bn for the wholesale portfolio

and an increase to ECL of HK$0.6bn for the retail portfolio.

At 31 December 2022, wholesale management judgemental

adjustments were an ECL increase of HK$3.3bn (31 December

2021: HK$3.9bn increase).

•Adjustments to corporate exposures increased ECL by

HK$3.1bn (31 December 2021: HK$4.1bn increase). These

principally reflected the outcome of management judgements

for high-risk and vulnerable sectors in some of our key markets.

This was supported by credit experts’ input, portfolio risk

metrics, short- to medium-term risks under each scenario,

model performance, quantitative analyses and benchmarks.

Considerations include risk of individual exposures under

different macroeconomic scenarios and sub-sector analyses.

The largest increase in ECL was observed in the real estate

sector, including material adjustments to reflect the uncertainty

of the higher-risk Chinese commercial real estate exposures,

booked in Hong Kong.

At 31 December 2022, retail management judgemental

adjustments were an ECL increase of HK$0.6bn (31 December

2021: HK$1.0bn increase):

•Retail lending Inflation-related adjustments increased ECL by

HK$0.1bn (31 December 2021: HK$0.0bn). These adjustments

addressed where increasing inflation and interest rates were

not fully captured by the modelled output.

•Other macroeconomic-related adjustments increased ECL by

HK$0.4bn (31 December 2021: HK$0.4bn decrease). These

adjustments were primarily in relation to country-specific risks

related to future macroeconomic conditions.

•Other retail lending adjustments increased ECL by HK$0.3bn

(31 December 2021: $0.7bn increase), reflecting all other data

and model and judgemental adjustments.

•Material pandemic-related economic recovery adjustments

were removed during the year as scenarios stabilized.

Economic scenarios sensitivity analysis of ECL

estimates

Management considered the sensitivity of the ECL outcome

against the economic forecasts as part of the ECL governance

process by recalculating the ECL under each scenario described

above for selected portfolios, applying a 100% weighting to each

scenario in turn. The weighting is reflected in both the

determination of a significant increase in credit risk and the

measurement of the resulting ECL.

The ECL calculated for the Upside and Downside scenarios should

not be taken to represent the lower and upper limits of possible

ECL outcomes. The impact of defaults that might occur in the

future under different economic scenarios is captured by

recalculating ECL for loans at the balance sheet date.

There is a particularly high degree of estimation uncertainty in

numbers representing more severe risk scenarios when assigned a

100% weighting.

For wholesale credit risk exposures, the sensitivity analysis

excludes ECL and financial instruments related to defaulted (stage

3) obligors. It is generally impracticable to separate the effect of

macroeconomic factors in individual assessments of obligors in

default. The measurement of stage 3 ECL is relatively more

sensitive to credit factors specific to the obligor than future

economic scenarios, and loans to defaulted obligors are a small

portion of the overall wholesale lending exposure, even if

representing the majority of the allowance for ECL. Therefore, the

sensitivity analysis to macroeconomic scenarios does not capture

the residual estimation risk arising from wholesale stage 3

exposures.

For retail credit risk exposures, the sensitivity analysis includes

ECL for loans and advances to customers related to defaulted

obligors. This is because the retail ECL for secured mortgage

portfolios including loans in all stages is sensitive to

macroeconomic variables.

Wholesale and retail sensitivity

The wholesale and retail sensitivity analysis is stated inclusive of

management judgemental adjustments, as appropriate to each

scenario. The results tables exclude portfolios held by the

insurance business and small portfolios, and as such cannot be

directly compared to personal and wholesale lending presented in

other credit risk tables. In both the wholesale and retail analysis,

the comparative period results for additional and alternative

Downside scenarios are not directly comparable to the current

period, because they reflect different risks relative with the

consensus scenarios for the period end.

Risk


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

Wholesale analysis


HKFRS 9 ECL sensitivity to future economic conditions1
	Hong Kong	Mainland China
ECL coverage of financial instruments subject to significant measurement uncertainty at 31 December 20222	HK$m	HK$m
Reported ECL	7,211	2,302
Consensus scenarios ECL
Central scenario	6,386	1,887
Upside scenario	4,616	1,123
Downside scenario	10,252	3,235
Alternative (Downside 2) scenario ECL	16,852	9,572


HKFRS 9 ECL sensitivity to future economic conditions1
	Hong Kong	Mainland China
ECL coverage of financial instruments subject to significant measurement uncertainty at 31 December 20212	HK$m	HK$m
Reported ECL	5,981	1,162
Consensus scenarios
Central scenario	5,085	881
Upside scenario	3,712	281
Downside scenario	7,674	1,684
Alternative scenarios	14,575	6,286

1Excludes ECL and financial instruments relating to defaulted obligors

because the measurement of ECL is relatively more sensitive to credit

factors specific to the obligor than future economic scenarios.

2Includes off-balance sheet financial instruments that are subject to

significant measurement uncertainty.

At 31 December 2022, the most significant level of ECL sensitivity

related to the judgements over the mainland China offshore

commercial real estate portfolio booked in Hong Kong.

Retail analysis


HKFRS 9 ECL sensitivity to future economic conditions1
	Reported ECL	Central Scenario	Upside Scenario	Downside Scenario	Alternative (Downside 2) scenario ECL
ECL coverage of loans and advances to customers	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 December 20222
Hong Kong	2,702	2,406	1,985	4,037	6,014

HKFRS 9 ECL sensitivity to future economic conditions1
	Reported ECL	Central Scenario	Upside Scenario	Downside Scenario	Alternative (Downside 2) scenario ECL
ECL coverage of loans and advances to customers	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 December 20212
Hong Kong	2,554	2,395	1,884	2,802	4,198

1 ECL sensitivities exclude portfolios using less complex modelling

approaches.

2 ECL sensitivity includes only on-balance sheet financial instruments

to which HKFRS 9 impairment requirements are applied.

At 31 December 2022, Hong Kong mortgages had low levels of

reported ECL due to the credit quality of the portfolio. Credit cards

and other unsecured lending are more sensitive to economic

forecasts, and therefore reflected the highest level of ECL

sensitivity during 2022.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	41

Reconciliation of changes in gross carrying/

nominal amount and allowances for loans and

advances to banks and customers, including loan

commitments and financial guarantees

(Unaudited)

The following disclosure provides a reconciliation by stage of the

group’s gross carrying/nominal amount and allowances for loans

and advances to banks and customers, including loan

commitments and financial guarantees. Movements are calculated

on a quarterly basis and therefore fully capture stage movements

between quarters. If movements were calculated on a year-to-date

basis they would reflect only the opening and closing position of

the financial instrument.

The transfers of financial instruments represent the impact of

stage transfers upon the gross carrying/nominal amount and

associated allowance for ECL.

The net remeasurement of ECL arising from stage transfers

represents the increase or decrease due to these transfers, for

example, moving from a 12-month (stage 1) to a lifetime (stage 2)

ECL measurement basis. Net remeasurement excludes the

underlying customer risk rating ('CRR')/probability of default ('PD')

movements of the financial instruments transferring stage. This is

captured, along with other credit quality movements in the

‘changes in risk parameters – credit quality’ line item.

Changes in ‘New financial assets originated or purchased’, ‘assets

derecognised (including final repayments)’ and ‘changes to risk

parameters – further lending/repayments’ represent the impact

from volume movements within the group’s lending portfolio.


Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees
(Audited)
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 1 Jan 2022	5,589,480	(2,916)	529,597	(9,737)	41,639	(19,693)	1,558	(334)	6,162,274	(32,680)
Transfers of financial instruments:	(246,807)	(1,899)	204,008	7,046	42,799	(5,147)	—	—	—	—
– transfers from stage 1 to stage 2	(725,814)	1,072	725,814	(1,072)	—	—	—	—	—	—
– transfers from stage 2 to stage 1	483,955	(2,759)	(483,955)	2,759	—	—	—	—	—	—
– transfers to stage 3	(7,041)	10	(39,526)	5,591	46,567	(5,601)	—	—	—	—
– transfers from stage 3	2,093	(222)	1,675	(232)	(3,768)	454	—	—	—	—
Net remeasurement of ECL arising from transfer of stage	—	1,391	—	(1,645)	—	(400)	—	—	—	(654)
New financial assets originated and purchased	1,854,004	(1,209)	—	—	—	—	200	(18)	1,854,204	(1,227)
Assets derecognised (including final repayments)	(1,180,100)	224	(186,273)	653	(6,023)	1,220	(764)	—	(1,373,160)	2,097
Changes to risk parameters – further lending/repayment	(303,451)	80	9,824	701	(1,357)	768	(294)	20	(295,278)	1,569
Changes in risk parameters – credit quality	—	1,099	—	(8,822)	—	(10,412)	—	214	—	(17,921)
Changes to model used for ECL calculation	—	(31)	—	11	—	(12)	—	—	—	(32)
Assets written off	—	—	—	—	(7,215)	7,215	(78)	78	(7,293)	7,293
Credit-related modifications that resulted in derecognition	—	—	—	—	(241)	60	—	—	(241)	60
Foreign exchange	(126,786)	32	(22,811)	180	(1,024)	526	1	(1)	(150,620)	737
Others	4	(13)	—	(5)	3	(9)	—	(150)	7	(177)
At 31 Dec 2022	5,586,344	(3,242)	534,345	(11,618)	68,581	(25,884)	623	(191)	6,189,893	(40,935)
ECL income statement charge for the year										(16,168)
Recoveries										880
Others										(543)
Total ECL income statement charge for the year										(15,831)


	At 31 Dec 2022		Year ended 31 Dec 2022
	Gross carrying/ nominal amount	Allowance for ECL	ECL charge
	HK$m	HK$m	HK$m
As above	6,189,893	(40,935)	(15,831)
Other financial assets measured at amortised cost	2,768,171	(681)	(110)
Non-trading reverse repurchase agreement commitments	2,335	—	—
Performance and other guarantees not considered for HKFRS 9	N/A	N/A	(81)
Amounts due from Group companies	129,357	—	—
Summary of financial instruments to which the impairment requirements in HKFRS 9 are applied/Summary consolidated income statement	9,089,756	(41,616)	(16,022)
Debt instruments measured at FVOCI	1,239,527	(344)	(343)
Total allowance for ECL/total income statement ECL charge for the year	N/A	(41,960)	(16,365)

Risk


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


Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees (continued)
(Audited)
	Stage 1		Stage 2		Stage 3		POCI		Total
	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL	Gross carrying/ nominal amount	Allowance for ECL
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 1 Jan 2021	5,254,097	(4,978)	567,753	(6,781)	35,984	(17,739)	855	(362)	5,858,689	(29,860)
Transfers of financial instruments:	(82,216)	(1,758)	62,505	3,758	19,711	(2,000)	—	—	—	—
– transfers from stage 1 to stage 2	(790,973)	1,689	790,973	(1,689)	—	—	—	—	—	—
– transfers from stage 2 to stage 1	716,431	(3,412)	(716,431)	3,412	—	—	—	—	—	—
– transfers to stage 3	(9,067)	104	(14,911)	2,238	23,978	(2,342)	—	—	—	—
– transfers from stage 3	1,393	(139)	2,874	(203)	(4,267)	342	—	—	—	—
Net remeasurement of ECL arising from transfer of stage	—	1,686	—	(2,347)	—	(107)	—	—	—	(768)
New financial assets originated and purchased	1,621,239	(1,183)	—	—	—	—	973	—	1,622,212	(1,183)
Assets derecognised (including final repayments)	(1,086,986)	314	(120,885)	674	(5,745)	1,165	(9)	—	(1,213,625)	2,153
Changes to risk parameters – further lending/repayment	(93,466)	1,078	19,540	87	(2,332)	998	(263)	25	(76,521)	2,188
Changes in risk parameters – credit quality	—	2,078	—	(4,768)	—	(6,612)	—	49	—	(9,253)
Changes to model used for ECL calculation	—	(126)	—	(377)	—	7	—	—	—	(496)
Assets written off	—	—	—	—	(4,531)	4,531	—	—	(4,531)	4,531
Credit-related modifications that resulted in derecognition	—	—	—	—	(973)	—	—	—	(973)	—
Foreign exchange	(23,231)	(28)	684	18	(478)	65	2	(1)	(23,023)	54
Others	43	1	—	(1)	3	(1)	—	(45)	46	(46)
At 31 Dec 2021	5,589,480	(2,916)	529,597	(9,737)	41,639	(19,693)	1,558	(334)	6,162,274	(32,680)
ECL income statement charge for the year										(7,359)
Recoveries										1,011
Others										(169)
Total ECL income statement charge for the year										(6,517)


	At 31 Dec 2021		Year ended 31 Dec 2021
	Gross carrying/nominal amount	Allowance for ECL	ECL charge
	HK$m	HK$m	HK$m
As above	6,162,274	(32,680)	(6,517)
Other financial assets measured at amortised cost	2,114,301	(639)	(184)
Non-trading reverse repurchase agreement commitments	3,605	—	—
Performance and other guarantees not considered for HKFRS 9	N/A	N/A	145
Amounts due from Group companies	99,604	—	—
Summary of financial instruments to which the impairment requirements in HKFRS 9 are applied/Summary consolidated income statement	8,379,784	(33,319)	(6,556)
Debt instruments measured at FVOCI	1,541,909	(121)	17
Total allowance for ECL/total income statement ECL charge for the year	N/A	(33,440)	(6,539)


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	43

Credit quality

Credit quality of financial instruments

(Audited)

We assess the credit quality of all financial instruments that are

subject to credit risk. The credit quality of financial instruments is

a point-in-time assessment of the probability of default of financial

instruments, whereas stages 1 and 2 are determined based on

relative deterioration of credit quality since initial recognition.

Accordingly, for non-credit-impaired financial instruments, there is

no direct relationship between the credit quality assessment and

stages 1 and 2, though typically the lower credit quality bands

exhibit a higher proportion in stage 2.

The five credit quality classifications each encompass a range of

granular internal credit rating grades assigned to wholesale and

retail lending businesses and the external ratings attributed by

external agencies to debt securities, as shown in the table on page

32.


Distribution of financial instruments by credit quality at 31 December 2022
(Audited)
	Gross carrying/notional amount						Allowance for ECL	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total	Allowance for ECL	Net
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
In-scope for HKFRS 9 impairment
Loans and advances to customers held at amortised cost	2,093,077	773,808	737,137	77,706	63,385	3,745,113	(39,964)	3,705,149
– personal	1,290,517	144,757	76,102	5,300	8,708	1,525,384	(5,369)	1,520,015
– corporate and commercial	641,317	545,533	604,724	71,417	53,761	1,916,752	(33,999)	1,882,753
– non-bank financial institutions	161,243	83,518	56,311	989	916	302,977	(596)	302,381
Loans and advances to banks	504,751	9,461	1,368	3,488	—	519,068	(44)	519,024
Cash and balances at central banks	226,479	6,047	222	—	—	232,748	(8)	232,740
Items in the course of collection from other banks	28,557	—	—	—	—	28,557	—	28,557
Hong Kong Government certificates of indebtedness	341,354	—	—	—	—	341,354	—	341,354
Reverse repurchase agreements – non-trading	503,956	132,390	291,608	—	22	927,976	—	927,976
Financial investments held at amortised cost	856,621	109,105	9,446	2	—	975,174	(465)	974,709
Prepayments, accrued income and other assets	169,517	57,958	33,648	796	443	262,362	(208)	262,154
Debt instruments measured at fair value through other comprehensive income1	1,192,017	52,361	17,234	1,030	39	1,262,681	(344)	1,262,337
Out-of-scope for HKFRS 9 impairment						—		—
Trading assets	335,477	65,188	32,910	788	999	435,362	—	435,362
Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss	30,724	3,166	1,050	—	—	34,940	—	34,940
Derivatives	269,923	52,467	11,351	823	5	334,569	—	334,569
Total gross carrying amount on-balance sheet	6,552,453	1,261,951	1,135,974	84,633	64,893	9,099,904	(41,033)	9,058,871
Percentage of total credit quality	72%	14%	12%	1%	1%	100%
Loan and other credit related commitments	1,924,469	744,111	484,054	29,892	7,934	3,190,460	(864)	3,189,596
Financial guarantee and similar contracts	171,761	133,701	62,022	5,459	553	373,496	(293)	373,203
Total nominal off-balance sheet amount	2,096,230	877,812	546,076	35,351	8,487	3,563,956	(1,157)	3,562,799

The above table does not include balances due from Group companies.

1For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss

allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes

fair value gains and losses.

Risk


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


Distribution of financial instruments by credit quality at 31 December 2021 (continued)
(Audited)
	Gross carrying/notional amount						Allowance for ECL	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total	Allowance for ECL	Net
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
In-scope for HKFRS 9 impairment
Loans and advances to customers held at amortised cost	2,076,114	876,388	838,222	39,342	42,890	3,872,956	(32,017)	3,840,939
– personal	1,290,946	136,390	91,809	3,008	10,158	1,532,311	(5,966)	1,526,345
– corporate and commercial	648,930	653,853	685,887	36,117	32,624	2,057,411	(25,706)	2,031,705
– non-bank financial institutions	136,238	86,145	60,526	217	108	283,234	(345)	282,889
Loans and advances to banks	423,839	5,750	2,611	86	—	432,286	(39)	432,247
Cash and balances at central banks	269,108	7,663	86	—	—	276,857	—	276,857
Items in the course of collection from other banks	21,632	—	—	—	—	21,632	—	21,632
Hong Kong Government certificates of indebtedness	332,044	—	—	—	—	332,044	—	332,044
Reverse repurchase agreements – non-trading	530,900	144,373	128,502	—	—	803,775	—	803,775
Financial investments held at amortised cost	406,588	88,765	7,644	—	—	502,997	(433)	502,564
Prepayments, accrued income and other assets	95,520	45,945	34,642	599	290	176,996	(206)	176,790
Debt instruments measured at fair value through other comprehensive income1	1,438,300	72,697	30,085	—	—	1,541,082	(121)	1,540,961
Out-of-scope for HKFRS 9 impairment						—		—
Trading assets	389,531	65,272	21,676	518	1,033	478,030	—	478,030
Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss	25,738	2,386	900	—	—	29,024	—	29,024
Derivatives	161,471	49,735	5,222	45	—	216,473	—	216,473
Total gross carrying amount on-balance sheet	6,170,785	1,358,974	1,069,590	40,590	44,213	8,684,152	(32,816)	8,651,336
Percentage of total credit quality	71%	16%	12%	—%	1%	100%
Loan and other credit related commitments	1,732,590	699,474	491,037	19,400	983	2,943,484	(580)	2,942,904
Financial guarantee and similar contracts	135,199	151,565	64,012	3,647	456	354,879	(204)	354,675
Total nominal off-balance sheet amount	1,867,789	851,039	555,049	23,047	1,439	3,298,363	(784)	3,297,579

The above table does not include balances due from Group companies.

1For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss

allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes

fair value gains and losses.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	45


Distribution of financial instruments to which the impairment requirements in HKFRS 9 are applied, by credit quality and stage allocation
(Audited)
	Gross carrying/notional amount						Allowance for ECL	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total	Allowance for ECL	Net
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Loans and advances to banks	504,751	9,461	1,368	3,488	—	519,068	(44)	519,024
– stage 1	503,622	8,731	1,338	3,243	—	516,934	(39)	516,895
– stage 2	1,129	730	30	245	—	2,134	(5)	2,129
– stage 3	—	—	—	—	—	—	—	—
– POCI	—	—	—	—	—	—	—	—
Loans and advances to customers at amortised cost	2,093,077	773,808	737,137	77,706	63,385	3,745,113	(39,964)	3,705,149
– stage 1	2,062,100	656,962	489,798	10,785	—	3,219,645	(2,755)	3,216,890
– stage 2	30,977	116,846	247,339	66,921	—	462,083	(11,200)	450,883
– stage 3	—	—	—	—	62,763	62,763	(25,818)	36,945
– POCI	—	—	—	—	622	622	(191)	431
Other financial assets measured at amortised cost	2,126,484	305,500	334,924	798	465	2,768,171	(681)	2,767,490
– stage 1	2,120,755	289,904	328,161	240	—	2,739,060	(391)	2,738,669
– stage 2	5,729	15,596	6,763	558	—	28,646	(231)	28,415
– stage 3	—	—	—	—	464	464	(59)	405
– POCI	—	—	—	—	1	1	—	1
Loan and other credit-related commitments	1,421,125	312,185	142,824	10,509	5,758	1,892,401	(864)	1,891,537
– stage 1	1,414,708	284,689	116,144	5,814	—	1,821,355	(427)	1,820,928
– stage 2	6,417	27,496	26,680	4,695	—	65,288	(397)	64,891
– stage 3	—	—	—	—	5,758	5,758	(40)	5,718
– POCI	—	—	—	—	—	—	—	—
Financial guarantees	14,274	11,643	8,649	1,012	68	35,646	(63)	35,583
– stage 1	13,938	9,994	6,627	179	—	30,738	(18)	30,720
– stage 2	336	1,649	2,022	833	—	4,840	(17)	4,823
– stage 3	—	—	—	—	68	68	(28)	40
– POCI	—	—	—	—	—	—	—	—
At 31 Dec 2022	6,159,711	1,412,597	1,224,902	93,513	69,676	8,960,399	(41,616)	8,918,783
Debt instruments at FVOCI1
– stage 1	1,191,560	52,146	17,178	—	—	1,260,884	(67)	1,260,817
– stage 2	457	215	56	1,030	—	1,758	(277)	1,481
– stage 3	—	—	—	—	39	39	—	39
– POCI	—	—	—	—	—	—	—	—
At 31 Dec 2022	1,192,017	52,361	17,234	1,030	39	1,262,681	(344)	1,262,337

The above table does not include balances due from Group companies.

1For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss

allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes

fair value gains and losses.

Risk


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


Distribution of financial instruments to which the impairment requirements in HKFRS 9 are applied, by credit quality and stage allocation (continued)
(Audited)
	Gross carrying/notional amount						Allowance for ECL	Net
	Strong	Good	Satisfactory	Sub- standard	Credit impaired	Total	Allowance for ECL	Net
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Loans and advances to banks	423,839	5,750	2,611	86	—	432,286	(39)	432,247
– stage 1	423,561	5,241	2,244	33	—	431,079	(36)	431,043
– stage 2	278	509	367	53	—	1,207	(3)	1,204
– stage 3	—	—	—	—	—	—	—	—
– POCI	—	—	—	—	—	—	—	—
Loans and advances to customers at amortised cost	2,076,114	876,388	838,222	39,342	42,890	3,872,956	(32,017)	3,840,939
– stage 1	2,034,725	732,858	577,785	4,066	—	3,349,434	(2,603)	3,346,831
– stage 2	41,389	143,530	260,437	35,276	—	480,632	(9,426)	471,206
– stage 3	—	—	—	—	41,332	41,332	(19,654)	21,678
– POCI	—	—	—	—	1,558	1,558	(334)	1,224
Other financial assets measured at amortised cost	1,655,792	286,746	170,874	599	290	2,114,301	(639)	2,113,662
– stage 1	1,651,199	278,343	163,190	115	—	2,092,847	(482)	2,092,365
– stage 2	4,593	8,403	7,684	484	—	21,164	(140)	21,024
– stage 3	—	—	—	—	289	289	(17)	272
– POCI	—	—	—	—	1	1	—	1
Loan and other credit-related commitments	1,347,783	311,803	162,448	4,030	271	1,826,335	(580)	1,825,755
– stage 1	1,344,540	297,202	138,722	1,889	—	1,782,353	(260)	1,782,093
– stage 2	3,243	14,601	23,726	2,141	—	43,711	(295)	43,416
– stage 3	—	—	—	—	271	271	(25)	246
– POCI	—	—	—	—	—	—	—	—
Financial guarantees	11,350	12,188	9,883	841	40	34,302	(44)	34,258
– stage 1	11,127	10,890	8,038	159	—	30,214	(14)	30,200
– stage 2	223	1,298	1,845	682	—	4,048	(14)	4,034
– stage 3	—	—	—	—	40	40	(16)	24
– POCI	—	—	—	—	—	—	—	—
At 31 Dec 2021	5,514,878	1,492,875	1,184,038	44,898	43,491	8,280,180	(33,319)	8,246,861
Debt instruments at FVOCI1
– stage 1	1,438,161	72,697	30,085	—	—	1,540,943	(121)	1,540,822
– stage 2	139	—	—	—	—	139	—	139
– stage 3	—	—	—	—	—	—	—	—
– POCI	—	—	—	—	—	—	—	—
At 31 Dec 2021	1,438,300	72,697	30,085	—	—	1,541,082	(121)	1,540,961

The above table does not include balances due from Group companies.

1For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss

allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes

fair value gains and losses.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	47

Mainland China commercial real estate

The following table presents the group's exposure to borrowers classified in the CRE sector where the ultimate parent is based in

mainland China, as well as all CRE exposures booked on mainland China balance sheets. The exposures at 31 December 2022 are split by

country/territory and credit quality including allowances for ECL by stage.


Mainland China CRE exposure
	At 31 Dec 2022
	Hong Kong	Mainland China	Rest of Asia-Pacific	Total
	(audited)1	(audited)1	(unaudited)1	(unaudited)1
	HK$m	HK$m	HK$m	HK$m
Loans and advances to customers2	71,148	44,843	3,570	119,561
Guarantees issued and others3	1,957	5,884	268	8,109
Total mainland China CRE exposure	73,105	50,727	3,838	127,670
Distribution of mainland China CRE exposure by credit quality
– Strong	11,105	16,510	638	28,253
– Good	5,431	8,475	2,543	16,449
– Satisfactory	9,896	17,521	168	27,585
– Sub-standard	22,509	6,072	349	28,930
– Credit Impaired	24,164	2,149	140	26,453
	73,105	50,727	3,838	127,670
Allowance for ECL by credit quality
– Strong	—	(39)	—	(39)
– Good	(2)	(60)	(5)	(67)
– Satisfactory	(153)	(637)	(3)	(793)
– Sub-standard	(3,570)	(326)	(14)	(3,910)
– Credit Impaired	(9,884)	(816)	—	(10,700)
	(13,609)	(1,878)	(22)	(15,509)
Allowance for ECL
ECL Stage 1	(6)	(69)	(4)	(79)
ECL Stage 2	(3,719)	(993)	(18)	(4,730)
ECL Stage 3	(9,884)	(816)	—	(10,700)
	(13,609)	(1,878)	(22)	(15,509)
ECL coverage %	18.6	3.7	0.6	12.1


	At 31 Dec 2021
	Hong Kong (restated)4	Mainland China	Rest of Asia-Pacific	Total
	(audited)1	(audited)1	(unaudited)1	(unaudited)1
	HK$m	HK$m	HK$m	HK$m
Loans and advances to customers2	89,646	53,116	658	143,420
Guarantees issued and others3	1,207	18,533	127	19,867
Total mainland China CRE exposure	90,853	71,649	785	163,287
Distribution of mainland China CRE exposure by credit quality
– Strong	27,630	30,141	239	58,010
– Good	20,681	18,357	—	39,038
– Satisfactory	26,384	22,263	546	49,193
– Sub-standard	12,245	94	—	12,339
– Credit Impaired	3,913	794	—	4,707
	90,853	71,649	785	163,287
Allowance for ECL by credit quality
– Strong	(116)	(53)	—	(169)
– Good	(292)	(78)	—	(370)
– Satisfactory	(849)	(154)	(15)	(1,018)
– Sub-standard	(2,320)	(8)	—	(2,328)
– Credit Impaired	(794)	(86)	—	(880)
	(4,371)	(379)	(15)	(4,765)
Allowance for ECL
ECL Stage 1	(17)	(84)	(4)	(105)
ECL Stage 2	(3,560)	(209)	(11)	(3,780)
ECL Stage 3	(794)	(86)	—	(880)
	(4,371)	(379)	(15)	(4,765)
ECL coverage %	4.8	0.5	1.9	2.9

1Disclosures in respect of mainland China CRE exposures in Hong Kong and mainland China form part of the scope of the audit of the group's

Annual Report. Amounts disclosed for mainland China CRE exposures elsewhere in the group have not been audited but are provided for

completeness.

2 Amounts represent gross carrying amount.

3 Amounts represent nominal amount for guarantees and other contingent liabilities.

4 Comparative balances have been restated to reflect an exposure re-classification from "guarantees and others" to "loans and advances to

customers", which better reflects the nature of product.

Risk


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

(Unaudited)

CRE financing refers to lending that focuses on commercial

development and investment in real estate and covers

commercial, residential and industrial assets. CRE financing can

also be provided to a corporate or financial entity for the purchase

or financing of a property which supports the overall operations of

the business.

The exposures in the table are related to companies whose

primary activities are focused on residential, commercial and

mixed-use real estate activities. Lending is generally focused on

tier 1 and 2 cities.

The exposures in the table above had 57% (31 December 2021:

89%) of exposure booked with a credit quality of ‘satisfactory’ or

above. This deterioration reflects increased funding risks and

weaker sales performance for a number of our customers over the

period.

Facilities booked in Hong Kong are exposures which represent

relatively higher risk within the mainland China CRE portfolio. This

portfolio had 36% (31 December 2021: 82%) of exposure booked

with a credit quality of ‘satisfactory’ or above, reflecting sustained

credit deterioration in this book over the course of the year. At

31 December 2022, the group had allowances for ECL of

HK$13,609m (31 December 2021: HK$4,371m) held against

mainland China CRE exposures booked in Hong Kong.

Over one third of the unimpaired exposure in the Hong Kong

portfolio reflects lending to state owned enterprises, and much of

the remaining is to relatively strong privately owned enterprises.

This is reflected in the relatively low ECL allowance in this part of

the portfolio.

Regulatory and policy developments in the latter part of 2022

appear to have stabilised the sector. Sustained liquidity support

and improved domestic residential demand will be necessary to

support a recovery.

The group has additional exposures to mainland China CRE as a

result of lending to multinational corporates which is not

incorporated in the table above.

Credit-impaired loans

(Audited)

We determine that a financial instrument is credit impaired and in

stage 3 by considering relevant objective evidence, primarily

whether:

•contractual payments of either principal or interest are past due

for more than 90 days;

•there are other indications that the borrower is unlikely to pay,

such as when a concession has been granted to the borrower

for economic or legal reasons relating to the borrower’s

financial condition; and

•the loan is otherwise considered to be in default. If such

unlikeliness to pay is not identified at an earlier stage, it is

deemed to occur when an exposure is 90 days past due, even

where regulatory rules permit default to be defined based on

180 days past due. Therefore, the definitions of credit impaired

and default are aligned as far as possible so that stage 3

represents all loans that are considered defaulted or otherwise

credit impaired.

Collateral and other credit enhancements

(Audited)

Although collateral can be an important mitigant of credit risk, it is

the group’s practice to lend on the basis of the customer’s ability

to meet their obligations out of cash flow resources rather than

placing primary reliance on collateral and other credit risk

enhancements. Depending on the customer’s standing and the

type of product, facilities may be provided without any collateral

or other credit enhancements. For other lending, a charge over

collateral is obtained and considered in determining the credit

decision and pricing. In the event of default, the bank may utilise

the collateral as a source of repayment.

Depending on its form, collateral can have a significant financial

effect in mitigating our exposure to credit risk. Where there is

sufficient collateral, an expected credit loss is not recognised. This

is the case for reverse repurchase agreements and for certain

loans and advances to customers where the loan to value (‘LTV’) is

very low.

Mitigants may include a charge on borrowers’ specific assets,

such as real estate or financial instruments. Other credit risk

mitigants include short positions in securities and financial assets

held as part of linked insurance/investment contracts where the

risk is predominantly borne by the policyholder.

Additionally, risk may be managed by employing other types of

collateral and credit risk enhancements, such as second charges,

other liens and unsupported guarantees. Guarantees are normally

taken from corporates and export credit agencies. Corporates

would normally provide guarantees as part of a parent/subsidiary

relationship and span a number of credit grades. The export credit

agencies will normally be investment grade.

Certain credit mitigants are used strategically in portfolio

management activities. While single name concentrations arise in

portfolios managed by Global Banking and Corporate Banking, it is

only in Global Banking that their size requires the use of portfolio

level credit mitigants. Across Global Banking, risk limits and

utilisations, maturity profiles and risk quality are monitored and

managed proactively. This process is key to the setting of risk

appetite for these larger, more complex, geographically distributed

customer groups. While the principal form of risk management

continues to be at the point of exposure origination, through the

lending decision-making process, Global Banking also utilises loan

sales and credit default swap (‘CDS’) hedges to manage

concentrations and reduce risk. These transactions are the

responsibility of a dedicated Global Banking portfolio management

team. Hedging activity is carried out within agreed credit

parameters, and is subject to market risk limits and a robust

governance structure. Where applicable, CDSs are entered into

directly with a central clearing house counterparty. Otherwise, our

exposure to CDS protection providers is diversified among mainly

banking counterparties with strong credit ratings.

CDS mitigants are held at portfolio level and are not reported in

the presentation below.

Collateral on loans and advances

(Audited)

The collateral measured in the following tables consists of

fixed first charges on real estate, and charges over cash and

marketable financial instruments. The values in the tables

represent the expected market value on an open market basis; no

adjustment has been made to the collateral for any expected costs

of recovery. Marketable securities are measured at their fair value.

Other types of collateral such as unsupported guarantees and

floating charges over the assets of a customer’s business are not

measured in the following tables. While such mitigants have value,

often providing rights in insolvency, their assignable value is not

sufficiently certain and they are therefore assigned no value for

disclosure purposes.

The LTV ratios presented are calculated by directly associating

loans and advances with the collateral that individually and

uniquely supports each facility. When collateral assets are shared

by multiple loans and advances, whether specifically or, more

generally, by way of an all monies charge, the collateral value is

pro-rated across the loans and advances protected by the

collateral.

For credit-impaired loans, the collateral values cannot be directly

compared with impairment allowances recognised. The LTV

figures use open market values with no adjustments.

Impairment allowances are calculated on a different basis, by

considering other cash flows and adjusting collateral values for

costs of realising collateral.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	49

Personal lending

(Unaudited)

The following table provides a quantification of the value of fixed

charges we hold over specific assets where we have a history of

enforcing, and are able to enforce, collateral in satisfying a debt in

the event of the borrower failing to meet its contractual

obligations, and where the collateral is cash or can be realised by

sale in an established market.

The collateral valuation excludes any adjustments for obtaining

and selling the collateral and, in particular, loans shown as not

collateralised or partially collateralised may also benefit from other

forms of credit mitigants.


Residential mortgages including loan commitments by level of collateral
(Audited)
	2022		2021
	Gross carrying/ nominal amount	ECL coverage	Gross carrying/ nominal amount	ECL coverage
	HK$m	%	HK$m	%
Stage 1
Fully collateralised	1,147,024	0.0	1,201,044	0.0
LTV ratio:
– less than 70%	918,527	0.0	1,004,531	0.0
– 71% to 90%	147,785	0.0	169,824	0.0
– 91% to 100%	80,712	0.0	26,689	0.0
Partially collateralised (A):	50,317	0.0	256	0.0
– collateral value on A	48,009		242
Total	1,197,341	0.0	1,201,300	0.0
Stage 2
Fully collateralised	33,972	0.2	23,758	0.4
LTV ratio:
– less than 70%	24,401	0.1	20,691	0.3
– 71% to 90%	8,730	0.4	2,860	1.0
– 91% to 100%	841	0.5	207	2.4
Partially collateralised (B):	425	0.7	28	3.6
– collateral value on B	401		23
Total	34,397	0.2	23,786	0.4
Stage 3
Fully collateralised	5,696	4.3	5,113	5.2
LTV ratio:
– less than 70%	3,935	3.6	4,153	4.5
– 71% to 90%	1,270	5.6	827	7.7
– 91% to 100%	491	6.3	133	14.3
Partially collateralised (C):	113	40.7	104	29.8
– collateral value on C	95		91
Total	5,809	5.0	5,217	5.7
At 31 Dec	1,237,547	0.0	1,230,303	0.0

Other personal lending

(Unaudited)

Other personal lending consists primarily of personal loans, overdrafts and credit cards, all of which are generally unsecured, except

lending to private banking customers which are generally secured.

Risk


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

Commercial real estate loans and advances

(Unaudited)

The value of commercial real estate collateral is determined by

using a combination of external and internal valuations and

physical inspections. For commercial real estate, where the facility

exceeds regulatory threshold requirements, group policy requires

an independent review of the valuation at least every three years,

or more frequently as the need arises. In Hong Kong, market

practice is typically for lending to major property companies to be

either secured by guarantees or unsecured.


Commercial real estate loans and advances including loan commitments by level of collateral
(Audited)
	2022		2021
	Gross carrying nominal amount	ECL coverage	Gross carrying/ nominal amount	ECL coverage
	HK$m	%	HK$m	%
Stage 1
Not collateralised	240,133	0.0	268,397	0.0
Fully collateralised	263,119	0.1	315,939	0.1
Partially collateralised (A):	13,898	0.1	14,260	0.1
– collateral value on A	7,292		7,790
Total	517,150	0.1	598,596	0.0
Stage 2
Not collateralised	51,128	7.7	68,871	5.8
Fully collateralised	85,421	1.9	69,438	0.7
Partially collateralised (B):	7,941	2.0	7,626	2.2
– collateral value on B	4,692		3,159
Total	144,490	4.0	145,935	3.2
Stage 3
Not collateralised	16,725	57.2	1,541	35.8
Fully collateralised	8,724	11.1	3,085	11.3
Partially collateralised (C):	982	36.2	21	33.3
– collateral value on C	697		14
Total	26,431	41.2	4,647	19.5
POCI
Not collateralised	—	—	—	—
Fully collateralised	—	—	764	—
Partially collateralised (D):	145	—	—	—
– collateral value on D	65		—
Total	145	—	764	—
At 31 Dec	688,216	2.5	749,942	0.8


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	51

Other corporate, commercial and non-bank financial institutions

lending

(Unaudited)

Other corporate, commercial and financial (non-bank) loans are

analysed separately in the following table. For financing activities

in other corporate and commercial lending, collateral value is not

strongly correlated to principal repayment performance.

Collateral values are generally refreshed when an obligor’s general

credit performance deteriorates and we have to assess the likely

performance of secondary sources of repayment should it prove

necessary to rely on them.

Accordingly, the following table reports values only for customers

with CRR 8–10, recognising that these loans and advances

generally have valuations that are comparatively recent.


Other corporate, commercial and non-bank financial institutions loans and advances including loan commitments by level of collateral
(Audited)
	2022		2021
	Gross carrying/ nominal amount	ECL coverage	Gross carrying/ nominal amount	ECL coverage
	HK$m	%	HK$m	%
Stage 1
Not collateralised	2,155,095	0.1	2,044,385	0.0
Fully collateralised	379,471	0.1	431,547	0.1
Partially collateralised (A):	246,654	0.1	262,118	0.0
– collateral value on A	97,058		108,645
Total	2,781,220	0.1	2,738,050	0.0
Stage 2
Not collateralised	314,140	0.5	314,470	0.4
Fully collateralised	128,648	1.0	113,991	0.7
Partially collateralised (B):	55,804	0.6	37,862	0.4
– collateral value on B	22,737		15,205
Total	498,592	0.6	466,323	0.4
Stage 3
Not collateralised	14,373	68.2	17,171	80.2
Fully collateralised	5,689	7.2	2,551	17.3
Partially collateralised (C):	8,956	37.0	7,621	36.8
– collateral value on C	4,480		4,102
Total	29,018	46.6	27,343	62.2
POCI
Not collateralised	138	1.4	351	47.6
Fully collateralised	183	92.9	442	37.8
Partially collateralised (D):	156	12.2	—	—
– collateral value on D	125		—
Total	477	40.0	793	42.1
At 31 Dec	3,309,307	0.6	3,232,509	0.6

Other credit risk exposures

(Unaudited)

In addition to collateralised lending described above, other credit

enhancements are employed and methods used to mitigate credit

risk arising from financial assets. These are summarised below:

•Some securities issued by governments, banks and other

financial institutions may benefit from additional credit

enhancements provided by government guarantees that cover

the assets.

•Debt securities issued by banks and financial institutions

include asset-backed securities (‘ABSs’) and similar

instruments, which are supported by underlying pools of

financial assets. Credit risk associated with ABSs is reduced

through the purchase of credit default swap (‘CDS’) protection.

•The group’s maximum exposure to credit risk includes financial

guarantees and similar contracts granted, as well as loan and

other credit-related commitments. Depending on the terms of

the arrangement, we may use additional credit mitigation if a

guarantee is called upon or a loan commitment is drawn and

subsequently defaults.

Derivatives

(Unaudited)

We participate in transactions exposing us to counterparty credit

risk. Counterparty credit risk is the risk of financial loss if the

counterparty to a transaction defaults before satisfactorily settling

it. It arises principally from over-the-counter (‘OTC’) derivatives

and securities financing transactions and is calculated in both the

trading and non-trading books. Transactions vary in value by

reference to a market factor such as an interest rate, exchange

rate or asset price.

The counterparty risk from derivative transactions is taken into

account when reporting the fair value of derivative positions. The

adjustment to the fair value is known as the credit value

adjustment (‘CVA’).

Risk


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

Treasury Risk

Overview

(Unaudited)

Treasury risk is the risk of having insufficient capital, liquidity or

funding resources to meet financial obligations and satisfy

regulatory requirements, including the risk to our earnings or

capital due to structural foreign exchange exposures and changes

in market interest rates, together with pension and insurance risk.

Treasury risk arises from changes to the respective resources and

risk profiles driven by customer behaviour, management decisions

or the external environment.

Approach and policy

(Unaudited)

The main objective in the management of treasury risk is to

maintain appropriate levels of capital, liquidity, funding, foreign

exchange and market risk to support business strategy, and meet

regulatory and stress testing-related requirements.

The approach to treasury management is driven by our strategic

and organisational requirements, taking into account the

regulatory, economic and commercial environment. We aim to

maintain a strong capital and liquidity base to support the risks

inherent in our business and invest in accordance with our

strategy, meeting both consolidated and local regulatory

requirements at all times.

Our policy is underpinned by our risk management framework, our

internal capital adequacy assessment process (‘ICAAP’) and our

internal liquidity adequacy assessment process (‘ILAAP’). The risk

framework incorporates a number of measures aligned to our

assessment of risks for both internal and regulatory purposes.

Treasury risk management

Key developments in 2022

(Unaudited)

•We continued to build our second line of defence capabilities,

providing independent oversight of treasury activities across

capital risk, liquidity and funding risk, interest rate risk in the

banking book ('IRRBB') and recovery and resolution planning in

Asia-Pacific sites during 2022.

•The Board approved risk appetite for IRRBB for the group was

further enhanced in 2022 to include NII sensitivity metric to

monitor impact of 100bps interest rate shock on forecasted

earnings of the Bank over next 1 year against the Board

approved Risk Appetite.

•During the periods of high market volatility in the first half of

2022, we enhanced monitoring and forecasting of our capital

positions. The mark-to-market movement in financial

instruments that impacted our capital ratio arose from the

portfolio of high-quality liquid assets (‘HQLA’) held by our

Markets Treasury for liquidity risk management and as

economic hedges of net interest income. This portfolio was

largely accounted for at fair value through other comprehensive

income (‘FVOCI’), together with any hedge derivative held to

offset the duration risk of the assets. During the year, we took

steps to reduce the duration risk of this portfolio to minimise

the capital impact from higher interest rates. As a result of

these measures, the hold-to-collect-and-sell stressed value at

risk (‘VaR’) exposure reduced from -HK$10.bn at the end of

2021 to -HK$3.7bn at the end of 2022.

•We implemented a new hold-to-collect business model, which

will involve our portfolio of hold-to-collect assets forming a

material part of our liquid asset buffer as well as a hedge to our

structural interest rate risk. This will allow more flexibility in

managing the hold-to-collect-and-sell portfolio to optimise

returns from market movements while safeguarding the group

capital and future earnings.

Governance and structure

(Unaudited)

The Board approves the policy and risk appetite for capital risk,

liquidity and funding risk, and IRRBB. It is supported and advised

by the Risk Committee (‘RC’).

The Global Treasury sub-function manages capital, liquidity and

funding risk and structural foreign exchange risk on an on-going

basis and provides support to the Asset and Liability Management

Committee (‘ALCO’), and is overseen by the Treasury Risk

Management sub-function ('TRM') and the Risk Management

Meeting (‘RMM’).

The Global Treasury sub-function also manages interest rate risk in

the banking book, maintaining the transfer pricing framework and

informing the regional and local ALCOs of the group and site’s

overall banking book interest rate exposure. Banking book interest

rate positions may be transferred to be managed by the Global

Treasury business, within the market risk limits approved by the

RMM.

Pension risk is managed through a network of local governance

forums. The regional Pension Risk Management Meeting oversees

all pension plans sponsored by HSBC in Asia-Pacific, and is

chaired by the Regional Head of Traded and Treasury Risk

Management.

The Treasury Risk Management sub-function carries out

independent review, challenge and assurance of the

appropriateness of the risk management activities undertaken by

Global Treasury. Internal Audit provides independent assurance

that risk is managed effectively.

Capital risk

Capital management

(Audited)

Our approach to capital management is driven by our strategic

and organisational requirements, taking into account the

regulatory, economic and commercial environment in which we

operate.

It is our objective to maintain a strong capital base to support the

risks inherent in our business, to invest in accordance with our

strategy and to meet regulatory capital requirements at all times.

To achieve this, our policy is to hold capital in a range of different

forms and all capital raising is agreed with major subsidiaries as

part of their individual and the group’s capital management

processes.

The policy on capital management is underpinned by a capital

management framework and our ICAAP. The framework

incorporates key capital risk appetites for CET1, Tier1, Total

Capital, Loss Absorbing Capacity ('LAC') and Leverage Ratio,

which enables us to manage our capital in a consistent manner.

Regulatory capital and economic capital are the two primary

measures used for the management and control of capital.

Capital measures:

•regulatory capital is the capital which we are required to hold in

accordance with the rules established by regulators; and

•economic capital is the internally calculated capital requirement

to support risks to which we are exposed and forms a core part

of the ICAAP.

ICAAP is an assessment of the group’s capital position, outlining

both regulatory and internal capital resources and requirements

resulting from our business model, strategy, risk profile,

performance and planning, and the findings arising from stress

testing. Our assessment of capital adequacy is driven by an

assessment of risks that include credit, market, operational,

pension, insurance, structural foreign exchange and interest rate

risk in the banking book. Climate risk is also considered as part of

the ICAAP, and we are continuing to develop our approach for

climate risk management.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	53

The group’s ICAAP supports the determination of the capital risk

appetite and target ratios, as well as enables the assessment and

determination of capital requirements by regulators. Banking

subsidiaries prepare ICAAPs in line with global guidance, while

considering their local regulatory regimes to determine their own

risk appetites and ratios.

Our capital management process is articulated in our annual

capital plan which is approved by the Board. The plan is drawn up

with the objective of maintaining both an appropriate amount of

capital and an optimal mix between the different components of

capital. Capital and Risk-Weighted Assets ('RWAs') are monitored

and managed against the plan, with capital forecasts reported to

relevant governance committees. Each subsidiary manages its

own capital to support its planned business growth and meet its

local regulatory requirements within the context of the approved

annual group capital plan. In accordance with our capital

management objectives, capital generated by subsidiaries in

excess of planned requirements is returned to the Bank, normally

by way of dividends.

The Bank is the primary provider of capital to its subsidiaries and

these investments are substantially funded by the Bank’s own

capital issuance and profit retention. As part of its capital

management process, the Bank seeks to maintain a prudent

balance between the composition of its capital and that of its

investment in subsidiaries.

The principal forms of capital are included in the following

balances on the consolidated balance sheet: share capital, other

equity instruments, retained earnings, other reserves and

subordinated liabilities.

Regulatory capital requirements

(Audited)

The Hong Kong Monetary Authority (‘HKMA’) supervises the

group on both a consolidated and solo-consolidated basis and

therefore receives information on the capital adequacy of, and sets

capital requirements for, the group as a whole and on a solo-

consolidated basis. Individual banking subsidiaries and branches

are directly regulated by their local banking supervisors, who set

and monitor their capital adequacy requirements. In most

jurisdictions, non-banking financial subsidiaries are also subject to

the supervision and capital requirements of local regulatory

authorities.

The group uses the advanced internal ratings-based approach to

calculate its credit risk for the majority of its non-securitisation

exposures. For collective investment scheme exposures, the group

uses the look-through approach and mandate-based approach to

calculate the risk-weighted amount. For securitisation exposures,

the group uses the securitisation internal ratings-based approach,

securitisation external ratings-based approach, securitisation

standardised approach or securitisation fall-back approach to

determine credit risk for its banking book securitisation exposures.

For counterparty credit risk, the group uses both the standardised

(counterparty credit risk) approach and the internal models

(counterparty credit risk) approach to calculate its default risk

exposures for derivatives, and the comprehensive approach for

securities financing transactions. For market risk, the group uses

an internal models method approach ('IMM') to calculate its

general market risk for the risk categories of interest rate and

foreign exchange (including gold) exposures, and equity

exposures. The group also uses an IMM approach to calculate its

market risk in respect of specific risk for interest rate exposures

and equity exposures. The group uses the standardised (market

risk) approach for calculating other market risk positions, as well

as trading book securitisation exposures, and the standardised

(operational risk) approach to calculate its operational risk.

During the year, the group issued various capital and LAC

instruments in order to operate above required levels, including

buffers.

Basel III

(Unaudited)

The Basel III capital rules set out the minimum CET1 capital

requirement of 4.5% and total capital requirement of 8%. At

31 December 2022, the capital buffers applicable to the group

include the Capital Conservation Buffer (‘CCB’), the

Countercyclical Capital Buffer (‘CCyB’) and the Higher Loss

Absorbency (‘HLA’) requirement for Domestic Systemically

Important Banks (‘D-SIB’). The CCB is 2.5% and is designed to

ensure banks build up capital outside periods of stress. The CCyB

is set on an individual country/territory basis and is built up during

periods of excess credit growth to protect against future losses.

The CCyB for Hong Kong and the list of D-SIB are regularly

reviewed and last announced by the HKMA on 8 February 2023

and 30 December 2022 respectively. In its latest announcement,

the HKMA maintained the CCyB for Hong Kong at 1.0% and

maintained the D-SIB designation as well as HLA requirement at

2.5% for the group.

The group is classified as a material subsidiary under the Financial

Institutions (Resolution) (Loss-absorbing Capacity Requirements –

Banking Sector) Rules (‘LAC Rules’) and therefore is subject to the

LAC requirements to maintain its internal LAC risk-weighted ratio

and the internal LAC leverage ratio at or above specified

minimums.

Leverage ratio

(Unaudited)

Basel III introduces a simple non risk-based leverage ratio as a

complementary measure to the risk-based capital requirements. It

aims to constrain the build-up of excess leverage in the banking

sector, introducing additional safeguards against model risk and

measurement errors. The ratio is a volume-based measure

calculated as tier 1 capital divided by total exposures (both on-

balance sheet and off-balance sheet).


	At
	31 Dec	31 Dec
	2022	2021
	%	%
Leverage ratio	5.9	5.8
Capital and leverage ratio exposure measure	HK$m	HK$m
Tier 1 capital	545,572	530,701
Total exposure measure	9,301,363	9,192,814

The increase in the leverage ratio from 31 December 2021 to

31 December 2022 was mainly due to the increase in Tier 1

capital, partly offset by the rise in the exposure measure.

Further details regarding the group’s leverage position can be

viewed in the Banking Disclosure Statement at 31 December

2022, which will be available in the Regulatory Disclosure Section

of our website: www.hsbc.com.hk.

Capital adequacy at 31 December 2022

(Unaudited)

The following tables show the capital ratios, RWAs and capital

base as contained in the ‘Capital Adequacy Ratio’ return submitted

to the HKMA on a consolidated basis under the requirements of

section 3C(1) of the Banking (Capital) Rules.

The basis of consolidation for financial accounting purposes is

described in Note 1 on the Consolidated Financial Statements and

differs from that used for regulatory purposes. Further information

on the regulatory consolidation basis and a full reconciliation

between the group’s accounting and regulatory balance sheets

can be viewed in the Banking Disclosure Statement 2022.

Subsidiaries not included in the group's consolidation for

regulatory purposes are securities and insurance companies and

the capital invested by the group in these subsidiaries is deducted

from regulatory capital, subject to threshold.

The Bank and its banking subsidiaries maintain regulatory reserves

to satisfy the provisions of the Banking Ordinance and local

regulatory requirements for prudential supervision purposes.

Risk


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

At 31 December 2022, the effect of this regulatory reserve

requirement is to reduce the amount of reserves which can be

distributed to shareholders by HK$16,413m (31 December 2021:

HK$18,587m).

We closely monitor and consider future regulatory change and

continue to evaluate the impact upon our capital requirements of

regulatory developments. This includes the Basel III Reforms

package, which is currently scheduled for implementation by the

HKMA no earlier than 1 January 2024. We continue to participate

in consultations and monitor progress on the implementation.

Based on the results of the latest HKMA consultations, we foresee

a positive impact on our capital ratios on initial application. The

risk-weighted asset ('RWA') output floor under the Basel III

Reforms will commence once implemented, with an expected five-

year transitional provision. Any impact from the output floor would

be towards the end of the transition period. We are expecting the

issuance of final rules in 2023 which will enable us to better

estimate the impact.


Capital ratios
(Unaudited)
	At
	31 Dec	31 Dec
	2022	2021
	%	%
Common equity tier 1 (‘CET1’) capital ratio	15.3	15.4
Tier 1 capital ratio	16.9	16.8
Total capital ratio	18.8	18.7


Risk-weighted assets by risk type
(Unaudited)
	At
	31 Dec	31 Dec
	2022	2021
	HK$m	HK$m
Credit risk	2,589,633	2,497,803
Counterparty credit risk	133,290	148,188
Market risk	160,533	172,831
Operational risk	337,004	337,731
Sovereign concentration risk	1,708	—
Total	3,222,168	3,156,553


Risk-weighted assets by reportable segments
(Unaudited)
	At
	31 Dec	31 Dec
	2022	2021
	HK$m	HK$m
Wealth and Personal Banking	640,626	621,757
Commercial Banking	1,209,888	1,157,241
Global Banking	562,404	566,587
Markets and Securities Services	410,401	410,599
Corporate Centre	338,254	334,450
Other (GBM-other)	60,595	65,919
Total	3,222,168	3,156,553


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	55

Capital base

(Unaudited)

The following table sets out the composition of the group’s capital base under Basel III at 31 December 2022.


Capital base
(Unaudited)
	At
	31 Dec	31 Dec
	2022	2021
	HK$m	HK$m
Common equity tier 1 (‘CET1’) capital
Shareholders’ equity	727,880	714,139
– shareholders’ equity per balance sheet	875,320	856,809
– revaluation reserve capitalisation issue	(1,454)	(1,454)
– other equity instruments	(52,386)	(44,615)
– unconsolidated subsidiaries	(93,600)	(96,601)
Non-controlling interests	30,106	28,730
– non-controlling interests per balance sheet	65,943	66,702
– non-controlling interests in unconsolidated subsidiaries	(11,365)	(11,800)
– surplus non-controlling interests disallowed in CET1	(24,472)	(26,172)
Regulatory deductions to CET1 capital	(266,424)	(258,215)
– valuation adjustments	(2,376)	(1,834)
– goodwill and intangible assets	(32,064)	(28,883)
– deferred tax assets net of deferred tax liabilities	(3,688)	(3,353)
– cash flow hedging reserve	233	(60)
– changes in own credit risk on fair valued liabilities	(3,494)	1,322
– defined benefit pension fund assets	(27)	(18)
– significant Loss-absorbing capacity (‘LAC’) investments in unconsolidated financial sector entities	(140,987)	(139,239)
– property revaluation reserves1	(67,608)	(67,563)
– regulatory reserve	(16,413)	(18,587)
Total CET1 capital	491,562	484,654
Additional tier 1 (‘AT1’) capital
Total AT1 capital before regulatory deductions	54,019	46,073
– perpetual subordinated loans	52,386	44,615
– allowable non-controlling interests in AT1 capital	1,633	1,458
Regulatory deductions to AT1 capital	(9)	(26)
– significant LAC investments in unconsolidated financial sector entities	(9)	(26)
Total AT1 capital	54,010	46,047
Total tier 1 capital	545,572	530,701
Tier 2 capital
Total tier 2 capital before regulatory deductions	68,118	67,802
– perpetual subordinated debt2	—	3,119
– term subordinated debt	19,505	14,972
– property revaluation reserves1	31,078	31,057
– impairment allowances and regulatory reserve eligible for inclusion in tier 2 capital	16,008	17,471
– allowable non-controlling interests in tier 2 capital	1,527	1,183
Regulatory deductions to tier 2 capital	(6,378)	(8,025)
– significant LAC investments in unconsolidated financial sector entities	(6,378)	(8,025)
Total tier 2 capital	61,740	59,777
Total capital	607,312	590,478

1Includes the revaluation surplus on investment properties which is reported as part of retained earnings and adjustments made in accordance with

the Banking (Capital) Rules issued by the HKMA.

2This Tier 2 capital instrument is grandfathered under Basel III and has been phased out in full after 31 December 2021.

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

Disclosure Statement 2022.

Risk


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

Non-trading book foreign exchange exposures

Structural foreign exchange exposures

(Unaudited)

A Structural foreign exchange exposure arises from the capital

invested or net assets in a foreign operation together with any

associated hedging. A foreign operation is defined as a subsidiary,

associate, joint arrangement or branch, the activities of which are

conducted in a currency other than that of the reporting entity. An

entity's functional reporting currency is normally that of the

primary economic environment in which the entity operates.

Exchange differences on structural exposures are recognised in

other comprehensive income ('OCI’). The group uses Hong Kong

dollar as our presentation currency in our consolidated financial

statements. Therefore, our consolidated balance sheet is affected

by exchange differences between Hong Kong dollar and all the

non-Hong Kong dollar functional currencies of foreign operation.

Our structural foreign exchange exposures are managed with the

primary objective of ensuring, where practical, that our

consolidated capital ratios and the capital ratios of individual

banking subsidiaries are largely protected from the effect of

changes in exchange rates.

We hedge structural foreign exchange positions where it is capital

efficient to do so, and subject to approved limits. Hedging

positions are monitored and rebalanced periodically to manage

RWA or downside risks associated with group’s foreign currency

investments.

The group had the following net structural foreign currency

exposures that were greater than 10% of the total net structural

foreign currency exposures:


	Local Currency (m)	HK$ equivalent (m)
At 31 Dec 2022
Renminbi	241,134	272,709
US dollars	10,891	84,902
At 31 Dec 2021
Renminbi	221,207	271,421
US dollars	10,224	79,731

Transactional foreign exchange exposures

(Unaudited)

Transactional foreign exchange exposures arise from transactions

in the banking book generating profit and loss or OCI reserves in a

currency other than the reporting currency of the operating entity.

Transactional foreign exchange exposure generated through profit

and loss is periodically transferred to Markets and Securities

Services and managed within limits with the exception of limited

residual foreign exchange exposure arising from timing differences

or for other reasons. Transactional foreign exchange exposure

generated through OCI reserves is managed by the Global

Treasury sub-function within an agreed limit framework.

Liquidity and funding risk

Overview

(Audited)

Liquidity risk is the risk that we do not have sufficient financial

resources to meet our obligations as they fall due. Liquidity risk

arises from mismatches in the timing of cash flows. Funding risk is

the risk that we cannot raise funding or can only do so at

excessive cost.

The group has comprehensive policies, metrics and controls,

which aim to allow us to withstand severe but plausible liquidity

stresses. The group manages liquidity and funding risk at an

operating entity level to make sure that obligations can be met in

the jurisdiction where they fall due, generally without reliance on

other parts of the group.

Operating entities are required to meet internal minimum

requirements and any applicable regulatory requirements at all

times. These requirements are assessed through the Internal

Liquidity Adequacy Assessment Process ('ILAAP'), which ensures

that operating entities have robust strategies, policies, processes

and systems for the identification, measurement, management

and monitoring of liquidity and funding risk. The ILAAP informs

the validation of risk tolerance and the setting of risk appetite. It

also assesses the capability to manage liquidity and funding

effectively in each operating entity. Liquidity and funding risk

metrics are set and managed locally but are subject to robust

global review and challenge to ensure consistency of approach

and application of the Group’s policies and controls.

Framework

(Unaudited)

Global Treasury sub-function is responsible for the application of

policies and controls at a local operating entity level. The elements

of liquidity and funding risk management framework are

underpinned by a robust governance framework, with the two

major elements being:

•Asset and Liability Management Committees (‘ALCOs’) at the

group and entity level; and

•annual ILAAP used to validate risk tolerance and set risk

appetite.

All operating entities are required to prepare an ILAAP document

at appropriate frequency. Compliance with liquidity and funding

requirements is monitored and reported to ALCO, RMM and

Executive Committee on a regular basis.

Liquidity and Funding Risk management processes include:

•maintaining compliance with relevant regulatory requirements

of the operating entity;

•projecting cash flows under various stress scenarios and

considering the level of liquid assets necessary in relation

thereto;

•monitoring liquidity and funding ratios against internal and

regulatory requirements;

•maintaining a diverse range of funding sources with adequate

back-up facilities;

•managing the concentration and profile of term funding;

•managing contingent liquidity commitment exposures within

predetermined limits;

•maintaining debt financing plans;

•monitoring of depositor concentration in order to avoid undue

reliance on large individual depositors and ensuring 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.

Management of liquidity and funding risk

(Audited)

Funding and liquidity plans form part of the financial resource plan

that is approved by the Board. The Board-level risk appetite

measures are the liquidity coverage ratio (‘LCR’) and net stable

funding ratio (‘NSFR’). An internal liquidity metric ('ILM') is used to

supplement these regulatory metrics. An appropriate funding and

liquidity profile is managed through a wider set of measures:

•a minimum LCR requirement;

•a minimum NSFR requirement or other appropriate metric;

•an ILM requirement;

•a legal entity depositor concentration limit;

•cumulative term funding maturity concentrations limit;

•liquidity metrics to monitor minimum requirement by currency;

•intra-day liquidity;

•the application of liquidity funds transfer pricing; and

•forward-looking funding assessments.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	57

Sources of funding

(Unaudited)

Our primary sources of funding are customer current accounts,

customer savings deposits payable on demand or at short notice

and term deposits. We issue wholesale securities (secured and

unsecured) to supplement our customer deposits and change the

currency mix, maturity profile or location of our liabilities.

Currency mismatch

(Unaudited)

Group policy requires all operating entities to monitor material

single currency ILM and LCR. Limits are set to ensure that

outflows can be met, given assumptions on stressed capacity in

the FX swap markets.

Additional collateral obligations

(Unaudited)

Under the terms of our current collateral obligations of derivative

contracts (which are International Swaps and Derivatives

Association ('ISDA') compliant credit support annex ('CSA')

contracts), the additional collateral required to post in the event of

one-notch and two-notch downgrade in credit ratings is

immaterial.

Liquidity and funding risk in 2022

(Unaudited)

The group is required to calculate its LCR and NSFR on a

consolidated basis in accordance with rule 11(1) of The Banking

(Liquidity) Rules ('BLR'), and is required to maintain both LCR and

NSFR of not less than 100%.

The average LCR of the group for the period are as follows:


	Quarter ended
	31 Dec	31 Dec
	2022	2021
	%	%
Average LCR	157.8	154.3

The average LCR increased by 3.5 percentage points from 154.3%

for the quarter ended 31 December 2021 to 157.8% for the quarter

ended 31 December 2022.

The majority of high quality liquid assets ('HQLA') included in the

LCR are Level 1 assets as defined in the BLR, which consist mainly

of government debt securities.

The total weighted amount of HQLA of the group for the period

are as follows:


	Weighted amount (average value) at quarter ended
	31 Dec	31 Dec
	2022	2021
	HK$m	HK$m
Level 1 assets	1,744,471	1,767,933
Level 2A assets	80,348	79,368
Level 2B assets	61,184	64,106
Total	1,886,003	1,911,407

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


	Quarter ended
	31 Dec	31 Dec
	2022	2021
	%	%
Net stable funding ratio	152.3	151.9

The NSFR increased by 0.4 percentage points from 151.9% for the

quarter ended 31 December 2021 to 152.3% for the quarter ended

31 December 2022.

Interdependent assets and liabilities included in the group's NSFR

are certificates of indebtedness held and legal tender notes issued.

Interest Rate Risk in the Banking Book

(Unaudited)

Assessment and risk appetite

Interest rate risk in the banking book is the risk of an adverse

impact to earnings or capital due to changes in market interest

rates. It is generated by our non-traded assets and liabilities,

specifically loans, deposits and financial instruments that are not

held for trading intent or in order to hedge positions held with

trading intent. Interest rate risk that can be economically hedged

may be transferred to the Global Treasury sub-function. Hedging is

generally executed through interest rate derivatives or fixed-rate

government bonds. Any interest rate risk that Global Treasury sub-

function cannot economically hedge is not transferred and will

remain within the global business where the risks originate.

The Global Treasury sub-function uses a number of measures to

monitor and control interest rate risk in the banking book,

including:

•net interest income sensitivity; and

•economic value of equity sensitivity; and

•hold-to-collect-and-sell value at risk.

Net interest income sensitivity

A principal part of our management of non-traded interest rate risk

is to monitor the sensitivity of expected net interest income (‘NII’)

under varying interest rate scenarios (i.e. simulation modelling),

where all other economic variables are held constant. This

monitoring is undertaken at an entity level, where entities

calculate both one-year and five-year NII sensitivities across a

range of interest rate scenarios.

NII sensitivity figures represent the effect of pro forma movements

in projected yield curves based on a static balance sheet size and

structure. The exception to this is where the size of the balances or

repricing is deemed interest rate sensitive, for example, early

prepayment of mortgages. These sensitivity calculations do not

incorporate actions that would be taken by Markets Treasury or in

the business that originates the risk to mitigate the effect of

interest rate movements.

The NII sensitivity calculations assume that interest rates of all

maturities move by the same amount in the ‘up-shock’ scenario.

The sensitivity calculations in the ‘down-shock’ scenarios reflect

no floors to the shocked market rates. However, customer

product-specific interest rate floors are recognised where

applicable.

Economic value of equity sensitivity

Economic value of equity (‘EVE’) represents the present value of

the future banking book cash flows that could be distributed to

equity holders under a managed run-off scenario. This equates to

the current book value of equity plus the present value of future

NII in this scenario. EVE can be used to assess the economic

capital required to support interest rate risk in the banking book.

An EVE sensitivity represents the expected movement in EVE due

to pre-specified interest rate shocks, where all other economic

variables are held constant. Operating entities are required to

monitor EVE sensitivities as a percentage of capital resources.

Further details of HSBC’s risk management of interest rate risk in

the banking book can be found in the Pillar 3 Disclosures at

31 December 2022.

Pension Risk

(Unaudited)

Our global pensions strategy is to move from defined benefit to

defined contribution plans, where local law allows and it is

considered competitive to do so.

In defined contribution pension plans, the contributions that HSBC

is required to make are known, while the ultimate pension benefit

will vary, typically with investment returns achieved by investment

choices made by the employee. While the market risk to HSBC of

defined contribution plans is low, the group is still exposed to

operational and reputational risk.

Risk


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

In defined benefit pension plans, the level of pension benefit is

known. Therefore, the level of contributions required by HSBC will

vary due to a number of risks, including:

•investments delivering a return below that required to provide

the projected plan benefits;

•the prevailing economic environment leading to corporate

failures, thus triggering write-downs in asset values (both

equity and debt);

•a change in interest rate expectations, causing an increase in

the value of plan liabilities; and

•plan members living longer than expected (known as longevity

risk).

Pension risk is assessed using an economic capital model that

takes into account potential variations in these factors. The impact

of these variations on both pension assets and pension liabilities is

assessed using a 1-in-200-year stress test. Scenario analysis and

other stress tests are also used to support pension risk

management, including the review of de-risking opportunities. To

fund the benefits associated with defined benefit plans,

sponsoring group companies make regular contributions in

accordance with advice from actuaries and in consultation with

the plan’s fiduciaries where relevant. These contributions are

normally 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 are required when plan

assets are considered insufficient to cover the existing pension

liabilities. Contribution rates are typically revised annually or once

every three years, depending on the plan.

The defined benefit plans invest contributions in a range of

investments designed to limit the risk of assets failing to meet a

plan’s liabilities. Any changes in expected returns from the

investments may also change future contribution requirements. In

pursuit of these long-term objectives, an overall target allocation is

established between asset classes of the defined benefit plan. In

addition, each permitted asset class has its own benchmarks, such

as stock-market indices. The target allocations are reviewed

regularly, typically once every three to five years, and more

frequently if required by local legislation or circumstances. The

process generally involves an asset and liability review.

Market Risk

Overview

(Unaudited)

Market risk is the risk of adverse financial impact on trading

activities arising from changes in market parameters such as

interest rates, foreign exchange rates, asset prices, volatilities,

correlations and credit spreads.

Market risk management

Key developments in 2022

(Unaudited)

There were no material changes to our policies and practices for

the management of market risk in 2022.

Governance and structure

(Unaudited)

The following diagram summarises the main business areas where

trading market risks reside, and the market risk measures used to

monitor and limit exposures.


Risk types	Trading risk
Risk types	•Foreign exchange and commodities •Interest rates •Credit spreads •Equities
Global business	GBM
Risk measure	Value at risk \| Sensitivity \| Stress Testing

The objective of our risk management policies and measurement

techniques is to manage and control market risk exposures to

optimise return on risk while maintaining a market profile

consistent with our established risk appetite.

Market risk is managed and controlled through limits approved by

the group's Board of Directors. These limits are allocated across

business lines and to the group’s legal entities. The group has an

independent market risk management and control sub-function,

which is responsible for measuring, monitoring and reporting

market risk exposures against limits on a daily basis. Each

operating entity is required to assess the market risks arising in its

business and to transfer them either to its local Markets and

Securities Services or Market Treasury for management, or to

separate books managed under the supervision of the local ALCO.

The Traded Risk sub-function enforces the controls around trading

in permissible instruments approved for each site as well as

changes that follow completion of the new product approval

process. Trading Risk also restricts trading in the more complex

derivatives products to offices with appropriate levels of product

expertise and robust control systems.

Key risk management processes

Monitoring and limiting market risk exposures

(Audited)

Our objective is to manage and control market risk exposures

while maintaining a market profile consistent with our risk

appetite.

We use a range of tools to monitor and limit market risk exposures

including sensitivity analysis, value at risk (‘VaR’) and

stress testing.

Sensitivity analysis

(Unaudited)

Sensitivity analysis measures the impact of individual market

factor movements on specific instruments or portfolios, including

interest rates, foreign exchange rates and equity prices. We use

sensitivity measures to monitor the market risk positions within

each risk type. Granular sensitivity limits are set for trading desks

with consideration of market liquidity, customer demand and

capital constraints, among other factors.

Value at risk

(Audited)

VaR is a technique for estimating potential losses on risk positions

as a result of movements in market rates and prices over a

specified time horizon and to a given level of confidence. The use

of VaR is integrated into market risk management and calculated

for all trading positions regardless of how we capitalise them.

Where we do not calculate VaR explicitly, we use alternative tools

as summarised in the ‘Stress testing’ section below.

Our models are predominantly based on historical simulation that

incorporates the following features:

•historical market rates and prices, which are calculated with

reference to foreign exchange rates, commodity prices, interest

rates, equity prices and the associated volatilities;

•potential market movements that are calculated with reference

to data from the past two years; and

•calculations to a 99% confidence level and using a one-day

holding period.

The models also incorporate the effect of option features on the

underlying exposures. The nature of the VaR models means that

an increase in observed market volatility will lead to an increase in

VaR without any changes in the underlying positions.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	59

VaR model limitations

(Audited)

Although a valuable guide to risk, VaR is used with awareness of

its limitations. For example:

•the use of historical data as a proxy for estimating future

market moves may not encompass all potential market events,

particularly those that are extreme in nature.

•the use of a one-day holding period for risk management

purposes of trading books assumes that this short period is

sufficient to hedge or liquidate all positions.

•the use of a 99% confidence level by definition does not take

into account losses that might occur beyond this level of

confidence.

•VaR is calculated on the basis of exposures outstanding at the

close of business and therefore does not reflect intra-day

exposures.

Risk not in VaR framework

(Unaudited)

The risks not in VaR (‘RNIV’) framework captures and capitalises

material market risks that are not adequately covered in the VaR

model.

Risk factors are reviewed on a regular basis and are either

incorporated directly in the VaR models, where possible, or

quantified through either the VaR-based RNIV approach or a stress

test approach within the RNIV framework. While VaR-based RNIVs

are calculated by using historical scenarios, stress-type RNIVs are

estimated on the basis of stress scenarios whose severity is

calibrated to be in line with the capital adequacy requirements.

The outcome of the VaR-based RNIV approach is included in the

overall VaR calculation but excluded from the VaR measure used

for regulatory back-testing. In addition, the stressed VaR measure

also includes risk factors considered in the VaR-based RNIV

approach. Stress-type RNIVs include a de-peg risk measure to

capture risk to pegged and heavily managed currencies.

Stress testing

(Unaudited)

Stress testing is an important procedure that is integrated into our

market risk management framework to evaluate the potential

impact on portfolio values of more extreme, although plausible,

events or movements in a set of financial variables. In such

scenarios, losses can be much greater than those predicted by

VaR modelling.

Stress testing is implemented at legal entity, regional and overall

Group levels. A set of scenarios is used consistently across all

regions within the Group. The risk appetite around potential stress

losses for the group is set and monitored against a referral limit.

Market risk reverse stress tests are designed to identify

vulnerabilities in our portfolios by looking for scenarios that lead to

loss levels considered severe for the relevant portfolio. These

scenarios may be quite local or idiosyncratic in nature, and

complement the systematic top-down stress testing.

Stress testing and reverse stress testing provide senior

management with insights regarding the ‘tail risk’ beyond VaR, for

which our appetite is limited.

Trading portfolios

(Audited)

Trading portfolios comprise positions held for client servicing and

market-making, with the intention of short-term resale and/or to

hedge risks resulting from such positions.

Back-testing

(Audited)

We routinely validate the accuracy of our VaR models by back-

testing the VaR metric against both actual and hypothetical profit

and loss. Hypothetical profit and loss excludes non-modelled items

such as fees, commissions and revenue of intra-day transactions.

The number of hypothetical loss back-testing exceptions, together

with a number of other indicators, are used to assess model

performance and to consider whether enhanced internal

monitoring of a VaR model is required.

We back-test our VaR at set levels of our group entity hierarchy.

Market risk in 2022

(Unaudited)

During 2022, financial markets were driven by concerns over high

inflation and recession risks, against the backdrop of the Russia-

Ukraine conflict and continued Covid-19 pandemic restrictions in

Asia. Throughout the year, major central banks tightened their

monetary policies at a faster pace than previously anticipated in

order to counter rising inflation. As a result, bond markets sold off

sharply and bond yields rose to multi-year highs. Equity valuations

saw pronounced volatility and fell across most market sectors due

to recession risks and tighter liquidity conditions. Foreign

exchange markets were largely dominated by a strong US dollar,

as a result of global geopolitical instability and the relatively fast

pace of monetary tightening by the US Federal Reserve. Investors

sentiment remained fragile in credit markets, with credit spreads

in investment-grade and high-yield debt benchmarks reaching

their widest levels since the start of the Covid-19 pandemic. The

Chinese property sector was underperforming in 2022, continuing

the wave of defaults and debt restructuring from 2021.

We continued to manage market risk prudently during 2022.

Sensitivity exposures and VaR remained within appetite as the

business pursued its core market-making activity in support of our

customers. Market risk was managed using a complementary set

of risk measures and limits, including stress and scenario analysis.

Trading portfolios

(Audited)

Value at risk of the trading portfolios

Trading VaR was predominantly generated by the Markets and

Securities Services business. Trading VaR was higher as at

31 December 2022 compared to 31 December 2021, mainly driven

by increase in VaR exposed to interest rate risk and foreign

exchange risk, partially offset by reduction in VaR from equity risk

and credit spread risk.

Risk


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

The trading VaR for the year is shown in the table below.


Trading value at risk, 99% 1 day1
(Audited)
	Foreign exchange and commodity	Interest rate	Equity	Credit spread	Portfolio diversification2	Total3
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2022
Year end	95	195	48	18	(154)	202
Average	55	172	55	24		208
Maximum	99	272	98	42		357

At 31 Dec 2021
Year end	36	135	60	31	(74)	188
Average	49	158	77	34		177
Maximum	78	218	108	62		241

1Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.

2Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in

unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange,

together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A

negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types,

it is not meaningful to calculate a portfolio diversification benefit for these measures.

3The total VaR is non-additive across risk types due to diversification effects.

Climate risk (unaudited) TCFD

Overview

Climate risk relates to the financial and non-financial impacts that

may arise as a result of climate change. Climate risk can

materialise through:

•physical risk, which arises from the increased frequency and

severity of weather events, such as typhoons and floods, or

chronic shifts in weather patterns;

•transition risk, which arises from the process of moving to a

low-carbon economy, including changes in government or

public policy, technology and end-demand; and

•greenwashing risk, which arises from the act of knowingly or

unknowingly misleading stakeholders regarding the group’s

strategy relating to climate, the climate impact/benefits of a

product or service, or the climate commitments or performance

of its customers.

Approach and policy

The group is affected by climate risks either directly or indirectly

through its relationships with its customers, resulting in both

financial and non-financial impacts.

The group may face direct exposure to the physical impacts of

climate change, which could negatively affect its day-to-day

operations. Any detrimental impact to its customers from climate

risk could negatively impact the group either through credit losses

on its loan book or losses on trading assets. The group may also

be impacted by reputational concerns related to the climate action

or inaction of its customers. In addition, if the group is perceived

to mislead stakeholders on its business activities or if it is

perceived to fail to achieve its stated net zero ambitions, it could

face greenwashing risk resulting in significant regulatory and legal

risks.

The group has integrated climate risk into its existing risk

taxonomy, and incorporated it within the risk management

framework through the policies and controls for existing risks

where appropriate.

The group’s climate risk approach is aligned to the Group-wide

risk management framework and three lines of defence model,

which sets out how the group identifies, assesses, and manages

its risks. This approach ensures the group and senior management

have visibility and oversight of the group’s key climate risks.

The first line of defence has ultimate accountability for managing

climate risk in line with risk appetite and owns the related

controls.

The second line of defence sets policies and minimum control

standards, provides subject matter expertise and reviews and

challenges to first line activities to ensure actions relating to

climate are appropriate. Risk Stewards in the existing risk

taxonomy are responsible for the oversight of climate risk impacts

on their risk types.

The third line of defence provides independent assurance to

management that climate risk management, governance and

control processes are designed and operating effectively.

The group’s approach to managing climate risk is currently

focused on understanding physical and transition impacts across

five priority risk types: wholesale credit risk, retail credit risk,

resilience risk, regulatory compliance risk and reputational risk.

On climate risk impact assessment, the group rely on the Group's

high-level materiality rating on how climate risk may impact risk

types within the Group’s taxonomy over a 12-month horizon, and

how the level of risk may increase over longer time horizons.

However, the group observes that the pace of transition in Asia-

Pacific varies market by market.

The group considers greenwashing to be an important risk that is

likely to increase over time, as the group looks to develop

capabilities and products to achieve its net zero ambition, and

work with its clients to help them transition to a low-carbon

economy. To reflect this, the group’s climate risk approach has

been updated to include greenwashing risk, and guidance has

been provided to the first and second lines of defence on the key

risk indicators, and how it should be managed.

The tables below provide an overview of the climate risk drivers

considered within the Group's climate risk framework. Primary risk

drivers refer to risk drivers aligned to the Financial Stability Board's

TCFD, which sets a framework to help public companies and other

organisations disclose climate-related risks and opportunities.

Thematic risk drivers are bespoke to the group's internal climate

risk framework.

The following table provides an overview of the physical and

transition climate risk drivers.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	61


Climate risk – primary risk drivers		Details	Potential Impacts
Physical	Acute	Increased frequency and severity of weather events causing disruption to business operations	•Decreased real estate values •Decreased household income and wealth •Increased costs of legal and compliance •Increased public scrutiny •Decreased profitability •Lower asset performance
Physical	Chronic	Longer-term shifts in climate patterns (e.g. sustained higher temperatures) that may cause sea level rise or chronic heat waves
Transition	Policy and legal	Mandates on, and regulation of, existing products and services. Litigation from parties who have suffered from the effects of climate change
	Technology	Replacement of existing products with lower emission options
	End-demand (market)	Changing consumer demand from individuals and corporates
	Reputational	Increased scrutiny following a change in stakeholder perceptions and expectations of climate-related action or inaction

The table below provides an overview of the drivers of greenwashing risk, which is considered to be a thematic risk driver within the

Group's framework.


Climate risk – thematic risk drivers		Details
Greenwashing	Firm	Failure to be accurate and transparent in communicating the group’s progress against its net zero ambition
	Product	Not taking steps to ensure the group’s ‘green’ and ‘sustainable’ products are developed and marketed appropriately
	Client	Failing to check the group’s products are being used for ‘green’ and ‘sustainable’ business activity and assessing the credibility of its customers’ climate commitments and/or progress against key performance indicators

Climate risk management (unaudited)

Key developments in 2022

The group’s dedicated climate risk programme continues to

support the development of its climate risk management

capabilities. The key developments in 2022 included:

•The Board approved the group climate strategy.

•The Group updated its climate risk approach to include all risk

types in its risk taxonomy.

•The group provided a climate-related training for the Board, and

expanded training to employees covering additional role-

specific topics, as well as increasing the availability of training

to the wider workforce.

•The group developed new climate risk metrics to assess the

impact of physical risk on the group’s retail mortgage portfolio

in Hong Kong.

•The Group enhanced its transition and physical risk

questionnaire and scoring tool, which helps the group to assess

and improve its understanding of the impact of transition and

physical risk on its customers' business models, and used them

for certain corporate clients in high climate transition risk

sectors.

•The Group developed its first internal climate scenario exercise,

where it used bespoke scenarios that were designed to

articulate a view of the range of potential outcomes for global

climate change. For further details of the internal climate

scenario analysis, see page 11.

Governance and structure

The Board takes overall responsibility for the group’s climate

strategy, overseeing executive management in developing the

execution and associated reporting.

The group Chief Risk Officer is responsible for the management of

climate-related risks, including responsibility for governance, risk

management, stress testing and scenario analysis.

The group CROF oversees all risk activities relating to climate risk

management and escalation of climate risks.

The group Risk Management Meeting and the group Risk

Committee receive regular updates on the climate risk profile, top

and emerging climate risks, and progress of the climate risk

programme.

A working group was established to coordinate the regional

implementation of climate risk-related enhancements across the

Compliance sub-function.

Risk appetite

The group’s climate risk appetite supports the oversight and

management of the financial and non-financial risks from climate

change, and supports the business to deliver its climate ambition

in a safe and sustainable way. The group’s initial risk appetite

focuses on the oversight and management of climate risks across

the five priority areas, including exposure to high transition risk

sectors in its wholesale portfolio and physical risk exposures in its

retail portfolio. These metrics have been implemented at group

level and locally where appropriate. The group continues to review

its risk appetite regularly to capture the most material climate risks

and will enhance its metrics over time.

Policies, processes and controls

The group is integrating climate risk into the policies, processes

and controls across many areas of its organisations, and the group

will continue to update these as its climate risk management

capabilities mature over time.

In 2022, the group incorporated climate considerations into new

money request processes for its wholesale business. The group

also continued to enhance its climate risk scoring tool, which will

enable the group to assess its customers' exposures to climate

risk.

The Group also published and updated the energy policy, covering

oil and gas, power and utilities, hydrogen, renewables, nuclear

and biomass sectors and it updated the thermal coal phase-out

policy after its initial publication in 2021.

Wholesale credit risk

Identification and assessment

The Group has identified six sectors where its wholesale credit

customers have the highest climate risk, based on their carbon

emissions. These are automotive, chemicals, construction and

building materials, metals and mining, oil and gas, and power and

utilities. In these sectors, the Group has a transition and physical

risk questionnaire to help assess and improve its understanding of

the impact of climate changes on its customers' business models

and any related transition strategies. Relationship managers work

with customers to record questionnaire responses, which also help

to identify potential business opportunities to support customers’

transition. The questionnaire is also being completed for the

Group’s largest customers in the agriculture, industrials, real

estate and transportation sectors.

The Group intends to continue increasing the scope of the

questionnaire in 2023 by including more customers.

Risk


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

Management

In 2022, the Group updated its credit policy to require relationship

managers to comment on climate risk factors in credit applications

for new money requests. The Group continues to use a climate

risk scoring tool, which provides a climate risk score for each

customer based on the questionnaire responses. The climate risk

score is used to inform portfolio level management decisions and

is made available to relationship management and credit risk

managements teams. The scoring tool will be enhanced and

refined over time as more data becomes available.

In 2023, the Group aims to further embed climate risk

considerations in its credit risk management processes.

Aggregation and reporting

The group internally reports its exposure and RWAs to the six high

transition risk sectors in the wholesale portfolio. The group also

reports the proportion of questionnaire responses that have a

board policy or management plan for transition risk. These are

included as part of the regular risk profile paper presented at the

group CROF which is held quarterly.

Retail credit risk

Identification and assessment

The Group continues to improve its identification and assessment

of climate risk within its retail mortgage portfolio, with increased

investments in physical risk data and enhancements to its internal

risk assessment capabilities. The Group prioritised applying these

improvements to its largest mortgage markets to understand its

physical risk exposure based on centrally available data. The

Group has also started to identify and monitor potential physical

risk in the remainder of its mortgage markets, using locally

available data.

In 2022, the Group undertook a stress test exercise for Singapore

at the behest of the Monetary Authority of Singapore. In addition,

a Group-wide internal climate stress testing exercise was

undertaken to further its understanding and assessment of the

potential impact of physical risk to its mortgage portfolios. The

Group completed a detailed asset-level analysis for Hong Kong,

Singapore and Australia which represent three of the group’s

largest residential mortgage portfolios in Asia-Pacific.

Management

The Group continues to review and update its retail credit risk

management policies and processes to further embed climate risk,

whilst also monitoring local regulatory developments to ensure

compliance.

Aggregation and reporting

The Group manages and monitors the integration of climate risk

across Wealth and Personal Banking through the CROF.

The Group assesses the progress of the implementation of its

strategic climate risk plans and ensures that operational processes

and risk management frameworks are updated as its data and

understanding of climate risk evolves.

How we are starting to measure climate risk

In 2022, the group implemented physical risk exposure

assessment across mortgage portfolios in Asia-Pacific. For Hong

Kong and Singapore, the assessment is based on property level

peril data.

For other markets, locally relevant data sources were used to

identify properties or areas with potentially heightened climate

risk. These climate risk exposure metrics are in the early stages of

development and the underlying data and methodologies may

require refinement in the future, although they provide an

indicative view.

Resilience risk

Identification and assessment

The group’s Operational and Resilience Risk sub-function is

responsible for overseeing the identification and assessment of

physical and transition climate risks that may impact on its

operational and resilience capabilities.

The group is developing a deeper understanding of the risks to

which its properties are subject, and assess the mitigants to

ensure ongoing operational resilience.

Management

Operational and Resilience Risk policies are reviewed and

enhanced periodically so they remain relevant to evolving risks,

including those linked to climate change. The capability of our

colleagues is enhanced through training, periodic communications

and dedicated guidance.

Aggregation and reporting

With its ambition to achieve net zero in its own operations, the

Group is particularly focused on developing measures to facilitate

proactive risk management and assess progress against this

strategic target.

Operational and Resilience Risk is represented at the group's

CROF.

Regulatory compliance risk

Identification and assessment

The Compliance sub-function continues to prioritise the

identification and assessment of compliance risks that may arise

from climate risk.

Throughout 2022, focus remained on greenwashing, particularly

with regard to the development and ongoing governance of new,

changed or withdrawn climate and ESG products and services,

and ensuring sales practices and marketing materials were clear,

fair and not misleading.

To support the ongoing management and mitigation of

greenwashing, the Compliance sub-function worked across all

business lines to enhance the group’s product controls. This

improved the group’s ability to identify, assess and manage

product-related greenwashing risks throughout the product

governance lifecycle. Examples of ongoing enhancements include:

•integrating the consideration and mitigation of climate and ESG

risks within the group’s existing product governance

framework;

•enhancing the group’s product templates and forms to ensure

climate risk is actively considered and documented by the

business within product review and creation; and

•clarifying and improving product governance policies,

associated guidance and key governance terms of reference to

ensure new climate and ESG products, as well as climate- and

ESG-related amendments to existing products, comply with

both internal and external standards, and are subject to robust

governance.

Management

The Group policies continue to set the Group-wide standards that

are required to manage the risk of breaches of its regulatory duty

to customers, including those related to climate risk, ensuring fair

customer outcomes are achieved. The Group’s product and

customer lifecycle policies have been enhanced to ensure they

take climate into consideration. They are reviewed on a periodic

basis to ensure they remain relevant and up to date.

The Compliance sub-function continues to focus on improving the

capability of colleagues through training, communications and

dedicated guidance, with a particular focus on ensuring colleagues

remain up to date with changes in the evolving regulatory

landscape.

Aggregation and reporting

The Compliance sub-function continues to operate an ESG and

Climate Risk Working Group at a Group level to track and monitor

the integration and embedding of climate risk within the

management of regulatory compliance risks. The working group

also continues to monitor ongoing regulatory and legislative

changes across the ESG and climate risk agenda. In Asia-Pacific, a


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	63

working group was established in February 2022 to coordinate the

regional implementation of climate risk-related enhancements

across the Compliance sub-function.

The Group has continued to develop its key climate risk-related

metrics and indicators, aligned to the broader focus on regulatory

compliance risks, to continually improve its risk monitoring

capability. This has included the development of a climate-specific

risk profile, which is produced at a Group level and regularly

disseminated and reviewed at regional level, alongside the

introduction and improvement of existing metrics and indicators.

The Compliance sub-function continues to be represented at the

Group’s and the group's CROF.

Reputational risk

Identification and assessment

The Group implements sustainability risk policies, including the

Equator Principles as part of its broader reputational risk

framework. The Group focuses on sensitive sectors that may have

a high adverse impact on people or the environment, and in which

the Group has a significant number of customers. A key area of

focus is high-carbon emission sectors, which include oil and gas,

power generation, mining, agricultural commodities and forestry.

In 2022, the Group published an updated energy policy, covering

oil and gas, power and utilities, hydrogen, renewables, nuclear

and biomass. It has also updated its thermal coal phase-out policy

after its initial publication in 2021.

Management

As the primary point of contact for customers, the group’s

relationship managers are responsible for checking that customers

meet policies aimed at reducing carbon emissions. The group's

network in Asia-Pacific of more than 20 sustainability risk

managers provides local policy support and expertise to

relationship managers. A regional Sustainability Risk team

provides a higher level of guidance and is responsible for the

oversight of policy compliance and implementation over wholesale

banking activities.

Aggregation and reporting

The Sustainability Risk Oversight Forum provides a group-wide

forum for senior members of the group's Risk, Compliance and

global business management to support the management of

sustainability risks. It also oversees the development and

implementation of sustainability risk policies. Cases involving

complex sustainability risk issues related to customers,

transactions or third parties are managed through the reputational

risk and client selection governance process. The Group reports

annually on its implementation of the Equator Principles and the

corporate loans, project-related bridge loans and advisory

mandates completed under the principles.

For the latest report, see: www.hsbc.com/who-we-are/our-climate-

strategy/sustainability-risk/equator-principles.

Other risks

The following section outlines key developments that the Group

made to embed climate considerations within other risk types in

its risk taxonomy. All risk taxonomies, including those not

referenced below, are assessed to determine the potential

materiality of the impact of climate risk on their risk framework.

Treasury risk

The Group established a treasury risk-specific climate risk

governance forum to provide oversight over climate-related topics

that may impact Treasury. The plan in 2023 is to update relevant

treasury risk policies to strengthen its climate risk guidance and

requirements pertaining to treasury risk.

Traded risk

The Group established a climate stress testing-focused working

group to coordinate the implementation of climate stress testing,

and support the delivery of internal climate scenario analysis.

Risk


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

Resilience risk

(Unaudited)

Overview

Resilience risk is the risk of sustained and significant business

disruption, execution, delivery or physical security or safety

events, causing the inability to provide critical services to our

customers, affiliates, and counterparties. Resilience risk arises

from failures or inadequacies in processes, people, systems or

external events.

Resilience risk management

Key developments in 2022

The Operational and Resilience Risk sub-function provides robust

Risk Steward oversight of the management of resilience risk by

the group businesses, functions and legal entities. This includes

effective and timely independent challenge and expert advice.

During the year, we carried out a number of initiatives to keep

pace with geopolitical, regulatory and technology changes and to

strengthen the management of resilience risk:

•We focused on enhancing our understanding of our risk and

control environment, by updating our risk taxonomy and

control libraries, and refreshing risk and control assessments.

•We implemented heightened monitoring and reporting of

cyber, third party, business continuity and payment/sanctions

risks resulting from the Russia/Ukraine war, and enhanced

controls and key processes where needed.

•We provided analysis and easy-to-access risk and control

information and metrics to enable management to focus on

non-financial risks in their decision-making and appetite

setting.

•We further strengthened our non-financial risk governance and

senior leadership, and improved our coverage and Risk

Steward Oversight for data privacy and change execution.

We prioritise our efforts on material risks and areas undergoing

strategic growth, aligning our location strategy to this need.

Governance and structure

The Operational and Resilience Risk target operating model

provides a globally consistent view across resilience risks,

strengthening our risk management oversight while operating

effectively as part of a simplified non-financial risk structure. We

view resilience risk across nine sub-risk types related to: failure to

manage third parties; technology and cybersecurity; transaction

processing; failure to protect people and places from physical

malevolent acts; business interruption and incident risk; data risk;

change execution risk; building unavailability; and workplace

safety.

Risk appetite and key escalations for resilience risk are reported to

the group Risk Management Meeting, chaired by the group Chief

Risk Officer, with an escalation path to the Group Risk Non-

Financial Risk Management Board (NFRMB), chaired by the Group

Chief Risk and Compliance Officer.

Key risk management processes

Operational resilience is our ability to anticipate, prevent, adapt,

respond to, recover and learn from operational disruption while

minimising customer and market impact. Resilience is determined

by assessing whether we are able to continue to provide our most

important services, within an agreed level. This is achieved via

day-to-day oversight, periodic and ongoing assurance, such as

deep dive reviews and controls testing, which may result in

challenges being raised to the business by Risk Stewards. Further

challenge is also raised in the form of quarterly Risk Steward

opinion papers to formal governance. We accept we will not be

able to prevent all disruption but we prioritise investment to

continually improve the response and recovery strategies for our

most important business services.

Regulatory compliance risk

(Unaudited)

Overview

Regulatory compliance risk is the risk associated with breaching

our duty to clients and other counterparties, inappropriate market

conduct and breaching related financial services regulatory

standards. Regulatory compliance risk arises from the failure to

observe relevant laws, codes, rules and regulations and can

manifest itself in poor market or customer outcomes and lead to

fines, penalties and reputational damage to our business.

Regulatory compliance risk management

Key developments in 2022

The dedicated programme to embed our updated purpose-led

conduct approach has concluded. Work to map applicable

regulations to our risks and controls continues in 2023 alongside

adoption of new tools to support enterprise-wide horizon scanning

for new regulatory obligations and to manage our regulatory

reporting inventories. Climate risk has been integrated into

regulatory compliance policies and processes, with enhancements

made to the product governance framework and controls in order

to ensure the effective consideration of climate and in particular

Greenwashing risks.

Governance and structure

The group Chief Compliance Officer reports to the Group Head of

Risk and Compliance and group Co-Chief Executive at an entity

level. They attend the RMM and the Risk Committee. The structure

of the Compliance sub-function is substantively unchanged and

the Group Regulatory Conduct capability and Group Financial

Crime capability both continue to work closely with the Country/

Markets Chief Compliance Officers and their respective teams to

help them identify and manage regulatory and financial crime

compliance risks across the region. They also work together, and

with all relevant stakeholders, to ensure we achieve good conduct

outcomes and provide enterprise-wide support on the Compliance

risk agenda in collaboration with the Risk sub-function.

Key risk management processes

The Group Regulatory Conduct capability is responsible for setting

global policies, standards and risk appetite to guide the Group’s

management of regulatory compliance risk. It also devises the

required frameworks, support processes and tools to protect

against regulatory compliance risks. The Group capability provides

oversight, review and challenge to the local Chief Compliance

Officers and their teams to help them identify, assess and mitigate

regulatory compliance risks, where required. The Group's

regulatory compliance risk policies are regularly reviewed. Global

Policies and Procedures require the prompt identification and

escalation of actual or potential regulatory breaches, and relevant

reportable events are escalated to the RMM and the Risk

Committee, as appropriate.

Financial crime risk

(Unaudited)

Overview

Financial crime risk is the risk that HSBC’s products and services

will be exploited for criminal activity. This includes fraud, bribery

and corruption, tax evasion, sanctions and export control

violations, money laundering, terrorist financing and proliferation

financing. Financial crime risk arises from day-to-day banking

operations involving customers, third parties and employees.

Financial crime risk management

Key developments in 2022

We regularly review the effectiveness of our financial crime risk

management framework, which includes consideration of the

complex and dynamic nature of sanctions compliance risk. In

2022, we adapted our policies, procedures and controls to respond

to the unprecedented volume and diverse set of sanctions and


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	65

trade restrictions imposed against Russia following its invasion of

Ukraine.

We also continued to make progress with several key financial

crime risk management initiatives, including:

•We enhanced our screening and non-screening controls to aid

the identification of potential sanctions risk related to Russia, as

well as risk arising from export control restrictions.

•We deployed a key component of our intelligence-led, dynamic

risk assessment capabilities for customer account monitoring in

Singapore for Wealth and Private Banking (WPB) and

Commercial Banking (CMB).

•We reconfigured our transaction screening capability in

readiness for the global change to payment systems formatting

under ISO20022 requirements, and enhanced transaction

screening capabilities by implementing automated alert

discounting.

•We to strengthened the first party lending fraud framework,

reviewed and published an updated fraud policy and associated

control library, and continued to develop fraud detection tools.

Governance and structure

The structure of the Financial Crime sub-function remained

substantively unchanged in 2022, although we continued to

review the effectiveness of our governance framework to manage

financial crime risk. The group Head of Financial Crime and group

Money Laundering Reporting Officer reports to the group Chief

Compliance Officer, while the group Risk Committee retains

oversight of matters relating to fraud, bribery and corruption, tax

evasion, sanctions and export control breaches, money

laundering, terrorist financing and proliferation financing.

Key risk management processes

We will not tolerate knowingly conducting business with

individuals or entities believed to be engaged in criminal activity.

We require everybody in HSBC to play their role in maintaining

effective systems and controls to prevent and detect financial

crime. Where we believe we have identified suspected criminal

activity or vulnerabilities in our control framework, we will take

appropriate mitigating action.

We manage financial crime risk because it is the right thing to do

to protect our customers, shareholders, staff, the communities in

which we operate, as well as the integrity of the financial system

on which we all rely. We operate in a highly regulated industry in

which these same policy goals are codified in laws and

regulations. We are committed to complying with the law and

regulation of all the markets in which we operate and applying a

consistently high financial crime standard globally.

We continue to assess the effectiveness of our end-to-end

financial crime risk management framework on an ongoing basis,

and invest in enhancing our operational control capabilities and

technology solutions to deter and detect criminal activity. We have

simplified our framework by streamlining and de-duplicating policy

requirements. We also strengthened our financial crime risk

taxonomy and control libraries, improved our investigative and

monitoring capabilities through technology deployments, as well

as developed more targeted metrics. We have also enhanced

governance and reporting.

We are committed to working in partnership with the wider

industry and the public sector in managing financial crime risk and

we participate in numerous public-private partnerships and

information-sharing initiatives around the world. In 2022, our focus

remained on measures to improve the overall effectiveness of the

global financial crime framework, notably by providing input into

legislative and regulatory reform activities. We did this by

contributing to the development of responses to consultation

papers focused on how financial crime risk management

frameworks can deliver more effective outcomes in detecting and

deterring criminal activity, including tackling evolving criminal

behaviour such as fraud. Through our work with the Wolfsberg

Group and the Institute of International Finance, we supported the

efforts of the global standard setter, the Financial Action Task

Force, on the use of technology and data pooling to advance

information sharing, as well as their work to strengthen beneficial

ownership standards. In addition, we participated in a number of

public events related to tackling forestry crimes, wildlife trafficking

and human trafficking.

Independent Reviews

In August 2022, the Board of Governors of the Federal Reserve

System terminated the 2012 cease-and-decist order, with

immediate effect. The order was the final regulatory enforcement

action that HSBC entered into in 2012. In June 2021, the UK

Financial Conduct Authority (FCA) had already determined that no

further Skilled Person work was required under section 166 of the

Financial Services and Markets Act. The Group Risk Committee

retains oversight of matters relating to financial crime, including

any remaining remedial activity not yet completed as part of

previous recommendations.

Model risk

(Unaudited)

Overview

Model risk is the risk of inappropriate or incorrect business

decisions arising from the use of models that have been

inadequately designed, implemented or used, or from models that

do not perform in line with expectations and predictions.

Model risk arises in both financial and non-financial contexts

whenever business decision making includes reliance on models.

Key developments in 2022

In 2022, we continued to make improvements in our model risk

management processes amid regulatory changes in model

requirements.

Initiatives during the year included:

•Redeveloped, independently validated and submitted our

models to the PRA and HKMA in response to regulatory capital

changes, including the internal ratings-based (‘IRB’) approach

for credit risk, internal model method (‘IMM’) for counterparty

credit risk and internal model approach (‘IMA’) for market risk.

These new models have been built to enhanced standards

using improved data as a result of investment in processes and

systems.

•Redeveloped and validated models impacted by the changes to

the alternative rate setting mechanisms due to the IBOR

transition.

•Embedded changes to our control framework for our Sarbanes-

Oxley models. These changes were made to address control

weaknesses that emerged as a result of significant increases in

adjustments and overlays that were applied to compensate for

the impact of the Covid-19 pandemic, and the subsequent

volatility due to the effects of the rise in global interest rates on

the ECL models.

•Businesses and Functions continued to be more involved in the

development and management of models, and hiring

colleagues with strong model risk skills. Enhanced focus was

also placed on key model risk drivers such as data quality and

model methodology.

•Enhanced the reporting that supports the model risk appetite

measures, to support our Businesses and Functions in

managing model risk more effectively.

•Rolled out our HBAP regional engagement strategy in response

to the growing maturity of model risk management and

demand, and enhanced the awareness of model inventory,

model limitations and risk controls across the Region.

•Conducted targeted briefing sessions across the Region to

strengthen the awareness of models used and the engagement

between the model user community and model developing

areas.

•Continued the transformation of the Model Risk Management

team, with further enhancements to the independent model

Risk


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

validation processes, including new systems and working

practises.

•Climate Risk, HKFRS 17 Insurance models and models using

advanced analytics and machine learning, have become critical

areas of focus that will grow in importance in 2023 and

beyond. The model risk teams were enhanced with specialist

skills to manage the increased model risk in these areas.

Governance

The group Model Risk Committee (MRC) provides oversight of

models used in HBAP and focuses on local delivery and

requirements. The Committee is chaired by the group's Chief Risk

Officer and the Regional Heads of Businesses, senior executives

from Risk, Finance and Compliance participate in these meetings.

Authorised sub-forums operating under the remit of the HBAP

MRC, oversee model risk management activities based on

associated model categories.

Key risk management processes

A variety of modelling approaches, including regression,

simulation, sampling, machine learning and judgemental

scorecards for a range of business applications were used. These

activities include customer selection, product pricing, financial

crime transaction monitoring, creditworthiness evaluation and

financial reporting.

Our model risk management policies and procedures were

regularly reviewed, and required the First Line of Defence to

demonstrate comprehensive and effective controls based on a

library of model risk controls provided by Model Risk

Management.

Model Risk Management also reports on model risk to senior

management and the group Risk Committee on a regular basis

through the use of the risk map, risk appetite and regular key

updates.

The effectiveness of these processes, including the Regional

model oversight committee structure, were regularly reviewed to

ensure clarity in authority, coverage and escalations and that

appropriate understanding and ownership of model risk continued

to be embedded in the Businesses and Functions.

Insurance manufacturing operations risk

Overview

(Unaudited)

The key risks for our insurance manufacturing operations are

market risks, in particular interest rate and equity, credit risks and

insurance underwriting. These have a direct impact on the

financial results and capital positions of the insurance operations.

Liquidity risk, whilst significant in other parts of the group, is

relatively minor for our insurance operations.

HSBC’s Insurance business

(Unaudited)

We sell insurance products through a range of channels including

our branches, insurance salesforces, direct channels and third-

party distributors. The majority of sales are through an integrated

bancassurance model that provides insurance products principally

for customers with whom we have a banking relationship,

although the proportion of sales through other sources such as

independent financial advisers, tied agents and digital is

increasing.

For the insurance products we manufacture, the majority of sales

are of savings, universal life and protection contracts.

We choose to manufacture these insurance products in HSBC

subsidiaries based on an assessment of operational scale and risk

appetite. Manufacturing insurance allows us to retain the risks and

rewards associated with writing insurance contracts by keeping

part of the underwriting profit and investment income within the

group.

We have life insurance manufacturing operations in Hong Kong,

Singapore and mainland China. We also have a life insurance

manufacturing associate in India.

Where we do not have the risk appetite or operational scale to be

an effective insurance manufacturer, we engage with a small

number of leading external insurance companies in order to

provide insurance products to our customers. These arrangements

are generally structured with our exclusive strategic partners and

earn the group a combination of commissions, fees and a share of

profits.

Insurance products are sold predominantly by WPB and CMB

through our branches and direct channels.

Insurance manufacturing operations risk

management

Key developments in 2022

(Unaudited)

The insurance manufacturing subsidiaries follow the group’s risk

management framework. In addition, there are specific policies

and practices relating to the risk management of insurance

contracts, which have not changed materially over 2022. There

has been continued market volatility observed over 2022 across

interest rates, equity markets and foreign exchange rates. This has

been predominantly driven by geopolitical factors and wider

inflationary concerns. One area of key risk management focus

over 2022 was the implementation of the new accounting

standard, HKFRS 17 Insurance Contracts. Given the fundamental

nature of the impact of the accounting standard on insurance

accounting, this presents additional financial reporting and model

risks for the group. Another area of focus has been the acquisition

early in 2022 of an insurance business in Singapore and the

subsequent integration of that business into the group’s risk

management framework.

Governance and structure

(Unaudited)

Insurance risks are managed to a defined risk appetite, which is

aligned to the group's risk appetite and risk management

framework, including the group’s ‘Three lines of defence’ model.

The Global Insurance Risk Management Meeting oversees the risk

and control framework for insurance business in the group.

The monitoring of the risks within our insurance operations is

carried out by insurance risk teams. The Bank’s risk stewardship

sub-functions support the insurance risk teams in their respective

areas of expertise.

Stress and scenario testing

(Unaudited)

Stress testing forms a key part of the risk management framework

for the insurance business. We participate in local and group-wide

regulatory stress tests, as well as internally developed stress and

scenario tests, including Group internal stress test exercises. The

results of these stress tests and the adequacy of management

action plans to mitigate these risks are considered in the group

ICAAP and the entities’ regulatory Own Risk and Solvency

Assessments ('ORSAs') which are produced by all material

entities.

Key risk management processes

Market risk

(Audited)

All our insurance manufacturing subsidiaries have market risk

mandates that specify the investment instruments in which they

are permitted to invest and the maximum quantum of market risk

that they may retain. They manage market risk by using, among

others, some or all of the techniques listed below, depending on

the nature of the contracts written:


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	67

•We are able to adjust bonus rates to manage the liabilities to

policyholders for products with discretionary participating

features (‘DPF’). The effect is that a significant portion of the

market risk is borne by the policyholder;

•We use asset and liability matching where asset portfolios are

structured to support projected liability cash flows. The group

manages its assets using an approach that considers asset

quality, diversification, cash flow matching, liquidity, volatility

and target investment return. We use models to assess the

effect of a range of future scenarios on the values of financial

assets and associated liabilities, and ALCOs employ the

outcomes in determining how best to structure asset holdings

to support liabilities;

•We use derivatives to protect against adverse market

movements; and

•We design new products to mitigate market risk, such as

changing the investment return sharing portion between

policyholders and the shareholder.

Credit risk

(Audited)

Our insurance manufacturing subsidiaries also have credit risk

mandates and limits within which they are permitted to operate,

which consider the credit risk exposure, quality and performance

of their investment portfolios. Our assessment of the

creditworthiness of issuers and counterparties is based primarily

upon internationally recognised credit ratings and other publicly

available information.

Stress testing is performed on investment credit exposures using

credit spread sensitivities and default probabilities.

We use a number of tools to manage and monitor credit risk.

These include a credit report containing a watch-list of

investments with current credit concerns, primarily investments

that may be at risk of future impairment or where high

concentrations to counterparties are present in the investment

portfolio. Sensitivities to credit spread risk are assessed and

monitored regularly.

Capital and liquidity risk

(Audited)

Capital risk for our insurance manufacturing subsidiaries is

assessed in the ICAAP based on their financial capacity to support

the risks to which they are exposed. Capital adequacy is assessed

on both the group’s economic capital basis, and the relevant local

insurance regulatory basis.

Risk appetite buffers are set to ensure that the operations are able

to remain solvent, allowing for business-as-usual volatility and

extreme but plausible stress events. In certain cases, entities use

reinsurance to manage capital risk.

Liquidity risk is relatively minor for the insurance business. It is

managed by cash flow matching and maintaining sufficient cash

resources, investing in high credit-quality investments with deep

and liquid markets, monitoring investment concentrations and

restricting them where appropriate, and establishing committed

contingency borrowing facilities.

Insurance manufacturing subsidiaries complete quarterly liquidity

risk reports and an annual review of the liquidity risks to which

they are exposed.

Insurance underwriting risk

(Unaudited)

Our insurance manufacturing subsidiaries primarily use the

following frameworks and processes to manage and mitigate

insurance underwriting risks:

•a formal approval process for launching new products or

making changes to products;

•a product pricing and profitability framework which requires

initial and ongoing assessment of the adequacy of premiums

charged on new insurance contracts to meet the risks

associated with them;

•a framework for customer underwriting;

•reinsurance, which cedes risks to third party reinsurers to keep

risks within risk appetite, reduce volatility and improve capital

efficiency; and

•oversight of expense and reserving risks by entity Financial

Reporting Committees.

Insurance manufacturing operations risk in 2022

Measurement

(Unaudited)

The tables below show the composition of assets and liabilities by

contract type. 89% (2021: 91%) of both assets and liabilities are

derived from Hong Kong.

Risk


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



Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
	Non-linked	Unit-linked	Shareholders' assets and liabilities	Total
	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2022
Financial assets	702,897	34,632	43,822	781,351
– financial assets designated and otherwise mandatorily measured at fair value through profit or loss	183,423	33,533	1,569	218,525
– derivatives	1,322	—	12	1,334
– financial investments measured at amortised cost	482,271	328	37,177	519,776
– financial investments measured at fair value through other comprehensive income	5,977	—	734	6,711
– other financial assets1	29,904	771	4,330	35,005
Reinsurance assets	35,320	17	—	35,337
PVIF2	—	—	65,537	65,537
Other assets and investment properties	14,564	9	6,370	20,943
Total assets	752,781	34,658	115,729	903,168
Liabilities under investment contracts designated at fair value	25,693	7,338	—	33,031
Liabilities under insurance contracts	679,567	21,299		700,866
Deferred tax3	559	—	10,665	11,224
Other liabilities	—	—	38,942	38,942
Total liabilities	705,819	28,637	49,607	784,063
Total equity	—	—	119,105	119,105
Total equity and liabilities	705,819	28,637	168,712	903,168


Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
	Non-linked	Unit-linked	Shareholders' assets and liabilities	Total
	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2021
Financial assets	637,317	37,382	46,971	721,670
– financial assets designated and otherwise mandatorily measured at fair value through profit or loss	160,555	35,906	457	196,918
– derivatives	631	6	3	640
– financial investments measured at amortised cost	432,733	479	37,734	470,946
– financial investments measured at fair value through other comprehensive income	5,780	—	592	6,372
– other financial assets1	37,618	991	8,185	46,794
Reinsurance assets	28,874	6	—	28,880
PVIF2	—	—	63,765	63,765
Other assets and investment properties	13,626	4	5,304	18,934
Total assets	679,817	37,392	116,040	833,249
Liabilities under investment contracts designated at fair value	28,397	7,030	—	35,427
Liabilities under insurance contracts	608,590	29,645	—	638,235
Deferred tax3	9	—	10,579	10,588
Other liabilities	—	—	35,269	35,269
Total liabilities	636,996	36,675	45,848	719,519
Total equity	—	—	113,730	113,730
Total equity and liabilities	636,996	36,675	159,578	833,249

1Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.

2Present value of in-force long-term insurance business.

3‘Deferred tax’ includes the deferred tax liabilities arising on recognition of Present Value of In-force ('PVIF').

4Balance sheet of insurance manufacturing operations are shown before elimination of inter-company transactions with HSBC non-insurance

operations.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	69

Key risk types

Market risk

(Audited)

Description and exposure

Market risk is the risk of changes in market factors affecting

capital or profit. Market factors include interest rates, equity and

growth assets and foreign exchange rates.

Our exposure varies depending on the type of contract issued. Our

most significant life insurance products are contracts with

discretionary participating features (‘DPF’). These products

typically include some form of capital guarantee or guaranteed

return on the sums invested by the policyholders, to which

discretionary bonuses are added if allowed by the overall

performance of the funds. These funds are primarily invested in

fixed interest assets, with a proportion allocated to other asset

classes to provide customers with the potential for enhanced

returns.

DPF products expose the group to the risk of variation in asset

returns, which will impact our participation in the investment

performance. In addition, in some scenarios the asset returns can

become insufficient to cover the policyholders' financial

guarantees, in which case the shortfall has to be met by the group.

Reserves are held against the cost of such guarantees.

The cost of such guarantees is accounted for as a deduction from

the present value of in-force 'PVIF' asset, unless the cost of such

guarantees is already explicitly allowed for within the insurance

contracts liabilities.

For unit-linked contracts, market risk is substantially borne by the

policyholders, but some market risk exposure typically remains as

fees earned are related to the market value of the linked assets.

Sensitivities

(Unaudited)

Where appropriate, the effects of the sensitivity tests on profit

after tax and total equity incorporate the impact of the stress on

the PVIF. The relationship between the profit and total equity and

the risk factors is non-linear; therefore the results disclosed should

not be extrapolated to measure sensitivities to different levels of

stress. For the same reason, the impact of the stress is not

symmetrical on the upside and downside. The sensitivities reflect

the established risk sharing mechanism with policyholders for

participating products, and are stated before allowance for

management actions which may mitigate the effect of changes in

the market environment. The sensitivities presented allow for

adverse changes in policyholders’ behaviour that may arise in

response to changes in market rates.

The following table illustrates the effects of selected interest rate,

equity price and foreign exchange rate scenarios on our profit for

the year and the total equity of our insurance manufacturing

subsidiaries.

The differences between the impacts on profit after tax and equity

are driven by the changes in value of the bonds measured at fair

value through other comprehensive income, which are only

accounted for in equity.

Risk


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


Sensitivity of the group’s insurance manufacturing subsidiaries to market risk factors
(Audited)
	31 Dec 2022		31 Dec 2021
	Effect on profit after tax	Effect on total equity	Effect on profit after tax	Effect on total equity
	HK$m	HK$m	HK$m	HK$m
+100 basis points parallel shift in yield curves	(1,079)	(1,872)	(1,257)	(2,036)
-100 basis points parallel shift in yield curves	698	1,490	1,201	1,980
10% increase in equity prices	2,438	2,438	2,388	2,388
10% decrease in equity prices	(2,647)	(2,647)	(2,426)	(2,426)
10% increase in USD exchange rate compared to all currencies	767	767	635	635
10% decrease in USD exchange rate compared to all currencies	(767)	(767)	(635)	(635)

Credit risk

(Audited)

Description and exposure

Credit risk is the risk of financial loss if a customer or counterparty

fails to meet their obligation under a contract. It arises in two main

areas for our insurance manufacturers:

•risk associated with credit spread volatility and default by debt

security counterparties after investing premiums to generate a

return for policyholders and shareholders; and

•risk of default by reinsurance counterparties and non-

reimbursement for claims made after ceding insurance risk.

The amounts outstanding at the balance sheet date in respect of

these items are shown in the table on page 69.

The credit quality of the reinsurers’ share of liabilities under

insurance contracts is assessed as ‘strong’ or ‘good’ (as defined

on page 32), with 100% of the exposure being neither past due nor

impaired (2021: 100%).

Credit risk on assets supporting unit-linked liabilities is

predominantly borne by the policyholders. Therefore our exposure

is primarily related to liabilities under non-linked insurance and

investment contracts and shareholders’ funds. The credit quality of

insurance financial assets is included in the table on page 44. The

risk associated with credit spread volatility is to a large extent

mitigated by holding debt securities to maturity, and sharing a

degree of credit spread experience with policyholders.

Liquidity risk

(Audited)

Description and exposure

Liquidity risk is the risk that an insurance operation, though

solvent, either does not have sufficient financial resources

available to meet its obligations when they fall due, or can secure

them only at excessive cost. Liquidity risk may be able to be

shared with policyholders for products with DPF.

The following table shows the expected undiscounted cash flows

for insurance liabilities at 31 December 2022.

The profile of the expected maturity of insurance contracts at

31 December 2022 remained comparable with 2021.

The remaining contractual maturity of investment contract

liabilities is included in the table on page 118.


Expected maturity of insurance contract liabilities
(Audited)
	Expected cash flows (undiscounted)
	Within 1 year	1-5 years	5-15 years	Over 15 years	Total
	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2022
Non-linked insurance contracts	55,359	198,209	348,404	940,565	1,542,537
Unit-linked	4,865	10,047	11,978	4,898	31,788
	60,224	208,256	360,382	945,463	1,574,325

At 31 Dec 2021
Non-linked insurance contracts	53,098	187,589	324,654	662,058	1,227,399
Unit-linked	8,073	14,353	14,852	8,115	45,393
	61,171	201,942	339,506	670,173	1,272,792


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	71

Insurance underwriting risk

Description and exposure

(Unaudited)

Insurance underwriting risk is the risk of loss through adverse

experience, in either timing or amount, of insurance underwriting

parameters (non-economic assumptions). These parameters

include mortality, morbidity, longevity, lapses and expense rates.

Lapse risk exposure on products with premium financing has

increased over the year as rising interest rates have led to an

increase in the cost of financing for customers.

The principal risk we face is that, over time, the cost of the

contract, including claims and benefits may exceed the total

amount of premiums and investment income received.

The table on page 69 analyses our life insurance risk exposures by

type of contract.

The insurance risk profile and related exposures remain largely

consistent with those observed at 31 December 2021.

Sensitivities

(Audited)

The table below shows the sensitivity of profit and total equity to

reasonably possible changes in non-economic assumptions across

all our insurance manufacturing subsidiaries. Mortality and

morbidity risk is typically associated with life insurance contracts.

The effect on profit of an increase in mortality or morbidity

depends on the type of business being written.

Sensitivity to lapse rates depends on the type of contracts being

written. An increase in lapse rates typically has a negative effect

on profit due to the loss of future income on the lapsed policies.

However, some contract lapses have a positive effect on profit due

to the existence of policy surrender charges.

Expense rate risk is the exposure to a change in the allocated cost

of administering insurance contracts. To the extent that increased

expenses cannot be passed on to policyholders, an increase in

expense rates will have a negative effect on our profits. The risk is

generally greater for Singapore and mainland China than for Hong

Kong because these entities have smaller portfolios over which to

spread costs.


Sensitivity analysis
(Audited)
	2022	2021
	HK$m	HK$m
Effect on profit after tax and total equity at 31 Dec
10% increase in mortality and/or morbidity rates	(561)	(637)
10% decrease in mortality and/or morbidity rates	569	650
10% increase in lapse rates	(549)	(606)
10% decrease in lapse rates	535	680
10% increase in expense rates	(372)	(368)
10% decrease in expense rates	372	359

Risk


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

Statement of Directors’ Responsibilities

The following statement, which should be read in conjunction with the Auditor’s statement of their responsibilities set out in their report

on pages 74-78, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the Auditor

in relation to the Consolidated Financial Statements.

The Directors of The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) are responsible for the preparation of the Bank’s

Annual Report and Accounts, which contains the Consolidated Financial Statements of the Bank and its subsidiaries (together ‘the

group’), in accordance with applicable law and regulations.

The Hong Kong Companies Ordinance requires the Directors to prepare for each financial year the consolidated financial statements for

the group and the balance sheet for the Bank.

The Directors are responsible for ensuring adequate accounting records are kept that are sufficient to show and explain the group’s

transactions, such that the group’s consolidated financial statements give a true and fair view.

The Directors are responsible for preparing the consolidated financial statements that give a true and fair view and are in accordance with

Hong Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants. The Directors

have elected to prepare the Bank’s balance sheet on the same basis.

The Directors as at the date of this report, whose names and functions are set out in the ‘Report of the Directors’ on pages 3-8 of this

Annual Report and Accounts, confirm to the best of their knowledge that:

•the Consolidated Financial Statements, which have been prepared in accordance with HKFRSs and in accordance with the applicable

set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the group; and

•the management report represented by the Financial Review, the Risk and Capital Reports includes a fair review of the development

and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that

the group faces.

On behalf of the Board

Peter Wong

Chairman

21 February 2023


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	73

Independent Auditor’s Report

To the Shareholder of The Hongkong and Shanghai Banking Corporation Limited

(incorporated in Hong Kong with limited liability)

Opinion

What we have audited

The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited (the 'Bank’) and its subsidiaries (the

'group’), which are set out on pages 79 to 139, comprise:

•the consolidated balance sheet as at 31 December 2022;

•the consolidated income statement for the year then ended;

•the consolidated statement of comprehensive income for the year then ended;

•the consolidated statement of changes in equity for the year then ended;

•the consolidated statement of cash flows for the year then ended; and

•the notes1 on the consolidated financial statements, which include significant accounting policies and other explanatory information.

1Certain required disclosures as described in Note 1.1(d) on the consolidated financial statements have been presented elsewhere in the Annual

Report and Accounts 2022, rather than in the notes on the consolidated financial statements. These are cross-referenced from the consolidated

financial statements and are identified as audited.

Our opinion

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the group as at

31 December 2022, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance

with Hong Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants (‘HKICPA’)

and have been properly prepared in compliance with the Hong Kong Companies Ordinance.

Basis for Opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing (‘HKSAs’) issued by the HKICPA. Our responsibilities

under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (‘the Code’), and we have

fulfilled our other ethical responsibilities in accordance with the Code.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated

financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial

statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matters identified in our audit are summarised as follows:

•Allowances for expected credit losses on loans and advances to customers

•Impairment assessment of investment in associate – Bank of Communications Co., Limited (‘BoCom’)

•The present value of in-force long-term insurance business (‘PVIF’) and liabilities under non-linked life insurance contracts

•Disclosure of the impact of adoption of HKFRS 17, Insurance contracts

Independent Auditor’s Report


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


Allowances for expected credit losses on loans and advances to customers
Nature of the Key Audit Matter	How our audit addressed the Key Audit Matter
At 31 December 2022, the group recorded allowances for expected credit losses (‘ECL’) on loans and advances to customers of HK$40.0bn. The determination of the ECL on non-credit-impaired loans and advances to customers requires the use of complex credit risk methodologies that are applied in models using the group’s historic experience of the correlations between defaults and losses, borrower creditworthiness, segmentation of customers or portfolios and economic conditions. It also requires the determination of assumptions which involve estimation uncertainty. The assumptions used for ECL that we focused on for non- credit-impaired loans and advances to customers included those with greater levels of management judgement and for which variations have the most significant impact on ECL on loans and advances to customers. Specifically, these included economic scenarios and their likelihood, as well as customer risk ratings. Likewise, there is inherent uncertainty with the consensus economic forecast data from external economists. Impacts from the Covid-19 infection rates in Asia, particularly in mainland China, ongoing developments related to the mainland China commercial real estate sector, the geopolitical landscape and certain other current macroeconomic conditions impact the inherent risk and estimation uncertainty involved in determining the ECL on loans and advances to customers. Management judgemental adjustments to ECL on non-credit- impaired loans and advances to customers therefore continue to be made. This includes judgemental adjustments to the ECL for unsecured offshore mainland China Commercial Real Estate exposures. The above ongoing developments have also resulted in significant credit- impaired corporate exposures related to the unsecured offshore mainland China Commercial Real Estate sector. The assumptions with the most significant impact here are those applied in estimating the recoverability of these exposures.	We tested controls in place over the methodologies, their application, significant assumptions and data used to determine the ECL on loans and advances to customers. These included controls over: •Model development, validation and monitoring; •Approval of economic scenarios; •Approval of the probability weightings assigned to economic scenarios; •Assigning customer risk ratings; •Approval of management judgemental adjustments; and •Review of input and assumptions applied in estimating the recoverability of credit-impaired wholesale exposures. We performed substantive audit procedures over the compliance of ECL methodologies with the requirements of HKFRS 9. We engaged professionals with experience in ECL modelling to assess the appropriateness of changes to models during the year, and for a sample of those models, independently reperformed the modelling for certain aspects of the ECL calculation. We also assessed the appropriateness of methodologies and related models that did not change during the year. We further performed the following to assess the significant assumptions and data: •We challenged the appropriateness of the significant assumptions; •We involved our economic experts in assessing the reasonableness of the severity and likelihood of certain economic scenarios; •We tested a sample of customer risk ratings assigned to wholesale exposures; •We tested a sample of critical data used to determine ECL; and •We have independently assessed other significant assumptions and obtained corroborating evidence. For a sample of management judgemental adjustments and credit-impaired wholesale exposures, we challenged the appropriateness of these and assessed the ECL determined. We further considered whether the judgements made in selecting the significant assumptions, as well as determining the management judgemental adjustments and credit-impaired wholesale exposures, would give rise to indicators of possible management bias. We assessed the adequacy of the disclosures in relation to ECL on loans and advances to customers made in the consolidated financial statements in the context of the applicable financial reporting framework.
Matters discussed with the Audit Committee
We discussed the appropriateness of the methodologies, their application, significant assumptions and related disclosures with the Audit Committee, giving consideration to the current macroeconomic conditions. This included economic scenarios and their likelihood, management judgemental adjustments made to derive the ECL on loans and advances to customers, and future recoverability of certain significant credit-impaired wholesale exposures. We further discussed certain controls over the process in determining ECL on loans and advances to customers.
Relevant references in the consolidated financial statements
Risk: Credit Risk, as cross-referenced from the consolidated financial statements (only information identified as audited), page 31-52 Note 1.2 (i) on the consolidated financial statements: Basis of preparation and significant accounting policies – Summary of significant accounting policies - Impairment of amortised cost and FVOCI financial assets, page 90-93 Note 2 (e) on the consolidated financial statements: Operating profit – Change in expected credit losses and other credit impairment charges, page 97 Note 10 on the consolidated financial statements: Loans and advances to customers, page 106-107


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	75


Impairment assessment of investment in associate – Bank of Communications Co., Limited (‘BoCom’)
Nature of the Key Audit Matter	How our audit addressed the Key Audit Matter
At 31 December 2022, the fair value of the investment in BoCom, based on the share price, was HK$118.8bn lower than the carrying value ('CV') of HK$182.3bn. This is an indicator of potential impairment. An impairment test was performed by management, with supporting sensitivity analysis, using a value in use ('VIU') model. The VIU was HK$0.7bn in excess of the CV. On this basis, no impairment was recorded. The methodology applied in the VIU model is dependent on various assumptions, both short term and long term in nature. These assumptions, which are subject to estimation uncertainty, are derived from a combination of management’s judgement, analysts’ forecasts, market data or other relevant information. The assumptions that we focused our audit on were those with greater levels of management judgement and subjectivity, and for which variations had the most significant impact on the VIU. Specifically, these included the discount rate, operating income growth rate, long-term profit and asset growth rates, cost-income ratio, expected credit losses as a percentage of customer advances, long-term effective tax rate, capital requirements – capital adequacy ratio, capital requirements – tier 1 capital adequacy ratio and risk-weighted assets as a percentage of total assets.	We tested controls in place over significant assumptions, the methodology and its application used to determine the VIU. We assessed the appropriateness of the methodology used, its application, and the mathematical accuracy of the calculations. In respect of the significant assumptions, we performed the following: •Challenged the appropriateness of the significant assumptions and, where relevant, their interrelationships; •Obtained corroborating evidence for data supporting significant assumptions which as relevant included past experience, external market information, third-party sources including analyst reports, information from BoCom management and historical publicly available BoCom financial information; •Determined a reasonable range for the discount rate assumption, with the assistance of our valuation experts, and compared it to the discount rate used by management; and •Assessed whether the judgements made in selecting the significant assumptions would give rise to indicators of possible management bias. We observed meetings between management and BoCom management, held specifically to identify facts and circumstances impacting significant assumptions relevant to the determination of the VIU. Representations were obtained from the Bank that assumptions used were consistent with information currently available to the Bank. We assessed the adequacy of the disclosures in relation to BoCom made in the consolidated financial statements in the context of the applicable financial reporting framework.
Matters discussed with the Audit Committee
We discussed the appropriateness of the methodology, its application and significant assumptions with the Audit Committee. We also discussed the disclosures made in relation to BoCom, including the use of sensitivity analysis to explain estimation uncertainty and the changes in certain assumptions that would result in the VIU being equal to the CV.
Relevant references in the consolidated financial statements
Note 1.2 (a) on the consolidated financial statements: Basis of preparation and significant accounting policies – Summary of significant accounting policies - Consolidation and related policies, page 87 Note 14 on the consolidated financial statements: Interests in associates and joint ventures, page 109-112


The present value of in-force long-term insurance business (‘PVIF’) and liabilities under non-linked life insurance contracts
Nature of the Key Audit Matter	How our audit addressed the Key Audit Matter
At 31 December 2022, the group has recorded an asset for PVIF of HK$65.5bn and liabilities under non-linked life insurance contracts of HK$679.5bn. The determination of these balances requires the use of complex actuarial methodologies that are applied in models and involves judgement about future outcomes. Specifically, judgement is required in deriving the economic and non-economic assumptions. These assumptions are subject to estimation uncertainty, both for PVIF asset and the liabilities under non- linked life insurance contracts.	We tested controls in place over the methodologies, their application, significant assumptions and data for PVIF asset and the liabilities under non- linked life insurance contracts. Specifically, these included controls over: •policy data reconciliations from the policyholder administration system to the actuarial valuation system; •assumptions setting; •review and determination of methodologies used, and their application in models; and •results aggregation and analysis processes. With the assistance of our actuarial experts, we performed the following audit procedures to assess the methodologies used, their application, significant assumptions, data and disclosures: •We assessed the appropriateness of the methodologies used, their application and the mathematical accuracy of the calculations; •We challenged the appropriateness of the judgements made in selecting significant assumptions and , where relevant, their interrelationships. We have independently assessed these assumptions and obtained relevant corroborating evidence. We further considered whether the judgements made in selecting the significant assumptions would give rise to indicators of possible management bias; •We performed substantive audit procedures over critical data used in the determination of these balances to ensure these are relevant and reliable; and •We assessed the adequacy of the disclosures in relation to the asset for PVIF and liabilities under non-linked life insurance contracts made in the consolidated financial statements in the context of the applicable financial reporting framework.
Matters discussed with the Audit Committee
We discussed the appropriateness of the methodologies, their application, significant assumptions and related disclosures with the Audit Committee. In relation to assumptions, we focused on those for which variations had the most significant impact on the valuation of PVIF and liabilities under non- linked life insurance contracts carrying value.
Relevant references in the consolidated financial statements
Risk: Insurance manufacturing operations risk as cross-referenced from the consolidated financial statements (only information identified as audited), page 67-72 Note 1.2 (j) on the consolidated financial statements: Basis of preparation and significant accounting policies - Summary of significant accounting policies - Insurance contracts, page 93-94 Note 3 on the consolidated financial statements: Insurance business, page 97-98 Note 15 on the consolidated financial statements: Goodwill and intangible assets, page 112-113

Independent Auditor’s Report


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


Disclosure of the impact of adoption of HKFRS 17, Insurance Contracts
Nature of the Key Audit Matter	How our audit addressed the Key Audit Matter
HKFRS 17 ‘Insurance contracts’ sets out the requirements that an entity should apply in accounting for insurance contracts it issues, reinsurance contracts it holds and investment contracts with discretionary participating features it issues. The group will adopt the standard retrospectively from 1 January 2023, with comparatives restated from 1 January 2022. As part of the transition to HKFRS 17, the group intends to apply the option under HKFRS 9 to re-designate holdings of financial assets held to support insurance liabilities currently measured at amortised cost, to fair value under HKFRS 9. The group has estimated and disclosed that the adoption will reduce the opening group equity as at 1 January 2022 by HK$75.4bn. In the consolidated financial statements it is disclosed that this estimate is based on accounting policies, assumptions, judgements and estimation techniques that remain subject to change. This is a new and complex standard and determining the impact as at 1 January 2022 requires judgement and interpretation in its implementation. This includes the selection of accounting policies and the use of complex actuarial methodologies that are applied in models and overlay adjustments to models. The selection and application of appropriate methodology requires significant professional judgement. It also requires the determination of assumptions which involve estimation uncertainty.	We tested controls in place over accounting policies, methodologies, their application, significant assumptions and data used in determining the estimated reduction of the opening group equity as at 1 January 2022 disclosed. Specifically, these included controls over: • Selection and approval of the accounting policies; • Policy data reconciliations from the policyholder administration systems to the actuarial valuation models; • Assumption setting; and • Review and determination of methodologies used, and their application in the models, including model development, validation and monitoring. With the assistance of our actuarial professionals, we performed the following substantive audit procedures to assess the accounting policies, methodologies, their application, significant assumptions, data and disclosures: • We assessed the adherence of the accounting policies with the requirements in HKFRS 17; • We assessed the appropriateness of the methodologies used, their application in models and overlay adjustments to models and the mathematical accuracy of the calculations; • We challenged the appropriateness of the judgements made in selecting significant assumptions and, where relevant, their interrelationships. We have independently assessed these assumptions and obtained relevant corroborating evidence. We further considered whether the judgements made in selecting the significant assumptions would give risk to indicators of susceptibility to management bias; • We performed substantive audit procedures over critical data used to ensure these are relevant and reliable; • We performed substantive audit procedures over the re-designation of financial assets held to support insurance liabilities; and • We assessed the adequacy of the disclosures in the context of the applicable financial reporting framework.
Matters discussed with the Audit Committee
Status updates were provided during the year. We discussed the appropriateness of the accounting policies, methodologies, their application, significant assumptions and the disclosures related to the impact of the coming adoption of HKFRS 17 with the Audit Committee. Perspectives were also shared on the control environment over the disclosures of the impact of adopting HKFRS 17.
Relevant references in the consolidated financial statements
Note 1.1 (b) on the consolidated financial statements: Basis of preparation and significant accounting policies - Basis of preparation - Future accounting developments, page 85-86

Other Information

The directors of the Bank are responsible for the other information. The other information comprises all of the information included in the

Annual Report and Accounts 2022, Banking Disclosure Statement as at 31 December 2022 and List of the directors of the Bank's

subsidiary undertakings (during the period from 1 January 2022 to 21 February 2023) other than the consolidated financial statements

and our auditor’s report thereon. We have obtained some of the other information including Certain defined terms, Cautionary statement

regarding forward-looking statements, Chinese translation, Financial Highlights, Report of the Directors, Environmental, Social and

Governance Review, Financial Review, Risk, Statement of Directors' Responsibilities and Additional information sections of the Annual

Report and Accounts 2022 prior to the date of this auditor’s report. The remaining other information, including Banking Disclosure

Statement as at 31 December 2022 and List of the directors of the Bank's subsidiary undertakings (during the period from 1 January

2022 to 21 February 2023), is expected to be made available to us after that date. The other information does not include the specific

information presented therein that is identified as being an integral part of the consolidated financial statements and, therefore, covered

by our audit opinion on the consolidated financial statements.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form

of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above

and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our

knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude

that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this

regard.

When we read the remaining other information, if we conclude that there is a material misstatement therein, we are required to

communicate the matter to the Audit Committee and take appropriate action considering our legal rights and obligations.

Responsibilities of Directors and the Audit Committee for the Consolidated Financial Statements

The directors of the Bank are responsible for the preparation of the consolidated financial statements that give a true and fair view in

accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the directors

determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether

due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the group’s ability to continue as a going

concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors

either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

The Audit Committee is responsible for overseeing the group’s financial reporting process.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	77

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material

misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to

you, as a body, in accordance with Section 405 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume

responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of

assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it

exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably

be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the

audit. We also:

•Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design

and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis

for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as

fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

•Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control.

•Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures

made by the directors.

•Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence

obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s ability to

continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s

report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion.

Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions

may cause the group to cease to continue as a going concern.

•Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and

whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair

presentation.

•Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to

express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the

group audit. We remain solely responsible for our audit opinion.

We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant

audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding

independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our

independence, and where applicable, actions taken to eliminate threats or safeguards applied.

From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of

the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our

auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we

determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be

expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Lars Christian Jordy Nielsen.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, 21 February 2023

Independent Auditor’s Report


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

Consolidated Financial Statements

Consolidated income statement

for the year ended 31 December


		2022	2021
	Notes	HK$m	HK$m
Net interest income	2a	126,852	98,113
– interest income		180,097	121,382
– interest expense		(53,245)	(23,269)
Net fee income	2b	36,600	45,296
– fee income		50,622	57,819
– fee expense		(14,022)	(12,523)
Net income from financial instruments held for trading or managed on a fair value basis	2c	41,674	28,359
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss	2c	(13,194)	18,180
Changes in fair value of designated debts issued and related derivatives	2c	(703)	(639)
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	2c	34	(25)
Gains less losses from financial investments		47	1,667
Net insurance premium income	3	80,415	61,722
Other operating income	2d	3,781	2,033
Total operating income		275,506	254,706
Net insurance claims and benefits paid and movement in liabilities to policyholders	3	(69,814)	(76,048)
Net operating income before change in expected credit losses and other credit impairment charges		205,692	178,658
Change in expected credit losses and other credit impairment charges	2e	(16,365)	(6,539)
Net operating income		189,327	172,119
Employee compensation and benefits	4	(40,662)	(39,261)
General and administrative expenses	2f	(54,549)	(52,327)
Depreciation and impairment of property, plant and equipment	2g	(9,157)	(8,891)
Amortisation and impairment of intangible assets		(6,140)	(4,397)
Total operating expenses		(110,508)	(104,876)
Operating profit		78,819	67,243
Share of profit in associates and joint ventures		18,792	19,320
Profit before tax		97,611	86,563
Tax expense	5	(15,507)	(14,015)
Profit for the year		82,104	72,548
Attributable to:
– ordinary shareholders of the parent company		75,506	64,633
– other equity holders		2,739	2,715
– non-controlling interests		3,859	5,200
Profit for the year		82,104	72,548


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	79

Consolidated statement of comprehensive income

for the year ended 31 December


	2022	2021
	HK$m	HK$m
Profit for the year	82,104	72,548
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific conditions are met:
Debt instruments at fair value through other comprehensive income	(13,675)	(4,009)
– fair value losses	(17,077)	(3,907)
– fair value gains transferred to the income statement	(139)	(1,276)
– expected credit (recoveries)/losses recognised in the income statement	342	(17)
– income taxes	3,199	1,191
Cash flow hedges	(1,965)	(700)
– fair value gains	5,851	7,038
– fair value gains reclassified to the income statement	(8,228)	(7,850)
– income taxes	412	112
Share of other comprehensive income/(expense) of associates and joint ventures	(1,964)	596
Exchange differences	(32,051)	3,973
Items that will not be reclassified subsequently to profit or loss:
Property revaluation	3,863	4,771
– fair value gains	4,683	5,643
– income taxes	(820)	(872)
Equity instruments designated at fair value through other comprehensive income	865	(3,480)
– fair value gains/(losses)	868	(3,478)
– income taxes	(3)	(2)
Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	4,588	522
– before income taxes	5,461	631
– income taxes	(873)	(109)
Remeasurement of defined benefit asset/liability	185	724
– before income taxes	232	885
– income taxes	(47)	(161)
Other comprehensive income/(expense) for the year, net of tax	(40,154)	2,397
Total comprehensive income for the year	41,950	74,945
Attributable to:
– ordinary shareholders of the parent company	36,360	67,148
– other equity holders	2,739	2,715
– non-controlling interests	2,851	5,082
Total comprehensive income for the year	41,950	74,945

Consolidated Financial Statements


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

Consolidated balance sheet

at 31 December


		2022	2021
	Notes	HK$m	HK$m
Assets
Cash and balances at central banks		232,740	276,857
Items in the course of collection from other banks		28,557	21,632
Hong Kong Government certificates of indebtedness		341,354	332,044
Trading assets	7	699,805	777,450
Derivatives	8	502,771	365,167
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	9	226,451	202,399
Reverse repurchase agreements – non-trading		927,976	803,775
Loans and advances to banks		519,024	432,247
Loans and advances to customers	10	3,705,149	3,840,939
Financial investments	11	2,221,361	2,051,575
Amounts due from Group companies	32	140,546	112,719
Interests in associates and joint ventures	14	185,898	188,485
Goodwill and intangible assets	15	102,419	95,181
Property, plant and equipment	16	130,926	129,827
Deferred tax assets	5	3,856	3,353
Prepayments, accrued income and other assets	17	355,319	269,743
Total assets		10,324,152	9,903,393
Liabilities
Hong Kong currency notes in circulation		341,354	332,044
Items in the course of transmission to other banks		33,073	25,701
Repurchase agreements – non-trading		351,093	255,374
Deposits by banks		198,908	280,310
Customer accounts	18	6,113,709	6,177,182
Trading liabilities	19	142,453	92,723
Derivatives	8	551,745	355,791
Financial liabilities designated at fair value	20	167,743	138,965
Debt securities in issue	21	100,909	67,364
Retirement benefit liabilities	4	1,655	1,890
Amounts due to Group companies	32	398,705	356,233
Accruals and deferred income, other liabilities and provisions	22	238,726	219,206
Liabilities under insurance contracts	3	700,758	638,145
Current tax liabilities		6,002	2,378
Deferred tax liabilities	5	32,937	32,522
Subordinated liabilities	23	3,119	4,054
Total liabilities		9,382,889	8,979,882
Equity
Share capital	24	180,181	172,335
Other equity instruments	25	52,386	44,615
Other reserves		109,235	151,804
Retained earnings		533,518	488,055
Total shareholders’ equity		875,320	856,809
Non-controlling interests		65,943	66,702
Total equity		941,263	923,511
Total liabilities and equity		10,324,152	9,903,393


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	81

Consolidated statement of cash flows

for the year ended 31 December


	2022	2021
	HK$m	HK$m
Profit before tax	97,611	86,563
Adjustments for non-cash items:
Depreciation and amortisation	15,297	13,288
Net (gain)/loss from investing activities	128	(1,890)
Share of profits in associates and joint ventures	(18,792)	(19,320)
Gain on disposal of subsidiaries, businesses, associates and joint ventures	(4)	(4)
Gain on acquisition of subsidiary	(665)	—
Change in expected credit losses gross of recoveries and other credit impairment charges	17,245	7,549
Provisions	592	607
Share-based payment expense	843	913
Other non-cash items included in profit before tax	(1,507)	5,416
Elimination of exchange differences	36,982	8,024
Changes in operating assets and liabilities
Change in net trading securities and derivatives	185,431	(159,767)
Change in loans and advances to banks and customers	77,973	(172,484)
Change in reverse repurchase agreements – non-trading	(166,542)	(174,643)
Change in financial assets designated and otherwise mandatorily measured at fair value through profit or loss	4,728	(23,439)
Change in other assets	(91,989)	43,706
Change in deposits by banks and customer accounts	(144,875)	297,468
Change in repurchase agreements – non-trading	95,719	119,217
Change in debt securities in issue	33,545	(12,055)
Change in financial liabilities designated at fair value	26,028	(28,048)
Change in other liabilities	101,882	129,710
Dividends received from associates	6,003	5,525
Contributions paid to defined benefit plans	(345)	(356)
Tax paid	(11,463)	(12,648)
Net cash from operating activities	263,825	113,332
Purchase of financial investments	(1,256,919)	(1,233,472)
Proceeds from the sale and maturity of financial investments	1,093,359	1,193,780
Purchase of property, plant and equipment	(2,802)	(2,718)
Proceeds from sale of property, plant and equipment and assets held for sale	73	96
Proceeds from disposal of customer loan portfolios	1,449	2,267
Net investment in intangible assets	(11,771)	(10,835)
Net cash outflow on purchase of subsidiaries	(4,166)	(13)
Net cash from investing activities	(180,777)	(50,895)
Issue of ordinary share capital and other equity instruments	15,617	—
Purchase of non-controlling interest	(1,548)	—
Subordinated loan capital issued1	81,014	57,764
Subordinated loan capital repaid1	(22,367)	(24,102)
Dividends paid to shareholders of the parent company and non-controlling interests	(37,666)	(63,523)
Net cash from financing activities	35,050	(29,861)
Net increase in cash and cash equivalents	118,098	32,576
Cash and cash equivalents at 1 Jan	1,055,084	1,047,807
Exchange differences in respect of cash and cash equivalents	(51,487)	(25,299)
Cash and cash equivalents at 31 Dec2	1,121,695	1,055,084
Cash and cash equivalents comprise
– cash and balances at central banks	232,740	276,857
– items in the course of collection from other banks	28,557	21,632
– loans and advances to banks of one month or less	368,946	326,691
– net settlement accounts and cash collateral	58,473	34,580
– reverse repurchase agreements with banks of one month or less	286,100	306,241
– treasury bills, other bills and certificates of deposit less than three months	179,952	114,784
– less: items in the course of transmission to other banks	(33,073)	(25,701)
Cash and cash equivalents at 31 Dec2	1,121,695	1,055,084

Interest received was HK$181,301m (2021: HK$133,964m), interest paid was HK$50,873m (2021: HK$26,553m) and dividends received

were HK$6,971m (2021: HK$5,592m).

1 Changes in subordinated loan capital (including those issued to group companies) during the year included amounts from issuance and

repayments as presented above, and non-cash changes from foreign exchange loss of HK$1,991m in 2022 (2021: exchange loss of HK$494m)

and fair value loss after hedging of HK$25,579m in 2022 (2021: HK$7,768m loss). These balances are presented under ‘Amounts due to Group

companies’ in the consolidated balance sheet.

2 At 31 December 2022, HK$161,252m (2021: HK$128,756m) was not available for use by the group, of which HK$65,026m (2021: HK$67,340m)

related to mandatory deposits at Central banks.

Consolidated Financial Statements


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

Consolidated statement of changes in equity

for the year ended 31 December


				Other reserves
	Share capital1	Other equity instru- ments	Retained earnings	Property revaluation reserve	Financial assets at FVOCI reserve	Cash flow hedge reserve	Foreign exchange reserve	Other3	Total share- holders’ equity	Non- controlling interests	Total equity
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 1 Jan 2022	172,335	44,615	488,055	64,990	3,869	153	(7,130)	89,922	856,809	66,702	923,511
Profit for the year	—	—	78,245	—	—	—	—	—	78,245	3,859	82,104
Other comprehensive income/(expense) (net of tax)	—	—	4,772	3,646	(14,774)	(1,639)	(31,351)	200	(39,146)	(1,008)	(40,154)
– debt instruments at fair value through other comprehensive income	—	—	—	—	(13,364)	—	—	—	(13,364)	(311)	(13,675)
– equity instruments designated at fair value through other comprehensive income	—	—	—	—	745	—	—	—	745	120	865
– cash flow hedges	—	—	—	—	—	(1,639)	—	—	(1,639)	(326)	(1,965)
– changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	—	—	4,590	—	—	—	—	—	4,590	(2)	4,588
– property revaluation	—	—	—	3,646	—	—	—	—	3,646	217	3,863
– remeasurement of defined benefit asset/liability	—	—	191	—	—	—	—	—	191	(6)	185
– share of other comprehensive income/(expense) of associates and joint ventures	—	—	(9)	—	(2,155)	—	—	200	(1,964)	—	(1,964)
– exchange differences	—	—	—	—	—	—	(31,351)	—	(31,351)	(700)	(32,051)
Total comprehensive income/ (expense) for the year	—	—	83,017	3,646	(14,774)	(1,639)	(31,351)	200	39,099	2,851	41,950
Shares issued1	7,846	—	—	—	—	—	—	—	7,846	—	7,846
Other equity instruments issued2	—	7,771	—	—	—	—	—	—	7,771	—	7,771
Dividends to shareholders4	—	—	(34,821)	—	—	—	—	—	(34,821)	(2,845)	(37,666)
Movement in respect of share-based payment arrangements	—	—	135	—	—	—	—	(137)	(2)	13	11
Transfers and other movements5	—	—	(2,868)	(3,488)	43	(1)	—	4,932	(1,382)	(778)	(2,160)
At 31 Dec 2022	180,181	52,386	533,518	65,148	(10,862)	(1,487)	(38,481)	94,917	875,320	65,943	941,263


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	83

Consolidated statement of changes in equity (continued)

for the year ended 31 December


				Other reserves
	Share capital1	Other equity instruments	Retained earnings	Property revaluation reserve	Financial assets at FVOCI reserve	Cash flow hedge reserve	Foreign exchange reserve	Other3	Total share- holders’ equity	Non- controlling interests	Total equity
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 1 Jan 2021	172,335	44,615	478,903	63,793	9,883	772	(10,688)	85,740	845,353	66,178	911,531
Profit for the year	—	—	67,348	—	—	—	—	—	67,348	5,200	72,548
Other comprehensive income/ (expense) (net of tax)	—	—	1,160	4,359	(5,992)	(619)	3,558	49	2,515	(118)	2,397
– debt instruments at fair value through other comprehensive income	—	—	—	—	(3,775)	—	—	—	(3,775)	(234)	(4,009)
– equity instruments designated at fair value through other comprehensive income	—	—	—	—	(2,737)	—	—	—	(2,737)	(743)	(3,480)
– cash flow hedges	—	—	—	—	—	(619)	—	—	(619)	(81)	(700)
– changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	—	—	521	—	—	—	—	—	521	1	522
– property revaluation	—	—	—	4,359	—	—	—	—	4,359	412	4,771
– remeasurement of defined benefit asset/liability	—	—	612	—	—	—	—	—	612	112	724
– share of other comprehensive income of associates and joint ventures	—	—	27	—	520	—	—	49	596	—	596
– exchange differences	—	—	—	—	—	—	3,558	—	3,558	415	3,973
Total comprehensive income/ (expense) for the year	—	—	68,508	4,359	(5,992)	(619)	3,558	49	69,863	5,082	74,945
Dividends to shareholders4	—	—	(59,105)	—	—	—	—	—	(59,105)	(4,418)	(63,523)
Movement in respect of share- based payment arrangements	—	—	131	—	—	—	—	(173)	(42)	(2)	(44)
Transfers and other movements5	—	—	(382)	(3,162)	(22)	—	—	4,306	740	(138)	602
At 31 Dec 2021	172,335	44,615	488,055	64,990	3,869	153	(7,130)	89,922	856,809	66,702	923,511

1Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous

years. During 2022, 3,138.4m new ordinary shares were issued at an issue price of HK$2.5 each.

2During 2022, an additional tier 1 capital instrument was issued amounted to US$1,000m on which there were US$10m issue costs.

3The other reserves mainly comprise share of associates’ other reserves, purchase premium arising from transfer of business from fellow

subsidiaries, property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-

based payment reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC

Holdings plc.

4Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.

5The movements include transfers from retained earnings to other reserves in associates according to local regulatory requirements, and from the

property revaluation reserve to retained earnings in relation to depreciation of revalued properties.

Consolidated Financial Statements


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

Notes on the Consolidated Financial Statements


1	Basis of preparation and significant accounting policies

1.1Basis of preparation

(a)Compliance with Hong Kong Financial Reporting Standards

The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries

(together ‘the group’) have been prepared in accordance with Hong Kong Financial Reporting Standards (‘HKFRSs’) as issued by the

Hong Kong Institute of Certified Public Accountants (‘HKICPA’) and accounting principles generally accepted in Hong Kong. These

consolidated financial statements also comply with the requirements of the Hong Kong Companies Ordinance (Cap. 622) which are

applicable to the preparation of the financial statements.

Standards adopted during the year ended 31 December 2022

There were no new accounting standards or interpretations that had a significant effect on the group in 2022. Accounting policies have

been consistently applied to all the years presented, unless otherwise stated.

(b)Future accounting developments

Minor amendments to HKFRSs

The HKICPA has published a number of minor amendments to HKFRSs that are effective from 1 January 2023 and 1 January 2024. The

group expects they will have an insignificant effect, when adopted, on the Consolidated Financial Statements.

New HKFRSs

HKFRS 17 ‘Insurance Contracts’

HKFRS 17 ‘Insurance Contracts’ is effective for annual reporting periods beginning on or after 1 January 2023 and is applied

retrospectively.

HKFRS 17 sets out the requirements that the group will apply in accounting for insurance contracts it issues, reinsurance contracts it

holds, and investment contracts with discretionary participation features.

The group is at an advanced stage in the implementation of HKFRS 17, having put in place accounting policies, data and models, and

made progress with preparing 2022 comparative data. Below are set out our expectations of the impact of HKFRS 17 compared with our

current accounting policy for insurance contracts, which is set out in policy 1.2(j) on page 93.

Under HKFRS 17, no present value of in-force business (‘PVIF’) asset is recognised. Instead, the measurement of the insurance contracts

liability is based on groups of insurance contracts and will include fulfilment cash flows, as well as the contractual service margin

(‘CSM’), which represents the unearned profit.

To identify groups of insurance contracts, individual contracts subject to similar dominant risk and managed together are identified as a

portfolio of insurance contracts. Each portfolio is further separated by profitability group and issue date into periodic cohorts.

The fulfilment cash flows comprise:

•the best estimates of future cash flows, including amounts expected to be collected from premiums and payouts for claims, benefits

and expenses, which are projected using assumptions based on demographic and operating experience;

•an adjustment for the time value of money and financial risks associated with the future cash flows; and

•an adjustment for non-financial risk that reflects the uncertainty about the amount and timing of future cash flows.

In contrast to the group’s HKFRS 4 accounting where profits are recognised upfront, the CSM will be systematically recognised in

revenue, as services are provided over the expected coverage period of the group of contracts without any change to the overall profit of

the contracts. Losses resulting from the recognition of onerous contracts are recognised in the income statement immediately.

The CSM is adjusted depending on the measurement model of the group of insurance contracts. While the general measurement model

(‘GMM’) is the default measurement model under HKFRS 17, the Group expects that the majority of its contracts will be accounted for

under the variable fee approach (‘VFA’), which is mandatory to apply for insurance contracts with direct participation features upon

meeting the eligibility criteria.

HKFRS 17 requires entities to apply HKFRS 17 retrospectively as if HKFRS 17 had always been applied, using the full retrospective

approach ('FRA') unless it is impracticable. When FRA is impracticable such as when there is a lack of sufficient and reliable data, an

entity has an accounting policy choice to use either the modified retrospective approach (‘MRA’) or the fair value approach (‘FVA’). The

group will apply the FRA for new business from 2018 at the earliest, subject to practicability, and FVA for the majority of contracts for

which FRA is impracticable. Where the FVA is used, the measurement takes into account the cost of capital that a market participant

within the jurisdiction would be expected to hold based on the asset and liability positions on the transition date.

The group will make use of the option to re-designate eligible financial assets held to support insurance liabilities currently measured at

amortised cost, as financial assets measured at fair value through profit or loss. Following re-designation, interest income earned on

these financial assets will no longer be shown in 'net interest income', and will instead form part of ‘net income/(expense) from assets

and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’ in accordance with the

group’s income and expense policy set out in Note 1.2(b) on page 87.

The group will also make use of the risk mitigation option for a number of economic offsets between the VFA contracts and reinsurance

contracts held that meet the requirements.

Impact of HKFRS 17

Changes to equity on transition are driven by the elimination of the PVIF asset, the re-designation of certain eligible financial assets in the

scope of HKFRS 9, the remeasurement of insurance liabilities and assets under HKFRS 17, and the recognition of the CSM.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	85

HKFRS 17 requires the use of current market values for the measurement of insurance liabilities. The shareholder’s share of the

investment experience and assumption changes will be absorbed by the CSM and released over time to profit or loss under VFA. For

contracts measured under GMM, the shareholder’s share of the investment volatility is recorded in profit or loss as it arises. Under

HKFRS 17, operating expenses will be lower as directly attributable costs will be incorporated in the CSM and recognised in the

insurance service result.

While the profit over the life of an individual contract will be unchanged, its emergence will be later under HKFRS 17.

All of these impacts will be subject to deferred tax.

Estimates of the opening balance sheet as at 1 January 2022 have been calculated and are presented below, showing separately the

impact on the total assets, liabilities and equity of our insurance manufacturing operations and group equity. These estimates are based

on accounting policies, assumptions, judgements and estimation techniques that remain subject to change.



Impact of transition to HKFRS 17, at 1 January 2022	Insurance manufacturing operations			group
	Assets	Liabilities	Equity	Equity
	HK$bn	HK$bn	HK$bn	HK$bn
Balance sheet values at 1 January 2022 under HKFRS 4	833.2	719.5	113.7	923.5
Removal of PVIF*	(63.8)	—	(63.8)	(63.8)
Replacement of HKFRS 4 liabilities with HKFRS 17	(3.4)	57.8	(61.2)	(64.3)
– Removal of HKFRS 4 liabilities and recording of HKFRS 17 fulfilment cash	(3.1)	(5.7)	2.6	2.7
– HKFRS 17 contractual service margin	(0.3)	63.5	(63.8)	(67.0)
Remeasurement effect of HKFRS 9 re-designations	38.1	—	38.1	38.1
Tax effect*	3.6	(10.5)	14.1	14.6
Estimated balance sheet values at 1 January 2022 under HKFRS 17	807.7	766.8	40.9	848.1

* PVIF of HK$63.8bn less deferred tax of HK$10.5bn constitute the overall estimated reduction in intangible assets, after tax, of HK$53.3bn on

transition to HKFRS 17.

The group's accounting for insurance contracts considers a broader set of cash flows than those arising within the insurance

manufacturing entities. This includes the effect of eliminating intra-group fees associated with distribution of policies through the group's

banking channel and directly attributable costs incurred by other group entities. These factors lead to an increase to the group CSM after

inclusion of distribution activities of approximately HK$3.2bn, with a consequential reduction to group equity of approximately HK$2.6bn

after the inclusion of deferred tax.

Items included in each of the group’s entities are measured using the currency of the primary economic environment in which the entity

operates (the ‘functional currency’). The group’s consolidated financial statements are presented in Hong Kong dollars.

Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated

in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured

at historical cost which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other

comprehensive income (‘OCI’) or in the income statement depending on where the gain or loss on the underlying item is recognised.

In the Consolidated Financial Statements, the assets, liabilities and results of foreign operations whose functional currency is not Hong

Kong dollars are translated into the group’s presentation currency at the rate of exchange at the balance sheet date, while their results

are translated into Hong Kong dollars at the average rates of exchange for the reporting period. Exchange differences arising are

recognised in OCI. On disposal of a foreign operation, exchange differences previously recognised in OCI are reclassified to the income

statement.

(d)Presentation of information

Certain disclosures required by HKFRSs have been included in the sections marked as ('Audited') in this Annual Report and Accounts as

follows:

•Consolidated income statement and balance sheet data by reportable segments are included in the 'Financial Review' on page 16 as

specified as ‘Audited’.

•Disclosures on 'Financial instruments impacted by IBOR reform' are included in the 'Top and Emerging Risks' section on page 25 as

specified as 'Audited'.

•Disclosures concerning the nature and extent of risks relating to banking and insurance activities are included in the ‘Risk' section on

pages 31 to 61 and pages 68 to 72 as specified as ‘Audited’.

•Capital disclosures are included in the ‘Treasury Risk’ section on pages 53 to 54 as specified as ‘Audited’.

In accordance with the group’s policy to provide disclosures that help stakeholders understand the group’s performance, financial

position and changes to them, the information provided in the Risk section goes beyond the minimum levels required by accounting

standards, statutory and regulatory requirements. In addition, the group assesses good practice recommendations issued from time to

time by relevant regulators and standard setters and will assess the applicability and relevance of such guidance, enhancing disclosures

where appropriate.

(e)Critical accounting estimates and judgements

The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent

uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted as the critical accounting

estimates and judgements in Note 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which

management’s estimates are based. This could result in materially different estimates and judgements from those reached by

management for the purposes of the Consolidated Financial Statements. Management’s selection of the group’s accounting policies that

contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of

judgement and estimation uncertainty involved.

Management has considered the impact of climate-related risks on the group's financial position and performance. While the effects of

climate change are a source of uncertainty, as at 31 December 2022 we do not consider there to be a material impact on our critical

Notes on the Consolidated Financial Statements


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

judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular

management has considered the known and observable potential impact of climate-related risks of associated judgements and estimates

in our value in use calculations.

(f)Segmental analysis

The group’s chief operating decision-maker is the Executive Committee, which operates as a general management committee under the

direct authority of the Board. Operating segments are reported in a manner consistent with the internal reporting provided to the

Executive Committee.

Measurement of segmental assets, liabilities, income and expenses is in accordance with the group’s accounting policies. Segmental

income and expenses include transfers between segments and these transfers are conducted at arm’s length. Shared costs are included

in segments on the basis of the actual recharges made.

(g)Going concern

The Consolidated Financial Statements are prepared on a going concern basis, as the Directors are satisfied that the group and parent

company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered

a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital

requirements and capital resources. These considerations include stressed scenarios that reflect the uncertainty in structural changes

from the Covid-19 pandemic, the Russia-Ukraine war, disrupted supply chains globally, slower Chinese economic activity, climate change

and other top and emerging risks, as well as from the related impacts on profitability, capital and liquidity.

1.2Summary of significant accounting policies

(a)Consolidation and related policies

Investments in subsidiaries

Where an entity is governed by voting rights, the group consolidates when it holds, directly or indirectly, the necessary voting rights to

pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other

factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or

principal.

Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair

value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made for each

business combination.

The Bank’s investments in subsidiaries are stated at cost less impairment losses.

Goodwill

Goodwill is allocated to cash-generating units (‘CGU’) for the purpose of impairment testing, which is undertaken at the lowest level at

which goodwill is monitored for internal management purposes. Impairment testing is performed at least once a year, or whenever there

is an indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.

Interests in associates

The group classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint

arrangements, as associates.

Investments in associates are recognised using the equity method. The attributable share of the results and reserves of associates is

included in the consolidated financial statements of the group based on either financial statements made up to 31 December or amounts

adjusted for any material transactions or events occurring between the date the financial statements are available and

31 December.

Investments in associates are assessed at each reporting date and tested for impairment when there is an indication that the investment

may be impaired. Goodwill on acquisitions of interests in associates is not tested separately for impairment but is assessed as part of the

carrying amount of the investment.

Critical accounting estimates and judgements


The most significant critical accounting estimates relate to the assessment of impairment of our investment in Bank of Communications Co. Limited (‘BoCom’), which involves estimations of value in use.
Judgements	Estimates
	•The VIU calculation uses discounted cash flow projections based on management’s best estimates of future earnings available to ordinary shareholders prepared in accordance with HKAS 36. •Key assumptions are used in estimating BoCom’s value in use, the sensitivity of the value in use calculations to different assumptions and a sensitivity analysis that shows the changes in key assumptions that would reduce the excess of value in use over the carrying amount (the ‘headroom’) to nil are described in Note 14.

(b)Income and expense

Operating income

Interest income and expense

Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value are

recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method. However, as an

exception to this, interest on debt instruments issued by the group for funding purposes that are designated under the fair value option to

reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.

Interest on credit impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose

of measuring the impairment loss.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	87

Non-interest income and expense

The group generates fee income from services provided at a fixed price over time, such as account service and card fees, or when the

group delivers a specific transaction at a point in time such as broking services and import/export services. With the exception of certain

fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be

variable depending on the size of the customer portfolio and the group’s performance as fund manager. Variable fees are recognised

when all uncertainties are resolved. Fee income is generally earned from short term contracts with payment terms that do not include a

significant financing component.

The group acts as principal in the majority of contracts with customers, with the exception of broking services. For brokerage trades

where the group acts as an agent in the transaction it recognises broking income net of fees payable to other parties in the arrangement.

The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the

customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the

agreement.

Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in

account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct

performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to

each performance obligation based on the estimated stand-alone selling prices.

Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities,

and usually the date when shareholders approve the dividend for unlisted equity securities.

Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:

•‘Net income from financial instruments held for trading or managed on a fair value basis’. This comprises net trading income, which

includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other

financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the

effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the

fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or

loss.

•‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through

profit or loss’. This includes interest income, interest expense and dividend income in respect of financial assets and liabilities

measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately

identifiable from other trading derivatives.

•‘Changes in fair value of designated debt instruments and related derivatives’. Interest paid on debt instruments and interest cash

flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch.

•‘Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss’. This includes interest

on instruments that fail the solely payments of principal and interest ('SPPI') test. See (d) below.

The accounting policies for insurance premium income are disclosed in Note 1.2(j).

(c)Valuation of financial instruments

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument

on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a

difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an

active market or a valuation technique that uses only data from observable markets, the group recognises the difference as a trading gain

or loss at inception (‘a day 1 gain or loss’). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income

statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or the

group enters into an offsetting transaction.

The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a group

of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is

measured on a net basis but the underlying financial assets and liabilities are presented separately in the Consolidated Financial

Statements, unless they satisfy the HKFRSs offsetting criteria.

Critical accounting estimates and judgements


The majority of valuation techniques employ only observable market data, which is assumed to include the potential effects of a variety of factors including climate-related risks. However, certain financial instruments are classified on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the measurement of fair value is more judgemental.
Judgements	Estimates
•An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument’s inception profit or greater than 5% of the instrument’s valuation is driven by unobservable inputs. •‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).	•Details on the group’s level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonably possible alternative assumptions in determining their fair value are set out in Note 33.

(d)Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates

to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans

and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost.

Notes on the Consolidated Financial Statements


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

The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of these

financial assets at initial recognition includes any directly attributable transactions costs.

The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the

lending commitment is expected to be sold shortly after origination, the commitment to lend is recorded as a derivative. When the group

intends to hold the loan, the loan commitment is included in the impairment calculations set out below.

Non-trading reverse repurchase, repurchase and similar agreements

When debt securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on the

balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell

(‘reverse repos’) are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading

repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price, or between the purchase

and resale price, is treated as interest and recognised in net interest income over the life of the agreement.

Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into

together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or

repo agreements.

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

Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain

contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at FVOCI.

These comprise primarily debt securities. They are recognised on the trade date when the group enters into contractual arrangements to

purchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value and

changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are

recognised in OCI until the assets are sold. Upon disposal, the cumulative gains or losses in OCI are recognised in the income statement

as ‘Gains less losses from financial instruments’. Financial assets measured at FVOCI are included in the impairment calculations set out

below and impairment is recognised in the income statement.

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

The equity securities for which fair value movements are shown in OCI are business facilitation and other similar investments where the

group holds the investments other than to generate a capital return. Gains or losses on the derecognition of these equity securities are

not transferred to the income statement. Dividend income is recognised in the income statement.

(g)Financial instruments designated at fair value through profit or loss

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out

below and are so designated irrevocably at inception:

•The use of the designation removes or significantly reduces an accounting mismatch.

•A group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value

basis, in accordance with a documented risk management or investment strategy.

•The financial liability contains one or more non-closely related embedded derivatives.

Designated financial assets are recognised when the group enters into contracts with counterparties, which is generally on trade date,

and are normally derecognised when the rights to the cash flows expire or are transferred.

Designated financial liabilities are recognised when the group enters into contracts with counterparties, which is generally on settlement

date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in

‘Net income from financial instruments held for trading or managed on a fair value basis’ or ‘Net income/(expense) from assets and

liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’ or ‘Changes in fair value of

designated debt and related derivatives’ except for the effect of changes in the liabilities' credit risk which is presented in OCI, unless that

treatment would create or enlarge an accounting mismatch in profit or loss.

Under the above criterion, the main classes of financial instruments designated by the group are:

•Debt instruments for funding purposes that are designated to reduce an accounting mismatch. The interest and/or foreign exchange

exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain

swaps as part of a documented risk management strategy.

•Financial assets and financial liabilities under unit-linked and non-linked investment contracts. A contract under which the group does

not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts

with discretionary participation features (‘DPF’), but is accounted for as a financial liability. Customer liabilities under linked and

certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in

the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise be

measured at either fair value through OCI or amortised cost. The related financial assets and liabilities are managed and reported to

management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values

to be recorded in the income statement and presented in the same line.

•Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance

evaluated on a fair value basis.

(h)Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other

indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as

assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial

liabilities which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.

Where the derivatives are managed with debt securities issued by the group that are designated at fair value where doing so reduces an

accounting mismatch, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	89

Hedge accounting

When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge

accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses these

derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net

investments in foreign operations as appropriate to the risk being hedged.

Fair value hedge

Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results

in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be

recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is

discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a

recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income

statement immediately.

Cash flow hedge

The effective portion of gains and losses on hedging instruments is recognised in OCI and the ineffective portion of the change in fair

value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income

statement within ‘Net income from financial instruments held for trading or managed on a fair value basis’. The accumulated gains and

losses recognised in OCI are reclassified to the income statement in the same periods in which the hedged item affects profit or loss.

When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in OCI remains in equity until

the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the

cumulative gain or loss previously recognised in OCI is immediately reclassified to the income statement.

Derivatives that do not qualify for hedge accounting

Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not

applied.

(i)Impairment of amortised cost and FVOCI financial assets

Expected credit losses (‘ECL’) are recognised for loans and advances to banks and customers, non-trading reverse repurchase

agreements, other financial assets held at amortised cost, debt instruments measured at fair value through other comprehensive income

('FVOCI'), and certain loan commitments and financial guarantee contracts. At initial recognition, an allowance (or provision in the case of

some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12

months (or less, where the remaining life is less than 12 months) (’12-month ECL’). In the event of a significant increase in credit risk, an

allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument

(‘lifetime ECL’). Financial assets where 12-month ECL is recognised are considered to be ‘stage 1’; financial assets that are considered to

have experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there is objective evidence of

impairment so are considered to be in default or otherwise credit-impaired are in ‘stage 3’. Purchased or originated credit-impaired

financial assets (‘POCI’) are treated differently as set out below.

Credit-impaired (stage 3)

The group determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily

whether contractual payments of either principal or interest are past due for more than 90 days, there are other indications that the

borrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons relating to the

borrower’s financial condition, or the loan is otherwise considered to be in default.

If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where

regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit-impaired and default are

aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired.

Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL

allowance.

Write-off

Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic

prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In

circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further

recovery, write-off may be earlier.

Forbearance

Loans are identified as forborne and classified as either performing or non-performing when the group modifies the contractual terms

due to financial difficulty of the borrower. Non-performing forborne loans are stage 3 and classified as non-performing until they meet the

cure criteria, as specified by applicable credit risk policy (for example, when the loan is no longer in default and no other indicators of

default have been present for at least 12 months). Any amount written off as a result of any modification of contractual terms upon

entering forbearance would not be reversed.

In 2022, the group adopted the EBA Guidelines on the application of definition of default for our retail portfolios, which affects credit risk

policies and our reporting in respect of the status of loans as credit impaired principally due to forbearance (or curing thereof). Further

details are provided under ‘Forborne loans and advances’ on page 32.

Performing forborne loans are initially stage 2 and remain classified as forborne until they meet applicable cure criteria (for example, they

continue to not be in default and no other indicators of default are present for a period of at least 24 months). At this point, the loan is

either stage 1 or stage 2 as determined by comparing the risk of a default occurring at the reporting date (based on the modified

contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms).

A forborne loan is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms, or if

the terms of an existing agreement are modified such that the forborne loan is a substantially different financial instrument. Any new

loans that arise following derecognition events in these circumstances would generally be classified as POCI and will continue to be

disclosed as forborne.

Notes on the Consolidated Financial Statements


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

Loan modifications other than forborne loans

Loan modifications that are not identified as forborne are considered to be commercial restructurings. Where a commercial restructuring

results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such

that the group’s rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is

recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates

and no payment-related concession has been provided. Modifications of certain higher credit risk wholesale loans are assessed for

derecognition having regard to changes in contractual terms that either individually or in combination are judged to result in a

substantially different financial instrument. Mandatory and general offer loan modifications that are not borrower specific, for example

market-wide customer relief programmes, generally do not result in derecognition, but their stage allocation is determined considering all

available and supportable information under our ECL impairment policy. Changes made to these financial instruments that are

economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying

amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change of the interest rate

benchmark.

Significant increase in credit risk (stage 2)

An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by

considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or

implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account

reasonable and supportable information, including information about past events, current conditions and future economic conditions. The

assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in

the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its

weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and

the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a

significant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale.

However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when

30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers,

and included on a watch or worry list are included in stage 2.

For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default (‘PD’) which

encompasses a wide range of information including the obligor’s customer risk rating ('CRR'), macroeconomic condition forecasts and

credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD

for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure of

significance varies depending on the credit quality at origination as follows:


Origination CRR	Significance trigger – PD to increase by
0.1–1.2	15bps
2.1–3.3	30bps

For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination

PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit

migrations and to relative changes in external market rates.

For loans originated prior to the implementation of HKFRS 9, the origination PD does not include adjustments to reflect expectations of

future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD

must be approximated assuming through-the-cycle PDs and through-the-cycle migration probabilities, consistent with the instrument’s

underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional

CRR deterioration based thresholds as set out in the table below:


Origination CRR	Additional significance criteria – number of CRR grade notches deterioration required to identify as significant credit deterioration (stage 2) (> or equal to)
0.1	5 notches
1.1–4.2	4 notches
4.3–5.1	3 notches
5.2–7.1	2 notches
7.2–8.2	1 notch
8.3	0 notch

Further information about the 23-grade scale used for CRR can be found on page 32.

For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporate all

available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12

months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into

homogenous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts

with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days

past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold therefore

identifies loans with a PD higher than would be expected from loans that are performing as originally expected and higher than that

which would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.

As additional data becomes available, the retail transfer criteria approach continues to be refined to utilise a more relative approach for

certain portfolios. These enhancements take advantage of the increase in origination related data in the assessment of significant

increases in credit risk by comparing remaining lifetime PD to the comparable remaining term lifetime PD at origination based on

portfolio-specific origination segments. These enhancements resulted in significant migrations of loans to customers gross carrying

amounts from stage 1 to stage 2, but did not have a significant impact on the overall ECL for these portfolios in 2022 due to low loan-to-

value ratios.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	91

Unimpaired and without significant increase in credit risk – (stage 1)

ECL resulting from default events that are possible within the next 12 months is recognised for financial instruments that remain in

stage 1.

Purchased or originated credit-impaired (‘POCI’)

Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI.

This population includes new financial instruments recognised in most cases following the derecognition of forborne loans. The amount

of change in lifetime ECL for a POCI loan is recognised in profit or loss until the POCI loan is derecognised, even if the lifetime ECL are

less than the amount of ECL included in the estimated cash flows on initial recognition.

Movement between stages

Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk

since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly

increased since initial recognition based on the assessments described above. In the case of non-performing forborne loans, such

financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment and meet the curing

criteria as described above.

Measurement of ECL

The assessment of credit risk, and the estimation of ECL, are unbiased and probability-weighted, and incorporate all available information

which is relevant to the assessment including information about past events, current conditions and reasonable and supportable

forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the

time value of money and considers other factors such as climate-related risks.

In general, the group calculates ECL using three main components, a probability of default, a loss given default ('LGD') and the exposure

at default (‘EAD’).

The 12-month ECL is calculated by multiplying the 12-month PD, LGD, and EAD. Lifetime ECL is calculated using the lifetime PD instead.

The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the

instrument respectively.

The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet

date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD

given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected

to be realised and the time value of money.

The group makes use of the Basel II IRB framework where possible, with recalibration to meet the differing HKFRS 9 requirements as set

out in the following table:


Model	Regulatory capital	HKFRS 9
PD	•Through the cycle (represents long-run average PD throughout a full economic cycle). •The definition of default includes a backstop of 90+ days past due.	•Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD). •Default backstop of 90+ days past due for all portfolios.
EAD	•Cannot be lower than current balance.	•Amortisation captured for term products.
LGD	•Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn). •Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data. •Discounted using cost of capital. •All collection costs included.	•Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral). •No floors. •Discounted using the original effective interest rate of the loan. •Only costs associated with obtaining/selling collateral included.
Other		•Discounted back from point of default to balance sheet date.

While 12-month PDs are recalibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD

using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating

through the CRR bands over its life.

The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow (‘DCF’) methodology. The expected

future cash flows are based on the credit risk officer’s estimates as of the reporting date, reflecting reasonable and supportable

assumptions and projections of future recoveries and expected future receipts of interest.

Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on the

estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral.

The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under

four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by the group and the

judgement of the credit risk officer in relation to the likelihood of the work-out strategy succeeding or receivership being required. For

less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to

the most likely outcome.

Period over which ECL is measured

ECL is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month

or lifetime ECL) is the maximum contractual period over which the group is exposed to credit risk. However, where the financial

instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn

commitment does not serve to limit the group’s exposure to credit risk to the contractual notice period, the contractual period does not

determine the maximum period considered. Instead, ECL is measured over the period the group remains exposed to credit risk that is not

mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken

for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six

years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the

Notes on the Consolidated Financial Statements


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

financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL

exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision. For wholesale overdraft

facilities, credit risk management actions are taken no less frequently than on an annual basis.

Forward-looking economic inputs

The group applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions

representative of its view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in

most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional

scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed

methodology is disclosed in ‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on pages 37 to 41.

Critical accounting estimates and judgements


The calculation of the group’s ECL under HKFRS 9 requires the group to make a number of judgements, assumptions and estimates. The most significant are set out below:
Judgements	Estimates
•Defining what is considered to be a significant increase in credit risk. •Determining the lifetime and point of initial recognition of overdrafts and credit cards. •Selecting and calibrating the PD, LGD and EAD models, which support the calculations, including making reasonable and supportable judgements about how models react to current and future economic conditions. •Selecting model inputs and economic forecasts, including determining whether sufficient and appropriately weighted economic forecasts are incorporated to calculate unbiased expected loss. •Making management adjustments to account for late breaking events, model and data limitations and deficiencies, and expert credit judgements. •Selecting applicable recovery strategies for certain wholesale credit-impaired loans.	•The sections ‘Measurement uncertainty and sensitivity analysis of ECL estimates’ marked as audited from pages 37 to 41, set out the assumptions used in determining ECL and provide an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions.

(j)Insurance contracts

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

compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk, but

is accounted for as an insurance contract if the insurance risk is significant. In addition, the group issues investment contracts with

discretionary participation features ('DPF') which are also accounted for as insurance contracts as required by HKFRS 4 ‘Insurance

Contracts’.

Net insurance premium income

Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums 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.

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

Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs

and any policyholder bonuses allocated in anticipation of a bonus declaration.

Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following

notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when

notified.

Reinsurance recoveries are accounted for in the same period as the related claim.

Future profit participation on insurance contracts with DPF

Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the

future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and

management’s expectation of the future performance of the assets backing the contracts, as well as other experience factors such as

mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by the contractual

terms, regulation, or past distribution policy.

Investment contracts with DPF

While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by

HKFRS 4. The group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting

increase in the carrying amount of the liability.

In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance

of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or OCI, 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. Movements in the liabilities arising from realised gains and losses on relevant

assets are recognised in the income statement.

Liabilities under insurance contracts and present value of in-force long-term insurance business

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.

The group recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term and

in-force at the balance sheet date, as an asset. 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.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	93

Critical accounting estimates and judgements


The valuation of the PVIF and insurance contract liabilities are dependent on economic assumptions (e.g. future investment returns) and non-economic assumptions (e.g. related to policyholder behaviour or demographics).
Judgements	Estimates
•The PVIF asset represents the value of the equity holders’ interest in the issuing insurance companies’ profits expected to emerge from these contracts written at the balance sheet date. It is determined by discounting those expected future profits using appropriate assumptions in assessing factors such as future mortality, lapse rates, investment returns and levels of expenses, and a risk discount rate that reflects the risk premium attributable to the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial options and guarantees. •Insurance contract liabilities are set in accordance with local actuarial principles in each market, aligned with local regulatory measurement frameworks. Core judgements made in applying these frameworks include demographic and behavioural assumptions, expense assumptions and investment return assumptions.	•The assumptions are reassessed at each reporting date and changes in the estimates which affect the value of PVIF and Insurance contract liabilities are reflected in the income statement. More information is included in Note 15 for PVIF and Note 3 for liabilities under insurance contracts. •The sections marked as audited on pages 68 to 72, ‘Insurance manufacturing operations risk management’ provide an indication of the sensitivity of the result to the application of different weightings being applied to different economic and non- economic assumptions.

(k)Property

Land and buildings

Land and buildings held for own use are carried at their revalued amount, being the fair value at the date of the revaluation less any

subsequent accumulated depreciation and impairment losses.

Revaluations are performed by professional qualified valuers, on a market basis, with sufficient regularity to ensure that the net carrying

amount does not differ materially from the fair value. Surpluses arising on revaluation are credited firstly to the income statement, to the

extent of any deficits arising on revaluation previously charged to the income statement in respect of the same land and buildings, and

are thereafter taken to the ‘Property revaluation reserve’. Deficits arising on revaluation are first set off against any previous revaluation

surpluses included in the ‘Property revaluation reserve’ in respect of the same land and buildings, and are thereafter recognised in the

income statement.

Leasehold land and buildings are depreciated on a straight-line basis over the shorter of the unexpired terms of the leases or the

remaining useful lives.

The Government of Hong Kong owns all the land in Hong Kong and permits its use under leasehold arrangements. Similar arrangements

exist in mainland China. The group accounts for its interests in own use leasehold land and land use rights in accordance with HKFRS 16

but discloses these as owned assets when the right of use are considered sufficient to constitute control.

Investment properties

The group holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties are

included on balance sheet at fair value with changes in fair value being recognised in the income statement.

(l)Employee compensation and benefits

Post-employment benefit plans

The group operates a number of pension schemes including defined benefit, defined contribution, and post-employment benefit

schemes.

Payments to defined contribution schemes are charged as an expense as the employees render service.

Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly

comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.

Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets excluding

interest and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The net defined benefit asset or

liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling

test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the

plan.

(m)Tax

Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates

to items recognised in OCI or directly in equity, in which case the tax is recognised in the same statement as the related item appears.

Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of

previous years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to

the tax authorities.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the

amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the

periods in which the assets will be realised or the liabilities settled.

In assessing the probability and sufficiency of future taxable profit, management considers the availability of evidence to support the

recognition of deferred tax assets. taking into account the inherent risks in long-term forecasting, including climate change-related, and

drivers of recent history of tax losses where applicable. Management also considers the future reversal of existing taxable temporary

differences and tax planning strategies, including corporate reorganisations.

Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.

(n)Provisions, contingent liabilities and guarantees

Provisions

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or

constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.

Notes on the Consolidated Financial Statements


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

Contingent liabilities and guarantees

Contingent liabilities

Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related

to legal proceedings or regulatory matters, are not recognised in the Consolidated Financial Statements but are disclosed unless the

probability of settlement is remote.

Financial guarantee contracts

Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which

is generally the fee received or present value of the fee receivable.

The Bank has issued financial guarantees and similar contracts to other group entities. The group elects to account for certain guarantees

as insurance contracts in the Bank's financial statements, in which case they are measured and recognised as insurance liabilities. This

election is made on a contract-by-contract basis, and is irrevocable.

(o)Impairment of non-financial assets

Software under development is tested for impairment at least annually. Other non-financial assets such as property, plant and equipment,

intangible assets (excluding goodwill) and right-of-use assets are tested for impairment at the individual asset level when there is

indication of impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In

addition, impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are

considered to be the principal operating legal entities and branches divided in a similar manner as the group's operating segments.

Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of

the fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying value of its assets and

liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a

reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an

appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which

is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs.

When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the

extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the

higher of their respective individual recoverable amount or nil. This impairment is not allocated to financial assets within a CGU.

Impairment loss recognised in prior periods for non-financial assets is reversed when there has been a change in the estimate used to

determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets

would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been

recognised in prior periods.


2	Operating profit

(a)Net interest income


Net interest income includes:
	2022	2021
	HK$m	HK$m
Interest income recognised on impaired financial assets	821	315
Interest income recognised on financial assets measured at amortised cost	158,552	106,916
Interest income recognised on financial assets measured at FVOCI	21,563	14,461
Interest expense on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise mandatorily measured at fair value1	(47,525)	(20,907)

1Includes interest expenses on lease liabilities of HK$265m (2021: HK$374m).

(b) Net fee income


Net fee income by reportable segments
	Wealth and Personal Banking	Commercial Banking	Global Banking	Markets and Securities Services	Corporate Centre1	Other (GBM- other)	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Account services	807	979	366	75	—	—	2,227
Funds under management	4,894	592	16	1,824	—	—	7,326
Cards	7,826	257	52	—	—	—	8,135
Credit facilities	332	1,303	1,186	25	—	—	2,846
Broking income	3,513	53	—	737	—	—	4,303
Imports/exports	—	2,465	667	—	—	—	3,132
Unit trusts	4,534	112	2	—	—	—	4,648
Underwriting	—	—	325	237	—	—	562
Remittances	264	1,902	723	3	—	—	2,892
Global custody	858	39	32	3,174	—	—	4,103
Insurance agency commission	1,434	107	5	—	—	—	1,546
Other	3,132	2,638	2,322	3,240	(2,214)	(216)	8,902
Fee income	27,594	10,447	5,696	9,315	(2,214)	(216)	50,622
Fee expense	(9,699)	(720)	(610)	(5,614)	2,461	160	(14,022)
Year ended 31 Dec 2022	17,895	9,727	5,086	3,701	247	(56)	36,600


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	95


Net fee income by reportable segments (continued)
	Wealth and Personal Banking	Commercial Banking	Global Banking	Markets and Securities Services	Corporate Centre1	Other (GBM-other)	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Account services	809	929	367	70	—	—	2,175
Funds under management	5,927	639	16	2,028	—	—	8,610
Cards	7,559	207	40	—	—	—	7,806
Credit facilities	409	1,371	1,304	62	—	—	3,146
Broking income	5,477	69	—	869	—	—	6,415
Imports/exports	—	2,462	594	—	—	—	3,056
Unit trusts	7,373	176	1	—	—	—	7,550
Underwriting	1	1	869	683	—	—	1,554
Remittances	255	1,843	715	—	—	—	2,813
Global custody	976	50	47	3,414	—	—	4,487
Insurance agency commission	1,326	114	1	—	—	—	1,441
Other	2,329	2,675	2,497	3,413	(2,156)	8	8,766
Fee income	32,441	10,536	6,451	10,539	(2,156)	8	57,819
Fee expense	(8,614)	(708)	(705)	(4,809)	2,399	(86)	(12,523)
Year ended 31 Dec 2021	23,827	9,828	5,746	5,730	243	(78)	45,296

1Includes inter-segment elimination.


Net fee income includes:
	2022	2021
	HK$m	HK$m
Fees earned on financial assets that are not at fair value through profit and loss (other than amounts included in determining the effective interest rate)	9,286	9,742
– fee income	14,867	15,173
– fee expense	(5,581)	(5,431)
Fee earned on trust and other fiduciary activities	8,961	11,242
– fee income	11,290	12,801
– fee expense	(2,329)	(1,559)

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


	2022	2021
	HK$m	HK$m
Net income/(expense) arising on:
Net trading activities	43,138	29,888
Other instruments managed on a fair value basis	(1,464)	(1,529)
Net income from financial instruments held for trading or managed on a fair value basis	41,674	28,359
Financial assets held to meet liabilities under insurance and investment contracts	(15,075)	17,837
Liabilities to customers under investment contracts	1,881	343
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss	(13,194)	18,180
Change in fair value of designated debt issued and related derivatives1	(703)	(639)
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	34	(25)
Year ended 31 Dec	27,811	45,875

1Includes debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting

mismatch.

(d)Other operating income


	2022	2021
	HK$m	HK$m
Movement in present value of in-force insurance business	(256)	(1,294)
Gains/(losses) on investment properties	(133)	277
Losses on disposal of property, plant and equipment and assets held for sale	(42)	(54)
Gain on acquisition of subsidiary1	665	—
Gains on disposal of subsidiaries, associates and business portfolios	4	4
Rental income from investment properties	437	393
Dividend income	233	198
Other	2,873	2,509
Year ended 31 Dec	3,781	2,033

1Represents a gain of HK$665m from the acquisition of AXA Insurance Pte Limited. Details are included in Note 37 'Business acquisitions'.

There was a gain on disposal of loans and receivables of HK$84m in the year (2021: HK$77m). There was no gain or loss on disposal of

financial liabilities measured at amortised cost (2021: loss of HK$136m).

Notes on the Consolidated Financial Statements


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

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


Change in expected credit losses and other credit impairment charges arising from the following asset categories:
	2022	2021
	HK$m	HK$m
Loans and advances to banks and customers	15,503	7,055
– new allowances net of allowance releases	16,383	8,065
– recoveries of amounts previously written off	(880)	(1,010)
Loan commitments and guarantees	409	(683)
Other financial assets	453	167
Year ended 31 Dec	16,365	6,539

Change in expected credit losses as a percentage of average gross customer advances was 0.40% for 2022 (2021: 0.18%).

(f)General and administrative expenses


	2022	2021
	HK$m	HK$m
Premises and equipment	2,956	2,867
Marketing and advertising expenses	2,622	2,417
Other administrative expenses1	48,971	47,043
Year ended 31 Dec	54,549	52,327

1 Include recharges from fellow group entities. Further details are set out in Note 32.

Included in operating expenses were direct operating expenses of HK$47m (2021: HK$37m) arising from investment properties that

generated rental income in the year. Direct operating expenses arising from investment properties that did not generate rental income

amounted to HK$9m (2021: HK$4m).

(g)Depreciation and impairment of property, plant and equipment


	2022	2021
	HK$m	HK$m
Owned property, plant and equipment	6,569	6,019
Other right-of-use assets	2,588	2,872
Year ended 31 Dec	9,157	8,891

(h)Auditors’ remuneration

Auditors’ remuneration amounted to HK$172m (2021: HK$152m).


3	Insurance business


Net insurance premium income1
	Non-linked insurance	Unit-linked	Total
	HK$m	HK$m	HK$m
Gross insurance premium income	88,141	1,302	89,443
Reinsurers’ share of gross insurance premium income	(9,002)	(26)	(9,028)
Year ended 31 Dec 2022	79,139	1,276	80,415

Gross insurance premium income	62,937	2,398	65,335
Reinsurers’ share of gross insurance premium income	(3,594)	(19)	(3,613)
Year ended 31 Dec 2021	59,343	2,379	61,722

1The group's net insurance premium income is presented after elimination of inter-company transactions between our insurance manufacturing

operations and other group entities.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	97


Net insurance claims and benefits paid and movement in liabilities to policyholders1
	Non-linked insurance	Unit-linked	Total
	HK$m	HK$m	HK$m
Gross claims and benefits paid and movement in liabilities to policyholders	83,114	(4,162)	78,952
– claims, benefits and surrenders paid	29,275	3,800	33,075
– movement in liabilities	53,839	(7,962)	45,877
Reinsurers’ share of claims and benefits paid and movement in liabilities	(9,107)	(31)	(9,138)
– claims, benefits and surrenders paid	(7,418)	(30)	(7,448)
– movement in liabilities	(1,689)	(1)	(1,690)
Year ended 31 Dec 2022	74,007	(4,193)	69,814

Gross claims and benefits paid and movement in liabilities to policyholders	78,159	1,898	80,057
– claims, benefits and surrenders paid	18,573	6,735	25,308
– movement in liabilities	59,586	(4,837)	54,749
Reinsurers’ share of claims and benefits paid and movement in liabilities	(4,013)	4	(4,009)
– claims, benefits and surrenders paid	(2,048)	(39)	(2,087)
– movement in liabilities	(1,965)	43	(1,922)
Year ended 31 Dec 2021	74,146	1,902	76,048

1The group's net insurance claims and benefits paid and movement in liabilities to policyholders is presented after elimination of inter-company

transactions between our insurance manufacturing operations and other group entities.


Liabilities under insurance contracts
	2022			2021
	Gross	Reinsurers’ share2	Net	Gross	Reinsurers’ share2	Net
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Non-linked insurance
At 1 Jan	608,500	(27,361)	581,139	547,058	(25,361)	521,697
Claims and benefits paid	(29,275)	7,418	(21,857)	(18,573)	2,048	(16,525)
Increase/(decrease) in liabilities to policyholders	83,114	(9,107)	74,007	78,159	(4,013)	74,146
Exchange differences and other movements1	17,120	(3,084)	14,036	1,856	(35)	1,821
At 31 Dec	679,459	(32,134)	647,325	608,500	(27,361)	581,139
Unit-linked
At 1 Jan	29,645	(5)	29,640	34,348	(4)	34,344
Claims and benefits paid	3,800	(30)	3,770	(6,735)	39	(6,696)
Increase/(decrease) in liabilities to policyholders	(4,162)	(31)	(4,193)	1,898	4	1,902
Exchange differences and other movements1	(7,984)	49	(7,935)	134	(44)	90
At 31 Dec	21,299	(17)	21,282	29,645	(5)	29,640
Total liabilities to policyholders	700,758	(32,151)	668,607	638,145	(27,366)	610,779

1'Exchange differences and other movements’ includes movements in liabilities arising from net unrealised investment gains recognised in other

comprehensive income.

2Amounts recoverable from reinsurance of liabilities under insurance contracts are included in the consolidated balance sheet in ‘Prepayment,

accrued income and other assets’.

The key factors contributing to the movement in liabilities to policyholders included movements in the market value of assets supporting

policyholder liabilities, death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the

declaration of bonuses and other amounts attributable to policyholders.


4	Employee compensation and benefits


	2022	2021
	HK$m	HK$m
Wages and salaries1	37,053	35,736
Social security costs	1,384	1,344
Post-employment benefits	2,225	2,181
– defined contribution pension plans	1,758	1,651
– defined benefit pension plans	467	530
Year ended 31 Dec	40,662	39,261

1'Wages and salaries’ includes the effect of share-based payments arrangements of HK$890m (2021: HK$951m).

Post-employment benefit plans

The group operates a number of post-employment benefit plans for its employees. Some of these plans are defined benefit plans, of

which the largest plan is The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (the 'Principal Plan’).

The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and the

discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are

recoverable through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a

surplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions.

Notes on the Consolidated Financial Statements


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

Defined benefit pension plans


Net asset/(liability) under defined benefit pension plans
	Fair value of plan assets	Present value of defined benefit obligations	Net defined benefit liability
	HK$m	HK$m	HK$m
At 1 Jan 2022	10,075	(11,945)	(1,870)
Service cost	—	(429)	(429)
– current service cost	—	(434)	(434)
– past service cost and gains from settlements	—	5	5
Net interest income/(expense) on the net defined benefit asset/(liability)	162	(197)	(35)
Re-measurement effects recognised in other comprehensive income	(841)	1,073	232
– return on plan assets (excluding interest income)	(841)	—	(841)
– actuarial gains	—	1,073	1,073
Contributions by the group	345	—	345
Benefits paid	(1,414)	1,487	73
Exchange differences and other movements	(61)	122	61
At 31 Dec 2022	8,266	(9,889)	(1,623)
Retirement benefit liabilities recognised on the balance sheet			(1,655)
Retirement benefit assets recognised on the balance sheet (within ‘Prepayment, accrued income and other assets’)			32


At 1 Jan 2021	10,453	(13,140)	(2,687)
Service cost	—	(475)	(475)
– current service cost	—	(492)	(492)
– past service cost and gains from settlements	—	17	17
Net interest income/(expense) on the net defined benefit asset/(liability)	79	(125)	(46)
Re-measurement effects recognised in other comprehensive income	500	385	885
– return on plan assets (excluding interest income)	500	—	500
– actuarial gains	—	385	385
Contributions by the group	356	—	356
Benefits paid	(1,340)	1,407	67
Exchange differences and other movements	27	3	30
At 31 Dec 2021	10,075	(11,945)	(1,870)
Retirement benefit liabilities recognised on the balance sheet			(1,890)
Retirement benefit assets recognised on the balance sheet (within ‘Prepayment, accrued income and other assets’)			20


Fair value of plan assets by asset classes
	At 31 Dec 2022			At 31 Dec 2021
	Value	Quoted market price in active market	Thereof HSBC	Value	Quoted market price in active market	Thereof HSBC
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Fair value of plan assets	8,266	8,266	195	10,075	10,075	257
– equities	1,078	1,078	—	1,232	1,232	—
– bonds	4,622	4,622	—	5,676	5,676	—
– alternative investments	2,112	2,112	—	2,490	2,490	—
– other1	454	454	195	677	677	257

1 Other mainly consists of cash and cash deposits.

The Principal Plan

In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, the Principal Plan, covers employees of the group

and HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the group set up in Hong Kong as part of

the recovery and resolution planning to provide functional support services to the group, as well as certain other local employees of the

Group. The Principal Plan comprises a funded defined benefit scheme (which provides a lump sum benefit on retirement and is now

closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees, and the

group has been providing defined contribution plans to all new employees. Since the defined benefit scheme of the Principal Plan is a

final salary lump sum scheme, its exposure to longevity risk and interest rate risk is limited compared to a scheme that provides annuity

payments.

The Principal Plan is a funded plan with assets which are held in trust funds separate from the group. The investment strategy of the

defined benefit scheme of the Principal Plan is to hold the majority of assets in fixed income investments, with a smaller portion in

equities. The target asset allocation for the portfolio is as follows: Fixed income investments 75% and Equity 25%. Each investment

manager has been assigned a benchmark applicable to their respective asset class. The actuarial funding valuation of the Principal Plan is

conducted at least on a triennial basis in accordance with the local practice and regulations. The actuarial assumptions used to conduct

the actuarial funding valuation of the Principal Plan vary according to the economic conditions.

The trustee, which is a subsidiary of the Bank, assumes the overall responsibility for the Principal Plan and the group has established a

management committee and a number of sub-committees to broaden the governance and manage the concomitant issues.

Both the group and ServCo participate in the Principal Plan that shares risks between the entities which are under common control of the

Group. As agreed between the group and ServCo, the net defined benefit cost of the defined benefit scheme of the Principal Plan shall be

charged separately. Details on the defined benefit scheme of the Principal Plan are disclosed below.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	99


Net asset/(liability) under the defined benefit scheme of the Principal Plan
	Included within the group			Included within ServCo
	Fair value of plan assets	Present value of defined benefit obligations	Net defined benefit liability	Fair value of plan assets	Present value of defined benefit obligations	Net defined benefit liability
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 1 Jan 2022	4,424	(4,915)	(491)	3,945	(4,191)	(246)
Service cost	—	(162)	(162)	—	(141)	(141)
– current service cost	—	(162)	(162)	—	(141)	(141)
Net interest income/(expense) on the net defined benefit asset/(liability)	56	(61)	(5)	50	(52)	(2)
Re-measurement effects recognised in other comprehensive income	(409)	566	157	(364)	537	173
– return on plan assets (excluding interest income)	(409)	—	(409)	(364)	—	(364)
– actuarial gains	—	566	566	—	537	537
Contributions	191	—	191	123	—	123
Benefits paid	(737)	737	—	(515)	515	—
Exchange differences and other movements	60	(67)	(7)	(69)	67	(2)
At 31 Dec 2022	3,585	(3,902)	(317)	3,170	(3,265)	(95)
Retirement benefit liabilities recognised on the balance sheet			(317)			(95)


At 1 Jan 2021	4,486	(5,330)	(844)	4,288	(5,001)	(713)
Service cost	—	(179)	(179)	—	(171)	(171)
– current service cost	—	(179)	(179)	—	(171)	(171)
Net interest income/ (expense) on the net defined benefit asset/(liability)	22	(26)	(4)	21	(24)	(3)
Re-measurement effects recognised in other comprehensive income	265	118	383	250	240	490
– return on plan assets (excluding interest income)	265	—	265	250	—	250
– actuarial gains	—	118	118	—	240	240
Contributions	166	—	166	149	—	149
Benefits paid	(585)	585	—	(682)	682	—
Exchange differences and other movements	70	(83)	(13)	(81)	83	2
At 31 Dec 2021	4,424	(4,915)	(491)	3,945	(4,191)	(246)
Retirement benefit liabilities recognised on the balance sheet			(491)			(246)

The group expects to make HK$180m of contributions to the defined benefit scheme of the Principal Plan during 2023 (during 2022:

HK$160m) and ServCo expects to make HK$116m contributions to the defined benefit scheme of the Principal Plan during 2023 (during

2022: HK$136m). These expected contributions are determined separately by the group and ServCo by reference to the actuarial funding

valuation carried out by the Principal Plan's local actuary.

Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate for

the five years thereafter, are as follows:


Benefits expected to be paid from the defined benefit scheme of the Principal Plan1
	Within one year	One to two years	Two to three years	Three to four years	Four to five years	Five to ten years
As at 31 December 2022 as reported by:	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
– The group	292	373	382	371	396	1,892
– ServCo	187	299	340	271	338	1,825
As at 31 December 2021 as reported by:
– The group	381	467	383	362	396	1,896
– ServCo	286	284	333	365	287	1,785

1The duration of the defined benefit obligation is six years for the Principal Plan under the disclosed assumptions (2021: seven years).


Fair value of plan assets of the defined benefit scheme of the Principal Plan by asset classes
	At 31 Dec 2022			At 31 Dec 2021
	Value	Quoted market price in active market	Thereof HSBC	Value	Quoted market price in active market	Thereof HSBC
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Fair value of plan assets	6,755	6,755	51	8,369	8,369	76
– equities	1,581	1,581	—	1,839	1,839	—
– bonds	3,725	3,725	—	4,731	4,731	—
– alternative investments	1,398	1,398	—	1,723	1,723	—
– other1	51	51	51	76	76	76

1Other mainly consists of cash and cash deposits.

Notes on the Consolidated Financial Statements


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

The Principal Plan’s key actuarial financial assumptions

The group and ServCo determine the discount rate to be applied to the defined benefit scheme's obligations in consultation with the

Principal Plan’s local actuary, on the basis of the current average yields of Hong Kong Government Bonds and Hong Kong Exchange

Fund Notes, with maturities consistent with that of the defined benefit obligations.

The key actuarial assumptions used to calculate the group’s obligations for the defined benefit scheme of the Principal Plan for the

year, and used as the basis for measuring the expenses were as follows:


Key actuarial assumptions for the defined benefit scheme of the Principal Plan
	Discount rate	Rate of pay increase
	% p.a.	% p.a.
At 31 Dec 2022	3.50	3.50% p.a. for 2023 and 3.00% p.a. thereafter
At 31 Dec 2021	1.30	3.00

Actuarial assumption sensitivities

The discount rate and rate of pay increase are sensitive to changes in market conditions arising during the reporting period. The

following table shows the financial impact of assumption changes on the defined benefit scheme of the Principal Plan at year end:


The effect of changes in key assumptions on the defined benefit scheme of the Principal Plan
	Impact on HSBC Group Hong Kong Local Staff Retirement Benefit Scheme obligation
	Financial impact of increase		Financial impact of decrease
	2022	2021	2022	2021
	HK$m	HK$m	HK$m	HK$m
Discount rate – increase/decrease of 0.25%	(111)	(158)	114	162
Rate of pay increase – increase/decrease of 0.25%	115	160	(112)	(157)

Directors’ emoluments

The aggregate emoluments of the Directors of the Bank disclosed pursuant to section 4 of the Companies (Disclosure of Information

about Benefits of Directors) Regulation were HK$111m (2021: HK$131m). This comprises fees (which represent the aggregate

emoluments paid to or receivable by directors in respect of their services as a director) of HK$37m (2021: HK$30m) and other

emoluments of HK$74m (2021: HK$101m) which includes contributions to pension schemes of HK$3m (2021: HK$1m). Non-cash

benefits which are included in other emoluments mainly relate to share-based payment awards, and the provision of housing and

furnishings.

Details on loans to directors are set out in Note 32.


5	Tax

The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2021: 16.5%) on the profits for

the year assessable in Hong Kong. Overseas branches and subsidiaries have similarly provided for tax in the countries in which they

operate at the appropriate rates of tax in force in 2022. Deferred taxation is provided for in accordance with the group’s accounting policy

in Note 1.2(m).


Tax expense
	2022	2021
	HK$m	HK$m
Current tax	14,839	12,489
– Hong Kong taxation – on current year profit	5,072	5,719
– Hong Kong taxation – adjustments in respect of prior years	(492)	(158)
– overseas taxation – on current year profit	10,692	7,151
– overseas taxation – adjustments in respect of prior years	(433)	(223)
Deferred tax	668	1,526
– origination and reversal of temporary differences	128	1,209
– effect of changes in tax rates	—	9
– adjustments in respect of prior years	540	308
Year ended 31 Dec	15,507	14,015

Tax reconciliation

The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the applicable tax

rates in the countries concerned as follows:


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	101


Reconciliation between taxation charge and accounting profit at applicable tax rates
	2022	2021
	HK$m	HK$m
Profit before tax	97,611	86,563
Notional tax on profit before tax, calculated at the rates applicable to profits in the countries concerned	19,832	17,463
Effects of profits in associates and joint ventures	(3,100)	(3,186)
Non-taxable income and gains	(3,591)	(3,181)
Local taxes and overseas withholding taxes	1,848	2,695
Permanent disallowables	747	577
Others	(229)	(353)
Year ended 31 Dec	15,507	14,015


Movements of deferred tax assets and liabilities
	Accelerated capital allowances	Insurance business	Expense provisions	Impairment allowance on financial instruments	Revaluation of properties	Other2	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Assets	176	—	1,557	2,680	—	2,106	6,519
Liabilities	(580)	(10,428)	(18)	—	(14,985)	(9,677)	(35,688)
At 1 Jan 2022	(404)	(10,428)	1,539	2,680	(14,985)	(7,571)	(29,169)
Exchange and other adjustments	(15)	(544)	(157)	(312)	215	(396)	(1,209)
Charge/(credit) to income statement	(43)	158	(229)	1,002	759	(2,315)	(668)
Charge/(credit) to other comprehensive income	6	—	10	—	(812)	2,761	1,965
At 31 Dec 2022	(456)	(10,814)	1,163	3,370	(14,823)	(7,521)	(29,081)
Assets1	146	—	1,193	3,370	—	4,550	9,259
Liabilities1	(602)	(10,814)	(30)	—	(14,823)	(12,071)	(38,340)


Assets	102	—	1,294	2,676	—	3,088	7,160
Liabilities	(358)	(10,662)	—	—	(14,645)	(9,167)	(34,832)
At 1 Jan 2021	(256)	(10,662)	1,294	2,676	(14,645)	(6,079)	(27,672)
Exchange and other adjustments	(6)	2	(42)	(75)	(1)	(11)	(133)
Charge/(credit) to income statement	(142)	232	286	80	524	(2,506)	(1,526)
Charge/(credit) to other comprehensive income	—	—	1	(1)	(863)	1,025	162
At 31 Dec 2021	(404)	(10,428)	1,539	2,680	(14,985)	(7,571)	(29,169)
Assets1	176	—	1,557	2,680	—	2,106	6,519
Liabilities1	(580)	(10,428)	(18)	—	(14,985)	(9,677)	(35,688)

1 After netting off balances within countries, the balances as disclosed in the Consolidated Financial Statements are as follows: deferred tax assets

HK$3,856m (2021: HK$3,353m); and deferred tax liabilities HK$32,937m (2021: HK$32,522m).

2Other included deferred tax of HK$5,847m (2021: HK$5,523m) provided in respect of distributable reserves or post-acquisition reserves of

associates that, on distribution or sale, would attract withholding tax.

The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$4,537m (2021: HK$3,130m). Of

this amount, HK$1,536m (2021: HK$733m) has no expiry date and the remaining will expire within 10 years.

Deferred tax is not recognised in respect of the group‘s investments in subsidiaries and branches where remittance or other realisation is

not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise.


6	Dividends


Dividends to shareholders of the parent company
	2022		2021
	HK$ per share	HK$m	HK$ per share	HK$m
Dividends paid on ordinary shares
In respect of previous year:
– fourth interim dividend	0.23	10,584	0.47	21,665
In respect of current year:
– first interim dividend paid	0.17	7,761	0.26	12,211
– second interim dividend paid	0.12	5,887	0.24	11,153
– third interim dividend paid	0.16	7,850	0.24	11,361
Total	0.68	32,082	1.21	56,390
Distributions on other equity instruments		2,739		2,715
Dividends to shareholders		34,821		59,105

On 14 February 2023, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2022 of

HK$0.27 per ordinary share (HK$13,500m) (2021: HK$0.23 per ordinary share (HK$10,584m)). No liability was recorded in the financial

statements in respect of the fourth interim dividend for 2022.

Notes on the Consolidated Financial Statements


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


Total coupons on other equity instruments
	2022	2021
	HK$m	HK$m
US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.510%)	460	456
US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.030%)	426	422
US$1,000m Fixed rate perpetual subordinated loan (interest rate fixed at 6.090%)	477	474
US$1,200m Fixed rate perpetual subordinated loan (interest rate fixed at 6.172%)	580	576
US$600m Fixed rate perpetual subordinated loan (interest rate fixed at 5.910%)	278	275
US$1,100m Fixed rate perpetual subordinated loan (interest rate fixed at 6.000%)	518	512
Total	2,739	2,715


7	Trading assets


	2022	2021
	HK$m	HK$m
Treasury and other eligible bills	132,737	132,104
Debt securities	231,601	274,508
Equity securities	264,447	299,420
Reverse repurchase agreements and other similar secured lending1	59,398	63,519
Other1,2	11,622	7,899
At 31 Dec	699,805	777,450

1 Further product details have been included to reconcile to Note 30 'Offsetting of financial assets and financial liabilities' with effect from

31 December 2022.

2 'Other' includes term lending and other accounts with banks and customers.


8	Derivatives


Notional contract amounts and fair values of derivatives by product contract type
	Notional contract amount		Fair value – Assets			Fair value – Liabilities
	Trading	Hedging	Trading	Hedging	Total	Trading	Hedging	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Foreign Exchange	19,574,143	34,877	263,215	3,226	266,441	281,468	14	281,482
Interest rate	32,534,469	456,741	529,327	12,416	541,743	575,665	3,326	578,991
Equity	785,281	—	18,363	—	18,363	14,017	—	14,017
Credit	462,180	—	2,386	—	2,386	2,708	—	2,708
Commodity and other	159,242	—	3,230	—	3,230	3,939	—	3,939
Gross total	53,515,315	491,618	816,521	15,642	832,163	877,797	3,340	881,137
Offset					(329,392)			(329,392)
At 31 Dec 2022					502,771			551,745

Foreign Exchange	17,721,333	74,732	155,110	3,401	158,511	150,034	523	150,557
Interest rate	30,392,783	218,885	368,523	4,321	372,844	372,342	1,406	373,748
Equity	845,058	—	18,611	—	18,611	14,800	—	14,800
Credit	413,340	—	3,446	—	3,446	4,437	—	4,437
Commodity and other	146,377	—	1,884	—	1,884	2,378	—	2,378
Gross total	49,518,891	293,617	547,574	7,722	555,296	543,991	1,929	545,920
Offset					(190,129)			(190,129)
At 31 Dec 2021					365,167			355,791

The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships

indicate the nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

Use of derivatives

The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risk

arising from client business, and to manage and hedge the group’s own risks. Derivatives (except for derivatives which are designated as

effective hedging instruments) are held for trading. Within the held for trading classification are two types of derivative instruments:

those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet 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. When entering into derivative transactions, the group employs the same credit

risk management framework to assess and approve potential credit exposures that it uses for traditional lending.

Trading derivatives

Most of the group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of

derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include

market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of

generating revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client

transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying

hedging derivatives.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	103

Derivatives valued using models with unobservable inputs

Any initial gain or loss on financial instruments where the valuation is dependent on unobservable parameters is deferred over the life of

the contract or until the instrument is redeemed, transferred or sold or the fair value becomes observable. All derivatives that are part of

qualifying hedging relationships have valuations based on observable market parameters.

The aggregate unobservable inception profit yet to be recognised in the income statement is immaterial.

Hedge accounting derivatives

The group applies hedge accounting to manage interest rate and foreign exchange risk. The group uses derivatives (principally interest

rate and currency swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This

enables the group to optimise its overall costs of accessing debt capital markets, and to mitigate the market risk which would otherwise

arise from structural imbalances in the maturity and other profiles of its assets and liabilities. The accounting treatment of hedging

transactions varies according to the nature of the instrument hedged and the type of hedging transaction. Derivatives may qualify as

hedges for accounting purposes if they are fair value hedges, or cash flow hedges.

Hedged risk components

The group designates a portion of cash flows of a financial instrument or a group of financial instruments for a specific interest rate or

foreign currency risk component in a fair value or cash flow hedge. The designated risks and portions are either contractually specified or

otherwise separately identifiable components of the financial instrument that are reliably measurable. Risk-free or benchmark interest

rates generally are regarded as being both separately identifiable and reliably measurable, except for the Ibor reform transition where the

group designates alternative benchmark rates as the hedged risk which may not have been separately identifiable upon initial

designation, provided the group reasonably expects it will meet the requirement within 24 months from the first designation date. The

designated risk component accounts for a significant portion of the overall changes in fair value or cash flows of the hedged item(s).

Fair value hedges

The group enters into to fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value due to movements in

market interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss, including debt

securities held and issued.


HSBC hedging instrument by hedged risk
	Hedging instrument
		Carrying amount
	Notional amount1	Assets	Liabilities	Balance sheet presentation	Change in fair value2
Hedged risk	HK$m	HK$m	HK$m	Balance sheet presentation	HK$m
Interest rate	309,450	11,761	2,281	Derivatives	6,130
At 31 Dec 2022	309,450	11,761	2,281		6,130



Interest rate	203,871	4,148	1,387	Derivatives	2,488
At 31 Dec 2021	203,871	4,148	1,387		2,488

1The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions

outstanding at the balance sheet date. They do not represent amounts at risk.

2Used in effectiveness testing, which uses the full fair value change of the hedging instrument not excluding any component.


HSBC hedged item by hedged risk
	Hedged item						Ineffectiveness
	Carrying amount		Accumulated fair value hedge adjustments included in carrying amount2			Change in fair value1	Recognised in profit and loss
	Assets	Liabilities	Assets	Liabilities	Balance sheet presentation	Change in fair value1	Recognised in profit and loss	Profit and loss presentation
Hedged risk	HK$m	HK$m	HK$m	HK$m	Balance sheet presentation	HK$m	HK$m	Profit and loss presentation
Interest rate	257,126		(10,312)		Financial investments measured at fair value through other comprehensive income	(10,716)	(237)	Net income from financial instruments held for trading or managed on a fair value basis
	5,755		(435)		Loans and advances to customers	(351)
		1,161		—	Debt securities in issue	8
		33,113		(2,260)	Subordinated liabilities3	4,692
At 31 Dec 2022	262,881	34,274	(10,747)	(2,260)		(6,367)	(237)


Interest rate	162,769		116		Financial investments measured at fair value through other comprehensive income	(4,930)	(77)	Net income from financial instruments held for trading or managed on a fair value basis
	6,465		(72)		Loans and advances to customers	(110)
		1,269		9	Debt securities in issue	3
		37,783		2,413	Subordinated liabilities3	2,472
At 31 Dec 2021	169,234	39,052	44	2,422		(2,565)	(77)

1Used in effectiveness testing, which comprise an amount attributable to the designated hedged risk that can be a risk component.

2The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be

adjusted for hedging gains and losses were assets of HK$143m (2021: HK$164m) for FVOCI assets and assets of HK$1,243m (2021: nil) for

subordinated liabilities.

3Represents Loss Absorbing Capacity (‘LAC’) instruments issued by the Bank to HSBC Asia Holdings Limited, the balance of which is included in

"amounts due to Group companies".

Notes on the Consolidated Financial Statements


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

Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fair

value of derivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items

and hedging instruments.

The interest rate risk of the group's fixed rate debt securities issued is managed in a non-dynamic risk management strategy.

Cash flow hedges

The group’s cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage

the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates

and foreign-currency basis.

The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuances

of non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of

future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the

basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows

representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and

ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.

The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes in

foreign exchange market rates with cross-currency swaps; these are considered non-dynamic hedges.


Hedging instrument by hedged risk
	Hedging instrument					Hedged item	Ineffectiveness
		Carrying amount			Change in fair value2	Change in fair value3	Recognised in profit and loss	Profit and loss presentation
	Notional amount1	Assets	Liabilities	Balance sheet presentation	Change in fair value2	Change in fair value3	Recognised in profit and loss
Hedged risk	HK$m	HK$m	HK$m	Balance sheet presentation	HK$m	HK$m	HK$m
Foreign currency	34,877	3,226	14	Derivatives	5,461	5,461	—	Net income from financial instruments held for trading or managed on a fair value basis
Interest rate	147,291	655	1,045	Derivatives	(448)	(448)	—
At 31 Dec 2022	182,168	3,881	1,059		5,013	5,013	—


Foreign currency	74,732	3,401	523	Derivatives	6,062	6,062	—	Net income from financial instruments held for trading or managed on a fair value basis
Interest rate	15,014	173	19	Derivatives	140	140	—
At 31 Dec 2021	89,746	3,574	542		6,202	6,202	—

1The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions

outstanding at the balance sheet date. They do not represent amounts at risk.

2Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to timing differences between the hedged items and

hedging instruments, and hedges using instruments with a non-zero fair value.


Reconciliation of equity and analysis of other comprehensive income by risk type
	Interest rate	Foreign currency
	HK$m	HK$m
Cash flow hedging reserve at 1 Jan 2022	108	45
Fair value gains/(losses)	(448)	5,461
Fair value (gains) reclassified from the cash flow hedge reserve to the income statement in respect of:
Hedged items that have affected profit or loss	(109)	(6,891)
Income taxes	112	236
Others	(1)	—
Cash flow hedging reserve at 31 Dec 2022	(338)	(1,149)



Cash flow hedging reserve at 1 Jan 2021	35	737
Fair value gains	140	6,062
Fair value (gains) reclassified from the cash flow hedge reserve to the income statement in respect of:
Hedged items that have affected profit or loss	(30)	(6,886)
Income taxes	(37)	132
Others	—	—
Cash flow hedging reserve at 31 Dec 2021	108	45

Interest rate benchmark reform

At 31 December 2022, HK$157,460m (2021: HK$99,608m) of the notional amounts of interest rate derivatives designated in hedge

accounting relationships are expected to be directly affected by market-wide Ibors reform and in scope of HKFRS Interest Rate

Benchmark Reform Phase 1 amendments. They do not represent the extent of the risk exposure managed by the group.

Further details regarding the impact of the market-wide benchmarks reform is set out in the 'Top and emerging risks' section on page

25-26 as specified as 'Audited'.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	105


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


	2022			2021
	Designated at fair value	Mandatorily measured at fair value	Total	Designated at fair value	Mandatorily measured at fair value	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Treasury and other eligible bills	—	743	743	—	241	241
Debt securities	18,754	10,492	29,246	12,847	11,066	23,913
Equity securities	—	186,955	186,955	—	169,125	169,125
Reverse repurchase agreements and other similar secured lending1	—	1,764	1,764	—	777	777
Other1,2	—	7,743	7,743	—	8,343	8,343
At 31 Dec	18,754	207,697	226,451	12,847	189,552	202,399

1Further product details have been included to reconcile to Note 30 'Offsetting of financial assets and financial liabilities' with effect from 31

December 2022.

2‘Other’ includes term lending to banks and customers, and default fund contribution.


10	Loans and advances to customers


	2022	2021
	HK$m	HK$m
Gross loans and advances to customers	3,745,113	3,872,956
Expected credit loss allowances	(39,964)	(32,017)
At 31 Dec	3,705,149	3,840,939

The following table provides an analysis of gross loans and advances to customers by industry sector based on the Statistical

Classification of economic activities in the European Community (‘NACE’).


Analysis of gross loans and advances to customers
	2022	2021
	HK$m	HK$m
Residential mortgages	1,177,614	1,167,487
Credit card advances	92,023	89,005
Other personal	255,747	275,819
Total personal	1,525,384	1,532,311
Real estate	570,370	635,217
Wholesale and retail trade	377,359	428,785
Manufacturing	372,060	410,033
Transportation and storage	106,172	111,388
Other	490,791	471,988
Total corporate and commercial	1,916,752	2,057,411
Non-bank financial institutions	302,977	283,234
At 31 Dec	3,745,113	3,872,956
By geography1
Hong Kong	2,332,813	2,447,799
Rest of Asia Pacific	1,412,300	1,425,157

1The geographical information shown above is classified by the location of the principal operations of the subsidiary or the branch responsible for

advancing the funds.

Notes on the Consolidated Financial Statements


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

Finance lease receivables and hire purchase contracts

The group leases a variety of assets to third parties under finance leases. At the end of lease terms, assets may be sold to third parties or

leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income. Loans and

advances to customers include receivables under finance leases and hire purchase contracts having the characteristics of finance leases.


Net investment in finance leases and hire purchase contracts
	2022			2021
	Total future minimum payments	Unearned finance income	Present value	Total future minimum payments	Unearned finance income	Present value
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Amounts receivable
– within one year	2,971	(783)	2,188	4,205	(1,213)	2,992
– one to two years	2,538	(724)	1,814	3,543	(1,051)	2,492
– two to three years	2,287	(677)	1,610	2,757	(912)	1,845
– three to four years	2,226	(644)	1,582	2,357	(762)	1,595
– four to five years	2,172	(619)	1,553	2,200	(647)	1,553
– after five years	24,585	(4,729)	19,856	22,133	(3,203)	18,930
	36,779	(8,176)	28,603	37,195	(7,788)	29,407
Expected credit loss allowances			(309)			(378)
At 31 Dec			28,294			29,029


11	Financial investments


	2022	2021
	HK$m	HK$m
Financial investments measured at fair value through other comprehensive income	1,246,652	1,549,011
– treasury and other eligible bills	612,990	653,245
– debt securities	626,537	888,664
– equity securities	7,125	7,102
Debt instruments measured at amortised cost	974,709	502,564
– treasury and other eligible bills	135,216	6,900
– debt securities	839,493	495,664
At 31 Dec	2,221,361	2,051,575


Equity instruments measured at fair value through other comprehensive income
	2022		2021
	Fair value	Dividends recognised	Fair value	Dividends recognised
Type of equity instruments	HK$m	HK$m	HK$m	HK$m
Business facilitation	6,615	217	6,540	189
Investments required by central institutions	404	3	420	3
Others	106	—	142	6
At 31 Dec	7,125	220	7,102	198


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	107


12	Assets pledged, assets transferred and collateral received

Assets pledged


Financial assets pledged to secure liabilities
	2022	2021
	HK$m	HK$m
Treasury bills and other eligible securities	121,131	57,631
Loans and advances to banks	4,372	3,211
Loans and advances to customers	22,512	30,975
Debt securities	149,687	134,747
Equity securities	34,388	47,453
Cash collateral included in other assets	129,025	75,951
Assets pledged at 31 Dec	461,115	349,968
Amount of liabilities secured	354,146	275,815

The table above shows assets where a charge has been granted to secure liabilities on a legal and contractual basis. These transactions

are conducted under terms that are usual and customary to collateralised transactions including repurchase agreements, securities

lending, derivative margining, and include assets pledged to cover short positions and to facilitate settlement processes with clearing

houses as well as swaps of equity and debt securities. The group places both cash and non-cash collateral in relation to derivative

transactions.

Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates

of indebtedness are held.

Financial assets pledged as collateral which the counterparty has the right to sell or repledge was HK$193,461m (2021: HK$85,162m).

Assets transferred


Transferred financial assets not qualifying for full derecognition and associated financial liabilities
	2022		2021
	Carrying amount of:		Carrying amount of:
	Transferred assets	Associated liabilities	Transferred assets	Associated liabilities
	HK$m	HK$m	HK$m	HK$m
Repurchase agreements	167,260	151,677	135,994	124,663
Securities lending agreements	70,036	3,644	44,171	282
	237,296	155,321	180,165	124,945

The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt

securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending

agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to be

recognised in full while a related liability, reflecting the group’s obligation to repurchase the assets for a fixed price at a future date, is

also recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no

associated liability as the non-cash collateral received is not recognised on the balance sheet. The group is unable to use, sell or pledge

the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these pledged

assets.

Collateral received

Assets accepted as collateral relate primarily to standard securities borrowing, reverse repurchase agreements, swaps of securities and

derivative margining. The group is obliged to return equivalent securities. These transactions are conducted under terms that are usual

and customary to standard securities borrowing, reverse repurchase agreements and derivative margining.


Fair value of collateral accepted as security for assets
	2022	2021
	HK$m	HK$m
Fair value of collateral permitted to sell or repledge in the absence of default	1,337,822	1,134,296
Fair value of collateral actually sold or repledged	520,756	377,117

Notes on the Consolidated Financial Statements


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


13	Investments in subsidiaries


Main subsidiaries of the Bank
	Place of incorporation	Principal activity	The group’s interest in issued share capital/ registered or charter capital
Hang Seng Bank Limited	Hong Kong	Banking	62.14%
HSBC Bank (China) Company Limited	mainland China	Banking	100%
HSBC Bank Malaysia Berhad	Malaysia	Banking	100%
HSBC Bank Australia Limited1	Australia	Banking	100%
HSBC Bank (Taiwan) Limited1	Taiwan	Banking	100%
HSBC Bank (Singapore) Limited	Singapore	Banking	100%
HSBC Life (International) Limited1	Bermuda	Retirement benefits and life insurance	100%

1Held indirectly.

All of the above subsidiaries are included in the group’s consolidated financial statements. These subsidiaries make their financial

statements up to 31 December.

The principal places of business are the same as the places of incorporation except for HSBC Life (International) Limited which operates

mainly in Hong Kong.

The proportion of voting rights held is the same as the proportion of ownership interest held.

The main subsidiaries are regulated banking and insurance entities in the Asia-Pacific region and, as such, are required to maintain

certain minimum levels of capital and liquid assets to support their operations. The effect of these regulatory requirements is to limit the

extent to which the subsidiaries may transfer funds to the Bank in the form of repayment of shareholder loans or cash dividends.


Subsidiary with significant non-controlling interest
	2022	2021
	HK$m	HK$m
Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests	37.86%	37.86%
Profit attributable to non-controlling interests	3,835	5,272
Accumulated non-controlling interests of the subsidiary	65,237	65,431
Dividends paid to non-controlling interests	2,823	4,415
Summarised financial information (before intra-group eliminations):
– total assets	1,893,805	1,820,185
– total liabilities	1,709,844	1,635,769
– net operating income before change in expected credit losses and other credit impairment charges	33,864	33,265
– profit for the year	10,151	13,946
– other comprehensive expense for the year, net of tax	(2,446)	(357)
– total comprehensive income for the year	7,705	13,589


14	Interests in associates and joint ventures

Associates and joint ventures


	2022	2021
	HK$m	HK$m
Share of net assets	182,137	184,402
Goodwill	3,815	4,141
Impairment	(54)	(58)
At 31 Dec	185,898	188,485

As 31 December 2022, the group’s interests in associates amounted to HK$185,888m (2021: HK$188,485m).

Principal associate


	Place of incorporation	The group’s interest in issued share capital
Bank of Communications Co., Ltd	mainland China	19.03%

Bank of Communications Co., Ltd. is listed on recognised stock exchanges. The fair value represents valuation based on the quoted

market price of the shares held (Level 1 in the fair value hierarchy) and amounted to HK$63,469m at 31 December 2022

(2021: HK$66,579m).

Bank of Communications Co., Ltd (‘BoCom’)

The group’s investment in BoCom is classified as an associate. Significant influence in BoCom was established with consideration of all

relevant factors, including representation on BoCom’s Board of Directors and participation in a resource and experience sharing

agreement (‘RES’). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom’s financial and operating

policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28, whereby the

investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group’s share of BoCom’s net

assets. An impairment test is required if there is any indication of impairment.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	109

Impairment testing

At 31 December 2022, the fair value of the group’s investment in BoCom had been below the carrying amount for approximately eleven

years. As a result, the group performed an impairment test on the carrying amount, which confirmed that there was no impairment at 31

December 2022 as the recoverable amount as determined by a value-in-use (‘VIU’) calculation was higher than the carrying value.


	At
	31 Dec 2022			31 Dec 2021
	VIU	Carrying value	Fair value	VIU	Carrying value	Fair value
	HK$bn	HK$bn	HK$bn	HK$bn	HK$bn	HK$bn
BoCom	183.0	182.3	63.5	193.0	184.8	66.6

The headroom, which is defined as the extent to which the VIU exceeds the carrying value decreased by HK$7.5bn compared with

31 December 2021. The decrease in headroom was principally due to revisions to management's best estimates of BoCom's future

earnings in the short to medium term, and the impact from BoCom's actual performance.

In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are

described below and are based on factors observed at period-end. The factors that could result in a change in the VIU and an impairment

include a short-term underperformance by BoCom, a change in regulatory capital requirements or an increase in uncertainty regarding

the future performance of BoCom resulting in a downgrade of the forecast of future asset growth or profitability. An increase in the

discount rate could also result in a reduction of VIU and an impairment.

If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying

value.

Basis of recoverable amount

The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying

amount. The VIU calculation uses discounted cash flow projections based on management’s best estimates of future earnings available

to ordinary shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best

estimate.

There are two main components to the VIU calculation. The first component is management’s best estimate of BoCom’s earnings.

Forecast earnings growth over the short to medium term are lower than recent (within the last five years) historical actual growth and

reflect the uncertainty arising from the current economic outlook. Reflecting management's intent to continue to retain its investment,

earnings beyond the short to medium term are then extrapolated into perpetuity using a long-term growth rate to derive a terminal value,

which comprises the majority of the VIU. The second component is the capital maintenance charge (‘CMC’), which is management’s

forecast of the earnings that need to be withheld in order for BoCom to meet capital requirements over the forecast period, meaning that

CMC is deducted when arriving at management’s estimate of future earnings available to ordinary shareholders. The principal inputs to

the CMC calculation include estimates of asset growth, the ratio of risk-weighted assets to total assets and the expected capital

requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management

considers other qualitative factors, to ensure that the inputs to the VIU calculation remain appropriate.

Key assumptions in value-in-use calculation

We used a number of assumptions in our VIU calculation, in accordance with the requirements of HKAS 36:

•Long-term profit growth rate: 3% (2021: 3%) for periods after 2026, which does not exceed forecast GDP growth in mainland China

and is similar to forecasts by external analysts.

•Long-term asset growth rate: 3% (2021: 3%) for periods after 2026, which is the rate that assets are expected to grow to achieve long-

term profit growth of 3%.

•Discount rate: 10.04% (2021: 10.03%), which is based on a capital asset pricing model (‘CAPM’), using market data. The discount rate

used is within the range of 8.4% to 10.4% (2021: 8.7% to 10.1%) indicated by the CAPM. While the CAPM range sits at the lower end

of the range adopted by selected external analysts of 8.8% to 13.5% (2021: 9.9% to 13.5%), we continue to regard the CAPM range as

the most appropriate basis for determining this assumption.

•Expected credit losses ('ECL') as a percentage of customer advances: ranges from 0.99% to 1.05% (2021: 0.98% to 1.12%) in the short

to medium term, reflecting reported credit experience through the ongoing Covid-19 pandemic in mainland China followed by an

expected reversion to recent historical levels. For periods after 2026, the ratio is 0.97% (2021: 0.97%), which is higher than BoCom’s

average ECL as a percentage of customer advances in recent years prior to the pandemic.

•Risk-weighted assets as a percentage of total assets: ranges from 61.0% to 64.4% (2021: 61.0% to 62.4%) in the short to medium

term, reflecting higher risk-weights in the short term followed by an expected reversion to recent historical levels. For periods after

2026, the ratio is 61.0% (2021: 61.0%), which is similar to BoCom’s actual results in recent years.

•Operating income growth rate: ranges from 1.9% to 7.7% (2021: 5.1% to 6.2%) in the short to medium term, is lower than BoCom’s

actual results in recent years and is similar to the forecasts disclosed by external analysts. This reflects BoCom’s most recent actual

results, global trade tensions and industry developments in mainland China.

•Cost-income ratio: ranges from 35.5% to 36.3% (2021: 35.5% to 36.1%) in the short to medium term. These ratios are similar to

BoCom's actual results in recent years and forecasts disclosed by external analysts.

•Effective tax rate (‘ETR’): ranges from 4.4% to 15.0% (2021: 6.8% to 15.0%) in the short to medium term, reflecting BoCom’s actual

results and an expected increase towards the long-term assumption through the forecast period. For periods after 2026, the rate is

15.0% (2021: 15.0%), which is higher than the recent historical average, and aligned to the minimum tax rate as proposed by the

OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.

•Capital requirements: capital adequacy ratio of 12.5% (2021: 12.5%) and tier 1 capital adequacy ratio of 9.5% (2021: 9.5%), based on

BoCom’s capital risk appetite and capital requirements respectively.

Notes on the Consolidated Financial Statements


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

The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom to nil:


Key assumption	Changes to key assumption to reduce headroom to nil
•Long-term profit growth rate •Long-term asset growth rate •Discount rate •Expected credit losses as a percentage of customer advances •Risk-weighted assets as a percentage of total assets •Operating income growth rate •Cost-income ratio •Long-term effective tax rate •Capital requirements – capital adequacy ratio •Capital requirements – tier 1 capital adequacy ratio	•Decrease by 2 basis points •Increase by 2 basis points •Increase by 3 basis points •Increase by <1 basis points •Increase by 14 basis points •Decrease by 3 basis points •Increase by 9 basis points •Increase by 26 basis points •Increase by 3 basis points •Increase by 173 basis points

The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity

of the VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur at

the same time. The selected rates of reasonably possible changes to key assumptions are based on external analysts’ forecasts, statutory

requirements and other relevant external data sources, which can change period to period.

Sensitivity of VIU to reasonably possible changes in key assumptions


	Favourable change			Unfavourable change
		Increase in VIU	VIU		Decrease in VIU	VIU
	bps	HK$bn	HK$bn	bps	HK$bn	HK$bn
At 31 December 2022
Long-term profit growth rate1	+75	28.1	211.1	-71	(21.1)	161.9
Long-term asset growth rate1	-71	24.2	207.2	+75	(31.8)	151.2
Discount rate	-164	54.3	237.3	+136	(28.7)	154.3
Expected credit losses as a percentage of customer advances	2022 to 2026: 95 2027 onwards: 91	14.9	197.9	2022 to 2026: 120 2027 onwards: 104	(22.5)	160.5
Risk-weighted assets as a percentage of total assets	-118	0.6	183.6	+239	(17.5)	165.5
Operating income growth rate	+44	10.5	193.5	-83	(19.3)	163.7
Cost-income ratio	-122	8.1	191.1	+174	(16.5)	166.5
Long-term effective tax rate	-426	11.8	194.8	+1000	(27.7)	155.3
Capital requirements – capital adequacy ratio	—	—	183.0	+191	(48.8)	134.2
Capital requirements – tier 1 capital adequacy ratio	—	—	183.0	+266	(24.8)	158.2

At 31 December 2021
Long-term profit growth rate1	+87	33.1	226.1	-69	(20.5)	172.5
Long-term asset growth rate1	-69	22.9	215.9	+87	(36.2)	156.8
Discount rate	-133	42.2	235.2	+207	(40.8)	152.2
Expected credit losses as a percentage of customer advances	2021 to 2025: 103 2026 onwards: 91	11.9	204.9	2021 to 2025: 121 2026 onwards: 105	(21.0)	172.0
Risk-weighted assets as a percentage of total assets	-111	2.2	195.2	+280	(15.8)	177.2
Operating income growth rate	+37	8.2	201.2	-58	(13.6)	179.4
Cost-income ratio	-152	13.6	206.6	+174	(12.7)	180.3
Long-term effective tax rate	-104	2.9	195.9	+1000	(27.4)	165.6
Capital requirements – capital adequacy ratio	—	—	193.0	+325	(77.6)	115.4
Capital requirements – tier 1 capital adequacy ratio	—	—	193.0	+364	(50.0)	143.0

1 The reasonably possible ranges of the long-term profit growth rate and long-term asset growth rate assumptions reflect the close relationship

between these assumptions, which would result in offsetting changes to each assumption.

Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of

VIU is HK$131.9bn to HK$223.9bn (2021: HK$148.3bn to HK$228.4bn). The range is based on impacts set out in the table above arising

from the favourable/unfavourable change in the earnings in the short to medium term, the long-term expected credit losses as a

percentage of customer advances and a 50bps increase/decrease in the discount rate. All other long-term assumptions, and the basis of

the CMC have been kept unchanged when determining the reasonably possible range of the VIU. Impairment, if determined, would be

recognised in the income statement. The impact on group’s CET1 ratio is expected to be minimal in the event of an impairment, as the

adverse impact on CET1 capital from the impairment would be partly offset by the favourable impact from a lower carrying value.

Selected financial information of BoCom

The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2022, the group included the

associate’s results on the basis of financial statements made up for the 12 months to 30 September 2022, but taking into account the

financial effect of significant transactions or events in the period from 1 October 2022 to 31 December 2022.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	111


Selected balance sheet information of BoCom
	At 30 Sep
	2022	2021
	HK$m	HK$m
Cash and balances with central banks	891,754	960,732
Due from and placements with banks and other financial institutions	778,032	771,522
Loans and advances to customers	7,968,993	7,751,362
Other financial assets	4,282,704	4,223,488
Other assets	438,653	375,073
Total assets	14,360,136	14,082,177
Due to and placements from banks and other financial institutions	2,160,865	2,238,612
Deposits from customers	8,920,656	8,572,625
Other financial liabilities	1,851,657	1,779,110
Other liabilities	277,086	312,486
Total liabilities	13,210,264	12,902,833
Total equity	1,149,872	1,179,344


Reconciliation of BoCom’s net assets to carrying amount in the group’s consolidated financial statements
	At 30 Sep
	2022	2021
	HK$m	HK$m
The group’s share of ordinary shareholders' equity	178,526	180,738
Goodwill	3,728	4,044
Carrying amount	182,254	184,782

Selected income statement information of BoCom
	For the 12 months ended 30 Sep
	2022	2021
	HK$m	HK$m
Net interest income	198,218	191,076
Net fee and commission income	53,667	55,735
Credit and impairment losses	(76,046)	(75,402)
Depreciation and amortisation	(18,406)	(17,851)
Tax expense	(4,681)	(8,119)
– profit for the year	106,352	110,370
– other comprehensive expense	(1,921)	(2,861)
Total comprehensive income	104,431	107,509
Dividends received from BoCom	5,881	5,386

Using the latest period for which BoCom has disclosed this information (at 30 June 2022), the group's share of associate's contingent liabilities was

HK$442,884m (2021: HK$432,259m).


15	Goodwill and intangible assets

Goodwill and intangible assets include goodwill arising on business combinations, the present value of in-force long-term insurance

business, and other intangible assets.


	2022	2021
	HK$m	HK$m
Goodwill	6,795	7,116
Present value of in-force long-term insurance business	65,537	63,765
Other intangible assets1	30,087	24,300
At 31 Dec	102,419	95,181

1Included within other intangible assets is internally generated software with a net carrying value of HK$27,209m (2021: HK$21,670m). During the

year, capitalisation of internally generated software was HK$11,570m (2021: HK$10,681m), amortisation charge was HK$5,610m (2021:

HK$4,115m) and impairment charge was HK$332m (2021: HK$184m).

The present value of in-force long-term insurance business

When calculating the present value of in-force long-term ('PVIF') insurance business, expected cash flows are projected after adjusting

for a variety of assumptions made by each insurance operation to reflect local market conditions and management’s judgement of future

trends, and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology).

Variations in actual experience and changes to assumptions can contribute to volatility in the results of the insurance business.

Financial Reporting Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. All

changes to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by

the Financial Reporting Committee.

Notes on the Consolidated Financial Statements


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


Movements in PVIF
	2022	2021
	HK$m	HK$m
At 1 Jan	63,765	65,052
Acquisition	2,114
Changes in PVIF of long-term insurance business	(256)	(1,294)
– value of new business written during the year	9,213	7,381
– expected return1	(5,326)	(5,950)
– assumption changes and experience variances (see below)	(3,967)	(2,873)
– other adjustments	(176)	148
Exchange differences and other	(86)	7
At 31 Dec	65,537	63,765

1‘Expected return’ represents the unwinding of the discount rate and reversal of expected cash flows for the period.

Assumption changes and experience variances

Included within this line item are:

•HK$(6,896)m (2021: HK$440m) decrease in PVIF due to rising interest rates, which is directly offset within the valuation of liabilities

under insurance contracts.

•HK$(564)m (2021: HK$(2,519)m), reflecting the future expected sharing of returns with policyholders on contracts with discretionary

participation features (‘DPF’), to the extent this sharing is not already included in liabilities under insurance contracts.

•HK$3,493m (2021: HK$(794)m), driven by other assumptions changes and experience variances.

Key assumptions used in the computation of PVIF for the main life insurance operations

Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed

market movements. The following are the key long-term assumptions used in the computation of PVIF for Hong Kong insurance entities,

being the main life insurance operations:


	2022	2021
	%	%
Weighted average risk free rate	3.85	1.40
Weighted average risk discount rate	7.33	5.20
Expense inflation	3.00	3.00

Sensitivity to changes in economic assumptions

The group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances

for risks not reflected in the best-estimate cash flow modelling. Where the insurance operations provide options and guarantees to

policyholders, the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already allowed for as an explicit

addition to the technical provisions required by regulators. See page 71 for further details of these guarantees and the impact of changes

in economic assumptions on our insurance manufacturing subsidiaries.

Sensitivity to changes in non-economic assumptions

Policyholder liabilities and PVIF are determined by reference to non-economic assumptions, including mortality and/or morbidity, lapse

rates and expense rates. See page 72 for further details on the impact of changes in non-economic assumptions on our insurance

manufacturing operations.


16	Property, plant and equipment


	2022	2021
	HK$m	HK$m
Owned property, plant and equipment1	123,491	121,072
Other right-of-use assets	7,435	8,755
At 31 Dec	130,926	129,827

1Included leasehold land and buildings of HK$112,591m (2021: HK$110,458m) for which the right of use are considered sufficient to constitute

control. They are therefore presented as owned assets.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	113


Movement in owned property, plant and equipment
	2022				2021
	Land and buildings	Investment properties	Equipment	Total	Land and buildings	Investment properties	Equipment	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Cost or valuation
At 1 Jan	102,367	13,465	15,747	131,579	100,791	13,167	15,266	129,224
Exchange and other adjustments	(797)	8	(679)	(1,468)	(67)	16	(112)	(163)
Additions	3,183	324	2,253	5,760	667	2	2,049	2,718
Disposals	(55)	—	(680)	(735)	(58)	—	(1,456)	(1,514)
Transfers	—	—	—	—	—	—	—	—
Elimination of accumulated depreciation on revalued land and buildings	(5,105)	—	—	(5,105)	(4,633)	—	—	(4,633)
Surplus/(deficit) on revaluation	4,683	(133)	—	4,550	5,643	277	—	5,920
Reclassifications	(2,849)	2,535	—	(314)	24	3	—	27
At 31 Dec	101,427	16,199	16,641	134,267	102,367	13,465	15,747	131,579
Accumulated depreciation
At 1 Jan	87	—	10,420	10,507	90	—	10,387	10,477
Exchange and other adjustments	(42)	—	(533)	(575)	30	—	(46)	(16)
Charge for the year	5,151	—	1,418	6,569	4,645	—	1,374	6,019
Disposals	—	—	(620)	(620)	(45)	—	(1,295)	(1,340)
Transfers	—	—	—	—	—	—	—	—
Elimination of accumulated depreciation on revalued land and buildings	(5,105)	—	—	(5,105)	(4,633)	—	—	(4,633)
At 31 Dec	91	—	10,685	10,776	87	—	10,420	10,507
Net book value at 31 Dec	101,336	16,199	5,956	123,491	102,280	13,465	5,327	121,072

The carrying amount of land and buildings, had they been stated at cost less accumulated depreciation, would have been as follows:


	2022	2021
	HK$m	HK$m
Cost less accumulated depreciation	18,584	17,121

Valuation of land and buildings and investment properties

The group’s land and buildings and investment properties were revalued as at 31 December 2022. The basis of valuation for land and

buildings and investment properties was open market value. The resultant values are Level 3 in the fair value hierarchy. The fair values for

land and buildings are determined by using a direct comparison approach which values the properties in their respective existing states

and uses, assuming sale with immediate vacant possession and by making reference to comparable sales evidence. The valuations take

into account the characteristics of the properties (unobservable inputs) which include the location, size, shape, view, floor level, year of

completion and other factors collectively. The premium or discount applied to the characteristics of the properties is within minus 20%

and plus 20%. In determining the open market value of investment properties, expected future cash flows have been discounted to their

present values. The net book value of ‘Land and buildings’ includes HK$6,839m (2021: HK$6,854m) in respect of properties which were

valued using the depreciated replacement cost method.

Valuation of land and buildings and investment properties in Hong Kong, Macau and mainland China were largely carried out by

Cushman & Wakefield Limited, who have recent experience in the location and type of properties and who are members of the Hong

Kong Institute of Surveyors. This represents 93% by value of the group’s properties subject to valuation. Other properties were valued by

different independent professionally qualified valuers.


17	Prepayments, accrued income and other assets


	2022	2021
	HK$m	HK$m
Prepayments and accrued income	32,604	24,986
Bullion	50,253	52,986
Acceptances and endorsements	57,118	55,789
Reinsurers’ share of liabilities under insurance contracts (Note 3)	32,151	27,366
Current tax assets	2,144	2,674
Settlement accounts	38,621	24,577
Cash collateral and margin receivables	94,850	44,177
Other assets	47,578	37,188
At 31 Dec	355,319	269,743

Prepayments, accrued income and other assets included HK$267,972m (2021: HK$180,757m) of financial assets, the majority of which

were measured at amortised cost.

Notes on the Consolidated Financial Statements


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


18	Customer accounts


Customer accounts by country/territory
	2022	2021
	HK$m	HK$m
Hong Kong	4,229,531	4,284,719
Singapore	479,241	448,976
Mainland China	443,954	462,187
Australia	222,222	220,233
India	176,466	191,116
Malaysia	124,792	128,673
Taiwan	119,400	120,744
Indonesia	45,529	46,938
Other	272,574	273,596
At 31 Dec	6,113,709	6,177,182


19	Trading liabilities


	2022	2021
	HK$m	HK$m
Net short positions in securities	80,564	85,627
Repurchase agreements and other similar secured lending1	61,404	6,703
Customer accounts	485	393
At 31 Dec	142,453	92,723

1 Further product details have been included to reconcile to Note 30 'Offsetting of financial assets and financial liabilities' with effect from 31

December 2022.


20	Financial liabilities designated at fair value


	2022	2021
	HK$m	HK$m
Deposits by banks and customer accounts	89,258	59,611
Debt securities in issue	45,454	43,928
Liabilities to customers under investment contracts	33,031	35,426
At 31 Dec	167,743	138,965

The carrying amount of financial liabilities designated at fair value was HK$370m lower than the contractual amount at maturity

(2021: HK$1,385m lower). The cumulative gain in fair value attributable to changes in credit risk was HK$138m (2021: HK$62m loss).


21	Debt securities in issue


	2022	2021
	HK$m	HK$m
Bonds and medium-term notes	78,537	79,852
Other debt securities in issue	67,826	31,440
Total debt securities in issue	146,363	111,292
Included within:
– financial liabilities designated at fair value (Note 20)	(45,454)	(43,928)
At 31 Dec	100,909	67,364


22	Accruals and deferred income, other liabilities and provisions


	2022	2021
	HK$m	HK$m
Accruals and deferred income	32,779	23,020
Acceptances and endorsements	57,210	55,824
Settlement accounts	33,536	26,158
Cash collateral and margin payables	58,919	53,541
Share-based payment liability to HSBC Holdings plc	1,564	1,431
Lease liabilities	7,850	9,165
Other liabilities1	44,957	48,668
Provisions for liabilities and charges	1,911	1,399
At 31 Dec	238,726	219,206

1 Mainly includes marginal deposit on letter of credit and credit card settlement account.

Accruals and deferred income, other liabilities and provisions included HK$227,840m (2021: HK$209,441m) of financial liabilities which

were measured at amortised cost.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	115


Movement in provisions
	Restructuring costs	Other	Total
Provisions (excluding contractual commitments)	HK$m	HK$m	HK$m
At 31 Dec 2021	148	466	614
Additions	468	243	711
Amounts utilised	(307)	(174)	(481)
Unused amounts reversed	(35)	(84)	(119)
Exchange and other movements	(3)	30	27
At 31 Dec 2022	271	481	752
Contractual commitments1
At 31 Dec 2021			785
Net change in expected credit loss provision and other movements			374
At 31 Dec 2022			1,159
Total Provisions at 31 Dec 2022			1,911


At 31 Dec 2020	116	419	535
Additions	357	333	690
Amounts utilised	(309)	(258)	(567)
Unused amounts reversed	(59)	(24)	(83)
Exchange and other movements	43	(4)	39
At 31 Dec 2021	148	466	614
Contractual commitments
At 31 Dec 2020			1,257
Net change in expected credit loss provision and other movements			(472)
At 31 Dec 2021			785
Total Provisions at 31 Dec 2021			1,399

1 Contractual commitments include provisions for contingent liabilities measured under HKFRS 9 ‘Financial Instruments’ in respect of financial

guarantees and expected credit loss provisions in relation to off-balance sheet guarantees and commitments.


23	Subordinated liabilities

Subordinated liabilities to third parties measured at amortised cost consist of undated primary capital notes and other capital loan having

an original term to maturity of five years or more. Subordinated liabilities to Group entities are not included in the table below.


		2022	2021
		HK$m	HK$m
US$400m	Undated floating rate primary capital notes	3,119	3,119
MYR500m	Fixed rate (5.050%) subordinated bonds due 2027, callable from 20221	—	935
At 31 Dec		3,119	4,054

1These securities were called in 2022.


24	Share capital



	2022	2021
	HK$m	HK$m
Paid up share capital in HK$	123,949	116,103
Paid up share capital in US$1	56,232	56,232
At 31 Dec	180,181	172,335


Ordinary shares issued and fully paid
	2022		2021
	HK$m	Number	HK$m	Number
At 1 Jan	172,335	46,440,991,798	172,335	46,440,991,798
Shares issued during the year	7,846	3,138,400,000	—	—
At 31 Dec	180,181	49,579,391,798	172,335	46,440,991,798

1 Paid up share capital in US$ represents preference shares which were redeemed or bought back via payment out of distributable profits and for

which the amount was transferred from retained earnings to share capital in accordance with the requirements of the Companies Ordinance.

3,138.4m new ordinary shares were issued during 2022 (2021: nil) at an issue price of HK$2.5 each for general corporate purposes and to

further strengthen the capital base. The holder of the ordinary shares is entitled to receive dividends as declared from time to time, rank

equally with regard to the Bank’s residual assets and are entitled to one vote per share at shareholder meetings of the Bank.

Notes on the Consolidated Financial Statements


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


25	Other equity instruments

Other equity instruments comprise additional tier 1 capital instruments in issue which are accounted for as equity.


	2022	2021
	HK$m	HK$m
US$1,000m Fixed rate perpetual subordinated loan, callable from Mar 20251	7,834	7,834
US$900m Fixed rate perpetual subordinated loan, callable from Sep 20262	7,063	7,063
US$700m Fixed rate perpetual subordinated loan, callable from Mar 20253	5,467	5,467
US$500m Fixed rate perpetual subordinated loan, callable from Mar 20253	3,905	3,905
US$600m Fixed rate perpetual subordinated loan, callable from May 20274	4,685	4,685
US$900m Fixed rate perpetual subordinated loan, callable from Sep 20245	7,044	7,044
US$1,100m Fixed rate perpetual subordinated loan, callable from Jun 20246	8,617	8,617
US$1,000m Floating rate perpetual subordinated loan, callable from May 20277	7,771	—
At 31 Dec	52,386	44,615

1Interest rate fixed at 6.090%.

2Interest rate fixed at 6.510%.

3Interest rate fixed at 6.172%.

4Interest rate fixed at 5.910%.

5Interest rate fixed at 6.030%.

6 Interest rate fixed at 6.000%.

7 Interest rate at compounded SOFR plus 5.090%.

The additional tier 1 capital instruments are perpetual subordinated loans on which coupon payments may be cancelled at the sole

discretion of the Bank. The subordinated loans will be written down at the point of non-viability on the occurrence of a trigger event as

defined in the Banking (Capital) Rules. They rank higher than ordinary shares in the event of a wind-up.


26	Maturity analysis of assets and liabilities

The following tables provide an analysis of consolidated total assets and liabilities by residual contractual maturity at the balance sheet

date. These balances are included in the maturity analysis as follows:

•Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are included

in the ‘Due not more than 1 month’ time bucket, because trading balances are typically held for short periods of time.

•Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the ‘Due over 5 years’ time

bucket. Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the

instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the ‘Due over

5 years’ time bucket.

•Non-financial assets and liabilities with no contractual maturity are included in the ‘Due over 5 years’ time bucket.

•Liabilities under insurance contracts are irrespective of contractual maturity included in the ‘Due over 5 years’ time bucket in the

maturity table provided below. An analysis of the expected maturity of liabilities under insurance contracts based on undiscounted

cash flows is provided on page 71. Liabilities under investment contracts are classified in accordance with their contractual maturity.

Undated investment contracts are included in the ‘Due over 5 years’ time bucket, however, such contracts are subject to surrender

and transfer options by the policyholders.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	117


Maturity analysis of assets and liabilities
	Due not more than 1 month	Due over 1 month but not more than 3 months	Due over 3 months but not more than 6 months	Due over 6 months but not more than 9 months	Due over 9 months but not more than 1 year	Due over 1 year but not more than 2 years	Due over 2 years but not more than 5 years	Due over 5 years	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Financial assets
Cash and balances at central banks	232,740	—	—	—	—	—	—	—	232,740
Items in the course of collection from other banks	28,557	—	—	—	—	—	—	—	28,557
Hong Kong Government certificates of indebtedness	341,354	—	—	—	—	—	—	—	341,354
Trading assets	691,744	1,764	3,089	—	163	3,045	—	—	699,805
Derivatives	495,785	691	205	142	474	1,840	2,556	1,078	502,771
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	6,334	662	2,334	809	306	3,644	13,130	199,232	226,451
Reverse repurchase agreements – non-trading	585,333	256,887	54,039	7,679	7,172	13,402	3,464	—	927,976
Loans and advances to banks	321,807	99,229	39,705	6,132	13,686	16,445	22,020	—	519,024
Loans and advances to customers	567,455	370,175	301,012	151,506	146,803	441,860	632,986	1,093,352	3,705,149
Financial investments	313,122	516,476	135,636	71,865	73,234	217,677	391,288	502,063	2,221,361
Amounts due from Group companies	101,287	4,652	4,356	716	2,696	10,236	7,729	19	131,691
Accrued income and other financial assets	193,219	40,300	21,535	3,864	4,077	796	675	3,506	267,972
Financial assets at 31 Dec 2022	3,878,737	1,290,836	561,911	242,713	248,611	708,945	1,073,848	1,799,250	9,804,851
Non-financial assets	—	—	—	—	—	—	—	519,301	519,301
Total assets at 31 Dec 2022	3,878,737	1,290,836	561,911	242,713	248,611	708,945	1,073,848	2,318,551	10,324,152

Financial liabilities
Hong Kong currency notes in circulation	341,354	—	—	—	—	—	—	—	341,354
Items in the course of transmission to other banks	33,073	—	—	—	—	—	—	—	33,073
Repurchase agreements – non-trading	335,467	2,173	2,557	—	5,027	5,869	—	—	351,093
Deposits by banks	193,147	1,249	3,513	811	176	12	—	—	198,908
Customer accounts	5,050,054	540,611	304,705	81,349	85,465	22,028	29,490	7	6,113,709
Trading liabilities	142,432	21	—	—	—	—	—	—	142,453
Derivatives	550,741	4	62	60	157	175	489	57	551,745
Financial liabilities designated at fair value	35,661	35,229	12,142	10,593	8,957	20,585	11,436	33,140	167,743
Debt securities in issue	13,723	13,266	24,251	13,388	1,054	9,674	22,382	3,171	100,909
Amounts due to Group companies	129,641	12,841	808	272	842	70,332	49,935	133,987	398,658
Accruals and other financial liabilities	138,862	41,883	22,569	5,525	7,098	5,566	5,228	1,109	227,840
Subordinated liabilities1	—	—	—	—	—	—	—	3,119	3,119
Total financial liabilities at 31 Dec 2022	6,964,155	647,277	370,607	111,998	108,776	134,241	118,960	174,590	8,630,604
Non-financial liabilities	—	—	—	—	—	—	—	752,285	752,285
Total liabilities at 31 Dec 2022	6,964,155	647,277	370,607	111,998	108,776	134,241	118,960	926,875	9,382,889

Notes on the Consolidated Financial Statements


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


Maturity analysis of assets and liabilities (continued)
	Due not more than1 month	Due over 1 month but not more than 3 months	Due over 3 months but not more than 6 months	Due over 6 months but not more than 9 months	Due over 9 months but not more than 1 year	Due over 1 year but not more than 2 years	Due over 2 years but not more than 5 years	Due over 5 years	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Financial assets
Cash and balances at central banks	276,857	—	—	—	—	—	—	—	276,857
Items in the course of collection from other banks	21,632	—	—	—	—	—	—	—	21,632
Hong Kong Government certificates of indebtedness	332,044	—	—	—	—	—	—	—	332,044
Trading assets	768,376	7,082	208	431	—	815	538	—	777,450
Derivatives	361,447	1,079	466	769	131	441	713	121	365,167
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	5,880	172	1,636	884	1,561	3,781	11,244	177,241	202,399
Reverse repurchase agreements – non-trading	528,832	223,041	34,435	5,081	1,865	9,384	1,137	—	803,775
Loans and advances to banks	277,060	80,547	20,767	7,667	7,532	20,248	17,908	518	432,247
Loans and advances to customers	605,216	402,921	312,336	177,577	171,989	410,594	731,226	1,029,080	3,840,939
Financial investments	247,163	405,109	187,038	107,329	118,029	232,350	307,753	446,804	2,051,575
Amounts due from Group companies	84,688	1,302	1,189	2,227	2,441	6,138	5,857	17	103,859
Accrued income and other financial assets	119,499	31,449	19,062	3,708	2,034	805	750	3,450	180,757
Financial assets at 31 Dec 2021	3,628,694	1,152,702	577,137	305,673	305,582	684,556	1,077,126	1,657,231	9,388,701
Non-financial assets	—	—	—	—	—	—	—	514,692	514,692
Total assets at 31 Dec 2021	3,628,694	1,152,702	577,137	305,673	305,582	684,556	1,077,126	2,171,923	9,903,393
Financial liabilities
Hong Kong currency notes in circulation	332,044	—	—	—	—	—	—	—	332,044
Items in the course of transmission to other banks	25,701	—	—	—	—	—	—	—	25,701
Repurchase agreements – non-trading	231,463	4,713	368	—	1,104	7,570	2,904	7,252	255,374
Deposits by banks	269,405	2,140	6,780	1,019	526	440	—	—	280,310
Customer accounts	5,722,470	272,462	88,483	34,813	32,417	11,792	14,741	4	6,177,182
Trading liabilities	92,723	—	—	—	—	—	—	—	92,723
Derivatives	354,567	304	74	212	79	241	274	40	355,791
Financial liabilities designated at fair value	32,086	21,849	11,059	4,967	5,574	8,789	18,899	35,742	138,965
Debt securities in issue	4,304	5,509	17,363	12,374	3,963	9,320	12,324	2,207	67,364
Amounts due to Group companies	114,388	17,504	1,401	222	223	21,699	66,205	134,534	356,176
Accruals and other financial liabilities	124,346	40,286	24,070	5,135	3,820	4,802	5,197	1,785	209,441
Subordinated liabilities1	—	—	—	—	—	—	—	4,054	4,054
Financial liabilities at 31 Dec 2021	7,303,497	364,767	149,598	58,742	47,706	64,653	120,544	185,618	8,295,125
Non-financial liabilities	—	—	—	—	—	—	—	684,757	684,757
Total liabilities at 31 Dec 2021	7,303,497	364,767	149,598	58,742	47,706	64,653	120,544	870,375	8,979,882

1The maturity for subordinated liabilities is based on the earliest date on which the group is required to pay, i.e. the callable date.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	119


27	Analysis of cash flows payable under financial liabilities by remaining contractual maturities


	Due not more than 1 month	Due over 1 month but not more than 3 months	Due between 3 and 12 months	Due between 1 and 5 years	Due after 5 years	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2022
Hong Kong currency notes in circulation	341,354	—	—	—	—	341,354
Items in the course of transmission to other banks	33,073	—	—	—	—	33,073
Repurchase agreements – non-trading	335,951	2,194	7,708	5,877	—	351,730
Deposits by banks	193,748	1,250	4,542	14	—	199,554
Customer accounts	5,053,321	552,623	481,006	55,739	16	6,142,705
Trading liabilities	142,453	—	—	—	—	142,453
Derivatives	551,094	67	253	603	60	552,077
Financial liabilities designated at fair value	37,062	36,310	32,404	33,198	33,170	172,144
Debt securities in issue	13,917	14,305	40,630	34,698	3,400	106,950
Amounts due to Group companies	129,728	14,509	11,396	155,038	170,299	480,970
Other financial liabilities	135,664	38,584	31,237	9,967	1,128	216,580
Subordinated liabilities	—	36	108	577	4,561	5,282
	6,967,365	659,878	609,284	295,711	212,634	8,744,872
Loan and other credit-related commitments	3,191,864	—	—	—	—	3,191,864
Financial guarantees	41,991	—	—	—	—	41,991
	10,201,220	659,878	609,284	295,711	212,634	11,978,727
Proportion of cash flows payable in period	85%	6%	5%	2%	2%

At 31 Dec 2021
Hong Kong currency notes in circulation	332,044	—	—	—	—	332,044
Items in the course of transmission to other banks	25,701	—	—	—	—	25,701
Repurchase agreements – non-trading	231,531	4,714	1,517	10,530	7,289	255,581
Deposits by banks	269,681	2,140	8,341	451	—	280,613
Customer accounts	5,723,441	273,282	157,735	28,638	4	6,183,100
Trading liabilities	92,723	—	—	—	—	92,723
Derivatives	354,584	416	384	621	40	356,045
Financial liabilities designated at fair value	33,288	22,323	21,903	28,536	35,768	141,818
Debt securities in issue	4,336	5,667	34,629	22,632	2,370	69,634
Amounts due to Group companies	113,944	19,523	7,301	108,035	147,000	395,803
Other financial liabilities	123,460	39,607	31,486	10,630	1,854	207,037
Subordinated liabilities	—	15	44	236	4,207	4,502
	7,304,733	367,687	263,340	210,309	198,532	8,344,601
Loan and other credit-related commitments	2,945,560	—	—	—	—	2,945,560
Financial guarantees	41,843	—	—	—	—	41,843
	10,292,136	367,687	263,340	210,309	198,532	11,332,004
Proportion of cash flows payable in period	91%	3%	2%	2%	2%

The balances in the above tables incorporate all cash flows relating to principal and future coupon payments on an undiscounted basis.

Trading liabilities and trading derivatives have been included in the ‘On demand’ time bucket as they are typically held for short periods

of time. The undiscounted cash flows payable under hedging derivative liabilities are classified according to their contractual maturity.

Investment contract liabilities have been included in financial liabilities designated at fair value, whereby the policyholders have the

options to surrender or transfer at any time, and are reported in the ‘Due after 5 years’ time bucket. A maturity analysis prepared on the

basis of the earliest possible contractual repayment date (assuming that all surrender and transfer options are exercised) would result in

all investment contracts being presented as falling due within one year or less. The undiscounted cash flows potentially payable under

loan commitments and financial guarantee contracts are classified on the basis of the earliest date they can be called. Cash flows

payable in respect of customer accounts are primarily contractually repayable on demand or at short notice.

Notes on the Consolidated Financial Statements


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


28	Contingent liabilities, contractual commitments and guarantees


	2022	2021
	HK$m	HK$m
Guarantees and contingent liabilities:
– financial guarantees1	41,991	41,843
– performance and other guarantees2	354,794	335,849
– other contingent liabilities	1,222	1,751
At 31 Dec	398,007	379,443
Commitments3:
– documentary credits and short-term trade-related transactions	26,324	32,284
– forward asset purchases and forward forward deposits placed	48,560	40,745
– undrawn formal standby facilities, credit lines and other commitments to lend	3,116,980	2,872,531
At 31 Dec	3,191,864	2,945,560

1Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a

specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

2Performance and other guarantees include re-insurance letters of credit related to particular transactions, trade-related letters of credit issued

without provision for the issuing entity to retain title to the underlying shipment, performance bonds, bid bonds, standby letters of credit and other

transaction-related guarantees.

3Includes HK$1,892,401m of commitments at 31 December 2022 (2021: HK$1,826,335m) to which the impairment requirements in HKFRS 9 are

applied where the group has become party to an irrevocable commitment.

The above table discloses the nominal principal amounts of commitments (excluding other commitments as disclosed in Note 29),

guarantees and other contingent liabilities, which represent the amounts at risk should contracts be fully drawn upon and clients default.

The amount of the commitments shown above reflects, where relevant, the expected level of take-up of pre-approved facilities. As a

significant proportion of guarantees and commitments are expected to expire without being drawn upon, the total of the nominal

principal amounts is not representative of future liquidity requirements.

It also reflects the group’s maximum exposure under a large number of individual guarantee undertakings. The risks and exposures from

guarantees are captured and managed in accordance with HSBC’s overall credit risk management policies and procedures. Guarantees

are subject to an annual credit review process.

Other contingent liabilities at 31 December 2022 included amounts in relation to legal and regulatory matters as set out in Note 38.


29	Other commitments

Capital commitments

At 31 December 2022, capital commitments, mainly related to the commitment for purchase of properties, were HK$3,834m

(2021: HK$4,826m).


30	Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable

right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability

simultaneously (‘the offset criteria’).

The ‘Amounts not set off in the balance sheet’ include transactions where:

•the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right to set

off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and

•cash and non-cash collateral (debt securities and equities) has been received/pledged for derivatives and reverse repurchase/

repurchase, stock borrowing/lending and similar agreements to cover net exposure in the event of default or other predetermined

events.

The effect of over-collateralisation is excluded.

‘Amounts not subject to enforceable master netting agreements’ include contracts executed in jurisdictions where the rights of set off

may not be upheld under the local bankruptcy laws, and transactions where a legal opinion evidencing enforceability of the right of offset

may not have been sought, or may have been unable to obtain.

For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the

relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains

appropriate.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	121


Offsetting of financial assets and financial liabilities
	Amounts subject to enforceable netting arrangements
				Amounts not offset in the balance sheet
	Gross amounts	Amounts offset	Net amounts reported in the balance sheet	Financial instruments, including non-cash collateral	Cash collateral	Net amount	Amounts not subject to enforceable netting arrange- ments1	Balance sheet total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2022
Financial assets2
Derivatives	795,828	(329,392)	466,436	(397,121)	(39,022)	30,293	36,335	502,771
Reverse repos, stock borrowing and similar agreements classified as:4
– trading assets	57,505	—	57,505	(57,273)	(227)	5	4,177	61,682
–third party	55,221	—	55,221	(54,994)	(227)	—	4,177	59,398
–amounts due from Group companies	2,284	—	2,284	(2,279)	—	5	—	2,284
– reverse repurchase agreements - non-trading	932,272	(29,470)	902,802	(901,205)	(1,597)	—	63,031	965,833
–third party	891,131	(26,186)	864,945	(863,840)	(1,105)	—	63,031	927,976
–amounts due from Group companies	41,141	(3,284)	37,857	(37,365)	(492)	—	—	37,857
– financial assets designated and otherwise mandatorily measured at fair value through profit or loss
–third party	1,764	—	1,764	(1,764)	—	—	—	1,764
	1,787,369	(358,862)	1,428,507	(1,357,363)	(40,846)	30,298	103,543	1,532,050
Financial liabilities3
Derivatives	849,582	(329,392)	520,190	(390,421)	(70,825)	58,944	31,555	551,745
Repos, stock lending and similar agreements classified as:4
– trading liabilities	61,437	—	61,437	(61,436)	(1)	—	22	61,459
–third party	61,382	—	61,382	(61,381)	(1)	—	22	61,404
–amounts due to Group companies	55	—	55	(55)	—	—	—	55
– repurchase agreements - non-trading	403,019	(29,470)	373,549	(373,126)	(352)	71	37,064	410,613
–third party	340,215	(26,186)	314,029	(313,747)	(256)	26	37,064	351,093
–amounts due to Group companies	62,804	(3,284)	59,520	(59,379)	(96)	45	—	59,520
	1,314,038	(358,862)	955,176	(824,983)	(71,178)	59,015	68,641	1,023,817

At 31 Dec 2021
Financial assets2
Derivatives	524,603	(190,129)	334,474	(279,958)	(36,005)	18,511	30,693	365,167
Reverse repos, stock borrowing and similar agreements classified as:4
– trading assets	60,417	(79)	60,338	(59,771)	(552)	15	7,393	67,731
–third party	56,205	(79)	56,126	(55,561)	(552)	13	7,393	63,519
–amounts due from Group companies	4,212	—	4,212	(4,210)	—	2	—	4,212
– reverse repurchase agreements - non-trading	806,403	(71,333)	735,071	(733,647)	(197)	1,228	82,854	817,925
–third party	776,145	(55,224)	720,921	(720,662)	(197)	62	82,854	803,775
–amounts due from Group companies	30,258	(16,109)	14,149	(12,985)	—	1,166	—	14,149
– financial assets designated and otherwise mandatorily measured at fair value through profit or loss
–third party	777	—	777	(777)	—	—	—	777
	1,392,200	(261,541)	1,130,659	(1,074,153)	(36,754)	19,752	120,940	1,251,599
Financial liabilities3
Derivatives	516,525	(190,129)	326,396	(277,624)	(27,837)	20,935	29,395	355,791
Repos, stock lending and similar agreements classified as:4
– trading liabilities	6,807	(79)	6,728	(6,721)	—	7	—	6,728
–third party	6,782	(79)	6,703	(6,697)	—	6	—	6,703
–amounts due to Group companies	25	—	25	(24)	—	1	—	25
– repurchase agreements - non-trading	323,559	(71,333)	252,226	(251,802)	(3)	421	68,664	320,890
–third party	241,934	(55,224)	186,710	(186,338)	(3)	369	68,664	255,374
–amounts due to Group companies	81,625	(16,109)	65,516	(65,464)	—	52	—	65,516
	846,891	(261,541)	585,350	(536,147)	(27,840)	21,363	98,059	683,409

1These exposures continue to be secured by financial collateral, but the group may not have sought or been able to obtain a legal opinion

evidencing enforceability of the offsetting right.

2Include balances due from Group companies of HK$208,343m (2021: HK$167,054m).

3 Include balances due to Group companies of HK$213,726m (2021: HK$217,572m).

4 Further product details have been included with effect from 31 December 2022.

Notes on the Consolidated Financial Statements


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


31	Segmental analysis

The Executive Committee (‘EXCO’) is considered the Chief Operating Decision Maker ('CODM') for the purpose of identifying the group’s

operating segments. Operating segment results are assessed by the CODM on the basis of performance measured in accordance with

HKFRSs. Although the CODM reviews information on a number of bases, business performance is assessed and capital resources are

allocated by operating segments, and the segmental analysis is presented based on reportable segments as assessed under HKFRS 8

'Operating Segments'.

Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income

and expenses. These allocations include the costs of certain support services and global functions to the extent that they can be

meaningfully attributed to operational business lines and geographical regions. While such allocations have been made on a systematic

and consistent basis, they necessarily involve a degree of subjectivity. Costs which are not allocated to other operating segments are

included in the ‘Corporate Centre’.

Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and

inter-business line transactions. All such transactions are undertaken on arm’s length terms. The intra-group elimination items for the

operating segments are presented in the Corporate Centre.

Our global businesses and reportable segments

The group provides a comprehensive range of banking and related financial services to our customers in our global businesses: Wealth

and Personal Banking (‘WPB’), Commercial Banking (‘CMB’) and Global Banking and Markets ('GBM'). The products and services offered

to customers are organised by these global businesses.

•WPB provides a full range of retail banking and wealth products to our customers from personal banking to ultra high net worth

individuals. Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages and

personal loans, credit cards, debit cards and local and international payment services. We also provide wealth management services,

including insurance and investment products, global asset management services, investment management and Private Wealth

Solutions for customers with more sophisticated and international requirements.

•CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-

sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables

finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance

and investments. CMB also offers its customers access to products and services offered by other global businesses, such as GBM,

which include foreign exchange products, raising capital on debt and equity markets and advisory services.

•GBM comprises of two separate reportable segments: Global Banking ('GB') and Markets and Securities Services ('MSS'). GB provides

tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused

business lines deliver a full range of banking capabilities including financing, advisory and transaction services. MSS provides services

in credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.

•Corporate Centre includes strategic investments such as our investment in BoCom, Central Treasury revenue, and costs which are not

allocated to global businesses, mainly in relation to investments in technology.

•Other (GBM-other) mainly comprises other business activities which are jointly managed by GB and MSS.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	123

Performance by reportable segments is presented in the ‘Financial Review’ on page 16 as specified as 'Audited'.


Information by geographical region
	Hong Kong	Rest of Asia-Pacific	Intra-segment elimination	Total
	Hong Kong	Rest of Asia-Pacific	Intra-segment elimination	Total
	HK$m	HK$m	HK$m	HK$m
For the year ended 31 Dec 2022
Total operating income	184,065	90,536	905	275,506
Profit before tax	43,153	54,458	—	97,611
At 31 Dec 2022
Total assets	7,450,156	3,898,235	(1,024,239)	10,324,152
Total liabilities	6,954,421	3,452,707	(1,024,239)	9,382,889
Credit commitments and contingent liabilities (contract amounts)	1,894,046	1,695,824	—	3,589,870

For the year ended 31 Dec 2021
Total operating income	174,859	79,067	780	254,706
Profit before tax	41,043	45,520	—	86,563
At 31 Dec 2021
Total assets	7,035,497	3,696,064	(828,168)	9,903,393
Total liabilities	6,559,271	3,248,779	(828,168)	8,979,882
Credit commitments and contingent liabilities (contract amounts)	1,792,675	1,532,328	—	3,325,003


Information by country/territory
	Revenue1		Non-current assets2
	For the year ended 31 Dec		At 31 Dec
	2022	2021	2022	2021
	HK$m	HK$m	HK$m	HK$m
Hong Kong	121,031	106,966	138,717	134,400
Mainland China	21,965	19,381	196,844	196,477
Australia	7,815	7,351	1,691	1,837
India	11,708	10,614	2,426	2,534
Indonesia	3,188	3,242	3,289	3,584
Malaysia	5,790	5,174	1,981	2,022
Singapore	15,473	10,671	3,453	2,933
Taiwan	3,823	3,124	2,473	2,802
Other	14,899	12,135	2,833	3,140
Total	205,692	178,658	353,707	349,729

1Revenue (defined as ‘Net operating income before change in expected credit losses and other impairment charges') is attributable to countries

based on the location of the principal operations of the branch, subsidiary, associate or joint venture.

2Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures and

certain other assets.


32	Related party transactions

The group’s related parties include the parent, fellow subsidiaries, associates, joint ventures, post-employment benefit plans for the

group’s employees, Key Management Personnel (‘KMP’) as defined by HKAS 24, close family members of KMP and entities that are

controlled or jointly controlled by KMP or their close family members.

Particulars of transactions with related parties are set out below.

(a)Inter-company

The group is wholly owned by HSBC Asia Holdings Limited, which in turn is a wholly-owned subsidiary of HSBC Holdings plc

(incorporated in England).

The group entered into transactions with its fellow subsidiaries in the normal course of business, including the acceptance and placement

of interbank deposits, correspondent banking transactions and off-balance sheet transactions. The Bank also acted as agent for the

distribution of retail investment funds for fellow subsidiaries and paid professional fees for services provided by fellow subsidiaries.

The group shared the costs of certain IT projects and also used certain processing services of fellow subsidiaries. These costs are

reported under ‘General and administrative expenses – other administrative expenses in the income statement.

The aggregate amount of income and expenses arising from these transactions during the year and the balances of amounts due to and

from the relevant parties at the year end were as follows:

Notes on the Consolidated Financial Statements


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


	2022			2021
	Immediate holding company	Ultimate holding company	Fellow subsidiaries	Immediate holding company	Ultimate holding company	Fellow subsidiaries
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Income and expenses for the year
Interest income	—	50	1,276	—	—	220
Interest expense1	8,364	33	1,216	6,773	(651)	(286)
Fee income	—	17	2,246	—	—	2,538
Fee expense	—	8	1,739	—	1	1,428
Net income/(losses) from financial instruments held for trading or managed on a fair value basis	1,106	—	(374)	—	1	(19)
Net insurance premium income	—	—	238	—	—	249
Other operating income	—	120	1,913	—	129	1,770
Net insurance claims and benefits paid and movement in liabilities to policyholders	—	—	(204)	—	—	(179)
General and administrative expenses2	—	67	49,891	—	(141)	47,842
At 31 Dec
Assets	24	3,403	305,321	9	1,147	260,256
– trading assets3,7	—	33	2,300	—	22	4,232
– derivative assets	—	2	168,200	—	989	147,704
– other assets3,6,8	24	3,368	134,821	9	136	108,320
Liabilities	256,031	3,804	293,021	223,565	1,069	283,630
– trading liabilities3,9	—	—	55	—	—	25
– financial liabilities designated at fair value3,4	183,760	—	6	175,655	—	7
– derivative liabilities	—	3,677	150,474	—	18	152,013
– other liabilities3,6,10	1,842	64	142,486	1,388	980	131,585
– subordinated liabilities3,5,6	70,429	63	—	46,522	71	—
Guarantees	—	—	23,289	—	—	22,815
Commitments	—	—	1,405	—	—	2,076

1The amount includes interest expenses on debt instruments issued by the group for funding purposes that are designated under the fair value

option to reduce an accounting mismatch, and interest expenses/(income) on derivatives managed in conjunction with those debt instruments.

2This includes reimbursement of amount from ultimate holding company in accordance to the billing arrangement of the Group.

3These balances are presented under ‘Amounts due from/to Group companies’ in the consolidated balance sheet.

4The balance at 31 December 2022 included capital and loss-absorbing capacity ('LAC') instruments of HK$183,760m (2021: HK$175,655m).

During the year, there were repayment of HK$21,512m (2021: HK$4,437) and issuance of HK$51,579m (2021: HK$54,460m). The carrying

amount of financial liabilities designated at fair value was HK$13,593m lower than the contractual amount at maturity (2021: HK$7,211m higher).

The cumulative gain in fair value attributable to changes in credit risk was HK$3,456m (2021: HK$1,815m loss). The balances are under Level 2.

5The balance at 31 December 2022 included subordinated liabilities of HK$70,429m to meet TLAC requirements (2021: HK$46,522m). During the

year, there were no repayment (2021: HK$19,665m) and issuance of HK$29,435m (2021: HK$3,304m).

6The fair value hierarchy of assets and liabilities at amortised cost are under level 2 and the fair value has no material difference with carrying value.

7Includes trading reverse repo agreements and other similar secured lending of HK$2,284m (2021: HK$4,212m).

8 Includes non-trading reverse repo agreements and other similar secured lending of HK$37,857m (2021: HK$14,149m).

9Includes trading repurchase agreements and other similar secured lending of HK$55m (2021: HK$25m).

10Includes non-trading repurchase agreements and other similar secured lending of HK$59,520m (2021: HK$65,516m).

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates

and security, as for comparable transactions with third-party counterparties.

(b)Share option and share award schemes

The group participates in various share option and share plans operated by HSBC whereby share options or shares of HSBC are granted

to employees of the group. The group recognises an expense in respect of these share options and share awards. The cost borne by the

ultimate holding company in respect of share options is treated as a capital contribution and is recorded within ‘Other reserves’. In

respect of share awards, the group recognises a liability to the ultimate holding company over the vesting period. This liability is

measured at the fair value of the shares at each reporting date, with changes since the award dates adjusted through the capital

contribution account within ‘Other reserves’. The balances of the capital contribution and the liability at 31 December 2022 amounted to

HK$3,299m and HK$1,564m respectively (2021: HK$3,436m and HK$1,431m respectively).

(c)Post-employment benefit plans

At 31 December 2022, HK$7.7bn (2021: HK$9.2bn) of the group’s post-employment plan assets were under management by group

companies, earning management fees of HK$59m in 2022 (2021: HK$65m). At 31 December 2022, the group’s post-employment benefit

plans had placed deposits of HK$735m (2021: HK$783m) with its banking subsidiaries, earning interest payable to the schemes of

HK$1.1m (2021: HK$0.5m). The above outstanding balances arose from the ordinary course of business and on substantially the same

terms, including interest rates and security, as comparable transactions with third-party counterparties.

(d)Associates and joint ventures

The group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-

interest bearing deposits and current accounts. Details of interests in associates and joint ventures are set out in Note 14.

The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful

information to represent the amount of transactions and outstanding balances during the year.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	125


Transactions and balances during the year with associates and joint ventures
	2022		2021
	Highest balance during the year	Balance at 31 December	Highest balance during the year	Balance at 31 December
	HK$m	HK$m	HK$m	HK$m
Amounts due from associates – unsubordinated1	57,513	51,402	35,643	32,632
Amounts due to associates1	19,862	10,099	27,237	8,786
Amounts due to joint ventures	40	16	—	—
Fair value of derivative assets with associates2	9,394	6,559	7,299	3,644
Fair value of derivative liabilities with associates2	33,673	28,440	5,424	4,450
Guarantees and Commitments2	1,769	287	4,897	1,654

1 Comparatives have been re-presented to incorporate certain balances previously not included.

2 With effect from 31 Dec 2022, derivatives assets and liabilities and guarantees provided are included in the disclosure. Comparatives have been

re-presented to conform to the current year’s presentation.

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates

and security, as comparable transactions with third‑party counterparties.

(e)Key Management Personnel

Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the

activities of the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Board

of Directors and Group Executive Committee members of HSBC Holdings plc.


Compensation of Key Management Personnel
	2022	2021
	HK$m	HK$m
Salaries and other short-term benefits	320	314
Post employment benefits	12	9
Termination benefits	2	5
Share-based payments	87	123
Total	421	451


Transactions, arrangements and agreements involving Key Management Personnel
	2022	2021
	HK$m	HK$m
During the year
Highest average assets1	97,366	107,317
Highest average liabilities1	81,323	71,516
Contribution to group‘s profit before tax	1,858	1,510
At the year end
Guarantees	12,007	13,263
Commitments	12,186	13,624

1The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during the

year.

Transactions, arrangements and agreements are entered into by the group with companies that may be controlled by Key Management

Personnel of the group and their immediate relatives. These transactions are primarily loans and deposits, and were entered into in the

ordinary course of business and on substantially the same terms, including interest rates and security, as comparable transactions with

persons or companies of a similar standing or, where applicable, with other employees. The transactions did not involve more than the

normal risk of repayment or present other unfavourable features. Change in expected credit losses recognised for the year, and expected

credit loss allowances against balances outstanding at the end of the year, in respect of Key Management Personnel were insignificant

(2021: insignificant).

On 8 October 2019, the group acted as Joint Global Co-ordinator and Underwriter on aggregated EUR4.25bn and GBP800m Senior Note

issuances for CK Hutchison Group Telecom Finance S.A. in 6 tranches, with tenors of 4 to 15 years and coupon rates of 0.375% to

2.625%. CK Hutchison Group Telecom Finance S.A. is a wholly-owned subsidiary of an associated body corporate (CK Hutchison

Holdings Limited) of Mr Victor Li, a non-executive Director of the Bank.

(f)Loans to directors

Directors are defined as the Directors of the Bank, its ultimate holding company, HSBC Holdings plc and intermediate holding

companies. Loans to directors also include loans to companies that are controlled by, and entities that are connected with these

directors. Particulars of loans to directors disclosed pursuant to section 17 of the Companies (Disclosure of Information about Benefits of

Directors) Regulation are as follows:


	Aggregate amount outstanding at 31 Dec		Maximum aggregate amount outstanding during the year
	2022	2021	2022	2021
	HK$m	HK$m	HK$m	HK$m
By the Bank	1,483	3,755	2,769	3,967
By subsidiaries	12	13	14	14
	1,495	3,768	2,783	3,981

These amounts include principal and interest, and the maximum liability that may be incurred under guarantees.

Notes on the Consolidated Financial Statements


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


33	Fair values of financial instruments carried at fair value

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined, or validated, by a function independent

of the risk taker.

Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price

determination or validation is utilised. For inactive markets, the group sources alternative market information, with greater weight given

to information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument

comparability, consistency of data sources, underlying data accuracy and timing of prices.

Fair value of investment funds are sourced from the underlying fund managers which are based upon an assessment of the underlying

investees’ financial positions, results, risk profile and prospects.

For fair values determined using valuation models, the control framework includes development or validation by independent support

functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before

becoming operational and are calibrated against external market data on an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including

portfolio changes, market movements and other fair value adjustments.

The majority of financial instruments measured at fair value are in MSS and Insurance. The group's fair value governance structure

comprises its Finance function and Valuation Committees. Finance is responsible for establishing procedures governing valuation and

ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the group's relevant Valuation

Committees, which consist of independent support functions and consider all material subjective valuations. Within MSS and Insurance,

these Committees are overseen by the Group's Valuation Committee Review Group and the Group Insurance Valuation and Impairment

Committee respectively.

Financial liabilities measured at fair value

In certain circumstances, the group records its own debt in issue at fair value, based on quoted prices in an active market for the specific

instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which

are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active

market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to the

group's liabilities. The change in fair value of issued debt securities attributable to the group’s own credit spread is computed as follows:

for each security at each reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar

securities for the same issuer. Then, using discounted cash flow, each security is valued using a Libor-based discount curve. The

difference in the valuations is attributable to the group’s own credit spread. This methodology is applied consistently across all securities.

Structured notes issued and certain other hybrid instruments are included within ‘Financial liabilities designated at fair value’ and are

measured at fair value. The credit spread applied to these instruments is derived from the spreads at which the group issues structured

notes.

Gains and losses arising from changes in the credit spread of liabilities issued by the group, recorded in other comprehensive income,

reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	127

Fair value hierarchy

Fair values of financial assets and liabilities are determined according to the following hierarchy:

•Level 1 – valuation technique using quoted market price. These are financial instruments with quoted prices for identical instruments

in active markets that the group can access at the measurement date.

•Level 2 – valuation technique using observable inputs. These are financial instruments with quoted prices for similar instruments in

active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models

where all significant inputs are observable.

•Level 3 – valuation technique with significant unobservable inputs. These are financial instruments valued using valuation techniques

where one or more significant inputs are unobservable.


Financial instruments carried at fair value and bases of valuation
	Fair Value Hierarchy
	Level 1	Level 2	Level 3	Third-party total	Inter- company2	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2022
Assets
Trading assets1	486,547	203,975	9,283	699,805	—	699,805
Derivatives	1,018	330,250	3,301	334,569	168,202	502,771
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	100,917	34,139	91,395	226,451	—	226,451
Financial investments	962,261	280,083	4,308	1,246,652	—	1,246,652
Liabilities
Trading liabilities1	74,201	68,246	6	142,453	—	142,453
Derivatives	2,425	393,457	1,712	397,594	154,151	551,745
Financial liabilities designated at fair value1	—	133,009	34,734	167,743	—	167,743

At 31 Dec 2021
Assets
Trading assets1	537,816	236,388	3,246	777,450	—	777,450
Derivatives	440	212,740	3,294	216,474	148,693	365,167
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	93,544	34,203	74,652	202,399	—	202,399
Financial investments	1,153,521	391,816	3,674	1,549,011	—	1,549,011
Liabilities
Trading liabilities1	73,647	19,076	—	92,723	—	92,723
Derivatives	963	200,667	2,130	203,760	152,031	355,791
Financial liabilities designated at fair value1	—	118,516	20,449	138,965	—	138,965

1Amounts with HSBC Group entities are not reflected here.

2Derivatives balances with HSBC Group entities are largely under ‘Level 2’.


Transfers between Level 1 and Level 2 fair values
	Assets				Liabilities
	Financial investments	Trading assets	Designated and otherwise mandatorily measured at fair value	Derivatives	Trading liabilities	Designated at fair value	Derivatives
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2022
Transfers from Level 1 to Level 2	29,781	23,312	5,825	—	132	—	—
Transfers from Level 2 to Level 1	60,104	36,025	9,493	—	1,443	—	—

At 31 Dec 2021
Transfers from Level 1 to Level 2	57,471	29,852	1,970	802	1,012	—	1,652
Transfers from Level 2 to Level 1	36,073	20,948	1,679	—	3,452	—	—

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarter. Transfers into and out of levels of the

fair value hierarchy are primarily attributable to changes in observability of valuation inputs and price transparency.

Notes on the Consolidated Financial Statements


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

Fair value adjustments

We adopt the use of fair value adjustments when we take into consideration additional factors not incorporated within the valuation

model that would otherwise be considered by a market participant. We classify fair value adjustments as either ‘risk-related’ or ‘model-

related’. The majority of these adjustments relate to MSS. Movements in the level of fair value adjustments do not necessarily result in

the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no

longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in

profit or loss.

Bid-offer

HKFRS 13 requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically

generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all

residual net portfolio market risks were closed using available hedging instruments or by disposing of, or unwinding the position.

Uncertainty

Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In

these circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative

values for uncertain parameters and/or model assumptions, than those used in the group’s valuation model.

Credit valuation adjustment (‘CVA’) and debit valuation adjustment (‘DVA’)

The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect the possibility that the counterparty

may default and the group may not receive the full market value of the transactions.

The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that the group may default, and that the

group may not pay the full market value of the transactions.

The group calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the

exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments

are not netted across group entities.

The group calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of the

group, to the group’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of

default. Conversely, the group calculates the DVA by applying the PD of the group, conditional on the non-default of the counterparty, to

the expected positive exposure of the counterparty to the group and multiplying the result by the loss expected in the event of default.

Both calculations are performed over the life of the potential exposure.

For most products the group uses a simulation methodology, which incorporates a range of potential exposures over the life of the

portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as

counterparty netting agreements and collateral agreements with the counterparty.

The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk is an adverse correlation between the counterparty’s

probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the

currency of the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specific

approach is applied to reflect this risk in the valuation.

Funding fair value adjustment (‘FFVA’)

The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised

component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where

available and is adjusted for events that may terminate the exposure, such as the default of the group or the counterparty. The FFVA and

DVA are calculated independently.

Model limitation

Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all current and

future material market characteristics. In these circumstances, model limitation adjustments are adopted.

Inception profit (Day 1 profit or loss reserves)

Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant

unobservable inputs.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	129

Fair value valuation bases


Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3
	Assets					Liabilities
	Financial investments	Trading assets	Designated and otherwise mandatorily measured at fair value through profit or loss	Derivatives	Total	Trading liabilities	Designated at fair value	Derivatives	Total
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Private equity and related investments	3,742	16	90,767	—	94,525	6	—	—	6
Structured notes	—	—	—	—	—	—	34,734	—	34,734
Others	566	9,267	628	3,301	13,762	—	—	1,712	1,712
At 31 Dec 2022	4,308	9,283	91,395	3,301	108,287	6	34,734	1,712	36,452

Private equity and related investments	3,121	4	74,295	—	77,420	—	—	—	—
Structured notes	—	—	—	—	—	—	20,449	—	20,449
Others	553	3,242	357	3,294	7,446	—	—	2,130	2,130
At 31 Dec 2021	3,674	3,246	74,652	3,294	84,866	—	20,449	2,130	22,579

Private equity and related investments

The fair value of a private equity investment (including private equity, infrastructure and private credit, primarily held to support our

Insurance business, and strategic investments) is estimated on the basis of an analysis of the investee’s financial position and results, risk

profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; the price at which

similar companies have changed ownership; or from published net asset values (‘NAVs’) received. If necessary, adjustments are made to

the NAV of funds to obtain the best estimate of fair value.

Structured notes

The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded

derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked

notes issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.

Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and

foreign exchange rates.

Derivatives

OTC derivative valuation models calculate the present value of expected future cash flows, based upon ‘no arbitrage’ principles. For

many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products,

there may be some differences in market practice. Inputs to valuation models are determined from observable market data wherever

possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be

observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from

historical data or other sources.

Notes on the Consolidated Financial Statements


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

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy


Movement in Level 3 financial instruments
	Assets				Liabilities
	Financial investments	Trading assets	Designated and otherwise mandatorily measured at fair value through profit or loss	Derivatives	Trading liabilities	Designated at fair value1	Derivatives
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 1 Jan 2022	3,674	3,246	74,652	3,294	—	20,449	2,130
Total gains/(losses) recognised in profit or loss	—	(952)	1,545	669	3	(851)	214
– net income/(losses) from financial instruments held for trading or managed on a fair value basis	—	(952)	—	669	3	—	214
– changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	—	—	1,545	—	—	(851)	—
– gains less losses from financial investments at fair value through other comprehensive income	—	—	—	—	—	—	—
Total gains recognised in other comprehensive income (‘OCI’)	676	(81)	(37)	(25)	—	(1,001)	(83)
– financial investments: fair value gains/(losses)	812	—	—	—	—	(5)	—
– exchange differences	(136)	(81)	(37)	(25)	—	(996)	(83)
Purchases	1,670	6,480	28,304	—	—	—	—
New issuances	—	—	—	—	—	5,936	—
Sales	(71)	(644)	(71)	—	—	—	—
Settlements	(1,641)	(4,742)	(12,809)	(557)	—	12,130	(553)
Transfers out	—	(772)	(289)	(394)	—	(2,671)	(190)
Transfers in	—	6,748	100	314	3	742	194
At 31 Dec 2022	4,308	9,283	91,395	3,301	6	34,734	1,712
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2022	—	(734)	(1,615)	2,631	—	(19)	(78)
– net income/(losses) from financial instruments held for trading or managed on a fair value basis	—	(734)	—	2,631	—	—	(78)
– changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	—	—	(1,615)	—	—	(19)	—


At 1 Jan 2021	6,635	1,237	49,534	1,028	—	20,484	3,538
Total gains/(losses) recognised in profit or loss	(7)	(2,211)	11,700	4,002	—	(3,207)	3,082
– net income/(losses) from financial instruments held for trading or managed on a fair value basis	—	(2,211)	—	4,002	—	—	3,082
– changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	—	—	11,700	—	—	(3,207)	—
– gains less losses from financial investments at fair value through other comprehensive income	(7)	—	—	—	—	—	—
Total gains/(losses) recognised in other comprehensive income (‘OCI’)	(3,013)	10	11	18	—	386	23
– financial investments: fair value (losses)	(3,002)	—	—	—	—	(3)	—
– exchange differences	(11)	10	11	18	—	389	23
Purchases	1,383	5,082	22,232	—	—	—	—
New issuances	—	—	—	—	—	9,196	—
Sales	(35)	(561)	(6)	—	—	—	—
Settlements	(1,289)	(87)	(7,898)	(1,247)	—	(7,165)	(4,060)
Transfers out	—	(691)	(921)	(614)	—	(2,895)	(878)
Transfers in	—	467	—	107	—	3,650	425
At 31 Dec 2021	3,674	3,246	74,652	3,294	—	20,449	2,130
Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2021	—	(2,278)	11,236	2,686	—	113	(34)
– net income/(losses) from financial instruments held for trading or managed on a fair value basis	—	(2,278)	—	2,686	—	—	(34)
– changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss	—	—	11,236	—	—	113	—

1Includes structured deposits where the settlement balance represents the net of matured and new deposits.

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarter. Transfers into and out of levels of the

fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	131

Effect of changes in significant unobservable assumptions to reasonably possible alternatives


Sensitivity of fair values to reasonably possible alternative assumptions
	2022				2021
	Reflected in profit or loss		Reflected in OCI		Reflected in profit or loss		Reflected in OCI
	Favourable changes	Un- favourable changes	Favourable changes	Un- favourable changes	Favourable changes	Un- favourable changes	Favourable changes	Un- favourable changes
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
Derivatives, trading assets and trading liabilities1	242	(308)	—	—	158	(162)	—	—
Financial assets and liabilities designated and otherwise mandatorily measured at fair value through profit or loss	4,580	(4,580)	—	—	3,741	(3,742)	—	—
Financial investments	—	—	187	(187)	—	—	157	(157)
At 31 Dec	4,822	(4,888)	187	(187)	3,899	(3,904)	157	(157)

1 ‘Derivatives, trading assets and trading liabilities’ are presented as one category to reflect the manner in which these instruments are risk-

managed.

The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval.

Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable

proxy and historical data.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most

favourable or the most unfavourable change from varying the assumptions individually.

Key unobservable inputs to Level 3 financial instruments

The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31 December

2022.


Quantitative information about significant unobservable inputs in Level 3 valuations
	Fair value				2022		2021
	Assets	Liabilities	Valuation techniques	Key unobservable inputs	Full range of inputs		Full range of inputs
	HK$m	HK$m	Valuation techniques	Key unobservable inputs	Lower	Higher	Lower	Higher
Private equity and related investments	94,525	6	See below	See below
Structured notes	—	34,734
– equity-linked notes	—	12,917	Model – Option model	Equity volatility	6%	142%	6%	90%
– equity-linked notes	—	12,917	Model – Option model	Equity correlation	38%	98%	22%	97%
– FX-linked notes	—	20,972	Model – Option model	FX volatility	4%	37%	2%	36%
– other	—	845
Others1	13,762	1,712
At 31 Dec 2022	108,287	36,452

1‘Others’ includes a range of smaller asset holdings.

Private equity and related investments

Given the bespoke nature of the analysis in respect of each holding, it is not practical to quote a range of key unobservable inputs. The

key unobservable inputs would be price and correlation. The valuation approach includes using a range of inputs that include company

specific financials, traded comparable companies multiples, published net asset values and qualitative assumptions, which are not

directly comparable or quantifiable.

Volatility

Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike

and maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from

observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price.

Correlation

Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one.

It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of

instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations

is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, group's trade prices,

proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects

the wide variation in correlation inputs by market price pair.

Inter-relationships between key unobservable inputs

Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables

may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other

events. Furthermore, the effect of changing market variables on the group's portfolio will depend on the group’s net risk position in

respect of each variable.

Notes on the Consolidated Financial Statements


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


34	Fair values of financial instruments not carried at fair value


Fair values of financial instruments not carried at fair value and bases of valuation
		Fair Value Hierarchy
	Carrying amount	Quoted market price Level 1	Observable inputs Level 2	Significant unobservable inputs Level 3	Total
	HK$m	HK$m	HK$m	HK$m	HK$m
At 31 Dec 2022
Assets1
Reverse repurchase agreements – non-trading	927,976	—	927,190	—	927,190
Loans and advances to banks	519,024	—	514,524	4,452	518,976
Loans and advances to customers	3,705,149	—	56,130	3,628,504	3,684,634
Financial investments – at amortised cost	974,709	455,444	448,341	1,960	905,745
Liabilities1
Repurchase agreements – non-trading	351,093	—	349,133	—	349,133
Deposits by banks	198,908	—	198,905	—	198,905
Customer accounts	6,113,709	—	6,114,290	—	6,114,290
Debt securities in issue	100,909	—	101,414	—	101,414
Subordinated liabilities	3,119	—	2,191	—	2,191

At 31 Dec 2021
Assets1
Reverse repurchase agreements – non-trading	803,775	—	802,881	947	803,828
Loans and advances to banks	432,247	—	424,175	8,356	432,531
Loans and advances to customers	3,840,939	—	65,268	3,765,148	3,830,416
Financial investments – at amortised cost	502,564	89,050	449,284	2,142	540,476
Liabilities1
Repurchase agreements – non-trading	255,374	—	255,366	—	255,366
Deposits by banks	280,310	—	280,408	—	280,408
Customer accounts	6,177,182	—	6,177,676	—	6,177,676
Debt securities in issue	67,364	—	67,842	—	67,842
Subordinated liabilities	4,054	—	3,864	—	3,864

1 Amounts with HSBC Group entities are not reflected here. Further details are set out in Note 32.

The fair values above are stated at a specific date and may be significantly different from the amounts which will actually be paid on 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.

Other financial instruments not carried at fair value are typically short term in nature or re-priced to current market rates frequently.

Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in

the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness, Hong Kong currency

notes in circulation, other financial assets and other financial liabilities, all of which are measured at amortised cost.

Valuation

Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between

market participants at the measurement date. It does not reflect the economic benefits and costs that the group expects to flow from an

instrument’s cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no

observable market prices are available may differ from those of other companies.

Repurchase and reverse repurchase agreements – non-trading

Fair values approximate carrying amounts as these balances are generally short dated.

Loans and advances to banks and customers

To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of

similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values

are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from

third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected

customer prepayment rates, using assumptions that the group believes are consistent with those that would be used by market

participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants

including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the

fair value of a pool of loans.

The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants’ expectations of

credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit

impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	133

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are

determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.

Deposits by banks and customer accounts

The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are

estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices

for similar instruments.


35	Structured entities

The group is involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets,

conduits and investment funds, established either by the group or a third party.

Consolidated structured entities

The group uses consolidated structured entities to securitise customer loans and advances it originates to diversify its sources of funding

for asset origination and capital efficiency purposes. The loans and advances are transferred by the group to the structured entities for

cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. The group's transactions

with these entities are not significant.

Unconsolidated structured entities

The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by the group. The group enters into

transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific

investment opportunities.


Nature and risks associated with the group’s interests in unconsolidated structured entities
	Securitisations	HSBC managed funds	Non-HSBC managed funds	Other	Total
Total asset values of the entities (HK$bn)	Securitisations	HSBC managed funds	Non-HSBC managed funds	Other	Total
0–4	55	92	271	27	445
4–15	7	42	173	—	222
15–39	—	12	98	—	110
39–196	—	3	59	—	62
196+	—	1	11	—	12
Number of entities at 31 Dec 2022	62	150	612	27	851
	HK$m	HK$m	HK$m	HK$m	HK$m
Total assets in relation to the group's interests in the unconsolidated structured entities	17,564	34,071	109,351	5,245	166,231
– trading assets	—	2,527	—	82	2,609
– financial assets designated and otherwise mandatorily measured at fair value through profit or loss	—	31,544	109,351	—	140,895
– derivatives	—	—	—	10	10
– loans and advances to customers	17,564	—	—	5,070	22,634
– other assets	—	—	—	83	83
Total liabilities in relation to the group's interests in the unconsolidated structured entities	—	—	—	223	223
– derivatives	—	—	—	223	223
Other off balance sheet commitments	1,395	11,753	30,862	11,342	55,352
The group’s maximum exposure at 31 Dec 2022	18,959	45,824	140,213	16,364	221,360

Notes on the Consolidated Financial Statements


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


Nature and risks associated with the group’s interests in unconsolidated structured entities (continued)
	Securitisations	HSBC managed funds	Non-HSBC managed funds	Other	Total
Total asset values of the entities (HK$bn)	Securitisations	HSBC managed funds	Non-HSBC managed funds	Other	Total
0–4	65	65	114	21	265
4–15	11	37	130	—	178
15–39	—	15	91	—	106
39–196	—	1	50	—	51
196+	—	1	3	—	4
Number of entities at 31 Dec 2021	76	119	388	21	604
	HK$m	HK$m	HK$m	HK$m	HK$m
Total assets in relation to the group's interests in the unconsolidated structured entities	35,225	32,223	86,044	10,140	163,632
– trading assets	—	1,041	—	432	1,473
– financial assets designated and otherwise mandatorily measured at fair value through profit or loss	—	31,182	86,044	—	117,226
– derivatives	—	—	—	—	—
– loans and advances to customers	35,225	—	—	9,625	44,850
– other assets	—	—	—	83	83
Total liabilities in relation to the group's interests in the unconsolidated structured entities	—	—	—	60	60
– derivatives	—	—	—	60	60
Other off balance sheet commitments	402	6,999	26,246	5,939	39,586
The group's maximum exposure at 31 Dec 2021	35,627	39,222	112,290	16,019	203,158

The maximum exposure to loss from the group’s interests in unconsolidated structured entities represents the maximum loss it could

incur as a result of its involvement with these entities regardless of the probability of the loss being incurred.

•For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential

future losses.

•For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the

carrying value of these interests at the balance sheet reporting date.

The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate the group’s

exposure to loss.

Securitisations

The group has interests in unconsolidated securitisation vehicles through holding notes issued by these entities.

HSBC managed funds

The group establishes and manages money market funds and non-money market investment funds to provide customers with

investment opportunities. The group, as fund manager, may be entitled to receive management and performance fees based on the

assets under management. The group may also retain units in these funds.

Non-HSBC managed funds

The group purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs.

Other

The group has established structured entities in the normal course of business, such as structured credit transactions for customers, to

provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to the

interest disclosed above, the group enters into derivative contracts, reverse repos and stock borrowing transactions with structured

entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management

solutions.

Structured entities sponsored by the group

The amount of assets transferred to and income received from such sponsored entities during 2022 and 2021 were not significant.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	135


36	Bank balance sheet and statement of changes in equity

Bank balance sheet at 31 December 2022


	2022	2021
	HK$m	HK$m
Assets
Cash and balances at central banks	169,595	203,988
Items in the course of collection from other banks	22,886	17,825
Hong Kong Government certificates of indebtedness	341,354	332,044
Trading assets	587,760	647,625
Derivatives	481,979	346,937
Financial assets designated and otherwise mandatorily measured at fair value through profit or loss	5,431	3,246
Reverse repurchase agreements – non-trading	468,799	488,312
Loans and advances to banks	298,225	230,592
Loans and advances to customers	1,951,155	1,984,297
Financial investments	947,830	893,848
Amounts due from Group companies	720,765	544,587
Investments in subsidiaries	109,211	101,535
Interests in associates and joint ventures	39,830	39,830
Goodwill and intangible assets	23,659	19,226
Property, plant and equipment	71,555	72,312
Deferred tax assets	1,304	1,275
Prepayments, accrued income and other assets	214,624	145,729
Total assets	6,455,962	6,073,208
Liabilities
Hong Kong currency notes in circulation	341,354	332,044
Items in the course of transmission to other banks	26,601	19,101
Repurchase agreements – non-trading	307,661	175,476
Deposits by banks	155,423	224,650
Customer accounts	3,740,697	3,816,715
Trading liabilities	95,097	46,585
Derivatives	532,325	337,010
Financial liabilities designated at fair value	49,396	36,397
Debt securities in issue	26,584	25,393
Retirement benefit liabilities	898	1,098
Amounts due to Group companies	563,368	482,995
Accruals and deferred income, other liabilities and provisions	132,141	120,846
Current tax liabilities	3,537	481
Deferred tax liabilities	9,267	9,339
Subordinated liabilities	3,119	3,119
Total liabilities	5,987,468	5,631,249
Equity
Share capital	180,181	172,335
Other equity instruments	52,386	44,615
Other reserves	3,143	19,218
Retained earnings	232,784	205,791
Total equity	468,494	441,959
Total equity and liabilities	6,455,962	6,073,208

Notes on the Consolidated Financial Statements


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

Bank statement of changes in equity for the year ended 31 December 2022


				Other reserves
	Share capital1	Other equity instruments	Retained earnings	Property revaluation reserve	Financial assets at FVOCI reserve	Cash flow hedge reserve	Foreign exchange reserve	Other3	Total equity
	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m	HK$m
At 1 Jan 2022	172,335	44,615	205,791	36,900	1,524	63	(15,369)	(3,900)	441,959
Profit for the year	—	—	54,987	—	—	—	—	—	54,987
Other comprehensive income/(expense) (net of tax)	—	—	4,600	2,948	(10,829)	(993)	(4,999)	—	(9,273)
– debt instruments at fair value through other comprehensive income	—	—	—	—	(11,369)	—	—	—	(11,369)
– equity instruments designated at fair value through other comprehensive income	—	—	—	—	540	—	—	—	540
– cash flow hedges	—	—	—	—	—	(993)	—	—	(993)
– changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	—	—	4,432	—	—	—	—	—	4,432
– property revaluation	—	—	—	2,948	—	—	—	—	2,948
– remeasurement of defined benefit asset/ liability	—	—	168	—	—	—	—	—	168
– exchange differences	—	—	—	—	—	—	(4,999)	—	(4,999)
Total comprehensive income/(expense) for the year	—	—	59,587	2,948	(10,829)	(993)	(4,999)	—	45,714
Shares issued1	7,846	—	—	—	—	—	—	—	7,846
Other equity instruments issued2	—	7,771	—	—	—	—	—	—	7,771
Dividends to shareholders4	—	—	(34,821)	—	—	—	—	—	(34,821)
Movement in respect of share-based payment arrangements	—	—	127	—	—	—	—	(127)	—
Transfers and other movements5	—	—	2,100	(2,080)	2	—	—	3	25
At 31 Dec 2022	180,181	52,386	232,784	37,768	(9,303)	(930)	(20,368)	(4,024)	468,494

At 1 Jan 2021	172,335	44,615	221,300	35,196	6,364	605	(12,679)	(3,760)	463,976
Profit for the year	—	—	40,815	—	—	—	—	—	40,815
Other comprehensive income/(expense) (net of tax)	—	—	912	3,453	(4,834)	(542)	(2,690)	—	(3,701)
– debt instruments at fair value through other comprehensive income	—	—	—	—	(3,289)	—	—	—	(3,289)
– equity instruments designated at fair value through other comprehensive income	—	—	—	—	(1,545)	—	—	—	(1,545)
– cash flow hedges	—	—	—	—	—	(542)	—	—	(542)
– changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk	—	—	524	—	—	—	—	—	524
– property revaluation	—	—	—	3,453	—	—	—	—	3,453
– remeasurement of defined benefit asset/ liability	—	—	388	—	—	—	—	—	388
– exchange differences	—	—	—	—	—	—	(2,690)	—	(2,690)
Total comprehensive income/(expense) for the year	—	—	41,727	3,453	(4,834)	(542)	(2,690)	—	37,114
Dividends to shareholders4	—	—	(59,105)	—	—	—	—	—	(59,105)
Movement in respect of share-based payment arrangements	—	—	115	—	—	—	—	(140)	(25)
Transfers and other movements5	—	—	1,754	(1,749)	(6)	—	—	—	(1)
At 31 Dec 2021	172,335	44,615	205,791	36,900	1,524	63	(15,369)	(3,900)	441,959

1Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous

years. During 2022, 3,138.4m new ordinary shares were issued at an issue price of HK$2.5 each.

2During 2022, an additional tier 1 capital instrument was issued amounted to US$1,000m on which there were US$10m issue costs.

3The other reserves mainly comprise purchase premium arising from transfer of business from fellow subsidiaries, property revaluation reserve

relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment reserve is used to record

the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.

4Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.

5The movements include transfers from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	137


37	Business acquisitions

The following acquisitions form part of our strategy to become a market leader in Asian wealth management:

•On 28 January 2022, HSBC Insurance (Asia-Pacific) Holdings Limited, a subsidiary of the group, notified the shareholders of Canara

HSBC Life Insurance Company Limited (‘Canara HSBC’) of its intention to increase its shareholding in Canara HSBC up to 49%. The

group currently has a 26% shareholding which is accounted for as an associate. Any increase in shareholding is subject to agreement

with other shareholders in Canara HSBC, as well as internal and regulatory approvals. Established in 2008, Canara HSBC is a life

insurance company based in India.

•On 11 February 2022, HSBC Insurance (Asia-Pacific) Holdings Limited completed the acquisition of 100% of AXA Insurance Pte

Limited ('AXA Singapore') for HK$4.1bn. A gain on acquisition of HK$665m was recorded, reflecting the excess of the fair value of net

assets acquired (gross assets of HK$35.6bn and gross liabilities of HK$30.8bn) over the acquisition price. The legal integration of AXA

Singapore with HSBC’s pre-existing insurance operations in the country concluded on 1 February 2023.

•On 6 April 2022, the Bank announced it had increased its shareholding in HSBC Qianhai Securities Limited, a partially-owned

subsidiary, from 51% to 90%.

•On 23 June 2022, HSBC Insurance (Asia) Limited, a subsidiary of the group, acquired the remaining 50% equity interest in HSBC Life

Insurance Company Limited. Headquartered in Shanghai, HSBC Life Insurance Company Limited offers a comprehensive range of

insurance solutions covering annuity, whole life, critical illness and unit-linked insurance products.


38	Legal proceedings and regulatory matters

The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations.

Apart from the matters described below, the group considers that none of these matters are material. The recognition of provisions is

determined in accordance with the accounting policies set out in Note 1.2(n). While the outcomes of legal proceedings and regulatory

matters are inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been

made in respect of these matters as at 31 December 2022. Any provision recognised does not constitute an admission of wrongdoing or

legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters

as a class of contingent liabilities.

Anti-money laundering and sanctions-related matters

In December 2012, HSBC Holdings plc ('HSBC Holdings') entered into a number of agreements, including an undertaking with the UK

Financial Services Authority (replaced with a Direction issued by the UK Financial Conduct Authority (‘FCA’) in 2013 and again in 2020) as

well as a cease-and-desist order with the US Federal Reserve Board (‘FRB’), both of which contained certain forward-looking anti-money

laundering (‘AML’) and sanctions-related obligations. For several years thereafter, HSBC retained a Skilled Person under section 166 of

the Financial Services and Markets Act and an Independent Consultant, under the FRB cease-and-desist order to produce periodic

assessments of the Group’s AML and sanctions compliance programme. The Skilled Person completed its engagement in the second

quarter of 2021, and the FCA determined that no further Skilled Person work is required. Separately, the Independent Consultant's

engagement is now complete and, in August 2022, the FRB terminated its cease-and-desist order.

Singapore Interbank Offered Rate (‘Sibor’) and Singapore Swap Offer Rate (‘SOR’)

In 2016, the Bank and other panel banks were named as defendants in a putative class action filed in the New York District Court on

behalf of persons who transacted in products related to the Sibor and SOR benchmark rates. The complaint alleged, among other things,

misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws, and state law.

In October 2021, the Bank reached a settlement-in-principle with the plaintiffs to resolve this action, the agreement for which was

executed in May 2022. The court granted final approval of the settlement in November 2022.

Other regulatory investigations, reviews and litigation

The Bank and/or certain of its affiliates are subject to a number of other investigations and reviews by various regulators and competition

and law enforcement authorities, as well as litigation, in connection with various matters relating to the firm’s businesses and operations,

including investigations by tax administration, regulatory and law enforcement authorities in India and elsewhere in connection with

allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation.

There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be

significant.

Notes on the Consolidated Financial Statements


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


39	Ultimate holding company

The ultimate holding company of the Bank is HSBC Holdings plc, which is incorporated in England.

The largest group in which the accounts of the Bank are consolidated is that headed by HSBC Holdings plc. The consolidated accounts of

HSBC Holdings plc are available to the public on the HSBC Group’s website at www.hsbc.com or may be obtained from 8 Canada

Square, London E14 5HQ, United Kingdom.


40	Events after the balance sheet date

There have been no events after the balance sheet date that would require disclosure in the consolidated financial statements.


41	Approval of financial statements

The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on 21 February 2023.


The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2022	139

Additional cautionary statement regarding ESG

and climate-related data, metrics and forward-

looking statements

The Annual Report and Accounts 2022 contains a number of

forward-looking statements (as defined above) with respect to the

Group’s (including the group’s) ESG targets, commitments,

ambitions, climate-related scenarios or pathways and the

methodologies the Group uses to assess the Group’s progress in

relation to these (“ESG-related forward-looking statements”).

In preparing the ESG-related information contained in the Annual

Report and Accounts 2022, the group has relied on a number of

key judgements, estimations and assumptions of the Group and

the processes and issues involved are complex. The Group has

used ESG and climate data, models and methodologies that it

considers, as of the date on which they were used, to be

appropriate and suitable to understand and assess climate change

risk and its impact, to analyse financed emissions - and

operational and supply chain emissions, to set ESG-related targets

and to evaluate the classification of sustainable finance and

investments. However, these data, models and methodologies are

new, are rapidly evolving and are not of the same standard as

those available in the context of other financial information, nor

are they subject to the same or equivalent disclosure standards,

historical reference points, benchmarks or globally accepted

accounting principles. In particular, it is not possible to rely on

historical data as a strong indicator of future trajectories, in the

case of climate change and its evolution. Outputs of models,

processed data and methodologies are also likely to be affected by

underlying data quality, which can be hard to assess and the

Group expects industry guidance, market practice, and regulations

in this field to continue to change. In light of the highly uncertain

nature of the evolution of climate change and its impact, the

Group (including the group) may have to re-evaluate its progress

towards its ESG ambitions, commitments and targets in the future,

update the methodologies it uses or alter its collective approach to

ESG and climate analysis and may be required to amend, update

and recalculate its ESG disclosures and assessments in the future,

as market practice and data quality and availability develops

rapidly. The ESG-related forward-looking statements and metrics

discussed in the Annual Report and Accounts 2022 therefore carry

an additional degree of inherent risk and uncertainty.

No assurance can be given by or on behalf of the group as to the

likelihood of the achievement or reasonableness of any

projections, estimates, forecasts, targets, commitments,

ambitions, prospects or returns contained herein. Readers are

cautioned that a number of factors, both external and those

specific to the Group (including the group), could cause actual

achievements, results, performance or other future events or

conditions of the group to differ, in some cases materially, from

those stated, implied and/or reflected in any ESG-related forward-

looking statements or metrics due to a variety of risks,

uncertainties and other factors (including without limitation those

referred to below):

•Climate change projection risk: this includes, for example, the

evolution of climate change and its impacts, changes in the

scientific assessment of climate change impacts, transition

pathways and future risk exposure and limitations of climate

scenario forecasts;

•Changes in the ESG regulatory landscape: this involves

changes in government approach and regulatory treatment in

relation to ESG disclosures and reporting requirements, and the

current lack of a single standardised regulatory approach to

ESG across all sectors and markets;

•Variation in reporting standards: ESG reporting standards are

still developing and are not standardised or comparable across

all sectors and markets, new reporting standards in relation to

different ESG metrics are still emerging

•Data availability, accuracy, verifiability and data gaps: the

Group’s disclosures are limited by the availability of high quality

data needed to calculate financed emissions. Where data is not

available for all sectors or consistently year on year, there may

be an impact to the Group’s data quality scores. Whilst the

Group expects its data quality scores to improve over time, as

companies continue to expand their disclosures to meet

growing regulatory and stakeholder expectations, there may be

unexpected fluctuations within sectors year on year, and/or

differences between the data quality scores between sectors.

Any such changes in the availability and quality of data over

time could result in revisions to reported data going forward,

including on financed emissions, meaning that such data may

not be reconcilable or comparable year-on year;

•Developing methodologies: the methodologies the Group

(including the group) uses to assess financed emissions and set

ESG-related targets may develop over time in line with market

practice, regulation and/or developments in science, where

applicable. Any such developments in methodologies could

result in revisions to reported data going forward, including on

financed emissions meaning that data outputs may not be

reconcilable or comparable year-on year. In addition, climate

scenarios and the models that analyse them have limitations

that are sensitive to key assumptions and parameters, which

are themselves subject to some uncertainty, and cannot fully

capture all of the potential effects of climate, policy and

technology driven outcomes; and

•Risk management capabilities: governments’, customers’, and

the Group’s (including the group’s) actions may not be effective

in supporting the global transition to net zero carbon emissions

and in managing and mitigating ESG risks, including in

particular climate risk, nature-related risks and human rights

risks, each of which can impact the Group (including the group)

both directly and indirectly through its customers, and which

may result in potential financial and non-financial impacts to

the Group (including the group). In particular:

–the Group (including the group) may not be able to achieve

its ESG targets, commitments and ambitions (including with

respect to the commitments set forth in the Group’s thermal

coal phase-out policy, energy policy and targets to reduce

on-balance sheet financed emissions in its portfolio of

selected high-emitting sectors), which may result in its

failure to achieve any of the expected benefits of its

strategic priorities; and

–the Group (including the group) may not be able to develop

sustainable finance and climate-related products consistent

with the evolving expectations of its regulators, and its

capacity to measure the climate impact from its financing

activity may diminish (including as a result of data and

model limitations and changes in methodologies), which

may affect its ability to achieve its climate ambition, its

targets to reduce its on-balance sheet financed emissions in

its portfolio of selected high-emitting sectors and the

commitments set forth in the Group’s thermal coal phase-

out policy and energy policy, and increase the risk of

greenwashing.

The group makes no commitment to revise or update any ESG

forward-looking statements to reflect events or circumstances

occurring or existing after the date of any ESG forward-looking

statements. Written and/or oral ESG-related forward-looking

statements may also be made in its periodic reports to its

regulators, public offering or disclosure documents, press releases

and other written materials, and in oral statements made by its

Directors, officers or employees to third parties, including financial

analysts.

The Group’s data dictionaries and methodologies for preparing the

above ESG-related metrics and third-party limited assurance

reports can be found on: www.hsbc.com/who-we-are/esg-and-

responsible-business/esg-reporting-centre.

Additional Information


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