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Introduction to the private bank Our awards Letter from the Chairman Letter from the Chief Executive Officer, Global Private Banking Review of operations of HSBC Private Banking Holdings (Suisse) SA Board of Directors Financial statements Report of the statutory auditor Financial highlights of HSBC Holdings plc HSBC Private Bank office locations worldwide
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We search out and reveal new opportunities for our clients to manage and protect their wealth.
Our awards
Connecting our clients wealth to opportunities around the world has been at the heart of our business philosophy over the past year and with considerable success. We are delighted that our commitment to our clients has resulted in many industry awards. These awards recognise our excellence in client service, founded on a sound business strategy and strength in execution; an excellence that has seen us through difficult market conditions and places us firmly among the worlds leading private banks.
We were named Best Global Wealth Manager in the Euromoney Awards for Excellence 2010. Perhaps the hardest challenge for wealthy clients since April 2009 has been where to invest their money, Euromoney explained in its widely-read magazine in July 2010. Nervous of volatility in the equity markets and uninspired by returns on cash, the wealthy have been seeking new ideas. HSBC Private Bank wins this years award for best global wealth manager because it has helped them find opportunities. The bank has strived to offer clients alternative means of investing in real estate, distressed assets and hedge funds, and returns have not disappointed. We also won several major awards in the Euromoney Private Banking Survey 2010, including Best Private Bank in Asia, Best Private Bank in the Middle East, Best Relationship Management globally and Best Trust Services globally. Overall, we were ranked as the number two private bank globally.
In the Private Banker International Awards 2010 we were named the number one Outstanding Private Bank in the Middle East. We also performed strongly in other key areas. Reflecting our pedigree as a truly global private bank, we were finalists in the categories Outstanding Private Bank - Asia Pacific and Outstanding Private Bank - Latin America. At the Global Private Banking Awards 2010 produced by FT Global Events and supported by The Banker and Professional Wealth Management magazines we were declared Best Private Bank in the Middle East and Best Private Bank in Hong Kong.
hsBC Private Banking holdings (suisse)sA and its subsidiaries are 100% indirectly owned by hsBC holdings plc
Stuart Gulliver
hsBC Group
2010 was a year when the global economic recovery took hold, led once again by strong growth in the emerging markets, especially Asia. In this environment, as a globally connected bank with a growing presence across the worlds faster-growing regions, combined with our continued conservative management of the balance sheet, HSBC achieved improved financial performance in 2010 and a strengthened capital position. As Group Chief Executive, my clear objective is to deliver sustainable long-term value for shareholders consistently in a manner that maintains the confidence of all other key stakeholders in our businesses including depositors, counterparties, long-term creditors, customers, employees, regulators and governments. Everything we do is governed by the imperative of upholding HSBCs corporate reputation and character at the highest level and adding further strength to our brand. It is regrettable that a number of weaknesses in regulatory compliance, particularly in the US, were highlighted in 2010 and we are resolved to remedy these and reinforce the high standards we demand of ourselves. Underlying financial performance continued to improve in 2010 and shareholders continued to benefit from HSBCs universal banking model. All regions and customer groups were profitable, as Personal Financial Services and North America returned to profit. Profit before tax improved year on year. On a reported basis, profits increased by nearly USD 12 billion from USD 7.1 billion to USD 19 billion. On an underlying basis, profits increased by 36%, or almost USD 5 billion, from USD 13.5 billion to USD 18.4 billion. The cost efficiency ratio rose to 55.2%, which is above our target range and unacceptable in my view. The causes were constrained revenues and, in part, investment in strategic growth initiatives across the business together with higher staff costs. It additionally reflected some one-off costs, but it is clear that we need to re-engineer the business to remove inefficiencies. Return on average total shareholders equity rose from 5.1% to 9.5%, reflecting increased profit generation during the year. HSBC continued to grow its capital base and strengthen its capital ratios further. The core tier 1 ratio increased from 9.4% to 10.5%, as a result of capital generation and lower risk-weighted assets.
Luxembourg S.A.
Outlook
Christopher Meares
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747.3 903.0
2010 2009
A. Leigh Robertson
Client assets
At 31 December, in USDbillions
Client deposits 2010 Client deposits 2009 Client portfolio assets 2010 Client portfolio assets 2009
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The liquidity of the Companys consolidated balance sheet continued to be a major strength. Deposits with banks and bonds, issued or guaranteed by governments and highly rated institutions, comprised 61.4% of total balance sheet assets. Loans and advances to customers at 31 December2010 totalled USD 33.1 billion, representing 34.8% of total balance sheet assets, against which collective and individual impairment allowances of USD 115.3 million have been made. Overall performance in 2010 was resilient compared to the financial environment that the Company was operating in. The outlook for 2011 will be challenging. That said, HSBC Private Bank is well positioned given the diversity of its earnings and reach, as well as being part of the HSBC Group. A. Leigh Robertson Chief Financial Officer HSBC Private Banking Holdings (Suisse) SA Global Private Banking Geneva, 22 March 2011
Financial highlights
USD000 (except employee data)
2010
2009
For the year ended 31 December Profit after tax At year-end Total assets Total client assets Total equity attributable to shareholders of the parent company Number of employees 95,105,628 252,431,164 6,787,598 4,867 96,531,371 241,153,648 6,641,064 4,759 747,278 902,960
s&P 2010 Ratings at 31 December Counterparty credit ratings Bank deposit ratings AA A-1+
Moodys
Fitch IBCA
A1 P-1
AA F1+
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Board of Directors
Stuart T. Gulliver
Director and Chairman since 25 February 2010 Group Chief Executive from 1 January 2011 and executive Director of HSBC Holdings plc; Chairman, Europe, Middle East and Global Businesses until 31 December 2010. Chairman of HSBC Bank Middle East Limited from 15 February 2010 to 31 December 2010. Chairman of HSBC France. Chairman of The Hongkong and Shanghai Banking Corporation Limited from 1 January 2011. Deputy Chairman and a member of the Supervisory Board of HSBC Trinkaus & Burkhardt AG. Chairman of HSBC Bank plc from 21 April 2010 to 31 December 2010.
Andr Kudelski
Director A Director, Chairman and Chief Executive Officer of Kudelski SA. A Director of the Edipresse group, Nestl SA and Dassault Systmes (France) and Vice-Chairman of the Board of Directors of the SwissAmerican Chamber of Commerce.
Christopher Meares
Director Group General Manager of HSBC Holdings plc. Chief Executive Officer of HSBC Global Private Banking. Chairman of HSBC Private Bank (UK) Limited, HSBC Private Bank (Monaco) SA and HSBC Alternative Investments Limited. A Director of HSBC Private Bank (Suisse)SA. Ceased to be a Director of HSBC Bank Middle East Limited on 31 December 2010.
Peter Widmer
Vice-Chairman Counsel (former Senior Partner) of Homburger AG, Zurich. Chairman of the Board of HSBC Private Bank (Suisse)SA. A member of the Board of Careal Holding AG and AMAG Automobil- und Motoren AG.
Sieghardt Rometsch
Director Chairman of the Supervisory Board of HSBC Trinkaus & Burkhardt AG. Chairman of the Supervisory Board of University Clinic of Dusseldorf.
Zarir J. Cama
Director since 25 February 2010 Group General Manager of HSBC Holdings plc, Group Management Office. A Director of HSBC Global Resourcing (UK) Limited, HFC Bank Limited (UK), HSBC Bank Bermuda Limited and The Saudi British Bank.
David Shaw
Director Lawyer (England and Hong Kong SAR), former Partner of Norton Rose. Adviser to the Board of HSBC Holdings plc since 1998. A Director of HSBC Bank Bermuda Limited and an independent non-executive director of Kowloon Development Company Limited and Shui On Land Limited. The following directors resigned during 2010: Stephen K. Green (former Chairman until 25 February 2010), Adrian H. C. Fu (Director until 19 July 2010), and Youssef A. Nasr (Director until 25 February 2010).
Indu Chandaria
Director Chief Executive of Compagnie pour Assistance Technique et Investissements SA.
Michel Elia
Director A Director of HSBC Private Bank (Monaco) SA.
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Financial statements
Consolidated income statement
for the year ended 31 December 2010
Notes 2010 UsD 000 2009 UsD 000 2010 ChF 000 2009 ChF 000
ChF 000
Profit for the year Interest income Interest expense Net interest income 1,408,063 (348,921) 1,059,142 1,720,159 (517,752) 1,202,407 1,459,721 (361,722) 1,097,999 1,861,377 (560,257) 1,301,120 Other comprehensive income Available-for-sale investments: Fair value gains/(losses) Fair value losses transferred to income statement on disposal Fee income Fee expense Net fee income 1,048,991 (162,558) 886,433 1,004,556 (140,277) 864,279 1,087,475 (168,522) 918,953 1,087,026 (151,793) 935,233 Amounts transferred to the income statement in respect of impairment losses Income taxes Cash flow hedges: Fair value gains Net trading income Gains less losses from financial investments Dividend income Other operating income Total operating income before loan impairment charges and other credit risk provisions Loan impairment charges and other credit risk provisions Net operating income 383,638 22,805 2,912 4,142 2,359,072 (31,171) 2,327,901 329,961 (46,443) 7,892 35,892 2,393,988 (29,244) 2,364,744 397,713 23,642 3,019 4,294 2,445,620 (32,315) 2,413,305 357,049 (50,256) 8,540 38,839 2,590,525 (31,645) 2,558,880 Fair value (gains)/losses transferred to income statement Income taxes Actuarial gains/(losses) on defined benefit plans: Before income taxes Income taxes Exchange differences Other comprehensive income for the year, net of tax Total comprehensive income for the year Employee compensation and benefits General and administrative expenses Depreciation of property and equipment Amortisation of intangible assets and impairment of goodwill Total operating expenses Operating profit Profit before tax Tax expense Profit for the year 7 4 5 16 15 (923,352) (456,335) (29,654) (580) (1,409,921) 917,980 917,980 (170,702) 747,278 (879,133) (379,992) (30,626) (977) (1,290,728) 1,074,016 1,074,016 (171,056) 902,960 (957,227) (473,077) (30,742) (601) (1,461,647) 951,658 951,658 (176,965) 774,693 (951,306) (411,188) (33,140) (1,057) (1,396,691) 1,162,189 1,162,189 (185,099) 977,090 Total comprehensive income for the year attributable to: Shareholders of the parent company Non-controlling interests
747,278
902,960
774,693
977,090
(128,784) 164,014 4,905 12,320 17,855 (11,597) (835) (36,552) 10,512 317,201 349,039 1,096,317
612,092 234,284 50,051 (108,817) 18,871 19,379 (3,337) 108,668 (23,602) 255,516 1,163,105 2,066,065
(133,509) 170,031 5,085 12,772 18,510 (12,022) (866) (37,893) 10,898 (228,890) (195,884) 578,809
662,342 253,518 54,160 (117,750) 20,421 20,970 (3,611) 117,589 (25,540) 3,065 985,164 1,962,254
1,086,220 10,097
2,065,180 885
570,670 8,139
1,959,385 2,869
Profit attributable to shareholders of the parent company Profit attributable to non-controlling interests
736,807 10,471
891,361 11,599
763,838 10,855
964,539 12,551
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Notes 2010 Assets Cash and balances at central banks Items in the course of collection from other banks Trading assets Derivatives Loans and advances to banks Loans and advances to customers Financial investments Financial investments which may be repledged or resold by counterparties Other assets Current tax assets Prepayments and accrued income Interests in associates Goodwill and intangible assets Property and equipment Deferred tax assets Total assets Liabilities and equity Liabilities Deposits by banks Customer accounts Items in the course of transmission to other banks Derivatives Debt securities in issue Other liabilities Current taxation Accruals and deferred income Provisions Deferred tax liabilities Retirement benefit liabilities Total liabilities Equity Called up share capital Share premium account Other reserves Retained earnings Total equity attributable to shareholders of the parent company Non-controlling interests Total equity 25 20 7 4 11 21 19 21 21 15 16 7 10 11 21 21 13 13 18 18
ChF 000
ChF 000
658,495 656 462,741 1,038,365 10,476,359 33,136,911 47,248,411 718,598 457,254 1 393,661 1,241 308,201 190,331 14,403 95,105,628
97,268 5,588 450,546 1,081,160 20,399,181 29,370,509 43,886,319 410,837 3,773 329,362 1,126 307,406 172,956 15,340 96,531,371
614,705 612 431,969 969,314 9,779,681 30,933,307 44,106,392 670,811 426,846 1 367,483 1,158 287,706 177,674 13,445 88,781,104
100,089 5,750 463,612 1,112,514 20,990,758 30,222,254 45,159,022 422,750 3,882 338,913 1,159 316,321 177,972 15,785 99,330,781
Profit before tax Adjustments for: Non-cash items included in profit before tax Change in operating assets Change in operating liabilities Elimination of exchange differences and other adjustments Net gain from investing activities Contribution paid to defined benefit pension schemes Tax paid Net cash from operating activities Cash flows (used in)/from investing activities Purchase of financial investments Proceeds from sale and maturity of financial investments Purchase of property and equipment Proceeds from sale of property and equipment Purchase of goodwill and intangible assets Net cash outflow from acquisition of and increase in stake of subsidiaries Net cash flow from disposal of subsidiaries Net cash used in investing activities Cash flows used in financing activities Dividends paid to shareholders Dividends paid to non-controlling interests Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at 31 December 26 16 16 15 4 26 26 26
4,186,697 81,922,384 34,811 1,259,613 282,494 75,170 402,672 45,240 6,720 78,655 88,294,456
2,767,527 84,872,508 4,051 1,275,588 21 292,962 122,017 423,424 26,134 18,208 74,349 89,876,789
3,908,281 76,474,545 32,496 1,175,849 263,710 70,171 375,894 42,232 6,273 73,424 82,422,875
2,847,785 87,333,811 4,168 1,312,580 22 301,458 125,555 435,704 26,892 18,736 76,505 92,483,216
95,105,628
96,531,371
88,781,104
99,330,781
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Other reserves Foreign exchange reserve sharebased payment reserve Total shareNonholders controlling equity interests Called up share capital
CHF000
Retained earnings
Other reserves
Total equity
Retained earnings
Other reserves
Total equity
2010
2009
At 1 January
1,363,330
1,153,079
4,879,727
139,025
(531,416)
11,565
(179,024)
(2,631) 6,833,655
13,910
6,847,565
At 1 January
1,363,330
1,153,079
3,807,409
104,728 (1,298,245)
(23,265)
(195,098)
49,102
4,961,040
168,840
5,129,880
Profit for the year Other comprehensive income (net of tax): Available-for-sale investments Cash flow hedges Actuarial losses on defined benefit plans Exchange differences Total comprehensive income for the year
Profit for the year Other comprehensive income (net of tax): Available-for-sale investments Cash flow hedges Actuarial gains on defined benefit plans Exchange differences Total comprehensive income for the year
Dividends to shareholders Net impact of equity-settled share-based payments Impact of business combination Other movements
395,446 1,263
388
11
57,666 (77,998)
(43)
Dividends to shareholders Net impact of equity-settled share-based payments Change in ownership interest in subsidiaries Other movements
67,956
67,956
(20,560)
(20,560) 67,956
1,363,330
1,153,079
39,840 139,025
(88,779) (531,416)
(1,587) 11,565
(179,024)
(120,591)
135,619 (290,345)
(291,965) 6,847,565
At 31 December
1,363,330
1,153,079
4,171,692
473,716
(432,431)
15,564
(388,031)
(20,696) 6,336,223
22,006
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HSBC Private Banking Holdings (Suisse)SA was incorporated on 13 November 1996 in Geneva, Switzerland. Over the years it has become the holding company of the majority of HSBC Groups private banking activities worldwide, known under the name of HSBC Global Private Banking. HSBC Private Banking Holdings (Suisse)SA is a wholly-owned subsidiary of HSBC Bank plc, in London. Its ultimate parent is HSBC Holdings plc, in London.
standards and interpretations issued by the IAsB In November 2009, the IASB issued IFRS 9 Financial Instruments. This introduced new requirements for the classification and measurement of financial assets. In October 2010, the IASB issued additions to IFRS 9 dealing with financial liabilities. Together, these changes represent the first instalments in the IASBs planned phased replacement of IAS 39 Financial Instruments: Recognition and Measurement with a less complex and improved standard for financial instruments. The standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IFRS 9 is required to be applied retrospectively. If the standard is adopted prior to 1 January 2012, an entity will be exempt from the requirement to restate prior period comparative information. IFRS 9 is subject to EU endorsement, the timing of which is uncertain. Accordingly, the group is unable to provide a date by which it plans to apply IFRS 9. The main changes to the requirements of IAS 39 are summarised below. All financial assets that are currently in the scope of IAS 39 will be classified and measured at either amortised cost or fair value through profit and loss. The available-for-sale and held-to-maturity categories will no longer exist. Classification is based on an entitys business model for managing the financial assets at the date of initial application of the standard, and the contractual cash flow characteristics of the financial asset at inception of the contract. Reclassifications between the two categories are prohibited unless there is a change in the entitys business model, in which case they would be required. A financial asset is measured at amortised cost if two criteria are met: 1) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows; and 2) the contractual cash flows of the instrument are solely payments of principal and interest on the principal outstanding.
An entity is only permitted to designate a financial asset at fair value through profit and loss if doing so significantly reduces or eliminates an accounting mismatch. This designation is made on initial recognition and is irrevocable. Financial instruments which contain embedded derivatives are to be classified in their entirety either at fair value or amortised cost depending on whether the contracts as a whole meet the relevant criteria under IFRS 9. All equity financial assets are required to be measured at fair value through profit and loss unless an entity takes the option to designate the equity instrument that is not held for trading at fair value through other comprehensive income (FVTOCI). If this option is taken, all changes in fair value are recognised in other comprehensive income with no recycling of gains or losses to the profit and loss. Dividend income would continue to be recognised in the income statement. Most of IAS 39s requirements for financial liabilities are retained, including amortised cost accounting for most financial liabilities with bifurcation of embedded derivatives. However, fair value changes attributable to changes in own credit risk for financial liabilities designated under the fair value option, other than loan commitments and financial guarantee contracts, are to be presented in the statement of other comprehensive income. These amounts are not subsequently reclassified to the income statement but may be transferred within equity. It is impracticable to quantify the impact of IFRS 9 as at the date of publication of these financial statements. However, a preliminary study indicates that, subject to technical clarification and the development of industry interpretations, fewer financial assets are likely to be measured at fair value than at present, with the majority of the groups availablefor-sale debt securities being classified and measured at amortised cost; and the amounts of financial instruments currently measured at amortised cost that will move to a fair value measurement basis are likely to be small or insignificant.
The next steps in the IASBs project will address the impairment of financial assets measured at amortised cost and hedge accounting. The IASB has indicated that it aims to finalise the replacement of IAS 39 by June 2011. In addition, the IASB is working with the US Financial Accounting Standards Board to reduce inconsistencies between US GAAP and IFRS in accounting for financial instruments. The impact of IFRS 9 may change as a consequence of further developments resulting from the IASBs financial instruments project. As a result, it is impracticable to quantify the impact of IFRS 9 as at the date of publication of these financial statements.
C. Presentation of information
The preparation of financial information requires the use of estimates and assumptions about future conditions. Use of available information and application of judgment are inherent in the formulation of estimates. Actual results in the future may differ from those reported. In this regard, management believes that the critical accounting policies where judgment is necessarily applied are those which relate to loan impairment, goodwill impairment, the valuation of financial instruments and stock compensation. Certain prior year amounts have been reclassified to conform with the 2010 presentation.
B. Consolidation
The consolidated financial statements comprise the financial statements of HSBC Private Banking Holdings (Suisse)SA and its subsidiaries (together the group). Entities that are controlled by the group are consolidated until the date that control ceases. Newly acquired subsidiaries are consolidated from the date that control is transferred to the group. The acquisition method of accounting is used to account for the purchase of subsidiaries by the group. The acquisition cost of an acquisition is measured at the fair value of the consideration given at the date of exchange, together with costs directly attributable to that acquisition. The acquired identifiable assets, liabilities and contingent liabilities are measured at
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Where exposures are hedged by derivatives designated and qualifying as fair value hedges, the carrying value of the loans and advances so hedged includes a fair value adjustment for the hedged risk only.
the realisable value of security (or other credit mitigants) and likelihood of successful repossession; and the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local currency. Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the resultant present value with the loans current carrying amount. Any loss is charged in the income statement. The carrying amount of impaired loans on the balance sheet is reduced through the use of an impairment allowance. The impairment allowances on individually significant accounts are reviewed at least semi-annually, and more regularly when circumstances require. This normally encompasses re-assessment of the enforceability of any collateral held and of actual and anticipated receipts. Individually assessed impairment allowances are only released when there is reasonable and objective evidence of a reduction in the established loss estimate. 2. Collectively assessed loans and advances These loans are grouped together on the basis of similar credit risk characteristics for the purpose of calculating a collective impairment loss. This loss covers loans that are impaired at the balance sheet date but which will not be individually identified as such until some time in the future. The collective impairment loss is determined after taking into account: expected loss rates that reflect the actual experience of losses as a percentage of the outstanding loans over the last five years. A weighted average calculation is used to give greater emphasis to losses in more recent years than to those in earlier years; the estimated period between a loss becoming identified and a specific provision raised as determined by local management;
B. Non-interest income
Fee income Earned from a diverse range of services provided by the group to its customers, fee income is accounted for as follows: income earned on the execution of a significant act is recognised as revenue when the significant act is completed (for example, fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the arrangement for the acquisition of shares or other securities);
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managements experienced judgment as to whether the current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience. 3. Write-off of loans and advances Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of recovery of these amounts and, for collateralised loans, when the proceeds from the realisation of security have been received. 4. Reversals of impairment If, in a subsequent period, the amount of an impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent it is now excessive by reducing the loan impairment allowance account. The amount of any reversal is recognised in the income statement.
I. Financial investments
Treasury bills, debt securities and equity shares intended to be held on a continuing basis are classified as available-for-sale securities or held-to-maturity. Financial investments are recognised on trade date, when the group enters into contractual arrangements with counterparties to purchase securities, and are normally derecognised when either the securities are sold or the borrowers repay their obligations. Financial investments are recognised using trade date accounting. Available-for-sale securities are initially measured at fair value plus directly and incremental transaction costs. They are subsequently remeasured at fair value, and changes therein are recognised in other comprehensive income in Availablefor-sale investments fair value gains/ (losses) until the financial assets are either sold or become impaired. When available-for-sale securities are sold, cumulative gains or losses previously recognised in other comprehensive income are recognised in the income statement as Gains less losses from financial investments. Interest income is recognised on availablefor-sale securities using the effective interest method, calculated over the assets expected life. Premiums and/or discounts arising on the purchase of dated investment securities are included in the calculation of their effective interest rates. Dividends are recognised in the income statement when the right to receive payment has been established. An assessment is made at each balance sheet date as to whether there is any objective evidence of impairment, being circumstances where an adverse impact on estimated future cash flows of the financial asset or group of assets can be reliably estimated. If the available-for-sale financial asset is impaired, the difference between the financial assets acquisition cost (net of any principal repayments and amortisation) and the current fair value, less any previous impairment loss recognised in the income statement,
is removed from other comprehensive income and recognised in the income statement. Impairment losses for available-for-sale debt securities are recognised within Loan impairment charges and other credit risk provisions in the income statement, and impairment losses for available-forsale equity securities are recognised within Gains less losses from financial investments in the income statement. Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent accounting treatment for changes in the fair value of that asset differs depending on the nature of the available-for-sale financial asset concerned: For an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognised in the income statement when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, the decline in fair value of the financial asset is recognised in other comprehensive income. If the fair value of the debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement to the extent of the increase in fair value. For an available-for-sale equity security, all subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised directly in other comprehensive income. Impairment losses recognised on the equity security are not reversed through the income statement. Subsequent decreases in the fair value of the available-for-sale equity security are recognised in the income statement, to the extent that further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity security less any impairment loss previously recognised.
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the group positively intends, and is able, to hold until maturity. Held-tomaturity investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest method, less any impairment losses.
Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the income statement, along with changes in the fair value of the assets or liabilities that are attributable to the hedged risk. If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the residual period to maturity. Where the adjustment relates to the carrying amount of a hedged available-for-sale equity security, this remains in equity until the disposal of the equity security. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income within the cash flow hedging reserve. Any gain or loss in fair value relating to an ineffective portion is recognised immediately in the income statement. Amounts accumulated in other comprehensive income are recycled to the income statement in the periods in which the hedged item will affect profit and loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income are removed from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in equity until the forecast transaction is no longer expected to occur, and the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
H. Trading assets
Debt securities and equity shares which have been acquired principally for the purpose of selling or repurchasing in the near term or are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking are classified as held for trading. Such financial assets are recognised initially at fair value using trade date accounting, with transaction costs taken to the income statement. Subsequently, the fair values of these assets are remeasured, and gains and losses from changes therein, together with related interest income, interest expense and dividends, are recognised in the income statement in Net trading income.
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hedge effectiveness testing To qualify for hedge accounting, IAS 39 requires that at the inception of the hedge and throughout its life, each hedge must be expected to be highly effective (prospective effectiveness). Actual effectiveness (retrospective effectiveness) must also be demonstrated on an ongoing basis. The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method a group entity adopts for assessing hedge effectiveness will depend on its risk management strategy. For fair value hedge relationships, group entities utilise the cumulative dollar offset method or regression analysis as effectiveness testing methodologies. For cash flow hedge relationships, group entities utilise the change in variable cash flow method or the cumulative dollar offset method using the hypothetical derivative approach. For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness, the changes in fair value or cash flows must offset each other in the range of 80% to 125% for the hedge to be deemed effective. Derivatives that do not qualify for hedge accounting All gains and losses from changes in the fair value of any derivatives that do not qualify for hedge accounting are recognised immediately in the income statement. These gains and losses are reported in Net trading income.
liabilities are derecognised when they are extinguished, i.e. when the obligation is discharged, cancelled or expires.
M. Associates
1. Investments in associates are recognised using the equity method, initially stated at cost, including attributable goodwill, and are adjusted thereafter for the postacquisition change in the groups share of net assets. 2. Unrealised gains on transactions between the group and its associates are eliminated to the extent of the groups interest in the associates. Unrealised losses are also eliminated to the extent of the groups interest in the associates, unless the transaction provides evidence of an impairment of the asset transferred.
2. Intangible assets that have a finite useful life, except for the value of in-force long-term insurance business, are stated at cost less amortisation and accumulated impairment losses, and are amortised over their estimated useful lives. Estimated useful life is the lower of legal duration and expected economic life. Intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount may not be recoverable. Intangible assets are amortised, generally on a straight-line basis, over their finite useful lives as follows: purchased software: between three and five years; internally generated software: between three and five years; customer/merchant relationships: between three and fifteen years.
and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled. Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income taxes levied by the same taxation authority, and when a legal right to set off exists in the entity. Deferred tax relating to actuarial gains and losses arising from post-employment benefit plans which are recognised directly in other comprehensive income, is also credited or charged directly to equity. Deferred tax relating to share-based payment transaction is recognised directly in other comprehensive income to the extent that the amount of the estimated future tax deduction exceeds the amount of the related cumulative remuneration expense. Deferred tax relating to fair value remeasurement of available-forsale investments and cash flow hedge instruments, which are charged or credited directly to other comprehensive income, is also credited or charged directly to other comprehensive income. It is subsequently recognised in the income statement when the deferred fair value gain or loss is recognised in the income statement.
The costs recognised for funding defined benefit plans are determined using the Projected Unit Credit Method, with annual actuarial valuations performed on each plan. Actuarial differences that arise are recognised in shareholders equity and presented in the Statement of other comprehensive income in the period they arise. Past service costs are recognised immediately to the extent the benefits are vested, and are otherwise recognised on a straight-line basis over the average period until the benefits are vested. The current service costs and any past service costs, together with the expected return on plan assets less the unwinding of the discount on the plan liabilities, are charged to operating expenses. The net defined benefit liability recognised in the balance sheet represents the present value of the defined benefit obligations adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Any resulting asset is limited to unrecognised past service costs plus the present value of available refunds and reductions in future contributions to the plan. All cumulative actuarial gains and losses on defined benefit plans have been recognised in other comprehensive income at the date of transition to IFRSs.
Q. Income tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in the same statement in which the related item appears. Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantially enacted by the balance sheet date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when the group intends to settle on a net basis and the legal right to set off exists. Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet
S. Share-based payments
Shares in HSBC Holdings plc awarded to an employee on joining the group that are made available immediately, with no vesting period attached to the award, are expensed immediately. When an inducement is awarded to an employee on commencement of employment with the group, and the employee must complete a specified period of service before the inducement vests, the expense is spread over the period to vesting on a straight-line basis with corresponding credit to the share-based payment reserve. The compensation expense of share options is recognised on a straight-line basis over the vesting period. Compensation expense is determined by reference to the fair value of the options on grant date, and by the impact of any non-market vesting conditions such as option lapses.
30
31
W. Share capital
Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax.
Net operating income is stated after the following items of income, expense, and gains and losses:
2010 2009
CHF000
Income Interest on financial instruments, excluding interest on financial assets held for trading or designated at fair value Interest recognised on impaired financial assets Fees earned on trust and other fiduciary activities where the group holds or invests assets on behalf of its customers Gain/(loss) on sale of subsidiaries, associates and joint ventures Expense Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value Gains/(losses) Net impairment loss on loans and advances Net loss of impairment in respect of available-for-sale financial investments Gain on disposal of property, equipment and non-financial investments (32,315) (5,085) 18 (31,645) (54,160) 14,443 (361,722) (560,257) 1,459,721 3,503 62,144 (85) 1,861,377 537 65,552 5,742
2010
2009
T. Foreign currencies
1. Items included in the financial statements of each of the groups entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currency of the parent company is the US dollar (USD). The consolidated financial statements of HSBC Private Banking Holdings (Suisse)SA are presented in Swiss francs (CHF), which is the groups presentation currency. 2. Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange differences are included in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated into
The average number of persons employed by the group during the year 2010 was 4,776 (2009: 4,793).
U. 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 as a result of past events, and a reliable estimate can be made of the amount of the obligation.
32
33
Other plans
Other plans
2010
Present value of funded obligation Defined benefit plan surpluses unrecognised Net liability
(69,386) (6,251)
(365,571) (61,273)
Discount rate
%
Inflation assumption
2010
Other plans
Other plans
1.50 3.43
3.43
2010
365,571 29,302 19,294 13,988 60,734 (32,514) 252,927 (11,356) (8,357) 689,589
The discount rates are based upon yield on high quality (AA rated) corporate debt instruments. The expected rate of return on plan assets is determined in consultation with HSBCs actuaries, based on historical market returns and adjusted for additional factors such as the current rate of inflation and interest rates. The principal actuarial financial assumptions used to calculate the defined benefit pension plans at 31 December 2009 were:
Rate of increase for pensions in payment and deferred pension
Actuarial (gains)/losses Benefits paid Intercompany transfers Liabilities extinguished on settlements Exchange differences At 31 December
Discount rate
%
Inflation assumption
2009
1.50 3.28
3.37
34
35
Total expense recognised in the income statement, in Employee compensation and benefits:
hsBC Private Bank (suisse)sA Pension plan 2009
CHF000
Other plans
Other plans
2010
Other plans
Other plans
At 1 January Expected return on plan assets Contributions by HSBC Contributions by employees Experience gains/(losses) Benefits paid Intercompany transfers Assets distributed on settlements Exchange differences At 31 December
304,298 26,695 63,278 13,988 (14,739) (32,514) 286,350 (11,521) (6,358) 629,477
302,479 15,122 15,373 3,422 32,199 (35,257) 128 333,466 hsBC Private Bank (suisse)sA Pension plan
CHF000
Current service cost Interest cost Expected return on plan assets Losses on settlements Total expense
Summary
hsBC Private Bank (suisse)sA Pension plan 2009
The group expects to make contributions of CHF32million to defined benefit pension plans during 2011. Changes in the unrecognised benefit plan surpluses:
Other plans
Other plans
2010
Other plans
Fair value of plan assets Effect of limit on plan surpluses Other plans Net deficit
2010
Experience gains/(losses) on plan liabilities At 1 January Intercompany transfers Net amounts recognised in equity Exchange and other movements At 31 December 32,243 (28,715) 3,533 7,061 32,894 (32,243) (651) 34,893 (1,999) 32,894 Experience gains/(losses) on plan assets Gains/(losses) from changes in actuarial assumption Total net actuarial gains/(losses)
Total net actuarial losses recognised in the statement of other comprehensive income in 2010 in respect of defined benefit pension plans were CHF37.9million (2009: CHF116.7million gains). Total net actuarial losses recognised in other comprehensive income to date were CHF231.1million (2009: CHF193.2million losses).
36
37
The significant weighted average assumptions used to estimate the fair value of the options granted in 2010 and 2009 were as follows:
CHF000
2010
2009
Audit fees for hsBC Private Banking holdings (suisse)sA statutory audit Fees relating to current year Fees relating to prior year Total Fees payable to KPMG for other services provided to hsBC Other services pursuant to legislation Tax services Services relating to information technology Services relating to recruitment and remuneration Other services Total Total fees payable
Other services pursuant to legislation include services for assurance and other services that are in relation to statutory and regulatory filings, including comfort letters and interim reviews.
6. share-based payments
The group has no specific share-based payment arrangements of its own and participates in HSBC Holdings plans consisting of share option awards and share awards. Share option awards are granted by HSBC Holdings to group employees and are accounted for as equity-settled share-based payments, as they are satisfied by HSBC Holdings transferring shares to the employees on exercise. Where an award of HSBC Holdings shares is made to a group employee by a group entity, the employing entity has an obligation to transfer HSBC Holdings shares to the employee if the vesting conditions of the award are satisfied. The employing entity incurs a liability in respect of the share awards recognised at fair value, remeasured at each reporting date over the vesting period and at the date of settlement. During 2010, CHF66.9million was charged to the income statement in respect of equity-settled share-based payment transactions (2009: CHF67.9million). This expense was based on the fair value of the share-based payment transactions when contracted. All of the expense arose under employee share awards made within HSBCs reward structures. The carrying amount of the share-based payment liability at the balance sheet date was CHF129.3million (2009: CHF147.8million).
The risk-free rate was determined from the UK gilts yield curve for group Share Option Plan awards and UK Savings-Related Share Option Schemes in the U.K. A similar yield curve was used for the Overseas Savings-Related Share Option Schemes outside the U.K. 2 Expected life is not a single input parameter but a function of various behavioural assumptions. 3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded options over HSBC shares of similar maturity to those of the employee options.
2010
2009
Number of restricted shares awarded Outstanding at 1 January Adjustment for rights issue Granted in the year Released in the year Forfeited in the year Transferred in the year Outstanding at 31 December 24,534 6,683 (8,946) (272) 627 22,626 16,742 2,812 12,381 (9,912) (588) 3,099 24,534
The weighted average fair value of shares awarded by HSBC for Restricted Share Awards in 2010 was GBP 6.67 (2009: GBP 4.50).
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39
CHF000
Current tax Swiss corporation tax charge on current year profit Swiss corporation tax charge adjustments in respect of prior years Overseas tax on current year profit Overseas tax adjustments in respect of prior years Total Deferred tax Origination and reversal of temporary differences Effect of changes in tax rates Adjustment in respect of prior years Total Total tax expense 7,044 (1,672) 1,464 6,836 176,965 6,646 1,400 8,046 185,099 55,115 (1,698) 114,546 2,166 170,129 74,873 525 110,792 (9,137) 177,053
HSBC Private Banking Holdings (Suisse)SA and its subsidiary undertakings in Switzerland provided for Swiss corporation tax at 24% (2009: 24%). Other overseas subsidiary undertakings and overseas branches provided for taxation at the appropriate rates in the countries in which they operate. The following table reconciles the overall tax charge which could apply if all profits had been taxed at the Swiss corporation tax rate:
Overall tax charge in % 2009 Overall tax charge in %
The weighted average fair value of options granted in the year as at the date of grant was GBP 1.60 (2009: GBP 1.40). The number of options, the weighted average exercise price, and the weighted average remaining contractual life for options outstanding at the balance sheet date, analysed by exercise price range, were as follows:
ChF000 2010
ChF000
2010 share options Exercise price range (GBP) Weighted average remaining contractual life (years) Of which exercisable: Number (000s) Weighted average exercise price (GBP) 61 5.23 3.31-6.69 2.07
2009
Analysis of overall tax expense Taxation at Swiss corporate tax rate of 24% (2009: 24%) 3.31-7.67 2.68 125 5.26 Effect of taxing overseas profits at different rates1 Non-taxable income Effect of non-deductible expense Adjustments in respect of prior years Other items Overall tax expense 228,399 (39,013) (35,640) 20,648 1,932 639 176,965 24.0 (4.1) (3.8) 2.2 0.2 0.1 18.6 278,925 (42,301) (47,901) 4,138 (7,212) (550) 185,099 24.0 (3.6) (4.1) 0.3 (0.6) 0.1 15.9
Overseas profits taxed at different rates to the one applied in Switzerland contributed to a reduction in the statutory tax rate of 4.1% (2009: 3.6%).
In addition to the amount charged to the income statement, the aggregate amount of deferred taxation, relating to items that are taken directly to equity, was a CHF22.8million increase in other comprehensive income (2009: CHF146.9million decrease in other comprehensive income). The group is subject to income taxes in many jurisdictions and significant judgment is required in estimating the groups provision for income taxes. There are many transactions and interpretations of tax law for which the final outcome will not be established until some time later. The group recognises liabilities for taxation based on estimates of whether additional taxes will be payable. The estimation process includes seeking expert advice where appropriate. Where the final liability for taxation is different from the amounts that were initially recorded, these differences will affect the income tax and deferred taxation provisions in the period in which the estimate is revised or the final liability is established.
Number 000s
Awards of restricted shares Outstanding at 1 January Released in the year Outstanding at 31 December 59 (59)
No shares were awarded by the group in 2010 and 2009 for HSBC Holdings Restricted Share Plan 2000.
40
41
Deferred taxation
Movement of net deferred tax assets before offsetting balances within countries:
Loan impairment allowances Accelerated Availablecapital for-sale allowances investments Loan impairment allowances Accelerated Availablecapital for-sale allowances investments
Retirement benefits
CHF000
Revaluation of property
Other
Total
CHF000
Revaluation of property
Other
Total
2010
Assets Liabilities At 1 January Income statement: Current year Prior year Other comprehensive income: Available-for-sale investment Cash flow hedges Actuarial losses Foreign exchange and other adjustments Total
(2,877) (2,877)
(11,392) (11,392)
41,322 41,322
(23,984) (23,984)
(244) (244)
126,721 126,721
576 576
2,881 2,881
(8,770) (8,770)
11,271 11,271
149,773 149,773
(2,342) 10
(533) (12,528)
161
(2,019) 1,187
(46) (4)
(593) 9,871
(5,372) (1,464)
Current year Prior year Other comprehensive income: Available-for-sale investment Cash flow hedges Actuarial losses Foreign exchange and other adjustments Total
(1,796) 494
149 (51)
202
8,792
853
(45) (4)
(14,801) (1,839)
(6,646) (1,400)
(1,524) (14,585)
(3) 158
(1,688) (2,520)
1 (49)
(13,811) (4,533)
10 108
16 218
3,731 4,584
(2,573) (2,622)
16,694 54
20,674 20,674
(38,461) (38,461)
(3,390) (3,390)
(11,441) (11,441)
(2,877) (2,877)
(11,392) (11,392)
42
43
held-tomaturity securities
Availablefor-sale securities
Total
CHF000
held-tomaturity securities
Availablefor-sale securities
Total
At 31 December 2010
At 31 December 2009
Assets Cash and balances at central banks Items in the course of collection from other banks Trading assets Derivatives Loans and advances to banks Loans and advances to customers Financial investments Financial investments which may be repledged or resold by counterparties Other assets Accrued income Total financial assets Total non-financial assets Total assets Liabilities Deposits by banks Customer accounts Items in the course of transmission to other banks Derivatives Debt securities in issue Other liabilities Accruals Total financial liabilities Total non-financial liabilities Total liabilities 948,938 80,869,623 200,951 25,960 948,938 948,938 3,908,281 76,474,545 32,496 100,831 353,470 80,869,623 200,951 200,951 25,960 25,960 3,908,281 76,474,545 32,496 1,175,849 100,831 353,470 82,045,472 377,403 82,422,875 1,329,039 6,203,383 40,712,988 38,573,820 1,196,510 6,094 66,150 431,969 897,070 1,329,039 6,203,383 6,203,383 9,779,681 30,933,307 40,712,988 37,903,009 670,811 38,573,820 614,705 612 238,309 342,884 1,196,510 6,094 6,094 66,150 66,150 614,705 612 431,969 969,314 9,779,681 30,933,307 44,106,392 670,811 238,309 342,884 88,087,984 693,120 88,781,104
Assets Cash and balances at central banks Items in the course of collection from other banks Trading assets Derivatives Loans and advances to banks Loans and advances to customers Financial investments Financial investments which may be repledged or resold by counterparties Other assets Accrued income Total financial assets Total non-financial assets Total assets Liabilities Deposits by banks Customer accounts Items in the course of transmission to other banks Derivatives Debt securities in issue Other liabilities Accruals Total financial liabilities Total non-financial liabilities Total liabilities 962,622 90,630,337 292,689 57,269 962,622 962,622 2,847,785 87,333,811 4,168 22 31,436 413,115 90,630,337 292,689 292,689 57,269 57,269 2,847,785 87,333,811 4,168 1,312,580 22 31,436 413,115 91,942,917 540,299 92,483,216 1,481,945 8,087,048 51,213,012 37,071,974 641,311 3,911 90,270 463,612 1,018,333 1,481,945 8,087,048 8,087,048 20,990,758 30,222,254 51,213,012 37,071,974 37,071,974 100,089 5,750 205,210 330,262 641,311 3,911 3,911 90,270 90,270 100,089 5,750 463,612 1,112,514 20,990,758 30,222,254 45,159,022 205,210 330,262 98,589,471 741,310 99,330,781
44
45
2010
2009
At 31 December 2010
At 31 December 2009
Trading assets Not subject to repledge or resale by counterparties 431,969 431,969 463,612 463,612 Total
Reclassification to held-to-maturity Financial investments Total 6,203,383 6,203,383 6,591,415 6,591,415 8,086,019 8,086,019 8,727,155 8,727,155
The reclassifications were made as a result of significant reduction in market liquidity for these assets, and a change in the groups intention to hold the assets for the foreseeable future or the maturity. These circumstances form part of the wider context of market turmoil and are considered a rare event and, as such, the reclassification was permitted under the amendment to IAS 39. On the date of reclassification, the fair value of the asset was deemed to be the assets new amortised cost, and the asset was thereafter tested for impairment.
Effect on other comprehensive income Fair value gain on other comprehensive income
CHF000
410,663 410,663
433,989 433,989
Total
431,969
463,612
Assuming no reclassification
Assuming no reclassification
11. Derivatives
Derivatives are financial instruments that derive their value in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other indices. Derivatives enable users to increase, reduce or alter exposure to credit or market risks. The group makes markets in derivatives for its customers and uses derivatives to manage its exposure to credit and market risks. Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. Asset values represent the cost to the group of replacing all transactions with a fair value in the groups favour, assuming that all the groups relevant counterparties default at the same time and that transactions can be replaced instantaneously. Liability values represent the cost to the groups counterparties of replacing all their transactions with the group with a fair value in their favour if the group were to default.
2010
Reclassification to held-to-maturity Financial investments Total 200,114 200,114 (12,390) (12,390) 212,504 212,504 (828,254) (828,254) (207,938) (207,938) (620,316) (620,316)
A. Use of derivatives
The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risks arising from client business and to manage and hedge the groups own risks. For accounting purposes, derivative instruments are classified as held either for trading or hedging. Derivatives that are held as hedging instruments are formally designated as hedges as defined in IAS 39. All other derivative instruments are classified as held for trading. The held for trading classification includes 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 type of held for trading instruments includes derivatives managed in conjunction with financial instruments designated at fair value. These activities are described more fully below. The groups derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to ensure that they remain within acceptable risk levels, with offsetting deals being utilised to achieve this where necessary. When entering into derivative transactions, the group employs the same credit risk management procedures to assess and approve potential credit exposures as are used for traditional lending.
46
47
The group uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables the group to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities. The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, or cash flow hedges. These are described under the relevant headings below. Notional contract amounts of derivatives held for hedging purposes, by product type:
Cash flow hedge Fair value hedge Cash flow hedge Fair value hedge
At 31 December 2010
At 31 December 2009
CHF000
2010
2009
2,481,337
5,847,370
2,739,998
7,740,133
Foreign exchange Interest rate Equities Commodities and other contracts Total derivatives
The notional or contractual amounts of interest rate contracts indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
The notional or contractual amounts of these instruments indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. Fair values of derivative open positions held by the group, by product contract type:
Assets Trading
CHF000
hedging
At 31 December 2010
2010
2009
Gains/(losses) 72,244 72,244 631,964 140,564 107,345 89,441 969,314 (682,911) (82,630) (107,345) (76,052) (948,938) (226,911) (226,911) (682,911) (309,541) (107,345) (76,052) (1,175,849) On hedging instruments On the hedged items attributable to the hedged risk (18,987) 18,877 (110) (22,679) 22,964 285
Foreign exchange Interest rate Equities Commodities and other contracts Total fair values
At 31 December 2009
Foreign exchange Interest rate Equities Commodities and other contracts Total fair values
94,181 94,181
(349,958) (349,958)
48
49
2010
2009
Financial investments: Which may be pledged or resold by counterparties Not subject to repledge or resale by counterparties 670,811 44,106,392 44,777,203 45,159,022 45,159,022
Fair value
Treasury and other eligible bills: Available-for-sale 5 years or less but more than 1 year Debt securities: Available-for-sale Held-to-maturity Equity securities: Available-for-sale Cash inflows from assets Cash outflows from liabilities Net cash inflows 1,995,651 (485,686) 1,509,965 1,965,221 (485,686) 1,479,535 1,439,490 (112,286) 1,327,204 1,709,494 (1,030,504) 678,990 1,709,494 (1,030,504) 678,990 1,687,787 (867,408) 820,379 Total financial investments 5 years or less but more than 1 year
3 months or less
CHF000
3 months or less
At 31 December 2010
At 31 December 2009
Domicile
Interest held in %
50
51
B. Intangible assets
The analysis of the movement of intangible assets for the year ended 31 December 2010 was as follows:
Internally generated software Customer / merchant relationships
A. Goodwill
Goodwill for the years ended 31 December 2010 and 31 December 2009 were as follows:
Purchased software
Total
CHF000
2010
2009
CHF000
2010
Cost At 1 January Additions Exchange differences At 31 December Accumulated impairment losses Net carrying amount at 31 December 313,784 (28,069) 285,715 285,715 82,988 243,115 (12,319) 313,784 313,784
Cost At 1 January 2010 Additions Exchange differences At 31 December 2010 Accumulated amortisation At 1 January 2010 Charge for the year Exchange differences At 31 December 2010 Net carrying amount at 31 December 2010 (6,641) (370) 230 (6,781) (201) (29) 22 (208) 235 (881) (202) 109 (974) 1,756 (7,723) (601) 361 (7,963) 1,991 7,009 (228) 6,781 223 266 (46) 443 3,028 (298) 2,730 10,260 266 (572) 9,954
During 2010, no goodwill impairment was recognised (2009: nil). Impairment testing in respect of goodwill is performed annually by comparing the recoverable amount of cash-generating units (CGUs) determined as based on a value-in-use calculation. That calculation uses cash flow estimates based on managements cash flow projections, extrapolated in perpetuity using a nominal long-term growth rate based on current market assessments of GDP and inflation for the countries within which the CGU operates. Cash flows are extrapolated in perpetuity due to the long-term perspective within the group of the business units making up the CGUs. The discount rate used is based on the cost of capital the group allocates to investments in the countries within which the CGU operates. The cost of capital assigned to an individual cash-generating unit and used to discount its future cash flows can have a significant effect on its valuation. The cost of capital percentage is generally derived from an appropriate capital asset pricing model, which itself depends on inputs reflecting a number of financial and economic variables including the risk-free rate in the country concerned and a premium or discount to reflect the inherent risk of the business being evaluated. These variables are established on the basis of management judgment and current market assessments of economic variables. Management judgment is required in estimating the future cash flows of the cash-generating units. These values are sensitive to the cash flows projected for the periods for which detailed forecasts are available, and to assumptions regarding the long-term sustainable pattern of cash flows thereafter. While the acceptable range within which underlying assumptions can be applied is governed by the requirement for resulting forecasts to be compared with actual performance and verifiable economic data in future years, the cash flow forecasts necessarily and appropriately reflect managements view of future business prospects. The groups goodwill is attributed to the Private Banking CGU. The following assumptions were used when testing the goodwill for impairment: Discount rate: 11% Nominal growth rate beyond initial cash flow projections: 5%
The analysis of the movement of intangible assets for the year ended 31 December 2009 was as follows:
Internally generated software
CHF000
Purchased software
Total
2009
Cost At 1 January 2009 Exchange differences At 31 December 2009 Accumulated amortisation At 1 January 2009 Charge for the year Exchange differences At 31 December 2009 Net carrying amount at 31 December 2009 (5,926) (795) 80 (6,641) 368 (158) (51) 8 (201) 22 (690) (211) 20 (881) 2,147 (6,774) (1,057) 108 (7,723) 2,537 7,095 (86) 7,009 231 (8) 223 3,088 (60) 3,028 10,414 (154) 10,260
The amortisation charge for the year is recognised within the income statement under Amortisation of intangible assets and impairment of goodwill. Intangible assets are stated at cost less any accumulated amortisation and impairment losses and are amortised using the straight-line method over their useful lives. Estimated useful life is the lower of legal duration and the expected economic life.
52
53
Total
Included in Short leasehold land and buildings were the following amounts in respect of assets classified as improvements to buildings, which were carried at depreciated historical cost:
Accumulated depreciation 2009 Accumulated depreciation
2010 Cost 90,945 163 (1,102) 90,006 108,438 27,723 (5,830) (8,271) 122,060 158,135 12,355 (4,982) (119) (5,165) 160,224 357,518 40,241 (10,812) (119) (14,538) 372,290 At 1 January Additions Disposals Depreciation charge for the year Exchange differences (11,965) (1,723) 163 (13,525) 76,481 (52,855) (12,655) 5,830 1,349 (58,331) 63,729 (114,726) (16,364) 4,197 4,133 (122,760) 37,464 (179,546) (30,742) 10,027 5,645 (194,616) 177,674 At 31 December Net carrying amount at 31 December 80,122 32,771 (5,830) (8,711) 98,352 51,773
CHF000
Cost or deemed cost At 1 January 2010 Additions at cost Disposals Transfers Exchange differences At 31 December 2010 Accumulated depreciation At 1 January 2010 Depreciation charge for the year Disposals Exchange differences At 31 December 2010 Net carrying amount at 31 December 2010 2010
Cost
Total
2009
Cost or deemed cost At 1 January 2009 Additions at cost Disposals Exchange differences Other changes At 31 December 2009 Accumulated depreciation At 1 January 2009 Depreciation charge for the year Disposals Exchange differences Other changes At 31 December 2009 Net carrying amount at 31 December 2009
1
hsBC Private Banking holdings Country of (suisse)sA incorporation interest in or registration equity capital % 2010
375,552 23,978 (39,971) (2,064) 23 357,518 HSBC Private Bank (Suisse)SA HSBC Private Bank (UK) Limited HSBC Private Bank (C.I.) Limited HSBC Private Bank (Monaco) S.A. PBBS Ltd Switzerland England Guernsey Monaco Nassau
Included in the short leasehold land and buildings are assets held on finance leases with a net carrying amount of CHF 12.0 million (2009: CHF 12.2 million), on which the accumulated depreciation as at 31 December 2010 was CHF 11.8 million (2009: CHF 16.2 million).
54
55
Bullion Assets held for sale Current taxation recoverable Endorsements and acceptances Other accounts
The methods used to determine fair values of financial instruments for the purpose of measurement and disclosure are set out in Note 2. The majority of the groups financial instruments measured at fair value are valued using quoted market prices, valuation techniques based on observable market data or valuation technique with significant non-observable market data.
The best evidence of fair value is a quoted price in an actively traded market. The fair values of financial instruments that are quoted in active markets are based on bid prices for assets held and offer prices for liabilities issued. Where a financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the portfolio is calculated as the product of the number of units and quoted price, and no block discounts are made. In the event that the market for a financial instrument is not active, a valuation technique is used. The judgment as to whether a market is active may include, but is not restricted to, the consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. The bid/ offer spread represents the difference in prices at which a market participant would be willing to buy compared with the price at which the participant would be willing to sell. In inactive markets, obtaining assurance that the transaction price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the instrument requires additional work during the valuation process.
Disposal groups and non-current assets held for sale Property and equipment1 Total assets classified as held for sale
1
1,547 1,547
Level 1 quoted market price: financial instruments with quoted prices for identical instruments in active markets. Level 2 valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets, or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable. Level 3 valuation technique with significant unobservable inputs: financial instruments valued using models where one or more significant inputs are unobservable.
Included within property and equipment classified as held for sale is repossessed property that had been pledged as collateral by customers.
2010
2009
The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the derivation of fair value is more judgmental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instruments carrying amount and/or inception profit (day 1 gain and loss) is driven by unobservable inputs. Unobservable in this context means that there is little or no current market data available from which to determine the level at which an arms length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used). Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable inputs may be attributable to the observable inputs. Consequently, the effect of uncertainty in the determining unobservable inputs will generally be restricted to uncertainty about the overall fair value of the financial instrument being measured.
Share-based payment obligations Obligations under finance leases Endorsements and acceptances Other liabilities
Obligations under finance leases falling due: Within 1 year Between 1 and 5 years Over 5 years 620 2,829 16,228 19,677 609 2,795 18,965 22,369
20. Provisions
CHF000
2010
2009
At 1 January Additional provisions/increase in provisions Provisions utilised Amounts reversed Exchange differences and other movements At 31 December
Included in the above are provisions for potential client claims, regulatory fines and litigation payments of CHF32.6 million (2009: CHF17.2 million).
56
57
Level 2
2010
Total
At 31 December 2010
Assets Trading assets Derivatives Available-for-sale assets Liabilities Derivatives 40,234 1,131,877 3,738 1,175,849 131,392 18,573,879 21,306 834,184 19,999,941 410,663 3,738 431,969 969,314 38,573,820
2009
Level 2
Level 3
At 1 January 2009 Purchase Settlements Total Transfer out Transfer in Exchange differences At 31 December 2009
At 31 December 2009
Assets Trading assets Derivatives Available-for-sale assets Liabilities Derivatives 132,450 1,177,516 2,614 1,312,580 171,846 14,155,812 29,623 938,054 22,916,162 433,989 2,614 463,612 1,112,514 37,071,974
58
59
The following is an analysis of undiscounted cash flows payable under financial liabilities by remaining contractual maturities at the balance sheet date:
Due within Due between 3 months 3 & 12 months Due between 1 & 5 years Due after 5 years
On demand
CHF000
Total
At 31 December 2010
586,802 586,802
1,416,478 1,416,478
314,835 314,835
25,913 25,913
On demand
Total
At 31 December 2009
Deposits by banks Customer accounts Debt securities in issue Other financial liabilities
Fair value
2010
Assets Loans and advances to banks Loans and advances to customers Financial investments: debt securities Liabilities Deposits by banks Customer accounts Debt securities in issue 3,908,281 76,474,545 3,909,279 76,542,423 2,847,785 87,333,811 22 2,848,870 87,375,876 22 9,779,681 30,933,307 6,203,383 9,782,932 31,063,423 6,591,415 20,990,758 30,222,254 8,086,019 20,995,535 30,319,329 8,706,335
745,413 745,413
1,669,389 1,669,389
365,295 365,295
29,494 29,494
The following is an analysis, by remaining contractual maturities at the balance sheet date, of asset and liability line items that combine amounts expected to be recovered or settled in under one year, and after one year. Contractual maturity is considered to be a reasonable approximation of expected maturity for the assets and liabilities analysed below. However, for items such as demand deposits and overdrafts, the contractual maturities could differ from expected maturities. The undiscounted cash flows potentially payable under financial guarantee contracts are classified in accordance with the contractual cash flows of the financial instruments to which the guarantee relates. Trading assets and liabilities are expected to be recovered or settled no more than twelve months after the balance sheet date, and therefore are excluded from this analysis.
The fair values of intangible assets, such as values placed on portfolios of core funding and customer goodwill, are not included above because they are not financial instruments. As other financial institutions use different valuation methodologies and assumptions in determining fair values, comparisons of fair values between financial institutions may not be meaningful and users are advised to exercise caution when using this data. In addition, the following table lists those financial instruments where the carrying amount is a reasonable approximation of fair value, for example, because they are either short-term in nature or reprice to current market rates:
Liabilities Items in the course of transmission Endorsements and acceptances Short-term payables within Other Liabilities
Assets Cash and balances at central banks Items in the course of collection Endorsements and acceptances Short-term receivables within Other Assets
60
61
Total
Assets pledged to secure these liabilities are included under the following headings:
Total
CHF000
At 31 December 2010
At 31 December 2009
2010
2009
Assets Loans and advances to banks Loans and advances to customers Financial investments Other financial assets 8,846,181 23,646,438 26,806,706 241,208 59,540,533 Liabilities Deposits by banks Customer accounts Debt securities in issue Other financial liabilities 3,908,281 75,863,404 133,881 79,905,566 611,141 126,054 737,195 3,908,281 76,474,545 259,935 80,642,761 2,847,785 86,972,698 22 42,980 89,863,485 361,113 202,882 563,995 2,847,785 87,333,811 22 245,862 90,427,480 933,500 7,286,869 17,970,497 63,540 26,254,406 9,779,681 30,933,307 44,777,203 304,748 85,794,939 20,990,758 22,097,790 17,767,789 203,839 61,060,176 8,124,464 27,391,233 87,145 35,602,842 20,990,758 30,222,254 45,159,022 290,984 96,663,018 Loans and advances to banks Debt securities 578,770 1,269,803 1,848,573 637,980 47,260 685,240
These transactions are conducted under terms that are usual and customary to standard lending, stock borrowing and lending activities.
26. Notes on the cash flow statement A. Non-cash items included in profit before tax
CHF000
2010
2009
2010
2009
Provisions raised Provisions utilised Impairment of financial investments Charge of defined benefit pension schemes Accretion of discounts and amortisation of premiums
Currency of structural exposure Swiss francs Pounds sterling Euros Hong Kong dollars Singapore dollars Total 3,632,965 801,527 449,850 14,591 5,375 4,904,308 3,401,805 904,529 529,656 16,083 5,925 4,857,998
2010
2009
Change in prepayments and accrued income Change in net trading securities and net derivatives Change in loans and advances to banks Change in loans and advances to customers Change in other assets
62
63
2010
2009
Change in accruals and deferred income Change in deposits by banks Change in customer accounts Change in debt securities in issue Change in other liabilities
All the HSBCs activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risks or combinations of risks. The risk management framework is designed to foster the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. The most important risk categories that the group is exposed to are: credit risk, market risk, liquidity risk, operational risk and reputational risk. Market risk includes foreign exchange, interest rate and equity price risks. The strong risk governance of the group reflects the importance assigned by the Board to shaping the groups risk strategy and managing risks effectively. It is supported by a clear policy framework of risk ownership that aligns business and risk objectives, and by the accountability of all officers for identifying, assessing and managing risks within the scope of their assigned responsibilities. This personal accountability, reinforced by the governance structure, experience and mandatory learning, helps to foster throughout HSBC a disciplined and constructive culture of risk management and control. The management of all risks which are significant to the group is discussed below.
Credit quality The groups credit risk rating systems and processes differentiate exposures in order to highlight those with greater risk factors and higher potential severity of loss. In the case of individually significant accounts, risk ratings are reviewed regularly and amendments, where necessary, are implemented promptly. Within the groups retail portfolios, risk is assessed and managed using a wide range of risk and pricing models to generate portfolio data. The Credit Risk Review team reviews the robustness and effectiveness of key measurement, monitoring and control activities. The groups risk rating system facilitates the internal ratings-based (IRB) approach under Basel II adopted by the group to support calculation of our minimum credit regulatory capital requirement. For further details, see Credit quality of financial instruments on page 66.
2010
2009
Cash and balances at central banks Items in the course of collection from other banks Loans and advances to banks of one month or less Treasury bills, other bills and certificates of deposit less than three months Less: items in the course of transmission to other banks
64
65
Maximum exposure to credit risk The following table presents the maximum exposure to credit risk from balance sheet and off-balance sheet financial instruments, before taking account of any collateral held or other credit enhancements (unless such credit enhancements meet offsetting requirements). For financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount. For financial guarantees granted, the maximum exposure to credit risk is the maximum amount that the group would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments that are irrevocable over the life of the respective facilities, it is generally the full amount of the committed facilities.
Loans and advances Although collateral can be an important mitigant of credit risk, it is the groups policy to lend on the basis of the customers capacity to repay rather than rely on the value of security offered. Depending on the customers standing and the type of product, facilities may be provided unsecured. The principal collateral types employed by the group are as follows: in the personal sector: mortgages over residential properties; in the commercial and industrial sector: charges over business assets such as premises, stock and debtors; in the commercial real estate sector: charges over the properties being financed; and in the financial sector: charges over financial instruments such as debt securities and equities in support of trading facilities. The loans and advances offset adjustment in the table above primarily relates to customer loans and deposits, and balances arising from repo and reverse repo transactions. The offset relates to balances where there is a legally enforceable right of offset in the event of counterparty default, and where, as a result, there is a net exposure for credit risk management purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. The group does not disclose the fair value of collateral held as security or other credit enhancements on loans and advances past due but not impaired, or on individually assessed impaired loans and advances, as it is not practicable to do so. Concentrations of credit risk exposure Concentrations of credit risk arise when a number of counterparties or exposure have comparable economic characteristics, or such counterparties are engaged in similar activities, or operate in the same geographical areas or industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. The group provides a diverse range of financial services both in Switzerland and internationally. As a result, its portfolio of financial instruments with credit risk is diversified. Loans and advances to customers by industry sector
Gross loans by industry Gross loans sector as and advances a % of total to customers gross loans ChF000 2009 Gross loans by industry sector as a % of total gross loans
Maximum exposure
CHF000
Offset
Offset
2010
Cash and balances at central banks Items in course of collection from other banks Trading assets: Debt securities Loans and advances to banks Derivatives Loans and advances to banks Loans and advances to customers Financial investments: Treasury and other eligible bills Debt securities Other assets: Endorsements and acceptances Accrued income and other assets Financial guarantees Loan commitments and other credit related commitments At 31 December
614,705 612 20,630 410,663 969,314 9,779,681 30,933,307 6,584,091 38,090,639 6,292 574,901 2,659,008 3,960,404 94,604,247
(485,798) (485,798)
614,705 612 20,630 410,663 969,314 9,779,681 30,447,509 6,584,091 38,090,639 6,292 574,901 2,659,008 3,960,404 94,118,449
100,089 5,750 29,416 433,989 1,112,514 20,990,758 30,222,254 1,658,915 43,283,391 2,879 532,593 3,153,308 2,493,756 104,019,612
(553,213)
100,089 5,750 29,416 433,989 1,112,514 20,990,758 29,669,041 1,658,915 43,283,391 2,879 532,593 3,153,308 2,493,756
Gross loans and advances to customers ChF000 2010 Personal Residential mortgages 4,174,340 18,985,140 23,159,480
(553,213) 103,466,399
Collateral and other credit enhancements Collateral held against financial instruments presented above in the maximum exposure to credit risk table is described in more detail below. Items in the course of collection from other banks Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for counterparties to cover the aggregate of the groups transactions with each one on any single day. Settlement risk on many transactions, particularly those involving securities and equities, is substantially mitigated by settling through assured payment systems, or on a delivery-versus-payment basis. Treasury, other eligible bills and debt securities Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, except for ABSs and similar instruments, which are secured by pools of financial assets. Derivatives The International Swaps and Derivatives Association (ISDA) Master Agreement is the groups preferred agreement for documenting derivatives activity. It provides the contractual framework within which dealing activity across a full range of over-the-counter products is conducted, and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or other pre-agreed termination events occur. It is common, and the groups preferred practice, for the parties to execute a Credit Support Annex (CSA) in conjunction with the ISDA Master Agreement. Under a CSA, collateral is passed between the parties to mitigate the market-contingent counterparty risk inherent in the outstanding positions.
Other personal lending Total Corporate and commercial Commercial and industrial Commercial real estate Other property-related Other Total Financial Financials Settlement accounts Total
31,040,960
100.0
30,318,418
100.0
66
67
Credit quality of financial instruments The five classifications below describe the credit quality of the groups four categories of financial instruments, namely lending, debt securities portfolios, and derivatives. These categories each encompass a range of more granular, internal credit rating grades assigned to corporate and personal lending business, as well as the external ratings attributed by external agencies to debt securities. There is no direct correlation between the internal and external ratings at granular level, except insofar as both fall within one of the four classifications. Credit quality of the groups lending, debt securities and other bills
Distribution of financial instruments by credit quality The following tables set out the distribution of financial instruments by measures of credit quality:
Neither past-due nor impaired strong
CHF000
Medium Good
Medium satisfactory
sub-standard
Impaired
Impairment allowances
Total
At 31 December 2010
Corporate lending and derivatives Internal credit rating 2010 Quality classification Strong Medium Good Medium Satisfactory Sub-standard Impaired
1
Probability of default %
Cash and balances at central banks Items in course of collection from other banks Trading assets: Debt securities Loans and advances to banks
55,968
296,790
Derivatives Loans and advances held at amortised cost: Loans and advances to banks Loans and advances to customers Financial investments: Treasury and other similar bills
4,262 387,319 46
(107,653)
The EL percentage is derived through a combination of PD and LGD and may exceed 100% in circumstances where the LGD is above 100% reflecting the cost of recoveries.
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. Personal accounts operate within product parameters and only exceptionally show any period of delinquency. Medium Good: exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minimal following the adoption of recovery processes. Medium Satisfactory: exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minor following the adoption of recovery processes. Sub -standard: exposures require varying degrees of special attention and default risk is of greater concern. Personal portfolio segments show longer delinquency periods of generally up to 90 days past due and/or expected losses are higher due to a reduced ability to mitigate these through security realisation or other recovery processes. Impaired: exposures have been assessed, individually or collectively, as impaired. Risk rating scales The Customer Risk Rating (CRR) 10-grade scale above summarises a more granular, underlying 22-grade scale of obligor probability of default (PD). All distinct customers group-wide are rated using one of these two PD scales, depending on the degree of sophistication of the Basel II approach adopted for the exposure. The Expected Loss (EL) 10-grade scale for Personal business summarises a more granular underlying EL scale for these customer segments; this combines obligor and facility/product risk factors in a composite measure. For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications. The ratings of Standard and Poors are cited, with those of other agencies being treated equivalently. Debt securities with short-term issue ratings are reported against the long-term rating of the issuer of those securities. If major rating agencies have different ratings for the same debt securities, a prudent rating selection is made in line with regulatory requirements. For the purpose of the following disclosure, personal loans which are past due up to 89 days and are not otherwise classified as EL9 or EL10 are separately classified as past due but not impaired.
Medium Good
Medium satisfactory
sub-standard
Impaired
Impairment allowances
Total
At 31 December 2009
Cash and balances at central banks Items in course of collection from other banks Trading assets: Debt securities Loans and advances to banks Derivatives Loans and advances held at amortised cost: Loans and advances to banks Loans and advances to customers Financial investments: Treasury and other similar bills Debt securities Other assets: Endorsements and acceptances Other
72,123
358,171
130
896,535 1,088
(96,164)
68
69
Impairment allowances and charges on loans and advances to customers The table below analyses the impairment allowances recognised for impaired loans and advances that are either individually assessed or collectively assessed, and collective impairment allowances on loans and advances classified as not impaired.
Collectively assessed Total
CHF000
Collectively assessed
Total
Individually assessed
At 31 December 2010
At 31 December 2009
Gross loans and advances Individually assessed impaired loans1 Collectively assessed Non-impaired loans 3 Total gross loans and advances Impairment allowances Individually assessed 80,793 26,860 107,653 73,351 22,813 96,164
2
387,319
193,427
30,653,641 31,040,960
30,124,991 30,318,418
Individually assessed allowances as a % of individually assessed impaired loans and advances Collectively assessed allowances as a % of collectively assessed loans and advances
1 2
20.9 0.1
37.9 0.1
Impaired loans and advances are those classified as CRR9, CRR10, EL9 or EL10, and all retail loans 90 days or more past due. Collectively assessed loans and advances comprise homogeneous groups of loans that are not considered individually significant, and loans subject to individual assessment where no impairment has been identified on an individual basis, but on which a collective impairment allowance has been calculated to reflect losses which have been incurred but not yet identified. 3 Collectively assessed loans and advances not impaired are those classified as CRR1 to CRR8 and EL1 to EL8, but excluding retail loans 90 days past due.
The group obtained assets by taking possession of collateral held as security, or by calling upon other credit enhancements. Repossessed properties are made available for sale in orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness. If excess funds arise after the debt has been repaid, they are made available either to repay other secured lenders with lower priority or are returned to the customer. The group does not generally occupy the repossessed properties for its business use.
70
71
Total allowances
Total allowances
Collectively assessed
Total
Collectively assessed
Total
At 31 December 2010
At 31 December 2009
2010
Customers Personal Commercial and corporate 77,732 3,061 80,793 26,860 26,860 104,592 3,061 107,653 61,070 12,281 73,351 22,813 22,813 83,883 12,281 96,164
Personal Residential mortgages Other personal Commercial and corporate Commercial industrial and international trade Commercial real estate and other property related Total charge to income statement 870 29,896 7,893 870 37,789 64 4,098 28,502 8,707 64 4,098 37,209 6,203 22,823 7,893 6,203 30,716 4,590 19,750 8,707 4,590 28,457
2010
2009
Total impairment allowances to gross lending1 Individually assessed impairment allowances Collectively assessed impairment allowances Total
1
Individually assessed
Collectively assessed
Total
Individually assessed
Collectively assessed
Total
At 31 December 2010
At 31 December 2009
At 1 January Amounts written off Recoveries of loans and advances written off in previous years Charge to income statement Transfer Exchange and other movements At 31 December
72
73
B. Liquidity management
2010 2009
CHF000
Impairment allowance at 1 January Amounts written off Personal: Residential mortgages Other personal Corporate and commercial: Commercial, industrial and international trade Commercial real estate and other property related Recoveries of amounts written off in previous years Personal: Residential mortgages Other personal Corporate and commercial: Commercial real estate and other property related Charge to income statement Personal: Residential mortgages Other personal Corporate and commercial: Commercial, industrial and international trade Commercial real estate and other property related Exchange, transfer and other movements Impairment allowance at 31 December Impaired allowances against customers: Individually assessed Collectively assessed Impairment allowance at 31 December
%
96,164
68,546
(5,904) (5,660) (5,825) (79) (79) (5,474) (5,183) (2,074) (3,109) (291) (291) 37,789 36,919 6,203 30,716 870 870 (14,922) 107,653 80,793 26,860 107,653
(7,416) (5,853) (317) (5,536) (1,563) (983) (580) (5,564) (4,865) (728) (4,137) (699) (699) 37,209 33,047 4,590 28,457 4,162 64 4,098 3,389 96,164 73,351 22,813 96,164
The objective of liquidity management is to ensure that all foreseeable commitments, those contractual and those determined on the basis of behavioural patterns which are required to be funded, can be met out of readily available and secure sources of funding. Together with its capital resources, a surplus of stable customer deposits over loans to the groups customers is placed with the treasury units where the groups funding and liquidity are managed to ensure compliance with the different local regulatory requirements. In addition, all sites operate within the HSBC Groups liquidity policy. This process includes: projecting cash flows by major currency and consideration of the level of liquid assets necessary in relation thereto; monitoring balance sheet liquidity and advances to core funding ratios against internal and regulatory requirements; maintaining a diverse range of funding sources with adequate back-up facilities; managing the concentration and profile of debt maturities; managing contingent liquidity commitment exposures within predetermined caps; maintaining debt financing plans; monitoring of depositor concentration both in terms of the overall funding mix and to avoid undue reliance on large individual depositors; 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.
Approximately two-thirds of the banks asset base is dollar-based, with the remainder mostly denominated in euros and pounds sterling. The non-dollar asset base is principally funded through currency-denominated customer deposits, supplemented by time deposits taken from the eurocurrency interbank market. Swiss-regulated entities comply with the liquidity requirements of the Swiss Financial Market Authority. Minimum reserves applies only to Swiss currency and requires that liquid assets are, on the basis of a monthly average, at least equal to 2.5% of the amounts due to banks/clients maturing within 3 months, and 20% of the clients savings and deposit liabilities. Total liquidity embraces all currencies and requires that liquid and easily realisable assets are, on a continuous basis, at least equal to one-third of the short-term liabilities. Other non-Swiss units maintain sufficient liquidity to meet their day-to-day needs and local regulatory requirements. The breakdown by contractual maturity of assets and liabilities is shown on the table in Note 22. Primary sources of funding Current accounts and savings deposits payable on demand or at short notice form a significant part of the groups funding, and the group places considerable importance on maintaining their stability. For deposits, which are a primary source of funding, stability depends upon preserving depositor confidence in the groups capital strength and liquidity, and competitive and transparent pricing. The group also accesses professional markets in order to provide funding for non-banking subsidiaries that do not accept deposits, to maintain a presence in local money markets, and to optimise the funding of asset maturities not naturally matched by core deposit funding.
Of total liabilities of CHF82.4billion at 31 December 2010, funding from customers amounted to CHF76.5billion, of which CHF75.9billion was contractually repayable within one year. An analysis of cash flows payable by the group under financial liabilities by remaining contractual maturities at the balance sheet date, is included in Note 22. Assets available to meet these liabilities, and to cover outstanding commitments to lend (CHF88.8million) included cash, central bank balances, items in the course of collection, and treasury and other bills (CHF7.2billion); loans to banks (CHF9.8billion, including CHF8.8billion repayable within one year); and loans to customers (CHF30.9billion, including CHF23.6billion repayable within one year). In the normal course of business, a proportion of customer loans contractually repayable within one year will be extended. In addition, the Company held debt securities marketable at a value of CHF38.1billion. Of these assets, CHF1.3billion of debt securities and treasury and other bills had been pledged to secure liabilities.
Impairment allowances as a % of loans and advances: Individually assessed Collectively assessed At 31 December 0.26 0.09 0.35 0.24 0.08 0.32
74
75
Advances to core funding ratios The group emphasises the importance of core current deposits as a source of funds to finance lending to customers, and discourages reliance on short-term professional funding. This is achieved by placing limits on banking entities, which restrict their ability to increase loans and advances to customers without corresponding growth in core customer deposits or long-term debt funding. This measure is referred to as the advance to core funding ratio (previously referred to as the advances to deposits ratio). The ratio describes loans and advances to customers as a percentage of the total of core customer deposits and term funding with a remaining term to maturity in excess of one year. Loans and advances to customers which are part of reverse repurchase arrangements, and where the group receives securities which are deemed to be liquid, are excluded from the advances to core funding ratio. The distinction between core and non-core deposits means that the groups measure of advances to core funding is more restrictive than that which can be inferred from the published financial statements.
%
and term debt markets and to generate funds from asset portfolios is restricted. The scenarios are modelled by all group banking entities. The appropriateness of the assumptions under each scenario is regularly reviewed. Limits for cumulative net cash flows under stress scenarios are set. Both ratio and cash flow limits reflect the local market place, the diversity of funding sources available, and the concentration risk from large depositors. Compliance with entity level limits is monitored and reported regularly to the Risk Management Meeting (RMM). Contingent liquidity risk In the normal course of business, the group provides customers with committed facilities and standby facilities to customers. These facilities increase the funding requirements of the group when customers choose to raise drawdown levels over and above their normal utilisation rates. The liquidity risk consequences of increasing levels of drawdown are analysed in the form of projected cash flows under different stress scenarios.
Only those offices which management deems to have sufficient derivative product expertise and appropriate control systems are authorised to trade derivative products. Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits, as well as valueat-risk limits at a portfolio level. Similarly, option risks are controlled through full revaluation limits in conjunction with limits on the underlying variables that determine each options value. Non-trading risks The principal objective of market risk management of non-trading portfolios is to optimise net interest income. Market risk in non-trading portfolios arises principally from mismatches between the future yield on assets and their funding cost as a result of interest rate changes. Analysis of this risk is complicated by having to make assumptions on optionality in certain product areas, for example mortgage prepayments, and from behavioural assumptions regarding the economic duration of liabilities which are contractually repayable on demand, for example current accounts. This prospective change in future net interest income from non-trading portfolios will be reflected in the current realisable value of these positions, should they be sold or closed prior to maturity. In order to manage this risk optimally, market risk in non-trading portfolios is transferred to Global Markets or to separate books managed under the auspices of the local ALCO. A positive interest rate sensitivity gap exists where more assets than liabilities re-price during a given period. Although a positive gap position tends to benefit net interest income in a rising interest rate environment, the actual effect will depend on a number of factors, including the extent to which repayments are made earlier or later than the contracted date; and, variations in interest rates within re-pricing periods and among currencies. Similarly, a negative interest rate sensitivity gap exists where more liabilities than assets re-price during a given period. In this case, a negative gap position tends to benefit net interest income in a declining interest rate environment, but again the actual effect will depend on the same factors as for positive interest rate gaps, as described above.
Sensitivity analysis The group uses a range of tools to monitor and limit market risk exposures. These include value at risk (VAR), present value of a basis point, and stress testing. 1. Value at risk VAR is one of the principal tools used by HSBC to monitor and limit market risk exposure in its trading portfolios. VAR is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon (for HSBC, one day) and to a given level of confidence (for HSBC, 99%). HSBC calculates VAR daily. The VAR model used by HSBC is predominantly based on historical simulation. The historical simulation model derives plausible future scenarios from historical market rates time series, taking account of interrelationships between different markets and rates, for example between interest rates and foreign exchange rates. Potential movements in market prices are calculated with reference to market data from the last two years. Although a valuable guide to risk, VAR should always be viewed in the context of its limitations. For example: the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature; the use of a one-day holding period assumes that all positions can be liquidated or hedged in one day. This may not fully reflect the market risk arising from times of severe illiquidity, when a one-day holding period may be insufficient to liquidate or hedge all positions fully; the use of a 99% confidence level, by definition, does not take into account any losses that might occur beyond this level of confidence; and VAR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intraday exposures. Value at risk of the trading and non-trading portfolios was as follows: Positions taken with trading intent VAR by risk type
Minimum during the year Maximum during the year
The group would meet any unexpected net cash outflows by selling securities and accessing additional funding sources such as interbank or collateralised lending markets. In addition to the advances to core funding ratios, the group uses a range of other measures for managing liquidity risk. These other measures include the ratio of net liquid assets to customer liabilities and projected cash flow scenario analyses. Projected cash flow scenario analyses The Company uses a number of standard projected cash flow scenarios designed to model both group-specific and market-wide liquidity crises, in which the rate and timing of deposit withdrawals and drawdowns on committed lending facilities are varied, and the ability to access interbank funding
Market risk is the risk that interest rates, credit spreads, foreign exchange rates or equity and commodity prices will move and result in profits or losses to the group. Market risk arises on financial instruments which are valued at current market prices (mark-to-market basis) and those valued at cost plus accrued interest (accruals basis). The main valuation sources are securities prices, foreign exchange rates, and interest rate yield curves and volatilities. 1. Trading and non-trading risks Trading risks Trading risks arise either from customerrelated business or from position-taking. Trading positions are valued on a market-tomarket basis. The group manages market risk through risk limits approved by the Asset and Liability Management Committee (ALCO). Risk limits are determined for each location and, within location, for each portfolio. Limits are set by product and risk type, with market liquidity being a principal factor in determining the level of limits set.
At 31 December
CHF000
2010
796 30 68 796
2009
76
77
At 31 December
CHF000
2010
2. structural foreign exchange exposures Structural foreign exchange exposures represent net investments in subsidiaries, branches or associated undertakings, the functional currencies of which are currencies other than the US dollar. Revaluation gains and losses on structural exposures are recorded in the consolidated statement of recognised income and expense. The main operating (or functional) currencies of the groups subsidiaries are pounds sterling, euros, US dollars, Swiss francs, Hong Kong dollars and Singapore dollars. Trading value at risk The foreign exchange exposures comprise those which arise from foreign exchange dealing to meet the financial needs of customers. These exposures are transferred to local treasury units where they are managed together with exposures which result from dealing within approved limits. VAR on foreign exchange trading positions is shown in the tables on page 75. 3. Interest rate exposure The groups interest rate exposures comprise those originating in its treasury trading activities to meet the financial needs of customers, and structural interest rate exposures. Both are managed under limits described above. Interest rate risk arises on trading positions and accrual books. The interest rate risk on interest rate trading positions is set out in the trading VAR tables on page 75. Structural interest rate risk Structural interest rate risk arises from the differing repricing characteristics of banking assets and liabilities, including non-interestbearing liabilities such as shareholders funds and some current accounts.
The HSBC Group manages this risk through a controls-based environment in which processes are documented, authorisation is independent, and transactions are reconciled and monitored. This risk management is supported by an independent programme of periodic reviews undertaken by internal audit, and by monitoring external operational risk events, which ensures that the HSBC Group stays in line with best practice and takes account of lessons learned from publicised operational failures within the financial services industry. The HSBC Group has codified its operational risk management process by issuing a high-level standard. This explains how the HSBC Group manages operational risk by identifying, assessing, monitoring, controlling and mitigating the risk, rectifying operational risk events, and implementing any additional procedures required for compliance with local regulatory requirements. The processes undertaken to manage operational risk are determined by reference to the scale and nature of each HSBC Group operation. The HSBC Group standard covers the following: operational risk management responsibility is assigned at a senior management level within the business operation; information systems are used to record the identification and assessment of operational risks and to generate appropriate, regular management reporting; operational risks are identified by risk assessments covering operational risks facing each business and risks inherent in processes, activities and products. Risk assessment incorporates a regular review of risks identified to monitor significant changes; operational risk loss data is collected and reported to senior management. This reporting covers aggregate operational risk losses and details of incidents above a materiality threshold; and risk mitigation, including insurance, is considered where this is cost-effective.
Local management within the group is responsible for implementation of the HSBC Group standard on operational risk throughout its operation. Where deficiencies are evident, these are required to be rectified within a reasonable timeframe.
2009
2. Present value of a basis point Sensitivity measures are used to monitor the market risk positions within each risk type, for example, present value of a basis point movement in interest rates. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining the level of limits set. 3. Stress testing In recognition of the limitations of VAR, HSBC augments VAR with stress testing to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. The process is governed by the Stress Testing Review Group forum. This coordinates the groups stress testing scenarios in conjunction with the regional risk managers. Actual market risk exposures and market events are considered in determining the stress scenarios to be applied at portfolio and consolidated level. These scenarios are as follows: sensitivity scenarios, which consider the impact of market moves to any single risk factor or a set of factors. For example, the impact resulting from a break of a currency peg that is unlikely to be captured within the VAR models; technical scenarios, which consider the largest move in each risk factor without consideration of any underlying market correlation; hypothetical scenarios, which consider potential macroeconomic events; and historical scenarios, which incorporate historical observations of market moves during previous periods of stress which would not be captured within VAR. Stress testing results are reported to senior management and provide it with an assessment of the financial impact such events would have on the groups profit. The daily losses experienced during 2010 and 2009 were within the stress loss scenarios reported to senior management.
78
79
Future developments
The regulation and supervision of financial institutions continues to undergo significant change in response to the global financial crisis. In December 2010, the Basel Committee issued final rules in two documents A global regulatory framework for more resilient banks and banking systems, and International framework for liquidity risk measurement, standards and monitoring, which together are commonly referred to as Basel III. The new minimum capital requirements will be phased in from 1 January 2013, with full implementation required by 1 January 2019. The capital conservation buffer and the countercyclical capital buffer will be phased-in in parallel from 1 January 2016, becoming fully effective on 1 January 2019. The leverage ratio will be subject to a supervisory monitoring period which commenced 1 January 2011, and a parallel run period which will run from 1 January 2013 until 1 January 2017. Further calibration of the leverage ratio will be carried out in the first half of 2017, with a view to migrate to a Pillar 1 requirement from 1 January 2018. The Basel Committee has increased the capital requirements for the trading book and complex securitisation exposures, which must be implemented by 31 December 2011. They will continue to conduct the fundamental review of the trading book, which is targeted for completion by the end of 2011. In addition to the reforms discussed above, identified Global Systemically Important Financial Institutions (GSIFIs) may be subjected to a further capital requirement, which has not yet been announced.
On 13 January 2011, the Basel Committee issued Further minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss. Instruments issued on or after 1 January 2013 may only be included in regulatory capital if the new requirements are met. The regulatory capital recognition of securities issued prior to 1 January 2013 will decline from 1 January 2013 in line with Basel III grandfathering rules.
80
81
CHF000
2010
2009
Composition of capital Called up share capital Share premium Other reserves Retained earnings Non-controlling interests Total equity as per balance sheet Buildings revaluation Unrealised gains booked into the "Debt securities available-for-sale reserve" Unrealised gains booked into the "Equity securities available-for-sale reserve" Net losses from "Cash flow hedging reserve" valuation Regulatory adjustments to the accounting basis Goodwill Dividend to be paid Deductions Total qualifying tier 1 capital Other deductions from total capital Total regulatory capital - Basel I Expected loss not covered by provisions Additional capital to meet 80% of Basel 1 Total regulatory capital - Basel II Risk-weighted assets - Basel I Banking book Trading book Total risk-weighted assets - Basel I Risk-weighted assets - Basel II Credit risk Market risk Operational risk Total risk-weighted assets - Basel II Capital ratios - Basel I (%) Total capital Tier 1 capital Capital ratios - Basel II (%) Total capital 17.71 14.81 13.69 13.69 12.85 12.85 23,190,968 477,256 4,401,122 28,069,346 28,704,977 516,385 4,964,719 34,186,081 36,917,849 477,256 37,395,105 39,965,664 516,385 40,482,049 1,363,330 1,153,079 (351,878) 4,171,692 22,006 6,358,229 (27,641) (177,793) (26,083) (15,564) (247,081) (285,715) (704,793) (990,508) 5,120,640 (1,158) 5,119,482 (66,166) (81,574) 4,971,742 1,363,330 1,153,079 (562,481) 4,879,727 13,910 6,847,565 (31,082) (292,098) (69,181) (11,564) (403,925) (313,784) (926,100) (1,239,884) 5,203,756 (1,159) 5,202,597 (138,284) 5,064,313
Contract amounts Guarantees Guarantees and irrevocable letters of credit pledged as collateral security: 1 year and under Over 1 year Total Commitments Documentary credits and short-term trade-related transactions Undrawn formal standby facilities, credit lines and other commitments to lend Total 99,927 3,860,477 3,960,404 139,214 2,354,542 2,493,756 2,659,008 2,318,260 340,748 2,659,008 3,153,308 2,758,519 394,789 3,153,308
The table above discloses the nominal amounts of commitments, guarantees and other contingent liabilities. Contingent liabilities and commitments are credit-related instruments, which include letters of credit, guarantees and commitments to extend credit. The contractual amounts represent the amounts at risk, should the contract be fully drawn upon and the client defaults. Since a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the contractual amounts is not representative of future liquidity requirements.
B. Guarantees
The group provides guarantees and similar undertakings on behalf of both third party customers and other entities within the group. These guarantees are generally provided in the normal course of the groups banking business. The principal types of guarantees provided, and the maximum potential amount of future payments which the group could be required to make at 31 December 2010 and 31 December 2009, were as follows:
Guarantees by hsBC Private Banking holdings Guarantees (suisse)sA in in favour of favour of other third parties group entities
CHF000
Guarantees by hsBC Private Banking holdings Guarantees (suisse)sA in in favour of favour of other third parties group entities At 31 December 2009
At 31 December 2010
2,581,648 2,581,648
77,360 77,360
3,138,934 3,138,934
14,374 14,374
Financial guarantees include undertakings to stand behind the obligations of customers or other group entities and to undertake these obligations if the other entity fails to do so. Intra-group items of this type will also include guarantees of a capital nature given to another group entity and intended to be considered as capital support by the relevant regulatory authority.
The above maximum amounts payable reflect the groups maximum exposure under a large number of individual guarantee undertakings. The risks and exposures arising from guarantees are captured and managed in accordance with the groups overall credit risk management policies and procedures. Approximately one-half of the above guarantees have a term of less than one year. Guarantees with a term of more than one year are subject to the groups annual credit review process. When the group has given a guarantee on behalf of a customer, it will have the right to recover from that customer any amounts paid under the guarantee. At 31 December 2010, the group held collateral amounting to CHF9.2 billion (2009: CHF9.6 billion), which could be used to recover amounts paid under the above guarantees. A provision is recognised only where the group considers that it is more likely than not that an obligation exists under the guarantees. At 31 December 2010, the group had established no provisions in respect of its obligations under outstanding guarantees.
82
83
brought and the number of different plaintiffs and defendants in such proceedings. The cases where the group is named as a defendant are at an early stage. For these reasons, among others, it is not practicable at this time for the group to estimate reliably the aggregate liabilities, or ranges of liabilities, that might arise as a result of all such claims. In any event, the group considers that it has good defences to these claims and will continue to defend itself vigorously.
Interest charges Present value Total future minimum payments 2009 Interest charges Present value
2010
Other litigation This action apart, the group is party to legal actions in a number of jurisdictions arising out of its normal business operations. The group considers that none of the actions is material, and none is expected to result in a significant adverse effect on the financial position of the group, either individually or in the aggregate. Management believes that adequate provisions have been made in respect of the litigation arising out of its normal business operations.
No later than one year Later than one year and no later than five years Later than five years Total
32. Related party transactions A. Transactions with Directors and other Key Management Personnel
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of HSBC Private Banking Holdings (Suisse) SA and the group and also includes members of the Board of Directors. Compensation of Key Management Personnel The following represents the compensation paid to the Key Management Personnel of the bank in exchange for services rendered to the bank.
CHFin millions
Equipment 2009
2010
2009
Equipment Short-term employee benefits Post-employment benefits Termination benefits Share-based payments 49.0 16.3 65.3 46.7 17.6 64.3
2010
Future minimum lease payments under non-cancellable operating leases expiring No later than one year Later than one year and no later than five years Later than five years Total 46,295 147,221 224,341 417,857 47 260 307 29,798 105,768 131,186 266,752 45 136 181
During the year, CHF53.4 million (2009: CHF44.3 million) was recognised within General and administrative expenses in respect of lease and sublease agreements, all of which related to minimum lease payments.
Loans to the Board of Directors and Key Management Personnel Loans to the Board of Directors and Key Management Personnel were CHF 17.7 million (2009: CHF 159.6 million).
B. Summary of significant aggregate balances of transactions with other related parties of HSBC Private Banking Holdings (Suisse) SA
Fellow subsidiary undertakings
Balance at 31 December
CHF000
31. Litigation
Bernard L. Madoff Investment securities LLC In December 2008, Bernard L. Madoff (Madoff) was arrested for running a Ponzi scheme and a trustee was appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC (Madoff Securities). Since his appointment, the trustee has been recovering assets and processing claims of Madoff Securities customers. Plaintiffs (including funds, fund investors, and the Madoff Securities trustee) have commenced Madoff-related proceedings against various HSBC companies, including the group and numerous other defendants, in a multitude of jurisdictions. The suits allege that the HSBC defendants knew or should have known of Madoffs fraud and breached various duties to the funds and fund investors. Between October 2009 and July 2010, Fairfield Sentry Limited and Fairfield Sigma Limited (Fairfield), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands and the US against numerous fund shareholders, including the group and various HSBC companies that acted as nominees for clients of HSBCs private banking business and other clients who invested in the Fairfield funds. The Fairfield actions seek restitution of amounts paid to the defendants in connection with share redemptions, on the ground that such payments were made by mistake, based on inflated values resulting from Madoffs fraud. In December 2010, the Madoff Securities trustee commenced proceedings against various HSBC companies, including the group, in the US bankruptcy court. The action (which also names certain funds, investment managers, and other entities and individuals) seeks USD9billion in damages and additional recoveries from HSBC and the various co-defendants. It seeks damages against HSBC for allegedly aiding and abetting Madoffs fraud and breach of fiduciary duty, recovery of unspecified amounts received by HSBC from funds invested with Madoff, and recovery of fees. There are many factors which may affect the range of possible outcomes and the resulting financial impact, of the various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple jurisdictions in which the proceedings have been
2010
2009
Assets Trading assets Derivatives Loans and advances to banks Loans and advances to customers Financial investments Total related party assets Liabilities Deposits by banks Customer accounts Derivatives Total related party liabilities Off-balance sheet Derivatives Contingent liabilities 48,133,601 77,360 60,433,927 14,374 3,082,341 632,322 580,301 4,294,964 1,732,876 699,014 749,480 3,181,370 410,663 388,222 6,157,903 38,061 14,012,805 21,007,654 433,989 373,409 11,971,087 101,546 16,392,621 29,272,652
84
85
2010
2009
Income statement Interest income Interest expense Fee income Fee expense Other operating income General and administrative expenses 321,650 6,694 28,672 55,633 187 91,352 560,827 8,792 36,614 41,139 (2,318) 99,020
The consolidated financial statements of the group are prepared in accordance with the IFRS. Set out below are the significant differences regarding recognition and measurement between IFRS, the Banking Ordinance provisions and the FINMA Guidelines governing financial statement reporting pursuant to Article 23 through Article 27 of the Banking Ordinance.
A. Consolidation
Under IFRS, entities which are directly or indirectly controlled by the group are consolidated. Under Swiss law, only entities that are active in the field of banking and finance as well as real estate entities are subject to consolidation.
B. Financial investments
Under IFRS, available-for-sale financial investments are carried at fair value. Changes in fair value are recorded directly in other comprehensive income until an investment is sold, collected or otherwise disposed of, or until an investment is determined to be impaired. At the time an availablefor-sale investment is determined to be impaired, the cumulative unrealised loss previously recognised in other comprehensive income is included in net profit and loss for the period. On disposal of a financial investment, the difference between the net disposal proceeds and the carrying amount, plus any attributable unrealised gain or loss balance recognised in other comprehensive income, is included in net profit and loss for the period. Under Swiss law, financial investments are carried at the lower of cost or market value. Reductions to market value below cost and reversals of such reductions, as well as gains and losses on disposal, are included in Other income.
The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features. Associates Information relating to associates can be found in Note 14. hsBC holdings plc
CHF000
Under IFRS, when hedge accounting is applied for these instruments, the unrealised gain or loss on the effective portion of the derivatives is recorded in other comprehensive income until the hedged cash flows occur, at which time the accumulated gain or loss is realised and released to income.
516,355 835 7,846
Under Swiss law, the unrealised gains or losses on the effective portion of the derivative instruments used to hedge cash flow exposures are deferred on the balance sheet as assets or liabilities. The deferred amounts are released to income when the hedged cash flows occur.
D. Goodwill
Pension funds At 31 December 2010, CHF546.6 million (2009: CHF624.4 million) of the groups pension fund assets were under management of the HSBC Group companies. Fees of CHF1.0 million (2009: CHF0.3 million) were earned by the group companies for these management services. The groups pension funds had placed deposits of CHF45.7 million (2009: CHF36.9 million) with its banking subsidiaries. Under IFRS, goodwill is tested for impairment annually by comparing the present value of the expected future cash flows from a business with the carrying value of its net assets, including attributable goodwill. Goodwill is stated at cost less accumulated impairment losses which are charged to the income statement. Under Swiss law, goodwill must be amortised over a period not exceeding five years, unless a longer useful life, which may not exceed twenty years, can be justified.
1.0367
0.9335
1.0821
1.029
CHF in billions
Discretionary assets Other invested assets Total invested assets Thereof double count Net new money
86
87
UsD m 2010 For the year Profit before tax Profit attributable to shareholders of the parent company Dividends 19,037 13,159 5,937
GBP m
hKD m 2009
UsD m
At the year-end Total shareholders equity Capital resources Customer accounts and deposits by banks Total assets Risk-weighted assets 147,667 167,555 1,338,309 2,454,689 1,103,113 95,098 107,905 861,871 1,580,820 710,405 1,147,816 1,302,405 10,402,675 19,080,298 8,574,497 128,299 155,729 1,283,906 2,364,452 1,133,168
UsD 2010 Per ordinary share Basic earnings1 Diluted earnings1 Dividends2 Net asset value at the year-end share information USD 0.50 ordinary shares in issue Market capitalisation Closing market price per share 17,686 m 180 bn GBP 6.51 0.73 0.72 0.34 7.94
GBP
hKD 2009
UsD
Auditors responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards and International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
Opinion
In our opinion, the consolidated financial statements for the year ended 31 December 2010 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with International Financial Reporting Standards and comply with Swiss law.
Over 1 year
Over 3 years
Over 5 years
Total shareholder return to 31 December 2010 3 Benchmarks: FTSE 100 MSCI World MSCI Banks
1 2 3
The effect of the bonus element of the rights issue has been included within the basic and diluted earnings per share. Under IFRSs accounting rules, the dividend per share of USD 0.34 shown in the accounts is the total of the dividends declared during 2010. This represents the fourth interim dividend for 2009 and the first, second and third interim dividends for 2010. As the fourth interim dividend for 2010 was declared in 2011, it will be reflected in the accounts for 2011. Total shareholder return (TSR) is as defined in the Annual Report and Accounts 2010.
88
89
2010
2009
Performance ratios Return on average invested capital 1 Return on average total shareholders equity Post-tax return on average total assets Post-tax return on average risk-weighted assets Efficiency and revenue mix ratios Cost efficiency ratio As a percentage of total operating income: Net interest income Net fee income Net trading income Capital ratios Core tier 1 ratio Tier 1 ratio Total capital ratio
1
Return on invested capital is based on the profit attributable to ordinary shareholders. Average invested capital is measured as average total shareholders equity after adding back goodwill previously writtenoff directly to reserves, deducting average equity preference shares issued by HSBC Holdings plc and deducting/(adding) average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities. This measure reflects capital initially invested and subsequent profit.
90
91
Americas
Belo Horizonte Bermuda Beverly Hills Brasilia Campinas Chicago Curitiba Florianopolis Guadalajara Mexico City Miami Monterrey Montevideo New York Panama City Porto Alegre Puebla Punta del Este Recife Ribeirao Preto Rio de Janeiro Salvador San Francisco Santiago Sao Paulo Wilmington
United Kingdom
Ascot Birmingham Bristol Cardiff Edinburgh Guernsey Hungerford Jersey Leeds London Manchester Oxford
Europe
Ankara Athens Baden-Baden Berlin Bordeaux Cologne Dublin Dusseldorf Frankfurt Geneva Gstaad Hamburg Istanbul Izmir Lugano Luxembourg Lyon Marseille Monaco Munich Nice Paris St. Moritz Stockholm Stuttgart Zurich
Africa
Johannesburg
India
Bangalore Chennai Hyderabad Kolkata Mumbai New Delhi Pune
Asia
Auckland Beijing Cook Islands Guangzhou Hong Kong SAR Kuala Lumpur Manila Nagoya Osaka Shanghai Singapore Taipei Tokyo
Russia
Moscow
Middle East
Abu Dhabi Beirut Doha Dubai Kuwait Manama Muscat
www.hsbcprivatebank.com The hsBC Group parent company hsBC Private Bank principal holding company
HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from around 7,500 offices in 87 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With assets of USD 2,455 billion at 31 December 2010, HSBC is one of the worlds largest banking and financial services organisations. HSBC is marketed worldwide as the worlds local bank.
www.hsbcprivatebank.com