The Hongkong and Shanghai Banking Corporation Limited

The Hongkong and Shanghai

Banking Corporation Limited

Annual Report and Accounts 2023

Contents

Certain defined terms

Cautionary statement regarding forward-looking statements

Chinese translation

Financial Highlights

Report of the Directors

Task Force on Climate-related Financial Disclosures

Financial Review

Risk

Statement of Directors’ Responsibilities

Independent Auditor’s Report

Consolidated Financial

Statements

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in equity

Consolidated statement of cash flows

Notes on the Consolidated

Financial Statements

Basis of preparation and material accounting policies

Operating profit

102

Insurance business

108

Employee compensation and benefits

111

Tax

112

Dividends

113

Trading assets

113

Derivatives

116 9 Financial assets designated and otherwise mandatorily

measured at fair value through profit or loss

116

Loans and advances to customers

117

Financial investments

117

Assets pledged, assets transferred and collateral received

118

Investments in subsidiaries

119

Interests in associates and joint ventures

122

Goodwill and intangible assets

122

Property, plant and equipment

123

Prepayments, accrued income and other assets

124

Customer accounts

124

Trading liabilities

124

Financial liabilities designated at fair value

124

Debt securities in issue

125 22 Accruals and deferred income, other liabilities and

provisions

125

Subordinated liabilities

126

Share capital

126

Other equity instruments

126

Maturity analysis of assets and liabilities

129 27 Analysis of cash flows payable under financial liabilities by

remaining contractual maturities

130 28 Contingent liabilities, contractual commitments and

guarantees

130

Other commitments

130

Offsetting of financial assets and financial liabilities

132

Segmental analysis

133

Related party transactions

136

Fair values of financial instruments carried at fair value

142

Fair values of financial instruments not carried at fair value

143

Interest rate benchmark reform

143

Structured entities

145

Bank balance sheet and statement of changes in equity

147

Effects of adoption of HKFRS 17

150

Business disposals and acquisitions

151

Legal proceedings and regulatory matters

151

Ultimate holding company

151

Events after the balance sheet date

151

Approval of financial statements

152

Additional information

Certain defined terms

This document comprises the Annual Report and Accounts 2023 for

The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’)

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

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

Holdings plc together with its subsidiaries. Within this document the

Hong Kong Special Administrative Region of the People’s Republic of

China is referred to as ‘Hong Kong’. The abbreviations ‘HK$m’ and

‘HK$bn’ represent millions and billions (thousands of millions) of

Hong Kong dollars respectively.

Cautionary statement regarding

forward-looking statements

This Annual Report and Accounts 2023 contains certain forward-

looking statements with respect to the financial condition,

environmental, social and governance (‘ESG’) related matters, results

of operations and business of the group, including the strategic

priorities; financial investment and capital targets; and the group's

ability to contribute to the Group's ESG targets, commitments and

ambitions described herein.

Statements that are not historical facts, including statements about

the group’s beliefs and expectations, are forward-looking statements.

Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’,

‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, variations of

these words and similar expressions are intended to identify forward-

looking statements. These statements are based on current plans,

estimates and projections, and therefore no undue reliance should be

placed on them. Forward-looking statements apply only as of the date

they are made. The group makes no commitment to revise or update

any forward-looking statements to reflect events or circumstances

occurring or existing after the date of any forward-looking statement.

Forward-looking statements involve inherent risks and uncertainties.

Readers are cautioned that a number of factors, including ESG related

factors, could cause actual results to differ, in some instances

materially, from those anticipated or implied in any forward-looking

statement.

Please see pages 152-153 for the additional cautionary statement

regarding ESG and climate-related data, metrics and forward-looking

statements.

Chinese translation

A Chinese translation of the Annual Report and Accounts 2023 is

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

Main Building, 1 Queen’s Road Central, Hong Kong. The report is also

available, in English and Chinese, on the Bank’s website at

www.hsbc.com.hk.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 1

Financial Highlights

2023 2022

HK$m HK$m

For the year

Net operating income before change in expected credit losses and other credit impairment charges 249,679 200,803

Profit before tax 121,443 96,687

Profit attributable to shareholders 90,747 76,401

At the year-end

Total shareholders’ equity 812,726 807,552

Total equity 872,586 864,380

Total capital

631,701 607,312

Customer accounts 6,261,051 6,113,709

Total assets 10,500,393 10,197,843

Ratios

Return on average ordinary shareholders’ equity 11.3 9.9

Return on tangible equity (‘ROTE’)

13.5 11.7

Post-tax return on average total assets 0.9 0.8

Cost efficiency ratio 44.1 53.1

Net interest margin 1.81 1.54

Advances-to-deposits ratio 56.8 60.4

Capital ratios

Common Equity Tier 1 ('CET1') capital 15.8 15.3

Tier 1 capital 17.5 16.9

Total capital 19.7 18.8

1 From 1 January 2023, we adopted HKFRS 17 'Insurance Contracts', which replaced HKFRS 4 'Insurance Contracts'. Comparative data presented in

Financial Highlights, Financial Review, Risk and Financial Statements sections have been restated. For further details on our adoption of HKFRS 17,

see Note 1 'Basis of preparation and material accounting policies' on page 89 to 99 and Note 38 'Effects of adoption of HKFRS 17' on page 147 to

150.

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

the Banking Ordinance.

3 The group's ROTE is calculated as part of the Group ROTE framework and is based on IFRS financials.

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

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

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

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

The Hongkong and Shanghai Banking Corporation Limited

Incorporated in the Hong Kong SAR with limited liability

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

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

Financial Highlights | Report of the Directors

2 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Report of the Directors

Principal Activities

The group provides a comprehensive range of domestic and

international banking and related financial services, principally in the

Asia–Pacific region.

Asia Strategy

The Asia region has strong and sustained underlying fundamentals of

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

builds on 158 years of experience in the region. Our strategy is

aligned to the biggest opportunities to create further shareholder

value. Our ambition is to be the leading international wealth,

corporate and institutional bank across Asia. We are well positioned

to further extend the strengths of our leading Hong Kong franchise

into other key growth markets, including mainland China, India and

Southeast Asian markets. We have invested in our people and

technology. We aspire to grow our Asia Wealth business, and

strengthen our distinctive position as the leading international bank

for corporate and institutional clients across Asia. We remain focused

on connecting Asian markets to each other and the world through

HSBC’s global network, supporting the transition to a low-carbon

economy through sustainable finance solutions, improving customer

experience, while continually streamlining our organisation to realise

greater operating efficiencies through technology.

Consolidated Financial Statements

The consolidated financial statements of the group are set out on

pages 83 to 151.

Subordinated Liabilities, Share Capital and

Other Equity Instruments

Details on subordinated liabilities issued by the group are set out in

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

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

consolidated financial statements.

Dividends

The interim dividends paid in respect of 2023 are set out in Note 6 on

the consolidated financial statements.

Directors

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

Peter Tung Shun WONG, GBS, JP

Non-executive Chairman (since June 2021)

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

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

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

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

Indiana University, a Doctor of Laws, honoris causa, from the Hang Seng

University of Hong Kong and a Doctor of Business Administration,

honoris causa, from Lingnan University.

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

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

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

David Gordon ELDON, GBS, CBE, JP

Non-executive Deputy Chairman (since June 2021)

He holds an Honorary Doctor of Business Administration from City

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

Bankers and the Hong Kong Institute of Bankers.

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

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

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

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

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

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

Octopus Cards Client Funds Limited from 2016 to 2022.

David Yi Chien LIAO

Co-Chief Executive Officer (since June 2021)

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

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

and Bank of Communications Co., Ltd. He holds a Bachelor of Arts

(major in Japanese and Economics) from the University of London.

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

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

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

Limited.

Surendranath Ravi ROSHA

Co-Chief Executive Officer (since June 2021)

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

Holdings plc and an executive Director of HSBC Bank Malaysia Berhad.

He holds a Bachelor of Commerce from Sydenham College of

Commerce & Economics, Bombay University and a Master of Business

Administration from the Indian Institute of Management, Ahmedabad.

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

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

Financial Institutions Group, Asia-Pacific.

Paul Jeremy BROUGH

Independent non-executive Director (since June 2023)

He is also an independent non-executive Director of Guoco Group

Limited and Vitasoy International Holdings Limited. He holds a Bachelor

of Arts (Hons) in Business Studies from Nottingham Trent University,

and is an Associate of the Institute of Chartered Accountants in England

and Wales and the Hong Kong Institute of Certified Public Accountants.

He was previously an independent non-executive Director of Habib Bank

Zurich (Hong Kong) Limited from 2013 to February 2023. He worked at

KPMG Hong Kong for around 30 years and left the firm in 2012 as Senior

Regional Partner.

Edward Wai Sun CHENG, GBS, JP

Independent non-executive Director (since May 2023)

He is also Deputy Chairman and Chief Executive of Wing Tai Properties

Limited and Chairman of Lanson Place Hospitality Management Limited.

He holds a Bachelor of Arts (Economics and Politics) from Cornell

University, Ithaca, New York, and a Bachelor of Arts in Jurisprudence and

a Master of Arts from the University of Oxford. He is qualified as a

solicitor in England and Wales as well as in Hong Kong.

He was previously a non-executive Director of the Securities and Futures

Commission of Hong Kong, and an independent non-executive Director

of Standard Chartered Bank (Hong Kong) Limited. He was also the

former Chairman of the Urban Renewal Authority and the University

Grants Committee of Hong Kong.

Sonia Chi Man CHENG

Independent non-executive Director (since November 2020)

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

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

Group Limited, an executive Director of New World Development

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

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

Mathematics from Harvard University.

Yiu Kwan CHOI

Independent non-executive Director (since October 2017)

He holds a higher certificate in Accountancy from The Hong Kong

Polytechnic University and is a Fellow member of The Hong Kong

Institute of Bankers.

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

Company Limited from December 2016 to December 2022. He was

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

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

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

Monetary Policy and Reserves Management from June 2005 to August

2007 and held various senior positions in the HKMA including Executive

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

Banking Policy from 1993 to 2005.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 3

Andrea Lisa DELLA MATTEA

Independent non-executive Director (since March 2022)

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

She holds a Bachelor of Engineering and an Honorary Doctor of

Engineering from James Cook University of North Queensland, Australia.

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

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

Software Spectrum Inc from 1996 to 2006.

Pam KAUR

Non-executive Director (since November 2023)

She is also the Group Chief Risk and Compliance Officer and a member

of the Group Executive Committee of HSBC Holdings plc. She serves as

an independent non-executive Director of abrdn plc. She holds an MBA

in Finance, and a BCom (Hons) from Panjab University in India, and is a

Fellow member of The Institute of Chartered Accountants in England and

Wales.

She was previously an independent non-executive Director of Centrica

plc. She joined HSBC in April 2013 and has held the roles of Group Head

of Internal Audit and Head of Wholesale Market and Credit Risk. She

previously held senior leadership roles at Deutsche Bank, Royal Bank of

Scotland Group plc, Lloyds TSB and Citigroup.

Rajnish KUMAR

Independent non-executive Director (since August 2021)

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

executive Director and Chairman of Mastercard India Services Private

Limited, an independent Director of Larsen and Toubro Limited and

Brookprop Management Services Private Limited, an independent non-

executive Director of Hero MotoCorp Limited and Ambuja Cements

Limited, a Director of Lighthouse Communities Foundation, and

Chairman of Board of Governors of Management Development Institute

in India. He is also a senior adviser to EQT AB and an advisor to Think &

Learn Private Limited. He holds a Master of Science in Physics from

Meerut University and a Post Graduate Certificate in Business

Management from XLRI Jamshedpur in India. He is an Associate of the

Indian Institute of Bankers.

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

October 2020.

Beau Khoon Chen KUOK

Independent non-executive Director (since August 2020)

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

holds a Bachelor of Economics from Monash University. He was

previously Chairman and Chief Executive Officer of Shangri-La Asia

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

Director of Wilmar International Limited.

Irene Yun-lien LEE

Independent non-executive Director (since October 2013)

She is also executive Chairman of Hysan Development Company

Limited. She is also independent non-executive Chairman of Hang Seng

Bank Limited and an independent non-executive Director of Alibaba

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

History of Art from Smith College, Northampton, Massachusetts, USA.

She is also a member of the Honourable Society of Gray’s Inn, UK and a

Barrister-at-Law in England and Wales.

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

from 2015 to 2022.

Annabelle Yu LONG

Independent non-executive Director (since August 2022)

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

L.P. and a Group Management Committee Member of Bertelsmann SE

& Co. KGaA. She is an independent Director of Tapestry Inc.,

LexinFintech Holdings Ltd., Nio Inc. and Linmon Media Limited. She

holds a Master in Business Administration from Stanford Graduate

School of Business, United States and a Bachelor of Science in Electrical

Engineering from University of Electronic Science and Technology,

China.

Kevin Anthony WESTLEY, BBS

Independent non-executive Director (since September 2016)

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

Foundation Limited and a member of the investment committee of the

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

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

Institute of Chartered Accountants in England and Wales.

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

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

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

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

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

2016.

During the year, Edward Wai Sun Cheng and Paul Jeremy Brough

were appointed independent non-executive Directors with effect

from 19 May and 20 June 2023 respectively, and Pam Kaur was

appointed a non-executive Director with effect from 23 November

2023. Victor Tzar Kuoi Li retired as a Director with effect from 9May

2023, being the date of passing the written resolutions of the Bank’s

shareholder in lieu of holding the 2023 Annual General Meeting

('AGM'). Save for the above, all the Directors served throughout the

year.

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

(consolidated in the financial statements) during the period from

1January 2023 to the date of this report will be available on the

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

Secretary

Paul Stafford is the Corporation Secretary.

Permitted Indemnity Provision

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

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

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

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

Bank or an associated company of the Bank in connection with any

negligence, default, breach of duty or breach of trust in relation to the

Bank or associated company. In addition, the Bank’s ultimate holding

company, HSBC Holdings plc, has maintained directors’ and officers’

liability insurance providing appropriate cover for the directors and

officers within the Group, including the Directors of the Bank and its

subsidiaries.

Directors’ Interests in Transactions,

Arrangements or Contracts

Save as disclosed in Note 32 on the consolidated financial

statements, no transactions, arrangements or contracts that were

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

or his or her connected entities had, directly or indirectly, a material

interest were entered into by or subsisted with the Bank, its holding

companies, its subsidiaries or subsidiaries of its holding companies

during the year.

Directors’ Rights to Acquire Shares or

Debentures

To help align the interests of employees with shareholders, executive

Directors of the Bank are eligible to be granted conditional awards

over ordinary shares in HSBC Holdings plc by that company (being

the ultimate holding company) under the HSBC Share Plan 2011 and

the HSBC International Employee Share Purchase Plan.

Executive Directors of the Bank and HSBC Holdings plc are eligible to

receive an annual incentive award based on the outcome of the

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

annual performance scorecard. Annual incentive awards are normally

delivered in cash and/or shares, and these generally have a deferral

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

GBP500,000. The period over which annual incentive awards would

be deferred is determined in accordance with the requirements of the

Prudential Regulation Authority (‘PRA’) Remuneration Rules, i.e.

Report of the Directors

4 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

seven years for Senior Managers (individuals in PRA and Financial

Conduct Authority (‘FCA’) designated Senior Management Functions),

five years for Risk Managers, and four years for other Material Risk

Takers (‘MRTs’). From January 2017 onwards, all share awards

granted to MRTs are subject to a minimum retention period of one

year as opposed to six months previously. However, for certain

individuals whose variable pay awards will be deferred for at least five

years and who are not considered to be members of senior

management, their retention period may be kept at six months.

To incentivise sustainable long-term performance and alignment with

shareholder interests, Senior Management of Holdings plc including

the Co-Chief Executives of the Bank are eligible to receive Long-Term

Incentive ('LTI') Share Award. These awards which have been made

to executive Directors of Holdings plc are subject to three-year

forward-looking performance measures and a seven-year vesting

period with a one-year post-vesting retention period, which is not

accelerated on departure. The weighted average holding period of an

LTI award within HSBC is therefore six years, in excess of the five-

year holding period typically implemented by FTSE-listed companies.

When the individual ceases employment, if they are treated as a

good leaver under our policy, any LTI awards granted will continue to

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

of performance conditions. For more details on the operation of the

plan, please refer to HSBC Holdings plc annual report and accounts.

All unvested deferred awards made under the HSBC Share Plan 2011

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

reduction of unvested deferred awards. All paid or vested variable pay

awards made to identified staff and MRTs will be subject to clawback

for a period of seven years from the date of award. For Senior

Managers, this may be extended to 10 years in the event of an

ongoing internal or regulatory investigation at the end of the seven-

year period.

Executive Directors and other senior executives of HSBC Holdings

plc are subject to Group minimum shareholding requirements.

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

appointment to build up the recommended levels of shareholding.

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

MRTs including executive Directors in accordance with the PRA

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

Personal Account Dealing system that they have not entered into any

personal hedging strategies in relation to their holdings of HSBC

shares as part of the Global Personal Account Dealing Certification.

The HSBC International Employee Share Purchase Plan is an

employee share purchase plan offered to employees in Hong Kong

since 2013 and has been extended to further countries in the HSBC

Group. For every three shares in HSBC Holdings plc purchased by an

employee (‘Investment Shares’), a conditional award to acquire one

share is granted (‘Matching Shares’). The employee becomes entitled

to the Matching Shares subject to continued employment with HSBC

and retention of the Investment Shares until the third anniversary of

the start of the relevant plan year. HSBC Holdings Savings-Related

Share Option Plan (UK) is an all employee share plan under which

eligible employees may be granted options to acquire HSBC Holdings

ordinary shares. Employees may make monthly contributions, up to a

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

shares are exercisable within six months following either the third or

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

20% discount to the market value immediately preceding the date of

invitation.

During the year, Surendra Rosha and David Liao acquired or were

awarded shares of HSBC Holdings plc under the terms of the HSBC

Share Plan 2011. Pam Kaur was appointed to the Bank’s Board on

23November 2023 and the awards of shares of HSBC Holdings plc

during the year were in her capacity as an employee of HSBC Group

Management Services Ltd.

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

Bank, its holding companies, its subsidiaries or any fellow

subsidiaries a party to any arrangements to enable the Directors to

acquire benefits by means of the acquisition of shares in or

debentures of the Bank or any other body corporate.

Donations

Donations made by the group during the year amounted to HK$318m

(2022: HK$439m).

Compliance with the Banking (Disclosure)

Rules

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

2023 and Banking Disclosure Statements 2023 fully comply with the

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

Ordinance and the Financial Institutions (Resolution) (Loss-absorbing

Capacity Requirements – Banking Sector) Rules (‘LAC Rules’) made

under section 19(1) of the Financial Institutions (Resolution)

Ordinance ('FIRO').

Auditor

The consolidated financial statements have been audited by

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

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

Corporate Governance

The Bank is committed to high standards of corporate governance.

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

the HKMA Supervisory Policy Manual CG-1 ‘Corporate Governance of

Locally Incorporated Authorised Institutions’ ('SPM CG-1') except that

the membership of the Bank’s Nomination Committee does not

comprise a majority of independent non-executive Directors. The

Bank’s Nomination Committee currently comprises an equal number

of independent non-executive Directors and non-executive Directors.

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

accordance with the Group’s Subsidiary Accountability Framework

including its responsibility for overseeing the implementation of the

framework for all of its subsidiaries. The Subsidiary Accountability

Framework, which was refreshed in 2023, sets out high-level

principles to promote effective governance and improve

communications and connectivity between HSBC Holdings plc and its

subsidiaries.

Board of Directors

The Board, led by the Chairman, provides entrepreneurial leadership

of the Bank within a framework of prudent and effective controls

which enables risks to be assessed and managed. The Board is

collectively responsible for the long-term success of the Bank and

delivery of sustainable value to shareholders. The Board sets the

strategy and risk appetite for the group and approves capital and

operating plans presented by management for the achievement of

the strategic objectives it has set.

Directors

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

exercised in Board meetings where the Board acts collectively. As at

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

Chairman; the non-executive Deputy Chairman; two executive

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

executive Director; and ten independent non-executive Directors.

Independent non-executive Directors

Independent non-executive Directors do not participate in the daily

business management of the Bank. They bring an external

perspective, constructively challenge and help develop proposals on

strategy, scrutinise the performance of management in meeting

agreed goals and objectives, and monitor the risk profile and reporting

of performance of the Bank. The independent non-executive

Directors bring experience from a number of industries and business

sectors, including the leadership of large complex multinational

enterprises. The Board has determined that there are ten

independent non-executive Directors. In making this determination, it

was agreed that there are no relationships or circumstances likely to

affect the judgement of the independent non-executive Directors,

with any relationships or circumstances that could appear to do so

not considered to be material.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 5

Chairman and co-Chief Executive Officers

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

separate and held respectively by an experienced non-executive

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

clear division of responsibilities between leading the Board and the

executive responsibility for running the Bank’s business.

The Chairman provides leadership to the Board in promoting the

overall effectiveness of the Bank, in particular the development of

strategy and monitoring of the execution and delivery of Board

approved strategies and plans by the co-Chief Executive Officers and

management. The Chairman’s role includes promoting an open and

inclusive culture on the Board to facilitate open and critical discussion

and challenge. The Chairman's role also leads the Board in setting an

appropriate ‘tone from the top’ and in the oversight of the Bank’s

corporate culture. The Chairman also leads an annual evaluation of

the performance of the Board, its Committees and individual

Directors. The role also involves maintaining external relationships

with key stakeholders and communicating their views to the Board.

The co-Chief Executive Officers are individually and jointly responsible

for ensuring implementation of the strategy and policies as

established by the Board and the day-to-day running of operations.

The co-Chief Executive Officers are co-Chairmen of the Executive

Committee. The heads of Global Businesses and Global Functions

and country/territory Chief Executive Officers in Asia-Pacific report to

the co-Chief Executive Officers. For the purposes of section 74 of the

Banking Ordinance, David Liao (co-Chief Executive Officer) is the

Chief Executive, and Surendranath Rosha (co-Chief Executive

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

Haythorne (Chief Risk Officer, Asia-Pacific) and Ming Lau (Chief

Financial Officer, Asia-Pacific and Eastern Markets) are Alternate

Chief Executives.

Role profiles for the Chairman and co-Chief Executive Officers were

approved by the Board in May 2021.

Deputy Chairman

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

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

the exercise of his responsibilities. The Deputy Chairman also acts as

an intermediary for other non-executive Directors when necessary

and leads the non-executive directors in the annual performance

evaluation of the Chairman and in ensuring a clear division of

responsibility between the Chairman and co-Chief Executive Officers.

The role also involves maintaining external relationships with key

stakeholders and communicating their views to the Board.

The role profile for the Deputy Chairman was approved by the Board

in April 2021.

Board Committees

The Board has established various committees consisting of

Directors and senior management. The committees include the

Executive Committee, Audit Committee, Risk Committee,

Nomination Committee, Remuneration Committee and Chairman's

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

Chairman of each Board committee that includes independent non-

executive Directors report to each subsequent Board meeting on the

relevant committee’s proceedings.

The Board has also established an Asset, Liability and Capital

Management Committee and a Risk Management Meeting. The

Executive Committee has the delegated authority to approve any

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

Liability and Capital Management Committee and the Risk

Management Meeting.

The Board and each Board committee have terms of reference to

document their responsibilities and governance procedures. The key

roles of the Board committees are described in the paragraphs

below.

Executive Committee

The Executive Committee is responsible for the exercise of all of the

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

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

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

may from time to time determine, with power to sub-delegate. A

schedule of items that require the approval of the Board is

maintained.

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

Rosha, are co-Chairmen of the Committee. The current members of

the Committee are: Hitendra Dave (Chief Executive Officer, India);

Philip Fellowes (Chief of Staff, Asia-Pacific); Darren Furnarello (Chief

Compliance Officer, Asia-Pacific); Matthew Ginsburg (Global Co-Head

of Capital Financing and Investment Banking Coverage); David

Grimme (Chief Operating Officer, Asia-Pacific); Martin Haythorne

(Chief Risk Officer, Asia-Pacific); Gregory Hingston (Chief Executive

Officer, HSBC Global Insurance and Partnerships); Ming Lau (Chief

Financial Officer, Asia-Pacific and Eastern Markets); Luanne Lim

(Chief Executive Officer, Hong Kong); Christina Ma (Head of Global

Banking, Asia-Pacific); Amanda Murphy (Head of Commercial

Banking, South and Southeast Asia); Susan Sayers (Regional General

Counsel, Asia-Pacific); Antony Shaw (Chief Executive Officer,

Australia); Omar Siddiq (Chief Executive Officer, Malaysia); Monish

Tahilramani (Head of Markets & Securities Services, Asia-Pacific);

David Thomas (Head of Human Resources, Asia-Pacific); Mark Wang

(President and Chief Executive Officer, China); Kee Joo Wong (Chief

Executive Officer, Singapore) and Kai Zhang (Head of Wealth and

Personal Banking, South Asia). Paul Stafford (Corporation Secretary)

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

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

Communications, Asia-Pacific) and Fred Xue (Senior Assistant

Regional Company Secretary, Asia-Pacific). The Committee met ten

times in 2023. In between Committee meetings, there were periodic

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

members to discuss urgent or important matters and to support

effective communication.

Asset, Liability and Capital Management

Committee

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

chaired by the Chief Financial Officer. It is an advisory committee to

provide recommendations and advice to support the Chief Financial

Officer's individual accountability for the efficient management of the

Bank’s assets, liabilities and capital within the constraints of risk

appetite, regulatory and other limits set for liquidity and funding,

capital, and key balance sheet risks such as interest rate risk, non-

traded banking book foreign exchange risk and equity risk. The

Committee also has responsibilities for the review of the Bank's

recovery and resolution planning activities, and the oversight and

escalation of treasury sustainability related matters in support of the

Group’s sustainability objectives.

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

Pacific and Eastern Markets), David Liao and Surendranath Rosha (co-

Chief Executive Officers), Martin Haythorne (Chief Risk Officer, Asia-

Pacific), the Regional Treasurer, Asia-Pacific, the Regional Head of

Liquidity, Asia-Pacific, the Regional Head of Capital Management,

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

Head of Interest Rate Risk in the Banking Book, Asia-Pacific, the

Regional Head of Traded and Treasury Risk Management, Asia-Pacific

and other senior executives of the Bank most of whom are members

of the Executive Committee. The Committee met ten times in 2023.

Risk Management Meeting

The Risk Management Meeting is chaired by the Chief Risk Officer. It

is a formal governance forum established to support the Chief Risk

Officer’s individual accountability for the oversight of enterprise risk

and provide recommendations and advice to the Chief Risk Officer on

enterprise-wide management of all risks, including key policies and

frameworks for the management of risk within the Bank. The Risk

Management Meeting consists of Martin Haythorne (Chief Risk

Officer, Asia-Pacific), David Liao and Surendranath Rosha (co-Chief

Report of the Directors

6 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Executive Officers), the Head of Global Internal Audit, Asia-Pacific,

the Chief Executive Officer of Hang Seng Bank Limited, the Head of

Wholesale Credit and Market Risk, Asia-Pacific and other senior

executives of the Bank most of whom are members of the Executive

Committee. The Risk Management Meeting met six times in 2023.

Audit Committee

The Audit Committee has non-executive responsibility for oversight

of and advice to the Board on matters relating to financial reporting

and internal financial controls. The current members of the

Committee are Kevin Westley (Chairman of the Committee), Paul

Brough, Yiu Kwan Choi, David Eldon, Rajnish Kumar and Irene Lee.

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

are independent non-executive Directors. The Committee met four

times in 2023.

The Audit Committee monitors the integrity of the consolidated

financial statements, banking disclosure statements, and disclosures

relating to financial performance, the effectiveness of the internal

audit function and the external audit process, and the effectiveness

of internal financial control systems. The Committee reviews the

adequacy of resources and expertise as well as succession planning

for the finance function. It reviews, and considers changes to, the

Bank’s accounting policies. The Committee advises the Board on the

appointment, re-appointment, or removal of the external auditor and

reviews and monitors the external auditor’s independence and

objectivity. The Committee reviews matters escalated for its

attention by subsidiaries’ audit committees and receives minutes of

meetings of the ALCO.

Risk Committee

The Risk Committee has non-executive responsibility for oversight of

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

and its subsidiaries, including risk governance and internal control

systems (other than internal controls over financial reporting). The

current members of the Committee are Yiu Kwan Choi (Chairman of

the Committee), Paul Brough, Edward Cheng, Sonia Cheng, David

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

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

are independent non-executive Directors. The Committee met four

times in 2023.

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

identification, assessment, monitoring and management of risk or

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

requires and encourages a strong risk culture which shapes the

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

the Group’s risk management framework which provides a clear

policy of risk ownership and accountability of all staff for identifying,

assessing and managing risks within the scope of their assigned

responsibilities. This personal accountability, reinforced by clear and

consistent employee communication on risk that sets the tone from

senior leadership, the governance structure, mandatory learning and

remuneration policy, helps to foster a disciplined and constructive

culture of risk management and control throughout the group.

The Board and the Risk Committee oversee the maintenance and

development of a strong risk management framework by continually

monitoring the risk environment, top and emerging risks facing the

group and mitigating actions planned and taken. The Risk Committee

reviews certain Group risk management policies and procedures at

least annually and advises the Board if these are appropriate for the

circumstances of the Bank. It also reviews local risk management

policies at least annually, and approves or recommends any changes

to the Board for approval.

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

statement twice a year and recommends any proposed changes to

the Board for approval. The Committee reviews management’s

assessment of risk against the risk appetite statement and provides

scrutiny of management’s proposed mitigating actions. The

Committee monitors the risk profiles for all of the risk categories

within the group’s business. The Committee also monitors the

effectiveness of the Bank’s risk management and internal controls

other than those over financial reporting. Regular reports from the

Risk Management Meeting are also presented at each Risk

Committee meeting to report on the ongoing monitoring, assessment

and management of the risk environment and the effectiveness of

the risk management framework. The Committee reviews matters

escalated for its attention by subsidiaries’ risk committees and

receives minutes of meetings of the Risk Management Meeting.

Nomination Committee

The Nomination Committee is responsible for leading the process for

Board appointments and for identifying and approving, or nominating

for the approval of the Board, candidates for appointment to the

Board and certain senior management roles. Appointments to the

Board and certain senior management roles are subject to the

approval of the HKMA. The Committee considers plans for orderly

succession to the Board and the appropriate balance of skills,

knowledge and experience on the Board, and undertakes an annual

review of the time commitment and any potential conflicts of

interests of each Director. The Committee also reviews the board

succession plans of certain subsidiaries of the Bank and considers

and endorses appointments to boards of directors of specified

subsidiaries.

The current members of the Committee are Beau Kuok (Chairman of

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

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

Kevin Westley are independent non-executive Directors and Peter

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

met five times in 2023.

A rigorous selection process, overseen by the Nomination Committee

and based upon agreed requirements using an external search

consultancy when appropriate, is followed in relation to the

appointment of non-executive Directors. Before recommending an

appointment of a Director to the Board, the Committee evaluates the

Board composition including the balance of skills, knowledge and

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

In identifying suitable Board candidates, the Committee considers

candidates’ backgrounds, knowledge and experience to promote

diversity of views, and takes into account the required time

commitment and any potential conflicts of interest.

Chairman’s Committee

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

accordance with authority delegated by the Board from time to time

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

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

determine and can implement previously agreed strategic decisions

by the full Board, approve specified matters subject to their prior

review by the full Board, and act exceptionally on urgent matters

within its terms of reference.

The current members of the Committee comprise the Chairman of

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

Officers and the Chairmen of the Audit and Risk Committees. The

Committee met two times in 2023.

Remuneration Committee

The Group Remuneration Committee is responsible for setting the

principles, parameters and governance framework for the Group‘s

Remuneration Strategy applicable to all Group employees, which is

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

responsible for the oversight of matters related to remuneration

impacting the Bank and its subsidiaries, in particular, overseeing the

implementation and operation of the Group’s Remuneration Strategy

and satisfying itself that the remuneration framework complies with

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

business strategy, culture and values, and long-term interests of the

Bank; and is appropriate to attract, retain and motivate employees to

support the success of the Bank. The current members of the

Committee, all being independent non-executive Directors, are Irene

Lee (Chairman of the Committee), Beau Kuok, Edward Cheng and

Sonia Cheng.

The Committee met six times in 2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 7

The following is a summary of the Committee's key activities during

2023:

Details of the Committee’s key activities

Senior Management

– Reviewed and approved senior management's remuneration and pay

proposals

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

Executive and Executive Committee members of the Bank

All employees

– Approved 2022/2023 performance year pay review matters

– Reviewed remuneration framework effectiveness

– Received updates on notable events and regulatory and corporate

governance matters

– Reviewed and approved 2023 Material Risk Taker (‘MRT’)

identification approaches and outcomes

– Received updates and approval of reward and benefit changes to

address regulatory updates and to enhance the employee values

proposition in the markets we operate

– Approved 2023 remuneration related regulatory submissions

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

Chief Executive of Hang Seng Bank Limited, Executive Committee

members, Alternate Chief Executives and Managers as registered with

HKMA.

Remuneration Strategy

Our performance and pay framework is underpinned by our Group’s

Remuneration Strategy and Principles, to which it is reviewed

periodically and refreshed in 2023 with a wider employee proposition

centered on our purpose and values.

The refreshed principles and supporting commitments articulate the

experience for employees and provide a clear framework to create a

dynamic culture where the best talent are motivated to deliver high

performance.

– We will reward you responsibly through fixed pay security and

protection through core benefits, a competitive total

compensation opportunity, and pay equity with a more inclusive

and sustainable benefits proposition over time.

– We will recognise your success through our performance culture

and routines, including feedback and recognition, pay for

performance, and all employee share ownership opportunities.

– We will support you to grow through our proposition beyond pay,

with a focus on future skills and development, your mental,

physical, social and financial well-being, and flexibility in working

practices.

Our aim is to use the framework to deliver an exceptional colleague

experience – strengthening our ability to attract, retain and motivate

the people we need in competitive labour markets, in the context of

evolving employee expectations.

During 2023 we have undertaken significant design work to review

our performance approach and pay structures to simplify, improve

transparency, and foster an environment focused on growth, learning

and motivating colleagues to perform at their best. This will be

implemented from 2024.

In addition to performance and pay, work is underway to drive

improvements to our proposition beyond pay, aligned to the

principles of our reward strategy, building on our strong benefits and

well-being programme, including flexible working, and more inclusive

and sustainable benefits.

More details of the Bank’s remuneration strategy are contained

within the Annual Report and Accounts 2023 of HSBC Holdings plc.

The Bank as an Authorised Institution under the Banking Ordinance is

required by HKMA Supervisory Policy Manual CG-5 'Guideline on a

Sound Remuneration System' (the Guideline) to assess whether their

existing remuneration systems and policy are in line with the

principles in the Guideline, independently of management and at least

annually. The annual review for 2022 was commissioned externally to

Deloitte LLP and the results were approved by the Remuneration

Committee in April 2023. The review confirmed that the Bank’s

remuneration strategy as adopted from the Group is consistent with

the principles set out in the Guideline.

Recovery and Resolution Planning

The group is subject to recovery and resolution requirements in many

of the jurisdictions in which it operates. In Hong Kong, the Banking

Ordinance and Financial Institutions (Resolution) Ordinance sets out

requirements for recovery and resolution planning.

Recovery

The group maintains recovery plans designed to outline credible

management actions that could be implemented in the event of

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

and sustainable condition. The Bank typically submits a recovery plan

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

other host regulators where local requirements are in place. The

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

and internal feedback, including through regular stress testing and

‘fire drill’ tests.

Resolution

In general terms, resolution refers to the exercise of statutory powers

where a financial institution and/or its parent or other group company

is deemed by its regulators to be failing, or likely to fail and it is not

reasonably likely that recovery action could be taken that would result

in the institution recovering.

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

group of locally regulated operating banks, the preferred resolution

strategy for the HSBC Group, as confirmed by its regulators, is a

multiple point of entry (‘MPE’) bail-in strategy. This provides flexibility

for HSBC to be resolved either (i) through a bail-in at the HSBC

Holdings level, which enables the recapitalisation of operating bank

subsidiaries in the HSBC Group (as required) while restructuring

actions are undertaken, with the HSBC Group remaining together; or

(ii) at a local subsidiary level pursuant to the application of statutory

resolution powers by local resolution authorities.

The group is part of the HSBC Group-wide Resolvability Assessment

Framework (‘RAF’) implementation along with continued bilateral

engagement with the HKMA and the other principal Asian regulators

in addressing any identified impediments to resolvability of the group,

ensuring resolvability capabilities being developed are in line with the

local requirements and regulatory expectations. The group has put in

place capabilities to enhance the bank’s resolvability, taking into

account the various components of the resolution standards as they

come into effect.

In July 2019, the Bank of England ('BoE') and PRA published final

policies on the RAF which places the onus on firms to demonstrate

their own resolvability. HSBC Group, including the group, was

required to have capabilities as of 1January 2022 to achieve the

resolvability outcomes: (i) have adequate resources in resolution; (ii)

be able to continue business through resolution and restructuring;

and (iii) be able to co-ordinate its resolution and communicate

effectively with stakeholders. The RAF requires HSBC to prepare a

report on the HSBC Group's assessment of its resolvability, which

must be submitted to the BoE on a biennial basis. HSBC Group

submitted its first such report to the BoE in October 2021 and the

second report in October 2023. In June 2024, HSBC will make its

second public disclosure on its resolvability, which will summarise

the key findings from the second RAF Self-assessment. Regular

engagement with the BoE and PRA continues as HSBC prepares for

the public disclosure of the second RAF cycle. HSBC continues to

engage with the BoE, PRA, HKMA and its global regulators in other

jurisdictions to ensure that it meets current and future recovery and

resolution requirements.

Report of the Directors

8 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Business Review

The Bank is exempt from the requirement to prepare a business

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

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

On behalf of the Board

Peter Wong, Chairman

21 February 2024

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 9

Task Force on Climate-related Financial Disclosures (unaudited)

The Group continues to work to incorporate environmental, social and

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

embed sustainability into the way the Group operates.

Approach to climate reporting

The information set out in this Task Force on Climate-related Financial

Disclosures ('TCFD'), taken together with other information relating to

climate issues included in the Annual Report and Accounts 2023,

provides key climate information and data relevant to the group’s

operations for the year ended 31 December 2023. The data is

compiled for the financial year 1 January to 31December 2023

unless otherwise specified. Measurement techniques and

calculations are explained next to data tables where necessary.

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

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

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

2021. The group has made disclosures consistent with the TCFD

Recommendations and Recommended Disclosures, issued in July

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

and Accounts save for certain items which are described on pages 14

to 18. Further details have been included in this section and the Risk

Review section on pages 66 to 69. TCFD disclosures are highlighted

with the following symbol: TCFD.

Understanding HSBC's climate reporting

The availability of high quality climate-related data, transparent

reporting standards and consistent methodology will play a vital role

in helping deliver the wholesale economic transformation required to

limit global warming to 1.5°C at the speed and scale it is needed. The

group understands that its existing data, systems, controls and

processes require enhancements to drive effective change, but the

group recognises the necessity to balance this with providing early

transparency on climate disclosures.

The group acknowledges that to achieve the Group's climate

ambition the group needs to be transparent on the opportunities,

challenges, related risks it faces and progress it makes. The group's

reporting must evolve to keep pace with market developments and

the group will aim to work through challenges where possible and

seek to improve consistency across different markets. The role of

standard setters and regulators will be important in achieving

standardisation. The Group has highlighted some of the limitations

and challenges that the organisation, and the wider industry, currently

face with regard to climate reporting. For details, see the Group's

Annual Report and Accounts.

In addition, there is a heightened need for subject matter experts for

climate related topics as well as upskilling of key colleague groups

who are supporting customers through their net zero transition. The

group also needs new sources of data, some of which may be

difficult to assure using traditional verification techniques. Given this

industry challenge, coupled with diverse external data sources and

structures, this further complicates data consolidation.

The group continues to invest in its climate resources and skills, and

to develop its business management processes to integrate climate

impacts. The group's activities are underpinned by efforts to develop

its data and analytics capabilities and to help ensure that it has the

appropriate processes, systems, controls and governance in place to

support the group's transition.

In 2024, the group will continue to review its approach to disclosures,

and enhance as appropriate.

How climate is governed TCFD

The Board takes overall responsibility for climate governance

including approval for the climate strategy and the oversight of

executive management in developing the approach, execution, risk

management and associated reporting. The group’s developments in

relation to its strategies was reviewed through Board discussions at

five meetings in 2023. In addition, Board members received training

on the Group's net zero ambition on its own operations, the Group's

financed emissions and decarbonisation solutions, as part of their

ongoing development. The 2023 annual incentive scorecards of the

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

members include outcomes linked to realisation of different ESG

metrics such as customer satisfaction, employee sentiment, carbon

reduction of the group's own operations and sustainable finance

measures. Management has engaged with the Board throughout

2023 on the key climate issues, such as climate strategy, client

transition engagement and climate risk management.

Given the wide-ranging remit of climate matters, governance

activities are managed through a combination of specialist

governance infrastructure and regular meetings and committees,

where appropriate. These include the Board level committees - the

Risk Committee, the Audit Committee, the Executive Committee, the

Risk Management Meeting; the executive level committees,

including the Sustainability Committee, the Environmental Risk

Oversight Forum and the Disclosure and Controls Committee. The

Risk Committee reviews the effectiveness of the group’s conduct

framework, which is designed to deliver fair outcomes for customers,

and to preserve the orderly and transparent operation of financial

markets. The Risk Committee also oversees and advises the Board

on risk-related matters, including both financial and non-financial risks.

In addition, the Executive Committee reviews the annual financial

plan for sustainable finance and on a quarterly basis an ESG

dashboard including key metrics such as sustainable finance and own

operations emissions.

The group Sustainability Committee is a governance forum

established by the group to support the Group’s climate ambition.

The group Sustainability Committee, chaired by the Co-CEOs of Asia-

Pacific, oversees the group’s contribution to the Group’s net zero

transition plan. This includes overseeing delivery across Asia-Pacific

of the Group’s climate ambition and commitments, including

supporting clients and customers with sustainable finance, and

partnering with organizations and governments in the region. The

group Environmental Risk Oversight Forum is a sub-committee of the

Risk Management Meeting, established to provide oversight of all

risk activities relating to the group’s approach to environmental risk

management. The Disclosure and Controls Committee is to support

the group in discharging its obligations under applicable legislation

and regulations relating to external disclosure obligations.

Transition to net zero TCFD

The Group aims to be net zero by 2050 and is working to achieve a

1.5°C aligned phase-down of its financed emissions from its portfolio.

The Paris Agreement aims to limit the rise in global temperatures to

well below 2°C, preferably to 1.5°C, compared with pre-industrial

levels.

The Group’s history means its balance sheet is weighted towards the

sectors and regions which matter the most in terms of emissions,

and whose transitions are therefore key to the world’s ability to reach

net zero on time. There will be a complex transition, with markets

and sectors at different starting points and moving at different

speeds. However, it also provides the Group with an opportunity to

work with its customers to help make an impact – in both the

emissions challenge and the financing challenge. The Group’s ability

to transition relies on decarbonisation in the real economy happening

at the necessary pace. It means the Group’s customers and the

industries and markets it serves will need to transition effectively,

supported by strong government policies and regulation, and

substantially scaled investment. Engagement and collaboration are

therefore key to how the Group responds.

Explaining scope 1, 2 and 3 emissions

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

group follows the Greenhouse Gas Protocol global framework, which

identifies three scopes of emissions. Scope 1 represents the direct

emissions the group creates. Scope 2 represents the indirect

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

business. Scope 3 represents indirect emissions attributed to

upstream and downstream activities taking place to provide services

to customers. The group’s upstream activities include business travel

and emissions from its supply chain including transport, distribution

and waste. The group’s downstream activities include those related

to investments and financed emissions.

Task Force on Climate-related Financial Disclosures

10 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

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

categories. The group provides reporting emissions data in relation to

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

relation to the group’s greenhouse gas emissions is set out on page

12.

Our approach to the transition TCFD

The Group’s net zero transition plan

The Group’s first net zero transition plan, published in January 2024,

provides an overview of the Group’s approach to net zero and the

actions it is taking to help meet its ambition. It sets out how the

Group intends to use its strength as an organisation to help deliver a

broader impact on decarbonisation, how it is working to embed net

zero across key areas of the organisation, and the principles that it

aims to use to guide the implementation of its approach.

The Group's net zero strengths

The Group aims to rebalance the capital deployment towards

achieving net zero over the coming decades. The Group believes this

can be done best by promoting change in three key areas that play to

its strengths as an organisation: transitioning industry; catalysing the

new economy; and decarbonising trade and supply chains.

The Group's implementation plan

The Group is working to embed net zero across the organisation. This

includes embedding net zero into: the way it supports its customers,

both through customer engagement and the provision of financing

solutions; the way that it operates as an organisation, including risk

management, policies, governance and own operations; and how the

Group partners externally in support of systemic change. It also

means focusing first on the sectors and customers with the highest

emissions and transition risks, and evolving and expanding the

Group's efforts over time.

The Group's net zero principles

In implementing its approach to net zero, the Group aims to be

guided by a set of principles which are aligned with its core values:

science-based, transparent and accountable; integrating nature; and

just and inclusive.

For details, see the Group's Net Zero Transition Plan 2024 at

www.hsbc.com/who-we-are/our-climate-strategy/our-net-zero-

transition-plan.

Supporting our customers TCFD

The Group recognises that it has an important role to play in

supporting the transition to a net zero global economy.

As a global organisation with presence in the regions and sectors

where most significant change is needed, the Group is well placed to

help transition industry and catalyse the new economy to reach net

zero.

The Group aims to help its customers transition to net zero and a

sustainable future by providing and facilitating between $750bn and

$1tn of sustainable finance and investment by 2030. In 2023, the

group continued to support its customers through products, services,

and partnerships help enable emissions reduction in the real

economy:

– increased funding to a sustainable finance scheme to support

businesses of all sizes to transition to low-carbon operations in

China’s Greater Bay Area to US$9bn. Successful loan applicants

are entitled to a range of additional services including training,

subsidised third-party assessments and assistance from a team

with sustainable financing expertise.

– launched electric vehicles loans in India.

– The Group continued to support the FAST-Infra Initiative, which

the Group helped conceive, working with the International Finance

Corporation ('IFC'), Organisation for Economic Co-operation and

Development ('OECD'), the World Bank’s Global Infrastructure

Facility and the Climate Policy Initiative, under the auspices of the

One Planet Lab. In 2023 the initiative invited pilot photovoltaic and

wind power projects located around the world to apply for the

provisional FAST-Infra Label.

– Label applicants included a solar photovoltaic project submitted by

Pentagreen Capital, the Group’s sustainable infrastructure debt

financing partnership with Temasek, a global investment company

owned by the Government of Singapore. The project sponsor was

Citicore Solar Energy Corporation, a subsidiary of the Philippines-

focus renewable energy developer and operator Citicore

Renewable Energy Corporation.

The group continued to be a participant in the Just Energy Transition

Partnerships (‘JETPs’) in Indonesia and Vietnam, aiming to play a

catalytic role in mobilising finance to accelerate the energy transition.

In 2023, the Group won three awards at the Environmental Finance

Bond Awards. It also retained the Euromoney award for Best Bank

for Sustainable Finance in Asia for the sixth year in a row. HSBC also

won the global award for Best Bank for Public Sector Clients for

innovation in sustainability and tokenised public-sector bonds.

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

below, with detailed definitions available in the Group’s Sustainable

Finance and Investment Data Dictionary 2023 (see www.hsbc.com/

who-we-are/esg-and-responsible-business/esg-reporting-centre).

Continued progress towards achieving the Group’s sustainable

finance and investment ambition is dependent on market demand for

the products and services set out in the Group’s Sustainable Finance

and Investment Data Dictionary 2023.

Sustainable finance metrics, taxonomies and best practices lack

global consistency. As standards develop over time and as the

regulatory guidance around them evolves across jurisdictions, the

Group's methodologies, disclosures and targets may need to evolve.

This could lead to differences in year-on-year reporting and

restatements.

The group continues to engage with standard setters in different

markets to support the development of transparent and consistent

taxonomies to best incentivise science-based decarbonisation,

particularly in high transition risk sectors. The group aims to align to

enhanced industry standards as they are further developed, and

increase transparency across the different types of green and

sustainable finance and investment categories going forward.

Sustainable finance summary

2023 2022

HK$m HK$m

Balance sheet-related transactions provided 168,464 126,845

Capital markets/advisory (facilitated) 55,048 45,301

ESG and sustainable investing (net new flows)

(250) —

Total contribution 223,262 172,146

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

Sustainable Finance and Investment Data Dictionary 2023, which

includes green, social and sustainability activities. The amounts

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

related transactions provided, the proportional share of facilitated

capital markets/advisory activities and the net new flows of sustainable

investments within assets under management.

2 In 2023, the group included the net new flow numbers in the reporting

for the first time. The net total for 2023 was an outflow.

Working with customers

The Group's ambition to become a net zero bank includes an aim to

align its financed emissions to net zero by 2050 or sooner. The Group

has set combined on-balance sheet financed emissions and facilitated

emissions targets for two emissions-intensive sectors: oil and gas,

and power and utilities. It also continued to report on-balance sheet

financed emissions and targets for cement, iron, steel and aluminium,

aviation, automotive and in 2023 it added thermal coal mining

financed emissions. Financed emissions link the financing the Group

provides to its customers and their activities in the real economy, and

provides an indication of the associated greenhouse gas emissions.

For details on the Group’s approach to financed emissions including

methodology and exclusions, see the Group's Financed Emissions

and Thermal Coal Exposures Methodology. In 2023, the Group

continued its efforts to design and implement a differentiated

approach to understand and assess the transition plans and risks of

its corporate customers. These assessments help the group to

identify opportunities, manage climate risks and define areas to drive

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 11

strategic engagement with each corporate customer. The group is

still at the start of rolling out this process across its corporate

customers. To complete these assessments, the group has gathered

the client’s transition plan data and completed an assessment. Once

completed, these assessments can be used to support business

decisions in relation to the Group’s financed emissions portfolio

management and alignment, and the Group’s climate risk

management efforts. In 2023, the Group has completed assessments

for most customers in scope of HSBC’s thermal coal phase-out

policy. The Group has also completed assessments for customers

that make the most material contribution to its financed emissions in

the oil and gas, and power and utilities sectors.

Embedding net zero into the way we operate TCFD

Net zero in our own operations

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

zero carbon emissions in its operations and supply chain by 2030.

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

remove. The Group plans to first focus on reducing carbon emissions

from consumption, and then subsequently replace remaining

emissions with low-carbon alternatives in line with the Paris

Agreement. The Group plans to remove the remaining emissions that

cannot be reduced or replaced by procuring, in accordance with

prevailing regulatory requirements, high-quality offsets at a later

stage.

In October 2020, the Group announced its ambition to reduce energy

consumption by 50% by 2030 against a 2019 baseline. The Group

continues to work to do this by optimising the use of the Group’s real

estate portfolio, and strategically reducing office space. The Group is

adopting new technologies and emerging products to make its

spaces more energy efficient.

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

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

opportunities to procure green electricity in each of its markets. A key

challenge remains the limited opportunity to pursue power purchase

agreements or green tariffs in key markets due to regulations. For

details of the Group’s renewable electricity procured, see the Group's

ESG Data Pack.

Business travel

The Group's ambition is to halve travel emissions by 2030, compared

with pre-pandemic levels. Emissions from business travel, and from

the use of HSBC owned/leased cars, increased compared to 2022,

due to the easing of pandemic-related travel restrictions which has

resulted in a return to travel. The Group is closely managing the

gradual resumption of travel through internal reporting and review of

emissions, internal carbon budgets and the introduction of emissions

information at the point of booking. With hybrid working embedded

across the organisation, the use of virtual working practices has

reduced the need for our colleagues to travel to meet with other

colleagues and customers.

The group reports its emissions following the Greenhouse Gas

Protocol, which incorporates the scope 2 market-based emissions

methodology. The group reports greenhouse gas emissions resulting

from the energy used in its buildings and employees’ business travel.

Due to the nature of the group's primary business, carbon dioxide is

the main type of greenhouse gas applicable to its operations. While

the amount is immaterial, the group's current reporting also

incorporates methane and nitrous oxide for completeness. The

environmental data for the group’s own operations is based on a 12-

month period to 30 September each year.

In 2023, the group collected data on energy use and business travel

for its own operations in 17 markets across the region, which

accounted for approximately 98% of its full-time equivalent

employees ('FTEs').

Greenhouse gas emissions in tonnes CO

1,2

2023 2022

Scope 1 - direct 1,204 915

Scope 2 - indirect 103,272 104,162

Scope 3 - indirect (upstream activities - business travel) 31,990 11,120

Total 136,466 116,197

Greenhouse gas emissions in tonnes CO

e per FTE 2.29 2.16

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

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

been included due to the data collection challenges.

2 CO

e refers to carbon dioxide equivalent.

Engaging with supply chain

The Group's supply chain is critical to achieving its net zero

ambitions, and the Group is partnering with its suppliers on this

journey. Since 2020, the Group has been encouraging its largest

suppliers to make their own carbon commitments, and to disclose

their emissions via the CDP (formerly Carbon Disclosure Project)

supply chain programme. The Group will continue to engage with its

supply chain through CDP, and through direct discussions with its

suppliers on how they can further support the Group’s transition to

net zero.

Task Force on Climate-related Financial Disclosures

12 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Managing climate risk and scenario analysis TCFD

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

arise as a result of climate change and the move to a net zero

economy. The group manages climate risk across all its businesses

and is incorporating climate considerations within its traditional risk

types in line with the Group-wide risk management framework. The

group’s material exposure to climate risk relates to its business with

its wholesale and retail customers financing activity within its banking

portfolio. The group is also exposed to climate risk in relation to asset

ownership by its insurance and asset management businesses.

The table below sets out the group's duties to its stakeholders in the

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

to climate risk, see 'Environmental, social and governance risk' on

page 30 and 'Climate risk' on page 66.

Banking

The group manages the climate risk in its banking

portfolios through its risk appetite and policies for

financial and non-financial risks.

Asset management

Climate risk management is a key feature of HSBC

Asset Management's investment decision making

and portfolio management approach.

Insurance

The group’s insurance operations consider climate

risk in their portfolio of assets.

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Climate Risk

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This helps enable the group to identify

opportunities to support its customers, while

continuing to meet stakeholder expectations.

HSBC Asset Management also engages with

companies on topics related to climate change.

HSBC Life has established an evolving ESG

programme to meet changing external

expectations and customer demands.

Banking

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

customers managing their own climate risk through financing. For its

wholesale customers, the group uses the Group's transition

engagement questionnaire to understand clients' climate strategies

and risks. The Group has set out a suite of policies to guide the

management of climate risk. The group continues to develop its

climate risk appetite and metrics to help manage climate exposures

in its wholesale and retail portfolios. The group also develops and

uses climate scenario analysis to gain insights on the long-term

effects of transition and physical risks across its wholesale and retail

banking portfolios. For further details, see page 13.

Asset management

The Group recognises that climate risk may manifest as transition and

physical risks over the short, medium and long term. The impact of

climate-related risk will vary depending on characteristics such as

asset class, sector, business model and geography. Where applicable

and relevant, HSBC Asset Management incorporates climate-related

indicators, such as carbon intensity and management of carbon

emissions, into investment decisions as well as insights from its

climate-related engagement.

HSBC Asset Management continues to integrate ESG and climate

analysis into its actively managed product offerings to help ensure

the climate risks faced by companies are considered when making

investment decisions and to assess ESG risks and opportunities that

could impact investment performance.

HSBC Asset Management also engages with investee companies on

a priority list as defined in its global stewardship plan and votes at

company general meetings, including on the topic of climate change.

It also works with collaborative engagement initiatives such as

Climate Action 100+ and Nature Action 100.

Insurance

In 2023, the Group’s insurance business updated its sustainability

procedures to align with the Group’s updated energy and thermal

coal phase-out policies. The Group’s insurance business also

delivered ESG product marketing guidelines with insurance examples

and training.

Insights from climate scenario analysis TCFD

Introduction

Scenario analysis supports the group’s strategy by assessing its

potential exposures to risks and vulnerabilities under a range of

climate scenarios. It helps to build the group’s awareness of climate

change, plan for the future and meet growing regulatory

requirements.

In climate scenario analysis, the group considers, jointly, both

physical risks and transition risks. The group analyses how these

climate risks impact principal risk types within the organisation,

including credit and traded market risks, non-financial risks, and

pension risk.

Our climate scenarios

In 2023, the Group enhanced its internal climate scenario analysis

('ICSA') exercise by focusing efforts on generating more granular

insights for key sectors and regions to support core decision making

processes and to respond to regulatory requirements.

Group created its internal scenarios using external publicly available

climate scenarios as a reference, including those produced by the

Network for Greening the Financial System, the Intergovernmental

Panel on Climate Change and the International Energy Agency. Using

these external scenarios as a template, the Group adapted them by

incorporating its unique climate risks and vulnerabilities to which the

organisation and customers across different business sectors and

regions are exposed.

The Group’s scenarios were:

– the Net Zero scenario, which is consistent with the Paris

Agreement. This assumes that there will be orderly but

considerable climate action, limiting global warming to no more

than 1.5°C by 2100, when compared with pre-industrial levels;

– the Current Commitments scenario, which assumes that climate

action is limited to current governmental committed policies,

including already implemented actions, leading to global

temperature rises of 2.4°C by 2100. This slow transition scenario

helps the Group to determine the actions it needs to take to reach

its net zero ambition while operating in a world that is not net

zero;

– the Delayed Transition Risk scenario, which assumes that climate

action is delayed until 2030 with a late disorderly transition to net

zero but stringent and rapid enough to limit global warming to

under 2°C by 2100. This scenario allows the Group to stress test

severe but plausible transition risk impacts;

– the Downside Physical Risk scenario, which assumes climate

action is limited to currently implemented governmental policies,

leading to extreme global warming with global temperatures

increasing by greater than 4°C by 2100. This scenario allows the

Group to assess physical risks associated with climate change;

and

– the Near Term scenario, which assumes both a sharp increase in

policies that drive a disorderly transition towards net zero and a

sharp increase in extreme climate events over a five-year period

until 2027. This scenario focused on the Group’s business in Asia.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 13

The Near Term scenario

Designed to meet the HKMA regulatory requirements, the Near Term

scenario allowed the group to explore the combined impacts of a

disorderly transition towards net zero and extreme acute events

occurring simultaneously.

The exercise allowed the group to understand the extent to which a

stressed scenario exhibiting both high physical and transition risks in

the near term could immediately impact group’s customers across all

its sectors.

In addition to the Near Term scenario analysis mandated by the

HKMA, the group also conducted a regulatory climate stress test for

the Financial Supervisory Commission in Taiwan in 2023.

Our methodology

The models incorporate a range of climate-specific metrics that will

have an impact on its customers, including expected production

volumes, revenue, costs and capital expenditure. These results feed

into the calculation of group’s risk-weighted assets and expected

credit loss (‘ECL’) projections. For group’s real estate portfolio

models, these focus on physical risk factors, including property

locations, perils and insurance coverage when assessing the overall

credit risk impact to the portfolio. The results were reviewed by

group’s sector specialists who, subject to its governance procedures,

make bespoke adjustments to the results based on their expert

judgement when relevant.

There are industry-wide limitations, particularly on data availability,

however, group’s models are designed to produce outputs that can

support group’s assessment of the level of its climate resilience.

How climate change is impacting our portfolios

Within group’s wholesale lending portfolio, customers in higher

emitting sectors continue to be most exposed to larger climate-

related losses. However, their level of exposure to transition risk is

influenced by geographical location given the varied pace of

regulatory changes globally. Overall, continuing from the 2022

disclosure, group’s commercial real estate and retail mortgage

portfolios remain resilient to climate risk. This is also evident in Hong

Kong, a region which also contains material physical risk exposures

due to the impacts from tropical cyclone winds and to a lesser extent

coastal inundation. The impact on prospective credit losses remains

low due to stringent building standards and existing measures in

place against flooding and storm surges.

Use of climate scenario analysis outputs

Climate scenario analysis plays a crucial role helping the Group to

identify and understand the impact of climate-related risks and

potential opportunities as the Group navigates the transition to net

zero.

Scenario analysis results have also been used to support the Group’s

internal capital adequacy assessment process ('ICAAP'). This is an

internal assessment of the capital the Group needs to hold to meet

the risks identified on a current and projected basis, including climate

risk.

From a financial planning perspective, internal climate scenario

analysis results are used to assess whether additional short-term

climate-specific ECL are required within the Group’s financial plan.

TCFD index table TCFD

The table below sets out the 11 TCFD recommendations and

summarises where additional information can be found.

Where the group has not included climate-related financial

disclosures consistent with all the TCFD recommendations and

recommended disclosures, the reasons for non-disclosure and steps

being undertaken are set out accordingly. The group will continue to

develop and refine its reporting and disclosures on climate matters in

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

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

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

performs an assessment to ascertain the appropriate level of detail to

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

Accounts. The assessment takes into account factors such as the

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

opportunities, the scope and objectives of its climate-related strategy,

transitional challenges, and the nature, size and complexity of its

business.

Recommendation Response

Disclosure

location

Governance

a) Describe the Board’s oversight of climate-related risks and opportunities

Process, frequency and training The Board takes overall responsibility for climate governance including approval for the climate strategy

and the oversight of executive management in developing the approach, execution, risk management

and associated reporting. The group’s developments in relation to its strategies was reviewed through

Board discussions at five meetings in 2023.

Board members received training on the Group's net zero ambition on its own operations, the Group's

financed emissions and decarbonisation solutions, as part of their ongoing development.

Page 10

Sub-committee accountability,

processes and frequency

Given the wide-ranging remit of climate matters, governance activities are managed through a

combination of specialist governance infrastructure and regular meetings and committees, where

appropriate. These include the Board level committees - the Risk Committee, the Audit Committee, the

Executive Committee, the Risk Management Meeting; the executive level committees, including the

Sustainability Committee, the Environmental Risk Oversight Forum and the Disclosure and Controls

Committee.

The Risk Committee reviews the effectiveness of the group’s conduct framework, which is designed to

deliver fair outcomes for customers, and to preserve the orderly and transparent operation of financial

markets. The Risk Committee also oversees and advises the Board on risk-related matters, including

both financial and non-financial risks.

The Executive Committee reviews the annual financial plan for sustainable finance and on a quarterly

basis an ESG dashboard including key metrics such as sustainable finance and own operations

emissions.

Page 10

Examples of the Board and

relevant Board committees

taking climate into account

The 2023 annual incentive scorecards of the Co-CEOs of Asia-Pacific and most of the Executive

Committee members include outcomes linked to realisation of different ESG metrics such as customer

satisfaction, employee sentiment, carbon reduction of the group's own operations and sustainable

finance measures.

Page 10

Task Force on Climate-related Financial Disclosures

14 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

TCFD index table TCFD (continued)

Recommendation Response

Disclosure

location

b) Describe management’s role in assessing and managing climate-related risks and opportunities

Who manages climate-related

risks and opportunities

The group Sustainability Committee, chaired by the Co-CEOs of Asia-Pacific, oversees the group’s

contribution to the Group’s net zero transition plan. This includes overseeing delivery across Asia-Pacific

of the Group’s climate ambition and commitments, including supporting clients and customers with

sustainable finance, and partnering with organizations and governments in the region.

The group Environmental Risk Oversight Forum is a sub-committee of the Risk Management Meeting,

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

risk management.

Page 10

How management reports to

the Board

Management has engaged with the Board throughout 2023 on the key climate issues, such as climate

strategy, client transition engagement and climate risk management.

Page 10

Processes used to inform

management

The Executive Committee reviews the annual financial plan for sustainable finance and on a quarterly

basis an ESG dashboard including key metrics such as sustainable finance and own operations

emissions.

Page 10

Strategy

a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term

Processes used to determine

material risks and opportunities

Scenario analysis supports the group’s strategy by assessing its potential exposures to risks and

vulnerabilities under a range of climate scenarios. It helps to build the group’s awareness of climate

change, plan for the future and meet growing regulatory requirements.

In climate scenario analysis, the group considers, jointly, both physical risks and transition risks. The

group analyses how these climate risks impact principal risk types within the organisation, including

credit and traded market risks, non-financial risks, and pension risk.

In 2023, the Group continued its efforts to design and implement a differentiated approach to

understand and assess the transition plans and risks of its corporate customers. These assessments

help the group to identify opportunities, manage climate risks and define areas to drive strategic

engagement with each corporate customer.

The group's relationship managers engage with their key wholesale clients through a transition and

physical risk questionnaire and recently introduced an updated questionnaire, the transition engagement

questionnaire. The questionnaire is used to gather information and assess the alignment of the

wholesale customers' business models to net zero and their exposure to physical and transition risk.

The Group’s retail credit risk management policy requires each mortgage market to conduct an annual

review of their climate risk management procedures, including perils and data sources, to ensure they

remain fit for purpose. In 2023, the Group introduced a global 'soft trigger' monitoring and review

process for physical risk exposure where a market reaches or exceeds a set threshold, as this ensures

markets are actively considering their balance sheet risk exposure to peril events.

The group participates in the Group’s ICSA exercise. In 2023, the Group completed a detailed climate

risk assessment for the retail mortgage portfolio in Australia, Hong Kong and mainland China.

Page 13

Page 11

Page 68

Relevant short, medium, and

long term time horizons

The Group aims to help its customers transition to net zero and a sustainable future by providing and

facilitating between $750bn and $1tn of sustainable finance and investment by 2030.

The group aligns with the Group’s definition of short, medium, and long term time horizon: short-term,

medium-term and long-term periods. The Group defines short-term as time periods up to 2025;

medium-term as between 2026 and 2035, and long-term as between 2036 and 2050.

The group participates in the Group’s wider ICSA exercise, which is used as a risk assessment tool to

provide insights on both the short and long-term effects of transition and physical risks across the

Group’s wholesale and retail banking portfolios, as well as the Group’s own operations. For details, see

the Group’s Annual Report and Accounts.

Page 11

Page 67

Transition or physical climate-

related issues identified

For transition risk, the group has metrics in place to monitor the exposure of its wholesale corporate

lending portfolio to six high transition risk sectors.

Within the group’s mortgage portfolios, properties or areas with potentially heightened physical risk are

identified and assessed locally, and potential exposure is managed through quarterly metrics. In

addition, the group has set risk appetite metrics in four key markets in the region namely Australia,

Hong Kong, mainland China and Singapore.

In 2023, the Group continued its efforts to design and implement a differentiated approach to

understand and assess the transition plans and risks of its corporate customers.

Page 68

Page 11

Risks and opportunities by

sector and/or geography

For retail mortgage portfolio, the group has set risk appetite metrics in four key markets in the region

namely Australia, Hong Kong, mainland China and Singapore.

The Group aims to help its customers transition to net zero and a sustainable future by providing and

facilitating between $750bn and $1tn of sustainable finance and investment by 2030. For a detailed

breakdown of the Group’s sustainable finance progress, see its ESG Data Pack.

The group does not currently fully disclose the impacts of transition and physical risk quantitatively by

sector/geography. The group is aiming to develop the appropriate systems, data and processes to

provide these disclosures in future years.

Page 68

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 15

TCFD index table TCFD (continued)

Recommendation Response

Disclosure

location

Concentrations of credit

exposure to carbon-related

assets (supplemental guidance

for banks)

For transition risk, the group has metrics in place to monitor the exposure of its wholesale corporate

lending portfolio to six high transition risk sectors. These are automotive, chemicals, construction and

building materials, metals and mining, oil and gas, and power and utilities. The group internally reports

its exposure to the six high transition risk sectors in the wholesale portfolio, and will further enhance its

disclosure as more data becomes available.

At Group level, as part of its 2023 ICSA, the Group completed a detailed climate risk assessment for the

retail mortgage portfolio in Australia, Hong Kong and mainland China. For details of the exposure to

flooding, see the Group’s Annual Report and Accounts.

Page 68

Climate-related risks in lending

and other financial intermediary

business activities

(supplemental guidance for

banks)

The group’s material exposure to climate risk relates to its business with its wholesale and retail

customers financing activity within its banking portfolio. The group is also exposed to climate risk in

relation to asset ownership by its insurance and asset management businesses.

Page 13

b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial

planning

Impact on strategy, business,

and financial planning

The Group’s first net zero transition plan, published in January 2024, provides an overview of the

Group’s approach to net zero and the actions it is taking to help meet its ambition. It sets out how the

Group intends to use its strength as an organisation to help deliver a broader impact on decarbonisation,

how it is working to embed net zero across key areas of the organisation, and the principles that it aims

to use to guide the implementation of its approach. For details, see the Group's Net Zero Transition Plan

2024.

Within group’s wholesale lending portfolio, customers in higher emitting sectors continue to be most

exposed to larger climate-related losses.

The Group does not fully disclose impacts from climate-related opportunities on financial planning and

performance including on revenue, costs and the balance sheet, quantitative scenario analysis, detailed

climate risk exposures for all sectors and geographies or physical risk metrics. This is due to transitional

challenges in relation to data limitations, although nascent work is ongoing in these areas. The Group

expects these data limitations to be addressed in the medium term as more reliable data becomes

available and technology solutions are implemented.

The group does not currently fully disclose the impacts of climate-related issues on financial planning,

and particularly the impact of climate-related issues on its financial performance (for example, revenues

and costs) and financial position (for example, assets and liabilities) or access to capital, in each case

due to lack of data and systems for compiling the relevant financial impacts. In 2023, the group

incorporated certain aspects of sustainable finance and financed emissions within its financial planning

process. This will be further enhanced as more data becomes available.

Page 11

Page 14

Impact on products and

services

The Group aims to help its customers transition to net zero and a sustainable future by providing and

facilitating between US$750bn and US$1tn of sustainable finance and investment by 2030.

Page 11

Impact on supply chain and/or

value chain

Since 2020, the Group has been encouraging its largest suppliers to make their own carbon

commitments, and to disclose their emissions via the CDP (formerly Carbon Disclosure Project) supply

chain programme. The Group will continue to engage with its supply chain through CDP, and through

direct discussions with its suppliers on how they can further support the Group’s transition to net zero.

The Group aims to rebalance the capital deployment towards achieving net zero over the coming

decades. The Group believes this can be done best by promoting change in three key areas that play to

its strengths as an organisation: transitioning industry; catalysing the new economy; and decarbonising

trade and supply chains.

Page 12

Page 11

Impact on operations Enterprise Risk Management function is responsible for overseeing the identification and assessment

of physical and transition climate risks that may impact on the organisation's operational and resilience

capabilities.

The Group has three elements to its strategy: reduce, replace and remove. The Group plans to first

focus on reducing carbon emissions from consumption, and then subsequently replace remaining

emissions with low-carbon alternatives in line with the Paris Agreement. The Group plans to remove the

remaining emissions that cannot be reduced or replaced by procuring, in accordance with prevailing

regulatory requirements, high-quality offsets at a later stage.

Page 69

Page 12

Impact on adaptation and

mitigation activities

In October 2020, the Group announced its ambition to reduce energy consumption by 50% by 2030

against a 2019 baseline. The Group continues to work to do this by optimising the use of the Group’s

real estate portfolio, and strategically reducing office space. The Group is adopting new technologies

and emerging products to make its spaces more energy efficient.

Page 12

Impact on investment in

research and development

Throughout 2023, the Group published regular ESG and sustainability-related market insights and

regular updates to help clients better understand the implications for their investments, such as

#WhyESGMatters, Learning about ESG and sustainability insights.

Impact on acquisitions and

divestments

The Group has updated its merger and acquisition process to consider potential climate and

sustainability-related targets, net zero transition plans and climate strategy, and how this relates to

HSBC.

Impact on access to capital The Group considered the impact of climate-related issues on its businesses, strategy, and financial

planning. The Group’s access to capital may be impacted by reputational concerns as a result of climate

action or inaction. If the Group is perceived to mislead stakeholders on its business activities or if the

Group fail to achieve its stated net zero ambitions, the Group could face reputational damage, impacting

its revenue generating ability and potentially its access to capital markets. This will be further enhanced

as more data becomes available.

Task Force on Climate-related Financial Disclosures

16 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

TCFD index table TCFD (continued)

Recommendation Response

Disclosure

location

Transition plan to a low-carbon

economy

The Group’s first net zero transition plan, published in January 2024, provides an overview of the

Group’s approach to net zero and the actions it is taking to help meet its ambition.

Page 11

c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower

scenario

Embedding climate into

scenario analysis

In 2023, the Group enhanced its ICSA exercise by focusing efforts on generating more granular insights

for key sectors and regions to support core decision making processes and to respond to regulatory

requirements.

Page 13

Key drivers of performance and

how these have been taken

into account

In climate scenario analysis, the group considers, jointly, both physical risks and transition risks. The

group analyses how these climate risks impact principal risk types within the organisation, including

credit and traded market risks, non-financial risks, and pension risk.

Page 13

Scenarios used and how they

factored in government policies

Group created its internal scenarios using external publicly available climate scenarios as a reference,

including those produced by the Network for Greening the Financial System, the Intergovernmental

Panel on Climate Change and the International Energy Agency. Using these external scenarios as a

template, the Group adapted them by incorporating its unique climate risks and vulnerabilities to which

the organisation and customers across different business sectors and regions are exposed.

Page 13

How our strategies may

change and adapt

Climate scenario analysis plays a crucial role helping the Group to identify and understand the

impact of climate-related risks and potential opportunities as the Group navigates the transition to

net zero.

Page 14

Risk management

a) Describe the organisation’s processes for identifying and assessing climate-related risks

Process The Group’s climate risk approach aims to effectively manage the material climate risks that could

impact the Group operations, financial performance, stability and reputation.

Scenario analysis results have also been used to support the Group’s internal capital adequacy

assessment process ('ICAAP'). This is an internal assessment of the capital the Group needs to hold to

meet the risks identified on a current and projected basis, including climate risk.

From a financial planning perspective, internal climate scenario analysis results are used to assess

whether additional short-term climate-specific ECL are required within the Group’s financial plan.

Page 66

Page 14

Integration into policies and

procedures

The Group is integrating climate risk into policies, processes and controls across many areas of its

organisation, and the Group will continue to update these as its climate risk management capabilities

mature over time.

Page 67

Consider climate-related risks

in traditional banking industry

risk categories (supplementary

guidance for banks)

The group provides further details of how it has embedded the management of climate risk across key

risk types, including wholesale credit risk, retail credit risk, treasury risk, traded risk, reputational risk,

regulatory compliance risk, resilience risk and model risk.

Page 68

b) Describe the organisation’s processes for managing climate-related risks

Process and how we make

decisions

The group is following a materiality based approach in developing its climate risk capabilities across its

businesses by prioritising sectors, portfolios and counterparties with the highest impacts.

The group Risk Management Meeting and the group Risk Committee receive regular updates on its

climate risk profile and progress of its climate risk programme.

Page 66

Page 67

c) Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s

overall risk management framework

How we have aligned and

integrated our approach

The Group’s climate risk approach is aligned to the Group-wide risk management framework and three

lines of defence model.

Page 66

How we take into account

interconnections between

entities, functions

The Group’s climate risk approach is aligned to the Group-wide risk management framework and three

lines of defence model, which sets out how the group identifies, assesses and manages its risks.

Page 66

Metrics and targets

a) Disclose the metrics used by the organisation to assess climate-related risk and opportunities in line with its strategy and

risk management process

Metrics used to assess the

impact of climate-related risks

on our loan portfolio

For transition risk, the group has metrics in place to monitor the exposure of its wholesale corporate

lending portfolio to six high transition risk sectors.

The group Risk Management Meeting and the group Risk Committee receive regular updates on its

climate risk profile and progress of its climate risk programme.

Page 68

Page 67

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 17

TCFD index table TCFD (continued)

Recommendation Response

Disclosure

location

Metrics used to assess

progress against opportunities

The Group tracks its net zero progress using multiple metrics, tailoring methodologies to the specific

measures. The group contributes to the Group’s other ambitions such as land use, waste management,

energy consumption and percentage of renewable electricity sourced. For details of the Group’s

ambitions, please see the Group’s Annual Report and Accounts and ESG Data Pack.

The Group aims to help its customers transition to net zero and a sustainable future by providing and

facilitating between US$750bn and US$1tn of sustainable finance and investment by 2030.

The group does not currently fully disclose the proportion of revenue or proportion of assets, capital

deployment or other business activities aligned with climate-related opportunities, including revenue

from products and services, forward-looking metrics consistent with its business or strategic planning

time horizons. In relation to sustainable finance revenue and assets, the Group is disclosing certain

elements. The group expects climate related metrics to be further integrated into financial planning and

forecasting as data and system limitations are addressed.

The group does not currently fully disclose the impacts of climate-related issues on financial planning,

and particularly the impact of climate-related issues on its financial performance (for example, revenues

and costs) and financial position (for example, assets and liabilities) or access to capital, in each case

due to lack of data and systems for compiling the relevant financial impacts. In 2023, the group

incorporated certain aspects of sustainable finance and financed emissions within its financial planning

process. This will be further enhanced as more data becomes available.

Page 11

Board or senior management

incentives

The 2023 annual incentive scorecards of the Co-CEOs of Asia-Pacific and most of the Executive

Committee members include outcomes linked to realisation of different ESG metrics such as customer

satisfaction, employee sentiment, carbon reduction of the group's own operations and sustainable

finance measures.

Page 10

Internal carbon price The Group does not currently disclose internal carbon prices due to transitional challenges such as data

challenges. But the Group considered carbon prices as an input for its climate scenario analysis

exercise. The Group expects to further enhance the disclosure in the medium term.

Metrics used to assess the

impact of climate risk on

lending and financial

intermediary business

(supplemental guidance for

banks)

The group does not fully disclose metrics used to assess the impact of climate-related physical (acute,

chronic) and transitions (policy and legal, technology, market, reputational) risks on retail lending,

wholesale lending and other financial intermediary business activities (specifically credit exposure,

equity and debt holdings, or trading positions, each broken down by industry, geography, credit quality,

average tenor). This is due to data and system limitations which the group is working to address.

b) Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas emissions and the related risks

Our own operations The group reported its scope 1, 2 and part of scope 3 greenhouse gas emissions resulting from the

energy used in its buildings and employees’ business travel. At Group level, it disclosed scope 3 supply

chain emissions.

Page 12

GHG emissions for lending and

financial intermediary business

(supplemental guidance for

Banks)

In relation to financed emissions, the Group publishes on-balance sheet financed emissions for a

number of sectors. The Group also publishes facilitated emissions for oil and gas and power and utilities

sectors. Future disclosure on financed emissions, and related risks is reliant on the Group’s customers

publicly disclosing their carbon emissions and related risks. The Group recognises the need to providing

transparency on climate disclosures but seek to balance this with the recognition that existing data and

reporting processes require significant enhancements.

The Group's approach to disclosure of financed emissions can be found at www.hsbc.com/who-we-are/

esg-and-responsible-business/esg-reporting-centre.

c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against

targets

Details of targets set and

whether they are absolute or

intensity based

The Group's ambition is to achieve net zero financed emissions by 2050, and has set interim 2030

targets for on-balance sheet financed or combined on balance sheet financed and facilitated emissions

for certain sectors.

The Group aims to help its customers transition to net zero and a sustainable future by providing and

facilitating between US$750bn and US$1tn of sustainable finance and investment by 2030.

Part of the Group’s ambition to be a net zero bank is to achieve net zero carbon emissions in its

operations and supply chain by 2030.

The group does not currently disclose its targets used to measure and manage physical and transition

risk, capital deployment, or climate-related opportunities due to transitional challenges and such as data

and system limitations which the group is working to address.

The group does not currently disclose internal carbon pricing target due to transitional challenges such

as developing the appropriate systems and processes, but the group considered carbon prices as an

input for its climate scenario analysis exercise. The group expects to further enhance the disclosure in

the medium term as more data becomes available.

Taking into account the nature of its business, the group does not consider water usage to be a material

target for its business and, therefore, the group has not included a target in this year’s disclosure.

Page 11

Page 12

Task Force on Climate-related Financial Disclosures

18 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Financial Review

Changes to presentation from 1January 2023

(Unaudited)

HKFRS 17 ‘Insurance Contracts’

On 1 January 2023, the group adopted HKFRS 17 ‘Insurance Contracts’. As required by the standard, the group applied the requirements

retrospectively with comparative data previously published under HKFRS 4 ‘Insurance Contracts’ restated from the 1 January 2022 transition

date. Under HKFRS 17 there is no present value of in-force long-term insurance business (‘PVIF’) asset recognised up front. Instead the

measurement of the insurance contract liability takes into account fulfilment cash flows and a contractual service margin (‘CSM’) representing

the unearned profit. In contrast to the group’s previous HKFRS 4 accounting where profits are recognised up front, under HKFRS 17 they are

deferred and systematically recognised in revenue as services are provided over the life of the contract. The CSM also includes attributable

cost, which had previously been expensed as incurred and which is now incorporated within the insurance liability measurement and

recognised over the life of the contract.

In conjunction with the implementation of HKFRS 17, the group has made use of the option to re-designate to fair value through profit or loss

assets that were previously held at amortised cost totalling HK$429,016m, and assets previously held at fair value through other

comprehensive income totalling HK$6,366m. The re-designation of amortised cost assets generated a net increase to assets of HK$38,072m

because the new fair value measurement on transition was higher than the previous amortised cost carrying amount.

The impact of the transition was a reduction of HK$4,889m on the group’s full-year 2022 reported revenue and a reduction of HK$924m on the

full-year 2022 reported profit before tax. The group’s total equity reduced by HK$75.4bn to HK$848.1bn on the transition at 1 January 2022. For

further details, see Note 1 'Basis of preparation and material accounting policies' and Note 38 ‘Effects of adoption of HKFRS 17’.

Results for 2023

(Unaudited)

Profit before tax for 2023 reported by The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries (together ‘the

group’) increased by HK$24,756m, or 26%, to HK$121,443m.

Consolidated income statement by reportable segments

(Audited)

Wealth and

Personal

Banking

Commercial

Banking

2,3

Global

Banking

Markets

and

Securities

Services

Corporate

Centre

Other

(GBM-

other)

Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Year ended 31 Dec 2023

Net interest income/(expense) 79,737 60,964 24,299 6,411 (42,064) 1,433 130,780

Net fee income/(expense) 19,426 10,664 5,038 2,652 270 (7) 38,043

Net income from financial instruments measured at fair

value through profit or loss

54,190 4,604 164 23,888 40,432 376 123,654

Gains less losses from financial investments (1,978) (1,102) — — — (711) (3,791)

Insurance finance expense (48,798) — — — — — (48,798)

Insurance service result 6,589 — — — (31) — 6,558

Other operating income/(expense) 526 107 467 1,693 1,366 (926) 3,233

Net operating income/(expense) before change in

expected credit losses and other credit impairment

charges

109,692 75,237 29,968 34,644 (27) 165 249,679

– of which: external 60,744 80,293 40,051 66,318 (19,895) 22,168 249,679

inter-segment 48,948 (5,056) (10,083) (31,674) 19,868 (22,003) —

Change in expected credit losses and other credit

impairment charges

(2,113) (9,378) (1,360) (26) 2 32 (12,843)

Net operating income/(expense) 107,579 65,859 28,608 34,618 (25) 197 236,836

Operating expenses (50,664) (22,205) (10,825) (15,653) (8,382) (2,264) (109,993)

Operating profit/(loss) 56,915 43,654 17,783 18,965 (8,407) (2,067) 126,843

Share of profit in associates and joint ventures 390 — — — 18,165 — 18,555

Impairment of interest in associate

— — — — (23,955) — (23,955)

Profit/(loss) before tax 57,305 43,654 17,783 18,965 (14,197) (2,067) 121,443

Balance sheet data at 31 Dec 2023

Loans and advances to customers (net) 1,567,893 1,154,648 791,061 37,366 1,178 4,930 3,557,076

Customer accounts 3,618,894 1,685,876 740,881 209,511 30 5,859 6,261,051

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 19

Consolidated income statement by reportable segments

(continued)

Wealth and

Personal

Banking

Commercial

Banking

2,3

Global

Banking

Markets

and

Securities

Services

Corporate

Centre

Other

(GBM-

other)

Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Year ended 31 Dec 2022

Net interest income/(expense) 55,686 41,723 18,703 4,370 (12,617) 2,013 109,878

Net fee income/(expense) 19,506 10,081 5,086 3,701 247 (56) 38,565

Net income/(expense) from financial instruments measured

at fair value through profit or loss

(91,905) 3,918 (110) 22,372 11,079 345 (54,301)

Gains less losses from financial investments (29) 64 — — — 17 52

Insurance finance income 97,167 — — — 20 — 97,187

Insurance service result 4,977 — — — — — 4,977

Other operating income/(expense) 2,649 155 369 1,208 315 (251) 4,445

Net operating income/(expense) before change in expected

credit losses and other credit impairment charges

88,051 55,941 24,048 31,651 (956) 2,068 200,803

– of which: external

72,095 58,981 26,413 40,870 (8,896) 11,340 200,803

inter-segment 15,956 (3,040) (2,365) (9,219) 7,940 (9,272) —

Change in expected credit losses and other credit

impairment charges

(1,337) (11,947) (3,070) 22 1 (39) (16,370)

Net operating income/(expense) 86,714 43,994 20,978 31,673 (955) 2,029 184,433

Operating expenses (48,978) (20,711) (10,513) (13,897) (9,607) (2,832) (106,538)

Operating profit/(loss) 37,736 23,283 10,465 17,776 (10,562) (803) 77,895

Share of profit in associates and joint ventures 140 — — — 18,652 — 18,792

Impairment of interest in associate — — — — — — —

Profit/(loss) before tax 37,876 23,283 10,465 17,776 8,090 (803) 96,687

Balance sheet data at 31 Dec 2022

Loans and advances to customers (net) 1,526,965 1,231,590 880,581 40,563 1,403 13,966 3,695,068

Customer accounts 3,443,694 1,665,463 805,600 195,775 11 3,166 6,113,709

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

2 From 1 January 2023, all balances within in the scope of HKFRS 17 of Hong Kong insurance manufacturing entities distributed by Commercial

Banking ('CMB') are reported under Wealth and Personal Banking ('WPB'). Comparative data have been re-presented accordingly.

3 From 1 January 2023, we have transferred our portfolio of Global Banking ('GB') customers within Australia and Indonesia from GB to CMB for

reporting purposes. Comparative data have not been re-presented.

4 Includes inter-segment elimination.

5 Mainly comprises other business activities which are jointly managed by GB and Markets and Securities Services ('MSS').

Financial Review

(Unaudited)

The commentary in this financial review compares the group's

financial performance for the year ended 31 December 2023 with the

year ended 31 December 2022. On 1 January 2023, the group

adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4

'Insurance Contracts'. Financial performance for the year ended

31December 2022 has been restated.

Results Commentary

(Unaudited)

The group reported profit before tax of HK$121,443m, an increase of

HK$24,756m, or 26%. Net operating income before change in

expected credit losses and other credit impairment charges increased

by HK$48,876m, or 24%, primarily driven by higher net income from

financial instruments held for trading or managed on a fair value basis

and higher net interest income. The results include a charge relating

to an impairment in interest in associate of HK$23,955m, relating to

the Bank of Communications Co., Ltd (‘BoCom’).

Net interest income increased by HK$20,902m, or 19%. Excluding

the unfavourable foreign exchange impact, net interest income

increased by HK$22,332m, or 21%, driven by a 27 basis point (‘bp’)

improvement in net interest margin and higher average interest-

earning assets. In Hong Kong, net interest margin improved from

higher customer deposit spreads and higher reinvestment yields as

market interest rates increased. Net interest income in Malaysia,

India and Singapore also increased, reflecting the favourable impact

from higher interest rates.

Net fee income decreased by HK$522m, or 1%. Excluding the

unfavourable foreign exchange impact, net fee income decreased by

HK$86m, mainly in Hong Kong, as securities brokerage income fell

due to lower equities turnover in the broader market and lower funds

under management income. These were largely offset by an increase

in unit trust income as client activities recovered, and higher net card

services income in Hong Kong, in line with a recovery in retail sales.

Net income from financial instruments measured at fair value

through profit or loss increased by HK$177,955m, or 328%.

Net income from assets and liabilities of insurance businesses,

including related derivatives, measured at fair value through profit or

loss increased by HK$143,873m, or 152% primarily in Hong Kong and

Singapore reflecting fair value gains on financial assets measured at

fair value through profit or loss which back insurance and investment

contracts. An offsetting impact related to the associated insurance

liabilities is reported in ‘Insurance finance income/(expense)’.

Net income from financial instruments held for trading or managed on

a fair value basis increased by HK$33,159m, or 80%, most notably in

Hong Kong due to higher gains on derivatives trading benefiting from

rising interest rates and favourable foreign exchange movements.

There was also an increase in Singapore from dealing profits on

treasury bills and debt securities.

Gains less losses from financial investments decreased by

HK$3,843m driven by the loss on disposal of treasury bonds in Hong

Kong, of which HK$3,695m was transferred from financial assets at

fair value through other comprehensive income (‘FVOCI’) reserve.

Insurance finance income/(expense) decreased by HK$145,985m,

or 150%, reflecting the extent to which the investment income

earned on underlying assets supporting insurance contracts is shared

with the policyholders.

Insurance service result increased by HK$1,581m, or 32% reflecting

an increase to the release of CSM of HK$1,363m as a result of a

Financial Review

20 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

higher closing CSM balance driven by an increase in new business

written during the year, updates to actuarial assumptions, as well as

the impact of interest rates on the CSM duration profile. A reduction

in losses from onerous contracts also contributed to the increase.

Other operating income decreased by HK$1,212m, or 27%, and

includes a HK$2,043m loss from updates to valuation estimates,

partly offset by gains from reinsurance contracts in Hong Kong.

Change in expected credit losses and other credit impairment

charges decreased by HK$3,527m, or 22%. The reduction was

concentrated in CMB and GB, mainly reflecting reduced charges in

respect of the mainland China commercial real estate (‘CRE’) portfolio

booked in Hong Kong.

Total operating expenses increased by HK$3,455m, or 3%.

Excluding the favourable foreign exchange impact, operating

expenses increased by HK$4,530m, or 4%, primarily reflecting our

continued investment in technology and people to support business

growth, which were partly offset by lower third party related costs.

Share of profit in associates and joint ventures decreased by

HK$237m, or 1%. Excluding the unfavourable foreign exchange

impact, the share of profit in associates and joint ventures increased

by HK$726m, or 4%, primarily from BoCom's reported profit growth.

Impairment of interest in associate of HK$23,955m (nil in 2022)

related to BoCom. Further details can be found in Note 14 ‘Interests

in associates and joint ventures’.

Analysis by country / territory

(Unaudited)

Profit before tax by country/territory

2023 2022

HK$m HK$m

Hong Kong 78,765 42,349

Mainland China

1,800 25,392

India 9,003 7,186

Singapore 8,474 5,854

Australia 4,431 3,503

Malaysia 3,560 2,898

Taiwan 2,788 1,572

Indonesia 1,626 1,303

Other 10,996 6,630

Total 121,443 96,687

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

2 The 2023 balance includes an impairment of HK$24.0bn (2022: nil) on the group's investment in BoCom.

Net interest income

(Unaudited)

2023 2022

HK$m HK$m

Net interest income 130,780 109,878

Average interest-earning assets 7,220,536 7,123,129

Net interest spread 1.64 1.47

Contribution from net free funds 0.17 0.07

Net interest margin 1.81 1.54

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Net interest income (‘NII’) increased by HK$20,902m, or 19%.

Excluding the unfavourable foreign exchange impact, net interest

income increased by HK$22,332m, or 21%, driven by a 27 bp

improvement in net interest margin and higher average interest-

earning assets. In Hong Kong, net interest margin improved from

higher customer deposit spreads and higher reinvestment yields as

market interest rates increased. Net interest income in Malaysia,

India and Singapore also increased, reflecting the favourable impact

from higher interest rates.

Average interest-earning assets increased by HK$97bn, or 1%,

driven by Hong Kong from growth in financial investments. To a

lesser extent, average interest-earning assets in Singapore and

Australia also increased.

Net interest margin ('NIM') increased by 27 bps, with increases

noted across the region with higher market interest rates compared

to the prior year. As a result, the NIM at the Bank's operations in

Hong Kong increased by 13 bps to 1.22%, and at Hang Seng Bank,

the NIM increased by 55bps to 2.30%.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 21

Insurance manufacturing

(Unaudited)

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

Results of insurance manufacturing operations

2023 2022

HK$m HK$m

Insurance manufacturing operations

Net interest income 545 727

Net fee income/(expense) 171 93

Other income 6,715 6,930

Insurance service result 6,870 5,157

– release of contractual service margin 6,831 5,507

– risk adjustment release 180 197

– experience variance and other 9 370

– gain/(loss) from onerous contracts (150) (917)

Net investment returns (excluding net interest income) (473) 394

– insurance finance income/(expense) (48,802) 97,187

– other investment income/(expense) 48,329 (96,793)

Other operating income 318 1,379

Net operating income before change in expected credit losses and other credit impairment charges 7,431 7,750

Change in expected credit losses and other credit impairment charges 19 (42)

Net operating income 7,450 7,708

Total operating expenses (3,828) (3,971)

Operating profit 3,622 3,737

Share of profit in associates and joint ventures 392 139

Profit before tax of insurance business operations 4,014 3,876

Annualised new business premiums of insurance manufacturing operations 27,512 15,420

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

non-insurance operations.

2 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Profit before tax of insurance business operations increased by HK$138m, or 4%, compared with 2022. This was primarily driven by the

increase in the insurance service result of HK$1,713m, reflecting an increase to the release of CSM of HK$1,324m as a result of a higher

closing CSM balance driven by an increase in new business written during the year, updates to actuarial assumptions, as well as the impact of

interest rates on the CSM duration profile. A reduction in losses from onerous contracts also contributed to the increase.

Net investment returns (excluding net interest income) decreased by HK$867m, compared with 2022. This reflected losses in mainland China

of HK$667m due to reducing interest rates in 2023 compared to 2022, as well as offsetting gains and losses in Hong Kong and Singapore

respectively from the impact of reinsurance risk mitigation treaties.

Other operating income decreased by HK$1,061m, or 77%, and includes a HK$2,043m loss from updates to valuation estimates, partly offset

by gains from reinsurance contracts in Hong Kong.

Annualised new business premiums (‘ANP’) is used to assess new insurance premium generated by the business. It is calculated as 100% of

annualised first year regular premiums and 10% of single premiums, before reinsurance cede. ANP increased by HK$12,092m, or 78% in 2023,

primarily from strong new business sales in Hong Kong and a shift in product mix from single to multi-premium products.

Interest in associate

(Unaudited)

We maintain a 19.03% interest in BoCom. Since our investment in

2004, BoCom has grown its business significantly to the extent that it

has recently been designated as a global systemically important bank

(‘G-SIB’).

For accounting purposes, the balance sheet carrying value attributed

to BoCom represents our share of its net assets. We perform

quarterly impairment tests incorporating a value in use calculation,

recognising the gap between this carrying value and the fair value

(based on the listed share price). We have previously disclosed that

the excess of the value in use calculation over its carrying value has

been marginal in recent years, and that reasonably possible changes

in assumptions could generate an impairment.

Recent macroeconomic, policy and industry factors resulted in a

wider range of reasonably possible value in use outcomes for our

BoCom valuation. At 31 December 2023, the group performed an

impairment test on the carrying value, which resulted in an

impairment of HK$24.0bn, as the recoverable amount as determined

by a value in use calculation was lower than the carrying value. Our

value in use calculation uses both historical experience and market

participant views to estimate future cash flows, relevant discount

rates and associated capital assumptions.

This impairment will have no material impact on the group’s capital,

capital ratios or distribution capacity. The insignificant impact on the

group’s capital and CET1 ratio is due to the compensating release of

regulatory capital deductions to offset the impairment charge.

Further details can be found in Note 14 ‘Interests in associates and

joint ventures’.

Financial Review

22 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Balance sheet commentary compared with 31 December 2022

(Unaudited)

The consolidated balance sheet as at 31 December 2023 is set out in

the consolidated financial statements.

Gross loans and advances to customers decreased by HK$139bn,

or 3.7%. Excluding the unfavourable foreign exchange translation

effects of HK$9bn, gross loans and advances to customers

decreased by HK$130bn. This was driven by a decrease in corporate

and commercial lending of HK$159bn, primarily in Hong Kong and

mainland China, partly offset by increases in Australia and India. The

residential mortgage book increased by HK$46bn, mainly in Hong

Kong and Australia.

Total gross impaired loans and advances as a percentage of gross

loans and advances stood at 1.75% at the end of 2023 (2022:

1.69%). The change in expected credit losses as a percentage of

average gross customer advances was 0.36% for 2023 (2022:

0.40%), reflecting reduced charges on the mainland China CRE

portfolio.

Customer deposits increased by HK$147bn, or 2.4%, to

HK$6,261bn. Excluding the unfavourable foreign exchange translation

effects of HK$8bn, customer deposits increased by HK$155bn. The

advances-to-deposits ratio was 56.8% at the end of the year (2022:

60.4%).

Shareholders’ equity grew by HK$5bn to HK$813bn at

31 December 2023, mainly reflecting the current year’s profit, net of

dividend payments and favourable movements from financial

instruments designated as hold-to-collect-and-sell. These were partly

offset by a decrease in foreign exchange reserves due to depreciation

of various foreign currencies against the Hong Kong dollar.

Loans and advances, deposits by currency

31 Dec 2023

HK$m HKD USD Others

Loans and advances to customers 1,663,563 605,656 1,287,857

Customer accounts 2,376,789 1,869,813 2,014,449

31 Dec 2022

HK$m HKD USD Others

Loans and advances to customers 1,722,906 707,295 1,264,867

Customer accounts 2,422,893 1,805,737 1,885,079

Information by business and key countries

(Unaudited)

Wealth and Personal Banking

2023 2022

HK$m HK$m

Revenue

109,692 88,051

– of which: Hong Kong 84,522 64,430

Mainland China 4,337 4,299

Singapore 7,166 7,137

India 1,774 1,557

Profit before tax 57,305 37,876

– of which: Hong Kong 53,033 34,531

Singapore 1,826 1,703

India 18 235

Loans and advances to customers 1,567,893 1,526,965

– of which: Hong Kong 1,085,238 1,038,982

Mainland China 64,109 79,219

Customer accounts 3,618,894 3,443,694

– of which: Hong Kong 2,838,115 2,759,814

Mainland China 137,756 119,189

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 23

Commercial Banking

2023 2022

HK$m HK$m

Revenue

75,237 55,941

– of which: Hong Kong 43,564 31,099

Mainland China 6,312 6,666

Singapore 5,034 3,439

India 4,288 3,589

Australia 3,598 2,100

Malaysia 1,867 1,481

Profit before tax 43,654 23,283

– of which: Hong Kong 23,242 10,182

Mainland China 2,650 2,368

Singapore 3,411 2,002

India 3,120 2,373

Loans and advances to customers 1,154,648 1,231,590

– of which: Hong Kong 614,145 716,869

Mainland China 152,514 174,244

Customer accounts 1,685,876 1,665,463

– of which: Hong Kong 1,049,481 1,069,637

Mainland China 148,363 157,256

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

2 Revenue (defined as ‘Net operating income before change in expected credit losses and other impairment charges') is attributable to countries based

on the location of the principal operations of the branch, subsidiary, associate or joint venture.

Financial Review

24 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Risk

Our approach to risk

(Unaudited)

Our risk appetite

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

shared attitudes, beliefs, values and standards that shape behaviours

including those related to risk awareness, risk taking and risk

management. All our people are responsible for the management of

risk, with the ultimate accountability residing with the Board. Our risk

appetite defines the level and types of risk that we are willing to take,

while informing the financial planning process and guiding strategic

decision making.

The following principles guide the group’s overarching appetite for

risk and determine how our businesses and risks are managed.

Financial position

– We aim to maintain a strong capital position, defined by regulatory

and internal capital ratios.

– We carry out liquidity and funding management for each operating

entity, on a stand-alone basis.

Operating model

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

strong risk management capability.

– We aim to deliver sustainable and diversified earnings and

consistent returns for shareholders.

Business practice

– We have no appetite for deliberately or knowingly causing

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

of regulatory requirements.

– We have no appetite for inappropriate market conduct by any

member of staff or by any group business.

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

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

ambition.

– We consider and, where appropriate, mitigate reputational risk

that may arise from our business activities and decisions.

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

including exposure related to inadequate or failed internal

processes, people and systems, or events that impact our

customers or can lead to sub-optimal returns to shareholders,

censure, or reputational damage.

Enterprise-wide application

Our risk appetite encapsulates the consideration of financial and non-

financial risks. We define financial risk as the risk of a financial loss as

a result of business activities. We actively take these types of risks to

maximise shareholder value and profits. Non-financial risk is the risk

to achieving our strategy or objectives as the result of failed internal

processes, people and systems or from external events.

Our risk appetite is expressed in both quantitative and qualitative

terms and applied at the global business level and to material banking

entities. It continues to evolve and expand its scope as part of our

regular review process.

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

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

considered, developed and enhanced through:

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

needs;

– trends highlighted in other group risk reports;

– communication with risk stewards on the developing risk

landscape;

– strength of our capital, liquidity and balance sheet;

– compliance with applicable laws and regulations;

– effectiveness of the applicable control environment to mitigate

risk, informed by risk ratings from risk control assessments;

– functionality, capacity and resilience of available systems to

manage risk; and

– the level of available staff with the required competencies to

manage risks.

We formally articulate our risk appetite through our risk appetite

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

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

risk appetite helps ensure that we agree a suitable level of risk for our

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

process and helps senior management to allocate capital to business

activities, services and products.

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

strategic and business planning, and remuneration. At a group level,

performance against the RAS is reported to the group Risk

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

support targeted insight and discussion on breaches of risk appetite

and any associated mitigating actions. This reporting allows risks to

be promptly identified and mitigated, and informs risk-adjusted

remuneration to drive a strong risk culture.

Most global businesses and material banking entities are required to

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

aligned with the group’s RAS. Each RAS and business activity is

guided and underpinned by qualitative principles and/or quantitative

metrics.

Risk management

We recognise that the primary role of risk management is to help

protect our customers, business, colleagues, shareholders and the

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

our strategy and provide sustainable growth. This is supported

through our three lines of defence model described on page 27.

The implementation of our business strategy remains a key focus. As

we implement change initiatives, we actively manage the execution

risks. We also perform periodic risk assessments, including against

strategies,to help ensure retention of key personnel for our continued

effective operation.

We aim to use a comprehensive risk management approach across

the organisation and across all risk types, underpinned by the group's

culture and values. This is outlined in our risk management

framework, including the key principles and practices that we employ

in managing material risks, both financial and non-financial.

The framework fosters continual monitoring, promotes risk

awareness and encourages a sound operational and strategic

decision making and escalation process. It also supports a consistent

approach to identifying, assessing, managing and reporting the risks

we accept and incur in our activities, with clear accountabilities. We

actively review and enhance our risk management framework and our

approach to managing risk, through our activities with regard to

people and capabilities, governance, reporting and management

information, credit risk management models and data.

Our risk management framework

The following diagram and descriptions summarise key aspects of

the risk management framework, including governance, structure,

risk management tools and our culture, which together help align

employee behaviour with risk appetite.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 25

Key components of our risk management framework

HSBC values and risk culture

Risk governance

Non-executive risk governance

The Board approves the group's risk appetite, plans and performance

targets. It sets the ‘tone from the top’ and is advised by the group's

Risk Committee.

Executive risk governance

Our executive risk governance structure is responsible for the

enterprise-wide management of all risks, including key policies and

frameworks for the management of risk within the group.

Roles and

responsibilities

Three lines of defence model

Our ‘three lines of defence’ model defines roles and responsibilities for

risk management. An independent Risk and Compliance function helps

ensure the necessary balance in risk/return decisions.

Processes and

tools

Risk appetite

The group has processes in place to identify, assess, monitor, manage

and report risks to help ensure we remain within our risk appetite.

Enterprise-wide risk management tools

Active risk management:

identification/assessment,

monitoring, management and reporting

Internal controls

Policies and procedures

Policies and procedures define the minimum requirements for the

controls required to manage our risks.

Control activities

Operational and resilience risk management defines minimum

standards and processes for managing operational risks and internal

controls.

Systems and infrastructure

The group has systems and processes that support the identification,

capture and exchange of information to support risk management

activities.

Risk governance

The Board has ultimate responsibility for the effective management

of risk and approves our risk appetite. It is advised on risk-related

matters by the RC. The RC reviews the effectiveness of the group’s

risk management framework and internal controls systems (other

than internal financial controls overseen by the group Audit

Committee) and oversees the group’s approach to conduct, fairness

and prevention of financial crime. Through review and independent

challenge of reports presented by management at RC meetings, the

committee oversees the effectiveness of monitoring, assessment

and management of the risk environment as well as the risk

management framework.

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

holds executive accountability for the ongoing monitoring,

assessment and management of the risk environment and the

effectiveness of the risk management framework.

The management of regulatory compliance risk and financial crime

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

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

enterprise-wide risk oversight responsibilities, through the RMM.

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

managers with individual accountability for decision making. All our

people have a role to play in risk management. These roles are

defined using the three lines of defence model, which takes into

account the group’s business and functional structures as described

in the following commentary, 'Our responsibilities’.

We use a defined executive risk governance structure to help ensure

there is appropriate oversight and accountability of risk, which

facilitates reporting and escalation to the RMM. This structure is

summarised in the following table.

Governance structure for the management of risk

Authority Membership Responsibilities include:

Risk Management

Meeting of the

group

group Chief Risk Officer

group General Counsel

group Co-Chief Executive Officers

group Chief Financial Officer

group Chief Compliance Officer

group Head of Internal Audit

Chief Executive Officer of Hang Seng Bank

Limited

All other group Executive Committee members

– Supporting the group Chief Risk Officer in exercising Board-delegated risk

management authority.

– Overseeing the implementation of risk appetite and the risk management

framework.

– Forward-looking assessment of the risk environment, analysing possible

risk impacts and taking appropriate action.

– Monitoring all categories of risk and determining appropriate mitigating

action.

– Promoting a supportive group culture in relation to risk management and

conduct.

Global business/

Market risk

management

meetings

Global business/Market Chief Risk and

Compliance Officer/Market Chief Risk Officer

Global business/Market Chief Executive

Global business/Market Chief Financial Officer

Global business/Market heads of global functions

– Supporting the group Chief Risk Officer in exercising Board-delegated risk

management authority.

– Forward-looking assessment of the risk environment, analysing the

possible risk impact and taking appropriate action.

– Implementation of risk appetite and the risk management framework.

– Monitoring all categories of risk and determining appropriate mitigating

actions.

– Embedding a supportive culture in relation to risk management and

controls.

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

Risk

26 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Our responsibilities

All our people are responsible for identifying and managing risk within

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

defence model, which takes into account our business and functional

structures as described below.

Three lines of defence

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

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

management accountabilities and responsibilities for risk

management and the control environment.

The model underpins our approach to risk management by clarifying

responsibility and encouraging collaboration, as well as enabling

efficient coordination of risk and control activities.

The three lines of defence are summarised below:

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

identifying, recording, reporting and managing them in line with

risk appetite, and ensuring that the right controls and

assessments are in place to mitigate them.

– The second line of defence challenges the first line of defence on

effective risk management, and provides advice and guidance in

relation to the risk.

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

which provides independent assurance that our risk management

approach and processes are designed and operating effectively.

Risk and Compliance function

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

Officer, is responsible for the group’s risk management framework.

This responsibility includes establishing and monitoring of risk

profiles, and identifying and managing forward-looking risk. The

group’s Risk sub-function is made up of sub-functions covering all

risks to our business. Forming part of the second line of defence, the

group's Risk sub-function is independent from the global businesses,

including sales and trading functions, to provide challenge,

appropriate oversight and balance in risk/return decisions.

Responsibility for minimising both financial and non-financial risk lies

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

business and operational activities for which they are responsible. We

maintain adequate oversight of our risks through our various

specialist risk stewards and the collective accountability held by our

Chief Risk Officers at markets and global businesses.

We have continued to strengthen the control environment and our

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

risk management framework. The management of non-financial risk

focuses on governance and risk appetite, and provides a single view

of the non-financial risks that matter the most and the associated

controls. It incorporates a risk management system designed to

enable the active management of non-financial risk. Our ongoing

focus is on simplifying our approach to non-financial risk

management, while driving more effective oversight and better end-

to-end identification and management of non-financial risks. This is

overseen by the Enterprise Risk sub-function, headed by the group

Head of Enterprise Risk Management.

Stress testing and recovery planning

Our stress testing programme assesses our capital and liquidity

strength through a rigorous examination of our resilience to external

shocks, which forms part of our risk management and capital and

liquidity planning. As well as undertaking regulatory-driven stress

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

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

impact of such risks and develop plausible mitigating actions.The

outcome of a stress testing provides management with key insights

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

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

Internal stress tests

Our internal capital assessment uses a range of stress scenarios that

explore risks identified by management. They include potential

adverse macroeconomic, geopolitical, climate and operational risk

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

group.

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

identified top and emerging risks and our risk appetite. Stress testing

analysis helps management understand the nature and extent of

vulnerabilities to which the group is exposed. Using this information,

management decides whether risks can or should be mitigated

through management actions or, if they were to crystallise, be

absorbed through capital and liquidity. This in turn informs decisions

about preferred capital and liquidity levels and allocations.

During 2023, we completed a Group-wide Internal Stress Test

alongside testing of the bank’s strategy, otherwise known as the

Corporate Plan to test and inform our strategy and assumptions. The

stress scenario explored the potential impact of interest rate shocks

and a deep recession. Under this scenario, inflation re-intensifies as

accentuated geo-political tensions lead to severe global supply-chain

disruptions and a rise in energy prices.

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

subsidiary conducts regular macroeconomic and event-driven

scenario analysis specific to its region. They also participate, as

required, in the regulatory stress testing programmes of the

jurisdictions in which they operate, such as stress tests required by

the Monetary Authority of Singapore, the Australian Prudential

Regulation Authority and those required by the HKMA. Global

functions and businesses also perform bespoke stress testing to

inform their assessment of risks to potential scenarios.

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

where required, at subsidiary entity level to understand potential

extreme conditions that would make our business model non-viable.

Reverse stress testing identifies potential stresses and vulnerabilities

we might face, and helps inform early warning triggers, management

actions and contingency plans designed to mitigate risks.

The group stress testing programme is overseen by the RC and

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

Recovery and resolution plans

Recovery and resolution plans form part of the integral framework

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

together with stress testing, helps us understand the likely outcomes

of adverse business or economic conditions and in the identification

of appropriate risk mitigating actions.

Ibor transition

Interbank offered rates (‘Ibors’) were previously used extensively to

set interest rates on different types of financial transactions and for

valuation purposes, risk measurement and performance

benchmarking.

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

dollar Libor interest rate benchmarks, as well as the Euro Overnight

Index Average (‘Eonia’) and other local interbank interest rates

regionally has ceased following regulatory announcements and

industry initiatives. To support any remaining contracts referencing

sterling and US dollar Libor benchmarks, the UK’s Financial Conduct

Authority (‘FCA') has compelled the ICE Benchmark Administration

Limited to publish the three-month sterling Libor setting using an

alternative ‘synthetic’ methodology until 31 March 2024, and one-

month, three-month and six-month US dollar Libor settings until

30September 2024. We continue to support our customers in the

transition of the limited number of outstanding contracts relying on

‘synthetic’ Libor benchmarks in line with these dates.

There are approximately 70 of these contracts remaining, which are

predominantly syndicated lending contracts, where Commercial or

Global Banking customers have required additional time to enable

refinancing or restructuring, with transition expected prior to

30September 2024. Additionally, there are a small number of debt

securities and retail mortgages that are contingent on demised Ibors,

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 27

after the end of their fixed interest rate periods. HSBC remains

committed to seeking to remediate and/or mitigate relevant risks

relating to IBOR demise, as appropriate, for these contracts. HSBC

expects to be able to remediate and/or mitigate these risks by the

relevant calculation dates, which may occur post cessation of the

relevant IBOR. All other contracts referencing benchmarks that are no

longer published, where the group has contractual responsibility,

have been transitioned in line with client and investor discussions.

We also have exposures referencing regional rates that are scheduled

to demise at future dates. We are approaching transition of such

exposures in a manner that is tailored to the risks and counterparty

types involved.

While we continue to track the transition of remaining contracts to

alternative interest rate benchmarks our regulatory compliance,

conduct and legal risks have materially diminished. We will remain

vigilant until all contracts are fully transitioned.

Key developments in 2023

We actively managed the risks related to macroeconomic and

geopolitical uncertainties, as well as other key risks described in this

section.

In addition, we sought to enhance our risk management in the

following areas:

– We implemented two revised risk appetite frameworks to better

manage and strengthen our controls with respect to concentration

risks. These relate to concentration risks arising from exposures to

countries and to single customer groups.

– We enhanced our processes, framework and reporting capabilities

to improve the control and oversight of our material third parties,

and to help maintain our operational resilience and meet new and

evolving regulatory requirements.

– We continued to make progress with our comprehensive

regulatory reporting programme to strengthen our global

processes, improve consistency, and enhance controls across

regulatory reports.

– Through our climate risk programme, we continued to embed

climate considerations throughout the organisation, including

through risk policy updates and the completion of our annual

climate risk materiality assessment. We also developed risk

metrics to monitor and manage exposures, and further enhanced

our internal climate scenario analysis.

– We deployed industry-leading technology and advanced analytics

capabilities into new markets to improve our ability to identify

suspicious activities and prevent financial crime.

– We continued to develop and enhance our electronic

communication policies and standards, to help ensured we acted

on our most substantive issues.

– We are embedding our suite of regulatory management systems

following the Group-wide roll-out of regulatory horizon scanning

capabilities and enhanced regulation mapping tooling.

– We continued to increase the stabilisation of our net interest

income (‘NII’) as interest rate expectations fluctuated, driven by

central bank rate increases and a reassessment of the trajectory

of inflation in major economies.

Top and emerging risks

(Unaudited)

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

looking view of issues with the potential to threaten the execution of

our strategy or operations over the medium to long term.

We proactively assess the internal and external risk environment, as

well as review the themes identified across our region and global

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

update our top and emerging risks as necessary.

Our current top and emerging risks are as follows:

Externally driven

Geopolitical and macroeconomic risks

The US-China relationship remains complex. To date, the US, the UK,

the EU and other countries have imposed various sanctions and trade

restrictions on Chinese persons and companies and the countries’

respective approaches to strategic competition with China continue

to develop. Although sanctions and trade restrictions are difficult to

predict, increases in diplomatic tensions between China and the US

and other countries could result in further sanctions and trade

restrictions that could negatively impact the group, its customers and

the markets in which the group operates. For example, there is a risk

of additional sanctions and trade restrictions being imposed by the

US and other governments in relation to human rights, technology,

and other issues which could create a more complex operating

environment for the group and its customers.

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

restrictions that target, or provide authority to target, foreign

individuals and companies. These, as well as law enforcement

measures, have been imposed against certain Western consulting

and data intelligence firms, defense companies, and public officials

associated with the implementation of foreign sanctions against

China.

The Russia-Ukraine war continues to have far-reaching geopolitical

and economic implications beyond those two countries borders.

There is also uncertainty about the scope, duration and potential

escalation of the Israel-Hamas war. The group is monitoring the

impacts of these wars. Additionally, recent attacks on shipping in the

Red Sea and resulting counter-measures have disrupted supply

chains.

The group continues to respond to evolving economic sanctions and

trade restrictions, in particular significant sanctions and trade

restrictions imposed against Russia by the UK, the US and the EU, as

well as other countries. Such sanctions and restrictions have targeted

certain Russian government officials, politically exposed persons,

business people, Russian oil imports, energy products, financial

institutions, and other major Russian companies and sanctions

evasion networks. More generally applicable investment, export, and

import bans and restrictions have also been implemented. In addition,

US authorities have been granted significant and broad discretion to

impose secondary sanctions on non-US banks engaged in certain

transactions or services involving Russia’s military-industrial base. In

response to such sanctions and trade restrictions, as well as asset

flight, Russia has implemented certain countermeasures including the

expropriation of foreign assets.

Further sanctions, counter-sanctions, and trade restrictions across the

markets in which the group operates may adversely affect the group,

its customers and the markets by creating regulatory, reputational

and market risks.

A fall in global energy prices from the highs of 2022 facilitated a

sustained disinflation process across most key economies over the

course of 2023. Global commodity markets were impacted by

heightened geopolitical risks – including the Russia-Ukraine war and

Israel-Hamas war – which fuelled concerns about supply disruptions,

although weaker economic activity in China and Europe dampened

demand growth. As of January 2024, geopolitical turmoil in the

Middle East has not led to a sustained increase in energy prices. The

Israel-Hamas war has not disrupted energy supply, while producers

not from the Organisation of the Petroleum Exporting Countries

('OPEC'), including the US, increase output through the fourth quarter

of 2023.

Mainland China commercial real estate conditions remain distressed

as offshore financing conditions and buyer demand remain subdued.

Signs of a material or sustained recovery are yet to emerge, with

market data still reflecting reduced investment and weak homebuyer

sales and sentiment. The Chinese government is expected to

continue to expand fiscal and monetary support to the economy to

boost growth and lending in 2024, including specific measures to

support developers and stimulate housing demand but the risk of a

slow and protracted recovery remains significant. The business and

Risk

28 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

financial performance of corporates operating in this sector has been

weak, and refinancing risks are likely to continue in 2024. State

owned enterprises continue to outperform privately owned

enterprises in general with above market average sales performance,

market share gains and greater access to funding. The challenges in

this sector could create further pressure on our customers. We

continue to closely monitor and take actions to proactively risk

manage our portfolio.

The reduction in global inflation rates prompted developed market

central banks to pause monetary policy tightening, from the third

quarter of 2023. A decrease in inflation trend is now visible across

most major economies and interest rates are forecast to fall through

2024, although they are expected to remain materially higher than in

recent years. 2024 will mark the biggest election year in history with

more than half the world's population across more than 76 countries

going to the polls. This has the potential to present policy continuity

in some markets and significant political change in others.

Budget deficits are set to remain large for many economies as

governments try to meet a range of spending demands. Alongside

this, higher bond yields will increase interest payment burdens for

many counterparties. We continue to monitor our risk profile closely

in the context of uncertainty over global macroeconomic policies.

Higher inflation and interest rates, alongside lower growth have had

an impact on expected credit losses and other credit impairment

charges (‘ECL’). The pressure on real disposable income of

households and business costs may have impacted the ability of our

customers to repay debt.

Our Central scenario, which has the highest probability weighting in

our HKFRS 9 ‘Financial Instruments’ calculations of ECL, assumes

that GDP growth will fall below trend through 2024. Inflation is

forecast to remain above central bank targets, but continues to fall.

Interest rates also decline but remain materially higher than in recent

years. Forecasts remain uncertain, however, and changing economic

conditions and the materialisation of key risks could reduce the

accuracy of the Central scenario forecast. In particular, forecasts in

recent years have been sensitive to commodity price changes,

changing supply chain conditions, monetary policy adjustments and

inflation expectations. There is also uncertainty with respect to the

relationship between the economic drivers and the historical loss

experience, which has required adjustments to modelled ECL in

cases where we determined that the model was unable to capture

the material underlying risks.

Despite these risks, forecast stability and reduced forecast dispersion

in our main markets, ensured that the Central scenario for impairment

was assigned the same likelihood of occurrence across our key

markets.

For further details of our Central and other scenarios, see

‘Measurement uncertainty and sensitivity analysis of ECL estimates’

on page 42.

Global tensions over trade, technology and ideology are manifesting

themselves in divergent regulatory standards and compliance

regimes, presenting long-term strategic challenges for multinational

businesses.

As the geopolitical landscape evolves, compliance by multinational

corporations with their legal or regulatory obligations in one

jurisdiction may be seen as supporting the law or policy objectives of

that jurisdiction over another, creating additional compliance,

reputational and political risks for the group. We maintain dialogue

with our regulators in various jurisdictions on the impact of legal and

regulatory obligations on our business and customers.

While it is the group's policy to comply with all applicable laws and

regulations of all jurisdictions in which it operates, geopolitical

tensions, and potential ambiguities in the group’s compliance

obligations will continue to present challenges and risks for the group

and could have a material adverse impact on the group‘s business,

financial condition, results of operations, prospects, strategy and

reputation, as well as on the group’s customers.

Expanding data privacy, national security and cybersecurity laws in a

number of markets could pose potential challenges to intra-group

data sharing. These developments could increase financial

institutions’ compliance obligations in respect of cross-border

transfers of personal information, which may affect our ability to

manage financial crime risk across markets.

Mitigating actions

– We closely monitor geopolitical and economic developments in

key markets and sectors, and undertake scenario analysis where

appropriate. This helps us to take actions to manage our portfolios

where necessary, including through enhanced monitoring,

amending our risk appetite and/or reducing limits and exposures.

– We stress test portfolios of particular concern to identify

sensitivity to loss under a range of scenarios, with management

actions being taken to rebalance exposures and manage risk

appetite where necessary.

– We regularly review key portfolios to help ensure that individual

customer or portfolio risks are understood and that our ability to

manage the level of facilities offered through any downturn is

appropriate.

– We continue to manage sanctions and trade restrictions through

the use of, testing and auditing of, and enhancements to, our

existing controls.

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

security in geographical areas deemed to be at high risk from

terrorism and military conflicts.

– We continue to closely monitor, and take actions to proactively

mange our commercial real estate portfolios against risk.

Technology and cyber security risk

Together with other organisations, we operate in an extensive and

complex technology landscape, which needs to remain resilient in

order to support customers, our organisation and financial markets

globally. Risks arise where, for example, technology is not

understood, maintained, or developed appropriately. We also

continue to operate in an increasingly hostile cyber threat

environment globally. These threats include potential unauthorised

access to customer accounts and attacks on our and our suppliers'

systems. These threats require ongoing investment in business and

technical controls to defend against.

Mitigating actions

– We continue to invest in transforming how software solutions are

developed, delivered and maintained to improve system

resilience, minimising the impact to customers, as well as

continuing to build security into our software development

lifecycle and improve our testing processes and tools.

– We continue to upgrade many of our IT systems, simplify our

service provision and replace older IT infrastructure and

applications.

– Our cyber intelligence and threat analysis team continually

evaluate threat levels for the most prevalent cyber-attack types

and their potential outcomes. We continue to strengthen our

controls to help reduce the likelihood and impact of advanced

malware, data leakage, exposure through third parties and security

vulnerabilities.

– We continue to enhance our cybersecurity capabilities, including

Cloud security, identity and access management, metrics and data

analytics, and supplier security reviews.

– We regularly report and review cyber risk and control

effectiveness at executive level across global businesses,

functions and markets, and at non-executive Board level to help

ensure there is appropriate visibility and governance of the risk

and its mitigating actions.

– We continue to invest in mitigating the potential threats of

emerging technologies, such as the use of Artificial Intelligence

('AI').

– The Group participates globally in industry bodies and working

groups to collaborate on tactics employed by cyber-crime groups

and to work together to seek to prevent, detect and defend

against cyber-attacks on financial organisations globally.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 29

– We, like other financial institutions, experience numerous

attempts to compromise our cybersecurity. We respond to these

in accordance with our cybersecurity framework which adheres to

applicable laws, rules and regulations. To date, none of these

attacks have had a material impact.

Financial crime risk

Financial institutions remain under considerable regulatory scrutiny

regarding their ability to detect and prevent financial crime. These

risks were in 2023 exacerbated by rising geopolitical tensions and

ongoing macroeconomic factors. These challenges include managing

conflicting laws and approaches to legal and regulatory regimes, and

implementing increasingly complex and less predictable sanctions

and trade restrictions.

Amid high levels of inflation and increasing cost of living pressures,

we face increasing regulatory expectations with respect to managing

internal and external fraud and protecting vulnerable customers. In

addition, the accessibility and increasing sophistication of generative

AI brings financial crime risks. While there is potential for the

technology to support financial crime detection, there is also material

risk that criminals use generative AI to perpetrate fraud, particularly

scams.

The digitisation of financial services continues to have an impact on

the payments ecosystem, with an increasing number of new market

entrants and payment mechanisms, not all of which are subject to

the same level of regulatory scrutiny or regulations as banks.

Developments around digital assets and currencies have continued at

pace, with an increasing regulatory and enforcement focus on the

financial crimes linked to these types of assets.

Expectations continue to increase with respect to the intersection of

environmental, social and governance ('ESG') issues and financial

crime, as our organisation, customers and suppliers transition to net

zero. These are particularly focused on potential ‘greenwashing’,

human rights issues and environmental crimes. In addition, climate

change itself could heighten risks linked to vulnerable migrant

populations in countries where financial crime is already more

prevalent.

We also continue to face increasing challenges presented by national

data privacy requirements, which may affect our ability to manage

financial crime risks across markets.

Mitigating actions

– We continue to manage sanctions and trade restrictions through

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

– We continue to develop our fraud controls, and invest in

capabilities to fight financial crime through the application of

advanced analytics and AI, while monitoring technological

developments and engaging third parties.

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

ecosystem, as well as risks associated with direct and indirect

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

appropriate financial crime controls.

– We regularly review our existing policies and control framework

so that developments relating to ESG are considered and the risks

mitigated to the extent possible.

– We engage with regulators, policymakers and relevant

international bodies, seeking to address data privacy challenges

through international standards, guidance, and legislation.

Environmental, social and governance risk

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

ESG-related matters. Our current areas of focus include climate risks,

nature-related risks and human rights risks. These can impact us both

directly and indirectly through our business activities and

relationships. For details of how climate risk is governed, see page

10.

Our assessment of climate risks covers three distinct time periods,

comprising: short term, which in this context is up to 2025; medium

term, which is between 2026 and 2035; and long term, which is

between 2036 and 2050.

We may face credit losses if our customers business models fail to

align to a net zero economy or if our customers face disruption to

their operations or deterioration to their assets as a result of extreme

weather.

We may face trading losses if we fail to accurately reflect the risks

associated with climate risk within our trading book assets.

We may face impacts from physical risk on our own operations,

owing to the increase in frequency and severity of weather events

and chronic shifts in weather patterns, which could affect our ability

to conduct our day-to-day operations.

We may face increased reputational, legal and regulatory risk if we

fail to make sufficient progress towards the Group's net zero

ambition, if we fail to meet evolving regulatory expectations and

requirements on climate risk management, or if we knowingly or

unknowingly make inaccurate, unclear, misleading, or

unsubstantiated claims regarding sustainability to stakeholders.

We may face financial reporting risk in relation to our climate

disclosures, as any data, methodologies and standards we have used

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

developments in climate science. We may also face the risk of

making reporting errors due to data, system, process and control

challenges. Any changes could result in revisions to our internal

frameworks and reported data and could mean that reported figures

are not reconcilable or comparable year on year. We may also have to

re-evaluate our progress towards our climate-related targets in future

and this could result in reputational, legal and regulatory risks.

We may face model risk, as the uncertain impacts of climate change

and data and methodology limitations present challenges to creating

reliable and accurate model outputs.

We may face climate related litigation risks, either directly if

stakeholders feel we are not adequately managing climate risks or

indirectly if our clients and customers are themselves the subject of

litigation, potentially resulting in the revaluation of client assets.

We may also be exposed to nature-related risks beyond climate

change. These risks arise when the provision of natural capital - such

as water availability, air quality, and soil quality - is compromised by

human activity/actions. Nature risk can manifest through

macroeconomic, market, credit, reputational, legal and regulatory

risks, for both the group and our customers.

Regulation and disclosure requirements in relation to human rights,

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

expected to be transparent about their efforts to identify and respond

to the risk of negative human rights impacts arising from their

business activities and relationships.

Mitigating actions

– A dedicated Environmental Risk Oversight Forum is responsible

for overseeing risk activities relating to environmental risk

management, including the transition and physical risks from

climate change. For further details of the group’s climate

governance is structured, see page 10.

– The group climate risk programme continues to support the

development of our climate risk management capabilities across

four key pillars: governance and risk appetite, risk management,

stress testing and scenario analysis, and disclosures. We continue

to enhance our approach and mitigation to the risk of

greenwashing.

– In January 2024, the Group updated our energy policy covering

the broader energy system including upstream oil and gas, oil and

gas power generation, coal, hydrogen, renewables and

hydropower, nuclear, biomass and energy from waste. We also

updated our thermal coal phase-out policy, in which we

committed to not provide new finance or advisory services for the

specific purposes of new metallurgical coal mines.

– In 2023, we provided practical guidance and training, where

relevant, to our colleagues across the group on human rights,

covering fundamental human rights concepts and international

standards, our public commitments and foundational principles for

responding to human rights risks.

Risk

30 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

– The scope of financial reporting risk was expanded to explicitly

include oversight over accuracy and completeness of ESG and

climate reporting. In 2023, we updated the risk appetite statement

to reference our ESG and climate-related disclosures. We also

updated our risk taxonomy and control library to incorporate

requirements for addressing the risk of misstatement in ESG and

climate reporting. To support this, the Group has developed a

framework to guide control implementation over ESG and climate

reporting disclosures, which includes areas such as process and

data governance, and risk assessment.

– We continue to engage with our customers, investors and

regulators proactively on the management of ESG risks. The

Group also engages with initiatives, including the Climate Financial

Risk Forum, Equator Principles, Taskforce on Climate-related

Financial Disclosures and CDP (formerly the Carbon Disclosure

Project) to help drive best practice for climate risk management.

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

‘Climate Risk’ on page 66.

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

environment‘ on page 30.

Our TCFD disclosures can be found on page 10.

Digitalisation and technological advances risk

Developments in technology and changes to regulations are enabling

new entrants to the industry, particularly with respect to payments.

This challenges the group to continue innovating to address evolving

customer requirements, drive efficiency and adapt our products to

attract and retain customers. As a result, we may need to increase

our investment in our business to adapt or develop products and

services to respond to our customers' evolving needs. We also need

to ensure that new digital capabilities do not weaken our resilience or

wider risk management capabilities.

New technologies such as generative AI, large language models,

blockchain and quantum computing offer both business opportunities

and potential risks for HSBC. As with all use of technologies, we aim

to maximise their potential while seeking to ensure a robust control

environment is in place to help manage the inherent risks, such as

the impact on encryption algorithms.

Mitigating actions

– We continue to monitor this emerging risk and advances in

technology, as well as changes in customer behaviours to

understand how these may impact our business.

– We assess new technologies to help develop appropriate controls

and maintain resilience.

– We closely monitor and assess financial crime risk and the impact

on payment transparency and architecture.

Internally driven

Risks associated with workforce capability, capacity and

environmental factors with potential impact on growth

Our global businesses and functions in all of our markets are exposed

to risks associated with workforce capacity challenges, including

challenges to retain, develop and attract high-performing employees

in key labour markets, and compliance with employment laws and

regulations. Failure to manage these risks may impact our delivery of

our strategic objectives or lead to regulatory sanctions or legal claims.

Mitigating actions

– We seek to promote a diverse and inclusive workforce and

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

speak-up culture through active campaigns.

– We monitor hiring activities and levels of employee attrition, with

each business and function putting in place plans to help ensure

they have effective workforce forecasting to meet business

demands.

– We monitor people risks that could arise due to organisational

restructuring, helping to ensure we manage redundancies

sensitively and support impacted employees. We encourage our

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

empathetic mindset and approach, while ensuring the whole

proposition of working at HSBC is well understood.

– Our Future Skills curriculum helps provide skills that will help to

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

– We develop succession plans for key management roles, with

oversight from the group Executive Committee.

Risks arising from the receipt of services from third

parties

(Unaudited)

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

critical that we ensure we have appropriate risk management

policies, processes and practices over the selection, governance and

oversight of third parties and their supply chain, particularly for key

activities that could affect our operational resilience. Any deficiency in

the management of risks associated with our third parties could

affect our ability to support our customers and meet regulatory

expectations.

Mitigating actions

– We continue to monitor the effectiveness of the controls operated

by our third-party providers and request third-party control reports,

where required.

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

Group arrangements using the same control standards as we have

for external third-party arrangements.

– We have strengthened the way third party risk is overseen and

managed across all non-financial risks and have enhanced our

processes, framework and reporting capabilities to improve the

visibility of risk and enable more robust management of our

material third parties by our global businesses, functions and

markets.

– We are implementing the changes required by new regulations as

set by our regulators.

Model risk

Model risk arises whenever business decision making includes

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

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

customer selection, product pricing, financial crime transaction

monitoring, creditworthiness evaluation and financial reporting.

Assessing model performance is a continuous undertaking. Models

can need redevelopment as market conditions change. Significant

increases in global inflation and interest rates have impacted the

reliability and accuracy of both credit and market risk models.

We continued to prioritise the redevelopment of internal ratings-

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

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

programmes with a key focus on enhancing the quality of data used

as model inputs. Some models have been approved and a number

are pending approval decisions from the UK’s Prudential Regulation

Authority (‘PRA’), the Hong Kong Monetary Authority ('HKMA') and

other key regulators for feedback. Some IMM and internal model

approach (‘IMA’) models have been approved for use, and feedback

has been received for some IRB models. Climate risk modelling is a

key focus for the group as HSBC’s commitment to ESG has become

a key part of the group’s strategy. Focus is also on AI and machine

learning where the pace of technological advances is driving

significant changes n modelling techniques.

Model risk remains a key area of focus, with local regulatory exams

taking place in many jurisdictions, new model risk guidance from the

PRA (SS1/23) due to come into force in 2024, and further

developments in policy expected from other regulators, including the

HKMA.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 31

Mitigating actions

– We have continued to embed the enhanced monitoring, review

and challenge of expected credit loss model performance through

our Model Risk Management sub-function as part of a broader

quarterly process to determine loss levels. The Model Risk

Management team aims to provide effective review and challenge

of any future redevelopment of these models.

– Model Risk Governance forums at the group, business and

functional levels continue to provide oversight of model risk.

– A full review of the firm's model landscape is being undertaken

across the firm to ensure models are being deployed in line with

global business strategy.

– Model Risk Management works closely with businesses to ensure

that IRB/IMM/IMA models in development meet risk

management, pricing and capital management needs. Global

Internal Audit provides assurance over the risk management

framework for models.

– Additional assurance work is performed by the model risk

governance teams, which act as second lines of defence. The

teams test whether controls implemented by model users comply

with model risk policy and if model risk standards are adequate.

– Models using AI or generative AI techniques are validated and

monitored to help ensure that risks that are determined by the

algorithms have adequate oversight and review. A framework to

manage the range of risks that are generated by these advanced

techniques, and to recognise the multi-disciplinary nature of these

risks, is being developed.

Data risk

We use multiple systems and growing quantities of data to support

our customers. Risk arises if data is incorrect, unavailable, misused,

or unprotected. Along with other banks and financial institutions, we

need to meet external regulatory obligations and laws that cover data,

such as the Basel Committee on Banking Supervision's 239

guidelines ‘Principles for effective risk data aggregation and risk

reporting’ and the General Data Protection Regulation (‘GDPR’).

Mitigating actions

– Through our global data management framework, we monitor the

quality, availability and security of data that supports our

customers and internal processes. We work towards resolving

any identified data issues in a timely manner.

– We continue to make improvements to our data policies and to

our control framework - which includes trusted sources, data

flows, and data quality - in order to enhance the end-to-end

management of data risk.

– The Group has established a global data management utility, and

continue to simplify and unify data management activities across

the Group.

– We seek to protect customer data through our data privacy

framework, which establishes practices, design principles and

guidelines that enable us to demonstrate compliance with data

privacy laws and regulations.

– We continue to modernise our data and analytics infrastructure

through investments in Cloud technology, data visualisation,

machine learning and AI.

– We continue to educate our employees on data risk and data

management. We have delivered regular global mandatory training

on how to protect and manage data appropriately.

Change execution risk

The needs of our customers are evolving faster than ever, particularly

with regard to technological advancements and the global transition

to a low-carbon economy. The resulting scale, complexity and pace of

strategic and regulatory change has elevated the level of risk for

executing such changes safely and efficiently.

Mitigating actions

– Change execution risk is part of our risk taxonomy and control

library, so that it is defined, assessed, managed, reported and

overseen in the same way as our other material risks.

– The Group Change Framework provides colleagues across all

levels of the Group who deliver on strategic and organisational

initiatives with a common and consistent understanding of their

role in achieving value and outcomes.

– The Group Change Prioritisation and Oversight Committee

oversees the prioritisation, strategic alignment and management

of execution risk for all strategic change portfolios and initiatives.

Risk

32 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Our material banking risks

(Unaudited)

The material risk types associated with our banking and insurance manufacturing operations are described in the following tables:

Description of risks – banking operations

Risks Arising from Measurement, monitoring and management of risk

Credit risk

Credit risk is the risk of financial loss

if a customer or counterparty fails to

meet an obligation under a contract.

Credit risk arises principally from

direct lending, trade finance and

leasing business, but also from

other products such as

guarantees and derivatives.

Credit risk is:

– measured as the amount that could be lost if a customer or counterparty

fails to make repayments;

– monitored using various internal risk management measures and within

limits approved by individuals within a framework of delegated authorities;

and

– managed through a robust risk control framework, which outlines clear and

consistent policies, principles and guidance for risk managers, and by

setting limits and appetite across geographical markets, portfolios or

sectors.

Treasury risk

Treasury risk is the risk of having

insufficient capital, liquidity or

funding resources to meet financial

obligations and satisfy regulatory

requirements, including the risk of

adverse impact on earnings or capital

due to structural and transactional

foreign exchange exposures and

changes in market interest rates,

together with pension and insurance

risk.

Treasury risk arises from changes

to the respective resources and

risk profiles driven by customer

behaviour, management

decisions, or the external

environment.

Treasury risk is:

– measured through risk appetite and more granular limits, set to provide an

early warning of increasing risk, minimum ratios of relevant regulatory

metrics, and metrics to monitor the key risk drivers impacting treasury

resources;

– monitored and projected against appetites and by using operating plans

based on strategic objectives together with stress and scenario testing;

and

– managed through control of resources in conjunction with risk profiles,

strategic objectives and cash flows.

Market risk

Market risk is the risk of an adverse

financial impact on trading activities

arising from changes in market

parameters such as interest rates,

foreign exchange rates, asset prices,

volatilities, correlations and credit

spreads.

Market risk arises from both

trading portfolios and non-trading

portfolios.

Market risk for non-trading

portfolios is discussed in the

Treasury risk section on page 58.

Market risk exposures arising

from our insurance operations are

discussed on page 73.

Market risk is:

– measured using sensitivities, value at risk (‘VaR’) and stress testing, giving

a detailed picture of potential gains and losses for a range of market

movements and scenarios, as well as tail risks over specified time

horizons;

– monitored using VaR, stress testing and other measures; and

– managed using risk limits approved by the Board for the group and the

various global businesses.

Climate risk

Climate risk relates to the financial

and non-financial impacts that may

arise as a result of climate change

and the move to a net zero

economy.

Climate risk is likely to materialise

through:

– physical risk, which arises

from the increased frequency

and severity of weather

events;

– transition risk, which arises

from the process of moving to

a low-carbon economy;

– net zero alignment risk, which

arises from failing to meet the

Group's net zero

commitments or to meet

external expectations related

to net zero because of

inadequate ambition and/or

plans, poor execution, or

inability to adapt to changes in

the external environment; and

– the risk of greenwashing,

which arises from the act of

knowingly or unknowingly

making inaccurate, unclear,

misleading or unsubstantiated

claims regarding sustainability

to stakeholders.

Climate risk is:

– measured using risk metrics and stress testing;

– monitored against risk appetite statements; and

– managed through adherence to risk appetite thresholds, through specific

policies, and through enhancements to processes and development of

tools and the development of portfolio steering capabilities to contribute to

the Group's net zero targets.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 33

Description of risks – banking operations (continued)

Risks Arising from Measurement, monitoring and management of risk

Resilience risk

Resilience risk is the risk of

sustained and significant business

disruption from execution, delivery or

physical security or safety events,

causing the inability to provide critical

services to our customers, affiliates

and counterparties.

Resilience risk arises from

failures or inadequacies in

processes, people, systems or

external events.

Resilience risk is:

– measured through a range of metrics with defined maximum acceptable

impact tolerances, and against our agreed risk appetite;

– monitored through oversight of enterprise processes, risks, controls and

strategic change programmes; and

– managed by continual monitoring and thematic reviews.

Regulatory compliance risk

Regulatory compliance risk is the risk

associated with breaching our duty

to clients and other counterparties,

inappropriate market conduct

(including unauthorised trading) and

breaching related financial services

regulatory standards.

Regulatory compliance risk arises

from the failure to observe the

relevant laws, codes, rules and

regulations and can manifest

itself in poor market or customer

outcomes and lead to fines,

penalties and reputational

damage to our business.

Regulatory compliance risk is:

– measured by reference to risk appetite, identified metrics, incident

assessments, regulatory feedback and the judgement and assessment of

our regulatory compliance teams;

– monitored against the first line of defence risk and control assessments,

the results of the monitoring and control assurance activities of the second

line of defence functions, and the results of internal and external audits and

regulatory inspections; and

– managed by establishing and communicating appropriate policies and

procedures, training employees in them, and monitoring activity to help

ensure their observance. Proactive risk control and/or remediation work is

undertaken where required.

Financial crime risk

Financial crime risk is the risk that

HSBC’s products and services will

be exploited for criminal activity. This

includes fraud, bribery and

corruption, tax evasion, sanctions

and export control violations, money

laundering, terrorist financing and

proliferation financing.

Financial crime risk arises from

day-to-day banking operations

involving customers, third parties

and employees.

Financial crime risk is:

– measured by reference to risk appetite, identified metrics, incident

assessments, regulatory feedback and the judgement and assessment of

our financial crime risk teams;

– monitored against the first line of defence risk and control assessments,

the results of the monitoring and control assurance activities of the second

line of defence functions, and the results of internal and external audits and

regulatory inspections; and

– managed by establishing and communicating appropriate policies and

procedures, training employees in them and monitoring activity to help

ensure their observance. Proactive risk control and/or remediation work is

undertaken where required.

Model risk

Model risk is the potential for

adverse consequences from model

errors or the inappropriate use of

modelled outputs to inform business

decisions.

Model risk arises in both financial

and non-financial contexts

whenever business decision

making includes reliance on

models.

Model risk is:

– measured by reference to model performance tracking and the output of

detailed technical reviews, with key metrics including model review

statuses and findings;

– monitored against model risk appetite statements, insight from the

independent validations completed by the model risk management team,

feedback from internal and external audits, and regulatory reviews; and

– managed by creating and communicating appropriate policies, procedures

and guidance, training colleagues in their application, and supervising their

adoption to ensure operational effectiveness.

Our insurance manufacturing subsidiaries have additional regulations

than those of our banking operations. Risks in the insurance entities

are managed using methodologies and processes that are subject to

oversight at group level. Our insurance operations are also subject to

many of the same risks as our banking operations, and these are

covered by the group's risk management processes. However, there

are specific risks inherent to the insurance operations as noted

below.

Risk

34 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Description of risks – insurance manufacturing operations

Risks Arising from Measurement, monitoring and management of risk

Financial risk

For insurance entities, financial risk

includes the risk of not being able to

match liabilities arising under insurance

contracts with appropriate investments

and that the expected sharing of

financial performance with

policyholders under certain contracts is

not possible.

Exposure to financial risk arises from:

– market risk affecting the fair values

of financial assets or their future

cash flows;

– credit risk; and

– liquidity risk of entities being

unable to make payments to

policyholders as they fall due.

Financial risk is:

– measured (i) for credit risk, in terms of economic capital and the

amount that could be lost if a counterparty fails to make

repayments; (ii) for market risk, in terms of economic capital,

internal metrics and fluctuations in key financial variables; and (iii)

for liquidity risk, in terms of internal metrics including stressed

operational cash flow projections;

– monitored through a framework of approved limits and delegated

authorities; and

– managed through a robust risk control framework, which outlines

clear and consistent policies, principles and guidance. This

includes using product design, asset liability matching and bonus

rates.

Insurance risk

Insurance risk is the risk that, over

time, the cost of insurance policies

written, including claims and benefits,

may exceed the total amount of

premiums and investment income

received.

The cost of claims and benefits can be

influenced by many factors, including

mortality and morbidity experience, as

well as lapse and surrender rates.

Insurance risk is:

– measured in terms of life insurance liabilities and economic capital

allocated to insurance underwriting risk;

– monitored through a framework of approved limits and delegated

authorities; and

– managed through a robust risk control framework which outlines

clear and consistent policies, principles and guidance. This

includes using product design, underwriting, reinsurance and

claims-handling procedures.

Credit risk

Overview

(Audited)

Credit risk is the risk of financial loss if a customer or counterparty

fails to meet an obligation under a contract. Credit risk arises

principally from direct lending, trade finance and leasing business, but

also from other products, suchas guarantees and credit derivatives.

Credit risk management

Key developments in 2023

(Unaudited)

There were no material changes to the policies and practices for the

management of credit risk in 2023. We continued to apply the

requirements of HKFRS 9 ‘Financial Instruments’ within the Credit

Risk sub-function. For our wholesale portfolios, we introduced new

policies for the management of country risk and subordinated debt

assessments. Implementation of these polices did not have a

material impact on our wholesale portfolios.

We actively managed the risks related to macroeconomic

uncertainties, including interest rates, inflation, fiscal and monetary

policy, broader geopolitical uncertainties and conflicts.

Governance and structure

(Unaudited)

We have established credit risk management and related HKFRS 9

processes. We continue to assess the impact of economic

developments in key markets on specific customers, customer

segments or portfolios. As credit conditions change, we take

mitigating actions, including the revision of risk appetites or limits and

tenors, as appropriate. In addition, we continue to evaluate the terms

under which we provide credit facilities within the context of

individual customer requirements, the quality of the relationship, local

regulatory requirements, market practices and our local market

position.

Credit risk sub-function

(Audited)

Credit approval authorities are delegated by the Board to the group

Co-Chief Executives together with the authority to sub-delegate

them. The Credit Risk sub-function in Global Risk and Compliance is

responsible for the key policies and processes for managing credit

risk, which include formulating group credit policies and risk rating

frameworks, guiding the group’s appetite for credit risk exposures,

undertaking independent reviews and objective assessment of credit

risk, and monitoring performance and management of portfolios.

The principal objectives of our credit risk management are:

– to maintain a strong culture of responsible lending, and robust risk

policies and control frameworks;

– to both partner and challenge our businesses in defining,

implementing and continually re-evaluating our risk appetite under

actual and scenario conditions; and

– to ensure there is independent, expert scrutiny of credit risks,

their costs and their mitigation.

Key risk management processes

HKFRS 9 'Financial Instruments' process

(Unaudited)

The HKFRS 9 process comprises three main areas: modelling and

data; implementation; and governance.

Modelling and data

(Unaudited)

We have established HKFRS 9 modelling and data processes in

various geographies, which are subject to internal model risk

governance including independent review of significant model

developments.

We have a centralised process at the Group for generating unbiased

and independent global economic scenarios. Scenarios are subject to

a process of review and challenge by a dedicated team at Group, as

well as regional groupings. Each quarter, the scenarios and probability

weights are reviewed and checked for consistency with the

economic conjuncture and current economic and financial risks.

These are subject to final review and approval by senior management

in a Forward Economic Guidance Global Business Impairment

Committee.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 35

Implementation

(Unaudited)

A centralised impairment engine performs the expected credit losses

calculation using data, which is subject to a number of validation

checks and enhancements, from a variety of client, finance and risk

systems. Where possible, these checks and processes are

performed in a globally consistent and centralised manner.

Governance

(Unaudited)

Management review forums are established in key sites and at group

level in order to review and approve the impairment results.

Management review forums have representatives from Credit Risk

and Finance. The key site and group approvals at the group

Impairment Committee are subsequently reported to the global

business impairment committee for final approval of the Group’s ECL

for the period.

Required members of the group Impairment Committee are the

group's Chief Risk Officer, Chief Credit Officer, Wealth and Personal

Banking Chief Risk Officer, as well as the group's Chief Financial

Officer and Financial Controller.

The group Risk Committee reviews and provides independent

challenge on the risk management report that may include

impairment results presented at each Risk Committee meeting, and

other reports on impairment results that are presented to the Risk

Committee from time to time, to assess the risk profile of the Bank

and how the risks arising from the Bank’s businesses are controlled,

monitored and mitigated.

Concentration of exposure

(Audited)

Concentrations of credit risk arise when a number of counterparties

or exposures 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. We use a number

of controls andmeasures to minimise undue concentration of

exposure inour portfolios across industries, countries and global

businesses. These include portfolio and counterparty limits, approval

and review controls, and stress testing.

Credit quality of financial instruments

(Audited)

Our risk rating system facilitates the internal ratings-based approach

under the Basel framework adopted by the group to support the

calculation of our minimum credit regulatory capital requirement. The

five credit quality classifications encompass a range of granular

internal credit rating grades assigned to wholesale and retail

customers, and the external ratings attributed by external agencies to

debt securities.

For debt securities and certain other financial instruments, external

ratings have been aligned to the five quality classifications based

upon the mapping of related customer risk rating (‘CRR’) to external

credit rating.

Wholesale lending

(Unaudited)

A CRR 10-grade scale summarises a more granular underlying 23-

grade scale of obligor probability of default (‘PD’). All corporate

customers are rated using the 10 or 23-grade scale, depending on the

degree of sophistication of the Basel approach adopted for the

exposure.

Each CRR band is associated with an external rating grade by

reference to long-run default rates for that grade, represented by the

average of issuer-weighted historical default rates. This mapping

between internal and external ratings is indicative and may vary over

time.

Retail lending

(Unaudited)

Retail lending credit quality is based on a 12-month point-in-time

probability-weighted PD.

Credit quality classification

(Unaudited)

Sovereign debt

securities

and bills

Other debt

securities

and bills

Wholesale lending

and derivatives Retail lending

External credit

rating

External credit

rating

Internal credit

rating

12-month

Basel

probability of

default %

Internal credit

rating

12 month

probability-

weighted PD %

Quality classification

1, 2

Strong BBB and above A- and above CRR 1 to CRR 2 0 – 0.169 Band 1 and 2 0.000 – 0.500

Good BBB- to BB BBB+ to BBB- CRR 3 0.170 – 0.740 Band 3 0.501 – 1.500

Satisfactory

BB- to B and

unrated

BB+ to B and

unrated CRR 4 to CRR 5 0.741 – 4.914 Band 4 and 5 1.501 – 20.000

Sub-standard B- to C B- to C CRR 6 to CRR 8 4.915 – 99.999 Band 6 20.001 – 99.999

Credit impaired Default Default CRR 9 to CRR 10 100 Band 7 100

1 Customer risk rating (‘CRR’).

2 12-month Point-in-time ('PIT') Probability of Default ('PD').

Quality classification definitions

‘Strong’ exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of

expected loss.

‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk.

‘Satisfactory’ exposures require closer monitoring and demonstrate an average-to-fair capacity to meet financial commitments, with moderate default

risk.

‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern.

‘Credit-impaired’ exposures have been assessed as described in Note 1.2(i) on the consolidated financial statements.

Risk

36 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Forborne loans and advances

(Audited)

Forbearance measures consist of concessions towards an obligor

that is experiencing or is about to experience difficulties in meeting

its financial commitments.

We continue to class loans as forborne when we modify the

contractual payment terms due to having significant concerns about

the borrowers’ ability to meet contractual payments when they were

due. Our definition of forborne captures non-payment-related

concessions, such as covenant waivers.

For details of our policy on derecognised renegotiated loans, see

Note 1.2(i) on the financial statements.

Credit quality of forborne loans

(Unaudited)

For wholesale lending, where payment-related forbearance measures

result in a diminished financial obligation, or if there are other

indicators of impairment, the loan will be classified as credit impaired

if it is not already so classified. All facilities with a customer, including

loans that have not been modified, are considered credit impaired

following the identification of a payment-related forborne loan. For

retail lending, where a material payment-related concession has been

granted, the loan will be classified as credit impaired. In isolation,

non-payment forbearance measures may not result in the loan being

classified as credit impaired unless combined with other indicators of

credit impairment. These are classed as performing forborne loans for

both wholesale and retail lending.

Wholesale and retail lending forborne loans are classified as credit-

impaired until there is sufficient evidence to demonstrate a significant

reduction in the risk of non-payment of future cash flows, observed

over a minimum one-year period, and there are no other indicators of

impairment. Any forborne loans not considered credit impaired will

remain forborne for a minimum of two years from the date that credit

impairment no longer applies. For wholesale and retail lending, any

forbearance measures granted on a loan already classed as forborne

results in the customer being classed as credit impaired.

Forborne loans and recognition of expected credit losses

(Audited)

Forborne loans expected credit loss assessments reflect the higher

rates of losses typically experienced with these types of loans such

that they are in stage 2 and stage 3. The higher rates are more

pronounced in unsecured retail lending requiring further

segmentation. For wholesale lending, forborne loans are typically

assessed individually. Credit risk ratings are intrinsic to the

impairment assessments. The individual impairment assessment

takes into account the higher risk of the future non-payment inherent

in forborne loans.

Impairment assessment

(Audited)

For details of our impairment policies on loans and advances and

financial investments, see Note 1.2(i) on the financial statements.

Write-off of loans and advances

(Audited)

For details of our policy on the write-off of loans and advances, see

Note 1.2(i) on the financial statements.

Under the HKFRS9 standard, write-off should occur when there is no

reasonable expectation of recovering further cash flows from the

financial asset.

This principle does not prohibit early write-off which is defined in local

policies to ensure effectiveness in the management of customers in

the collections process.

Unsecured personal facilities, including credit cards, are generally

written off at between 150 and 210 days past due. Thestandard

period runs until the end of the month in which the account becomes

180 days contractually delinquent. However, in exceptional

circumstances to avoid unfair customer outcomes, deliver customer

duty or meet regulatory expectations, the period may be extended

further.

For secured facilities, write-off should occur upon repossession of

collateral, receipt of proceeds via settlement, or determination that

recovery of the collateral will not be pursued. Where these assets are

maintained on the balance sheet beyond 60 months of consecutive

delinquency-driven default, the prospect of recovery is re-assessed.

Recovery activity, on both secured and unsecured assets, may

continue after write-off.

Any unsecured exposures which are not written off at 180 days past

due, and any secured exposures which are in ‘default’ status for 60

months or greater but are not written off, are subject to additional

monitoring via the appropriate governance forums.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 37

Summary of credit risk

The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in HKFRS

9 are applied and the associated allowance for ECL.

Summary of financial instruments to which the impairment requirements in HKFRS 9 are applied

(Audited)

2023 2022

Gross

carrying/

nominal

amount

Allowance

for

ECL

Gross

carrying/

nominal

amount

Allowance for

ECL

At 31 Dec

HK$m HK$m HK$m HK$m

Loans and advances to customers at amortised cost 3,595,929 (38,853) 3,734,987 (39,919)

Loans and advances to banks 563,852 (51) 515,890 (43)

Other financial assets measured at amortised cost 2,309,109 (393) 2,303,654 (262)

– cash and balances at central banks 232,988 (1) 232,748 (8)

– items in the course of collection from other banks 22,049 — 28,557 —

– Hong Kong Government certificates of indebtedness 328,304 — 341,354 —

– reverse repurchase agreements – non-trading 831,186 — 927,976 —

– financial investments 618,995 (57) 509,811 (46)

– prepayments, accrued income and other assets

275,587 (335) 263,208 (208)

Amounts due from Group companies 131,071 — 129,341 —

Total gross carrying amount on-balance sheet 6,599,961 (39,297) 6,683,872 (40,224)

Loans and other credit related commitments 1,978,328 (841) 1,892,401 (864)

Financial guarantee 46,325 (54) 35,646 (63)

Total nominal amount off-balance sheet

2,024,653 (895) 1,928,047 (927)

8,624,614 (40,192) 8,611,919 (41,151)

Fair value

Allowance

for ECL Fair value

Allowance

for ECL

HK$m HK$m HK$m HK$m

At 31 Dec

Debt instruments measured at Fair Value through Other Comprehensive Income (‘FVOCI’)

1,404,323 (93) 1,232,817 (329)

1 The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset,

in which case the ECL is recognised as a provision.

2 Includes only those financial instruments that are subject to the impairment requirements of HKFRS 9. 'Prepayments, accrued income and other

assets', as presented within the consolidated balance sheet on page 85, which includes both financial and non-financial assets.

3 Represents the maximum amount at risk should the contracts be fully drawn upon and client defaults.

4 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is

recognised in 'Change in expected credit losses and other credit impairment charges' in the consolidated income statement.

5 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

The following table provides an overview of the group’s credit risk by stage and industry, and the associated ECL coverage. The financial assets

recorded in each stage have the following characteristics:

– Stage 1: These financial assets are unimpaired and without significant increase in credit risk on which a 12-month allowance for ECL is

recognised.

– Stage 2: A significant increase in credit risk has been experienced on these financial assets since initial recognition for which a lifetime ECL

is recognised.

– Stage 3: There is objective evidence of impairment and the financial assets are therefore considered to be in default or otherwise credit

impaired on which a lifetime ECL is recognised.

– POCI: Financial assets that are purchased or originated at a deep discount are seen to reflect the incurred credit losses on which a lifetime

ECL is recognised.

Risk

38 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector

(Audited)

Gross carrying/nominal amount

Allowance for ECL ECL coverage %

Stage

POCI Total

Stage

3 POCI Total

Stage

3 POCI Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % % %

Loans and

advances to

customers

3,180,483 352,477 62,679 290 3,595,929 (2,681) (8,575) (27,433) (164) (38,853) 0.1 2.4 43.8 56.6 1.1

– personal 1,495,142 60,473 7,406 — 1,563,021 (1,285) (3,142) (1,265) — (5,692) 0.1 5.2 17.1 — 0.4

– corporate

1,405,747 280,699 54,613 290 1,741,349 (1,187) (5,396) (25,839) (164) (32,586) 0.1 1.9 47.3 56.6 1.9

– financial

institutions

279,594 11,305 660 — 291,559 (209) (37) (329) — (575) 0.1 0.3 49.8 — 0.2

Loans and

advances to

banks

563,647 205 — — 563,852 (50) (1) — — (51) 0.0 0.5 — — 0.0

Other financial

assets

2,296,216 12,497 396 — 2,309,109 (277) (11) (105) — (393) 0.0 0.1 26.5 — 0.0

Loans and

other credit-

commitments

1,929,040 47,175 2,113 — 1,978,328 (455) (285) (101) — (841) 0.0 0.6 4.8 — 0.0

– personal 1,416,939 19,362 1,742 — 1,438,043 (25) (1) — — (26) 0.0 0.0 — — 0.0

– corporate

381,803 25,661 371 — 407,835 (399) (273) (101) — (773) 0.1 1.1 27.2 — 0.2

– financial

institutions

130,298 2,152 — — 132,450 (31) (11) — — (42) 0.0 0.5 — — 0.0

Financial

guarantee

42,828 3,244 253 — 46,325 (20) (10) (24) — (54) 0.0 0.3 9.5 — 0.1

– personal 4,654 6 — — 4,660 — — — — — — — — — —

– corporate

33,169 3,131 253 — 36,553 (19) (10) (24) — (53) 0.1 0.3 9.5 — 0.1

– financial

institutions

5,005 107 — — 5,112 (1) — — — (1) — — — — 0.02

At 31 Dec

2023

8,012,214 415,598 65,441 290 8,493,543 (3,483) (8,882) (27,663) (164) (40,192) 0.0 2.1 42.3 56.6 0.5

The above table does not include balances due from Group companies.

1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

2 Includes corporate and commercial.

3 Includes non-bank financial institutions.

Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days

past due ('DPD') and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets, analysed

between less than 30 DPD and greater than 30 DPD, and therefore presents those amounts classified as stage 2 due to ageing (30 DPD) and

those identified at an earlier stage (less than 30 DPD).

Stage 2 days past due analysis for loans and advances to customers

(Audited)

Gross carrying amount Allowance for ECL ECL coverage %

which:

Stage

Up-to-

date

1 to 29

DPD

1,2

30 and >

DPD

1,2

Stage

Up-to-

date

1 to 29

DPD

1,2

30 and >

DPD

1,2

Stage

Up-to-

date

1 to 29

DPD

30 and >

DPD

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

% % % %

At 31 Dec 2023

Loans and advances to

customers at amortised cost

352,477

341,171 7,436 3,870 (8,575) (7,844) (299) (432) 2.4 2.3 4.0 11.2

– personal 60,473 50,725 6,289 3,459 (3,142) (2,507) (220) (415) 5.2 4.9 3.5 12.0

– corporate and commercial

280,699

279,144 1,146 409 (5,396) (5,300) (79) (17) 1.9 1.9 6.9 4.2

– non-bank financial

institutions

11,305 11,302 1 2 (37) (37) — — 0.3 0.3 — —

1 Days past due ('DPD').

2 The DPD amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 39

Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector

(continued)

(Audited)

Gross carrying/nominal amount

Allowance for ECL ECL coverage %

Stage 1 Stage 2

Stage

3 POCI Total

Stage

3 POCI Total

Stage

3 POCI Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

% % % % %

Loans and

advances to

customers

3,209,940 461,665 62,760 622 3,734,987 (2,727) (11,186) (25,815) (191) (39,919) 0.1 2.4 41.1 30.5 1.1

– personal 1,447,851 67,809 8,705 — 1,524,365 (1,076) (2,822) (1,456) — (5,354) 0.1 4.2 16.7 — 0.4

– corporate

1,484,030 369,973 53,141 620 1,907,764 (1,390) (8,039) (24,351) (189) (33,969) 0.1 2.2 45.8 30.5 1.8

– financial

institutions

278,059 23,883 914 2 302,858 (261) (325) (8) (2) (596) 0.1 1.4 0.9 100.0 0.2

Loans and

advances to

banks

514,442 1,448 — — 515,890 (38) (5) — — (43) 0.0 0.3 — — 0.0

Other

financial

assets

2,288,775 14,414 464 1 2,303,654 (163) (40) (59) — (262) 0.0 0.3 12.7 — 0.0

Loans and

other credit-

commitments

1,821,355 65,288 5,758 — 1,892,401 (427) (397) (40) — (864) 0.0 0.6 0.7 — 0.0

– personal 1,321,908 22,721 4,940 — 1,349,569 (18) (1) — — (19) 0.0 0.0 — — 0.0

– corporate

383,717 39,191 818 — 423,726 (394) (389) (40) — (823) 0.1 1.0 4.8 — 0.2

– financial

institutions

115,730 3,376 — — 119,106 (15) (7) — — (22) 0.0 0.2 — — 0.0

Financial

guarantee

30,738 4,840 68 — 35,646 (18) (17) (28) — (63) 0.1 0.4 41.2 — 0.2

– personal 4,176 6 1 — 4,183 — — — — — — — — — —

– corporate

24,093 4,483 67 — 28,643 (18) (17) (28) — (63) 0.1 0.4 41.2 — 0.2

– financial

institutions

2,469 351 — — 2,820 — — — — — — — — — —

At 31 Dec

2022

7,865,250 547,655 69,050 623 8,482,578 (3,373) (11,645) (25,942) (191) (41,151) 0.0 2.1 37.6 30.4 0.5

The above table does not include balances due from Group companies.

1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

2 Includes corporate and commercial.

3 Includes non-bank financial institutions.

4 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Stage 2 days past due analysis for loans and advances to customers (continued)

(Audited)

Gross carrying amount Allowance for ECL ECL coverage %

which:

Stage 2

Up-to-

date

1 to 29

DPD

1,2

30 and >

DPD

1,2

Stage 2

Up-to-

date

1 to 29

DPD

1,2

30 and

> DPD

1,2

Stage 2

Up-to-

date

1 to 29

DPD

30 and

> DPD

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m % % % %

At 31 Dec 2022

Loans and advances to customers at

amortised cost

461,665

449,786

8,806 3,073 (11,186) (10,635) (196) (355) 2.4 2.4 2.2 11.6

– personal 67,809 58,005 7,192 2,612 (2,822) (2,304) (170) (348) 4.2 4.0 2.4 13.3

– corporate and commercial 369,973

368,023

1,491 459 (8,039) (8,006) (26) (7) 2.2 2.2 1.7 1.5

– non-bank financial institutions 23,883 23,758 123 2 (325) (325) — — 1.4 1.4 — —

1 Days past due ('DPD').

2 The DPD amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted.

3 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Risk

40 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Credit exposure

(Audited)

Maximum exposure to credit risk

This section provides information on the maximum exposure to credit risk associated with balance sheet items as well as loan and other credit-

related commitments.

‘Maximum exposure to credit risk’ table

The following table presents our maximum exposure to credit risk before taking account of any collateral held or other credit enhancements (unless

such enhancements meet accounting offsetting requirements). The table excludes financial instruments whose carrying amount best represents the net

exposure to credit risk, and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet,

the maximum exposure to credit risk equals their carrying amount and is net of allowance for ECL. For financial guarantees and other guarantees

granted, it is the maximum amount that we would have topay if the guarantees were called upon. For loan commitments and other credit-related

commitments, it is generally thefull amount of the committed facilities.

Other credit risk mitigants

There are arrangements in place that reduce our maximum exposure

to credit risk. These include a charge over collateral on borrowers’

specific assets, such as residential properties, collateral held in the

form of financial instruments that are not held on the balance sheet

and short positions in securities. In addition, for financial assets

heldas part of linked insurance/investment contracts the risk

ispredominantly borne by the policyholder.

Collateral available to mitigate credit risk is disclosed in the Collateral

section on pages 54-57.

Maximum exposure to credit risk before collateral held or other credit enhancements

2023 2022

HK$m HK$m

Cash and balances at central banks 232,987 232,740

Items in the course of collection from other banks 22,049 28,557

Hong Kong Government certificates of indebtedness 328,304 341,354

Trading assets 565,660 435,358

Derivatives 409,253 502,877

Financial assets designated at fair value 484,593 466,312

Reverse repurchase agreements – non-trading 831,186 927,976

Loans and advances to banks 563,801 515,847

Loans and advances to customers 3,557,076 3,695,068

Financial investments 2,023,263 1,742,582

Amounts due from Group companies 158,592 140,487

Other assets 275,917 260,616

Total on-balance sheet exposure to credit risk 9,452,681 9,289,774

Total off-balance sheet 3,845,103 3,587,491

Financial guarantees and other similar contracts 434,030 396,491

Loan and other credit-related exposure 3,411,073 3,191,000

At 31 Dec 13,297,784 12,877,265

Total exposure to credit risk remained broadly unchanged in 2023 with loans and advances continuing to be the largest element.

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Credit deterioration of financial instruments

A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2, stage 3 (credit

impaired) and POCI financial instruments can be found in Note 1.2(i) on the consolidated financial statements.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 41

Measurement uncertainty and sensitivity analysis of ECL estimates

(Audited)

The recognition and measurement of ECL involves the use of

significant judgement and estimation. We form multiple economic

scenarios based on economic forecasts, apply these assumptions to

credit risk models to estimate future credit losses, and probability-

weight the results to determine an unbiased ECL estimate.

Management assessed the current economic environment, reviewed

the latest economic forecasts and discussed key risks before

selecting the economic scenarios and their weightings.

Scenarios were constructed to reflect the latest geopolitical risks and

macroeconomic developments, including the Israel-Hamas war and

subsequent disruptions in the Red Sea, and current Inflation and

monetary policy expectations.

Management judgemental adjustments are used where modelled

ECL does not fully reflect the identified risks and related uncertainty,

or to capture significant late breaking events.

At 31 December 2023, there was an overall reduction in management

judgemental adjustments compared with 31 December 2022.

Methodology

At 31 December 2023, four scenarios were used to capture the latest

economic expectations and to articulate management’s view of the

range of risks and potential outcomes. Each scenario is updated with

the latest economic forecasts and estimates every quarter.

Three scenarios, the Upside, Central and Downside are drawn from

external consensus forecasts, market data and distributional

estimates of the entire range of economic outcomes. The fourth

scenario, the Downside 2, represents management’s view of severe

downside risks.

The Central scenario is deemed the ‘most likely’ scenario, and usually

attracts the largest probability weighting. It is created using

consensus forecasts, which is the average of a panel of external

forecasts.

The outer scenarios represent the tails of the distribution and are less

likely to occur. The Consensus Upside and Downside scenarios are

created with reference to distributions for select markets that capture

forecasters’ views of the entire range of economic outcomes. In the

later years of those scenarios, projections revert to long-term

consensus trend expectations. Reversion to trend expectations is

done with reference to historically observed quarterly changes in the

values of macroeconomic variables.

The fourth scenario, the Downside 2, is designed to represent

management’s view of severe downside risks. It is a globally

consistent, narrative-driven scenario that explores a more extreme

economic outcome than those captured by the consensus scenarios.

In this scenario, variables do not, by design, revert to long-term trend

expectations and may instead explore alternative states of

equilibrium, where economic activity moves permanently away from

past trends.

The consensus Downside and the consensus Upside scenarios are

each constructed to be consistent with a 10% probability. The

Downside 2 is constructed to a 5% probability. The Central scenario

is assigned the remaining 75% probability. This weighting scheme is

deemed appropriate for the unbiased estimation of ECL in most

circumstances. However, management may depart from this

probability-based scenario weighting approach when the economic

outlook and forecasts are determined to be particularly uncertain and

risks are elevated.

At 31 December 2023, the standard approach to scenario weightings

was applied as key uncertainty and risk metrics were aligned to their

historical averages. Economic forecasts for the Central scenario have

remained stable and the dispersion within consensus forecast panels

has remained low, even as the Israel-Hamas war escalated. Risks,

including the economic consequences of a broader war in the Middle

East, are reflected in downside scenarios.

Scenarios produced to calculate ECL are aligned to HSBC’s top and

emerging risks.

Description of economic scenarios

The economic assumptions presented in this section have been

formed by HSBC with reference to external forecasts and estimates,

specifically for the purpose of calculating ECL.

Forecasts remain subject to uncertainty and variability. Outer

scenarios are constructed so that they capture risks that could alter

the trajectory of the economy and are designed to encompass the

potential crystallisation of number of key macro-financial risks.

In our key markets, Central scenario forecasts remained broadly

stable in the fourth quarter of 2023. The key exception was with

regard to monetary policy, where expectations for interest rate cuts

were brought forward. There continues to be expectations that 2024

will be a period of below trend growth, with inflation remaining above

central bank targets.

At the end of 2023, risks to the economic outlook included a number

of significant geopolitical issues. Within our downside scenarios, the

economic consequences from the crystallisation of those risks are

captured by higher commodity and goods prices, the re-acceleration

of inflation, a further rise in interest rates and a global recession.

The scenarios used to calculate ECL in the Annual Report and

Accounts 2023 are described below.

The consensus Central scenario

HSBC’s Central scenario reflects expectations for a low growth and

high interest rate environment across many of our key markets,

where GDP growth is expected to be lower in 2024, than in the

previous year.

In mainland China and Hong Kong, growth is also expected to be

moderately slower in 2024 relative to 2023. The economic boost from

post-pandemic re-opening has faded and slower global growth and

low trade volumes are expected to moderate activity. In mainland

China, the continued fall in investment in the property sector is

expected to act as a further brake on the economy, while in Hong

Kong, higher interest rates drive a further decline in property

valuations. Despite these headwinds, a steeper downturn is expected

to be avoided as authorities in mainland China are increasing fiscal

and monetary support to the economy. Fiscal expansion is anticipated

for 2024, alongside additional credit easing.

Global GDP is expected to grow by 2.2% in 2024 in the Central

scenario, and the average rate of global GDP growth is forecast to be

2.6% over the five-year forecast period. This is below the average

growth rate over the five-year period prior to the onset of the

pandemic of 2.9%.

The key features of our Central scenario are:

– GDP growth rates in our key markets are expected to slow down

in 2024, followed by a moderate recovery in 2025. The key driver

of weaker growth is high interest rates, which act to deter

consumption and investment. Lower trade volumes are also key

driver of weaker growth in Asia.

– In most markets, unemployment is expected rise moderately as

economic activity slows, although it remains low by historical

standards.

– Inflation is expected to continue to fall as commodity prices

decline, supply disruptions abate, and wage growth moderates. In

mainland China, weak consumption and excess supply has caused

inflation to drop sharply, but deflation is not projected to persist.

– Weak conditions in housing markets are expected to persist

through 2024 and 2025, with high interest rates weighing on

prices in Hong Kong and subdued confidence dampening demand

in mainland China.

– Challenging conditions are also forecast to continue in the

commercial property sector in a number of our key markets.

Structural changes to demand in the office segment in particular

have driven lower valuations.

– The Brent crude oil price is forecast to average around $75 per

barrel over the projection period.

Risk

42 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

The Central scenario was created with forecasts available in late

November, and reviewed continually until end-December 2023. In

accordance with HSBC’s scenario framework, a probability weight of

75% has been assigned to the Central scenario across all major

markets.

The following table describes key macroeconomic variables in the

consensus Central scenario.

Central scenario 2024-2028 (as at 4Q23)

Hong

Kong

Mainland

China

% %

GDP growth (annual average rate)

2024 2.6 4.5

2025 2.7 4.4

2026 2.6 4.3

2027 2.6 3.8

2028 2.6 3.9

5 year average

2.6 4.2

Unemployment rate

2024 3.0 5.2

2025 3.0 5.1

2026 3.2 5.1

2027 3.2 5.1

2028 3.2 5.1

5 year average

3.1 5.1

House price growth (annual average rate)

2024 (6.6) (0.6)

2025 (0.7) 1.1

2026 2.6 2.6

2027 2.8 4.0

2028 3.0 4.5

5 year average

0.2 2.3

Inflation rate (annual average growth rate)

2024 2.1 1.8

2025 2.1 2.0

2026 2.2 2.1

2027 2.4 2.0

2028 2.4 2.0

5 year average

2.2 2.0

Central bank policy rate (annual average, %)

2024 5.4 4.1

2025 4.4 4.2

2026 4.1 4.4

2027 4.1 4.6

2028 4.1 4.8

5 year average

4.4 4.4

1 The five-year average is calculated over a projected period of 20

quarters from 1Q24 to 4Q28.

The consensus Upside scenario

Compared with the Central scenario, the consensus Upside scenario

features stronger economic activity in the near term, before

converging to long-run trend expectations. It also incorporates a

faster fall in the rate of inflation than incorporated in the Central

scenario.

The scenario is consistent with a number of key upside risk themes.

These include a faster fall in the rate of inflation that allows central

banks to reduce interest rates more quickly; an easing in financial

conditions; and de-escalation in geopolitical tensions, as the Israel-

Hamas and Russia-Ukraine wars move towards conclusions, and the

US-China relationship improves.

The following table describes key macroeconomic variables in the

consensus Upside scenario.

Consensus Upside scenario 2024-2028 (as at 4Q23)

Hong Kong

Mainland

China

% %

GDP level (%, start-to-peak)

21.8 (4Q28) 30.4 (4Q28)

Unemployment rate (%, min)

2.4 (3Q24) 4.8 (4Q25)

House price index (%, start-to-peak)

17.9 (4Q28) 19.7 (4Q28)

Inflation rate (YoY % change, min)

0.3 (4Q24) 0.6 (3Q24)

Central bank policy rate (%, Min)

4.1 (1Q27) 4.0 (2Q24)

1 Cumulative change to the highest level of the series during the

20-quarter projection.

2 The lowest projected unemployment or policy rate in the scenario.

3 The lowest projected year-on-year percentage change in inflation in the

scenario.

Downside scenarios

Downside scenarios explore the intensification and crystallisation of a

number of key economic and financial risks. These include an

escalation of geopolitical tensions escalate, which disrupt key

commodity and goods markets, causing inflation and interest rates to

rise, and creating a global recession.

As the geopolitical environment remains volatile and complex, risks

include:

– a broader and more prolonged conflict in the Middle East that

undermines confidence, drives an increase in global energy costs

and reduces trade and investment;

– a potential escalation in the Russia-Ukraine war, which expands

beyond Ukraine’s borders, and further disrupts energy, fertiliser

and food supplies; and

– continued differences between the US and China, which could

affect economic confidence, the global goods trade and supply

chains for critical technologies.

High inflation and higher interest rates also remain key risks. Should

geopolitical tensions escalate, energy and food prices could rise and

increase pressure on household budgets and firms’ costs.

A wage-price spiral, triggered by higher inflation and labour supply

shortages could put sustained upward pressure on wages and

services prices, aggravating cost pressures and increasing the

squeeze on household real incomes and corporate margins. In turn, it

raises the risk of a more forceful policy response from central banks,

a steeper trajectory for interest rates, significantly higher defaults

and, ultimately, a deep economic recession.

The consensus Downside scenario

In the consensus Downside scenario, economic activity is weaker

compared with the Central scenario. In this scenario, GDP declines,

unemployment rates rise, and asset prices fall. The scenario features

an escalation of geopolitical tensions, which causes a rise in inflation,

as supply chain constraints intensify and energy prices rise. The

scenario also features a temporary increase in interest rates above

the Central scenario, before the effects of weaker consumption

demand begin to dominate and commodity prices and inflation fall

again.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 43

The following table describes key macroeconomic variables in the

consensus Downside scenario.

Consensus Downside scenario 2024-2028 (as at 4Q23)

Hong Kong

Mainland

China

% %

GDP level (%, start-to-trough)

(1.6) (3Q25) (1.5) (1Q24)

Unemployment rate (%, max)

4.7 (4Q25) 6.9 (4Q25)

House price index (%, start-to-trough)

(9.6) (4Q24) (7.1) (3Q25)

Inflation rate (YoY % change, max)

3.8 (3Q24) 3.5 (4Q24)

Central bank policy rate (%, Max)

6.0 (1Q24) 4.1 (3Q24)

1 Cumulative change to the lowest level of the series during the 20-

quarter projection.

2 The highest projected unemployment or policy rate in the scenario.

3 The highest projected year-on-year percentage change in inflation in

the scenario.

Downside 2 scenario

The Downside 2 scenario features a deep global recession and

reflects management’s view of the tail of the economic distribution. It

incorporates the crystallisation of a number of risks simultaneously,

including a further escalation of geopolitical crises globally, which

creates severe supply disruptions to goods and energy markets. In

the scenario, as inflation surges and central banks tighten monetary

policy further, confidence evaporates. However, this impulse is

expected to prove short-lived, as recession takes hold, causing

commodity prices to correct sharply and global price inflation to fall.

The following table describes key macroeconomic variables in the

Downside 2 scenario.

Downside 2 scenario 2024-2028 (as at 4Q23)

Hong Kong

Mainland

China

% %

GDP level (%, start-to-trough)

(8.2) (1Q25) (6.4) (1Q25)

Unemployment rate (%, max)

6.4 (4Q24) 7.0 (4Q25)

House price index (%, start-to-trough)

(32.8) (3Q26) (25.5) (4Q25)

Inflation rate (YoY % change, max)

4.1 (3Q24) 4.1 (4Q24)

Central bank policy rate (%, Max)

6.4 (1Q24) 4.8 (3Q24)

1 Cumulative change to the lowest level of the series during the 20-

quarter projection.

2 The highest projected unemployment/policy rate in the scenario.

3 The highest projected year-on-year percentage change in inflation in

the scenario.

Scenario weighting

In reviewing the economic environment, the level of risk and

uncertainty, management has considered both global and country-

specific factors.

Key considerations around uncertainty attached to the Central

scenario projections in the fourth quarter of 2023 focused on:

– the risk that the Israel-Hamas war escalates and affects economic

expectations;

– the lagged impact of elevated interest rates on household

finances and businesses and the implications of recent changes to

monetary policy expectations on growth and employment; and

– the outlook for real estate in our key markets, namely Hong Kong

and mainland China.

Although these risk factors remain significant, management assessed

that they were adequately reflected in scenarios, at the standard

weighting. It was noted that despite the escalation of geopolitical risk

in the Middle East, economic forecasts had remained stable, and

dispersion of forecasts around the consensus were either stable, or

have moved lower. Financial market measures of volatility also

remained low through the fourth quarter of 2023.

This has led management to assign scenario probabilities that are

aligned to the standard scenario framework. This entailed assigning a

75% probability weighting to the Central scenario in our major

markets. The consensus Upside is assigned a 10% weighting and the

consensus Downside scenario is assigned 10%. The Downside 2 is

assigned 5% weighting.

In support of the decision, it was noted that in mainland China recent

policy announcements suggest fiscal and monetary stimulus will

increase significantly through 2024. This suggests that there will be

increased official support to economic headwinds, which would

reduce the uncertainty attached to current forecasts.

The following table describes the probabilities assigned in each

scenario.

Scenario weightings, %

Standard

weights

Hong

Kong

Mainland

China

4Q23

Upside 10.0 10.0 10.0

Central 75.0 75.0 75.0

Downside 10.0 10.0 10.0

Downside 2 5.0 5.0 5.0

At 31 December 2023, the consensus Upside and Central scenarios

for all markets had a combined weighting of 85%.

Critical estimates and judgements

The calculation of ECL under HKFRS 9 involves significant

judgements, assumptions and estimates at 31 December 2023.

These included:

– the selection of weights to apply to the economic scenarios given

the rapidly changing economic conditions and the inherent

uncertainty of the underlying forecast under each scenario;

– the selection of scenarios to consider given the changing nature of

macroeconomic and geopolitical risks that the Bank and wider

economy faces; and

– estimating the economic effects of those scenarios on ECL,

particularly sector and portfolio specific risks and the uncertainty

of default and recovery experience under all scenarios.

How economic scenarios are reflected in of ECL

calculations

Models are used to reflect economic scenarios on ECL estimates. As

described above, modelled assumptions and linkages based on

historical information could not alone produce relevant information

under the conditions experienced in 2023, and management

judgemental adjustments were still required to support modelled

outcomes.

We have developed globally consistent methodologies for the

application of forward economic guidance into the calculation of ECL

for wholesale and retail credit risk. These standard approaches are

described below, followed by the management judgemental

adjustments made, including those to reflect the circumstances

experienced in 2023.

For our wholesale portfolios, a global methodology is used for the

estimation of the term structure of probability of default (‘PD’) and

loss given default (‘LGD’). For PDs, we consider the correlation of

forward economic guidance to default rates for a particular industry in

a country. For LGD calculations we consider the correlation of

forward economic guidance to collateral values and realisation rates

for a particular country and industry. PDs and LGDs are estimated for

the entire term structure of each instrument.

For impaired loans, ECL estimates are derived based on discounted

cash flow (‘DCF’) calculations for internal forward-looking scenarios

specific to individual company circumstances [see page 96].

Probability-weighted outcomes are applied, and depending on

materiality and status of the borrower, the number of scenarios

considered will change. Where relevant for the case being assessed,

forward economic guidance is incorporated as part of these

scenarios. LGD-driven proxy and modelled estimates are used for

certain less material cases.

For our retail portfolios, the models are predominantly based on

historical observations and correlations with default rates and

collateral values. For PD, the impact of economic scenarios is

modelled for each portfolio, leveraging historical relationships

Risk

44 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

between default rates and macro-economic variables. These are

included within HKFRS 9 ECL estimates using either economic

response models or models which contain internal, external and

macro-economic variables. The macro-economic impact on PD is

modelled over the period equal to the remaining maturity of the

underlying assets. For LGD, the impact is modelled for mortgage

portfolios by forecasting future loan-to-value profiles for the remaining

maturity of the asset, leveraging national level house price index

forecast and applying the corresponding LGD expectation relative to

the updated forecast collateral values. Management judgemental

adjustments are described below.

Management judgemental adjustments

In the context of HKFRS 9, management judgemental adjustments

are typically short-term increases or decreases to the modelled ECL

at either a customer, segment or portfolio level where management

believes ECL results do not sufficiently reflect the credit risk/

expected credit losses at the reporting date. These can relate to risks

or uncertainties which are not reflected in the models and/or to any

late breaking events with significant uncertainty, subject to

management review and challenge.

This includes refining model inputs and outputs and using

adjustments to ECL based on management judgement and

quantitative analysis for impacts that are difficult to model.

The effects of management judgmental adjustments are considered

for both balances and ECL when determining whether or not a

significant increase in credit risk has occurred and is allocated to a

stage where appropriate. This is in accordance with the internal

adjustments framework.

Management judgmental adjustments are reviewed under the

governance process for HKFRS 9 (as detailed in the section 'Credit

risk management' on page 35). Review and challenge focuses on the

rationale and quantum of the adjustments with a further review

carried out by the second line of defence where significant. For some

management judgemental adjustments, internal frameworks

establish the conditions under which these adjustments should no

longer be required and as such are considered as part of the

governance process. This internal governance process allows

management judgemental adjustments to be reviewed regularly and,

where possible, to reduce the reliance on these through model

recalibration or redevelopment, as appropriate.

The drivers of management judgemental adjustments continue to

evolve with the economic environment, and as new risks emerge.

In addition to management judgemental adjustments there are also

‘Other adjustments’ which are made to address process limitations

and data/model deficiencies.

‘Management judgemental adjustments’ and ‘Other adjustments’

constitute the total value of adjustments to modelled ECL.

At 31 December 2023, management judgement adjustments reduced

by HK$1.7bn compared with 31 December 2022. For the wholesale

portfolios this was due to modelled outcomes better reflecting the

key risks at 31 December 2023. For retail there was an increase in

other credit judgements due to the potential delayed impact of

economic scenarios on unsecured portfolio defaults.

Management judgemental adjustments made in estimating the

scenario-weighted reported ECL at 31 December 2023 are set out in

the following table.

Management judgemental adjustments to ECL as at

31 December 2023

Retail Wholesale

Total

$bn HK$bn HK$bn

Modelled ECL (A)

4.9 7.7 12.6

Banks, sovereigns, government entities

and low-risk counterparties

— — —

Corporate lending adjustments — 0.3 0.3

Inflation related adjustments — — —

Other credit judgements 0.8 — 0.8

Total management judgemental

adjustments (B)

0.8 0.3 1.1

Other adjustments (C)

— (0.1) (0.1)

Final ECL (A + B + C)

5.7 7.9 13.6

Management judgemental adjustments to ECL as at

31 December 2022

Retail Wholesale

Total

HK$bn HK$bn HK$bn

Modelled ECL (A)

5.3 8.1 13.4

Banks, sovereigns, government entities

and low-risk counterparties — 0.2 0.2

Corporate lending adjustments — 2.1 2.1

Inflation related adjustments — — —

Other credit judgements 0.5 — 0.5

Total management judgemental

adjustments (B)

0.5 2.3 2.8

Other adjustments (C)

0.1 1.0

1.1

Final ECL (A + B + C)

5.9 11.4 17.3

1 Management judgemental adjustments presented in the table reflect

increases or (decreases) to ECL, respectively.

2 The wholesale portfolio corresponds to adjustments to the performing

portfolio (stage 1 and stage 2).

3 (A) refers to probability-weighted allowance for ECL before any

adjustments are applied.

4 (B) refers to adjustments that are applied where management believes

allowance for ECL does not sufficiently reflect the credit risk/ expected

credit losses of any given portfolio at the reporting date. These can

relate to risks or uncertainties that are not reflected in the model and/

or to any late breaking events.

5 (C) refers to adjustments made to allowance for ECL to address

process limitations and data / model deficiencies.

6 As presented within our internal credit risk governance (see page 36).

Management judgemental adjustments at 31 December 2023 were a

decrease of ECL of HK$2.0bn for the wholesale portfolio and an

increase to ECL of HK$0.3bn for the retail portfolio.

At 31 December 2023, wholesale management judgemental

adjustments were an ECL increase of HK$0.3bn (31 December 2022:

HK$2.3bn increase).

Management judgmental adjustments to corporate exposures

increased ECL by HK$0.3bn at 31 December 2023 (31 December

2022: HK$2.1bn increase) mostly due to management judgements to

reflect heightened uncertainty in specific sectors and geographies,

including adjustments to exposures to the real estate sector in

mainland China. The decrease in adjustments to ECL compared with

31 December 2022 is attributed to a crystallisation of existing risks at

that date through downgrades, and an improved reflection of

emerging risks in macroeconomic scenarios and modelled outcomes.

At 31 December 2023, retail management judgemental adjustments

increased ECL by HK$0.8bn (31 December 2022: HK$0.5bn increase).

The increase in adjustments to ECL compared with 31December

2022 were primarily due to the increase in management judgemental

adjustments in other credit judgements (detailed below).

– Management judgemental adjustments in relation to other credit

judgements increased ECL by HK$0.74bn (31 December 2022:

HK$0.5bn). These adjustments were primarily in relation to

country-specific risks related to future macroeconomic conditions.

– Management judgemental adjustments in relation to inflation

increased ECL by HK$0.04bn (31 December 2022: HK$0.05bn).

These adjustments addressed where increasing inflation and

interest rates result in affordability risks that were not fully

captured by the modelled output.

Economic scenarios sensitivity analysis of ECL estimates

Management considered the sensitivity of the ECL outcome against

the economic forecasts as part of the ECL governance process by

recalculating the ECL under each scenario described above for

selected portfolios, applying a 100% weighting to each scenario in

turn. The weighting is reflected in both the determination of a

significant increase in credit risk and the measurement of the

resulting ECL. The ECL calculated for the Upside and Downside

scenarios should not be taken to represent the upper and lower limits

of possible ECL outcomes. The impact of defaults that might occur in

the future under different economic scenarios is captured by

recalculating ECL for loans at the balance sheet date.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 45

There is a particularly high degree of estimation uncertainty in

numbers representing tail risk scenarios when assigned a 100%

weighting.

For wholesale credit risk exposures, the sensitivity analysis excludes

ECL and financial instruments related to defaulted (stage 3) obligors.

The measurement of stage 3 ECL is relatively more sensitive to credit

factors specific to the obligor than future economic scenarios, and

therefore the effect of macroeconomic factors are not necessarily the

key consideration when performing individual assessments of ECL

for obligors in default. Loans to defaulted obligors are a small portion

of the overall wholesale lending exposure, even if representing the

majority of the allowance for ECL. Due to the range and specificity of

the credit factors to which the ECL is sensitive, it is not possible to

provide a meaningful alternative sensitivity analysis for a consistent

set of risks across all defaulted obligors.

For retail mortgage exposures, the sensitivity analysis includes ECL

for loans and advances to customers related to defaulted obligors.

This is because the retail ECL for secured mortgage portfolios

including loans in all stages is sensitive to macroeconomic variables.

Wholesale and retail sensitivity

The wholesale and retail sensitivity tables present the 100%

weighted results. These exclude portfolios held by the insurance

business and small portfolios, and as such cannot be directly

compared with personal and wholesale lending presented in other

credit risk tables. In both the wholesale and retail analysis, the

comparative period results for Downside 2 scenarios are also not

directly comparable with the current period, because they reflect

different risks relative to the consensus scenarios for the period end.

The wholesale and retail sensitivity analysis is stated inclusive of

management judgemental adjustments, as appropriate to each

scenario.

For both retail and wholesale portfolios, the gross carrying amount of

financial instruments are the same under each scenario. For

exposures with similar risk profile and product characteristics, the

sensitivity impact is therefore largely the result of changes in

macroeconomic assumptions.

Wholesale analysis

HKFRS 9 ECL sensitivity to future economic conditions

Hong Kong

Mainland

China

ECL coverage of financial instruments

subject to significant measurement

uncertainty at 31 December 2023

HK$m HK$m

Reported ECL 4,758 2,018

Consensus scenarios ECL

Central scenario 4,422 1,697

Upside scenario 3,378 1,106

Downside scenario 6,304 3,237

Alternative (Downside 2) scenario ECL 10,881 7,384

HKFRS 9 ECL sensitivity to future economic conditions

Hong Kong

Mainland

China

ECL coverage of financial instruments subject

to significant measurement uncertainty at

31 December 2022

HK$m HK$m

Reported ECL 7,211 2,302

Consensus scenarios

Central scenario 6,386 1,887

Upside scenario 4,616 1,123

Downside scenario 10,252 3,235

Alternative scenarios 16,852 9,572

1 Excludes ECL and financial instruments relating to defaulted obligors

because the measurement of ECL is relatively more sensitive to credit

factors specific to the obligor than future economic scenarios.

2 Includes off-balance sheet financial instruments that are subject to

significant measurement uncertainty.

Compared with 31 December 2022, the Downside 2 ECL impact was

lower in Hong Kong and mainland China, mostly due to the

crystallisation of defaults for certain high-risk exposures and decrease

of the associated downside uncertainty.

Retail analysis

HKFRS 9 ECL sensitivity to future economic conditions

Reported

ECL

Central

Scenario

Upside

Scenario

Downside

Scenario

Alternative

(Downside

2) scenario

ECL

coverage of

loans and

advances to

customers

HK$m HK$m HK$m HK$m HK$m

At 31

December

2023

Hong Kong 3,115 2,658 2,370 4,079 8,973

HKFRS 9 ECL sensitivity to future economic conditions

Reported

ECL

Central

Scenario

Upside

Scenario

Downside

Scenario

Alternative

(Downside

2) scenario

ECL

ECL coverage

of loans and

advances to

customers

HK$m HK$m HK$m HK$m HK$m

At 31

December

2022

Hong Kong 2,702 2,406 1,985 4,037 6,014

1 ECL sensitivities exclude portfolios using less complex modelling

approaches.

2 ECL sensitivity includes only on-balance sheet financial instruments to

which HKFRS 9 impairment requirements are applied.

At 31 December 2023, the most significant level of ECL sensitivity

was observed in Hong Kong driven by the relative size of the portfolio

in retail.

Risk

46 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and

advances to banks and customers, including loan commitments and financial guarantees

(Unaudited)

The following disclosure provides a reconciliation by stage of the

group’s gross carrying/nominal amount and allowances for loans and

advances to banks and customers, including loan commitments and

financial guarantees.

Movements are calculated on a quarterly basis and therefore fully

capture stage movements between quarters. If movements were

calculated on a year-to-date basis they would reflect only the opening

and closing position of the financial instrument.

The transfers of financial instruments represent the impact of stage

transfers upon the gross carrying/nominal amount and associated

allowance for ECL.

The net remeasurement of ECL arising from stage transfers

represents the increase or decrease due to these transfers, for

example, moving from a 12-month (stage 1) to a lifetime (stage 2)

ECL measurement basis. Net remeasurement excludes the

underlying customer risk rating ('CRR')/probability of default ('PD')

movements of the financial instruments transferring stage. This is

captured, along with other credit quality movements in the ‘changes

in risk parameters – credit quality’ line item.

Changes in 'Net new and further lending/repayments' represents the

impact from volume movements within the Group’s lending portfolio

and includes ‘New financial assets originated or purchased’, ‘assets

derecognised (including final repayments)’ and ‘changes to risk

parameters – further lending/repayment’.

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including

loan commitments and financial guarantees

(Audited)

Stage 1 Stage 2 Stage 3 POCI Total

Gross

carrying/

nominal

amount

Allowance

for ECL

Gross

carrying/

nominal

amount

Allowance

for ECL

Gross

carrying/

nominal

amount

Allowance

for ECL

Gross

carrying/

nominal

amount

Allowance

for ECL

Gross

carrying/

nominal

amount

Allowance

for ECL

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 1 Jan 2023 5,574,139 (3,212) 533,242 (11,605) 68,585 (25,881) 623 (191) 6,176,589 (40,889)

Transfers of financial

instruments:

(64,485) (1,974) 38,388 6,944 26,097 (4,970) — — — —

– transfers from stage 1 to

stage 2

(422,711) 888 422,711 (888) — — — — — —

– transfers from stage 2 to

stage 1

361,014 (2,808) (361,014) 2,808 — — — — — —

– transfers to stage 3 (4,009) 85 (24,460) 5,289 28,469 (5,374) — — — —

– transfers from stage 3 1,221 (139) 1,151 (265) (2,372) 404 — — — —

Net remeasurement of ECL

arising from transfer of stage

— 1,147 — (1,175) — (218) — — — (246)

Net new and further lending/

repayments

213,347 (222) (166,049) 2,286 (15,378) 3,604 (332) 15 31,588 5,683

Changes in risk parameters –

credit quality

— 1,143 — (5,451) — (14,174) — 208 — (18,274)

Changes to model used for

ECL calculation

— (121) — 109 — 43 — — — 31

Assets written off — — — — (13,856) 13,856 (2) 2 (13,858) 13,858

Credit-related modifications

that resulted in

derecognition

— — — — — — — — — —

Foreign exchange (4,522) 21 (2,366) 12 (341) 173 — — (7,229) 206

Others (5,800) 10 (116) 9 (57) 10 — (197) (5,973) (168)

At 31 Dec 2023 5,712,679 (3,208) 403,099 (8,871) 65,050 (27,557) 289 (163) 6,181,117 (39,799)

ECL income statement

charge for the year

(12,806)

Recoveries 864

Modification losses on

contractual cash flows that

did not result in

derecognition (6)

Others (1,118)

Total ECL income

statement charge for the

year

(13,066)

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 47

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including

loan commitments and financial guarantees (continued)

At 31 Dec 2023 Year ended 31 Dec 2023

Gross carrying/

nominal amount Allowance for ECL ECL charge

HK$m HK$m HK$m

As above 6,181,117 (39,799) (13,066)

Other financial assets measured at amortised cost 2,309,109 (393) (44)

Non-trading reverse repurchase agreement commitments 3,317 — —

Performance and other guarantees not considered for HKFRS 9 N/A N/A (106)

Amounts due from Group companies 131,071 — —

Summary of financial instruments to which the impairment requirements in

HKFRS 9 are applied/Summary consolidated income statement

8,624,614 (40,192) (13,216)

Debt instruments measured at FVOCI 1,404,323 (93) 373

Total allowance for ECL/total income statement ECL charge for the year N/A (40,285) (12,843)

Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers, including

loan commitments and financial guarantees (continued)

(Audited)

Stage 1 Stage 2 Stage 3 POCI Total

Gross

carrying/

nominal

amount

Allowance

for ECL

Gross

carrying/

nominal

amount

Allowance

for ECL

Gross

carrying/

nominal

amount

Allowance

for ECL

Gross

carrying/

nominal

amount

Allowance

for ECL

Gross

carrying/

nominal

amount

Allowance

for ECL

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 1 Jan 2022 5,575,693 (2,857) 528,888 (9,721) 41,640 (19,689) 1,558 (334) 6,147,779 (32,601)

Transfers of financial (246,161) (1,866) 203,391 7,011 42,770 (5,145) — — — —

– transfers from stage 1 to

stage 2

(724,574) 1,067 724,574 (1,067) — — — — — —

– transfers from stage 2 to

stage 1

483,362 (2,721) (483,362) 2,721 — — — — — —

– transfers to stage 3 (7,041) 10 (39,496) 5,589 46,537 (5,599) — — — —

– transfers from stage 3 2,092 (222) 1,675 (232) (3,767) 454 — — — —

Net remeasurement of ECL

arising from transfer of stage

— 1,353 — (1,601) — (373) — — — (621)

Net new and further lending/

repayment

371,013 (907) (176,230) 1,341 (7,372) 1,981 (858) 2 186,553 2,417

Changes in risk parameters –

credit quality

— 1,074 — (8,831) — (10,412) — 214 — (17,955)

Changes to model used for

ECL calculation

— (31) — 11 — (12) — — — (32)

Assets written off — — — — (7,191) 7,191 (78) 78 (7,269) 7,269

Credit-related modifications

that resulted in

derecognition

— — — — (241) 60 — — (241) 60

Foreign exchange (126,629) 32 (22,807) 180 (1,024) 526 1 (1) (150,459) 737

Others 223 (10) — 5 3 (8) — (150) 226 (163)

At 31 Dec 2022 5,574,139 (3,212) 533,242 (11,605) 68,585 (25,881) 623 (191) 6,176,589 (40,889)

ECL income statement

charge for the year

(16,191)

Recoveries 879

Others (563)

Total ECL income statement

charge for the year

(15,875)

At 31 Dec 2022 Year ended 31 Dec 2022

Gross carrying/

nominal amount Allowance for ECL ECL charge

HK$m HK$m HK$m

As above 6,176,589 (40,889) (15,875)

Other financial assets measured at amortised cost 2,303,654 (262) (83)

Non-trading reverse repurchase agreement commitments 2,335 — —

Performance and other guarantees not considered for HKFRS 9 N/A N/A (81)

Amounts due from Group companies 129,341 — —

Summary of financial instruments to which the impairment requirements in HKFRS 9

are applied/Summary consolidated income statement

8,611,919 (41,151) (16,039)

Debt instruments measured at FVOCI 1,232,817 (329) (332)

Total allowance for ECL/total income statement ECL charge for the year N/A (41,480) (16,371)

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Risk

48 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Credit quality

Credit quality of financial instruments

(Audited)

We assess the credit quality of all financial instruments that are

subject to credit risk. The credit quality of financial instruments is a

point-in-time assessment of the probability of default of financial

instruments, whereas stages 1 and 2 are determined based on

relative deterioration of credit quality since initial recognition for the

majority of portfolios. Accordingly, for non-credit-impaired financial

instruments, there is no direct relationship between the credit quality

assessment and stage 1 and 2, although typically the lower credit

quality bands exhibit a higher proportion in stage 2.

The five credit quality classifications provided below each encompass

a range of granular internal credit rating grades assigned to wholesale

and personal lending businesses and the external ratings attributed

by external agencies to debt securities, as shown in the table on page

36.

Distribution of financial instruments by credit quality at 31 December 2023

(Audited)

Gross carrying/notional amount

Allowance

for ECL NetStrong Good Satisfactory

Sub-

standard

Credit

impaired Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

In-scope for HKFRS 9 impairment

Loans and advances to customers held at

amortised cost

2,074,847 688,167 698,123 71,823 62,969 3,595,929 (38,853) 3,557,076

– personal 1,336,990 128,108 85,097 5,420 7,406 1,563,021 (5,692) 1,557,329

– corporate and commercial 571,741 499,109 549,653 65,943 54,903 1,741,349 (32,586) 1,708,763

– non-bank financial institutions 166,116 60,950 63,373 460 660 291,559 (575) 290,984

Loans and advances to banks 553,184 7,768 758 2,142 — 563,852 (51) 563,801

Cash and balances at central banks 227,259 5,607 122 — — 232,988 (1) 232,987

Items in the course of collection from other

banks

22,049 — — — — 22,049 — 22,049

Hong Kong Government certificates of

indebtedness

328,304 — — — — 328,304 — 328,304

Reverse repurchase agreements – non-trading 478,404 138,719 214,004 59 — 831,186 — 831,186

Financial investments held at amortised cost 586,404 29,796 2,792 3 — 618,995 (57) 618,938

Prepayments, accrued income and other

assets

169,103 65,365 39,610 1,113 396 275,587 (335) 275,252

Debt instruments measured at fair value

through other comprehensive income

1,317,382 69,918 26,535 462 39 1,414,336 (93) 1,414,243

Out-of-scope for HKFRS 9 impairment

— —

Trading assets 464,264 69,240 30,605 529 1,022 565,660 — 565,660

Other financial assets designated and

otherwise mandatorily measured at fair value

through profit or loss

385,170 79,763 14,346 39 49 479,367 — 479,367

Derivatives 247,409 38,615 9,865 358 — 296,247 — 296,247

Total gross carrying amount on-balance

sheet

6,853,779 1,192,958 1,036,760 76,528 64,475 9,224,500 (39,390) 9,185,110

Percentage of total credit quality 74% 13% 11% 1% 1% 100%

Loans and other credit related commitments 2,059,689 793,540 525,376 29,092 3,295 3,410,992 (841) 3,410,151

Financial guarantee and similar contracts 186,629 142,828 72,758 3,339 883 406,437 (405) 406,032

Total nominal off-balance sheet amount 2,246,318 936,368 598,134 32,431 4,178 3,817,429 (1,246) 3,816,183

The above table does not include balances due from Group companies.

1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss

allowance.As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes

fair value gains and losses.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 49

Distribution of financial instruments by credit quality at 31 December 2022 (continued)

(Audited)

Gross carrying/notional amount

Allowance

for ECL NetStrong Good Satisfactory

Sub-

standard

Credit

impaired Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

In-scope for HKFRS 9 impairment

Loans and advances to customers held at

amortised cost 2,092,001 767,388 734,536 77,680 63,382 3,734,987 (39,919) 3,695,068

– personal 1,290,516 143,934 75,910 5,300 8,705 1,524,365 (5,354) 1,519,011

– corporate and commercial 640,240 539,936 602,436 71,391 53,761 1,907,764 (33,969) 1,873,795

– non-bank financial institutions 161,245 83,518 56,190 989 916 302,858 (596) 302,262

Loans and advances to banks 502,021 9,013 1,368 3,488 — 515,890 (43) 515,847

Cash and balances at central banks 226,479 6,047 222 — — 232,748 (8) 232,740

Items in the course of collection from other

banks

28,557 — — — — 28,557 — 28,557

Hong Kong Government certificates of

indebtedness

341,354 — — — — 341,354 — 341,354

Reverse repurchase agreements – non-trading 503,956 132,390 291,608 — 22 927,976 — 927,976

Financial investments held at amortised cost 482,378 24,123 3,308 2 — 509,811 (46) 509,765

Prepayments, accrued income and other assets 168,757 59,634 33,578 796 443 263,208 (208) 263,000

Debt instruments measured at fair value

through other comprehensive income

1,188,399 51,597 15,281 1,030 39 1,256,346 (329) 1,256,017

Out-of-scope for HKFRS 9 impairment

— —

Trading assets 335,477 65,188 32,910 788 999 435,362 — 435,362

Other financial assets designated and

otherwise mandatorily measured at fair value

through profit or loss

367,285 82,980 11,461 26 3 461,755 — 461,755

Derivatives 270,028 52,467 11,351 823 5 334,674 — 334,674

Total gross carrying amount on-balance sheet 6,506,692 1,250,827 1,135,623 84,633 64,893 9,042,668 (40,553) 9,002,115

Percentage of total credit quality 72% 14% 12% 1% 1% 100%

Loans and other credit related commitments 1,924,469 744,111 484,054 29,892 7,934 3,190,460 (864) 3,189,596

Financial guarantee and similar contracts 171,761 133,701 62,022 5,459 553 373,496 (293) 373,203

Total nominal off-balance sheet amount 2,096,230 877,812 546,076 35,351 8,487 3,563,956 (1,157) 3,562,799

The above table does not include balances due from Group companies.

1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss

allowance.As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes

fair value gains and losses.

2 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Risk

50 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Distribution of financial instruments to which the impairment requirements in HKFRS 9 are applied, by credit quality and stage allocation

(Audited)

Gross carrying/notional amount

Allowance

for ECL NetStrong Good Satisfactory

Sub-

standard

Credit

impaired Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Loans and advances to banks 553,184 7,768 758 2,142 — 563,852 (51) 563,801

– stage 1 553,088 7,737 758 2,064 — 563,647 (50) 563,597

– stage 2 96 31 — 78 — 205 (1) 204

– stage 3 — — — — — — — —

– POCI — — — — — — — —

Loans and advances to customers at amortised cost 2,074,847 688,167 698,123 71,823 62,969 3,595,929 (38,853) 3,557,076

– stage 1 2,051,644 624,138 498,644 6,057 — 3,180,483 (2,681) 3,177,802

– stage 2 23,203 64,029 199,479 65,766 — 352,477 (8,575) 343,902

– stage 3 — — — — 62,679 62,679 (27,433) 35,246

– POCI — — — — 290 290 (164) 126

Other financial assets measured at amortised cost 1,811,523 239,487 256,528 1,175 396 2,309,109 (393) 2,308,716

– stage 1 1,810,577 233,634 251,694 311 — 2,296,216 (277) 2,295,939

– stage 2 946 5,853 4,834 864 — 12,497 (11) 12,486

– stage 3 — — — — 396 396 (105) 291

– POCI — — — — — — — —

Loans and other credit-related commitments 1,498,322 320,777 150,205 6,911 2,113 1,978,328 (841) 1,977,487

– stage 1 1,495,419 303,188 126,282 4,151 — 1,929,040 (455) 1,928,585

– stage 2 2,903 17,589 23,923 2,760 — 47,175 (285) 46,890

– stage 3 — — — — 2,113 2,113 (101) 2,012

– POCI — — — — — — — —

Financial guarantees 23,190 12,723 9,532 627 253 46,325 (54) 46,271

– stage 1 23,132 11,992 7,493 211 — 42,828 (20) 42,808

– stage 2 58 731 2,039 416 — 3,244 (10) 3,234

– stage 3 — — — — 253 253 (24) 229

– POCI — — — — — — — —

At 31 Dec 2023 5,961,066

1,268,922

1,115,146 82,678 65,731 8,493,543 (40,192) 8,453,351

Debt instruments at FVOCI

– stage 1 1,317,382 69,918 26,535 — — 1,413,835 (66) 1,413,769

– stage 2 — — — 462 — 462 (16) 446

– stage 3 — — — — 39 39 (11) 28

– POCI — — — — — — — —

At 31 Dec 2023 1,317,382 69,918 26,535 462 39 1,414,336 (93) 1,414,243

The above table does not include balances due from Group companies.

1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss

allowance.As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes

fair value gains and losses.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 51

Distribution of financial instruments to which the impairment requirements in HKFRS 9 are applied, by credit quality and stage

allocation (continued)

(Audited)

Gross carrying/notional amount

Allowance

for ECL NetStrong Good Satisfactory

Sub-

standard

Credit

impaired Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Loans and advances to banks 502,021 9,013 1,368 3,488 — 515,890 (43) 515,847

– stage 1 501,130 8,731 1,338 3,243 — 514,442 (38) 514,404

– stage 2 891 282 30 245 — 1,448 (5) 1,443

– stage 3 — — — — — — — —

– POCI — — — — — — — —

Loans and advances to customers at amortised cost 2,092,001 767,388 734,536 77,680 63,382 3,734,987 (39,919) 3,695,068

– stage 1 2,061,021 650,576 487,558 10,785 — 3,209,940 (2,727) 3,207,213

– stage 2 30,980 116,812 246,978 66,895 — 461,665 (11,186) 450,479

– stage 3 — — — — 62,760 62,760 (25,815) 36,945

– POCI — — — — 622 622 (191) 431

Other financial assets measured at amortised cost 1,751,481 222,194 328,716 798 465 2,303,654 (262) 2,303,392

– stage 1 1,749,522 216,767 322,244 242 — 2,288,775 (163) 2,288,612

– stage 2 1,959 5,427 6,472 556 — 14,414 (40) 14,374

– stage 3 — — — — 464 464 (59) 405

– POCI — — — — 1 1 — 1

Loans and other credit-related commitments 1,421,125 312,185 142,824 10,509 5,758 1,892,401 (864) 1,891,537

– stage 1 1,414,708 284,689 116,144 5,814 — 1,821,355 (427) 1,820,928

– stage 2 6,417 27,496 26,680 4,695 — 65,288 (397) 64,891

– stage 3 — — — — 5,758 5,758 (40) 5,718

– POCI — — — — — — — —

Financial guarantees 14,274 11,643 8,649 1,012 68 35,646 (63) 35,583

– stage 1 13,938 9,994 6,627 179 — 30,738 (18) 30,720

– stage 2 336 1,649 2,022 833 — 4,840 (17) 4,823

– stage 3 — — — — 68 68 (28) 40

– POCI — — — — — — — —

At 31 Dec 2022 5,780,902 1,322,423 1,216,093 93,487 69,673 8,482,578 (41,151) 8,441,427

Debt instruments at FVOCI

– stage 1 1,188,399 51,597 15,281 — — 1,255,277 (60) 1,255,217

– stage 2 — — — 1,030 — 1,030 (269) 761

– stage 3 — — — — 39 39 — 39

– POCI — — — — — — — —

At 31 Dec 2022 1,188,399 51,597 15,281 1,030 39 1,256,346 (329) 1,256,017

The above table does not include balances due from Group companies.

1 For the purposes of this disclosure, gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss

allowance.As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes

fair value gains and losses.

2 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Risk

52 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Mainland China commercial real estate

The following table presents the group's exposure to borrowers

classified in the CRE sector where the ultimate parent is based in

mainland China, as well as all CRE exposures booked on mainland

China balance sheets. The exposures at 31 December 2023 are split

by country/territory and credit quality including allowances for ECL by

stage.

Mainland China CRE exposure

(Audited)

At 31 Dec 2023

Hong Kong Mainland China Rest of Asia-Pacific Total

HK$m HK$m HK$m HK$m

Loans and advances to customers

47,133 38,410 3,518 89,061

Guarantees issued and others

1,993 518 86 2,597

Total mainland China CRE exposure 49,126 38,928 3,604 91,658

Distribution of mainland China CRE exposure by

credit quality

– Strong 6,100 13,458 57 19,615

– Good 4,719 7,445 3,283 15,447

– Satisfactory 5,308 13,313 84 18,705

– Sub-standard 10,142 2,557 180 12,879

– Credit Impaired 22,857 2,155 — 25,012

49,126 38,928 3,604 91,658

Allowance for ECL by credit quality

– Strong — (27) — (27)

– Good (2) (39) (8) (49)

– Satisfactory (21) (212) — (233)

– Sub-standard (518) (682) (45) (1,245)

– Credit Impaired (13,484) (977) — (14,461)

(14,025) (1,937) (53) (16,015)

Allowance for ECL

ECL Stage 1 (4) (77) (8) (89)

ECL Stage 2 (537) (883) (45) (1,465)

ECL Stage 3 (13,484) (977) — (14,461)

(14,025) (1,937) (53) (16,015)

ECL coverage % 28.5 5.0 1.5 17.5

At 31 Dec 2022

Hong Kong Mainland China Rest of Asia-Pacific Total

HK$m HK$m HK$m HK$m

Loans and advances to customers

71,148 44,843 3,570 119,561

Guarantees issued and others

1,957 5,884 268 8,109

Total mainland China CRE exposure 73,105 50,727 3,838 127,670

Distribution of mainland China CRE exposure by credit

quality

– Strong 11,105 16,510 638 28,253

– Good 5,431 8,475 2,543 16,449

– Satisfactory 9,896 17,521 168 27,585

– Sub-standard 22,509 6,072 349 28,930

– Credit Impaired 24,164 2,149 140 26,453

73,105 50,727 3,838 127,670

Allowance for ECL by credit quality

– Strong — (39) — (39)

– Good (2) (60) (5) (67)

– Satisfactory (153) (637) (3) (793)

– Sub-standard (3,570) (326) (14) (3,910)

– Credit Impaired (9,884) (816) 0 (10,700)

(13,609) (1,878) (22) (15,509)

Allowance for ECL

ECL Stage 1 (6) (69) (4) (79)

ECL Stage 2 (3,719) (993) (18) (4,730)

ECL Stage 3 (9,884) (816) — (10,700)

(13,609) (1,878) (22) (15,509)

ECL coverage % 18.6 3.7 0.6 12.1

1 Amounts represent gross carrying amount.

2 Amounts represent nominal amount for guarantees and other contingent liabilities.

(Unaudited)

Commercial real estate financing refers to lending that focuses on

commercial development and investment in real estate and covers

commercial, residential and industrial assets. The exposures in the

table are related to companies whose primary activities are focused

on these activities. Lending is generally focused on tier 1 and 2 cities.

The table also includes financing provided to a corporate or financial

entity for the purchase or financing of a property which supports the

overall operations of the business. Such exposures are outside of our

normal definition of Commercial Real Estate, as applied elsewhere in

this report, but are provided here for a more comprehensive view of

our mainland property exposure.

The table above shows 59% (HK$54bn) of total exposure with a

credit quality of 'satisfactory' or above, which was slightly higher in

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 53

proportion compared with 31 December 2022 (57%, HK$72bn). Total

‘credit impaired’ exposures increased to 27% (HK$25bn) (31

December 2022: 21%, HK$26bn), reflecting sustained stress in the

China commercial real estate market, including weakness in both

property market fundamentals and financing conditions for borrowers

operating in this sector.

Allowances for ECL are substantially against unsecured exposures.

For secured exposures, allowances for ECL are minimal, reflecting

the nature and value of the security held.

Facilities booked in Hong Kong continued to represent the largest

proportion of mainland China commercial real estate exposures,

although total exposures reduced to HK$49bn, down HK$24bn since

31 December 2022, as a result of de-risking measures, repayments

and write-offs. This portfolio remains relatively higher risk, with 33%

(31 December 2022: 36%) of exposure booked with a credit quality of

‘satisfactory’ or above and 47% ‘credit impaired’ (31 December 2022:

33%). At 31 December 2023, the group had allowances for ECL of

HK$14bn (31 December 2022: HK$14bn) held against mainland China

commercial real estate exposures booked in Hong Kong. ECL

coverage increased to 29% (31 December 2022: 19%), reflecting a

further credit deterioration during the year.

Approximately half of the unimpaired exposure in the Hong Kong

portfolio is lending to state-owned enterprises and relatively strong

private-owned enterprises. This is reflected in the relatively low ECL

allowance in this part of the portfolio.

Market conditions are likely to remain subdued with a protracted

recovery as sentiment and domestic residential demand remain

weak, with ongoing refinancing and liquidity risk for corporates

operating in this market. The divergence between Privately Owned

Enterprises (POE) and State Owned Enterprises (SOE) is likely to

continue, with SOEs achieving above market sales performance and

benefitting from market share gains and better access to funding.

The group has additional exposures to mainland China commercial

real estate as a result of lending to multinational corporates booked

outside of mainland China. These are not incorporated in the table

above.

Credit-impaired loans

(Audited)

We determine that a financial instrument is credit impaired and in

stage 3 by considering relevant objective evidence, primarily whether:

– contractual payments of either principal or interest are past due

for more than 90 days;

– there are other indications that the borrower is unlikely to pay,

such as when a concession has been granted to the borrower for

economic or legal reasons relating to the borrower’s financial

condition; and

– the loan is otherwise considered to be in default. If such

unlikeliness to pay is not identified at an earlier stage, it is deemed

to occur when an exposure is 90 days past due, even where

regulatory rules permit default to be defined based on 180 days

past due. Therefore, the definitions of credit impaired and default

are aligned as far as possible so that stage 3 represents all loans

that are considered defaulted or otherwise credit impaired.

Collateral and other credit enhancements

(Audited)

Although collateral can be an important mitigant of credit risk, it is the

group’s practice to lend on the basis of the customer’s ability to meet

their obligations out of cash flow resources rather than placing

primary reliance on collateral and other credit risk enhancements.

Depending on the customer’s standing and the type of product,

facilities may be provided without any collateral or other credit

enhancements. For other lending, a charge over collateral is obtained

and considered in determining the credit decision and pricing. In the

event of default, the bank may utilise the collateral as a source of

repayment.

Depending on its form, collateral can have a significant financial effect

in mitigating our exposure to credit risk. Where there is sufficient

collateral, an expected credit loss is not recognised. This is the case

for reverse repurchase agreements and for certain loans and

advances to customers where the loan to value (‘LTV’) is very low.

Mitigants may include a charge on borrowers’ specific assets, such

as real estate or financial instruments. Other credit risk mitigants

include short positions in securities and financial assets held as part

of linked insurance/investment contracts where the risk is

predominantly borne by the policyholder.

Additionally, risk may be managed by employing other types of

collateral and credit risk enhancements, such as second charges,

other liens and unsupported guarantees. Guarantees are normally

taken from corporates and export credit agencies. Corporates would

normally provide guarantees as part of a parent/subsidiary relationship

and span a number of credit grades. The export credit agencies will

normally be investment grade.

Certain credit mitigants are used strategically in portfolio

management activities. While single name concentrations arise in

portfolios managed by Global Banking and Corporate Banking, it is

only in Global Banking that their size requires the use of portfolio level

credit mitigants. Across Global Banking, risk limits and utilisations,

maturity profiles and risk quality are monitored and managed

proactively. This process is key to the setting of risk appetite for

these larger, more complex, geographically distributed customer

groups. While the principal form of risk management continues to be

at the point of exposure origination, through the lending decision-

making process, Global Banking also utilises loan sales and credit

default swap (‘CDS’) hedges to manage concentrations and reduce

risk. These transactions are the responsibility of a dedicated Global

Banking portfolio management team. Hedging activity is carried out

within agreed credit parameters, and is subject to market risk limits

and a robust governance structure. Where applicable, CDSs are

entered into directly with a central clearing house counterparty.

Otherwise, our exposure to CDS protection providers is diversified

among mainly banking counterparties with strong credit ratings.

CDS mitigants are held at portfolio level and are not included in the

expected credit loss calculations. CDS mitigants are not reported in

the presentation below.

Collateral on loans and advances

(Audited)

The collateral measured in the following tables consists of fixedfirst

charges on real estate, and charges over cash and marketable

financial instruments. The values in the tables represent the expected

market value on an open market basis; no adjustment has been made

to the collateral for any expected costs of recovery. Marketable

securities are measured at their fair value.

Other types of collateral such as unsupported guarantees and floating

charges over the assets of a customer’s business are not measured

in the following tables. While such mitigants have value, often

providing rights in insolvency, their assignable value is not sufficiently

certain and they are therefore assigned no value for disclosure

purposes.

The LTV ratios presented are calculated by directly associating loans

and advances with the collateral that individually and uniquely

supports each facility. When collateral assets are shared by multiple

loans and advances, whether specifically or, more generally, by way

of an all monies charge, the collateral value is pro-rated across the

loans and advances protected by the collateral.

For credit-impaired loans, the collateral values cannot be directly

compared with impairment allowances recognised. The LTV figures

use open market values with no adjustments.

Impairment allowances are calculated on a different basis, by

considering other cash flows and adjusting collateral values for costs

of realising collateral.

Risk

54 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Personal lending

(Unaudited)

The following table provides a quantification of the value of fixed

charges we hold over specific assets where we have a history of

enforcing, and are able to enforce, collateral in satisfying a debt in the

event of the borrower failing to meet its contractual obligations, and

where the collateral is cash or can be realised by sale in an

established market.

The collateral valuation excludes any adjustments for obtaining and

selling the collateral and, in particular, loans shown as not

collateralised or partially collateralised may also benefit from other

forms of credit mitigants.

Residential mortgages including loan commitments by level of collateral

(Audited)

2023 2022

Gross

carrying/

nominal

amount

ECL

coverage

Gross

carrying/

nominal

amount

ECL

coverage

HK$m % HK$m %

Stage 1

Fully collateralised 1,182,015 0.0 1,147,024 0.0

LTV ratio:

– less than 70% 909,167 0.0 918,527 0.0

– 71% to 90% 175,712 0.0 147,785 0.0

– 91% to 100% 97,136 0.0 80,712 0.0

Partially collateralised (A): 70,126 0.0 50,317 0.0

– collateral value on A 66,696 48,009

Total 1,252,141 0.0 1,197,341 0.0

Stage 2

Fully collateralised 25,573 0.3 33,972 0.2

LTV ratio:

– less than 70% 17,326 0.2 24,401 0.1

– 71% to 90% 7,438 0.5 8,730 0.4

– 91% to 100% 809 0.6 841 0.5

Partially collateralised (B): 703 1.3 425 0.7

– collateral value on B 660 401

Total 26,276 0.3 34,397 0.2

Stage 3

Fully collateralised 4,555 4.0 5,696 4.3

LTV ratio:

– less than 70% 3,477 3.5 3,935 3.6

– 71% to 90% 942 5.1 1,270 5.6

– 91% to 100% 136 11.0 491 6.3

Partially collateralised (C): 105 21.9 113 40.7

– collateral value on C 93 95

Total 4,660 4.4 5,809 5.0

At 31 Dec 1,283,077 0.0 1,237,547 0.0

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 55

Other personal lending

(Unaudited)

Other personal lending consists primarily of personal loans, overdrafts and credit cards, all of which are generally unsecured, except lending to

private banking customers which are generally secured.

Commercial real estate loans and advances

(Unaudited)

The value of commercial real estate collateral is determined by using a combination of external and internal valuations and physical inspections.

For commercial real estate, where the facility exceeds regulatory threshold requirements, group policy requires an independent review of the

valuation at least every three years, or more frequently as the need arises. In Hong Kong, market practice is typically for lending to major

property companies to be either secured by guarantees or unsecured.

Commercial real estate loans and advances including loan commitments by level of collateral

(Audited)

2023 2022

Gross

carrying

nominal

amount

ECL

coverage

Gross

carrying/

nominal

amount

ECL

coverage

HK$m % HK$m %

Stage 1

Not collateralised 217,922 0.0 239,954 0.0

Fully collateralised 206,940 0.1 262,850 0.1

Partially collateralised (A): 33,909 0.1 13,898 0.1

– collateral value on A 21,536 7,292

Total 458,771 0.0 516,702 0.1

Stage 2

Not collateralised 27,679 4.8 50,935 7.7

Fully collateralised 81,164 2.8 85,421 1.9

Partially collateralised (B): 7,487 1.4 7,941 2.0

– collateral value on B 5,558 4,692

Total 116,330 3.2 144,297 4.0

Stage 3

Not collateralised 17,904 77.7 16,725 57.2

Fully collateralised 10,034 8.7 8,724 11.1

Partially collateralised (C): 508 21.1 982 36.2

– collateral value on C 355 697

Total 28,446 52.4 26,431 41.2

POCI

Not collateralised — — — —

Fully collateralised — — — —

Partially collateralised (D): 117 — 145 —

– collateral value on D 65 65

Total 117 — 145 —

At 31 Dec 603,664 3.1 687,575 2.5

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Risk

56 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Other corporate, commercial and non-bank financial institutions lending

(Unaudited)

Other corporate, commercial and financial (non-bank) loans are

analysed separately in the following table. For financing activities in

other corporate and commercial lending, collateral value is not

strongly correlated to principal repayment performance.

Collateral values are generally refreshed when an obligor’s general

credit performance deteriorates and we have to assess the likely

performance of secondary sources of repayment should it prove

necessary to rely on them.

Accordingly, the following table reports values only for customers

with CRR 8–10, recognising that these loans and advances generally

have valuations that are comparatively recent.

Other corporate, commercial and non-bank financial institutions loans and advances including loan commitments by level of collateral

(Audited)

2023 2022

Gross

carrying/

nominal

amount ECL coverage

Gross

carrying/

nominal

amount ECL coverage

HK$m % HK$m %

Stage 1

Not collateralised 2,260,409 0.1 2,155,095 0.1

Fully collateralised 348,895 0.1 371,035 0.1

Partially collateralised (A): 260,554 0.0 246,654 0.1

– collateral value on A 96,226 97,058

Total 2,869,858 0.1 2,772,784 0.1

Stage 2

Not collateralised 297,925 0.3 314,107 0.5

Fully collateralised 83,629 1.3 128,648 1.0

Partially collateralised (B): 39,338 0.4 55,804 0.6

– collateral value on B 15,892 22,737

Total 420,892 0.5 498,559 0.6

Stage 3

Not collateralised 12,895 65.1 14,373 68.2

Fully collateralised 7,736 8.8 5,689 7.2

Partially collateralised (C): 7,675 33.7 8,956 37.0

– collateral value on C 3,618 4,480

Total 28,306 41.2 29,018 46.6

POCI

Not collateralised — — 138 1.4

Fully collateralised 173 94.8 183 92.9

Partially collateralised (D): — — 156 12.2

– collateral value on D — 125

Total 173 94.8 477 40.0

At 31 Dec 3,319,229 0.5 3,300,838 0.6

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 57

Other credit risk exposures

(Unaudited)

In addition to collateralised lending described above, other credit

enhancements are employed and methods used to mitigate credit

risk arising from financial assets. These are summarised below:

– Some securities issued by governments, banks and other financial

institutions may benefit from additional credit enhancements

provided by government guarantees that cover the assets.

– Debt securities issued by banks and financial institutions include

asset-backed securities (‘ABSs’) and similar instruments, which

are supported by underlying pools of financial assets. Credit risk

associated with ABSs is reduced through the purchase of credit

default swap (‘CDS’) protection.

– The group’s maximum exposure to credit risk includes financial

guarantees and similar contracts granted, as well as loan and

other credit-related commitments. Depending on the terms of the

arrangement, we may use additional credit mitigation if a

guarantee is called upon or a loan commitment is drawn and

subsequently defaults.

Derivatives

(Unaudited)

We participate in transactions exposing us to counterparty credit risk.

Counterparty credit risk is the risk of financial loss if the counterparty

to a transaction defaults before satisfactorily settling it. It arises

principally from over-the-counter (‘OTC’) derivatives and securities

financing transactions and is calculated in both the trading and non-

trading books. Transactions vary in value by reference to a market

factor such as an interest rate, exchange rate or asset price.

The counterparty risk from derivative transactions is taken into

account when reporting the fair value of derivative positions. The

adjustment to the fair value is known as the credit value adjustment

(‘CVA’).

Treasury Risk

Overview

(Unaudited)

Treasury risk is the risk of having insufficient capital, liquidity or

funding resources to meet financial obligations and satisfy regulatory

requirements, including the risk of adverse impact on earnings or

capital due to structural or transactional foreign exchange exposures

and changes in market interest rates, together with pension and

insurance risk.

Treasury risk arises from changes to the respective resources and

risk profiles driven by customer behaviour, management decisions or

the external environment.

Approach and policy

Our objective in the management of treasury risk is to maintain

appropriate levels of capital, liquidity, funding, foreign exchange and

market risk to support our business strategy, and meet our regulatory

and stress testing-related requirements.

Our approach to treasury management is driven by our strategic and

organisational requirements, taking into account the regulatory,

economic and commercial environment. We aim to maintain a strong

capital and liquidity base to support the risks inherent in our business

and invest in accordance with our strategy, meeting both

consolidated and local regulatory requirements at all times.

Our policy is underpinned by our risk management framework. The

risk management framework incorporates a number of measures

aligned to our assessment of risks for both internal and regulatory

purposes. These risks include credit, market, operational, pensions,

structural and transactional foreign exchange risk, and interest rate

risk in the banking book.

Treasury risk management

Key developments in 2023

(Unaudited)

– The roll out of our second line of defence capabilities, providing

independent oversight of treasury activities across capital risk,

liquidity and funding risk, interest rate risk in the banking book

('IRRBB') in Asia-Pacific sites have been completed during 2023.

– The implementation of hold-to-collect business model was

completed for Asia-Pacific sites. Compared to previous years our

portfolio of hold-to-collect assets now forms a larger part of the

liquid asset buffer as well as a hedge to our structural interest rate

risk. This allows us more flexibility in managing the hold-to-collect-

and-sell portfolio to optimise returns from market movements

while safeguarding the group capital and future earnings.

– Following high-profile US and Swiss banking failures in the first

quarter of 2023, the existing risk management practices including

stress testing and limit setting were validated. Additionally,

liquidity monitoring and metric assumptions as part of the internal

liquidity adequacy assessment process ('ILAAP') cycle were

reviewed to ensure they continued to cover observed and

emerging risks.

– Continued to improve our analysis and understanding of the

drivers of capital volatility and the underlying sensitivities, ensuring

these are actively considered in our risk appetite and limit setting

processes.

– Continued to increase the stabilisation of our net interest income

(‘NII’) as interest rate expectations fluctuated, driven by central

bank rate increases and a reassessment of the trajectory of

inflation in major economies.

Governance and structure

(Unaudited)

The Board approves the policy and risk appetite for capital risk,

liquidity and funding risk, and IRRBB. It is supported and advised by

the RC.

The Global Treasury sub-function manages capital, liquidity and

funding risk and structural foreign exchange risk on an on-going basis

and provides support to the Asset and Liability Management

Committee (‘ALCO’), and is overseen by the Treasury Risk

Management sub-function ('TRM') and the RMM.

The Global Treasury sub-function also manages interest rate risk in

the banking book, maintaining the transfer pricing framework and

informing the regional and local ALCOs of the group and site’s overall

banking book interest rate exposure. Banking book interest rate

positions may be transferred to be managed by the Global Treasury

sub-function, within the market risk limits approved by the RMM.

Pension risk is managed through a network of local governance

forums. The regional Pension Risk Management Meeting oversees all

pension plans sponsored by HSBC in Asia-Pacific, and is chaired by

the Regional Head of Traded and Treasury Risk Management.

The Treasury Risk Management sub-function carries out independent

review, challenge and assurance of the appropriateness of the risk

management activities undertaken by Global Treasury. Internal Audit

provides independent assurance that risk is managed effectively.

Risk

58 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Capital risk

Overview

(Audited)

Our approach to capital management is driven by our strategic and

organisational requirements, taking into account the regulatory,

economic and commercial environment in which we operate.

It is our objective to maintain a strong capital base to support the

risks inherent in our business, to invest in accordance with our

strategy and to meet regulatory capital requirements at all times. To

achieve this, our policy is to hold capital in a range of different forms

and all capital raising is agreed with major subsidiaries as part of their

individual and the group’s capital management processes.

Framework

(Audited)

Our capital management policy is underpinned by a capital

management framework. The framework sets out our approach to

determining key capital risk appetites for CET1, Tier1, Total capital,

Loss Absorbing Capacity ('LAC') and the Leverage Ratio, which

enables us to manage our capital in a consistent manner. Regulatory

capital and economic capital are the two primary measures used for

the management and control of capital.

Capital measures:

– regulatory capital is the capital which we are required to hold in

accordance with the rules established by regulators; and

– economic capital is the internally calculated capital requirement to

support risks to which we are exposed and forms a core part of

the internal capital adequacy assessment process ('ICAAP').

Our ICAAP is an assessment of the group’s capital position, outlining

both regulatory and internal capital resources and requirements

resulting from our business model, strategy, risk profile, performance

and planning, and the findings arising from stress testing. Our

assessment of capital adequacy is driven by an assessment of risks.

These risks include credit, market, operational, pensions, insurance,

structural foreign exchange and interest rate risk in the banking book.

Climate risk is also considered as part of the ICAAP, and we are

continuing to develop our approach for climate risk management.

The group’s ICAAP supports the determination of the capital risk

appetite and target ratios, as well as enables the assessment and

determination of capital requirements by regulators. Banking

subsidiaries prepare ICAAPs in line with global guidance, while

considering their local regulatory regimes to determine their own risk

appetites and ratios.

Our capital management process is articulated in our annual capital

plan which is approved by the Board. The plan is designed with the

objective of maintaining both an appropriate amount of capital and an

optimal mix between the different components of capital. Capital and

Risk-Weighted Assets ('RWAs') are monitored and managed against

the plan, with capital forecasts reported to relevant governance

committees. Each subsidiary manages its own capital to support its

planned business growth and meet its local regulatory requirements

within the context of the approved annual group capital plan. In

accordance with our capital management objectives, capital

generated by subsidiaries in excess of planned requirements is

returned to the Bank, normally by way of dividends.

The Bank is the primary provider of capital to its subsidiaries and

these investments are substantially funded by the Bank’s own capital

issuance and profit retention. As part of its capital management

process, the Bank seeks to maintain a prudent balance between the

composition of its capital and that of its investment in subsidiaries.

The principal forms of capital are included in the following balances

on the consolidated balance sheet: share capital, other equity

instruments, retained earnings, other reserves and subordinated

liabilities.

Regulatory capital requirements

(Audited)

The Hong Kong Monetary Authority (‘HKMA’) supervises the group

on both a consolidated and solo-consolidated basis and therefore

receives information on the capital adequacy of, and sets capital

requirements for, the group as a whole and on a solo-consolidated

basis. Individual banking subsidiaries and branches are directly

regulated by their local banking supervisors, who set and monitor

their capital adequacy requirements. In most jurisdictions, non-

banking financial subsidiaries are also subject to the supervision and

capital requirements of local regulatory authorities.

The group uses the advanced internal ratings-based approach to

calculate its credit risk for the majority of its non-securitisation

exposures. For collective investment scheme exposures, the group

uses the look-through approach and mandate-based approach to

calculate the risk-weighted amount. For securitisation exposures, the

group uses the securitisation internal ratings-based approach,

securitisation external ratings-based approach or securitisation

standardised approach to determine credit risk for its banking book

securitisation exposures. For counterparty credit risk, the group uses

both the standardised (counterparty credit risk) approach and the

internal models (counterparty credit risk) approach to calculate its

default risk exposures for derivatives, and the comprehensive

approach for securities financing transactions. For market risk, the

group uses an internal models method approach ('IMM') to calculate

its general market risk for the risk categories of interest rate and

foreign exchange (including gold) exposures, and equity exposures.

The group also uses an IMM approach to calculate its market risk in

respect of specific risk for interest rate exposures and equity

exposures. The group uses the standardised (market risk) approach

for calculating other market risk positions, as well as trading book

securitisation exposures, and the standardised (operational risk)

approach to calculate its operational risk.

During the year, the group complied with all the capital requirements

of HKMA on both a consolidated and solo-consolidated basis.

Basel III

(Unaudited)

The Basel III capital rules set out the minimum CET1 capital

requirement of 4.5% and total capital requirement of 8%. At

31 December 2023, the capital buffers applicable to the group include

the Capital Conservation Buffer (‘CCB’), the Countercyclical Capital

Buffer (‘CCyB’) and the Higher Loss Absorbency (‘HLA’) requirement

for Domestic Systemically Important Banks (‘D-SIB’). The CCB is

2.5% and is designed to ensure banks build up capital outside periods

of stress. The CCyB is set on an individual country/territory basis and

is built up during periods of excess credit growth to protect against

future losses. The CCyB for Hong Kong and the list of D-SIB are

regularly reviewed and last announced by the HKMA on 03

November 2023 and 29 December 2023 respectively. In its latest

announcement, the HKMA maintained the CCyB for Hong Kong at

1.0% and maintained the D-SIB designation as well as HLA

requirement at 2.5% for the group.

The group is classified as a material subsidiary under the Financial

Institutions (Resolution) (Loss-absorbing Capacity Requirements –

Banking Sector) Rules (‘LAC Rules’) and therefore is subject to the

LAC requirements to maintain its internal LAC risk-weighted ratio and

the internal LAC leverage ratio at or above specified minimums.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 59

Leverage ratio

(Unaudited)

Basel III introduces a simple non risk-based leverage ratio as a

complementary measure to the risk-based capital requirements. It

aims to constrain the build-up of excess leverage in the banking

sector, introducing additional safeguards against model risk and

measurement errors. The ratio is a volume-based measure calculated

as Tier 1 capital divided by total exposures (both on-balance sheet

and off-balance sheet).

31 Dec 31 Dec

2023 2022

% %

Leverage ratio 5.8 5.9

Capital and leverage ratio exposure

measure

HK$m HK$m

Tier 1 capital 562,454 545,572

Total exposure measure 9,672,960 9,301,363

The decrease in the leverage ratio from 31 December 2022 to

31 December 2023 was mainly due to the rise in the exposure

measure, partly offset by the increase in Tier 1 capital.

Further details regarding the group’s leverage position can be viewed

in the Banking Disclosure Statement at 31 December 2023, which

will be available in the Regulatory Disclosure Section of our website:

www.hsbc.com.hk.

Capital adequacy at 31 December 2023

(Unaudited)

The following tables show the capital ratios, RWAs and capital base

as contained in the ‘Capital Adequacy Ratio’ return submitted to the

HKMA on a consolidated basis under the requirements of section

3C(1) of the Banking (Capital) Rules.

The basis of consolidation for financial accounting purposes is

described in Note 1 on the consolidated financial statements and

differs from that used for regulatory purposes. Further information on

the regulatory consolidation basis and a full reconciliation between

the group’s accounting and regulatory balance sheets can be viewed

in the Banking Disclosure Statement 2023. Subsidiaries not included

in the group's consolidation for regulatory purposes are primarily

securities and insurance companies. The capital invested by the

group in these companies is deducted from regulatory capital, subject

to threshold.

The Bank and its banking subsidiaries maintain regulatory reserves to

satisfy the provisions of the Banking Ordinance and local regulatory

requirements for prudential supervision purposes.

At 31 December 2023, the effect of this regulatory reserve

requirement is to reduce the amount of reserves which can be

distributed to shareholders by HK$19,045m (31 December 2022:

HK$16,413m).

We closely monitor and consider future regulatory change and

continue to evaluate the impact upon our capital requirements of

regulatory developments. This includes the Basel III Reforms

package, which is scheduled for implementation by the HKMA on

1January 2025. We continue to monitor progress on the

implementation. Based on the results of the final HKMA rules, we

foresee a positive impact on our capital ratios on initial application.

The standardized risk-weighted asset ('RWA') output floor under the

Basel III Reforms will be phased in over five years from initial

implementation. Any impact from the output floor would be towards

the end of the phase in period.

Capital ratios

(Unaudited)

31 Dec 31 Dec

2023 2022

% %

Common Equity Tier 1 (‘CET1’) capital ratio 15.8 15.3

Tier 1 capital ratio 17.5 16.9

Total capital ratio 19.7 18.8

Risk-weighted assets by risk type

(Unaudited)

31 Dec 31 Dec

2023 2022

HK$m HK$m

Credit risk 2,536,239 2,589,633

Counterparty credit risk 136,866 133,290

Market risk 158,707 160,533

Operational risk 380,575 337,004

Sovereign concentration risk — 1,708

Total 3,212,387 3,222,168

Risk-weighted assets by reportable segments

(Unaudited)

31 Dec 31 Dec

2023 2022

HK$m HK$m

Wealth and Personal Banking 624,746 640,626

Commercial Banking 1,222,999 1,209,888

Global Banking 569,199 562,404

Markets and Securities Services 339,307 410,401

Corporate Centre 342,277 338,254

Other (GBM-other) 113,859 60,595

Total 3,212,387 3,222,168

Risk

60 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Capital base

(Unaudited)

The following table sets out the composition of the group’s capital base under Basel III at 31 December 2023.

Capital base

(Unaudited)

31 Dec 31 Dec

2023 2022

HK$m HK$m

Common Equity Tier 1 (‘CET1’) capital

Shareholders’ equity 733,940 727,880

– shareholders’ equity per balance sheet 812,726 807,552

– revaluation reserve capitalisation issue (1,454) (1,454)

– other equity instruments (52,465) (52,386)

– unconsolidated subsidiaries (24,867) (25,832)

Non-controlling interests 28,330 30,106

– non-controlling interests per balance sheet 59,860 56,828

– non-controlling interests in unconsolidated subsidiaries (2,437) (2,250)

– surplus non-controlling interests disallowed in CET1 (29,093) (24,472)

Regulatory deductions to CET1 capital (253,666) (266,424)

– valuation adjustments (2,291) (2,376)

– goodwill and intangible assets (33,949) (32,064)

– deferred tax assets net of deferred tax liabilities (3,754) (3,688)

– cash flow hedging reserve (2,018) 233

– changes in own credit risk on fair valued liabilities 2,264 (3,494)

– defined benefit pension fund assets (50) (27)

– significant Loss-absorbing Capacity (‘LAC’) investments in unconsolidated financial sector entities (127,173) (140,987)

– property revaluation reserves

(67,650) (67,608)

– regulatory reserve (19,045) (16,413)

Total CET1 capital 508,604 491,562

Additional Tier 1 (‘AT1’) capital

Total AT1 capital before regulatory deductions 53,850 54,019

– perpetual subordinated loans 52,465 52,386

– allowable non-controlling interests in AT1 capital 1,385 1,633

Regulatory deductions to AT1 capital — (9)

– significant LAC investments in unconsolidated financial sector entities — (9)

Total AT1 capital 53,850 54,010

Total Tier 1 capital 562,454 545,572

Tier 2 capital

Total Tier 2 capital before regulatory deductions 72,391 68,118

– term subordinated debt 26,060 19,505

– property revaluation reserves

31,097 31,078

– impairment allowances and regulatory reserve eligible for inclusion in Tier 2 capital 14,260 16,008

– allowable non-controlling interests in Tier 2 capital

974 1,527

Regulatory deductions to Tier 2 capital (3,144) (6,378)

– significant LAC investments in unconsolidated financial sector entities (3,144) (6,378)

Total Tier 2 capital 69,247 61,740

Total capital 631,701 607,312

1 Includes the revaluation surplus on investment properties which is reported as part of retained earnings and adjustments made in accordance with

the Banking (Capital) Rules issued by the HKMA.

The impairment of BoCom has an insignificant impact on the group’s total capital and CET1 capital due to the compensating release of

regulatory capital deduction to offset the impairment charge.

A detailed breakdown of the group’s CET1 capital, AT1 capital, Tier 2 capital and regulatory deductions can be viewed in the Banking Disclosure

Statement 2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 61

Non-trading book foreign exchange exposures

Structural foreign exchange exposures

(Unaudited)

Structural foreign exchange exposures arise from net assets or

capital investments in foreign operations together with any

associated hedging. A foreign operation is defined as a subsidiary,

associate, joint arrangement or branch, where the activities are

conducted in a currency other than that of the reporting entity. An

entity's functional reporting currency is normally that of the primary

economic environment in which the entity operates.

Exchange differences on structural exposures are recognised in other

comprehensive income ('OCI’). We use Hong Kong dollar as our

presentation currency in our consolidated financial statements.

Therefore, our consolidated balance sheet is affected by exchange

differences between Hong Kong dollar and all the non-Hong Kong

dollar functional currencies of underlying foreign operations.

Our structural foreign exchange exposures are managed with the

primary objective of ensuring, where practical, that our consolidated

capital ratios and the capital ratios of individual banking subsidiaries

and foreign branches subject to minimum regulatory capital

requirements are largely protected from the effect of changes in

exchange rates.

We hedge structural foreign exchange positions where it is capital

efficient to do so, and subject to approved limits. Hedging positions

are monitored and rebalanced periodically to manage RWA or

downside risks associated with the group’s foreign currency

investments.

The group had the following net structural foreign currency exposures

that were greater than 10% of the total net structural foreign

currency exposures:

Local Currency (m) Equivalent (HK$m)

At 31 Dec 2023

Renminbi 232,642 255,961

US dollars 11,176 87,314

At 31 Dec 2022

Renminbi 240,745 272,269

US dollars 10,891 84,902

1 From 1 January 2023, we adopted HKFRS 17 'Insurance Contracts',

which replaced HKFRS 4 'Insurance Contracts'. Comparatives data have

been restated accordingly.

Transactional foreign exchange exposures

(Unaudited)

Transactional foreign exchange exposures arise from transactions in

the banking book generating profit and loss or OCI reserves in a

currency other than the reporting currency of the operating entity.

Transactional foreign exchange exposure generated through profit

and loss is periodically transferred to Markets and Securities Services

and managed within limits with the exception of limited residual

foreign exchange exposure arising from timing differences or for

other reasons. Transactional foreign exchange exposure generated

through OCI reserves is managed by the Global Treasury sub-function

within an agreed limit framework.

Liquidity and funding risk

Overview

(Audited)

Liquidity Risk is the risk that an entity does not have sufficient

resources to meet its financial obligations when they fall due, or can

only secure them at excessive cost. This may cause potential

breaches in regulatory or internal metrics such as the Liquidity

Coverage Ratio ('LCR') or the Internal Liquidity Metrics ('ILM').

Funding Risk is the risk that an entity does not have sufficiently stable

and diverse sources of funding or the funding structure is inefficient.

This may cause potential breaches in regulatory or internal metrics

such as the Net Stable Funding Ratio ('NSFR').

The group has comprehensive policies, metrics and controls to

manage liquidity and funding risk. The group manages liquidity and

funding risk at an operating entity level to make sure that obligations

can be met in the jurisdiction where they fall due, generally without

reliance on other parts of the group.

Operating entities are required to meet internal and applicable

regulatory requirements at all times. These requirements are

assessed through the ILAAP, which ensures that operating entities

have robust strategies, processes and systems for the identification,

measurement, management and monitoring of liquidity and funding

risk over an appropriate set of time horizons, including intra-day. The

ILAAP supports determination of liquidity and funding risk appetite

and also assesses the capability to manage liquidity and funding

effectively in each major entity. Liquidity and funding risk metrics are

set and managed locally but are subject to global review and

challenge to ensure consistency of approach and application of the

Group’s policies and controls.

Framework

(Unaudited)

The Global Treasury sub-function is responsible for the application of

policies and controls at a local operating entity level. The elements of

liquidity and funding risk management framework are underpinned by

a robust governance framework, with the two major elements being:

– Asset and Liability Management Committees (‘ALCOs’) at the

group and entity level; and

– annual ILAAP support determination of risk appetite.

All operating entities are required to prepare an ILAAP document at

appropriate frequency. Compliance with liquidity and funding

requirements is monitored and reported to ALCO, RMM and

Executive Committee on a regular basis.

Liquidity and Funding Risk management processes include:

– maintaining compliance with relevant regulatory requirements of

the operating entity;

– projecting cash flows under various stress scenarios and

considering the level of liquid assets necessary in relation thereto;

– monitoring liquidity and funding ratios against internal and

regulatory requirements;

– maintaining a diverse range of funding sources with adequate

back-up facilities;

– managing the concentration and profile of term funding;

– managing contingent liquidity commitment exposures within pre

determined limits;

– maintaining debt financing plans;

– monitoring of depositor concentration in order to avoid undue

reliance on large individual depositors and ensuring a satisfactory

overall funding mix; and

– maintaining liquidity and funding contingency plans. These plans

identify early indicators of stress conditions and describe actions

to be taken during stress, while minimising adverse long-term

implications for the business.

Management of liquidity and funding risk

(Audited)

Funding and liquidity plans form part of the financial resource plan

that is approved by the Board. The Board-level risk appetite measures

are the LCR, ILM and NSFR. An appropriate funding and liquidity

profile is managed through a wider set of measures:

– a minimum LCR requirement;

– a minimum NSFR requirement or other appropriate metric;

– an ILM requirement;

– a legal entity depositor concentration limit;

– cumulative term funding maturity concentrations limit;

– liquidity metrics to monitor minimum requirement by currency;

– intra-day liquidity;

– the application of liquidity funds transfer pricing; and

– forward-looking funding assessments.

Risk

62 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Sources of funding

(Unaudited)

Our primary sources of funding are customer current accounts,

customer savings deposits payable on demand or at short notice and

term deposits. We issue wholesale securities (secured and

unsecured) to supplement our customer deposits and change the

currency mix, maturity profile or location of our liabilities.

Currency mismatch

(Unaudited)

Group policy requires all operating entities to manage currency

mismatch risks for material currencies. Limits are set to ensure that

outflows can be met, given assumptions on stressed capacity in the

FX swap markets.

Additional collateral obligations

(Unaudited)

Under the terms of our current collateral obligations of derivative

contracts (which are International Swaps and Derivatives Association

('ISDA') compliant credit support annex ('CSA') contracts), the

additional collateral required to post in the event of one-notch and

two-notch downgrade in credit ratings is immaterial.

Liquidity and funding risk in 2023

(Unaudited)

The group is required to calculate its LCR and NSFR on a

consolidated basis in accordance with rule 11(1) of The Banking

(Liquidity) Rules ('BLR'), and is required to maintain both LCR and

NSFR of not less than 100%.

The average LCR of the group for the period are as follows:

Quarter ended

31 Dec 31 Dec

2023 2022

% %

Average LCR 168.9 157.8

The 3-month average LCR increased by 11.1 percentage points from

157.8% for the quarter ended 31 December 2022 to 168.9% for the

quarter ended 31 December 2023, mainly as a result of an increase in

customer deposits.

The majority of high quality liquid assets ('HQLA') included in the LCR

are Level 1 assets as defined in the BLR, which consist mainly of

government debt securities.

The total weighted amount of HQLA of the group for the period are

as follows:

Weighted amount

(average value) at quarter

ended

31 Dec 31 Dec

2023 2022

HK$m HK$m

Level 1 assets 1,789,314 1,744,471

Level 2A assets 87,633 80,348

Level 2B assets 61,953 61,184

Total 1,938,900 1,886,003

The NSFR of the group for the period are as follows:

Quarter ended

31 Dec 31 Dec

2023 2022

% %

Net stable funding ratio 156.0 152.3

The NSFR increased by 3.7 percentage points from 152.3% for the

quarter ended 31 December 2022 to 156.0% for the quarter ended

31 December 2023.

Interdependent assets and liabilities included in the group's NSFR are

certificates of indebtedness held and legal tender notes issued.

Interest Rate Risk in the Banking Book

(Unaudited)

Assessment and risk appetite

Interest rate risk in the banking book is the risk of an adverse impact

to earnings or capital due to changes in market interest rates. It is

generated by our non-traded assets and liabilities, specifically loans,

deposits and financial instruments that are not held for trading intent

or in order to hedge positions held with trading intent. Interest rate

risk that can be economically hedged may be transferred to the

Global Treasury sub-function. Hedging is generally executed through

interest rate derivatives or fixed-rate government bonds. Any interest

rate risk that Global Treasury sub-function cannot economically hedge

is not transferred and will remain within the global business where

the risks originate.

The Global Treasury sub-function uses a number of measures to

monitor and control interest rate risk in the banking book, including:

– net interest income sensitivity; and

– economic value of equity sensitivity; and

– hold-to-collect-and-sell value at risk (’VaR‘) and

– hold-to-collect-and-sell present value of a basis point (‘PVBP‘)

Net interest income sensitivity

A principal part of our management of non-traded interest rate risk is

to monitor the sensitivity of expected net interest income (‘NII’)

under varying interest rate scenarios (i.e. simulation modelling),

where all other economic variables are held constant. This monitoring

is undertaken at an entity level, where entities calculate both one-

year and five-year NII sensitivities across a range of interest rate

scenarios.

As at 31 December 2023, the 12 month sensitivity of our NII based

on the HKMA reporting methodology is an adverse impact of

HK$11.4bn to the HKMA’s ‘Parallel Up’ scenario and a positive

impact of HK$11.6bn to the HKMA’s ‘Parallel Down’ scenario. NII

sensitivity figures represent the effect of pro forma movements in

projected yield curves based on a static balance sheet size and

structure. The exception to this is where the size of the balances or

repricing is deemed interest rate sensitive, for example, early

prepayment of mortgages. These sensitivity calculations do not

incorporate actions that would be taken by Global Treasury sub-

function or in the business that originates the risk to mitigate the

effect of interest rate movements.

The NII sensitivity calculations assume that interest rates of all

maturities move by the same amount in the ‘up-shock’ scenario. The

sensitivity calculations in the ‘down-shock’ scenarios reflect no floors

to the shocked market rates. However, customer product-specific

interest rate floors are recognised where applicable.

Economic value of equity sensitivity

Economic value of equity (‘EVE’) represents the present value of the

future banking book cash flows that could be distributed to equity

holders under a managed run-off scenario. This equates to the

current book value of equity plus the present value of future NII in

this scenario. EVE can be used to assess the economic capital

required to support interest rate risk in the banking book. An EVE

sensitivity represents the expected movement in EVE due to pre-

specified interest rate shocks, where all other economic variables are

held constant. Operating entities are required to monitor EVE

sensitivities as a percentage of capital resources.

Further details of HSBC’s risk management of interest rate risk in the

banking book can be found in the Pillar 3 Disclosures at 31December

2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 63

Pension Risk

(Unaudited)

Our global pensions strategy is to move from defined benefit to

defined contribution plans, where local law allows and it is considered

competitive to do so.

In defined contribution pension plans, the contributions that HSBC is

required to make are known, while the ultimate pension benefit will

vary, typically with investment returns achieved by investment

choices made by the employee. While the market risk to HSBC of

defined contribution plans is low, the group is still exposed to

operational and reputational risk.

In defined benefit pension plans, the level of pension benefit is

known. Therefore, the level of contributions required by HSBC will

vary due to a number of risks, including:

– investments delivering a return below that required to provide the

projected plan benefits;

– the prevailing economic environment leading to corporate failures,

thus triggering write-downs in asset values (both equity and debt);

– a change in interest rate expectations, causing an increase in the

value of plan liabilities; and

– plan members living longer than expected (known as longevity

risk).

Pension risk is assessed using an economic capital model that takes

into account potential variations in these factors. The impact of these

variations on both pension assets and pension liabilities is assessed

using a 1-in-200-year stress test. Scenario analysis and other stress

tests are also used to support pension risk management, including

the review of de-risking opportunities. To fund the benefits

associated with defined benefit plans, sponsoring group companies

make regular contributions in accordance with advice from actuaries

and in consultation with the plans’ fiduciaries where relevant. These

contributions are normally set to ensure that there are sufficient

funds to meet the cost of the accruing benefits for the future service

of active members. However, higher contributions are required when

plan assets are considered insufficient to cover the existing pension

liabilities. Contribution rates are typically revised annually or once

every three years, depending on the plan.

The defined benefit plans invest contributions in a range of

investments designed to limit the risk of assets failing to meet a

plan’s liabilities. Any changes in expected returns from the

investments may also change future contribution requirements. In

pursuit of these long-term objectives, an overall target allocation is

established between asset classes of the defined benefit plan. In

addition, each permitted asset class has its own benchmarks, such as

stock-market indices. The target allocations are reviewed regularly,

typically once every three to five years, and more frequently if

required by local legislation or circumstances. The process generally

involves an asset and liability review.

Market Risk

Overview

(Unaudited)

Market risk is the risk of an adverse financial impact on trading

activities arising from changes in market parameters such as interest

rates, foreign exchange rates, asset prices, volatilities, correlations

and credit spreads.

Market risk management

Key developments in 2023

(Unaudited)

There were no material changes to our policies and practices for the

management of market risk in 2023.

Governance and structure

(Unaudited)

The following diagram summarises the main business areas where

trading market risks reside and the market risk measures used to

monitor and limit exposures.

Risk types

Trading risk

– Foreign exchange and commodities

– Interest rates

– Credit spreads

– Equities

Global business

GBM

Risk measure

Value at risk | Sensitivity | Stress Testing

The objective of our risk management policies and measurement

techniques is to manage and control market risk exposures to

optimise return on risk while maintaining a market profile consistent

with our established risk appetite.

Market risk is managed and controlled through limits approved by the

group's Board of Directors. These limits are allocated across business

lines and to the group’s legal entities. The group has an independent

market risk management and control sub-function, which is

responsible for measuring, monitoring and reporting market risk

exposures against limits on a daily basis. Each operating entity is

required to assess the market risks arising in its business and to

transfer them either to its local Markets and Securities Services or

Market Treasury unit for management, or to separate books managed

under the supervision of the local ALCO. The Traded Risk sub-

function enforces the controls around trading in permissible

instruments approved for each site as well as changes that follow

completion of the new product approval process. Trading Risk also

restricts trading in the more complex derivatives products to offices

with appropriate levels of product expertise and control systems.

Key risk management processes

Monitoring and limiting market risk exposures

(Audited)

Our objective is to manage and control market risk exposures while

maintaining a market profile consistent with our risk appetite.

We use a range of tools to monitor and limit market risk exposures

including sensitivity analysis, value at risk (‘VaR’) and stresstesting.

Sensitivity analysis

(Unaudited)

Sensitivity analysis measures the impact of movements in individual

market factor on specific instruments or portfolios, including interest

rates, foreign exchange rates and equity prices. We use sensitivity

measures to monitor the market risk positions within each risk type.

Granular sensitivity limits are set for trading desks with consideration

of market liquidity, customer demand and capital constraints, among

other factors.

Value at risk

(Audited)

VaR is a technique for estimating potential losses on risk positions as

a result of movements in market ratesand prices over a specified

time horizon and to a given level of confidence. The use of VaR is

integrated into market risk management and calculated for all trading

positions regardless of how we capitalise them. Where we do not

calculate VaR explicitly, we use alternative tools as summarised in

the ‘Stress testing’ section below.

Our models are predominantly based on historical simulation that

incorporates the following features:

– historical market rates and prices, which are calculated with

reference to foreign exchange rates, commodity prices, interest

rates, equity prices and the associated volatilities;

– potential market movements that are calculated with reference to

data from the past two years; and

Risk

64 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

– calculations to a 99% confidence level and using a one-day

holding period.

The models also incorporate the effect of option features on the

underlying exposures. The nature of the VaR models means that an

increase in observed market volatility will lead to anincrease in VaR

without any changes in the underlying positions.

VaR model limitations

(Audited)

Although a valuable guide to risk, VaR is used with awareness of its

limitations. For example:

– the use of historical data as a proxy for estimating future market

moves may not encompass all potential market events,

particularly those that are extreme in nature. As the model is

calibrated on the last 500 business days, it does not adjust

instantaneously to a change in the market regime.

– the use of a one-day holding period for risk management purposes

of trading books assumes that this short period is sufficient to

hedge or liquidate all positions.

– the use of a 99% confidence level by definition does not take into

account losses that might occur beyond this level of confidence.

– VaR is calculated on the basis of exposures outstanding at the

close of business and therefore does not reflect intra-day

exposures.

Risk not in VaR framework

(Unaudited)

The risks not in VaR (‘RNIV’) framework captures and capitalises

material market risks that are not adequately covered in the VaR

model.

Risk factors are reviewed on a regular basis and are either

incorporated directly in the VaR models, where possible, or quantified

through either the VaR-based RNIV approach or a stress test

approach within the RNIV framework. While VaR-based RNIVs are

calculated by using historical scenarios, stress-type RNIVs are

estimated on the basis of stress scenarios whose severity is

calibrated to be in line with the capital adequacy requirements. The

outcome of the VaR-based RNIV approach is included in the overall

VaR calculation but excluded from the VaR measure used for

regulatory back-testing. Stress-type RNIVs include a deal contingent

derivatives capital charge to capture risk for these transactions.

Stress testing

(Unaudited)

Stress testing is an important procedure that is integrated intoour

market risk management framework to evaluate the potential impact

on portfolio values of more extreme, although plausible, events or

movements in a set of financial variables. Insuch scenarios, losses

can be much greater than those predicted by VaR modelling. Stress

testing and reverse stress testing provide senior management

withinsights regarding the ‘tail risk’ beyond VaR.

Stress testing is implemented at legal entity, regional and overall

Group levels. A set of scenarios is used consistently across all

regions within the Group. The market risk stress testing incorporates

both historical and hypothetical events. Market risk reverse stress

tests are designed to identify vulnerabilities in our portfolios by

looking for scenarios that lead to loss levels considered severe for the

relevant portfolio. These scenarios may be local or idiosyncratic in

nature and complement the systematic top-down stress testing.

The risk appetite around potential stress losses forthe group is set

and monitored against limits.

Trading portfolios

(Audited)

Trading portfolios comprise positions held for client servicing and

market-making, with the intention of short-term resale and/or to

hedge risks resulting from such positions.

Back-testing

(Audited)

We routinely validate the accuracy of our VaR models by back-testing

the VaR metric against both actual and hypothetical profit and loss.

Hypothetical profit and loss excludes non-modelled items such as

fees, commissions and revenue of intra-day transactions. The

hypothetical profit and loss reflects the profit and loss that would be

realised if positions were held constant from the end of one trading

day to the end of the next.

The number of hypothetical loss back-testing exceptions, together

with a number of other indicators, are used to assess model

performance and to consider whether enhanced internal monitoring

of a VaR model is required. We back-test our VaR at set levels of our

group entity hierarchy.

Market risk in 2023

(Unaudited)

During 2023, global financial markets were mainly driven by the

inflation outlook, interest rates expectations and recession risks,

coupled with banking distress in March and rising geopolitical

tensions in the Middle East from October. Major central banks

maintained restrictive monetary policies and bond markets

experienced a volatile year. After rising significantly in the second and

third quarter, US treasury bond yields fell during 4Q23, as lower

inflation pressures led markets to expect that key rates would be cut

in 2024. The interest rates outlook was also a major driver of global

equity markets performance, alongside resilient corporate earnings

and positive sentiment in the technology sector. Developed markets

equities advanced significantly amid low volatility, while emerging

markets performance was more subdued. In foreign exchange

markets, the US dollar fluctuated against other major currencies,

mostly in line with the Federal Reserve policy and bond yields

expectations. Investor sentiment remained resilient in credit markets.

High-yield and investment-grade credit spreads narrow in general, as

fears of contagion in the banking sector in 1Q23 abated and

economic growth remained resilient throughout 2023.

We continued to manage market risk prudently during 2023.

Sensitivity exposures and VaR remained within appetite as the

business pursued its core market-making activity in support of our

customers. Market risk was managed using a complementary set of

risk measures and limits, including stress testing and scenario

analysis.

Trading portfolios

(Audited)

Value at risk of the trading portfolios

Trading VaR was predominantly generated by the Markets and

Securities Services business. Trading VaR was higher as at

31December 2023 compared to 31 December 2022, mainly driven

by increase in VaR exposed to interest rate risk and equity risk,

partially offset by reduction in VaR from foreign exchange risk and

credit spread risk.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 65

The trading VaR for the year is shown in the table below.

Trading value at risk, 99% 1 day

(Audited)

Foreign

exchange and

commodity

Interest

rate Equity

Credit

spread

Portfolio

diversification

Total

HK$m HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2023

Year end 70 206 70 15 (114) 247

Average 67 223 110 24 266

Maximum 118 311 201 36 444

At 31 Dec 2022

Year end 95 195 48 18 (154) 202

Average 55 172 55 24 208

Maximum 99 272 98 42 357

1 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.

2 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in

unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange,

together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative

number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types, it is not

meaningful to calculate a portfolio diversification benefit for these measures.

3 The total VaR is non-additive across risk types due to diversification effects.

Climate risk (unaudited) TCFD

Overview

The Group's climate risk approach is aligned to the framework

outlined by the Financial Stability Board’s Task Force on Climate-

related Financial Disclosures (‘TCFD’), which identifies two primary

drivers of climate risk:

– physical risk, which arises from the increased frequency and

severity of extreme weather events, such as typhoons and floods

(acute risk), or shifts in weather patterns or rises in sea level; and

– transition risk, which arises from the process of moving to a net

zero economy, including changes in government policy and

legislation, technology, market demand, and reputational

implications triggered by a change in stakeholder expectations,

actions or inaction.

In addition to these primary drivers of climate risk, the Group has

identified the following thematic issues related to climate risk which

are most likely to materialise in the form of reputational, regulatory

compliance and litigation risks:

– net zero alignment risk, which arises from the risk of HSBC failing

to meet its net zero commitments or failing to meet external

expectations related to net zero, because of inadequate ambition

and/or plans, poor execution, or inability to adapt to changes in

external environment.

– the risk of greenwashing, which arises from the act of knowingly

or unknowingly making inaccurate, unclear, misleading or

unsubstantiated claims regarding sustainability to the group's

stakeholders.

Approach

The group recognises that the physical impacts of climate change and

the transition to net zero economy can create significant financial

risks for the companies, investors and the financial system. The

group may be affected by the financial or non-financial impacts of

climate risks either directly or indirectly through its relationships with

customers.

The Group’s climate risk approach aims to effectively manage the

material climate risks that could impact the Group operations,

financial performance, stability and reputation. The approach is

informed by the evolving expectations of the Group's regulators.

Climate considerations and the thematic issues of net zero alignment

risk and the risk of greenwashing are incorporated within the group's

traditional risk types in line with the Group-wide risk management

framework.

The Group’s climate risk approach is aligned to the Group-wide risk

management framework and three lines of defence model, which

sets out how the group identifies, assesses and manages its risks.

For further details of the three lines of defence framework, see page

27.

The Group aims to regularly review its approach to increase coverage

and incorporate maturing data, climate analytics capabilities,

frameworks and tools, as well as respond to emerging industry best

practice and climate risk regulations.

This includes updating the approach to reflect how the risks

associated with climate change continue to evolve in the real world,

and maturing how the Group embeds climate risk factors into

strategic planning, transactions and decision-making across its

businesses.

The group is following a materiality based approach in developing its

climate risk capabilities across its businesses by prioritising sectors,

portfolios and counterparties with the highest impacts.

The group continues to make progress in enhancing its climate risk

capabilities and recognise it is a long-term iterative process.

The tables below provide an overview of the climate risk drivers

considered with the Group's climate risk approach. Primary risk

drivers refer to risk drivers aligned to the TCFD, which sets a

framework to help public companies and other organisations disclose

climate-related risks and opportunities.

Risk

66 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Climate risk – primary risk

drivers

Details Potential Impacts Time horizons

Physical Acute Increased frequency and severity of weather events causing

disruption to business operations.

– Decreased real estate values or

stranded assets

– Decreased household income

and wealth

– Increased costs of legal and

compliance

– Increased public scrutiny

– Decreased profitability

– Lower asset performance

Short term

Medium term

Long term

Chronic Longer-term shifts in climate patterns (e.g. sustained higher

temperatures, sea level rise, shifting monsoons or chronic heat

waves).

Transition Policy and legal Mandates on, and regulation of products and services and/or

policy support for low carbon alternatives. Litigation from

parties who have suffered loss and damage from climate

impacts.

Technology Replacement of existing products with lower emissions and/or

lower options.

End-demand

(market)

Changing consumer demand from individuals and corporates.

Reputational Increased scrutiny following a change in stakeholder

perceptions of climate-related action or inaction.

In 2023, the Group updated its climate risk materiality assessment, to

understand how climate risk may impact across HSBC's risk

taxonomy. The assessment focused on a 12-month time horizon, as

well as time horizons for the short-term, medium-term and long-term

periods. The Group defines short-term as time periods up to 2025;

medium-term as between 2026 and 2035, and long-term as between

2036 and 2050. The assessment is refreshed annually, and the

results may change as the Group's understanding of climate risk and

how it impacts HSBC evolves (for further details, see the Group's

Annual Report and Accounts). In addition to these assessments, the

group also considers climate risk in its emerging risk reporting and

scenario analysis, which consider potential impacts across longer

time horizons (for further details, see 'Top and emerging risks' on

page 28 and 'Insights from climate scenario analysis' on page 13).

Climate risk management

Key developments in 2023

The group’s climate risk programme continues to support the

development of its climate risk management capabilities. The

following outlines key developments in 2023:

– The Group updated its climate risk approach to incorporate net

zero alignment risk and developed guidance on how climate risk

should be managed for non-financial risk types.

– The group provided climate-related training for Board and senior

management, and sponsored nominated staff to take climate risk

related professional certifications.

– The group has expanded the climate risk metrics beyond Hong

Kong to assess the impact of physical risk on the group’s retail

mortgage portfolio in Australia, mainland China and Singapore.

While the group has made progress in enhancing its climate risk

management capabilities, further work remains. This includes the

need to develop additional metrics and tools to measure the group's

exposures to climate-related risks and to incorporate these tools

within decision making.

Governance and structure

The Board takes overall responsibility for the group’s climate strategy,

overseeing executive management in developing the approach,

execution and associated reporting.

The group Chief Risk Officer is responsible for the management of

climate-related risks, including governance, risk management, stress

testing and scenario analysis. The group's Environmental Risk

Oversight Forum oversees risk activities relating to environmental risk

management, including the transition and physical risks from climate

change.

The group Risk Management Meeting and the group Risk Committee

receive regular updates on its climate risk profile and progress of its

climate risk programme.

Risk appetite

The group's climate risk appetite forms part of the Group's risk

appetite statement and supports the business in delivering the

group's climate strategy effectively and sustainably.

The group's climate risk appetite statement is approved and overseen

by the group Board. It is supported by risk appetite metrics and

tolerance thresholds. The group has also defined additional key risk

management information metrics. Both the risk appetite statement

and key risk management information metrics are reported for

oversight by the group Risk Management Meeting and the group Risk

Committee.

Policies, processes and controls

The Group is integrating climate risk into policies, processes and

controls across many areas of its organisation, and the Group will

continue to update these as its climate risk management capabilities

mature over time. For further details of how the group manages

climate risk across its global businesses, see page 13.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 67

Embedding the group's climate risk approach

The table below provides further details on how the group has embedded the management of climate risk across key risk types. For details of

its internal scenario analysis, see 'Insights from climate scenario analysis' on page 13.

Risk type Details

Wholesale

Credit Risk

The group has metrics in place to monitor the exposure of its wholesale corporate lending portfolio to six high transition risk sectors.

The group's relationship managers engage with their key wholesale customers through a transition and physical risk questionnaire

and recently introduced an updated questionnaire, the transition engagement questionnaire. The questionnaire is used to gather

information and assess the alignment of the wholesale customers' business models to net zero and their exposure to physical and

transition risk. The group uses the responses to the questionnaire to create a climate risk score for its key wholesale customers.

The Group's credit policies require that relationship managers comment on climate risk factors in credit applications for new money

requests and annual credit reviews. The policies also require manual credit risk rating overrides if climate is deemed to have a

material impact on credit risk under 12 months if not already captured under the original credit risk rating.

Key developments to the group's framework in 2023 include expanding the scope of its questionnaire to capture new countries,

territories and sectors.

Key challenges for further embedding climate risk into credit risk management relate to the availability of adequate physical risk data

to assess impacts to the group's wholesale customers.

Retail Credit

Risk

The Group has implemented policies and tools to manage climate risk across all its retail mortgage markets.

Within the group’s mortgage portfolios, properties or areas with potentially heightened physical risk are identified and assessed

locally and potential exposure is managed through quarterly metrics. In addition, the group has set risk appetite metrics in four key

markets in the region namely Australia, Hong Kong, mainland China and Singapore.

The Group’s retail credit risk management policy requires each mortgage market to conduct an annual review of their climate risk

management procedures, including perils and data sources, to ensure they remain fit for purpose. In 2023, the Group introduced a

global 'soft trigger' monitoring and review process for physical risk exposure where a market reaches or exceeds a set threshold, as

this ensures markets are actively considering their balance sheet risk exposure to peril events.

Treasury Risk

From a Capital perspective, climate risk has been considered as part of the ICAAP in 2023, and the group is continuing to develop its

approach for climate risk management. As part of the ILAAP, an initial analysis has been conducted to identify the potential climate

risk exposures across key liquidity risk drivers.

The Group updated the Treasury Risk policies to ensure that the impact of climate risk is considered when assessing applicable

treasury risks. The Group regularly discusses climate-related topics that may impact Global Treasury through climate-relevant

governance forums, including the Treasury Risk Management Climate Risk Oversight Forum and the Group Treasury Sustainability

Committee.

Treasury portfolios are included within scope of the ICSA and the Hong Kong Monetary Authority’s CRST, with potential quantitative

impacts on relevant hold-to-collect-and-sell positions estimated.

Pension Risk

The Group conducts an annual exercise to monitor the exposure of its largest pension plans to climate risk. The Group has also

updated its pension policies to explicitly reflect climate considerations.

Insurance Risk

The Group has an evolving programme to support the identification and management of climate risk. In 2023, the sustainability

procedures were updated to align with the Group’s updated energy and thermal coal-phase out policies.

Traded Risk

In 2023, the Group implemented metrics and thresholds to monitor exposure to high physical and transition risk sectors for the

different asset classes in the Markets and Securities Services (‘MSS‘) business. The metrics utilise a risk taxonomy which

categorises countries and sectors into high, medium and low risk, for which the group has set corresponding thresholds. In addition,

the group has identified key business lines that contribute the most to the total MSS high-climate sensitive exposures and developed

reports to monitor trends and pockets of risks.

The Group has developed tools to provide a better understanding of key profit and loss drivers under different climate scenarios along

different dimensions (e.g. risk factor, business line, desk etc.). These reports are available to traded risk managers to help monitor

and understand how climate sensitive exposures are impacted under different scenarios. Stress testing results have been presented

to senior management for oversight during dedicated review and challenge sessions to provide awareness on impact to MSS

portfolio and underlying business lines.

Risk

68 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Risk type Details

Reputational

Risk

The group manages the reputational impact of climate risk through its broader reputational risk framework, supported by its

sustainability risk policies and metrics.

The Group's sustainability risk policies set out its appetite for financing activities in certain sectors. The Group's thermal coal phase-

out and energy policies aim to drive down greenhouse gas emissions while supporting a just transition.

The group's global and regional network of sustainability risk managers provides local policy guidance to relationship managers for

the oversight of policy compliance and in support of implementation across the group's wholesale banking activities.

Regulatory

compliance

risk

The Group’s policies set the standards that are required to manage the risk of breaches of regulatory duty to customers, including

those related to climate risk, ensuring fair customer outcomes are achieved. To make sure responsibilities are met in this regard, the

Group’s policies are subject to continuous review and enhancement. There is also focus on the ongoing development and

improvement of monitoring capabilities, ensuring appropriate alignment to the broader focus on regulatory compliance risks.

Regulatory Compliance is particularly focused on mitigating climate risks inherent to the product lifecycle. To support this, the Group

has enhanced a number of processes including:

– ensuring Regulatory Compliance provides risk oversight and review of new product marketing materials with any reference to

climate, sustainability and ESG;

– developing the Group’s product marketing controls to ensure climate claims are robustly evidenced and substantiated within

product marketing materials; and

– clarifying and improving product marketing framework, procedures and associated guidance, to ensure product-related marketing

materials comply with both internal and external standards, and are subject to robust governance.

Regulatory Compliance operates an ESG and Climate Risk Working Group to track and monitor the integration and embedding of

climate risk management into the functions’ activities, while monitoring regulatory and legislative changes across the ESG and

climate risk agenda. In Asia-Pacific, a dedicated working group continues to coordinate the regional implementation of climate risk-

related enhancements within the Regulatory Compliance function. Regulatory Compliance also continues to be an active member of

the Group’s and the group’s Environmental Risk Oversight Forums.

Resilience Risk

Enterprise Risk Management function is responsible for overseeing the identification and assessment of physical and transition

climate risks that may impact on the organisation's operational and resilience capabilities.

The Group has developed metrics to assess how physical risk may impact the Group's critical properties. In 2023, the Group also

developed an energy and travel risk appetite metric for its own operations to establish and monitors progress against the Group's net

zero ambitions.

Resilience risk policies are subject to continuous improvement to remain relevant to evolving climate risks. New developments

relevant to the Group's own operations are reviewed to ensure climate risk considerations are effectively captured.

Model Risk

Group Model Risk published a new climate risk and ESG model category standard which sets out minimum control requirements for

identifying, measuring and managing model risk for climate-related models.

The group completed independent model validation for a number of models used for climate scenario analysis using both qualitative

and quantitative assessments of modelling decisions and outputs.

Challenges

While the group continued to develop its climate risk framework, its remaining challenges include:

– the diverse range of internal and external data sources and data structures needed for climate related reporting, which introduces data

accuracy and reliability risks;

– data limitations on customer assets and supply chains, and methodology gaps, which hinder the group's ability to assess physical risks

accurately;

– industry-wide data gaps on customer emissions and transition plan and methodology gaps, which limit its ability to assess transition risks

accurately; and

– limitations in the management of net zero alignment risk, which is undertaken at a Group level and supported by actions within Asia, is due

to known and unknown factors, including the limited accuracy and reliability of data, merging methodologies, and the need to develop new

tools to better inform decision making.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 69

Resilience risk

(Unaudited)

Overview

Resilience risk is the risk of sustained and significant business

disruption from execution, delivery, physical security or safety events,

causing the inability to provide critical services to our customers,

affiliates, and counterparties. Resilience risk arises from failures or

inadequacies in processes, people, systems or external events.

Resilience risk management

Key developments in 2023

During the year, we carried out several initiatives to keep pace with

geopolitical, regulatory and technology changes and strengthened the

management of resilience risk:

– We focused on enhancing our understanding of our risk and

control environment, by updating our risk taxonomy and control

libraries, and refreshing risk and control assessments.

– We continued to monitor markets affected by the Russia-Ukraine

and Israel-Hamas wars, as well as other geopolitical events, for

any potential impact they may have on our colleagues and

operations.

– We strengthened the way third party risk is overseen and

managed across all non-financial risks, and enhanced the

processes, framework and reporting capabilities used by our

global businesses, functions and regions.

– We provided analysis and easy-to-access risk and control

information and metrics to enable management to focus on non-

financial risks in their decision-making and appetite setting.

– We further strengthened our non-financial risk governance and

senior leadership, and improved our coverage and risk steward

oversight for data risk and change execution.

We prioritise our efforts on material risks and areas undergoing

strategic growth, aligning our location strategy to this need.

Governance and structure

The Enterprise Risk Management target operating model provides a

globally consistent view across resilience risks, strengthening our risk

management oversight while operating effectively as part of a

simplified non-financial risk structure.

We view resilience risk across seven sub-risk types related to: third

party risk; technology and cyber security risk; transaction processing

risk; business interruption and incident risk; data risk; change

execution risk; and facilities availability, safety and security risk. Risk

appetite and key escalations for resilience risk are reported to the

group Risk Management Meeting, chaired by the group Chief Risk

Officer, with an escalation path to the Group Non-Financial Risk

Management Board ('NFRMB'), chaired by the Group Chief Risk and

Compliance Officer.

Key risk management processes

Operational resilience is our ability to anticipate, prevent, adapt,

respond to, recover and learn from operational disruption while

minimising customer, firm and market impact. Resilience is

determined by assessing whether we can continue to provide our

important business services, within an agreed impact tolerance. This

is achieved via day-to-day oversight and periodic and ongoing

assurance, such as deep dive reviews and controls testing, which

may result in challenges being raised to the business by risk

stewards. Further challenge is also raised in the form of quarterly risk

steward opinion papers to formal governance. We accept we will not

be able to prevent all disruption but we must prioritise investment to

continually improve the response and recovery strategies for our

important business services to meet regulatory expectations.

Regulatory compliance risk

(Unaudited)

Overview

Regulatory compliance risk is the risk associated with breaching our

duty to clients and other counterparties, inappropriate market conduct

(including unauthorised trading) and breaching related financial

services regulatory standards. Regulatory compliance risk arises from

the failure to observe relevant laws, codes, rules and regulations and

can manifest itself in poor market or customer outcomes and lead to

fines, penalties and reputational damage to our business.

Regulatory compliance risk management

Key developments in 2023

The dedicated programme to embed our updated purpose-led

conduct approach has concluded. Work to map applicable regulations

to our risks and controls continued in 2023, alongside the adoption of

new tooling to support enterprise-wide horizon scanning for new

regulatory obligations and supporting wider work on regulatory

reporting enhancements. Climate risk has been integrated into

regulatory compliance policies and processes, with enhancements

made to the product governance framework and controls to ensure

the effective consideration of climate – and in particular the risk of

greenwashing – risks.

Governance and structure

The Compliance function has now been restructured and integrated

into a combined Risk and Compliance function with the appointment

of a Group Head of Regulatory Compliance reporting directly into the

Group Chief Risk and Compliance Officer. The group Chief

Compliance Officer is also the group Head of Regulatory Compliance.

Regulatory Compliance and Financial Crime teams work together and

with relevant stakeholders to achieve good conduct outcomes, and

provide enterprise-wide support on the compliance risk agenda in

close collaboration with colleagues from the Group Risk and

Compliance function.

Key risk management processes

The Global Regulatory Compliance capability is responsible for setting

global policies, standards and risk appetite to guide the Group’s

management of regulatory compliance risk. It also devises the

required frameworks, support processes and tooling to protect

against regulatory compliance risks. The Group capability provides

oversight, review and challenge of the global market, regional and line

of business teams to help them identify, assess and mitigate

regulatory compliance risks, where required. The Group’s regulatory

compliance risk policies are regularly reviewed. Global policies and

procedures require the identification and escalation of any actual or

potential regulatory breaches, and relevant events and issues are

escalated to group Risk Management Meeting and group Risk

Committee, as appropriate. The group Chief Compliance Officer Co-

chairs with the group Chief Risk Officer the group Risk and

Compliance Executive Committee and is a member of the group Risk

Management Meeting and an attendee to the group Risk Committee.

Risk

70 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Financial crime risk

(Unaudited)

Overview

Financial crime risk is the risk that HSBC’s products and services will

be exploited for criminal activity. This includes fraud, bribery and

corruption, tax evasion, sanctions and export control violations,

money laundering, terrorist financing and proliferation financing.

Financial crime risk arises from day-to-day banking operations

involving customers, third parties and employees.

Financial crime risk management

Key developments in 2023

We regularly review the effectiveness of our financial crime risk

management framework, which includes continued consideration of

the complex and dynamic nature of sanctions compliance and export

control risk. We continued to respond to the various financial

sanctions and trade restrictions, including methods used to limit

sanctions evasion.

We continued to make progress with several key financial crime risk

management initiatives, including:

– We deployed our intelligence-led, dynamic risk assessment

transaction monitoring capability for customer account monitoring

in Hong Kong and Singapore, improving effectiveness in detecting

financial crime risk. This capability will continue to be

implemented in 2024 across further key markets in Asia.

– We successfully introduced the required changes to our

transaction screening capability to accommodate the global

change to payment systems formatting under ISO 20022

requirements.

– We made enhancements in response to the rapidly evolving and

complex global payments landscape and refined our digital assets

and currencies strategy.

Governance and structure

The structure of the Financial Crime function remained substantively

unchanged in 2023, although we continued to review the

effectiveness of our governance framework to manage financial

crime risk. The group Head of Financial Crime reports to the Group

Head of Financial Crime while remaining accountable to the group

Chief Compliance Officer, and the group Risk Committee retains

oversight of matters relating to financial crime.

Key risk management processes

We will not tolerate knowingly conducting business with individuals

or entities believed to be engaged in criminal activity. We require

everybody in HSBC to play their role in maintaining effective systems

and controls to prevent and detect financial crime. Where we believe

we have identified suspected criminal activity or vulnerabilities in our

control framework, we will take appropriate mitigating action.

We manage financial crime risk because it is the right thing to do to

protect our customers, shareholders, staff, the communities in which

we operate, as well as the integrity of the financial system on which

we all rely. We operate in a highly regulated industry in which these

same policy goals are codified in law and regulation.

We are committed to complying with the laws and regulations of all

the markets in which we operate and applying a consistently high

financial crime standard globally.

We continue to assess the effectiveness of our end-to-end financial

crime risk management framework and invest in enhancing our

operational control capabilities and technology solutions to deter and

detect criminal activity. We have simplified our framework and

consolidated previously separate, financial crime policies into a single

global financial crime policy to drive consistency and provide a more

holistic assessment of financial crime risk. We further strengthened

our financial crime risk taxonomy and control libraries and our

monitoring capabilities through technology deployments. We

developed more targeted metrics and continued to seek to enhance

our governance and reporting.

We are committed to working in partnership with the wider industry

and the public sector in managing financial crime risk and we

participate in numerous public-private partnerships and information

sharing initiatives around the world. In 2023, our focus remained on

measures to improve the overall effectiveness of the global financial

crime framework, notably by providing input into legislative and

regulatory reform activities. We did this by contributing to the

development of responses to consultation papers focused on how

financial crime risk management frameworks can deliver more

effective outcomes in detecting and deterring criminal activity.

Through our work with the Wolfsberg Group and the Institute of

International Finance, we supported the efforts of the global standard

setter, the Financial Action Task Force. In addition, we participated in

several public events related to enhancing public private partnerships,

payment transparency, asset recovery, tackling forestry crimes,

wildlife trafficking and human trafficking.

Model Risk

(Unaudited)

Overview

Model risk is the potential for adverse consequences from model

errors or the inappropriate use of modelled outputs to inform

business decisions.

Model risk arises in both financial and non-financial contexts

whenever business decision making includes reliance on models.

Key developments in 2023

In 2023, we continued to make improvements in our model risk

management processes amid regulatory changes in model

requirements.

Initiatives during the year included:

– Received regulatory feedback on a number of our submissions

across internal ratings-based (‘IRB’) models for credit risk, internal

model method (‘IMM’) for counterparty credit risk and internal

model approach (‘IMA’) for market risk. Approved models for IMM

and IMA have been implemented. A programme of work has been

initiated to address feedback from the PRA and HKMA on the IRB

models for Wholesale and Retail Credit.

– Made changes to the Value at Risk (‘VaR’) model in response to

the interest rate changes by central banks across major markets

to curb inflationary pressures.

– Following the changes to address gaps in the control framework

that emerged as a result of increases in adjustments and overlays

during the Covid-19 pandemic; the dependency on adjustments

and overlays being applied to model outputs has reduced

significantly as global economies stabilised.

– Models play an important role under HKFRS 17 implementation

for our insurance business. Model developments to address

related financial reporting risk has been progressing. In the

meantime, we continue to monitor and manage any potential

material adverse consequences in relation to both financial and

capital reporting.

– The PRA published Supervisory Statement (SS1/23) which sets

out guiding principles for how model risks should be managed

across the industry. The principles set out the core disciplines

necessary for a robust Model Risk Management (‘MRM’)

framework to manage model risk effectively. A programme of

work with representation from Businesses and Functions,

including Internal Audit, has been initiated to uplift our MRM

Framework to meet the enhanced model risk management

requirements.

– Enhanced our frameworks and controls as more Climate Risk and

Artificial Intelligence ('AI') and Machine Learning ('ML') models are

being embedded in business processes. Focused also on

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 71

Generative AI due to the pace of technological changes where

applicable model risks need to be managed.

– Continued to carry out regular review on model inventory

completeness and accuracy, and increased awareness of model

landscape and model limitations across the Region.

– Conducted model risk refresher sessions across the Region to

strengthen the business ownership and management of model

risk and the connection between model risk role holders and

model developing areas.

Governance

The group's Model Risk Committee (‘MRC’) provides oversight of

models used in the group and focuses on local delivery and

requirements. The Committees is chaired by the group Chief Risk

Officer and the Regional Heads of Businesses, senior executives

from Risk, Finance and Compliance participate in these meetings.

Authorised sub-forums operating under the remit of the group MRC,

oversee model risk management activities based on associated

model categories.

Key risk management processes

A variety of modelling approaches, including regression, simulation,

sampling, machine learning and judgemental scorecards for a range

of business applications were used. These activities include customer

selection, product pricing, financial crime transaction monitoring,

creditworthiness evaluation and financial reporting.

Our model risk management policies and procedures were regularly

reviewed, and required the First Line of Defence to demonstrate

comprehensive and effective controls based on a library of model risk

controls provided by Model Risk Management.

Model Risk Management also reports on model risk to senior

management and the Board Risk Committee on a regular basis

through the use of the risk map, risk appetite and regular key

updates.

The effectiveness of these processes, including the Regional model

oversight structure, were regularly reviewed to ensure clarity in

authority, coverage and escalations and that appropriate

understanding and ownership of model risk continued to be

embedded in the Businesses and Functions.

Insurance manufacturing operations

risk

Overview

(Unaudited)

The key risks for our insurance manufacturing operations are market

risks, in particular interest rate and equity, credit risks and insurance

underwriting. These have a direct impact on the financial results and

capital positions of the insurance operations. Liquidity risk, whilst

significant in other parts of the group, is less material for our

insurance operations.

HSBC’s Insurance business

(Unaudited)

We sell insurance products through a range of channels including our

branches, insurance sales forces, direct channels and third-party

distributors. The majority of sales are through an integrated

bancassurance model that provides insurance products principally for

customers with whom we have a banking relationship, although the

proportion of sales through other sources such as independent

financial advisers, tied agents and digital platforms is increasing.

For the insurance products we manufacture, the majority of sales are

of savings, universal life and protection contracts.

We choose to manufacture these insurance products in HSBC

subsidiaries based on an assessment of operational scale and risk

appetite. Manufacturing insurance allows us to retain the risks and

rewards associated with writing insurance contracts by keeping part

of the underwriting profit and investment income within the group.

We have life insurance manufacturing operations in Hong Kong,

Singapore and mainland China. We also hold an interest in a life

insurance manufacturing associate in India.

Where we do not have the risk appetite or operational scale to be an

effective insurance manufacturer, we engage with a small number of

leading external insurance companies in order to provide insurance

products to our customers. These arrangements are generally

structured with our exclusive strategic partners and earn the group a

combination of commissions, fees and a share of profits.

Insurance products are sold predominantly by WPB and CMB through

our branches and direct channels.

Insurance manufacturing operations risk

management

Key developments in 2023

(Unaudited)

The insurance manufacturing subsidiaries follow the group’s risk

management framework. In addition, there are specific policies and

practices relating to the risk management of insurance contracts,

which did not change materially over 2023. During the year there has

been continued market volatility observed over 2023 across interest

rates, equity markets and foreign exchange rates. This has been

predominantly driven by geopolitical factors and wider inflationary

concerns. One key area of risk management focus during 2023 was

the implementation of the new accounting standard, HKFRS 17

Insurance Contracts. Given the fundamental change the accounting

standard represented in insurance accounting and the complexity of

the new standard, this change presented additional financial reporting

and model risks for the group, which were managed via the HKFRS

17 implementation project. Other areas of focus have been the

ongoing integration of the insurance business that was acquired, AXA

Insurance Pte Limited (‘AXA Singapore’), and controls supporting

HKFRS 17 implementation.

Governance and structure

(Unaudited)

Insurance risks are managed to a defined risk appetite, which is

aligned to the group's risk appetite and risk management framework,

including the group’s ‘Three lines of defence’ model. The Global

Insurance Risk Management Meeting oversees the risk and control

framework for insurance business in the group.

The monitoring of the risks within our insurance operations is carried

out by insurance risk teams. The Bank’s risk stewardship sub-

functions support the insurance risk teams in their respective areas of

expertise.

Stress and scenario testing

(Unaudited)

Stress testing forms a key part of the risk management framework

for the insurance business. We participate in local and group-wide

regulatory stress tests, as well as internally developed stress and

scenario tests, including Group internal stress test exercises. The

results of these stress tests and the adequacy of management action

plans to mitigate these risks are considered in the group ICAAP and

the entities’ regulatory Own Risk and Solvency Assessments which

are produced by all material entities.

Risk

72 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Key risk management processes

Market risk

(Audited)

All our insurance manufacturing subsidiaries have market risk

mandates that specify the investment instruments in which they are

permitted to invest and the maximum quantum of market risk that

they may retain. They manage market risk by using, among others,

some or all of the techniques listed below, depending on the nature

of the contracts written:

– We are able to adjust bonus rates to manage the liabilities to

policyholders for products with participating features. The effect is

that a significant portion of the market risk is borne by the

policyholder;

– We use asset and liability matching where asset portfolios are

structured to support projected liability cash flows. The group

manages its assets using an approach that considers asset quality,

diversification, cash flow matching, liquidity, volatility and target

investment return. We use models to assess the effect of a range

of future scenarios on the values of financial assets and

associated liabilities, and ALCOs employ the outcomes in

determining how best to structure asset holdings to support

liabilities;

– We use derivatives to protect against adverse market

movements; and

– We design new products to mitigate market risk, such as

changing the investment return sharing portion between

policyholders and the shareholder.

Credit risk

(Audited)

Our insurance manufacturing subsidiaries also have credit risk

mandates and limits within which they are permitted to operate,

which consider the credit risk exposure, quality and performance of

their investment portfolios. Our assessment of the creditworthiness

of issuers and counterparties is based primarily upon internationally

recognised credit ratings and other publicly available information.

Stress testing is performed on investment credit exposures using

credit spread sensitivities and default probabilities.

We use a number of tools to manage and monitor credit risk. These

include a credit report containing a watch-list of investments with

current credit concerns, primarily investments that may be at risk of

future impairment or where high concentrations to counterparties are

present in the investment portfolio. Sensitivities to credit spread risk

are assessed and monitored regularly.

Capital and liquidity risk

(Audited)

Capital risk for our insurance manufacturing subsidiaries is assessed

in the ICAAP based on their financial capacity to support the risks to

which they are exposed. Capital adequacy is assessed on both the

group’s economic capital basis, and the relevant local insurance

regulatory basis.

Risk appetite buffers are set to ensure that the operations are able to

remain solvent, allowing for business-as-usual volatility and extreme

but plausible stress events.

Liquidity risk is managed by cash flow matching and maintaining

sufficient cash resources, investing in high credit-quality investments

with deep and liquid markets, monitoring investment concentrations

and restricting them where appropriate, establishing committed

contingency borrowing facilities and stress testing to understand the

impact on liquidity in the event of a mass lapse.

Insurance manufacturing subsidiaries also complete quarterly liquidity

risk reports and an annual review of the liquidity risks to which they

are exposed.

Insurance underwriting risk

(Unaudited)

Our insurance manufacturing subsidiaries primarily use the following

frameworks and processes to manage and mitigate insurance

underwriting risks:

– a formal approval process for launching new products or making

changes to products;

– a product pricing and profitability framework which requires initial

and ongoing assessment of the adequacy of premiums charged

on new insurance contracts to meet the risks associated with

them;

– a framework for customer underwriting;

– reinsurance, which cedes risks to third party reinsurers to keep

risks within risk appetite, reduce volatility and improve capital

efficiency; and

– oversight by financial reporting committees in each of our entities

of the methodology and assumptions that underpin HKFRS 17

reporting.

Insurance manufacturing operations risk in

2023

Measurement

(Unaudited)

The tables below show the composition of assets and liabilities by

contract type. 88% (2022: 89%) of both assets and liabilities are

derived from Hong Kong.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 73

Balance sheet of insurance manufacturing subsidiaries by type of contract

(Audited)

Life direct

participating

and

investment

DPF

contracts

Life

other

contracts

Other

contracts

Shareholders'

assets and

liabilities Total

HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2023

Financial assets 675,860 26,482 34,021 40,415 776,778

– financial assets designated and otherwise mandatorily measured at fair

value

649,932 25,348 21,426 580 697,286

– derivatives 1,099 76 3 — 1,178

– financial investments measured at amortised cost 8,388 523 8,996 37,106 55,013

– financial investments measured at fair value through other

comprehensive income

— — 36 — 36

– other financial assets

16,441 535 3,560 2,729 23,265

Insurance contract assets 98 798 — — 896

Reinsurance contract assets — 36,633 — — 36,633

Other assets and investment properties 14,258 524 275 11,487 26,544

Total assets at 31 Dec 2023 690,216 64,437 34,296 51,902 840,851

Liabilities under investment contracts designated at fairvalue — — 29,885 — 29,885

Insurance contract liabilities 700,691 25,505 — — 726,196

Reinsurance contract liabilities — 6,079 — — 6,079

Deferred tax

— 9 — — 9

Other liabilities — — — 31,306 31,306

Total liabilities 700,691 31,593 29,885 31,306 793,475

Total equity — — — 47,376 47,376

Total equity and liabilities at 31 Dec 2023 700,691 31,593 29,885 78,682 840,851

At 31 Dec 2022

Financial assets 608,004 30,170 40,806 39,717 718,697

– financial assets designated and otherwise mandatorily measured at fair

value

588,743 26,714 28,076 1,569 645,102

– derivatives 1,189 75 162 12 1,438

– financial investments measured at amortised cost 4,736 1,395 9,487 36,125 51,743

– financial investments measured at fair value through other

comprehensive income

— — — — —

– other financial assets

13,336 1,986 3,081 2,011 20,414

Insurance contract assets 35 301 — — 336

Reinsurance contract assets — 33,274 — — 33,274

Other assets and investment properties 12,214 326 244 11,079 23,863

Total assets at 31 Dec 2022

620,253 64,071 41,050 50,796 776,170

Liabilities under investment contracts designated at fairvalue — — 33,031 — 33,031

Insurance contract liabilities 626,424 24,982 — — 651,406

Reinsurance contract liabilities — 5,518 — — 5,518

Deferred tax 179 — — 17 196

Other liabilities — — — 40,877 40,877

Total liabilities 626,603 30,500 33,031 40,894 731,028

Total equity — — — 45,142 45,142

Total equity and liabilities at 31 Dec 2022

626,603 30,500 33,031 86,036 776,170

1 Balance sheet of insurance manufacturing operations is shown before elimination of inter-company transactions with HSBC non-insurance operations.

2 ‘Life direct participating and investment DPF’ contracts are substantially measured under the variable fee approach measurement model.

3 ‘Life other’ contracts are measured under the general measurement model and mainly includes protection insurance contracts as well as reinsurance

contracts. The reinsurance contracts primarily provide diversification benefits over the life participating and investment discretionary participation

feature (’DPF’) contracts.

4 ‘Other contracts’ includes investment contracts for which HSBC does not bear significant insurance risk.

5 'Other financial assets' comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.

6 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4 ‘Insurance Contracts’. Comparative data have been

restated accordingly.

Key risk types

Market risk

(Audited)

Description and exposure

Market risk is the risk of changes in market factors affecting capital or

profit. Market factors include interest rates, equity and growth

assets, credit spreads and foreign exchange rates.

Our exposure varies depending on the type of contract issued. Our

most significant life insurance products are contracts with

participating features. These products typically include some form of

capital guarantee or guaranteed return on the sums invested by the

policyholders, to which discretionary bonuses are added if allowed by

the overall performance of the funds. These funds are primarily

invested in fixed interest assets, with a proportion allocated to other

asset classes to provide customers with the potential for enhanced

returns.

Participating products expose the group to the risk of variation in

asset returns, which will impact our participation in the investment

performance.

Risk

74 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

For unit-linked contracts, market risk is substantially borne by the

policyholders, but some market risk exposure typically remains as

fees earned are related to the market value of the linked assets.

Sensitivities

(Unaudited)

The following table provides the impacts on the CSM, profit after tax

and equity of our insurance manufacturing subsidiaries from

reasonably possible effects of changes in selected interest rate,

credit spreads, equity price, growth assets and foreign exchange rate

scenarios for the year. These sensitivities are prepared in accordance

with current HKFRSs and are based on changing one assumption at a

time with other variables being held constant which in practice could

be correlated.

Due in part to the impact of the cost of guarantees and hedging

strategies, which may be in place, the relationship between the CSM,

profit after tax and total equity and the risk factors is non-linear.

Therefore, the results disclosed should not be extrapolated to

measure sensitivities to different levels of stress. For the same

reason, the impact of the stress is not necessarily symmetrical on the

upside and downside. The sensitivities are stated before allowance

for management actions, which may mitigate the effect of changes in

the market environment.

The method used for deriving sensitivity information and significant

market risk factors remain consistent between 2022 and 2023.In

2022, due to a lower CSM level, some portfolios generated onerous

contracts in the 100bps up scenarios for interest rate and credit

spread sensitivities, generating income statement losses and equity

reductions in those scenarios. This was less prevalent in 2023 as the

base CSMs were higher from changing market conditions and

changes in lapse rate assumptions.

Sensitivity of the group’s insurance manufacturing subsidiaries to market risk factors

(Audited)

2023 2022

Effect on

profit after tax

Effect on

CSM

Effect on

total equity

Effect on profit

after tax

Effect on

CSM

Effect on

total equity

HK$m HK$m HK$m HK$m HK$m HK$m

+100 basis point parallel shift in yield curves 453 (779) 453 (1,702) (912) (1,702)

– Insurance and reinsurance contracts 459 (779) 459 (1,734) (912) (1,734)

– Financial instruments (6) — (6) 32 — 32

–100 basis point parallel shift in yield curves (964) (2,413) (964) (243) 586 (243)

– Insurance and reinsurance contracts (908) (2,413) (908) (171) 586 (171)

– Financial instruments (56) — (56) (72) — (72)

+100 basis point shift in credit spreads (48) (6,564) (48) (2,497) (6,295) (2,497)

– Insurance and reinsurance contracts (48) (6,564) (48) (2,497) (6,295) (2,497)

– Financial instruments — — — — — —

–100 basis point shift in credit spreads 772 5,931 772 880 8,294 880

– Insurance and reinsurance contracts 772 5,931 772 880 8,294 880

– Financial instruments — — — — — —

10% increase in growth assets

289 2,762 289 284 2,389 284

– Insurance and reinsurance contracts 272 2,762 272 258 2,389 258

– Financial instruments 17 — 17 26 — 26

10% decrease in growth assets

(338) (3,325) (338) (360) (3,629) (359)

– Insurance and reinsurance contracts (317) (3,325) (317) (331) (3,629) (330)

– Financial instruments (21) — (21) (29) — (29)

10% appreciation in US dollar exchange rate against local

functional currency

905 3,045 905 741 2,124 741

– Insurance and reinsurance contracts 211 3,045 211 157 2,124 157

– Financial instruments 694 — 694 584 — 584

10% depreciation in US dollar exchange rate against local

functional currency

(905) (3,045) (905) (741) (2,124) (741)

– Insurance and reinsurance contracts (211) (3,045) (211) (157) (2,124) (157)

– Financial instruments (694) — (694) (584) — (584)

1 Sensitivities presented for ‘Insurance and reinsurance contracts’ includes the impact of the sensitivity stress on underlying assets held to support

insurance and reinsurance contracts. Sensitivities presented for ‘Financial Instruments’ includes the impact of the sensitivity stress on other financial

instruments, primarily shareholder assets.

2 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4 ‘Insurance Contracts’. Comparative data have been

restated accordingly.

3 'Growth assets' primarily comprise equity securities and investment properties. Variability in growth asset fair value constitutes a market risk to

HSBC insurance manufacturing subsidiaries.

Credit risk

(Audited)

Description and exposure

Credit risk is the risk of financial loss if a customer or counterparty

fails to meet their obligation under a contract. It arises in two main

areas for our insurance manufacturers:

– risk associated with credit spread volatility and default by debt

security counterparties after investing premiums to generate a

return for policyholders and shareholders; and

– risk of default by reinsurance counterparties and non-

reimbursement for claims made after ceding insurance risk.

The amounts outstanding at the balance sheet date in respect of

these items are shown in the table on page 74.

The credit quality of the reinsurers’ share of liabilities under insurance

contracts is assessed as ‘strong’ or ‘good’ (as defined on page 36),

with 100% of the exposure being neither past due nor impaired

(2022: 100%).

Credit risk on assets supporting unit-linked liabilities is predominantly

borne by the policyholders. Therefore our exposure is primarily

related to liabilities under non-linked insurance and investment

contracts and shareholders’ funds. The credit quality of insurance

financial assets is included in the table on page 49. The risk

associated with credit spread volatility is to a large extent mitigated

by holding debt securities to maturity, and sharing a degree of credit

spread experience with policyholders.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 75

Liquidity risk

(Audited)

Description and exposure

Liquidity risk is the risk that an insurance operation, though solvent,

either does not have sufficient financial resources available to meet

its obligations when they fall due, or can secure them only at

excessive cost. Liquidity risk may be able to be shared with

policyholders for products with participating features.

The remaining maturity of insurance contract liabilities is included in

Note 3 on page 107.

The amounts of insurance contract liabilities that are payable on demand are set out by the product grouping below:

Amounts Payable on Demand

(Audited)

2023 2022

Amounts

Payable on

Demand

Carrying Amount

for these

Contracts

Amounts

Payable on

Demand

Carrying

Amount for these

Contracts

HK$m HK$m HK$m HK$m

Life direct participating and investment DPF contracts 654,981 700,691 587,973 626,424

Life other contracts 20,021 25,505 20,239 24,982

At 31 Dec 675,002 726,196 608,212 651,406

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4 ‘Insurance Contracts’. Comparative data have been

restated accordingly.

Insurance underwriting risk

Description and exposure

(Unaudited)

Insurance underwriting risk is the risk of loss through adverse

experience, in either timing or amount, of insurance underwriting

parameters (non-economic assumptions). These parameters include

mortality, morbidity, longevity, lapses and expense rates. Lapse risk

exposure on products with premium financing has increased over the

year as rising interest rates have led to an increase in the cost of

financing for customers.

The principal risk we face is that, over time, the cost of the contract,

including claims and benefits may exceed the total amount of

premiums and investment income received.

The table on page 74 analyses our life insurance underwriting risk

exposures by type of contract.

The insurance underwriting risk profile and related exposures remain

largely consistent with those observed at 31December 2022.

Sensitivities

(Audited)

The table below shows the sensitivity of the CSM, profit and total

equity to reasonably foreseeable changes in non-economic

assumptions across all our insurance manufacturing subsidiaries.

These sensitivities are prepared in accordance with current HKFRS

Accounting Standards, which have changed following the adoption of

HKFRS 17 ‘Insurance Contracts’, effective from 1 January 2023.

Further information about the adoption of HKFRS17 is provided on

page 89-99 and 147-150.

Mortality and morbidity risk is typically associated with lifeinsurance

contracts. The effect on profit of an increase in mortality or morbidity

depends on the type of business being written.

Sensitivity to lapse rates depends on the type of contracts being

written. An increase in lapse rates typically has a negative effect on

CSM (and therefore expected future profits) due to the loss offuture

income on the lapsed policies. However, some contract lapses have a

positive effect on profit due to the existence of policy surrender

charges.

Expense rate risk is the exposure to a change in the allocated cost

ofadministering insurance contracts. To the extent that increased

expenses cannot be passed on to policyholders, an increase in

expense rates will have a negative effect on our profits. The risk is

generally greater for Singapore and mainland China than for Hong

Kong because these entities have smaller portfolios over which to

spread costs.

The impact of changing insurance underwriting risk factors is

primarily absorbed within the CSM, unless contracts are onerous in

which case the impact is directly to profits. The impact of changes to

the CSM is released to profits over the life of the related insurance

contracts.

Sensitivity of the group’s insurance manufacturing subsidiaries to insurance underwriting risk factors

(Audited)

Effect on CSM

(gross)

Effect on profit

after tax (gross)

Effect on profit

after tax (net)

Effect on total

equity (gross)

Effect on total

equity (net)

At 31 Dec 2023 HK$m HK$m HK$m HK$m HK$m

10% increase in mortality and/or morbidity rates (2,361) (259) (138) (259) (138)

10% decrease in mortality and/or morbidity rates 2,677 111 163 111 163

10% increase in lapse rates (1,753) (156) (100) (156) (100)

10% decrease in lapse rates 1,929 98 119 98 119

10% increase in expense rates (237) (25) (26) (25) (26)

10% decrease in expense rates 242 36 37 36 37

At 31 Dec 2022

10% increase in mortality and/or morbidity rates (2,059) (125) (124) (125) (124)

10% decrease in mortality and/or morbidity rates 2,170 108 104 108 104

10% increase in lapse rates (1,160) (123) (119) (123) (119)

10% decrease in lapse rates 1,181 127 112 127 112

10% increase in expense rates (169) (24) (28) (24) (28)

10% decrease in expense rates 178 21 17 21 17

1 The ‘gross’ sensitivities impacts are provided before considering the impacts of reinsurance contracts held as risk mitigation.

2 The ‘net’ sensitivities impacts are provided after considering the impacts of reinsurance contracts held as risk mitigation.

3 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts’, which replaced HKFRS 4 ‘Insurance Contracts’. Comparative data have been

restated accordingly.

Risk

76 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Statement of Directors’ Responsibilities

The following statement, which should be read in conjunction with the Auditor’s statement of their responsibilities set out in their report on

pages 78-82, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the Auditor in relation

to the consolidated financial statements.

The Directors of The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) are responsible for the preparation of the Bank’s Annual

Report and Accounts, which contains the consolidated financial statements of the Bank and its subsidiaries (together ‘the group’), in

accordance with applicable law and regulations.

The Hong Kong Companies Ordinance requires the Directors to prepare for each financial year the consolidated financial statements for the

group and the balance sheet for the Bank.

The Directors are responsible for ensuring adequate accounting records are kept that are sufficient to show and explain the group’s

transactions, such that the group’s consolidated financial statements give a true and fair view.

The Directors are responsible for preparing the consolidated financial statements that give a true and fair view and are in accordance with Hong

Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants. The Directors have elected

to prepare the Bank’s balance sheet on the same basis.

The Directors as at the date of this report, whose names and functions are set out in the ‘Report of the Directors’ on pages 3-9 of this Annual

Report and Accounts, confirm to the best of their knowledge that:

– the consolidated financial statements, which have been prepared in accordance with HKFRSs and in accordance with the applicable set of

accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the group; and

– the management report represented by the Financial Review, the Risk and Capital Reports includes a fair review of the development and

performance of the business and the position of the group, together with a description of the principal risks and uncertainties that the group

faces.

On behalf of the Board

Peter Wong

Chairman

21 February 2024

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 77

Independent Auditor’s Report

To the Shareholder of The Hongkong and Shanghai Banking Corporation

Limited (incorporated in Hong Kong with limited liability)

Opinion

What we have audited

The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited (the 'Bank’) and its subsidiaries (the

'group’), which are set out on pages 83 to 151, comprise:

– the consolidated balance sheet as at 31 December 2023;

– the consolidated income statement for the year then ended;

– the consolidated statement of comprehensive income for the year then ended;

– the consolidated statement of changes in equity for the year then ended;

– the consolidated statement of cash flows for the year then ended; and

– the notes

on the consolidated financial statements, comprising material accounting policies and other explanatory information.

1 Certain required disclosures as described in Note 1.1(d) on the consolidated financial statements have been presented elsewhere in the Annual

Report and Accounts 2023, rather than in the notes on the consolidated financial statements. These are cross-referenced from the consolidated

financial statements and are identified as audited.

Our opinion

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the group as at

31 December 2023, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with

Hong Kong Financial Reporting Standards (‘HKFRSs’) issued by the Hong Kong Institute of Certified Public Accountants (‘HKICPA’) and have

been properly prepared in compliance with the Hong Kong Companies Ordinance.

Basis for Opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing (‘HKSAs’) issued by the HKICPA. Our responsibilities under

those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our

report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (‘the Code’), and we have

fulfilled our other ethical responsibilities in accordance with the Code.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial

statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a

whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matters identified in our audit are summarised as follows:

– Allowances for expected credit losses on loans and advances to customers

– Impairment assessment of investment in associate – Bank of Communications Co., Ltd (‘BoCom’)

– Insurance contract liabilities

Independent Auditor’s Report

78 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Allowances for expected credit losses on loans and advances to customers

Nature of the Key Audit Matter How our audit addressed the Key Audit Matter

At 31 December 2023, the group recorded allowances for expected credit

losses (‘ECL’) on loans and advances to customers of HK$38.9bn.

The determination of the ECL on non-credit-impaired loans and advances

to customers requires the use of complex credit risk methodologies that

are applied in models using the group’s historic experience of the

correlations between defaults and losses, borrower creditworthiness,

segmentation of customers or portfolios and economic conditions.

It also requires the determination of assumptions which involve estimation

uncertainty. The assumptions used for ECL that we focused on for non-

credit-impaired loans and advances to customers included those with

greater levels of management judgement and for which variations have the

most significant impact on ECL on loans and advances to customers.

Specifically, these included economic scenarios and their likelihood, as well

as customer risk ratings. Likewise, there is inherent uncertainty with the

consensus economic forecast data from external economists.

Impacts related to the mainland China commercial real estate sector, the

geopolitical landscape and other current macroeconomic conditions effect

the inherent risk and estimation uncertainty involved in determining the

ECL on loans and advances to customers. Management judgemental

adjustments to ECL on non-credit-impaired loans and advances to

customers therefore continue to be made.

The above ongoing conditions continue to result in significant credit-

impaired corporate exposures related to the unsecured offshore mainland

China commercial real estate sector. The assumptions with the most

significant impact here are those applied in estimating the recoverability of

these exposures.

We tested controls in place relating to the methodologies, their application,

significant assumptions and data used to determine the ECL on loans and

advances to customers. These included controls relating to:

– Model development, validation and monitoring;

– Approval of economic scenarios;

– Approval of the probability weightings assigned to economic scenarios;

– Assigning customer risk ratings;

– Approval of management judgemental adjustments; and

– Review of input and assumptions applied in estimating the recoverability

of credit-impaired wholesale exposures.

We performed substantive audit procedures over the compliance of ECL

methodologies with the requirements of HKFRS 9. We engaged

professionals with experience in ECL modelling to assess the

appropriateness of methodologies and related models.

We further performed the following to assess the significant assumptions

and data:

– We challenged the appropriateness of the significant assumptions and

obtained corroborating evidence;

– We involved our economic experts in assessing the reasonableness of

the severity and likelihood of certain economic scenarios;

– We tested a sample of customer risk ratings assigned to wholesale

exposures; and

– We tested a sample of critical data used to determine ECL.

For a sample of management judgemental adjustments and a sample of

credit-impaired wholesale exposures, we challenged the appropriateness

of these and assessed the ECL determined.

We further considered whether the judgements made in selecting the

significant assumptions, as well as determining the management

judgemental adjustments and credit-impaired wholesale exposures, would

give rise to indicators of possible management bias.

We assessed the adequacy of the disclosures in relation to ECL on loans

and advances to customers made in the consolidated financial statements

in the context of the applicable financial reporting framework.

Matters discussed with the Audit Committee

We discussed the appropriateness of the methodologies, their application,

significant assumptions and related disclosures with the Audit Committee,

giving consideration to the current macroeconomic conditions. This

included economic scenarios and their likelihood, management

judgemental adjustments made to derive the ECL on loans and advances

to customers, and future recoverability of certain significant credit-impaired

wholesale exposures.

Relevant references in the consolidated financial statements

Risk: Credit risk, as cross-referenced from the consolidated financial statements (only information identified as audited), page 35-58

Note 1.2 (i) on the consolidated financial statements: Basis of preparation and material accounting policies – Summary of material accounting policies -

Impairment of amortised cost and FVOCI financial assets, page 94-96

Note 2 (e) on the consolidated financial statements: Operating profit – Change in expected credit losses and other credit impairment charges, page 101

Note 10 on the consolidated financial statements: Loans and advances to customers, page 116-117

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 79

Impairment assessment of investment in associate – Bank of Communications Co., Ltd (‘BoCom’)

Nature of the Key Audit Matter How our audit addressed the Key Audit Matter

At 31 December 2023, the fair value of the investment in BoCom, based

on the share price, was lower than the carrying value. This is an indicator

of potential impairment. An impairment test was performed by

management, with supporting sensitivity analysis, using a value in use

('VIU') model. On this basis, the group impaired the value of the

investment in BoCom by HK$24.0bn. The carrying value of the investment

in BoCom after impairment amounted to HK$166.2bn at 31 December

2023.

The methodology applied in the VIU model is dependent on various

assumptions, both short-term and long-term in nature. These assumptions,

which are subject to estimation uncertainty, are derived from a

combination of management’s judgement, analysts’ forecasts, market data

or other relevant information.

The assumptions that we focused our audit on were those with greater

levels of management judgement and subjectivity, and for which variations

had the most significant impact on the VIU. Specifically, these significant

assumptions included the discount rate, operating income growth rate,

loans and advances to customers growth rate, long-term profit and asset

growth rates, cost-income ratio, expected credit losses as a percentage of

loans and advances to customers, long-term effective tax rate, capital

requirements – capital adequacy ratio, capital requirements – tier 1 capital

adequacy ratio and risk-weighted assets as a percentage of total assets.

We tested controls in place relating to significant assumptions, the

methodology and its application used to determine the VIU. We assessed

the appropriateness of the methodology used and its application. In

respect of the significant assumptions, we performed the following:

– Challenged the appropriateness of the significant assumptions and,

where relevant, their interrelationships;

– Obtained corroborating evidence for data supporting significant

assumptions which as relevant included past experience, external

market information, third-party sources including analyst reports,

information from BoCom management and historical publicly available

BoCom financial information;

– Determined a reasonable range for the discount rate assumption, with

the assistance of our valuation experts, and compared it to the discount

rate used by management; and

– Assessed whether the judgements made in selecting the significant

assumptions would give rise to indicators of possible management bias.

We observed meetings between management and BoCom management

to identify facts and circumstances impacting significant assumptions

relevant to the determination of the VIU.

Representations were obtained from the Bank that assumptions used

were consistent with information currently available to the Bank.

We assessed the adequacy of the disclosures in relation to BoCom made

in the consolidated financial statements in the context of the applicable

financial reporting framework.

Matters discussed with the Audit Committee

We discussed the appropriateness of the methodology, its application and

significant assumptions with the Audit Committee. We also discussed the

disclosures made in relation to BoCom, including the use of sensitivity

analysis to explain estimation uncertainty.

Relevant references in the consolidated financial statements

Note 1.2 (a) on the consolidated financial statements: Basis of preparation and material accounting policies – Summary of material accounting policies –

Consolidation and related policies, page 91

Note 14 on the consolidated financial statements: Interests in associates and joint ventures, page 119-122

Independent Auditor’s Report

80 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Insurance contract liabilities

Nature of the Key Audit Matter How our audit addressed the Key Audit Matter

The group has adopted HKFRS 17 ‘Insurance contracts’. The standard sets

out the requirements that an entity should apply in accounting for insurance

contracts it issues, reinsurance contracts it holds and investment contracts

with discretionary participating features it issues.

At 31 December 2023, the group recorded insurance contract liabilities of

HK$730.8bn.

Insurance contract liabilities under HKFRS 17 are measured as the total of

fulfilment cash flows and contractual service margin, the determination of

which requires judgement and interpretation. This includes the selection of

accounting policies and the use of complex methodologies that are applied

in models. The selection and application of appropriate methodology

requires significant professional judgement. It also requires the

determination of assumptions which involve estimation uncertainty.

We tested certain controls in place relating to accounting policies,

methodologies, their application, significant assumptions and data used in

determining insurance contract liabilities, these included controls relating

to:

– Selection and approval of the accounting policies;

– Policy data reconciliations from the policyholder administration systems

to the actuarial valuation models;

– Assumption setting; and

– Review and determination of methodologies used, and their application

in the models.

With the assistance of our actuarial professionals, we performed the

following substantive audit procedures to assess the accounting policies,

methodologies, their application, significant assumptions, data and

disclosures:

– We assessed the adherence of the accounting policies with the

requirements in HKFRS 17;

– We assessed the appropriateness of the methodologies used and their

application in models;

– We challenged the appropriateness of the judgements made in

selecting significant assumptions and, where relevant, their

interrelationships. We have assessed these significant assumptions and

obtained relevant corroborating evidence. We further considered

whether the judgements made in selecting the significant assumptions

would give risk to indicators of susceptibility to management bias;

– We performed substantive audit procedures over a sample of critical

data used to ensure these are relevant and reliable; and

– We assessed the adequacy of the relevant disclosures in the context of

the applicable financial reporting framework.

Matters discussed with the Audit Committee

We discussed the appropriateness of the accounting policies,

methodologies, their application, significant assumptions and related

disclosures with the Audit Committee. Perspectives were also shared on

the control environment related to accounting for insurance contract

liabilities.

Relevant references in the consolidated financial statements

Risk: Insurance manufacturing operations risk as cross-referenced from the consolidated financial statements (only information identified as audited),

page 72-76

Note 1.1 (a) on the consolidated financial statements: Basis of preparation and material accounting policies – Basis of preparation – Compliance with

Hong Kong Financial Reporting Standards, page 89-90

Note 1.2 (j) on the consolidated financial statements: Basis of preparation and material accounting policies – Summary of material accounting policies –

Insurance contracts, page 97-98

Note 3 on the consolidated financial statements: Insurance business, page 102-107

Note 38 on the consolidated financial statements: Effects of adoption of HKFRS 17, page 147-150

Other Information

The directors of the Bank are responsible for the other information. The other information comprises all of the information included in the

Annual Report and Accounts 2023, Banking Disclosure Statement at 31 December 2023 and List of the directors of the Bank's subsidiary

undertakings (during the period from 1 January 2023 to 21 February 2024) other than the consolidated financial statements and our auditor’s

report thereon. We have obtained some of the other information including Certain defined terms, Cautionary statement regarding forward-

looking statements, Chinese translation, Financial Highlights, Report of the Directors, Task Force on Climate-related Financial Disclosures,

Financial Review, Risk, Statement of Directors' Responsibilities and Additional information sections of the Annual Report and Accounts 2023

prior to the date of this auditor’s report. The remaining other information, including Banking Disclosure Statement at 31 December 2023 and

List of the directors of the Bank's subsidiary undertakings (during the period from 1 January 2023 to 21 February 2024), is expected to be made

available to us after that date. The other information does not include the specific information presented therein that is identified as being an

integral part of the consolidated financial statements and, therefore, covered by our audit opinion on the consolidated financial statements.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of

assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in

doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge

obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that

there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

When we read the remaining other information, if we conclude that there is a material misstatement therein, we are required to communicate

the matter to the Audit Committee and take appropriate action considering our legal rights and obligations.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 81

Responsibilities of Directors and the Audit Committee for the Consolidated Financial

Statements

The directors of the Bank are responsible for the preparation of the consolidated financial statements that give a true and fair view in

accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the directors

determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to

fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the group’s ability to continue as a going

concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either

intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

The Audit Committee is responsible for overseeing the group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material

misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a

body, in accordance with Section 405 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility

towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a

guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can

arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the

economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit.

We also:

– Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and

perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our

opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may

involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

– Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control.

– Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by

the directors.

– Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained,

whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s ability to continue as a

going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related

disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based

on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group to cease to

continue as a going concern.

– Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the

consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

– Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to

express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group

audit. We remain solely responsible for our audit opinion.

We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit

findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and

to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where

applicable, actions taken to eliminate threats or safeguards applied.

From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the

consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s

report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a

matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh

the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Lars Christian Jordy Nielsen.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong, 21 February 2024

Independent Auditor’s Report

82 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Consolidated Financial Statements

Consolidated income statement

for the year ended 31 December

2023 2022

Notes

HK$m HK$m

(restated)

Net interest income

130,780 109,878

– interest income 295,212 163,124

– interest expense (164,432) (53,246)

Net fee income

38,043 38,565

– fee income 51,025 50,053

– fee expense (12,982) (11,488)

Net income from financial instruments held for trading or managed on a fair value basis

74,435 41,276

Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair

value through profit or loss

48,959 (94,914)

Changes in fair value of designated debts issued and related derivatives

8 (703)

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss

252 40

Gains less losses from financial investments (3,791) 52

Insurance finance income/(expense) (48,798) 97,187

Insurance service result

6,558 4,977

– Insurance revenue 13,007 10,723

– Insurance service expense (6,449) (5,746)

Other operating income

3,233 4,445

Net operating income before change in expected credit losses and other credit impairment charges 249,679 200,803

Change in expected credit losses and other credit impairment charges

(12,843) (16,370)

Net operating income 236,836 184,433

Employee compensation and benefits

(38,547) (38,322)

General and administrative expenses

(54,538) (53,097)

Depreciation and impairment of property, plant and equipment

(9,724) (9,096)

Amortisation and impairment of intangible assets (7,184) (6,023)

Total operating expenses (109,993) (106,538)

Operating profit 126,843 77,895

Share of profit in associates and joint ventures

18,555 18,792

Impairment of interest in associate

(23,955) —

Profit before tax 121,443 96,687

Tax expense

(23,916) (15,996)

Profit for the year 97,527 80,691

Attributable to:

– ordinary shareholders of the parent company 87,191 73,662

– other equity holders 3,556 2,739

– non-controlling interests 6,780 4,290

Profit for the year 97,527 80,691

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 83

Consolidated statement of comprehensive income

for the year ended 31 December

2023 2022

HK$m HK$m

(restated)

Profit for the year 97,527 80,691

Other comprehensive income/(expense)

Items that will be reclassified subsequently to profit or loss when specific conditions are met:

Debt instruments at fair value through other comprehensive income 7,953 (13,705)

– fair value gains/(losses) 6,256 (17,121)

– fair value (gains)/losses transferred to the income statement 3,799 (124)

– expected credit (recoveries)/losses recognised in the income statement (372) 331

– income taxes (1,730) 3,209

Cash flow hedges 3,605 (1,965)

– fair value gains 7,581 5,851

– fair value gains reclassified to the income statement (3,282) (8,228)

– income taxes (694) 412

Share of other comprehensive income/(expense) of associates and joint ventures 736 (1,964)

Exchange differences (9,043) (32,040)

Items that will not be reclassified subsequently to profit or loss:

Property revaluation 4,496 3,863

– fair value gains 5,330 4,683

– income taxes (834) (820)

Equity instruments designated at fair value through other comprehensive income (899) 865

– fair value gains/(losses) (895) 868

– income taxes (4) (3)

Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk (5,410) 4,588

– before income taxes (6,457) 5,461

– income taxes 1,047 (873)

Remeasurement of defined benefit asset/liability 21 185

– before income taxes 26 232

– income taxes (5) (47)

Other comprehensive income/(expense) for the year, net of tax 1,459 (40,173)

Total comprehensive income for the year 98,986 40,518

Attributable to:

– ordinary shareholders of the parent company 88,289 34,497

– other equity holders 3,556 2,739

– non-controlling interests 7,141 3,282

Total comprehensive income for the year 98,986 40,518

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

Consolidated Financial Statements

84 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Consolidated balance sheet

at 31 December

31 Dec 2023 31 Dec 2022 1 Jan 2022

Notes

HK$m

(restated)

HK$m

(restated)

Assets

Cash and balances at central banks 232,987 232,740 276,857

Items in the course of collection from other banks 22,049 28,557 21,632

Hong Kong Government certificates of indebtedness 328,304 341,354 332,044

Trading assets

941,250 699,805 777,450

Derivatives

409,253 502,877 365,167

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss

707,573 653,030 675,853

Reverse repurchase agreements – non-trading 831,186 927,976 803,775

Loans and advances to banks 563,801 515,847 427,811

Loans and advances to customers

3,557,076 3,695,068 3,830,956

Financial investments

2,029,212 1,749,707 1,630,612

Amounts due from Group companies

158,592 140,485 112,621

Interests in associates and joint ventures

170,206 185,898 188,485

Goodwill and intangible assets

38,923 36,863 31,416

Property, plant and equipment

129,675 130,926 129,827

Deferred tax assets

9,315 7,582 7,444

Prepayments, accrued income and other assets

370,991 349,128 266,466

Total assets 10,500,393 10,197,843 9,878,416

Liabilities

Hong Kong currency notes in circulation 328,304 341,354 332,044

Items in the course of transmission to other banks 27,536 33,073 25,701

Repurchase agreements – non-trading 521,984 351,093 255,374

Deposits by banks 182,146 198,908 280,310

Customer accounts

6,261,051 6,113,709 6,177,182

Trading liabilities

103,050 142,453 92,723

Derivatives

450,216 551,729 355,791

Financial liabilities designated at fair value

170,728 167,743 138,965

Debt securities in issue

87,745 100,909 67,364

Retirement benefit liabilities

1,362 1,655 1,890

Amounts due to Group companies

465,476 398,261 356,277

Accruals and deferred income, other liabilities and provisions

258,113 246,614 227,245

Insurance contract liabilities

730,829 654,922 690,991

Current tax liabilities 15,344 6,009 2,385

Deferred tax liabilities

23,923 21,912 22,043

Subordinated liabilities

— 3,119 4,053

Total liabilities 9,627,807 9,333,463 9,030,338

Equity

Share capital

180,181 180,181 172,335

Other equity instruments

52,465 52,386 44,615

Other reserves 117,214 108,837 151,510

Retained earnings 462,866 466,148 422,462

Total shareholders’ equity 812,726 807,552 790,922

Non-controlling interests 59,860 56,828 57,156

Total equity 872,586 864,380 848,078

Total liabilities and equity 10,500,393 10,197,843 9,878,416

1 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. We have restated 2022

comparative data and the HKFRS 17 transition impact on the balance sheet at 1 January 2022.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 85

Consolidated statement of changes in equity

for the year ended 31 December

Other reserves

capital

Other

equity

instruments

Retained

earnings

Property

revaluation

reserve

Financial

assets at

FVOCI

reserve

Cash

flow

hedge

reserve

Foreign

exchange

reserve Other

Total

share-

holders’

equity

Non-

controlling

interests

Total

equity

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 1 Jan 2023 180,181 52,386 466,148 65,148 (11,186) (1,487) (38,470) 94,832 807,552 56,828 864,380

Profit for the year — — 90,747 — — — — — 90,747 6,780 97,527

Other comprehensive

income/(expense) (net of

tax)

— — (5,415) 4,186 7,840 3,342 (8,698) (157) 1,098 361 1,459

– debt instruments at fair

value through other

comprehensive income

— — — — 7,784 — — — 7,784 169 7,953

– equity instruments

designated at fair value

through other

comprehensive income

— — — — (689) — — — (689) (210) (899)

– cash flow hedges

— — — — — 3,334 — — 3,334 271 3,605

– changes in fair value of

financial liabilities

designated at fair value

upon initial recognition

arising from changes in

own credit risk

— — (5,413) — — — — — (5,413) 3 (5,410)

– property revaluation

— — — 4,186 — — — — 4,186 310 4,496

– remeasurement of

defined benefit asset/

liability

— — (7) — — — — — (7) 28 21

– share of other

comprehensive income/

(expense) of associates

and joint ventures

— — 5 — 888 — — (157) 736 — 736

– exchange differences

— — — — (143) 8 (8,698) — (8,833) (210) (9,043)

Total comprehensive

income/(expense) for the

year

— — 85,332 4,186 7,840 3,342 (8,698) (157) 91,845 7,141 98,986

Other equity instruments

issued

— 7,850 — — — — — — 7,850 — 7,850

Other equity instruments

redeemed

— (7,771) (406) — — — — — (8,177) — (8,177)

Dividends to shareholders

— —

(86,356) — — — — — (86,356) (3,843) (90,199)

Movement in respect of

share-based payment

arrangements

— — (99) — — — — (208) (307) 12 (295)

Transfers and other

movements

— — (1,753) (4,055) 800 (4) (731) 6,062 319 (278) 41

At 31 Dec 2023 180,181 52,465 462,866 65,279 (2,546) 1,851 (47,899)

100,529

812,726 59,860 872,586

Consolidated Financial Statements

86 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Consolidated statement of changes in equity (continued)

for the year ended 31 December (restated

)

Other reserves

capital

Other

equity

instruments

Retained

earnings

Property

revaluation

reserve

Financial

assets at

FVOCI

reserve

Cash

flow

hedge

reserve

Foreign

exchange

reserve Other

Total

share-

holders’

equity

Non-

controlling

interests

Total

equity

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2021 172,335 44,615 488,055 64,990 3,869 153 (7,130) 89,922 856,809 66,702 923,511

Impact on transition to

HKFRS 17

— — (65,593) — (294) — — — (65,887) (9,546) (75,433)

At 1 Jan 2022 172,335 44,615 422,462 64,990 3,575 153 (7,130) 89,922 790,922 57,156 848,078

Profit for the year — — 76,401 — — — — — 76,401 4,290 80,691

Other comprehensive

income/(expense) (net of

tax)

— — 4,772 3,646 (14,804) (1,639) (31,340) 200 (39,165) (1,008) (40,173)

– debt instruments at fair

value through other

comprehensive income

— — — — (13,394) — — — (13,394) (311) (13,705)

– equity instruments

designated at fair value

through other

comprehensive income

— — — — 745 — — — 745 120 865

– cash flow hedges — — — — — (1,639) — — (1,639) (326) (1,965)

– changes in fair value of

financial liabilities

designated at fair value

upon initial recognition

arising from changes in

own credit risk

— — 4,590 — — — — — 4,590 (2) 4,588

– property revaluation — — — 3,646 — — — — 3,646 217 3,863

– remeasurement of

defined benefit asset/

liability

— — 191 — — — — — 191 (6) 185

– share of other

comprehensive income of

associates and joint

ventures

— — (9) — (2,155) — — 200 (1,964) — (1,964)

– exchange differences — — — — — — (31,340) — (31,340) (700) (32,040)

Total comprehensive

income/(expense) for the

year

— — 81,173 3,646 (14,804) (1,639) (31,340) 200 37,236 3,282 40,518

Shares issued

7,846 — — — — — — — 7,846 — 7,846

Other equity instruments

issued

— 7,771 — — — — — — 7,771 — 7,771

Dividends to shareholders

— — (34,821) — — — — — (34,821) (2,845) (37,666)

Movement in respect of

share-based payment

arrangements

— — 135 — — — — (137) (2) 13 11

Transfers and other

movements

— — (2,801) (3,488) 43 (1) — 4,847 (1,400) (778) (2,178)

At 31 Dec 2022 180,181 52,386 466,148 65,148 (11,186) (1,487) (38,470) 94,832 807,552 56,828 864,380

1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous

years. During 2022, 3,138.4m new ordinary shares were issued at an issue price of HK$2.5 each.

2 During 2023, an additional tier 1 capital instrument amounting to US$1,000m was issued for which there were no issuance costs.

During 2022, an additional tier 1 capital instrument amounting to US$1,000m was issued for which there were US$10m issuance costs.

3 During 2023, an additional tier 1 capital instrument was redeemed at fair value US$(1,041)m.

4 The other reserves mainly comprise share of associates’ other reserves, purchase premium arising from transfer of business from fellow subsidiaries,

property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment

reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.

5 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.

6 The movements include transfers from retained earnings to other reserves in associates according to local regulatory requirements, and from the

property revaluation reserve to retained earnings in relation to depreciation of revalued properties.

7 From 1 January 2023, we adopted HKFRS 17 ‘Insurance Contracts‘, which replaced HKFRS 4 ‘Insurance Contracts‘. Comparative data have been

restated accordingly.

8 The impact of HKFRS 17 on previously reported total equity was HK$(76,883)m at 31 December 2022.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 87

Consolidated statement of cash flows

for the year ended 31 December

2023 2022

HK$m

(restated)

Profit before tax 121,443 96,687

Adjustments for non-cash items:

Depreciation and amortisation

16,908

15,119

Net loss from investing activities

4,247

123

Share of profit in associates and joint ventures

(18,555)

(18,792)

Impairment of interest in associate

23,955

—

Gain on disposal of businesses and associate

(4)

Gain on acquisition of subsidiary

—

(665)

Change in expected credit losses gross of recoveries and other credit impairment charges

13,707

17,249

Provisions

369

592

Share-based payment expense

976

837

Other non-cash items included in profit before tax

(26,335)

(2,366)

Elimination of exchange differences

(3,505)

45,970

Changes in operating assets and liabilities

Change in net trading securities and derivatives

(288,737)

185,309

Change in loans and advances to banks and customers

76,084

76,805

Change in reverse repurchase agreements – non-trading

55,259

(166,542)

Change in financial assets designated and otherwise mandatorily measured at fair value through profit or loss

(51,239)

50,565

Change in other assets

(77,121)

(70,588)

Change in deposits by banks and customer accounts

130,580

(144,875)

Change in repurchase agreements – non-trading

170,891

95,719

Change in debt securities in issue

(13,164)

33,545

Change in financial liabilities designated at fair value

2,985

26,028

Change in other liabilities

149,791

3,669

Dividends received from associates

5,878

6,003

Contributions paid to defined benefit plans

(628)

(345)

Tax paid

(15,725)

(11,463)

Net cash from operating activities 278,060 238,580

Purchase of financial investments (3,563,846) (3,278,568)

Proceeds from the sale and maturity of financial investments 3,270,020 3,140,253

Purchase of property, plant and equipment (2,176) (2,802)

Proceeds from sale of property, plant and equipment and assets held for sale 36 73

Proceeds from disposal of customer loan portfolios 967 1,449

Net investment in intangible assets (9,641) (11,771)

Net cash inflow from disposal of businesses and associate 4,869 —

Net cash outflow on purchase of subsidiaries — (4,166)

Net cash from investing activities (299,771) (155,532)

Issue of ordinary share capital and other equity instruments 7,850 15,617

Purchase of non-controlling interest (159) (1,548)

Redemption of other equity instruments (8,177) —

Subordinated loan capital issued

66,521 81,014

Subordinated loan capital repaid

(74,277) (22,367)

Dividends paid to shareholders of the parent company and non-controlling interests (90,199) (37,666)

Net cash from financing activities (98,441) 35,050

Net increase/(decrease) in cash and cash equivalents (120,152) 118,098

Cash and cash equivalents at 1 Jan 1,121,695 1,055,084

Exchange differences in respect of cash and cash equivalents (4,905) (51,487)

Cash and cash equivalents at 31 Dec

996,638 1,121,695

Cash and cash equivalents comprise

– cash and balances at central banks 232,987 232,740

– items in the course of collection from other banks 22,049 28,557

– loans and advances to banks of one month or less 355,725 368,946

– net settlement accounts and cash collateral 55,053 58,473

– reverse repurchase agreements with banks of one month or less 223,563 286,100

– treasury bills, other bills and certificates of deposit less than three months 134,797 179,952

– less: items in the course of transmission to other banks (27,536) (33,073)

Cash and cash equivalents at 31 Dec

996,638 1,121,695

Interest received was HK$294,111m (2022: HK$180,879m), interest paid was HK$157,280m (2022: HK$50,873m) and dividends received were

HK$8,261m (2022: HK$6,971m).

1 Comparatives have been restated reflecting the implementation of HKFRS 17. In addition, certain debt instruments have been voluntarily re-presented

in the comparative year, between investing and operating activities, to better align with other HSBC Group entities. This re-presentation does not

impact the net change in cash and cash equivalents during the reporting periods.

2 Changes in subordinated loan capital (including those issued to Group companies) during the year included amounts from issuance and repayments as

presented above, and non-cash changes from foreign exchange loss of HK$216m in 2023 (2022: exchange loss of HK$1,991m) and fair value gain

after hedging of HK$9,899m in 2023 (2022: HK$25,579m loss). These balances are presented under ‘Amounts due to Group companies’ in the

consolidated balance sheet.

3 At 31 December 2023, HK$150,537m (2022: HK$161,252m) was not available for use by the group due to a range of restrictions, including currency

exchange and other restrictions.

Consolidated Financial Statements

88 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Notes on the Consolidated Financial Statements

Basis of preparation and material accounting policies

1.1 Basis of preparation

(a) Compliance with Hong Kong Financial Reporting Standards

The consolidated financial statements of The Hongkong and Shanghai Banking Corporation Limited (‘the Bank’) and its subsidiaries (together

‘the group’) have been prepared in accordance with Hong Kong Financial Reporting Standards (‘HKFRSs’) as issued by the Hong Kong Institute

of Certified Public Accountants (‘HKICPA’) and accounting principles generally accepted in Hong Kong. These consolidated financial statements

also comply with the requirements of the Hong Kong Companies Ordinance (Cap. 622) which are applicable to the preparation of the financial

statements.

Standards adopted during the year ended 31 December 2023

HKFRS 17 ‘Insurance Contracts’

On 1 January 2023, the group adopted the requirements of HKFRS 17 ‘Insurance Contracts’ retrospectively with comparatives restated from the

transition date, 1 January 2022. These include comparative data presented in the primary financial statements, Note 2 (a to g) ‘Operating profit’,

Note 3 ‘Insurance business’, Note 4 ‘Employee compensation and benefits’, Note 5 ‘Tax’, Note 8 ‘Derivatives’, Note 9 ‘Financial assets

designated and otherwise mandatorily measured at fair value through profit or loss’, Note 10 ‘Loans and advances to customers’, Note 11

‘Financial investments’, Note 13 ‘Investments in subsidiaries’, Note 15 ‘Goodwill and intangible assets’, Note 16 ‘Property, plant and

equipment’, Note 17 ‘Prepayments, accrued income and other assets’, Note 22 ‘Accruals and deferred income, other liabilities and provisions’,

Note 26 ‘Maturity analysis of assets and liabilities’, Note 27 ‘Analysis of cash flows payable under financial liabilities by remaining contractual

maturities’, Note 30 ‘Offsetting of financial assets and financial liabilities’, Note 31 ‘Segmental analysis’, Note 32 (a) ‘Related party transactions’,

Note 33 ‘Fair values of financial instruments carried at fair value’ and Note 34 ‘Fair values of financial instruments not carried at fair value’. At

transition, the group’s total equity reduced by HK$75,433m. For further details, see Note 38 ‘Effects of adoption of HKFRS 17’.

On adoption of HKFRS 17, balances based on HKFRS 4, including the present value of in-force long-term insurance business (‘PVIF’) asset in

relation to the upfront recognition of future profits of in-force insurance contracts, were derecognised. Insurance contract liabilities have been

remeasured under HKFRS17 based on groups of insurance contracts, which include the fulfilment cash flows comprising the best estimate of

the present value of the future cash flows (for example premiums and payouts for claims, benefits, and expenses), together with a risk

adjustment for non-financial risk, as well as the contractual service margin (‘CSM’). The CSM represents the unearned profits that will be

released and systematically recognised in Insurance revenue as services are provided over the expected coverage period.

In addition, the group has made use of the option under the standard to re-designate certain eligible financial assets held to support insurance

contract liabilities, which were predominantly measured at amortised cost, as financial assets measured at fair value through profit or loss, with

comparatives restated from the transition date.

The key differences between HKFRS 4 and HKFRS 17 are summarised in the following table:

HKFRS 4 HKFRS 17

Balance sheet

– Insurance contract liabilities for non-linked life insurance

contracts are calculated by local actuarial principles.

Liabilities under unit-linked life insurance contracts are at

least equivalent to the surrender or transfer value, by

reference to the value of the relevant underlying funds or

indices. Grouping requirements follow local regulations.

– An intangible asset for the PVIF is recognised,

representing the upfront recognition of future profits

associated with in-force insurance contracts.

– Insurance contract liabilities are measured for groups of

insurance contracts at current value, comprising the fulfilment

cash flows and the CSM.

– The fulfilment cash flows comprise the best estimate of the

present value of the future cash flows, together with a risk

adjustment for non-financial risk.

– The CSM represents the unearned profit.

Profit emergence /

recognition

– The value of new business is reported as revenue on Day

1 as an increase in PVIF.

– The impact of the majority of assumption changes is

recognised immediately in the income statement.

– Variances between actual and expected cash flows are

recognised in the period they arise.

– The CSM is systematically recognised in revenue as services

are provided over the expected coverage period of the group of

contracts (i.e. no Day 1 profit).

– Contracts are measured using the general measurement model

('GMM') or the variable fee approach ('VFA') model for

insurance contracts with direct participation features upon

meeting the eligibility criteria. Under the VFA model, the

group's share of the investment experience and assumption

changes are absorbed by the CSM and released over time to

profit or loss. For contracts measured under GMM, the group's

share of the investment volatility is recorded in profit or loss as

it arises.

– Losses from onerous contracts are recognised in the income

statement immediately.

Investment return

assumptions

(discount rate)

– PVIF is calculated based on long-term investment return

assumptions based on assets held. It therefore includes

investment margins expected to be earned in future.

– Under the market consistent approach, expected future

investment spreads are not included in the investment return

assumption. Instead, the discount rate includes an illiquidity

premium that reflects the nature of the associated insurance

contract liabilities.

Expenses

– Total expenses to acquire and maintain the contract over

its lifetime are included in the PVIF calculation.

– Expenses are recognised across operating expenses and

fee expense as incurred and the allowances for those

expenses are released from the PVIF simultaneously.

– Projected lifetime expenses that are directly attributable costs

are included in the insurance contract liabilities and recognised

in the insurance service result.

– Non-attributable costs are reported in operating expenses.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 89

Transition

In applying HKFRS 17 for insurance contracts retrospectively, the full retrospective approach (‘FRA’) has been used unless it was impracticable.

When the FRA is impracticable such as when there is a lack of sufficient and reliable data, an entity has an accounting policy choice to use

either the modified retrospective approach (‘MRA’) or the fair value approach (‘FVA’). The group has applied the FRA for new business from

2018 at the earliest, subject to practicability, and the FVA for contracts for which the FRA is impracticable.

Under the FVA, the valuation of insurance liabilities on transition is based on the applicable requirements of HKFRS 13 ‘Fair Value

Measurement’. This requires consideration of the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date (an exit price). The CSM is calculated as the difference between what a

market participant would demand for assuming the unexpired risk associated with insurance contracts, including required profit, and the

fulfilment cash flows that are determined using HKFRS 17 principles.

In determining the fair value, the group considered the estimated profit margin that a market participant would demand in return for assuming

the insurance liabilities with the consideration of the level of capital that a market participant would be required to hold, and the discount rate

with an allowance for an illiquidity premium that takes into account the level of ‘matching’ between the group’s assets and related liabilities.

These assumptions were set taking into account the assumptions that a hypothetical market participant operating in each local jurisdiction would

consider.

Amendments to HKAS 12 ‘International Tax Reform — Pillar Two Model Rules’

In July 2023, the HKICPA issued amendments to Hong Kong Accounting Standard ('HKAS') 12 ‘International Tax Reform – Pillar Two Model

Rules’, which became effective immediately. On 20 June 2023, legislation was substantively enacted in the UK (the jurisdiction of the group's

ultimate parent entity) to introduce the Organisation for Economic Cooperation and Development (‘OECD’)’s Pillar Two global minimum tax rules

and a UK qualified domestic minimum top-up tax, with effect from 1 January 2024. The Hong Kong Qualified Domestic Minimum Top-up Tax is

expected to be effective from 1 January 2025. Information about the group's exposure to Pillar Two income taxes is described in Note 5.

There were no other new standards or amendments to standards that had an effect on these financial statements.

(b) Future accounting developments

Minor amendments to HKFRSs

The HKICPA has published a number of minor amendments to HKFRSs that are effective from 1 January 2024 and 1 January 2025. The group is

continuing to assess the impact of Lack of Exchangeability (Amendments to HKAS 21). The group expects the remainder will have an

insignificant effect, when adopted, on the consolidated financial statements.

Items included in each of the group’s entities are measured using the currency of the primary economic environment in which the entity

operates (the ‘functional currency’). The group’s consolidated financial statements are presented in Hong Kong dollars.

Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated in

foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured at

historical cost which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other

comprehensive income (‘OCI’) or in the income statement depending on where the gain or loss on the underlying item is recognised.

In the consolidated financial statements, the assets, liabilities and results of foreign operations whose functional currency is not Hong Kong

dollars are translated into the group’s presentation currency at the rate of exchange at the balance sheet date, while their results are translated

into Hong Kong dollars at the average rates of exchange for the reporting period. Exchange differences arising are recognised in OCI. On

disposal of a foreign operation, exchange differences previously recognised in OCI are reclassified to the income statement.

(d) Presentation of information

Certain disclosures required by HKFRSs have been included in the sections marked as ('Audited') in this Annual Report and Accounts as follows:

– Consolidated income statement and balance sheet data by reportable segments are included in the 'Financial Review' on page 19 as

specified as ‘Audited’.

– Disclosures concerning the nature and extent of risks relating to banking and insurance activities are included in the ‘Risk' section on pages

35 to 66 and pages 72 to 76 as specified as ‘Audited’.

– Capital disclosures are included in the ‘Treasury Risk’ section on pages 58 to 59 as specified as ‘Audited’.

In accordance with the group’s policy to provide disclosures that help stakeholders understand the group’s performance, financial position and

changes to them, the information provided in the Risk section goes beyond the minimum levels required by accounting standards, statutory and

regulatory requirements. In addition, the group assesses good practice recommendations issued from time to time by relevant regulators and

standard setters and will assess the applicability and relevance of such guidance, enhancing disclosures where appropriate.

(e) Critical estimates and judgements

The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent

uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted as the critical estimates and

judgements in Note 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management’s

estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of

the consolidated financial statements. Management’s selection of the group’s accounting policies that contain critical estimates and judgements

reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved.

Management has considered the impact of climate-related risks on the group's financial position and performance. While the effects of climate

change are a source of uncertainty, as at 31 December 2023 management did not consider there to be a material impact on our critical

judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular, management

has considered the known and observable potential impacts of climate-related risks of associated judgements and estimates in our value in use

('VIU') calculations.

Notes on the Consolidated Financial Statements

90 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(f) Going concern

The consolidated financial statements are prepared on a going concern basis, as the Directors are satisfied that the group has the resources to

continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating

to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources.

These considerations include stressed scenarios that reflect the uncertainty in the macroeconomic environment following disrupted supply

chains, slower economic activity and ongoing geopolitical tensions. They also considered other top and emerging risks, including climate

change, as well as the related impacts on profitability, capital and liquidity.

1.2 Summary of material accounting policies

(a) Consolidation and related policies

Investments in subsidiaries

Where an entity is governed by voting rights, the group consolidates when it holds, directly or indirectly, the necessary voting rights to pass

resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors,

including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal.

Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or

at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made for each business

combination.

The Bank’s investments in subsidiaries are stated at cost less impairment losses.

Goodwill

Goodwill is allocated to cash-generating units (‘CGU’) for the purpose of impairment testing, which is undertaken at the lowest level at which

goodwill is monitored for internal management purposes. Impairment testing is performed at least once a year, or whenever there is an

indication of impairment, by comparing the recoverable amount of a CGU with its carrying amount.

Interests in associates

The group classifies investments in entities over which it has significant influence, and that are neither subsidiaries nor joint arrangements, as

associates.

Investments in associates are recognised using the equity method. The attributable share of the results and reserves of associates is included in

the consolidated financial statements of the group based on either financial statements made up to 31 December or amounts adjusted for any

material transactions or events occurring between the date the financial statements are available and 31 December.

Investments in associates are assessed at each reporting date and tested for impairment when there is an indication that the investment may

be impaired, by comparing the recoverable amount of the relevant investment to its carrying amount. Goodwill on acquisitions of interests in

associates is not tested separately for impairment, but is assessed as part of the carrying amount of the investment. Previously recognised

impairments are assessed for reversal when there are indicators that they may no longer exist or have decreased. Any reversal, which may arise

only from changes in estimates used to determine the prior impairment loss, is recognised to the extent that it does not increase the carrying

amount above that had no impairment loss been previously recognised.

Critical estimates and judgements

The most significant critical estimates relate to the assessment of impairment of our investment in Bank of Communications Co., Limited (‘BoCom’),

which involves estimations of value in use.

Judgements Estimates

– The value in use calculation uses discounted cash flow projections based on

management’s best estimates of future earnings available to ordinary shareholders

prepared in accordance with HKAS 36.

– Key assumptions are used in estimating BoCom’s value in use and the sensitivity

of the value in use calculations to different assumptions are described in Note 14.

(b) Income and expense

Operating income

Interest income and expense

Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value, are

recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method. However, as an exception

to this, interest on debt instruments issued by the group for funding purposes that are designated under the fair value option to reduce an

accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense.

Interest on credit-impaired financial assets is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amount

of the asset less allowance for expected credit losses (‘ECL’)).

Non-interest income and expense

The group generates fee income from services provided over time, such as account service and card fees, or when the group delivers a specific

transaction at a point in time such as broking services and import/export services. With the exception of certain fund management and

performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size

of the customer portfolio and the group’s performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee

income is generally earned from short term contracts with payment terms that do not include a significant financing component.

The group acts as principal in the majority of contracts with customers, with the exception of broking services. For brokerage trades where the

group acts as an agent in the transaction it recognises broking income net of fees payable to other parties in the arrangement.

The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer.

Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 91

Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in account

service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance

obligations, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices.

Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and

usually the date when shareholders approve the dividend for unlisted equity securities.

Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following:

– ‘Net income from financial instruments held for trading or managed on a fair value basis’: This comprises net trading income, which includes

all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments

managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the

credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are

managed in conjunction with financial assets and liabilities measured at fair value through profit or loss.

– ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit

or loss’: This includes all gains and losses from changes in the fair value, together with related interest income, expense and dividends in

respect of financial assets and liabilities measured at fair value through profit or loss, and those derivatives managed in conjunction with the

above that can be separately identifiable from other trading derivatives.

– ‘Changes in fair value of designated debt instruments and related derivatives’: Interest paid on debt instruments and interest cash flows on

related derivatives is presented in interest expense where doing so reduces an accounting mismatch.

– ‘Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss’: This includes interest on

instruments that fail the solely payments of principal and interest ('SPPI') test. See (d) below.

The accounting policies for insurance service result and insurance finance income/(expenses) are disclosed in Note 1.2(j).

All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a

liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial

recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference

between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a

valuation technique that uses only data from observable markets, the group recognises the difference as a trading gain or loss at inception (‘a

day 1 gain or loss’). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the

transaction until the transaction matures, is closed out, the valuation inputs become observable or the group enters into an offsetting

transaction.

The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a group of

financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured

on a net basis but the underlying financial assets and liabilities are presented separately in the consolidated financial statements, unless they

satisfy the HKFRSs offsetting criteria.

Critical estimates and judgements

The majority of valuation techniques employ only observable market data, which is assumed to include the potential effects of a variety of factors

including climate-related risks. However, certain financial instruments are classified on the basis of valuation techniques that feature one or more

significant market inputs that are unobservable, and for them, the measurement of fair value is more judgemental.

Judgements Estimates

– An instrument in its entirety is classified as valued using significant unobservable

inputs if, in the opinion of management, a significant proportion of the

instrument’s inception profit or greater than 5% of the instrument’s valuation is

driven by unobservable inputs.

– ‘Unobservable’ in this context means that there is little or no current market data

available from which to determine the price at which an arm’s length transaction

would be likely to occur. It generally does not mean that there is no data available

at all upon which to base a determination of fair value (consensus pricing data

may, for example, be used).

– Details on the group’s level 3 financial instruments and the

sensitivity of their valuation to the effect of applying reasonably

possible alternative assumptions in determining their fair value

are set out in Note 33.

(d) Financial instruments measured at amortised cost

Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash

flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances

to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. The group accounts for

regular way amortised cost financial instruments using trade date accounting. The carrying amount of these financial assets at initial recognition

includes any directly attributable transactions costs.

The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending

commitment is expected to be sold shortly after origination, the commitment to lend is recorded as a derivative. When the group intends to hold

the loan, the loan commitment is included in the impairment calculations set out below.

Non-trading reverse repurchase, repurchase and similar agreements

When debt securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on the balance

sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (‘reverse repos’) are

not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are

measured at amortised cost. The difference between the sale and repurchase price, or between the purchase and resale price, is treated as

interest and recognised in net interest income over the life of the agreement.

Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into

together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo

agreements.

Notes on the Consolidated Financial Statements

92 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(e) Financial assets measured at fair value through other comprehensive income (‘FVOCI’)

Financial assets managed within a business model that is achieved by both collecting contractual cash flows and selling and which contain

contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at FVOCI.

These comprise primarily debt securities. They are recognised on trade date when the group enters into contractual arrangements to purchase

and are generally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value with changes therein

(except for those relating to impairment, interest income and foreign currency exchange gains and losses) recognised in OCI until the assets are

sold. Upon disposal, the cumulative gains or losses in OCI are recognised in the income statement as ‘Gains less losses from financial

instruments’. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in the

income statement.

(f) Equity securities measured at fair value with fair value movements presented in OCI

The equity securities for which fair value movements are shown in OCI are business facilitation and other similar investments where the group

holds the investments other than to generate a capital return. Dividends from such investments are recognised in the income statement. Gains

or losses on the derecognition of these equity securities are not transferred to the income statement. Otherwise, equity securities are

measured at fair value through profit or loss.

(g) Financial instruments designated at fair value through profit or loss

Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below and

are so designated irrevocably at inception:

– The use of the designation removes or significantly reduces an accounting mismatch.

– A group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value basis, in

accordance with a documented risk management or investment strategy.

– The financial liability contains one or more non-closely related embedded derivatives.

Designated financial assets are recognised when the group enters into contracts with counterparties, which is generally on trade date, and are

normally derecognised when the rights to the cash flows expire or are transferred. Designated financial liabilities are recognised when the group

enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when extinguished. Subsequent

changes in fair values are recognised in the income statement in ‘Net income from financial instruments held for trading or managed on a fair

value basis’ or ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value

through profit or loss’ or ‘Changes in fair value of designated debt and related derivatives’ except for the effect of changes in the liabilities' credit

risk which is presented in OCI, unless that treatment would create or enlarge an accounting mismatch in profit or loss.

Under the above criteria, the main classes of financial instruments designated by the group are:

– Debt instruments for funding purposes that are designated to reduce an accounting mismatch: The interest and/or foreign exchange

exposure on certain fixed rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps

as part of a documented risk management strategy.

– Financial assets and financial liabilities under unit-linked and non-linked investment contracts: A contract under which the group does not

accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with

discretionary participation features (‘DPF’), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked

investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds or by a

valuation method. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at

fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in

the same line.

– Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance

evaluated on a fair value basis.

(h) Derivatives

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices.

Derivatives are recognised initially and are subsequently measured at fair value through profit or loss. Derivatives are classified as assets when

their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities which are

bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.

Where the derivatives are managed with debt securities issued by the group that are designated at fair value where doing so reduces an

accounting mismatch, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt.

Hedge accounting

When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge

accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses these derivatives or,

where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign

operations as appropriate to the risk being hedged.

Fair value hedge

Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in

recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in

the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the

cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate,

unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.

Cash flow hedge

The effective portion of gains and losses on hedging instruments is recognised in OCI and the ineffective portion of the change in fair value of

derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income statement within ‘Net

income from financial instruments held for trading or managed on a fair value basis’. The accumulated gains and losses recognised in OCI are

reclassified to the income statement in the same periods in which the hedged item affects profit or loss. When a hedge relationship is

discontinued, or partially discontinued, any cumulative gain or loss recognised in OCI remains in equity until the forecast transaction is

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 93

recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously

recognised in OCI is immediately reclassified to the income statement.

Derivatives that do not qualify for hedge accounting

Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied.

(i) Impairment of amortised cost and FVOCI financial assets

Expected credit losses are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other

financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and financial guarantee contracts.

At initial recognition, an allowance (or provision in the case of some loan commitments and financial guarantees) is recognised for ECL resulting

from possible default events within the next 12 months or less, where the remaining life is less than 12 months (’12-month ECL’). In the event

of a significant increase in credit risk, an allowance (or provision) is recognised for ECL resulting from all possible default events over the

expected life of the financial instrument (‘lifetime ECL’). Financial assets where 12-month ECL is recognised are considered to be ‘stage 1’;

financial assets which are considered to have experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there

is objective evidence of impairment, and so are considered to be in default or otherwise credit-impaired are in ‘stage 3’. Purchased or originated

credit-impaired financial assets (‘POCI’) are treated differently as set out below.

Credit-impaired (stage 3)

The group determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily whether

contractual payments of either principal or interest are past due for more than 90 days, there are other indications that the borrower is unlikely to

pay such as that a concession has been granted to the borrower for economic or legal reasons relating to the borrower’s financial condition, or

the loan is otherwise considered to be in default.

If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due. Therefore, the

definitions of credit-impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or

otherwise credit-impaired.

Interest income is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amount less allowance for ECL).

Write-off

Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of

recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the

net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

Forbearance

Loans are identified as forborne and classified as either performing or non-performing when the group modifies the contractual terms due to

financial difficulty of the borrower. Non-performing forborne loans are stage 3 and classified as non-performing until they meet the cure criteria,

as specified by applicable credit risk policy (for example, when the loan is no longer in default and no other indicators of default have been

present for at least 12 months). Any amount written off as a result of any modification of contractual terms upon entering forbearance would not

be reversed.

The group applies the EBA Guidelines on the application of definition of default for our retail portfolios, which affect credit risk policies and our

reporting in respect of the status of loans as credit impaired principally due to forbearance (or curing thereof). Further details are provided under

‘Forborne loans and advances’ on page 37.

Performing forborne loans are initially stage 2 and remain classified as forborne until they meet applicable cure criteria (for example, they

continue to not be in default and no other indicators of default are present for a period of at least 24 months). At this point, the loan is either

stage 1 or stage 2 as determined by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms)

and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms).

A forborne loan is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms, or if the

terms of an existing agreement are modified such that the forborne loan is a substantially different financial instrument. Any new loans that arise

following derecognition events in these circumstances would generally be classified as POCI and will continue to be disclosed as forborne.

Loan modifications other than forborne loans

Loan modifications that are not identified as forborne are considered to be commercial restructurings. Where a commercial restructuring results

in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that the group’s

rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The

rights to cash flows are generally considered to have expired if the commercial restructure is at market rates and no payment-related

concession has been provided. Modifications of certain higher credit risk wholesale loans are assessed for derecognition having regard to

changes in contractual terms that either individually or in combination are judged to result in a substantially different financial instrument.

Mandatory and general offer loan modifications that are not borrower specific, for example market-wide customer relief programmes, generally

do not result in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL

impairment policy. Changes made to these financial instruments that are economically equivalent and required by interest rate benchmark

reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest

rate to be updated to reflect the change of the interest rate benchmark.

Significant increase in credit risk (stage 2)

An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the

change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the

risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable

information, including information about past events, current conditions and future economic conditions. The assessment is unbiased,

probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The

analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors

depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not

possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will

differ for different types of lending, particularly between retail and wholesale.

Notes on the Consolidated Financial Statements

94 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when

30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and

included on a watch or worry list are included in stage 2.

For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default (‘PD') which encompasses a

wide range of information including the obligor’s customer risk rating ('CRR'), macroeconomic condition forecasts and credit transition

probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term

estimated at origination with the equivalent estimation at the reporting date.

The quantitative measure of significance varies depending on the credit quality at origination as follows:

Origination CRR Significance trigger – PD to increase by

0.1–1.2

15bps

2.1– 3.3

30bps

For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has

doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to

relative changes in external market rates.

For loans originated prior to the implementation of HKFRS 9, the origination PD does not include adjustments to reflect expectations of future

macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be

approximated assuming through-the-cycle PDs and through-the-cycle migration probabilities, consistent with the instrument’s underlying

modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration

based thresholds as set out in the table below:

Origination CRR

Additional significance criteria – number of CRR grade notches

deterioration required to identify as significant credit

deterioration(stage 2) (> or equal to)

0.1

5 notches

1.1– 4.2

4 notches

4.3 – 5.1

3 notches

5.2 – 7.1

2 notches

7.2 – 8.2

1 notch

8.3

0 notch

Further information about the 23-grade scale used for CRR can be found on page 36.

For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporate all available

information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12 months and is

considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogenous portfolios,

generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD

greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk

judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold therefore identifies loans with a PD higher than

would be expected from loans that are performing as originally expected and higher than that which would have been acceptable at origination.

It therefore approximates a comparison of origination to reporting date PDs.

As additional data becomes available, the retail transfer criteria approach continues to be refined to utilise a more relative approach for certain

portfolios. These enhancements take advantage of the increase in origination related data in the assessment of significant increases in credit

risk by comparing remaining lifetime PD to the comparable remaining term lifetime PD at origination based on portfolio-specific origination

segments.

Unimpaired and without significant increase in credit risk – (stage 1)

ECL resulting from default events that are possible within the next 12 months is recognised for financial instruments that remain in

stage 1.

Purchased or originated credit-impaired (‘POCI’)

Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This

population includes new financial instruments recognised in most cases following the derecognition of forborne loans. The amount of change in

lifetime ECL for a POCI loan is recognised in profit or loss until the POCI loan is derecognised, even if the lifetime ECL are less than the amount

of ECL included in the estimated cash flows on initial recognition.

Movement between stages

Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since

initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly increased

since initial recognition based on the assessments described above. In the case of non-performing forborne loans, such financial instruments are

transferred out of stage 3 when they no longer exhibit any evidence of credit impairment and meet the curing criteria as described above.

Measurement of ECL

The assessment of credit risk, and the estimation of ECL, are unbiased and probability-weighted, and incorporate all available information which

is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future

events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money and

considers other factors such as climate-related risks.

In general, the group calculates ECL using three main components, a PD, a loss given default ('LGD') and the exposure at default (‘EAD’).

The 12-month ECL is calculated by multiplying the 12-month PD, LGD, and EAD. Lifetime ECL is calculated using the lifetime PD instead. The

12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument

respectively.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 95

The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to

the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the

event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and

the time value of money.

The group makes use of the regulatory internal ratings-based (‘IRB’) framework where possible, with recalibration to meet the differing HKFRS 9

requirements as set out in the following table:

Model Regulatory capital HKFRS 9

– Through the cycle (represents long-run average PD throughout

a full economic cycle).

– The definition of default includes a backstop of90+ days past

due.

– Point in time (based on current conditions, adjusted totake into

account estimates of future conditions that will impact PD).

– Default backstop of 90+ days past due for all portfolios.

EAD – Cannot be lower than current balance. – Amortisation captured for term products.

LGD

– Downturn LGD (consistent losses expected to be suffered

during a severe but plausible economic downturn).

– Regulatory floors may apply to mitigate risk of underestimating

downturn LGD due to lack of historical data.

– Discounted using cost of capital.

– All collection costs included.

– Expected LGD (based on estimate of loss given default

including the expected impact of future economic conditions

such as changes in value of collateral).

– No floors.

– Discounted using the original effective interest rate of the loan.

– Only costs associated with obtaining/selling collateral included.

Other

– Discounted back from point of default to balance sheet date.

While 12-month PDs are recalibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD using a

term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the

CRR bands over its life.

The ECL for wholesale stage 3 is determined primarily on an individual basis using a discounted cash flow (‘DCF’) methodology. The expected

future cash flows are based on estimates as of the reporting date, reflecting reasonable and supportable assumptions and projections of future

recoveries and expected future receipts of interest.

Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on its

estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral.

The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under up to

four different scenarios are probability-weighted by reference to the status of the borrower, economic scenarios applied more generally by the

group and judgement in relation to the likelihood of the work-out strategy succeeding or receivership being required. For less significant cases

where an individual assessment is undertaken, the effect of different economic scenarios and work-out strategies results in an ECL calculation

based on a most likely outcome which is adjusted to capture losses resulting from less likely but possible outcomes. For certain less significant

cases, the group may use a LGD-based modelled approach to ECL assessment, which factors in a range of economic scenarios.

Period over which ECL is measured

ECL is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or

lifetime ECL) is the maximum contractual period over which the group is exposed to credit risk. However, where the financial instrument

includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does

not serve to limit the group’s exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum

period considered. Instead, ECL is measured over the period the group remains exposed to credit risk that is not mitigated by credit risk

management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to

default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these

facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result,

the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial

asset, in which case the ECL is recognised as a provision. For wholesale overdraft facilities, credit risk management actions are taken no less

frequently than on an annual basis.

Forward-looking economic inputs

The group applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions

representative of its view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected credit losses in

most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios or

adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in

‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on pages 42 to 46.

Critical estimates and judgements

The calculation of the group’s ECL under HKFRS 9 requires the group to make a number of judgements, assumptions and estimates. The most

significant are set out below:

Judgements Estimates

– Defining what is considered to be a significant increase in credit risk.

– Determining the lifetime and point of initial recognition of overdrafts and credit cards.

– Selecting and calibrating the PD, LGD and EAD models, which support the calculations,

including making reasonable and supportable judgements about how models react to

current and future economic conditions.

– Selecting model inputs and economic forecasts, including determining whether sufficient

and appropriately weighted economic forecasts are incorporated to calculate unbiased

expected credit losses.

– Making management adjustments to account for late breaking events, model and data

limitations and deficiencies, and expert credit judgements.

– Selecting applicable recovery strategies for certain wholesale credit-impaired loans.

– The section ‘Measurement uncertainty and

sensitivity analysis of ECL estimates’ marked as

audited from pages 42 to 46, set out the

assumptions used in determining ECL and provides

an indication of the sensitivity of the result to the

application of different weightings being applied to

different economic assumptions.

Notes on the Consolidated Financial Statements

96 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(j) Insurance contracts

A contract is classified as an insurance contract where the group accepts significant insurance risk from another party by agreeing to

compensate that party if it is adversely affected by a specified uncertain future event. An insurance contract may also transfer financial risk, but

is accounted for as an insurance contract if the insurance risk is significant. In addition, the group issues investment contracts with DPF, which

are also accounted under HKFRS 17 ’Insurance Contracts’.

Aggregation of insurance contracts

Individual insurance contracts that are managed together and subject to similar risks are identified as a portfolio. Contracts that are managed

together usually belong to the same product group, and have similar characteristics such as being subject to a similar pricing framework or

similar product management, and are issued by the same legal entity. If a contract is exposed to more than one risk, the dominant risk of the

contract is used to assess whether the contract features similar risks. Each portfolio is further separated by the contract’s expected profitability.

The portfolios are split by their profitability into: (i) contracts that are onerous at initial recognition; (ii) contracts that at initial recognition have no

significant possibility of becoming onerous subsequently; and (iii) the remaining contracts. These profitability groups are then divided by issue

date, with contracts the group issues after the transition date being grouped into calendar quarter cohorts. For multi-currency groups of

contracts, the group considers its groups of contracts as being denominated in a single currency.

The measurement of the insurance contract liability is based on groups of insurance contracts as established at initial recognition, and will

include fulfilment cash flows as well as the CSM representing the unearned profit. The group has elected to update the estimates used in the

measurement on a year-to-date basis.

Fulfilment cash flows

The fulfilment cash flows comprise the following:

Best estimates of future cash flows

The cash flows within the contract boundary of each contract in the group include amounts expected to be collected from premiums and

payouts for claims, benefits and expenses, and are projected using a range of scenarios and assumptions in an unbiased way based on the

group’s demographic and operating experience along with external mortality data where the group’s own experience data is not sufficiently

large in size to be credible.

Adjustment for the time value of money and financial risks associated with the future cash flows

The estimates of future cash flows are adjusted to reflect the time value of money (i.e. discounting) and the financial risks to derive an expected

present value. The group generally makes use of stochastic modelling techniques in the estimation for products with options and guarantees.

A bottom-up approach is used to determine the discount rate to be applied to a given set of expected future cash flows. This is derived as the

sum of the risk-free yield and an illiquidity premium. The risk-free yield is determined based on observable market data, where such markets are

considered to be deep, liquid and transparent. When information is not available, management judgement is applied to determine the

appropriate risk-free yield. Illiquidity premiums reflect the liquidity characteristics of the associated insurance contracts.

Risk adjustment for non-financial risk

The risk adjustment reflects the compensation required for bearing the uncertainty about the amount and timing of future cash flows that arises

from non-financial risk. It is calculated as a 75th percentile level of stress over a one-year period. The level of the stress is determined with

reference to external regulatory stresses and internal economic capital stresses.

For the main insurance manufacturing entity in the group, the one-year 75th percentile level of stress corresponds to 60th percentile (2022: 59th

percentile) based on an ultimate view of risk over all future years.

The group does not disaggregate changes in the risk adjustment between insurance service result (comprising insurance revenue and insurance

service expense) and insurance finance income or expenses. All changes are included in the insurance service result.

Measurement models

The variable fee approach (‘VFA’) measurement model is used for most of the contracts issued by the group, which is mandatory upon meeting

the following eligibility criteria at inception:

a. the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;

b. the group expects to pay to the policyholder a substantial share of the fair value returns on the underlying items. The group considers that a

substantial share is a majority of returns; and

c. the group expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of

the underlying items. The group considers that a substantial proportion is a majority proportion of change on a present value probability-

weighted average of all scenarios.

The risk mitigation option is used for a number of economic offsets against the instruments that meet specific requirements.

The remaining contracts issued and the reinsurance contracts held are accounted for under the general measurement model (‘GMM’).

CSM and coverage units

The CSM represents the unearned profit and results in no income or expense at initial recognition when the group of contracts is profitable. The

CSM is adjusted at each subsequent reporting period for changes in fulfilment cash flows relating to future service (e.g. changes in non-

economic assumptions, including mortality and morbidity rates). For initial recognition of onerous groups of contracts and when groups of

contracts become onerous subsequently, losses are recognised in insurance service expense immediately.

For groups of contracts measured using the VFA, changes in the group’s share of the underlying items, and economic experience and economic

assumption changes adjust the CSM, whereas these changes do not adjust the CSM under the GMM, but are recognised in profit or loss as

they arise. However, under the risk mitigation option for VFA contracts, the changes in the fulfilment cash flows and the changes in the group’s

share in the fair value return on underlying items that the instruments mitigate are not adjusted in CSM but recognised in profit or loss. The risk

mitigating instruments are primarily reinsurance contracts held.

The CSM is systematically recognised in insurance revenue to reflect the insurance contract services provided, based on the coverage units of

the group of contracts. Coverage units are determined by the quantity of benefits and the expected coverage period of the contracts.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 97

The group identifies the quantity of the benefits provided as follows:

– Insurance coverage: This is based on the expected net policyholder insurance benefit at each period after allowance for decrements, where

net policyholder insurance benefit refers to the amount of sum assured less the fund value or surrender value.

– Investment services (including both investment-return service and investment-related service): This is based on a constant measure basis

which reflects the provision of access for the policyholder to the facility.

For contracts that provide both insurance coverage and investment services, coverage units are weighted according to the expected present

value of the future cash outflows for each service.

Insurance service result

Insurance revenue reflects the consideration to which the group expects to be entitled in exchange for the provision of coverage and other

insurance contract services (excluding any investment components). Insurance service expenses comprise the incurred claims and other

incurred insurance service expenses (excluding any investment components), and losses on onerous groups of contracts and reversals of such

losses.

Insurance finance income and expenses

Insurance finance income or expenses comprise the change in the carrying amount of the group of insurance contracts arising from the effects

of the time value of money, financial risk and changes therein. For VFA contracts, changes in the fair value of underlying items (excluding

additions and withdrawals) are recognised in insurance finance income or expenses.

Critical estimates and judgements

The measurement of insurance contract liabilities under HKFRS 17 involves significant judgements that are set out below:

Judgements Estimates

– The VFA measurement model is used for most of the contracts issued by the group. In

applying the VFA eligibility criteria as described above under the accounting policies for

insurance contracts, the group determined that for criterion (b) a substantial share is a

majority of the returns, and for criterion (c) a substantial proportion is a majority proportion

of the change on a present value probability-weighted average of all scenarios.

– The CSM is systematically recognised in insurance revenue based on the coverage units of

the group of contracts. The group determined that the coverage unit basis that best reflects

the provision of investment services is the availability of the facility over time, and therefore

the quantity of benefit selected is a constant measure. The coverage units are reviewed and

updated at each reporting date.

(k) Property

Land and buildings

Land and buildings held for own use are carried at their revalued amount, being the fair value at the date of the revaluation less any subsequent

accumulated depreciation and impairment losses.

Revaluations are performed by professional qualified valuers, on a market basis, with sufficient regularity to ensure that the net carrying amount

does not differ materially from the fair value. Surpluses arising on revaluation are credited firstly to the income statement, to the extent of any

deficits arising on revaluation previously charged to the income statement in respect of the same land and buildings, and are thereafter taken to

the ‘Property revaluation reserve’. Deficits arising on revaluation are first set off against any previous revaluation surpluses included in the

‘Property revaluation reserve’ in respect of the same land and buildings, and are thereafter recognised in the income statement.

Leasehold land and buildings are depreciated on a straight-line basis over the shorter of the unexpired terms of the leases or the remaining

useful lives.

The Government of Hong Kong owns all the land in Hong Kong and permits its use under leasehold arrangements. Similar arrangements exist in

mainland China. The group accounts for its interests in own use leasehold land and land use rights in accordance with HKFRS 16 but discloses

these as owned assets when the right of use are considered sufficient to constitute control.

Investment properties

The group holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties are

included on balance sheet at fair value with changes in fair value being recognised in the income statement.

(l) Employee compensation and benefits

Post-employment benefit plans

The group operates a number of pension schemes including defined benefit, defined contribution, and post-employment benefit schemes.

Payments to defined contribution schemes are charged as an expense as the employees render service.

Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly

comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses.

Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets excluding interest

and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The net defined benefit asset or liability

represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where

the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan.

(m) Tax

Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to

items recognised in OCI or directly in equity, in which case the tax is recognised in the same statement as the related item appears.

Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years.

The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities.

Notes on the Consolidated Financial Statements

98 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the

amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods

in which the assets will be realised or the liabilities settled.

In assessing the probability and sufficiency of future taxable profit, management considers the availability of evidence to support the recognition

of deferred tax assets, taking into account the inherent risks in long-term forecasting, including climate change-related, and drivers of recent

history of tax losses where applicable. Management also considers the future reversal of existing taxable temporary differences and tax

planning strategies, including corporate reorganisations.

Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.

(n) Provisions, contingent liabilities and guarantees

Provisions

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive

obligation that has arisen as a result of past events and for which a reliable estimate can be made.

Contingent liabilities and guarantees

Contingent liabilities

Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to

legal proceedings or regulatory matters, are not recognised in the consolidated financial statements but are disclosed unless the probability of

settlement is remote.

Financial guarantee contracts

Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is

generally the fee received or present value of the fee receivable.

(o) Impairment of non-financial assets

Software under development is tested for impairment at least annually. Other non-financial assets such as property, plant and equipment,

intangible assets (excluding goodwill) and right-of-use assets are tested for impairment at the individual asset level when there is indication of

impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition,

impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be the

principal operating legal entities and branches divided in a similar manner as the group's operating segments.

Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair

value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying amount of its assets and liabilities,

including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent

basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The

recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and

qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs.

When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the

extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of

their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU.

Impairment losses recognised in prior periods for non-financial assets are reversed when there has been a change in the estimate used to

determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not

exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior

periods.

Operating profit

(a) Net interest income

Net interest income includes:

2023 2022

HK$m HK$m

Interest income recognised on impaired financial assets 1,753 821

Interest income recognised on financial assets measured at amortised cost 247,908 141,816

Interest income recognised on financial assets measured at FVOCI 47,431 21,326

Interest expense on financial instruments, excluding interest on financial liabilities held for trading or designated or otherwise

mandatorily measured at fair value

(149,496) (47,525)

1 Includes interest expenses on lease liabilities of HK$272m (2022: HK$265m).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 99

(b) Net fee income

Net fee income by reportable segments

Wealth and

Personal

Banking

Commercial

Banking

2,3

Global

Banking

Markets and

Securities

Services

Corporate

Centre

Other (GBM-

other) Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Account services 809 1,092 351 75 — — 2,327

Funds under management 4,741 459 16 1,765 — — 6,981

Cards 9,055 313 56 — — — 9,424

Credit facilities 310 1,360 1,173 24 — — 2,867

Broking income 2,650 46 — 601 — — 3,297

Imports/exports — 2,326 790 2 — — 3,118

Unit trusts 4,831 78 5 — — — 4,914

Underwriting 1 1 384 262 — — 648

Remittances 265 1,959 755 4 — — 2,983

Global custody 814 40 41 2,979 — — 3,874

Insurance agency commission

1,510 117 — — — — 1,627

Other 3,242 3,237 2,644 4,024 (3,601) (581) 8,965

Fee income 28,228 11,028 6,215 9,736 (3,601) (581) 51,025

Fee expense (8,802) (364) (1,177) (7,084) 3,871 574 (12,982)

Year ended 31 Dec 2023 19,426 10,664 5,038 2,652 270 (7) 38,043

Account services 807 979 366 75 — — 2,227

Funds under management 4,894 592 16 1,824 — — 7,326

Cards 7,826 257 52 — — — 8,135

Credit facilities 332 1,303 1,186 25 — — 2,846

Broking income 3,515 53 — 737 — — 4,305

Imports/exports — 2,465 667 — — — 3,132

Unit trusts 4,534 112 2 — — — 4,648

Underwriting — — 325 237 — — 562

Remittances 264 1,902 723 3 — — 2,892

Global custody 858 39 32 3,174 — — 4,103

Insurance agency commission

1,434 107 5 — — — 1,546

Other 2,502 2,752 2,322 3,240 (2,269) (216) 8,331

Fee income 26,966 10,561 5,696 9,315 (2,269) (216) 50,053

Fee expense (7,460) (480) (610) (5,614) 2,516 160 (11,488)

Year ended 31 Dec 2022 19,506 10,081 5,086 3,701 247 (56) 38,565

1 Includes inter-segment elimination.

2 From 1 January 2023, all balances within in the scope of HKFRS 17 of Hong Kong insurance manufacturing entities distributed by Commercial Banking

('CMB') are reported under Wealth and Personal Banking ('WPB'). Comparative data have been re-presented accordingly.

3 From 1 January 2023, we have transferred our portfolio of Global Banking ('GB') customers within Australia and Indonesia from GB to CMB for

reporting purposes. Comparative data have not been re-presented.

Net fee income includes:

2023 2022

HK$m HK$m

Fees earned on financial assets that are not at fair value through profit and loss (other than amounts included in determining the

effective interest rate)

9,110 9,286

– fee income 15,927 14,867

– fee expense (6,817) (5,581)

Fee earned on trust and other fiduciary activities 8,861 9,372

– fee income 10,374 11,290

– fee expense (1,513) (1,918)

2023 2022

HK$m HK$m

Net income/(expense) arising on:

Net trading activities 80,700 42,740

Other instruments managed on a fair value basis (6,265) (1,464)

Net income from financial instruments held for trading or managed on a fair value basis 74,435 41,276

Financial assets held to meet liabilities under insurance and investment contracts 49,907 (98,716)

Liabilities to customers under investment contracts (948) 3,802

Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at

fair value through profit or loss

48,959 (94,914)

Change in fair value of designated debt issued and related derivatives

8 (703)

Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss 252 40

Year ended 31 Dec 123,654 (54,301)

1 Includes debt instruments which are issued for funding purposes and are designated under the fair value option to reduce an accounting mismatch.

Notes on the Consolidated Financial Statements

100 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

(d) Other operating income

2023 2022

HK$m HK$m

Gain on acquisition of subsidiary

— 665

Losses on investment properties (35) (133)

Losses on disposal of property, plant and equipment and assets held for sale (421) (42)

Gain on disposal of businesses and associate 4 4

Rental income from investment properties 502 437

Dividend income 283 233

Other

2,3

2,900 3,281

Year ended 31 Dec 3,233 4,445

1 Represents a gain of HK$665m from the acquisition of AXA Insurance Pte Limited in 2022.

2 Includes the gain on disposal of loans and receivables of HK$40m (2022: HK$84m).

3 Includes the recovery of operating expenses from other Group companies.

(e) Change in expected credit losses and other credit impairment charges

Change in expected credit losses and other credit impairment charges arising from the following asset categories:

2023 2022

HK$m HK$m

Loans and advances to banks and customers 13,163 15,546

– new allowances net of allowance releases 14,021 16,425

– recoveries of amounts previously written off (864) (879)

– modification losses and other movements 6 —

Loan commitments and guarantees 9 410

Other financial assets (329) 414

Year ended 31 Dec 12,843 16,370

Change in expected credit losses as a percentage of average gross customer advances was 0.36% for 2023 (2022: 0.40%).

(f) General and administrative expenses

2023 2022

HK$m HK$m

Premises and equipment 2,358 2,590

Marketing and advertising expenses 2,226 2,407

Other administrative expenses

49,954 48,100

Year ended 31 Dec 54,538 53,097

1 Includes recharges from fellow group entities. Further details are set out in Note 32.

Included in operating expenses were direct operating expenses of HK$60m (2022: HK$47m) arising from investment properties that generated

rental income in the year. Direct operating expenses arising from investment properties that did not generate rental income amounted to

HK$8m (2022: HK$9m).

(g) Depreciation and impairment of property, plant and equipment

2023 2022

HK$m HK$m

Owned property, plant and equipment 7,361 6,550

Other right-of-use assets 2,363 2,546

Year ended 31 Dec 9,724 9,096

(h) Auditors’ remuneration

Auditors’ remuneration amounted to HK$199m (2022: HK$172m).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 101

Insurance business

Insurance Service result

Year ended 31 Dec 2023 Year ended 31 Dec 2022

Life direct

participating and

Investment DPF

contracts

Life other

contracts

Total

Life direct

participating and

Investment DPF

contracts

Life other

contracts

Total

HK$m HK$m HK$m HK$m HK$m HK$m

Insurance revenue

Amounts relating to changes in liabilities for remaining coverage 10,167 1,669 11,836 8,798 1,613 10,411

– Contractual service margin recognised for services provided 6,772 398 7,170 5,285 522 5,807

– Change in risk adjustment for non-financial risk for risk expired 108 43 151 118 43 161

– Expected incurred claims and other insurance service expenses 3,289 1,228 4,517 3,001 1,048 4,049

– Other (2) — (2) 394 — 394

Recovery of insurance acquisition cash flows 867 304 1,171 161 151 312

Total insurance revenue 11,034 1,973 13,007 8,959 1,764 10,723

Insurance service expenses

Incurred claims and other insurance service expenses (3,274) (1,305) (4,579) (2,825) (1,219) (4,044)

Losses and reversal of losses on onerous contracts (173) (515) (688) (698) (645) (1,343)

Amortisation of insurance acquisition cash flows (867) (304) (1,171) (161) (151) (312)

Adjustments to liabilities for incurred claims (8) (3) (11) (27) (20) (47)

Total insurance service expenses (4,322) (2,127) (6,449) (3,711) (2,035) (5,746)

Total insurance service results 6,712 (154) 6,558 5,248 (271) 4,977

1 'Life direct participating and investment DPF contracts' are substantially measured under the variable fee approach measurement model.

2 'Life other contracts' are measured under the general measurement model and excludes reinsurance contracts.

Net investment return

Year ended 31 Dec 2023 Year ended 31 Dec 2022

Life direct

participating

and

Investment

DPF contracts

Life other

contracts Total

Life direct

participating

and

Investment

DPF contracts

Life other

contracts Total

HK$m HK$m HK$m HK$m HK$m HK$m

Total investment return

46,474 1,318 47,792 (95,039) (1,327) (96,366)

Net finance income/(expense)

Changes in fair value of underlying items of direct participating contracts (46,491) — (46,491) 95,198 — 95,198

Effect of risk mitigation option (271) — (271) 765 — 765

Interest accreted — (981) (981) — (649) (649)

Effect of changes in interest rates and other financial assumptions (96) (944) (1,040) — 1,844 1,844

Effect of measuring changes in estimates at current rates and adjusting the

CSM at rates on initial recognition

— (15) (15) — 29 29

Total net finance income/(expenses) from insurance contracts (46,858) (1,940) (48,798) 95,963 1,224 97,187

Total net investment results (384) (622) (1,006) 924 (103) 821

1 All items are recognised in the income statement.

2 Investment returns of HK$47,792m gain (2022: $96,366m loss) on underlying assets supporting insurance liabilities are reported in ‘Net income/

(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’.

Notes on the Consolidated Financial Statements

102 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Movements in carrying amounts of insurance contracts - Analysis by remaining coverage and incurred claims

Year ended 31 Dec 2023

Life direct participating and Investment DPF

contracts

Life other contracts

Liabilities for remaining

coverage:

Liabilities for remaining

coverage:

Excluding

loss

component

Loss

component

Incurred

claims Total

Excluding

loss

component

Loss

component

Incurred

claims Total Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Opening assets (35) — — (35) (480) 163 7 (310) (345)

Opening liabilities 626,367 812 2,949 630,128 23,443 757 594 24,794 654,922

Net opening balance at 1 Jan 2023 626,332 812 2,949 630,093 22,963 920 601 24,484 654,577

Changes in the statement of profit or

loss and other comprehensive

income

Insurance revenue

Contracts under the fair value approach (3,105) — — (3,105) (369) — — (369) (3,474)

Other contracts

(7,929) — — (7,929) (1,159) — — (1,159) (9,088)

Total insurance revenue (11,034) — — (11,034) (1,528) — — (1,528) (12,562)

Insurance service expenses

Incurred claims and other insurance

service expenses

— (43) 3,317 3,274 — (178) 1,077 899 4,173

Amortisation of insurance acquisition

cash flows

867 — — 867 295 — — 295 1,162

Losses and reversal of losses on

onerous contracts

— 173 — 173 — 508 — 508 681

Adjustments to liabilities for incurred

claims

— — 8 8 — — 3 3 11

Total insurance service expenses 867 130 3,325 4,322 295 330 1,080 1,705 6,027

Investment components (44,797) — 44,797 — (5,824) — 5,824 — —

Insurance service result (54,964) 130 48,122 (6,712) (7,057) 330 6,904 177 (6,535)

Net finance (income)/expense from

insurance contracts

46,858 — — 46,858 1,917 23 — 1,940 48,798

Other movements recognised in the

statement of profit or loss

3,899 7 (610) 3,296 (18) 5 (88) (101) 3,195

Effect of movements in exchange rates 948 — (255) 693 (9) (12) 5 (16) 677

Total changes in the statement of

profit or loss and other

comprehensive income

(3,259) 137 47,257 44,135 (5,167) 346 6,821 2,000 46,135

Cash flows

Premiums received 82,050 — — 82,050 6,188 — — 6,188 88,238

Claims and other insurance service

expenses paid, including investment

components, and other cash flows

374 — (47,087) (46,713) 4 — (6,891) (6,887) (53,600)

Insurance acquisition cash flows (3,919) — — (3,919) (1,693) — — (1,693) (5,612)

Total cash flows 78,505 — (47,087) 31,418 4,499 — (6,891) (2,392) 29,026

Other movements 96 (96) — — 60 (60) — — —

Net closing balance at 31 Dec 2023 701,674 853 3,119 705,646 22,355 1,206 531 24,092 729,738

Closing assets (109) 5 6 (98) (874) (159) 40 (993) (1,091)

Closing liabilities 701,783 848 3,113 705,744 23,229 1,365 491 25,085 730,829

Net closing balance at 31 Dec 2023 701,674 853 3,119 705,646 22,355 1,206 531 24,092 729,738

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 103

Movements in carrying amounts of insurance contracts - Analysis by remaining coverage and incurred claims (continued)

Year ended 31 Dec 2022

Life direct participating and Investment DPF

contracts

Life other contracts

Liabilities for remaining

coverage:

Liabilities for remaining

coverage:

Excluding

loss

component

Loss

component

Incurred

claims Total

Excluding

loss

component

Loss

component

Incurred

claims Total Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Opening assets — — — — (187) 51 6 (130) (130)

Opening liabilities 661,137 679 1,741 663,557 26,788 478 168 27,434 690,991

Net opening balance at 1 Jan 2022 661,137 679 1,741 663,557 26,601 529 174 27,304 690,861

Changes in the statement of profit or loss

and other comprehensive income

Insurance revenue

Contracts under the fair value approach (3,828) — — (3,828) (666) — — (666) (4,494)

Other contracts

(5,131) — — (5,131) (652) — — (652) (5,783)

Total insurance revenue (8,959) — — (8,959) (1,318) — — (1,318) (10,277)

Insurance service expenses

Incurred claims and other insurance service

expenses

— (36) 2,861 2,825 — (70) 861 791 3,616

Amortisation of insurance acquisition cash

flows

161 — — 161 151 — — 151 312

Losses and reversal of losses on onerous

contracts

— 698 — 698 — 639 — 639 1,337

Adjustments to liabilities for incurred claims — — 27 27 — — 11 11 38

Total insurance service expenses 161 662 2,888 3,711 151 569 872 1,592 5,303

Investment components (26,648) — 26,648 — (3,715) — 3,715 — —

Insurance service result (35,446) 662 29,536 (5,248) (4,882) 569 4,587 274 (4,974)

Net finance (income)/expense from

insurance contracts

(95,963) — — (95,963) (1,241) 12 — (1,229) (97,192)

Effect of movements in exchange rates (1,502) (40) 2 (1,540) (565) (15) 42 (538) (2,078)

Total changes in the statement of profit or

loss and other comprehensive income

(132,911) 622 29,538 (102,751) (6,688) 566 4,629 (1,493) (104,244)

Cash flows

Premiums received 82,670 — — 82,670 3,861 1 — 3,862 86,532

Claims and other insurance service

expenses paid, including investment

components, and other cash flows

371 — (28,122) (27,751) — (1) (4,212) (4,213) (31,964)

Insurance acquisition cash flows (3,180) — — (3,180) (910) — — (910) (4,090)

Total cash flows 79,861 — (28,122) 51,739 2,951 — (4,212) (1,261) 50,478

Acquisition of subsidiaries and other

movements

18,245 (489) (208) 17,548 99 (175) 10 (66) 17,482

Net closing balance at 31 Dec 2022 626,332 812 2,949 630,093 22,963 920 601 24,484 654,577

Closing assets (35) — — (35) (480) 163 7 (310) (345)

Closing liabilities 626,367 812 2,949 630,128 23,443 757 594 24,794 654,922

Net closing balance at 31 Dec 2022 626,332 812 2,949 630,093 22,963 920 601 24,484 654,577

1 'Other contracts' are those contracts measured by applying HKFRS 17 from inception of the contracts. These include contracts measured under the

full retrospective approach at transition and contracts incepted after transition.

2 'Changes in the statement of profit or loss and other comprehensive income' do not include income and expenses with HSBC Group entities.

Notes on the Consolidated Financial Statements

104 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Movements in carrying amounts of insurance contracts - Analysis by measurement component

Year ended 31 Dec 2023

Life direct participating and investment

discretionary participating contracts

Life other contracts

Contractual service

margin

Contractual service

margin

Estimates

of present

value of

future cash

flows and

risk

adjustment

Contracts

under the

fair value

approach

Other

contracts

Total

Estimates

of present

value of

future cash

flows and

risk

adjustment

Contracts

under the

fair value

approach

Other

contracts

Total Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Opening assets (137) 26 76 (35) (875) 413 152 (310) (345)

Opening liabilities 569,705 33,138 27,285 630,128 22,631 1,429 734 24,794 654,922

Net opening balance at 1 Jan 2023 569,568 33,164 27,361 630,093 21,756 1,842 886 24,484 654,577

Changes in the statement of profit or loss

and other comprehensive income

Changes that relate to current services

Contractual service margin recognised for

services provided

— (1,351) (5,421) (6,772) — (154) (227) (381) (7,153)

Change in risk adjustment for non-financial

risk expired

(108) — — (108) (28) — — (28) (136)

Experience adjustments (15) — — (15) 75 — — 75 60

Changes that relate to future services

Contracts initially recognised in the year (11,966) — 12,062 96 (638) — 891 253 349

Changes in estimates that adjust contractual

service margin

(7,206) 2,954 4,252 — 273 (1) (272) — —

Changes in estimates that result in losses

and reversal of losses on onerous contracts

77 — — 77 256 — — 256 333

Changes that relate to past services

Adjustments to liabilities for incurred claims 8 — — 8 2 — — 2 10

Other movements recognised in insurance

service result

2 — — 2 — — — — 2

Insurance service result (19,208) 1,603 10,893 (6,712) (60) (155) 392 177 (6,535)

Net finance (income)/expenses from

insurance contract

46,858 — — 46,858 1,869 40 31 1,940 48,798

Other movements recognised in the

statement of profit or loss

2,007 1,146 143 3,296 (164) 57 6 (101) 3,195

Effect of movements in exchange rates 433 67 193 693 (25) 10 (1) (16) 677

Total changes in the statement of profit

or loss and other comprehensive income

30,090 2,816 11,229 44,135 1,620 (48) 428 2,000 46,135

Cash flows

Premiums received 82,050 — — 82,050 6,188 — — 6,188 88,238

Claims, other insurance service expenses

paid (including investment components) and

other cash flows

(46,713) — — (46,713) (6,887) — — (6,887) (53,600)

Insurance acquisition cash flows (3,919) — — (3,919) (1,693) — — (1,693) (5,612)

Total cash flows 31,418 — — 31,418 (2,392) — — (2,392) 29,026

Other movements — — — — — (2) 2 — —

Net closing balance at 31 Dec 2023 631,076 35,980 38,590 705,646 20,984 1,792 1,316 24,092 729,738

Closing assets (233) 25 110 (98) (924) 62 (131) (993) (1,091)

Closing liabilities 631,309 35,955 38,480 705,744 21,908 1,730 1,447 25,085 730,829

Net closing balance at 31 Dec 2023 631,076 35,980 38,590 705,646 20,984 1,792 1,316 24,092 729,738

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 105

Movements in carrying amounts of insurance contracts - Analysis by measurement component (continued)

Year ended 31 Dec 2022

Life direct participating and investment

discretionary participating contracts

Life Other contracts

Contractual service

margin

Contractual service

margin

Estimates

of present

value of

future cash

flows and

risk

adjustment

Contracts

under the

fair value

approach

Other

contracts

Total

Estimates

of present

value of

future cash

flows and

risk

adjustment

Contracts

under the

fair value

approach

Other

contracts

Total Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Opening assets — — — — (225) 45 50 (130) (130)

Opening liabilities 598,776 44,347 20,434 663,557 25,281 1,548 605 27,434 690,991

Net opening balance at 1 Jan 2022 598,776 44,347 20,434 663,557 25,056 1,593 655 27,304 690,861

Changes in the statement of profit or loss

and other comprehensive income

Changes that relate to current services

Contractual service margin recognised for

services provided

— (1,862) (3,423) (5,285) — (298) (216) (514) (5,799)

Change in risk adjustment for non-financial

risk expired

(118) — — (118) (22) — — (22) (140)

Experience adjustments (176) — — (176) 160 — — 160 (16)

Changes that relate to future services

Contracts initially recognised in the year (8,028) — 8,091 63 (514) — 527 13 76

Changes in estimates that adjust contractual

service margin

8,345 (10,682) 2,337 — 31 62 (93) — —

Changes in estimates that result in losses

and reversal of losses on onerous contracts

635 — — 635 626 — — 626 1,261

Changes that relate to past services

Adjustments to liabilities for incurred claims 27 — — 27 11 — — 11 38

Other movements recognised in insurance

service result

(394) — — (394) — — — — (394)

Insurance service result 291 (12,544) 7,005 (5,248) 292 (236) 218 274 (4,974)

Net finance (income)/expense from

insurance contracts

(95,953) — (10) (95,963) (1,272) 29 14 (1,229) (97,192)

Effect of movements in exchange rates (1,462) (10) (68) (1,540) (536) (1) (1) (538) (2,078)

Total changes in the statement of profit or

loss and other comprehensive income

(97,124) (12,554) 6,927 (102,751) (1,516) (208) 231 (1,493) (104,244)

Cash flows

Premiums received 82,670 — — 82,670 3,862 — — 3,862 86,532

Claims, other insurance service expenses

paid (including investment components) and

other cash flows

(27,751) — — (27,751) (4,213) — — (4,213) (31,964)

Insurance acquisition cash flows (3,180) — — (3,180) (910) — — (910) (4,090)

Total cash flows 51,739 — — 51,739 (1,261) — — (1,261) 50,478

Acquisition of subsidiaries and other

movements

16,177 1,371 — 17,548 (523) 457 — (66) 17,482

Net closing balance at 31 Dec 2022 569,568 33,164 27,361 630,093 21,756 1,842 886 24,484 654,577

Closing assets (137) 26 76 (35) (875) 413 152 (310) (345)

Closing liabilities 569,705 33,138 27,285 630,128 22,631 1,429 734 24,794 654,922

Net closing balance at 31 Dec 2022 569,568 33,164 27,361 630,093 21,756 1,842 886 24,484 654,577

1 'Other contracts' are those contracts measured by applying HKFRS 17 from inception of the contracts. These include contracts measured under the

full retrospective approach at transition and contracts incepted after transition.

2 'Changes in the statement of profit or loss and other comprehensive income' do not include income and expenses with HSBC Group entities.

Notes on the Consolidated Financial Statements

106 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Effect of contracts initially recognised in the year

Year ended 31 Dec 2023 Year ended 31 Dec 2022

Profitable

contracts

issued

Onerous

contracts

issued

Total

Profitable

contracts

issued

Onerous

contracts

issued

Total

HK$m HK$m HK$m HK$m HK$m HK$m

Life direct participating and investment DPF contracts

Estimates of present value of cash outflows 82,899 1,532 84,431 62,839 834 63,673

– Insurance acquisition cash flows 4,603 165 4,768 3,073 133 3,206

– Claims and other insurance service expenses payable 78,296 1,367 79,663 59,766 701 60,467

Estimates of present value of cash inflows (95,191) (1,447) (96,638) (71,112) (781) (71,893)

Risk adjustment for non-financial risk 230 11 241 182 10 192

Contractual service margin 12,062 — 12,062 8,091 — 8,091

Losses recognised on initial recognition — (96) (96) — (63) (63)

Life other contracts

Estimates of present value of cash outflows 6,392 3,529 9,921 3,154 642 3,796

– Insurance acquisition cash flows 762 388 1,150 446 69 515

– Claims and other insurance service expenses payable 5,630 3,141 8,771 2,708 573 3,281

Estimates of present value of cash inflows (7,387) (3,314) (10,701) (3,767) (632) (4,399)

Risk adjustment for non-financial risk 104 38 142 86 3 89

Contractual service margin 891 — 891 527 — 527

Losses recognised on initial recognition — (253) (253) — (13) (13)

Present value of expected future cash flows of insurance contract liabilities and contractual service margin

less than

1 year

1-2

years

2-3

years

3-4

years

4-5

years

5-10

years

10-20

years

Over 20

years

Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Insurance liability future cash flows

Life direct participating and investment DPF contracts (26,475) (10,266) 11,783 12,531 20,017 70,271 181,383 368,698 627,942

Life other contracts 6,507 1,862 (420) (387) 530 503 576 12,374 21,545

Insurance liability future cash flows at 31 Dec 2023 (19,968) (8,404) 11,363 12,144 20,547 70,774 181,959 381,072 649,487

Remaining contractual service margin

Life direct participating and investment DPF contracts 6,404 5,915 5,458 5,032 4,640 18,102 18,556 10,463 74,570

Life other contracts 706 406 289 274 234 400 503 296 3,108

Remaining contractual service margin at 31 Dec 2023 7,110 6,321 5,747 5,306 4,874 18,502 19,059 10,759 77,678

Insurance liability future cash flows

Life direct participating and investment DPF contracts (41,859) (17,921) (1,908) 7,793 10,053 64,781 234,585 312,332 567,856

Life other contracts 4,076 6,145 3,200 14 393 1,474 1,100 6,130 22,532

Insurance liability future cash flows at 31 Dec 2022 (37,783) (11,776) 1,292 7,807 10,446 66,255 235,685 318,462 590,388

Remaining contractual service margin

Life direct participating and investment DPF contracts 4,966 4,612 4,270 3,941 3,650 14,529 15,351 9,206 60,525

Life other contracts 356 282 251 225 201 632 483 298 2,728

Remaining contractual service margin at 31 Dec 2022 5,322 4,894 4,521 4,166 3,851 15,161 15,834 9,504 63,253

Discount rates

The discount rates applied to expected future cash flows are determined through a bottom-up approach as set out in Note 1.2(j) ‘Summary of

material accounting policies – Insurance contracts’ on page 97. The blended average of discount rates used within our most material

manufacturing entities are as follows:

HSBC Life (International) Ltd Hang Seng Insurance Co Ltd

HK$

US$

HK$

US$

At 31 December 2023

10 year discount rate (%) 4.02 4.47 4.16 4.62

20 year discount rate (%) 4.21 4.91 4.34 5.06

At 31 December 2022

10 year discount rate (%) 4.56 4.59 4.70 4.80

20 year discount rate (%) 4.63 4.96 4.76 5.17

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 107

Employee compensation and benefits

2023 2022

HK$m HK$m

Wages and salaries

35,021 34,760

Social security costs 1,352 1,379

Post-employment benefits 2,174 2,183

– defined contribution pension plans 1,748 1,716

– defined benefit pension plans 426 467

Year ended 31 Dec 38,547 38,322

1 'Wages and salaries’ includes the effect of share-based payments arrangements of HK$1,101m (2022: HK$882m).

Post-employment benefit plans

The group operates a number of post-employment benefit plans for its employees. Some of these plans are defined benefit plans, of which the

largest plan is The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme (the 'Principal Plan’).

The group's balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and the discounted

value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through

reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, the

group has considered its current right to obtain a future refund or a reduction in future contributions.

Defined benefit pension plans

Net asset/(liability) under defined benefit pension plans

Fair value of

plan assets

Present value of

defined benefit

obligations

Net defined

benefit liability

HK$m HK$m HK$m

At 1 Jan 2023 8,266 (9,889) (1,623)

Service cost — (362) (362)

– current service cost — (360) (360)

– past service cost and gains from settlements — (2) (2)

Net interest income/(expense) on the net defined benefit asset/(liability) 292 (349) (57)

Re-measurement effects recognised in other comprehensive income 243 (217) 26

– return on plan assets (excluding interest income) 243 — 243

– actuarial losses — (217) (217)

Contributions by the group 628 — 628

Benefits paid (1,053) 1,132 79

Exchange differences and other movements (43) 43 —

At 31 Dec 2023 8,333 (9,642) (1,309)

Retirement benefit liabilities recognised on the balance sheet (1,362)

Retirement benefit assets recognised on the balance sheet (within ‘Prepayments, accrued income

and other assets’)

At 1 Jan 2022 10,075 (11,945) (1,870)

Service cost — (429) (429)

– current service cost — (434) (434)

– past service cost and gains from settlements — 5 5

Net interest income/(expense) on the net defined benefit asset/(liability) 162 (197) (35)

Re-measurement effects recognised in other comprehensive income (841) 1,073 232

– return on plan assets (excluding interest income) (841) — (841)

– actuarial gains — 1,073 1,073

Contributions by the group 345 — 345

Benefits paid (1,414) 1,487 73

Exchange differences and other movements (61) 122 61

At 31 Dec 2022 8,266 (9,889) (1,623)

Retirement benefit liabilities recognised on the balance sheet (1,655)

Retirement benefit assets recognised on the balance sheet (within ‘Prepayments, accrued income and

other assets’)

Notes on the Consolidated Financial Statements

108 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Fair value of plan assets by asset classes

At 31 Dec 2023 At 31 Dec 2022

Value

Quoted market

price in active

market Thereof HSBC Value

Quoted market

price in active

market Thereof HSBC

HK$m HK$m HK$m HK$m HK$m HK$m

Fair value of plan assets 8,333 8,333 177 8,266 8,266 195

– equities 1,187 1,187 — 1,078 1,078 —

– bonds 4,458 4,458 — 4,622 4,622 —

– alternative investments 2,268 2,268 — 2,112 2,112 —

– other

420 420 177 454 454 195

1 Other mainly consists of cash and cash deposits.

The Principal Plan

In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, the Principal Plan, covers employees of the group and

HSBC Global Services (Hong Kong) Limited (the 'ServCo'), which is a fellow subsidiary of the group set up in Hong Kong as part of the recovery

and resolution planning to provide functional support services to the group, as well as certain other local employees of the Group. The Principal

Plan comprises a funded defined benefit scheme (which provides a lump sum benefit on retirement and is now closed to new members) and a

defined contribution scheme. The latter was established on 1 January 1999 for new employees, and the group has been providing defined

contribution plans to all new employees. Since the defined benefit scheme of the Principal Plan is a final salary lump sum scheme, its exposure

to longevity risk and interest rate risk is limited compared to a scheme that provides annuity payments.

The Principal Plan is a funded plan with assets which are held in trust funds separate from the group. The investment strategy of the defined

benefit scheme of the Principal Plan is to hold the majority of assets in fixed income investments, with a smaller portion in equities. The target

asset allocation for the portfolio is as follows: Fixed income investments 75% and Equity 25%.Each investment manager has been assigned a

benchmark applicable to their respective asset class. The actuarial funding valuation of the Principal Plan is conducted at least on a triennial basis

in accordance with the local practice and regulations. The actuarial assumptions used to conduct the actuarial funding valuation of the Principal

Plan vary according to the economic conditions.

The trustee, which is a subsidiary of the Bank, assumes the overall responsibility for the Principal Plan and the group has established a

management committee and a number of sub-committees to broaden the governance and manage the concomitant issues.

Both the group and ServCo participate in the Principal Plan that shares risks between the entities which are under common control of the Group.

As agreed between the group and ServCo, the net defined benefit cost of the defined benefit scheme of the Principal Plan shall be charged

separately. Details on the defined benefit scheme of the Principal Plan are disclosed below.

Net asset/(liability) under the defined benefit scheme of the Principal Plan

Included within the group Included within ServCo

Fair value

of plan

assets

Present

value of

defined

benefit

obligations

Net

defined

benefit

liability

Fair value

of plan

assets

Present

value of

defined

benefit

obligations

Net

defined

benefit

liability

HK$m HK$m HK$m HK$m HK$m HK$m

At 1 Jan 2023 3,585 (3,902) (317) 3,170 (3,265) (95)

Service cost — (128) (128) — (110) (110)

– current service cost — (128) (128) — (110) (110)

Net interest income/(expense) on the net defined benefit asset/(liability) 118 (131) (13) 110 (111) (1)

Re-measurement effects recognised in other comprehensive income 50 (170) (120) 41 (123) (82)

– return on plan assets (excluding interest income) 50 — 50 41 — 41

– actuarial losses — (170) (170) — (123) (123)

Contributions 173 — 173 114 — 114

Benefits paid (406) 406 — (422) 422 —

Exchange differences and other movements (29) 31 2 26 (31) (5)

At 31 Dec 2023 3,491 (3,894) (403) 3,039 (3,218) (179)

Retirement benefit liabilities recognised on the balance sheet (403) (179)

At 1 Jan 2022 4,424 (4,915) (491) 3,945 (4,191) (246)

Service cost — (162) (162) — (141) (141)

– current service cost — (162) (162) — (141) (141)

Net interest income/(expense) on the net defined benefit asset/(liability) 56 (61) (5) 50 (52) (2)

Re-measurement effects recognised in other comprehensive income (409) 566 157 (364) 537 173

– return on plan assets (excluding interest income) (409) — (409) (364) — (364)

– actuarial gains — 566 566 — 537 537

Contributions 191 — 191 123 — 123

Benefits paid (737) 737 — (515) 515 —

Exchange differences and other movements 60 (67) (7) (69) 67 (2)

At 31 Dec 2022 3,585 (3,902) (317) 3,170 (3,265) (95)

Retirement benefit liabilities recognised on the balance sheet (317) (95)

The group expects to make HK$168m of contributions to the defined benefit scheme of the Principal Plan during 2024 (during 2023: HK$180m)

and ServCo expects to make HK$105m contributions to the defined benefit scheme of the Principal Plan during 2024 (during 2023: HK$116m).

These expected contributions are determined separately by the group and ServCo by reference to the actuarial funding valuation carried out by

the Principal Plan's local actuary.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 109

Benefits expected to be paid from the defined benefit scheme of the Principal Plan over each of the next five years, and in aggregate for the five

years thereafter, are as follows:

Benefits expected to be paid from the defined benefit scheme of the Principal Plan

Within one

year

One to two

years

Two to three

years

Three to four

years

Four to five

years

Five to ten

years

As at 31 December 2023 as reported by:

HK$m HK$m HK$m HK$m HK$m HK$m

– The group 275 376 363 408 374 2,002

– ServCo 244 322 255 308 331 1,809

As at 31 December 2022 as reported by:

– The group 292 373 382 371 396 1,892

– ServCo 187 299 340 271 338 1,825

1 The duration of the defined benefit obligation is six years for the Principal Plan under the disclosed assumptions (2022: six years).

Fair value of plan assets of the defined benefit scheme of the Principal Plan by asset classes

At 31 Dec 2023 At 31 Dec 2022

Value

Quoted market

price in active

market Thereof HSBC Value

Quoted market

price in active

market Thereof HSBC

HK$m HK$m HK$m HK$m HK$m HK$m

Fair value of plan assets 6,530 6,530 59 6,755 6,755 51

– equities 1,691 1,691 — 1,581 1,581 —

– bonds 3,467 3,467 — 3,725 3,725 —

– alternative investments 1,313 1,313 — 1,398 1,398 —

– other

59 59 59 51 51 51

1 Other mainly consists of cash and cash deposits.

The Principal Plan’s key actuarial financial assumptions

The group and ServCo determine the discount rate to be applied to the defined benefit scheme's obligations in consultation with the Principal

Plan’s local actuary, onthe basis of the current average yields of Hong Kong Government Bonds and Hong Kong Exchange Fund Notes, with

maturities consistent with that of the defined benefit obligations.

The key actuarial assumptions used to calculate the group’s obligations for the defined benefit scheme of the Principal Plan for the year, and

used as the basis for measuring the expenses were as follows:

Key actuarial assumptions for the defined benefit scheme of the Principal Plan

Discount rate Rate of pay increase

% p.a. % p.a.

At 31 Dec 2023 2.95 3.00

At 31 Dec 2022 3.50

3.50% p.a. for 2023 and

3.00% p.a. thereafter

Actuarial assumption sensitivities

The discount rate and rate of pay increase are sensitive to changes in market conditions arising during the reporting period. The following table

shows the financial impact of assumption changes on the defined benefit scheme of the Principal Plan at year end:

The effect of changes in key assumptions on the defined benefit scheme of the Principal Plan

Impact on HSBC Group Hong Kong Local Staff Retirement

Benefit Scheme obligation

Financial impact of increase Financial impact of decrease

2023 2022 2023 2022

HK$m HK$m HK$m HK$m

Discount rate – increase/decrease of 0.25% (106) (111) 108 114

Rate of pay increase – increase/decrease of 0.25% 109 115 (107) (112)

Directors’ emoluments

The aggregate emoluments of the Directors of the Bank disclosed pursuant to section 4 of the Companies (Disclosure of Information about

Benefits of Directors) Regulation were HK$115m (2022: HK$111m). This comprises fees (which represent the aggregate emoluments paid to or

receivable by directors in respect of their services as a director) of HK$37m (2022: HK$37m) and other emoluments of HK$78m (2022: HK$74m)

which includes contributions to pension schemes of HK$3m (2022: HK$3m). Non-cash benefits which are included in other emoluments mainly

relate to share-based payment awards, and the provision of housing and furnishings.

Details on loans to directors are set out in Note 32.

Notes on the Consolidated Financial Statements

110 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Tax

The Bank and its subsidiaries in Hong Kong have provided for Hong Kong profits tax at the rate of 16.5% (2022: 16.5%) on the profits for the

year assessable in Hong Kong. Overseas branches and subsidiaries have similarly provided for tax in the countries in which they operate at the

appropriate rates of tax in force in 2023. Deferred taxation is provided for in accordance with the group’s accounting policy in Note 1.2(m)

‘Summary of material accounting policies – Tax’ on page 98-99.

Tax expense

2023 2022

HK$m HK$m

Current tax 25,764 14,839

– Hong Kong taxation – on current year profit 11,157 5,072

– Hong Kong taxation – adjustments in respect of prior years (37) (492)

– overseas taxation – on current year profit 14,596 10,692

– overseas taxation – adjustments in respect of prior years 48 (433)

Deferred tax (1,848) 1,157

– origination and reversal of temporary differences (1,631) 643

– adjustments in respect of prior years (217) 514

Year ended 31 Dec 23,916 15,996

Tax reconciliation

The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the applicable tax rates in

the countries concerned as follows:

Reconciliation between taxation charge and accounting profit at applicable tax rates

2023 2022

HK$m HK$m

Profit before tax 121,443 96,687

Notional tax on profit before tax, calculated at the rates applicable to profits in the countries concerned 24,403 20,369

Effects of profits in associates and joint ventures (3,072) (3,100)

Effects of impairment of interest in associate 3,953 —

Non-taxable income and gains (5,059) (3,525)

Local taxes and overseas withholding taxes 2,336 1,856

Permanent disallowables 836 740

Others 519 (344)

Year ended 31 Dec 23,916 15,996

On 20 June 2023, legislation was substantively enacted in the UK, the jurisdiction of the Bank’s ultimate parent entity, HSBC Holdings plc, to

introduce the ‘Pillar Two’ global minimum tax model rules of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (‘BEPS’), with

effect from 1 January 2024. Legislation has been enacted in Mauritius and Vietnam to implement a Qualified Domestic Minimum Top-up Tax

(‘QDMTT’). Additionally, in the Asia-Pacific region the governments of Australia, Hong Kong, Indonesia, Japan, Malaysia and Singapore, have

announced their intention to introduce Pillar Two legislation and a QDMTT.

Under these rules, a top-up tax liability arises where the effective tax rate of the group’s operations in a jurisdiction, calculated based on

principles set out in the OECD’s Pillar Two model rules, is below 15%. Any additional tax arising in relation to jurisdictions in which a QDMTT

applies will be payable to the tax authority in that jurisdiction. Where there is no QDMTT, any resulting tax is payable by HSBC Holdings plc,

being the group’s ultimate parent, to the UK tax authority.

Based on the Group’s forecasts, no material top-up tax liability is expected to arise in Mauritius or Vietnam. For those jurisdictions that have

announced their intention to introduce Pillar Two legislation and a QDMTT, a top-up tax liability is expected to arise in Hong Kong due to the low

effective tax rate, driven primarily by income from tax-exempt instruments. The Hong Kong QDMTT is expected to be effective from 1 January

2025. The application of the Pillar Two global minimum tax rules and the introduction of QDMTT, if enacted, is expected to increase the annual

effective tax rate of the group by approximately 0.5%. However, the impact is dependent upon the ongoing evolution of rules and guidance in

the UK and other jurisdictions.

Movements of deferred tax assets and liabilities

Accelerated

capital

allowances

Insurance

business

Expense

provisions

Impairment

allowance on

financial

instruments

Revaluation

of properties Other

Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Assets 112 4,059 1,192 3,289 — 1,004 9,656

Liabilities (467) (189) (30) — (14,823) (8,477) (23,986)

At 1 Jan 2023 (355) 3,870 1,162 3,289 (14,823) (7,473) (14,330)

Exchange and other adjustments 1 111 (31) (26) 38 (36) 57

Charge/(credit) to income statement (22) 1,802 167 (519) 830 (410) 1,848

Charge/(credit) to other

comprehensive income

— — — 133 (830) (1,486) (2,183)

At 31 Dec 2023 (376) 5,783 1,298 2,877 (14,785) (9,405) (14,608)

Assets

115 5,783 1,329 2,877 — 2,880 12,984

Liabilities

(491) — (31) — (14,785) (12,285) (27,592)

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 111

Movements of deferred tax assets and liabilities (continued)

Accelerated

capital

allowances

Insurance

business

Expense

provisions

Impairment

allowance on

financial

instruments

Revaluation

of properties Other

Total

HK$m HK$m HK$m HK$m HK$m HK$m

HK$m

Assets 145 4,236 1,557 2,597 — 827 9,362

Liabilities (459) (100) (19) — (14,992) (8,391) (23,961)

At 1 Jan 2022 (314) 4,136 1,538 2,597 (14,992) (7,564) (14,599)

Exchange and other adjustments (15) (186) (157) (318) 222 (95) (549)

Charge/(credit) to income statement (32) (80) (229) 1,010 759 (2,585) (1,157)

Charge/(credit) to other

comprehensive income

6 — 10 — (812) 2,771 1,975

At 31 Dec 2022 (355) 3,870 1,162 3,289 (14,823) (7,473) (14,330)

Assets

112 4,059 1,192 3,289 — 1,004 9,656

Liabilities

(467) (189) (30) — (14,823) (8,477) (23,986)

1 After netting off balances within countries, the balances as disclosed in the consolidated financial statements are as follows: deferred tax assets

HK$9,315m (2022: HK$7,582m); and deferred tax liabilities HK$23,923m (2022: HK$21,912m).

2 Other includes deferred tax liability of HK$6,402m (2022: HK$5,847m) provided in respect of distributable reserves or post-acquisition reserves of

associates that, on distribution, would attract withholding tax.

The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet is HK$4,898m (2022: HK$4,537m). Of this

amount, HK$1,906m (2022: HK$1,536m) has no expiry date and the remaining will expire within 10 years.

Deferred tax is not recognised in respect of the group‘s investments in subsidiaries and branches where remittance or other realisation is not

probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise.

Dividends

Dividends to shareholders of the parent company

2023 2022

HK$ per share HK$m HK$ per share HK$m

Dividends paid on ordinary shares

In respect of previous year:

– fourth interim dividend 0.27 13,500 0.23 10,584

In respect of current year:

– first interim dividend paid 0.44 22,000 0.17 7,761

– second interim dividend paid 0.43 21,500 0.12 5,887

– special dividend paid 0.16 7,800 — —

– third interim dividend paid 0.36 18,000 0.16 7,850

Total 1.66 82,800 0.68 32,082

Distributions on other equity instruments 3,556 2,739

Dividends to shareholders 86,356 34,821

On 19 February 2024, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2023 of HK$0.41 per

ordinary share (HK$20,300m) (2022: HK$0.27 per ordinary share (HK$13,500m)).

Total coupons on other equity instruments

2023 2022

HK$m HK$m

US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.510%) 459 460

US$900m Fixed rate perpetual subordinated loan (interest rate fixed at 6.030%) 425 426

US$1,000m Fixed rate perpetual subordinated loan (interest rate fixed at 6.090%) 478 477

US$1,200m Fixed rate perpetual subordinated loan (interest rate fixed at 6.172%) 581 580

US$600m Fixed rate perpetual subordinated loan (interest rate fixed at 5.910%) 277 278

US$1,100m Fixed rate perpetual subordinated loan (interest rate fixed at 6.000%) 516 518

US$1,000m Floating rate perpetual subordinated loan (interest rate at compounded SOFR plus 5.090%)

545 —

US$1,000m Fixed rate perpetual subordinated loan (interest rate fixed at 8.000%)

275 —

Total 3,556 2,739

1 This subordinated loan was early repaid in the first half of 2023 and distributions were made on repayment.

2 This subordinated loan was issued in March 2023.

Notes on the Consolidated Financial Statements

112 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Trading assets

2023 2022

HK$m HK$m

Treasury and other eligible bills 132,659 132,737

Debt securities 351,734 231,601

Equity securities 375,590 264,447

Reverse repurchase agreements and other similar secured lending 62,710 59,398

Other

18,557 11,622

At 31 Dec 941,250 699,805

1 'Other' includes term lending and other accounts with customers and banks.

Derivatives

Notional contract amounts and fair values of derivatives by product contract type

Notional contract amount Fair value – Assets Fair value – Liabilities

Trading Hedging Trading Hedging Total Trading Hedging Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Foreign Exchange 20,216,483 166,680 201,790 6,640 208,430 218,927 1,382 220,309

Interest rate 32,976,189 452,160 401,534 12,898 414,432 438,882 4,160 443,042

Equity 879,049 — 16,464 — 16,464 15,246 — 15,246

Credit 446,998 — 2,277 — 2,277 2,889 — 2,889

Commodity and other 179,417 — 3,011 — 3,011 4,091 — 4,091

Gross total 54,698,136 618,840 625,076 19,538 644,614 680,035 5,542 685,577

Offset (235,361) (235,361)

At 31 Dec 2023 409,253 450,216

Foreign Exchange 19,574,143 34,877 263,237 3,226 266,463 281,461 14 281,475

Interest rate 32,534,469 456,741 529,411 12,416 541,827 575,656 3,326 578,982

Equity 785,281 — 18,363 — 18,363 14,017 — 14,017

Credit 462,180 — 2,386 — 2,386 2,708 — 2,708

Commodity and other 159,242 — 3,230 — 3,230 3,939 — 3,939

Gross total 53,515,315 491,618 816,627 15,642 832,269 877,781 3,340 881,121

Offset (329,392) (329,392)

At 31 Dec 2022 502,877 551,729

The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the

nominal value of transactions outstanding at the balance sheet date. They do not represent amounts at risk.

Use of derivatives

The group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risk arising

from client business, and to manage and hedge the group’s own risks. Derivatives (except for derivatives which are designated as effective

hedging instruments) are held for trading. Within the held for trading classification are two types of derivative instruments: those used in sales

and trading activities, and those used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge

accounting. The second category includes derivatives managed in conjunction with financial instruments designated at fair value. These

activities are described more fully below.

The group’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to

ensure that they remain within acceptable risk levels. When entering into derivative transactions, the group employs the same credit risk

management framework to assess and approve potential credit exposures that it uses for traditional lending.

Trading derivatives

Most of the group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of

derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-

making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating

revenues based on spread and volume. Risk management activity is undertaken to manage the risk arising from client transactions, with the

principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives.

Derivatives valued using models with unobservable inputs

Any initial gain or loss on financial instruments where the valuation is dependent on unobservable parameters is deferred over the life of the

contract or until the instrument is redeemed, transferred or sold or the fair value becomes observable. All derivatives that are part of qualifying

hedging relationships have valuations based on observable market parameters.

The aggregate unobservable inception profit yet to be recognised in the income statement is immaterial.

Hedge accounting derivatives

The group applies hedge accounting to manage interest rate and foreign exchange risk. The group uses derivatives (principally interest rate and

currency swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables the

group to optimise its overall costs of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural

imbalances in the maturity and other profiles of its assets and liabilities. The accounting treatment of hedging transactions varies according to

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 113

the nature of the instrument hedged and the type of hedging transaction. Derivatives may qualify as hedges for accounting purposes if they are

fair value hedges, or cash flow hedges.

Hedged risk components

The group designates a portion of cash flows of a financial instrument or a group of financial instruments for a specific interest rate or foreign

currency risk component in a fair value or cash flow hedge. The designated risks and portions are either contractually specified or otherwise

separately identifiable components of the financial instrument that are reliably measurable. Risk-free or benchmark interest rates generally are

regarded as being both separately identifiable and reliably measurable, except for the Ibor reform transition where the group designates

alternative benchmark rates as the hedged risk which may not have been separately identifiable upon initial designation, provided the group

reasonably expects it will meet the requirement within 24 months from the first designation date. The designated risk component accounts for a

significant portion of the overall changes in fair value or cash flows of the hedged item(s).

Fair value hedges

The group enters into to fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value due to movements in market

interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss, including debt securities held

and issued.

HSBC hedging instrument by hedged risk

Hedging instrument

Carrying amount

Notional amount

1,3

Assets Liabilities Balance sheet

presentation

Change in fair value

Hedged risk

HK$m HK$m HK$m HK$m

Interest rate 240,001 9,293 3,700 Derivatives (3,259)

At 31 Dec 2023 240,001 9,293 3,700 (3,259)

Interest rate 309,450 11,761 2,281 Derivatives 6,130

At 31 Dec 2022 309,450 11,761 2,281 6,130

1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions

outstanding at the balance sheet date. They do not represent amounts at risk.

2 Used in effectiveness testing, which uses the full fair value change of the hedging instrument not excluding any component.

3 The notional amount of non-dynamic fair value hedges is equal to US$4,500m (2022: US$4,500m), of which the weighted-average maturity date is

December 2030 and the weighted-average swap rate is 2.67% (2022: 2.67%).

HSBC hedged item by hedged risk

Hedged item Ineffectiveness

Carrying amount

Accumulated fair value hedge adjustments

included in carrying amount

Change in

fair value

Recognised

in profit

and loss

Assets Liabilities Assets Liabilities

Balance sheet

presentation

Profit and loss

presentation

Hedged risk

HK$m HK$m HK$m HK$m HK$m HK$m

Interest rate

190,469 (4,791)

Financial investments

measured at fair value

through other

comprehensive income

3,135

(245)

Net income from

financial instruments

held for trading or

managed on a fair

value basis

6,449 (210)

Loans and advances to

customers

242

— — Debt securities in issue —

32,484 (1,898) Subordinated liabilities

(363)

At 31 Dec 2023 196,918 32,484 (5,001) (1,898) 3,014 (245)

Interest rate

257,126 (10,312)

Financial investments

measured at fair value through

other comprehensive income

(10,716)

(237)

Net income from

financial instruments

held for trading or

managed on a fair

value basis

5,755 (435)

Loans and advances to

customers

(351)

1,161 — Debt securities in issue 8

33,113 (2,260) Subordinated liabilities

4,692

At 31 Dec 2022 262,881 34,274 (10,747) (2,260) (6,367) (237)

1 Used in effectiveness testing, which comprise an amount attributable to the designated hedged risk that can be a risk component.

2 The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted

for hedging gains and losses were liabilities of HK$396m (2022: assets of HK$143m) for FVOCI assets, and assets of HK$1,067m (2022: HK$1,243m)

for subordinated liabilities.

3 Represents Loss Absorbing Capacity (‘LAC’) instruments issued by the Bank to HSBC Asia Holdings Limited, the balance of which is included in

‘amounts due to Group companies’.

Sources of hedge ineffectiveness may arise from basis risk including but not limited to the discount rates used for calculating the fair value of

derivatives, hedges using instruments with a non-zero fair value and notional and timing differences between the hedged items and hedging

instruments.

The interest rate risk of the group's fixed rate debt securities issued is managed in a non-dynamic risk management strategy.

Notes on the Consolidated Financial Statements

114 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Cash flow hedges

The group’s cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the

variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign-

currency basis.

The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuances of

non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash

flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their

contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both

principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow

hedges are considered to be dynamic hedges.

The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes in foreign

exchange market rates with cross-currency swaps; these are considered dynamic hedges.

Hedging instrument by hedged risk

Hedging instrument Hedged item Ineffectiveness

Carrying amount

Change in

fair value

Change in fair

value

Recognised

in profit and

loss

Profit and loss

presentation

Notional

amount

Assets Liabilities

Balance

sheet

presentation

Hedged risk

HK$m HK$m HK$m

HK$m

HK$m HK$m

Foreign currency 166,680 6,640 1,382 Derivatives 5,422 5,422 —

Net income from

financial instruments

held for trading or

managed on a fair

value basisInterest rate 212,159 3,605 460 Derivatives 1,834 1,803 31

At 31 Dec 2023 378,839 10,245 1,842 7,256 7,225 31

Foreign currency 34,877 3,226 14 Derivatives 5,461 5,461 —

Net income from

financial instruments

held for trading or

managed on a fair

value basis

Interest rate 147,291 655 1,045 Derivatives (448) (448) —

At 31 Dec 2022 182,168 3,881 1,059 5,013 5,013 —

1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions

outstanding at the balance sheet date. They do not represent amounts at risk.

2 Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.

3 Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.

Sources of hedge ineffectiveness may arise from basis risk, including but not limited to timing differences between the hedged items and

hedging instruments, and hedges using instruments with a non-zero fair value.

Reconciliation of equity and analysis of other comprehensive income by risk type

Interest rate Foreign currency

HK$m HK$m

Cash flow hedging reserve at 1 Jan 2023 (338) (1,149)

Fair value gains 1,803 5,422

Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:

Hedged items that have affected profit or loss

856 (4,107)

Income taxes (423) (217)

Others — 5

Cash flow hedging reserve at 31 Dec 2023 1,898 (46)

Cash flow hedging reserve at 1 Jan 2022 108 45

Fair value gains/(losses) (448) 5,461

Fair value (gains) reclassified from the cash flow hedge reserve to the income statement in respect of:

Hedged items that have affected profit or loss

(109) (6,891)

Income taxes 112 236

Others (1) —

Cash flow hedging reserve at 31 Dec 2022 (338) (1,149)

1 Hedged items that have affected profit or loss are primarily recorded within interest income.

Interest rate benchmark reform

At 31 December 2023, HK$33,127m (2022: HK$157,460m) of the notional amounts of interest rate derivatives designated in hedge accounting

relationships are expected to be directly affected by market-wide Ibors reform and in scope of HKFRS Interest Rate Benchmark Reform Phase 1

amendments. They do not represent the extent of the risk exposure managed by the group.

At 31 December 2022, the Hong Kong interbank offered rate (‘HIBOR’) was included given that the reform of this benchmark was considered

possible. At 31 December 2023, HIBOR is no longer expected to be directly affected by ibors reform following the successful transition of all

major LIBOR settings and the HKMA affirmation that there were no plans to discontinue HIBOR.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 115

Financial assets designated and otherwise mandatorily measured at fair

value through profit or loss

2023

2022

Designated

at fair value

Mandatorily

measured at

fair value Total

Designated

at fair value

Mandatorily

measured at

fair value Total

HK$m HK$m HK$m HK$m HK$m HK$m

Treasury and other eligible bills 2 5,565 5,567 — 6,777 6,777

Debt securities 12,128 444,653 456,781 18,882 418,571 437,453

Equity securities — 222,980 222,980 — 186,718 186,718

Reverse repurchase agreements and other similar secured

lending

— 514 514 — 1,764 1,764

Other

2,900 18,831 21,731 — 20,318 20,318

At 31 Dec 15,030 692,543 707,573 18,882 634,148 653,030

1 ‘Other’ includes term lending to customers and banks, and default fund contribution.

Loans and advances to customers

2023 2022

HK$m HK$m

Gross loans and advances to customers 3,595,929 3,734,987

Expected credit loss allowances (38,853) (39,919)

At 31 Dec 3,557,076 3,695,068

The following table provides an analysis of gross loans and advances to customers by industry sector based on the Statistical Classification of

economic activities in the European Community (‘NACE’).

Analysis of gross loans and advances to customers

2023 2022

HK$m HK$m

Residential mortgages 1,224,325 1,177,615

Credit card advances 101,257 92,023

Other personal 237,440 254,729

Total personal 1,563,022 1,524,367

Real estate & Construction 537,393 616,517

Wholesale and retail trade 350,492 377,326

Manufacturing 359,914 371,718

Transportation and storage 96,789 104,933

Other 396,760 437,269

Total corporate and commercial 1,741,348 1,907,763

Non-bank financial institutions 291,559 302,857

At 31 Dec 3,595,929 3,734,987

By geography

Hong Kong 2,211,592 2,322,684

Mainland China 349,116 396,989

Australia 294,502 269,937

Singapore 238,537 240,590

India 143,657 116,840

Taiwan 90,396 88,738

Malaysia 81,898 84,931

Indonesia 30,141 29,528

Other 156,090 184,750

1 The geographical information shown above is classified by the location of the principal operations of the subsidiary or the branch responsible for

advancing the funds.

Notes on the Consolidated Financial Statements

116 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Finance lease receivables and hire purchase contracts

The group leases a variety of assets to third parties under finance leases. At the end of lease terms, assets may be sold to third parties or

leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income. Loans and

advances to customers include receivables under finance leases and hire purchase contracts having the characteristics of finance leases.

Net investment in finance leases and hire purchase contracts

2023 2022

Total future

minimum

payments

Unearned

finance

income

Present

value

Total future

minimum

payments

Unearned

finance

income

Present

value

HK$m HK$m HK$m HK$m HK$m HK$m

Amounts receivable

– within one year 2,395 (963) 1,432 2,971 (783) 2,188

– one to two years 2,310 (876) 1,434 2,538 (724) 1,814

– two to three years 2,360 (828) 1,532 2,287 (677) 1,610

– three to four years 2,285 (782) 1,503 2,226 (644) 1,582

– four to five years 2,134 (736) 1,398 2,172 (619) 1,553

– after five years 25,740 (5,725) 20,015 24,585 (4,729) 19,856

37,224 (9,910) 27,314 36,779 (8,176) 28,603

Expected credit loss allowances (274) (309)

At 31 Dec 27,040 28,294

Financial investments

2023 2022

HK$m HK$m

Financial investments measured at fair value through other comprehensive income 1,410,271 1,239,941

– treasury and other eligible bills 700,863 612,990

– debt securities 703,459 619,826

– equity securities 5,949 7,125

Debt instruments measured at amortised cost 618,941 509,766

– treasury and other eligible bills 52,758 129,174

– debt securities 566,183 380,592

At 31 Dec 2,029,212 1,749,707

Equity instruments measured at fair value through other comprehensive income

2023 2022

Fair value

Dividends

recognised Fair value

Dividends

recognised

Type of equity instruments

HK$m HK$m HK$m HK$m

Business facilitation 5,435 267 6,615 217

Investments required by central institutions 400 5 404 3

Others 114 — 106 —

At 31 Dec 5,949 272 7,125 220

Assets pledged, assets transferred and collateral received

Assets pledged

Financial assets pledged to secure liabilities

2023 2022

HK$m HK$m

Treasury bills and other eligible securities 119,861 121,131

Loans and advances to banks 3,019 4,372

Loans and advances to customers 17,710 22,512

Debt securities 343,226 149,687

Equity securities 78,246 34,388

Cash collateral included in other assets 118,633 129,025

Assets pledged at 31 Dec 680,695 461,115

Amount of liabilities secured 514,795 354,146

The table above shows assets where a charge has been granted to secure liabilities on a legal and contractual basis. These transactions are

conducted under terms that are usual and customary to collateralised transactions including repurchase agreements, securities lending,

derivative margining, and include assets pledged to cover short positions and to facilitate settlement processes with clearing houses as well as

swaps of equity and debt securities. The group places both cash and non-cash collateral in relation to derivative transactions.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 117

Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates of

indebtedness are held.

Financial assets pledged as collateral which the counterparty has the right to sell or repledge was HK$373,138m (2022: HK$193,461m).

Assets transferred

Transferred financial assets not qualifying for full derecognition and associated financial liabilities

2023 2022

Carrying amount of: Carrying amount of:

Transferred

assets

Associated

liabilities

Transferred

assets

Associated

liabilities

HK$m HK$m HK$m HK$m

Repurchase agreements 364,502 330,073 167,260 151,677

Securities lending agreements 87,227 1,187 70,036 3,644

451,729 331,260 237,296 155,321

The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities

held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements, as well as

swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to be recognised in full while a related

liability, reflecting the group’s obligation to repurchase the assets for a fixed price at a future date, is also recognised on the balance sheet.

Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral

received is not recognised on the balance sheet. The group is unable to use, sell or pledge the transferred assets for the duration of the

transaction, and remains exposed to interest rate risk and credit risk on these pledged assets.

Collateral received

Assets accepted as collateral relate primarily to standard securities borrowing, reverse repurchase agreements, swaps of securities and

derivative margining. The group is obliged to return equivalent securities. These transactions are conducted under terms that are usual and

customary to standard securities borrowing, reverse repurchase agreements and derivative margining.

Fair value of collateral accepted as security for assets

2023 2022

HK$m HK$m

Fair value of collateral permitted to sell or repledge in the absence of default 1,307,234 1,337,822

Fair value of collateral actually sold or repledged 482,415 520,756

Investments in subsidiaries

Main subsidiaries of the Bank

Place of incorporation Principal activity

The group’s interest in

issued share capital/

registered or charter

capital

Hang Seng Bank Limited

Hong Kong Banking 62.14%

HSBC Bank (China) Company Limited mainland China Banking 100%

HSBC Bank Malaysia Berhad Malaysia Banking 100%

HSBC Bank Australia Limited

Australia Banking 100%

HSBC Bank (Taiwan) Limited

Taiwan Banking 100%

HSBC Bank (Singapore) Limited Singapore Banking 100%

HSBC Life (International) Limited

Bermuda

Retirement benefits and

life insurance

100%

1 In addition to the strategic holding disclosed above, the group held 0.09% (2022: 0.07%) shareholding as part of its trading books.

2 Held indirectly.

All of the above subsidiaries are included in the group’s consolidated financial statements. These subsidiaries make their financial statements up

to 31 December.

The principal places of business are the same as the places of incorporation except for HSBC Life (International) Limited which operates mainly

in Hong Kong.

The proportion of voting rights held is the same as the proportion of ownership interest held.

The main subsidiaries are regulated banking and insurance entities in the Asia-Pacific region and, as such, are required to maintain certain

minimum levels of capital and liquid assets to support their operations. The effect of these regulatory requirements is to limit the extent to

which the subsidiaries may transfer funds to the Bank in the form of repayment of shareholder loans or cash dividends.

Notes on the Consolidated Financial Statements

118 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Subsidiary with significant non-controlling interest

2023 2022

HK$m HK$m

Hang Seng Bank Limited

Proportion of ownership interests and voting rights held by non-controlling interests (%)

37.86 37.86

Profit attributable to non-controlling interests 6,730 4,264

Accumulated non-controlling interests of the subsidiary 59,115 56,121

Dividends paid to non-controlling interests 3,836 2,823

Summarised financial information (before intra-group eliminations):

– total assets 1,692,094 1,854,446

– total liabilities 1,523,910 1,694,448

– net operating income before change in expected credit losses and other credit impairment charges 40,789 34,291

– profit for the year 17,838 11,272

– other comprehensive income/(expense) for the year, net of tax 1,215 (2,316)

– total comprehensive income for the year 19,053 8,956

1 Includes the group's shareholding held 0.09% (2022: 0.07%) as part of its trading books.

Interests in associates and joint ventures

Associates and joint ventures

2023 2022

HK$m HK$m

Share of net assets 190,479 182,137

Goodwill originally arising on acquisition 3,713 3,815

Impairment (23,986) (54)

At 31 Dec 170,206 185,898

As 31 December 2023, the group’s interests in associates amounted to HK$170,196m (2022: HK$185,888m).

Principal associate

Place of incorporation The group’s interest in issued share capital

Bank of Communications Co., Ltd mainland China 19.03%

Bank of Communications Co., Ltd. is listed on recognised stock exchanges. The fair value represents valuation based on the quoted market

price of the shares held (Level 1 in the fair value hierarchy) and amounted to HK$68,841m at 31 December 2023 (2022: HK$63,469m).

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

We maintain a 19.03% interest in BoCom. The group’s investment in BoCom is classified as an associate. Significant influence in BoCom was

established with consideration of all relevant factors, including representation on BoCom’s Board of Directors and participation in a resource and

experience sharing agreement (‘RES’). Under the RES, HSBC staff have been seconded to assist in the maintenance of BoCom’s financial and

operating policies. Investments in associates are recognised using the equity method of accounting in accordance with HKAS 28, whereby the

investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the group’s share of associate’s net assets.

An impairment test is required if there is any indication of impairment.

Impairment testing

The fair value of the group’s investment in BoCom had been below the carrying value for approximately twelve years. We have previously

disclosed that the excess of the value in use ('VIU') calculation over its balance sheet value has been marginal in recent years, and that

reasonably possible changes in assumptions could generate an impairment.

Recent macroeconomic, policy and industry-wide factors resulted in a wider range of possible VIU calculation outcomes, and our VIU calculation

uses both historical experience and market participant views to estimate future cash flows, relevant discount rates and associated capital

assumptions.

At 31 December 2023, the group performed an impairment test on the carrying value, which resulted in an impairment of HK$24.0bn, as the

recoverable amount as determined by a VIU calculation was lower than the carrying value.

31 Dec 2023 31 Dec 2022

VIU

Carrying

value

Fair

value VIU

Carrying

value

Fair

value

HK$bn HK$bn HK$bn HK$bn HK$bn HK$bn

BoCom 166.2 166.2 68.8 183.0 182.3 63.5

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 119

The impairment test will be updated in future periods, reflecting updated assumptions in the VIU impairment calculation. Going forward, the

carrying value will be aligned to the updated VIU calculation and capped at carrying value that would have been determined had no impairment

loss been recognised, rather than at cost and adjusted thereafter for the post-acquisition change in the group’s share of associate’s net assets,

and therefore there is a risk of reversals or further impairments in future periods.

The VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are described below and are

based on factors observed at period-end. The factors that could result in increases or reductions in the VIU include changes in BoCom’s short-

term performance, a change in regulatory capital requirements or revisions to the forecast of BoCom’s future profitability.

If the group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying value.

Basis of recoverable amount

The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying value.

The VIU calculation uses discounted cash flow projections based on management’s best estimates of future earnings available to ordinary

shareholders prepared in accordance with HKAS 36. Significant management judgement is required in arriving at the best estimate.

There are two main components to the VIU calculation. The first component is management’s best estimate of BoCom’s earnings. Forecast

earnings growth over the short to medium term is lower than recent (within the last five years) actual growth and reflects the impact of recent

macroeconomic, policy and industry factors in mainland China. As a result of management's intent to continue to retain its investment, earnings

beyond the short to medium term are then extrapolated into perpetuity using a long-term growth rate to derive a terminal value, which

comprises the majority of the VIU. The second component is the capital maintenance charge (‘CMC’), which is management’s forecast of the

earnings that need to be withheld in order for BoCom to meet capital requirements over the forecast period, meaning that CMC is deducted

when arriving at management’s estimate of future earnings available to ordinary shareholders. The CMC reflects the revised capital

requirements arising from revisions of the ratio of risk-weighted assets to total assets assumption. The principal inputs to the CMC calculation

include estimates of asset growth, the ratio of risk-weighted assets to total assets and the expected capital requirements. An increase in the

CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other qualitative factors, to ensure

that the inputs to the VIU calculation remain appropriate.

Key assumptions in value in use calculation

We used a number of assumptions in our VIU calculation, in accordance with the requirements of HKAS 36:

– Long-term profit growth rate: 3% (2022: 3%) for periods after 2027, which does not exceed forecast GDP growth in mainland China and is

similar to forecasts by external analysts.

– Long-term asset growth rate: 3% (2022: 3%) for periods after 2027, which is the rate that assets are expected to grow to achieve long-term

profit growth of 3%.

– Discount rate: 9.00% (2022: 10.04%), which is based on a capital asset pricing model (‘CAPM’), using market data. The discount rate used is

within the range of 7.9% to 9.7% (2022: 8.4% to 10.4%) indicated by the CAPM, and decreased as a consequence of a market driven

reduction in beta. While the CAPM range sits at the lower end of the range adopted by selected external analysts of 8.8% to 13.5% (2022:

8.8% to 13.5%), we continue to regard the CAPM range as the most appropriate basis for determining this assumption.

– Expected credit losses ('ECL') as a percentage of loans and advances to customers: ranges from 0.80% to 0.97% (2022: 0.99% to 1.05%) in

the short to medium term, reflecting reported credit experience in mainland China. For periods after 2027, the ratio is 0.97% (2022: 0.97%),

which is higher than BoCom’s average ECL as a percentage of loans and advances to customers in recent years prior to the pandemic.

– Risk-weighted assets as a percentage of total assets: ranges from 62.0% to 63.7% (2022: 61.0% to 64.4%) in the short to medium term,

reflecting higher risk-weights in the short term followed by an expected reversion to recent historical levels. For periods after 2027, the ratio

is 62.0% (2022: 61.0%), which is similar to BoCom’s actual results in recent years.

– Loans and advances to customers growth rate: ranges from 9.0% to 10.0% (2022: 7.1% to 11.0%) in the short to medium term, reflecting

higher growth rate in loans and advances to customers as a result of recent macroeconomic, policy and industry factors in mainland China.

Increases in the forecast growth rate of loans and advances to customers results in higher forecast ECL.

– Operating income growth rate: ranges from -0.4% to 9.7% (2022: 1.9% to 7.7%) in the short to medium term, which is lower than BoCom’s

actual results in recent years, and is impacted by projections of net interest income in the short term as a consequence of recent

macroeconomic, policy and industry factors in mainland China.

– Cost-income ratio: ranges from 35.5% to 39.8% (2022: 35.5% to 36.3%) in the short to medium term. These ratios are higher than BoCom's

actual results in recent years and forecasts disclosed by external analysts.

– Effective tax rate (‘ETR’): ranges from 5.3% to 15.0% (2022: 4.4% to 15.0%) in the short to medium term, reflecting BoCom’s actual results

and an expected increase towards the long-term assumption through the forecast period. For periods after 2027, the rate is 15.0% (2022:

15.0%), which is higher than the recent historical average, and aligned to the minimum tax rate as proposed by the OECD/Group of 20

('G20') Inclusive Framework on Base Erosion and Profit Shifting.

– Capital requirements: capital adequacy ratio of 12.5% (2022: 12.5%) and tier 1 capital adequacy ratio of 9.5% (2022: 9.5%), based on

BoCom’s capital risk appetite and capital requirements respectively.

The following table further illustrates the impact on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of the

VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable change may occur at the same

time. Loans and advances to customers growth rate has been added to the list of key assumptions detailed in the table to reflect the greater

potential variability associated with the assumption as a result of recent macroeconomic, policy and industry factors in mainland China. The

selected rates of reasonably possible changes to key assumptions are based on external analysts’ forecasts, statutory requirements and other

relevant external data sources, which can change period to period. Unless specified, favourable and unfavourable changes are consistently

applied throughout short-to-medium and long term forecast years, based on a straight-line average of the base case assumption.

Notes on the Consolidated Financial Statements

120 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Sensitivity of VIU to reasonably possible changes in key assumptions

Favourable change Unfavourable change

Increase in

VIU VIU

Decrease

in VIU VIU

bps HK$bn HK$bn bps HK$bn HK$bn

At 31 December 2023

Long-term profit growth rate

58 25.2 191.4 (79) (27.3) 138.9

Long-term asset growth rate

(79) 34.9 201.1 58 (31.7) 134.5

Discount rate (110) 34.5 200.7 280 (48.4) 117.8

Expected credit losses as a percentage of loans and advances

to customers

2023 to 2027: 78

2028 onwards: 91

22.1 188.3

2023 to 2027: 120

2028 onwards: 104

(34.8) 131.4

Risk-weighted assets as a percentage of total assets (150) 6.2 172.4 216 (12.8) 153.4

Loans and advances to customers growth rate (213) 24.6 190.8 207 (23.4) 142.8

Operating income growth rate 57 19.7 185.9 (81) (20.7) 145.5

Cost-income ratio (212) 5.3 171.5 99 (23.4) 142.8

Long-term effective tax rate (426) 12.0 178.2 1,000 (28.1) 138.1

Capital requirements – capital adequacy ratio — — 166.2 215 (59.5) 106.7

Capital requirements – tier 1 capital adequacy ratio — — 166.2 248 (29.2) 137.0

At 31 December 2022

Long-term profit growth rate

75 28.1 211.1 (71) (21.1) 161.9

Long-term asset growth rate

(71) 24.2 207.2 75 (31.8) 151.2

Discount rate (164) 54.3 237.3 136 (28.7) 154.3

Expected credit losses as a percentage of loans and advances

to customers

2022 to 2026: 95

2027 onwards: 91

14.9 197.9

2022 to 2026: 120

2027 onwards: 104

(22.5) 160.5

Risk-weighted assets as a percentage of total assets (118) 0.6 183.6 239 (17.5) 165.5

Loans and advances to customers growth rate (75) 8.9 191.9 295 (24.7) 158.3

Operating income growth rate 44 10.5 193.5 (83) (19.3) 163.7

Cost-income ratio (122) 8.1 191.1 174 (16.5) 166.5

Long-term effective tax rate (426) 11.8 194.8 1,000 (27.7) 155.3

Capital requirements – capital adequacy ratio — — 183.0 191 (48.8) 134.2

Capital requirements – tier 1 capital adequacy ratio — — 183.0 266 (24.8) 158.2

1 The favourable and unfavourable ranges of the long-term profit growth rate and long-term asset growth rate assumptions reflect the close relationship

between these assumptions, which would result in offsetting changes to each assumption.

Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is

HK$102.3bn to HK$225.2bn (2022: HK$131.9bn to HK$223.9bn), acknowledging that the fair value of the group’s investment has ranged from

HK$52.6bn to HK$90.9bn over the last five years as at the date of the impairment tests. The possible range of VIU is based on impacts set out

in the table above arising from the favourable/unfavourable change in the earnings in the short to medium term, the long-term expected credit

losses as a percentage of loans and advances to customers and a 50bps increase/decrease in the discount rate. All other long-term

assumptions, and the basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU.

Selected financial information of BoCom

The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2023, the group included the associate’s

results on the basis of financial statements made up for the 12 months to30 September 2023, but taking into account the financial effect of

known significant transactions or events in the period from 1 October 2023 to 31 December 2023.

Selected balance sheet information of BoCom

At 30 Sep At 31 Dec

2023 2022

HK$m HK$m

Cash and balances with central banks 881,237 911,654

Due from and placements with banks and other financial institutions 784,860 780,826

Loans and advances to customers 8,496,811 8,069,782

Other financial assets 4,593,262 4,551,920

Other assets 465,521 383,391

Total assets 15,221,691 14,697,573

Due to and placements from banks and other financial institutions 2,281,718 2,301,346

Deposits from customers 9,504,593 8,989,936

Other financial liabilities 1,962,818 1,942,935

Other liabilities 287,310 289,638

Total liabilities 14,036,439 13,523,855

Total equity 1,185,252 1,173,718

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 121

Reconciliation of BoCom’s net assets to carrying amount in the group’s consolidated financial statements

At 30 Sep

2023 2022

HK$m HK$m

The group’s share of ordinary shareholders' equity 186,578 178,526

Goodwill originally arising on acquisition 3,626 3,728

Impairment (23,955) —

Carrying amount 166,249 182,254

Selected income statement information of BoCom

For the 9 months ended 30 Sep

2023 2022

HK$m HK$m

Net interest income 137,151 148,814

Net fee and commission income 37,695 40,572

Credit and impairment losses (53,514) (59,834)

Depreciation and amortisation (15,474) (13,975)

Tax expense (4,321) (3,415)

– profit for the year 76,993 79,102

– other comprehensive income/(expense) 4,942 (292)

Total comprehensive income 81,935 78,810

Dividends received from BoCom 5,762 5,881

Using the latest period for which BoCom has disclosed this information (at 30 June 2023), the group's share of associate's contingent liabilities was

HK$463,564m (2022: HK$442,884m).

Goodwill and intangible assets

Goodwill and intangible assets include goodwill arising on business combinations and other intangible assets.

2023 2022

HK$m HK$m

Goodwill 6,817 6,795

Other intangible assets

32,106 30,068

At 31 Dec 38,923 36,863

1 Included within other intangible assets is internally generated software with a net carrying value of HK$29,370m (2022: HK$27,209m). During the year,

capitalisation of internally generated software was HK$9,391m (2022: HK$11,570m), the amortisation charge was HK$6,922m (2022: HK$5,495m) and

the impairment charge was HK$122m (2022: HK$332m).

Property, plant and equipment

2023 2022

HK$m HK$m

Owned property, plant and equipment

123,301 123,491

Other right-of-use assets 6,374 7,435

At 31 Dec 129,675 130,926

1 Included leasehold land and buildings of HK$112,308m (2022: HK$112,591m) for which the right of use are considered sufficient to constitute control.

They are therefore presented as owned assets.

Notes on the Consolidated Financial Statements

122 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Movement in owned property, plant and equipment

2023 2022

Land and

buildings

Investment

properties Equipment Total

Land and

buildings

Investment

properties Equipment Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Cost or valuation

At 1 Jan 101,427 16,199 16,659 134,285 102,367 13,465 15,747 131,579

Exchange and other adjustments (326) (13) (52) (391) (797) 8 (661) (1,450)

Additions 674 57 1,705 2,436 3,183 324 2,253 5,760

Disposals (22) — (1,087) (1,109) (55) — (680) (735)

Transfers — — — — — — — —

Elimination of accumulated depreciation on

revalued land and buildings

(5,723) — — (5,723) (5,105) — — (5,105)

Surplus/(deficit) on revaluation 5,330 (35) — 5,295 4,683 (133) — 4,550

Reclassifications (89) 3 (10) (96) (2,849) 2,535 — (314)

At 31 Dec 101,271 16,211 17,215 134,697 101,427 16,199 16,659 134,285

Accumulated depreciation

At 1 Jan 91 — 10,703 10,794 87 — 10,420 10,507

Exchange and other adjustments (5) — (29) (34) (42) — (496) (538)

Charge for the year 5,876 — 1,485 7,361 5,151 — 1,399 6,550

Disposals (6) — (996) (1,002) — — (620) (620)

Transfers — — — — — — — —

Elimination of accumulated depreciation on

revalued land and buildings

(5,723) — — (5,723) (5,105) — — (5,105)

At 31 Dec 233 — 11,163 11,396 91 — 10,703 10,794

Net book value at 31 Dec 101,038 16,211 6,052 123,301 101,336 16,199 5,956 123,491

The carrying amount of land and buildings, had they been stated at cost less accumulated depreciation, would have been as follows:

2023 2022

HK$m HK$m

Cost less accumulated depreciation 18,297 18,584

Valuation of land and buildings and investment properties

The group’s land and buildings and investment properties were revalued as at 31December 2023. The basis of valuation for land and buildings

and investment properties was open market value. The resultant values are Level 3 in the fair value hierarchy. The fair values for land and

buildings are determined by using a direct comparison approach which values the properties in their respective existing states and uses,

assuming sale with immediate vacant possession and by making reference to comparable sales evidence. The valuations take into account the

characteristics of the properties (unobservable inputs) which include the location, size, shape, view, floor level, year of completion and other

factors collectively. The premium or discount applied to the characteristics of the properties is within minus 20% and plus 20%. In determining

the open market value of investment properties, expected future cash flows have been discounted to their present values. The net book value

of ‘Land and buildings’ includes HK$7,253m (2022: HK$6,839m) in respect of properties which were valued using the depreciated replacement

cost method.

Valuation of land and buildings and investment properties in Hong Kong, Macau and mainland China were largely carried out by Cushman &

Wakefield Limited, who have recent experience in the location and type of properties and who are members of the Hong Kong Institute of

Surveyors. This represents 93% by value of the group’s properties subject to valuation. Other properties were valued by different independent

professionally qualified valuers.

Prepayments, accrued income and other assets

2023 2022

HK$m HK$m

Prepayments and accrued income 42,613 32,314

Bullion 52,544 50,253

Acceptances and endorsements 53,389 57,118

Insurance contract assets 1,092 345

Reinsurance contract assets 36,214 32,863

Current tax assets 2,145 2,144

Settlement accounts 54,756 38,607

Cash collateral and margin receivables 78,194 94,847

Other assets 50,044 40,637

At 31 Dec 370,991 349,128

Prepayments, accrued income and other assets included HK$275,917m (2022: HK$260,616m) of financial assets, the majority of which were

measured at amortised cost.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 123

Customer accounts

Customer accounts by country/territory

2023 2022

HK$m HK$m

Hong Kong 4,246,041 4,229,531

Singapore 574,574 479,241

Mainland China 437,542 443,954

Australia 250,550 222,222

India 190,439 176,466

Malaysia 123,487 124,792

Taiwan 132,410 119,400

Indonesia 43,744 45,529

Other 262,264 272,574

At 31 Dec 6,261,051 6,113,709

Trading liabilities

2023 2022

HK$m HK$m

Net short positions in securities 70,592 80,564

Repurchase agreements and other similar secured lending 32,360 61,404

Customer accounts 98 485

At 31 Dec 103,050 142,453

Financial liabilities designated at fair value

2023 2022

HK$m HK$m

Deposits by banks and customer accounts 89,604 89,258

Debt securities in issue 51,239 45,454

Liabilities to customers under investment contracts 29,885 33,031

At 31 Dec 170,728 167,743

The carrying amount of financial liabilities designated at fair value was HK$456m higher than the contractual amount at maturity

(2022:HK$370m lower). The cumulative gain in fair value attributable to changes in credit risk was HK$45m (2022: HK$138m gain).

Debt securities in issue

2023 2022

HK$m HK$m

Bonds and medium-term notes 83,903 78,537

Other debt securities in issue 55,081 67,826

Total debt securities in issue 138,984 146,363

Included within:

– financial liabilities designated at fair value (Note 20) (51,239) (45,454)

At 31 Dec 87,745 100,909

Notes on the Consolidated Financial Statements

124 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Accruals and deferred income, other liabilities and provisions

2023 2022

HK$m HK$m

Accruals and deferred income 49,176 34,698

Acceptances and endorsements 53,441 57,210

Settlement accounts 32,951 33,552

Cash collateral and margin payables 50,461 58,964

Reinsurance contract liabilities 6,079 5,518

Share-based payment liability to HSBC Holdings plc 1,883 1,564

Lease liabilities 6,830 7,850

Other liabilities

55,259 45,347

Provisions for liabilities and charges 2,033 1,911

At 31 Dec 258,113 246,614

1 Mainly includes marginal deposit on letter of credit and credit card settlement account.

Accruals and deferred income, other liabilities and provisions included HK$239,779m (2022: HK$228,240m) of financial liabilities which were

measured at amortised cost.

Movement in provisions

Restructuring

costs Other Total

Provisions (excluding contractual commitments)

HK$m HK$m HK$m

At 31 Dec 2022 271 481 752

Additions 204 298 502

Amounts utilised (188) (148) (336)

Unused amounts reversed (102) (31) (133)

Exchange and other movements 1 (2) (1)

At 31 Dec 2023 186 598 784

Contractual commitments

At 31 Dec 2022 1,159

Net change in expected credit loss provision and other movements 90

At 31 Dec 2023 1,249

Total Provisions at 31 Dec 2023 2,033

At 31 Dec 2021 148 466 614

Additions 468 243 711

Amounts utilised (307) (174) (481)

Unused amounts reversed (35) (84) (119)

Exchange and other movements (3) 30 27

At 31 Dec 2022 271 481 752

Contractual commitments

At 31 Dec 2021 785

Net change in expected credit loss provision and other movements 374

At 31 Dec 2022 1,159

Total Provisions at 31 Dec 2022 1,911

1 Contractual commitments include provisions for contingent liabilities measured under HKFRS 9 ‘Financial Instruments’ in respect of financial

guarantees and expected credit loss provisions in relation to off-balance sheet guarantees and commitments.

Subordinated liabilities

2023 2022

HK$m HK$m

US$400m Undated floating rate primary capital notes

— 3,119

At 31 Dec — 3,119

1 Subordinated liabilities to Group entities are not included in the above table.

2 The undated floating rate primary capital notes were called in July 2023.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 125

Share capital

2023 2022

HK$m HK$m

Paid up share capital in HK$ 123,949 123,949

Paid up share capital in US$

56,232 56,232

At 31 Dec 180,181 180,181

Ordinary shares issued and fully paid

2023 2022

HK$m Number HK$m Number

At 1 Jan 180,181 49,579,391,798 172,335 46,440,991,798

Shares issued during the year — — 7,846 3,138,400,000

At 31 Dec 180,181 49,579,391,798 180,181 49,579,391,798

1 Paid up share capital in US$ represents preference shares which were redeemed or bought back via payment out of distributable profits and for which

the amount was transferred from retained earnings to share capital in accordance with the requirements of the Companies Ordinance.

There were no new ordinary shares issued during 2023 (2022: 3,138.4m). The holder of the ordinary shares is entitled to receive dividends as

declared from time to time, rank equally with regard to the Bank’s residual assets and are entitled to one vote per share at shareholder meetings

of the Bank.

Other equity instruments

Other equity instruments comprise additional tier 1 capital instruments in issue which are accounted for as equity.

2023 2022

HK$m HK$m

US$1,000m Fixed rate perpetual subordinated loan, callable from Mar 2025

7,834 7,834

US$900m Fixed rate perpetual subordinated loan, callable from Sep 2026

7,063 7,063

US$700m Fixed rate perpetual subordinated loan, callable from Mar 2025

5,467 5,467

US$500m Fixed rate perpetual subordinated loan, callable from Mar 2025

3,905 3,905

US$600m Fixed rate perpetual subordinated loan, callable from May 2027

4,685 4,685

US$900m Fixed rate perpetual subordinated loan, callable from Sep 2024

7,044 7,044

US$1,100m Fixed rate perpetual subordinated loan, callable from Jun 2024

8,617 8,617

US$1,000m Floating rate perpetual subordinated loan, callable from May 2027

— 7,771

US$1,000m Fixed rate perpetual subordinated loan, callable from Mar 2028

7,850 —

At 31 Dec 52,465 52,386

1 Interest rate fixed at 6.090%.

2 Interest rate fixed at 6.510%.

3 Interest rate fixed at 6.172%.

4 Interest rate fixed at 5.910%.

5 Interest rate fixed at 6.030%.

6 Interest rate fixed at 6.000%.

7 This subordinated loan was early repaid in the first half of 2023.

8 Interest rate fixed at 8.000%.

The additional tier 1 capital instruments above are held by HSBC Asia Holdings Limited. These are perpetual subordinated loans on which

coupon payments may be cancelled at the sole discretion of the Bank. The subordinated loans will be written down at the point of non-viability

on the occurrence of a trigger event as defined in the Banking (Capital) Rules. They rank higher than ordinary shares in the event of a wind-up.

Maturity analysis of assets and liabilities

The following tables provide an analysis of consolidated total assets and liabilities by residual contractual maturity at the balance sheet date.

These balances are included in the maturity analysis as follows:

– Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are included in the

‘Due not more than 1 month’ time bucket, because trading balances are typically held for short periods of time.

– Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the ‘Due over 5years’ time bucket.

Undated or perpetual instruments are classified based on the contractual notice period which the counterparty of the instrument is entitled to

give. Where there is no contractual notice period, undated or perpetual contracts are included in the ‘Dueover 5 years’ time bucket.

– Financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual

maturity of the underlying instruments and not on the basis of the disposal transaction.

– Non-financial assets and liabilities with no contractual maturity are included in the ‘Due over 5 years’ time bucket.

– Insurance contract liabilities included in ‘non-financial liabilities’ are, irrespective of contractual maturity, included in the ‘Due over 5 years’

time bucket in the maturity table provided below. An analysis of the expected maturity of insurance contract liabilities based on discounted

cash flows is provided on page 107. Liabilities under investment contracts areclassified in accordance with their contractual maturity.

Undated investment contracts are included in the ‘Due over 5 years’ time bucket, however, such contracts are subject to surrender and

transfer options by the policyholders.

Notes on the Consolidated Financial Statements

126 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Maturity analysis of assets and liabilities

Due not

than

1 month

Due over

1 month

but not

than

3 months

Due over

3 months

but not

than

6 months

Due over

6 months

but not

than

9 months

Due over

9 months

but not

than

1 year

Due over

1 year

but

not more

than 2

years

Due over

2 years

but

not more

than 5

years

Due over

5 years Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Financial assets

Cash and balances at central banks 232,987 — — — — — — — 232,987

Items in the course of collection from other

banks

22,049 — — — — — — — 22,049

Hong Kong Government certificates of

indebtedness

328,304 — — — — — — — 328,304

Trading assets 936,087 4,606 246 311 — — — — 941,250

Derivatives 401,888 995 1,030 528 243 2,135 1,592 842 409,253

Financial assets designated and otherwise

mandatorily measured at fair value through

profit or loss

10,922 4,784 4,567 3,532 3,942 34,442 90,413 554,971 707,573

Reverse repurchase agreements – non-

trading

535,819 160,830 76,520 23,052 9,977 24,755 233 — 831,186

Loans and advances to banks 326,805 135,883 33,392 19,308 20,237 19,192 8,984 — 563,801

Loans and advances to customers 532,822 334,021 279,076 212,426 160,823 389,969 540,929 1,107,010 3,557,076

Financial investments 252,730 411,275 278,073 87,712 91,225 236,575 488,372 183,250 2,029,212

Amounts due from Group companies 68,894 35,486 6,440 3,395 3,674 25,877 2,350 1 146,117

Accrued income and other financial assets 203,363 39,520 23,853 2,990 3,119 709 918 1,445 275,917

Financial assets at 31 Dec 2023 3,852,670 1,127,400 703,197 353,254 293,240 733,654 1,133,791 1,847,519 10,044,725

Non-financial assets — — — — — — — 455,668 455,668

Total assets at 31 Dec 2023 3,852,670 1,127,400 703,197 353,254 293,240 733,654 1,133,791 2,303,187 10,500,393

Financial liabilities

Hong Kong currency notes in circulation 328,304 — — — — — — — 328,304

Items in the course of transmission to other

banks

27,536 — — — — — — — 27,536

Repurchase agreements – non-trading 494,630 18,078 5,392 2,344 1,540 — — — 521,984

Deposits by banks 165,535 954 14,988 537 132 — — — 182,146

Customer accounts 4,768,955 805,337 467,986 92,664 59,839 37,514 28,749 7 6,261,051

Trading liabilities 100,324 2,726 — — — — — — 103,050

Derivatives 448,517 60 50 66 278 267 488 490 450,216

Financial liabilities designated at fair value 47,717 30,532 20,425 8,748 7,702 16,845 8,781 29,978 170,728

Debt securities in issue 5,244 4,824 19,662 11,492 5,897 16,443 20,668 3,515 87,745

Amounts due to Group companies 186,851 17,171 1,653 77 174 9,666 117,754 131,907 465,253

Accruals and other financial liabilities 140,199 50,862 28,258 5,046 4,256 3,924 5,475 1,759 239,779

Subordinated liabilities

— — — — — — — — —

Total financial liabilities at 31 Dec 2023 6,713,812 930,544 558,414 120,974 79,818 84,659 181,915 167,656 8,837,792

Non-financial liabilities — — — — — — — 790,015 790,015

Total liabilities at 31 Dec 2023 6,713,812 930,544 558,414 120,974 79,818 84,659 181,915 957,671 9,627,807

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 127

Maturity analysis of assets and liabilities (continued)

Due not

than1

month

Due over

1 month

but not

more than

3 months

Due over

3 months

but not

more than

6 months

Due over

6 months

but not

more than

9 months

Due over

9 months

but not

more than

1 year

Due over

1 year but

not more

than 2

years

Due over

2 years

but not

more than

5 years

Due over

5 years Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Financial assets

Cash and balances at central banks 232,740 — — — — — — — 232,740

Items in the course of collection from other

banks

28,557 — — — — — — — 28,557

Hong Kong Government certificates of

indebtedness

341,354 — — — — — — — 341,354

Trading assets 691,744 1,764 3,089 — 163 3,045 — — 699,805

Derivatives 495,891 691 205 142 474 1,840 2,556 1,078 502,877

Financial assets designated and otherwise

mandatorily measured at fair value through

profit or loss

9,876 5,486 10,123 4,922 4,251 13,597 101,560 503,215 653,030

Reverse repurchase agreements – non-trading 585,333 256,887 54,039 7,679 7,172 13,402 3,464 — 927,976

Loans and advances to banks 321,798 99,242 39,386 5,973 13,563 16,445 19,440 — 515,847

Loans and advances to customers 567,448 370,158 300,760 151,447 146,744 441,127 631,192 1,086,192 3,695,068

Financial investments 309,588 511,786 128,596 67,945 69,423 208,325 302,114 151,930 1,749,707

Amounts due from Group companies 101,287 4,646 4,356 716 2,419 10,236 7,729 19 131,408

Accrued income and other financial assets 191,474 38,366 21,515 3,864 3,573 767 675 382 260,616

Financial assets at 31 Dec 2022 3,877,090 1,289,026 562,069 242,688 247,782 708,784 1,068,730 1,742,816 9,738,985

Non-financial assets — — — — — — — 458,858 458,858

Total assets at 31 Dec 2022 3,877,090 1,289,026 562,069 242,688 247,782 708,784 1,068,730 2,201,674 10,197,843

Financial liabilities

Hong Kong currency notes in circulation 341,354 — — — — — — — 341,354

Items in the course of transmission to other

banks

33,073 — — — — — — — 33,073

Repurchase agreements – non-trading 335,467 2,173 2,557 — 5,027 5,869 — — 351,093

Deposits by banks 193,147 1,249 3,513 811 176 12 — — 198,908

Customer accounts 5,050,054 540,611 304,705 81,349 85,465 22,028 29,490 7 6,113,709

Trading liabilities 142,432 21 — — — — — — 142,453

Derivatives 550,725 4 62 60 157 175 489 57 551,729

Financial liabilities designated at fair value 35,661 35,229 12,142 10,593 8,957 20,585 11,436 33,140 167,743

Debt securities in issue 13,723 13,266 24,251 13,388 1,054 9,674 22,382 3,171 100,909

Amounts due to Group companies 129,641 12,841 808 272 304 70,332 49,935 133,987 398,120

Accruals and other financial liabilities 139,464 43,325 22,513 5,099 6,601 4,904 5,228 1,106 228,240

Subordinated liabilities

— — — — — — — 3,119 3,119

Financial liabilities at 31 Dec 2022 6,964,741 648,719 370,551 111,572 107,741 133,579 118,960 174,587 8,630,450

Non-financial liabilities — — — — — — — 703,013 703,013

Total liabilities at 31 Dec 2022 6,964,741 648,719 370,551 111,572 107,741 133,579 118,960 877,600 9,333,463

1 The maturity for subordinated liabilities is based on the earliest date on which the group is required to pay, i.e. the callable date.

Notes on the Consolidated Financial Statements

128 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Analysis of cash flows payable under financial liabilities by remaining

contractual maturities

Due not

more than 1

month

Due over 1

month but

not more

than 3

months

Due

between 3

and

12 months

Due

between 1

and 5 years

Due after

5 years Total

HK$m HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2023

Hong Kong currency notes in circulation 328,304 — — — — 328,304

Items in the course of transmission to other banks 27,536 — — — — 27,536

Repurchase agreements – non-trading 495,424 18,281 9,496 — — 523,201

Deposits by banks 166,594 955 15,681 — — 183,230

Customer accounts 4,782,131 817,944 635,862 72,290 48 6,308,275

Trading liabilities 103,050 — — — — 103,050

Derivatives 448,542 46 37 705 530 449,860

Financial liabilities designated at fair value 48,616 31,052 37,555 27,007 30,013 174,243

Debt securities in issue 5,285 5,541 38,620 40,717 3,813 93,976

Amounts due to Group companies 187,263 20,553 10,424 174,035 182,676 574,951

Other financial liabilities 132,291 42,012 30,108 7,581 1,729 213,721

Subordinated liabilities — — — — — —

6,725,036 936,384 777,783 322,335 218,809 8,980,347

Loan and other credit-related commitments 3,411,371 — 545 — — 3,411,916

Financial guarantees 53,483 — — — — 53,483

10,189,890 936,384 778,328 322,335 218,809 12,445,746

Proportion of cash flows payable in period 81% 8% 6% 3% 2%

At 31 Dec 2022

Hong Kong currency notes in circulation 341,354 — — — — 341,354

Items in the course of transmission to other banks 33,073 — — — — 33,073

Repurchase agreements – non-trading 335,951 2,194 7,708 5,877 — 351,730

Deposits by banks 193,748 1,250 4,542 14 — 199,554

Customer accounts 5,053,321 552,623 481,006 55,739 16 6,142,705

Trading liabilities 142,453 — — — — 142,453

Derivatives 551,079 67 253 603 60 552,062

Financial liabilities designated at fair value 37,062 36,310 32,404 33,198 33,170 172,144

Debt securities in issue 13,917 14,305 40,630 34,698 3,400 106,950

Amounts due to Group companies 129,728 14,509 11,198 155,038 170,299 480,772

Other financial liabilities 137,987 40,157 30,306 9,306 1,126 218,882

Subordinated liabilities — 36 108 577 4,561 5,282

6,969,673 661,451 608,155 295,050 212,632 8,746,961

Loan and other credit-related commitments 3,191,864 — — — — 3,191,864

Financial guarantees 41,991 — — — — 41,991

10,203,528 661,451 608,155 295,050 212,632 11,980,816

Proportion of cash flows payable in period 85% 6% 5% 2% 2%

The balances in the above tables incorporate all cash flows relating to principal and future coupon payments on an undiscounted basis. Trading

liabilities and trading derivatives have been included in the ‘On demand’ time bucket as they are typically held for short periods of time. The

undiscounted cash flows payable under hedging derivative liabilities are classified according to their contractual maturity. Investment contract

liabilities have been included in financial liabilities designated at fair value, whereby the policyholders have the options to surrender or transfer at

any time, and are reported in the ‘Due after 5 years’ time bucket. A maturity analysis prepared on the basis of the earliest possible contractual

repayment date (assuming that all surrender and transfer options are exercised) would result in all investment contracts being presented as

falling due within one year or less. The undiscounted cash flows potentially payable under loan commitments and financial guarantee contracts

are classified on the basis of the earliest date they can be called. Cash flows payable in respect of customer accounts are primarily contractually

repayable on demand or at short notice.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 129

Contingent liabilities, contractual commitments and guarantees

2023 2022

HK$m HK$m

Guarantees and contingent liabilities:

– financial guarantees

53,483 41,991

– performance and other guarantees

380,953 354,794

– other contingent liabilities 1,161 1,222

At 31 Dec 435,597 398,007

Commitments

– documentary credits and short-term trade-related transactions 26,908 26,324

– forward asset purchases and forward forward deposits placed 71,708 48,560

– undrawn formal standby facilities, credit lines and other commitments to lend 3,313,300 3,116,980

At 31 Dec 3,411,916 3,191,864

1 Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a specified

debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

2 Performance and other guarantees include re-insurance letters of credit related to particular transactions, trade-related letters of credit issued without

provision for the issuing entity to retain title to the underlying shipment, performance bonds, bid bonds, standby letters of credit and other transaction-

related guarantees.

3 Includes HK$1,978,328m of commitments at 31 December 2023 (2022: HK$1,892,401m) to which the impairment requirements in HKFRS 9 are

applied where the group has become party to an irrevocable commitment.

The above table discloses the nominal principal amounts of commitments (excluding other commitments as disclosed in Note 29), guarantees

and other contingent liabilities, which represent the amounts at risk should contracts be fully drawn upon and clients default. As a significant

proportion of guarantees and commitments are expected to expire without being drawn upon, the total of the nominal principal amounts is not

representative of future liquidity requirements.

It also reflects the group’s maximum exposure under a large number of individual guarantee undertakings. The risks and exposures from

guarantees are captured and managed in accordance with HSBC’s overall credit risk management policies and procedures. Guarantees are

subject to an annual credit review process.

Other contingent liabilities at 31 December 2023 included amounts in relation to legal and regulatory matters as set out in Note 40.

Other commitments

Capital commitments

At 31 December 2023, capital commitments, mainly related to the commitment for purchase of properties, were HK$3,907m (2022:

HK$3,834m).

Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to

offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously (‘the

offset criteria’).

The ‘Amounts not set off in the balance sheet’ include transactions where:

– the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right to set off only

in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and

– cash and non-cash collateral (debt securities and equities) has been received/pledged for derivatives and reverse repurchase/repurchase,

stock borrowing/lending and similar agreements to cover net exposure in the event of default or other predetermined events.

The effect of over-collateralisation is excluded.

‘Amounts not subject to enforceable netting agreements’ include contracts executed in jurisdictions where the rights of set off may not be

upheld under the local bankruptcy laws, and transactions where a legal opinion evidencing enforceability of the right of offset may not have been

sought, or may have been unable to obtain.

For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the

relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains appropriate.

Notes on the Consolidated Financial Statements

130 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Offsetting of financial assets and financial liabilities

Amounts subject to enforceable netting arrangements

Amounts not offset in the

balance sheet

Gross

amounts

Amounts

offset

Net

amounts

reported in

the

balance

sheet

Financial

instruments,

including

non-cash

collateral

Cash

collateral

Net

amount

Amounts

not subject

enforceable

netting

arrange-

ments

Balance

sheet

total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2023

Financial assets

Derivatives 620,134 (235,361) 384,773 (332,456) (28,217) 24,100 24,480 409,253

Reverse repos, stock borrowing and similar

agreements classified as:

– trading assets 66,865 — 66,865 (64,526) (2,323) 16 10,824 77,689

– third party 51,886 — 51,886 (51,620) (266) — 10,824 62,710

– amounts due from Group companies 14,979 — 14,979 (12,906) (2,057) 16 — 14,979

– reverse repurchase agreements - non-trading 887,389 (48,798) 838,591 (838,533) (6) 52 42,442 881,033

– third party 835,167 (46,423) 788,744 (788,688) (6) 50 42,442 831,186

– amounts due from Group companies 52,222 (2,375) 49,847 (49,845) — 2 — 49,847

– financial assets designated and otherwise

mandatorily measured at fair value through profit

or loss

– third party 514 — 514 (514) — — — 514

1,574,902 (284,159) 1,290,743 (1,236,029) (30,546) 24,168 77,746 1,368,489

Financial liabilities

Derivatives 658,545 (235,361) 423,184 (331,004) (52,842) 39,338 27,032 450,216

Repos, stock lending and similar agreements

classified as:

– trading liabilities 32,429 — 32,429 (31,959) — 470 — 32,429

– third party 32,360 — 32,360 (31,890) — 470 — 32,360

– amounts due to Group companies 69 — 69 (69) — — — 69

– repurchase agreements - non-trading 630,963 (48,798) 582,165 (581,584) (10) 571 73,350 655,515

– third party 495,057 (46,423) 448,634 (448,071) (10) 553 73,350 521,984

– amounts due to Group companies 135,906 (2,375) 133,531 (133,513) — 18 — 133,531

1,321,937 (284,159) 1,037,778 (944,547) (52,852) 40,379 100,382 1,138,160

At 31 Dec 2022

Financial assets

Derivatives 795,934 (329,392) 466,542 (397,121) (39,022) 30,399 36,335 502,877

Reverse repos, stock borrowing and similar

agreements classified as:

– trading assets 57,505 — 57,505 (57,273) (227) 5 4,177 61,682

– third party 55,221 — 55,221 (54,994) (227) — 4,177 59,398

– amounts due from Group companies 2,284 — 2,284 (2,279) — 5 — 2,284

– reverse repurchase agreements - non-trading 932,272 (29,470) 902,802 (901,205) (1,597) — 63,031 965,833

– third party 891,131 (26,186) 864,945 (863,840) (1,105) — 63,031 927,976

– amounts due from Group companies 41,141 (3,284) 37,857 (37,365) (492) — — 37,857

– financial assets designated and otherwise

mandatorily measured at fair value through profit

or loss

– third party 1,764 — 1,764 (1,764) — — — 1,764

1,787,475 (358,862) 1,428,613 (1,357,363) (40,846) 30,404 103,543 1,532,156

Financial liabilities

Derivatives 849,566 (329,392) 520,174 (390,421) (70,825) 58,928 31,555 551,729

Repos, stock lending and similar agreements

classified as:

– trading liabilities 61,437 — 61,437 (61,436) (1) — 22 61,459

– third party 61,382 — 61,382 (61,381) (1) — 22 61,404

– amounts due to Group companies 55 — 55 (55) — — — 55

– repurchase agreements - non-trading 403,019 (29,470) 373,549 (373,126) (352) 71 37,064 410,613

– third party 340,215 (26,186) 314,029 (313,747) (256) 26 37,064 351,093

– amounts due to Group companies 62,804 (3,284) 59,520 (59,379) (96) 45 — 59,520

1,314,022 (358,862) 955,160 (824,983) (71,178) 58,999 68,641 1,023,801

1 These exposures continue to be secured by financial collateral, but the group may not have sought or been able to obtain a legal opinion evidencing

enforceability of the offsetting right.

2 Include balances due from Group companies of HK$202,680m (2022: HK$208,343m).

3 Include balances due to Group companies of HK$275,775m (2022: HK$213,726m).

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 131

Segmental analysis

The Executive Committee (‘EXCO’) is considered the Chief Operating Decision Maker ('CODM') for the purpose of identifying the group’s

operating segments. Operating segment results are assessed by the CODM on the basis of performance measured in accordance with

HKFRSs. Although the CODM reviews information on a number of bases, business performance is assessed and capital resources are allocated

by operating segments, and the segmental analysis is presented based on reportable segments as assessed under HKFRS 8 'Operating

Segments'.

Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and

expenses. These allocations include the costs of certain support services and global functions to the extent that they can be meaningfully

attributed to operational business lines and geographical regions. While such allocations have been made on a systematic and consistent basis,

they necessarily involve a degree of subjectivity. Costs which are not allocated to other operating segments are included in the ‘Corporate

Centre’.

Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-

business line transactions. All such transactions are undertaken on arm’s length terms. The intra-group elimination items for the operating

segments are presented in the Corporate Centre.

Our global businesses and reportable segments

The group provides a comprehensive range of banking and related financial services to our customers in our global businesses: Wealth and

Personal Banking (‘WPB’), Commercial Banking (‘CMB’) and Global Banking and Markets ('GBM'). The products and services offered to

customers are organised by these global businesses.

– WPB provides a full range of retail banking and wealth products to our customers from personal banking to ultra high net worth individuals.

Typically, customer offerings include retail banking products, such as current and savings accounts, mortgages and personal loans, credit

cards, debit cards and local and international payment services. We also provide wealth management services, including insurance and

investment products, global asset management services, investment management and Private Wealth Solutions for customers with more

sophisticated and international requirements.

– CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-sized

enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables finance, treasury

management and liquidity solutions (payments and cash management and commercial cards) and investments. CMB also offers its

customers access to products and services offered by other global businesses, such as GBM, which include foreign exchange products,

raising capital on debt and equity markets and advisory services.

– GBM comprises of two separate reportable segments: Global Banking ('GB') and Markets and Securities Services ('MSS'). GB provides

tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused

business lines deliver a full range of banking capabilities including financing, advisory and transaction services. MSS provides services in

credit, rates, foreign exchange, equities, money markets and securities services, and principal investment activities.

– Corporate Centre includes strategic investments such as our investment in BoCom, Central Treasury revenue, and costs which are not

allocated to global businesses, mainly in relation to investments in technology.

– Other (GBM-other) mainly comprises other business activities which are jointly managed by GB and MSS.

Performance by reportable segments is presented in the ‘Financial Review’ on page 19 as specified as 'Audited'.

Information by geographical region

Hong Kong

Rest of

Asia-Pacific

Intra-segment

elimination Total

HK$m HK$m HK$m HK$m

For the year ended 31 Dec 2023

Net operating income before change in expected credit losses and other credit

impairment charges

156,171 93,546 (38) 249,679

Profit before tax 78,765 42,678 — 121,443

At 31 Dec 2023

Total assets 7,485,995 3,977,785 (963,387) 10,500,393

Total liabilities 7,059,770 3,531,424 (963,387) 9,627,807

Credit commitments and contingent liabilities (contract amounts) 1,977,725 1,869,788 — 3,847,513

For the year ended 31 Dec 2022

Net operating income before change in expected credit losses and other credit

impairment charges

117,535 82,358 910 200,803

Profit before tax 42,349 54,338 — 96,687

At 31 Dec 2022

Total assets 7,332,182 3,889,906 (1,024,245) 10,197,843

Total liabilities 6,908,027 3,449,681 (1,024,245) 9,333,463

Credit commitments and contingent liabilities (contract amounts) 1,894,046 1,695,824 — 3,589,870

Notes on the Consolidated Financial Statements

132 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Information by country/territory

Revenue

Non-current assets

For the year ended 31 Dec At 31 Dec

2023 2022 2023 2022

HK$m HK$m HK$m HK$m

Hong Kong 156,171 117,535 140,646 138,717

Mainland China 19,934 20,847 180,166 196,844

Australia 8,886 7,815 1,659 1,691

India 13,773 11,708 2,711 2,426

Indonesia 3,609 3,188 3,253 3,289

Malaysia 6,708 5,790 1,833 1,981

Singapore 18,275 15,193 3,331 3,433

Taiwan 5,038 3,823 2,429 2,473

Other 17,285 14,904 2,775 2,833

Total 249,679 200,803 338,803 353,687

1 Revenue (defined as ‘Net operating income before change in expected credit losses and other impairment charges') is attributable to countries based

on the location of the principal operations of the branch, subsidiary, associate or joint venture.

2 Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures and certain

other assets.

Related party transactions

The group’s related parties include the parent, fellow subsidiaries, associates, joint ventures, post-employment benefit plans for the group’s

employees, Key Management Personnel (‘KMP’) as defined by HKAS 24, close family members of KMP and entities that are controlled or jointly

controlled by KMP or their close family members.

Particulars of transactions with related parties are set out below.

(a) Inter-company

The group is wholly owned by HSBC Asia Holdings Limited, which in turn is a wholly-owned subsidiary of HSBC Holdings plc (incorporated in

England).

The group entered into transactions with its fellow subsidiaries in the normal course of business, including the acceptance and placement of

interbank deposits, correspondent banking transactions and off-balance sheet transactions. The Bank also acted as agent for the distribution of

retail investment funds for fellow subsidiaries and paid professional fees for services provided by fellow subsidiaries.

The group shared the costs of certain IT projects and also used certain processing services of fellow subsidiaries. These costs are reported

under ‘General and administrative expenses – other administrative expenses' in the income statement.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 133

The balances of amounts due to and from the relevant parties at the year end were as follows:

2023 2022

Immediate

holding

company

Ultimate

holding

company

Fellow

subsidiaries

Immediate

holding

company

Ultimate

holding

company

Fellow

subsidiaries

HK$m HK$m HK$m HK$m HK$m HK$m

At 31 Dec

Assets 5 2,655 293,786 24 3,403 305,260

– trading assets

1,5

— 48 14,995 — 33 2,300

– derivative assets — 2 137,852 — 2 168,200

– other assets

1,4,6

5 2,605 140,939 24 3,368 134,760

Liabilities 262,111 2,772 342,768 256,031 3,804 292,577

– trading liabilities

1,7

— 36 72 — — 55

– financial liabilities designated at fair value

1,2

224,073 — 6 183,760 — 6

– derivative liabilities — 2,609 139,566 — 3,677 150,474

– other liabilities

1,4,8

2,811 127 203,022 1,842 64 141,947

– insurance contract liabilities

— —

102 — — 95

– subordinated liabilities

1,3,4

35,227 — — 70,429 63 —

Guarantees — — 27,997 — — 23,289

Commitments — — 925 — — 1,405

1 These balances are presented under ‘Amounts due from/to Group companies’ in the consolidated balance sheet.

2 The balance at 31 December 2023 included capital and loss-absorbing capacity ('LAC') instruments of HK$224,073m (2022: HK$183,760m). During the

year, there were repayment of HK$36,128m (2022: HK$21,512m) and issuance of HK$66,521m (2022: HK$51,579m). The carrying amount of financial

liabilities designated at fair value was HK$3,121m lower than the contractual amount at maturity (2022: HK$13,593m lower). The cumulative loss in

fair value attributable to changes in credit risk was HK$2,917m (2022: HK$3,456m gain). The balances are under Level 2.

3 The balance at 31 December 2023 included subordinated liabilities of HK$35,227m to meet TLAC requirements (2022: HK$70,429m). During the year,

there were repayment of HK$34,962m (2022: no repayment) and no issuance (2022: HK$29,435m).

4 The fair value hierarchy of assets and liabilities at amortised cost are under level 2 and the fair value has no material difference with carrying value.

5 Includes trading reverse repo agreements and other similar secured lending of HK$14,979m (2022: HK$2,284m).

6 Includes non-trading reverse repo agreements and other similar secured lending of HK$49,847m (2022: HK$37,857m).

7 Includes trading repurchase agreements and other similar secured lending of HK$69m (2022: HK$55m).

8 Includes non-trading repurchase agreements and other similar secured lending of HK$133,531m (2022: HK$59,520m).

The group routinely enters into related party transactions with other entities in the Group. These include transactions to facilitate third-party

transactions with customers, transactions for internal risk management, and other transactions relevant to Group processes. These transactions

and the above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and

security, as for comparable transactions with third-party counterparties.

(b) Share option and share award schemes

The group participates in various share option and share plans operated by HSBC whereby share options or shares of HSBC are granted to

employees of the group. The group recognises an expense in respect of these share options and share awards. The cost borne by the ultimate

holding company in respect of share options is treated as a capital contribution and is recorded within ‘Other reserves’. In respect of share

awards, the group recognises a liability to the ultimate holding company over the vesting period. This liability is measured at the fair value of the

shares at each reporting date, with changes since the award dates adjusted through the capital contribution account within ‘Other reserves’. The

balances of the capital contribution and the liability at 31December 2023 amounted to HK$3,091m and HK$1,883m respectively (2022:

HK$3,299m and HK$1,564m respectively).

Notes on the Consolidated Financial Statements

134 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

At 31 December 2023, HK$7.4bn (2022: HK$7.7bn) of the group’s post-employment plan assets were under management by group companies,

earning management fees of HK$58m in 2023 (2022: HK$59m). At 31 December 2023, the group’s post-employment benefit plans had placed

deposits of HK$736m (2022:HK$735m) with its banking subsidiaries, earning interest payable to the schemes of HK$8.8m (2022: HK$1.1m).

The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and

security, as comparable transactions with third-party counterparties.

(d) Associates and joint ventures

The group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-interest

bearing deposits and current accounts. Details of interests in associates and joint ventures are set out in Note 14.

The disclosure of the year-end balance and the highest amounts outstanding during the year is considered to be the most meaningful

information to represent the amount of transactions and outstanding balances during the year.

Transactions and balances during the year with associates and joint ventures

2023 2022

Highest

balance during

the year

Balance at

31 December

Highest

balance during

the year

Balance at

31 December

HK$m

Amounts due from associates – unsubordinated 61,769 46,173 57,513 51,402

Amounts due to associates 23,450 13,033 19,862 10,099

Amounts due to joint ventures 42 14 40 16

Fair value of derivative assets with associates 11,826 6,212 9,394 6,559

Fair value of derivative liabilities with associates 34,281 23,142 33,673 28,440

Guarantees and Commitments 1,569 377 1,769 287

The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and

security, as comparable transactions with third-party counterparties.

(e) Key Management Personnel

Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities

of the Bank and the group. It includes members of the Board of Directors and Executive Committee of the Bank and the Board of Directors and

Group Executive Committee members of HSBC Holdings plc.

Compensation of Key Management Personnel

2023 2022

HK$m HK$m

Salaries and other short-term benefits 362 320

Post employment benefits 11 12

Termination benefits — 2

Share-based payments 126 87

Total 499 421

Transactions, arrangements and agreements involving Key Management Personnel

2023 2022

HK$m HK$m

During the year

Highest average assets

78,447 97,366

Highest average liabilities

74,273 81,323

Contribution to group‘s profit before tax 3,372 1,858

At the year end

Guarantees 3,842 12,007

Commitments 9,147 12,186

1 The disclosure of the highest average balance during the year is considered the most meaningful information to represent transactions during the year.

Transactions, arrangements and agreements are entered into by the group with companies that may be controlled by Key Management

Personnel of the group and their immediate relatives. These transactions are primarily loans and deposits, and were entered into in the ordinary

course of business and on substantially the same terms, including interest rates and security, as comparable transactions with persons or

companies of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of

repayment or present other unfavourable features. Change in expected credit losses recognised for the year, and expected credit loss

allowances against balances outstanding at the end of the year, in respect of Key Management Personnel were insignificant (2022: insignificant).

On 8 October 2019, the group acted as Joint Global Co-ordinator and Underwriter on aggregated EUR4.25bn and GBP800m Senior Note

issuances for CK Hutchison Group Telecom Finance S.A. in 6 tranches, with tenors of 4 to 15 years and coupon rates of 0.375% to 2.625%. CK

Hutchison Group Telecom Finance S.A. is a wholly-owned subsidiary of an associated body corporate (CK Hutchison Holdings Limited) of

MrVictor Li, a non-executive Director of the Bank during the financial year. In October 2023, CK Hutchison Group Telecom Finance S.A.

redeemed one of Senior Note tranches for EUR1.5bn.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 135

(f) Loans to directors

Directors are defined as the Directors of the Bank, its ultimate holding company, HSBC Holdings plc and intermediate holding companies. Loans

to directors also include loans to companies that are controlled by, and entities that are connected with these directors. Particulars of loans to

directors disclosed pursuant to section 17 of the Companies (Disclosure of Information about Benefits of Directors) Regulation are as follows:

Aggregate amount outstanding

at 31 Dec

Maximum aggregate amount

outstanding during the year

2023 2022 2023 2022

HK$m HK$m HK$m HK$m

By the Bank 2,530 1,483 2,631 2,769

By subsidiaries 1 12 13 14

2,531 1,495 2,644 2,783

These amounts include principal and interest, and the maximum liability that may be incurred under guarantees.

Fair values of financial instruments carried at fair value

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined, or validated, by a function independent of the

risk taker.

Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price

determination or validation is utilised. For inactive markets, the group sources alternative market information, with greater weight given to

information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument

comparability, consistency of data sources, underlying data accuracy and timing of prices.

Fair value of investment funds are sourced from the underlying fund managers which are based upon an assessment of the underlying

investees’ financial positions, results, risk profile and prospects.

For fair values determined using valuation models, the control framework includes development or validation by independent support functions

of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence before becoming

operational and are calibrated against external market data on an ongoing basis.

Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including

portfolio changes, market movements and other fair value adjustments.

The majority of financial instruments measured at fair value are in MSS and Insurance. The group's fair value governance structure comprises its

Finance function and Valuation Committees. Finance is responsible for establishing procedures governing valuation and ensuring fair values are

in compliance with accounting standards. The fair values are reviewed by the group's relevant Valuation Committees, which consist of

independent support functions and consider all material subjective valuations. Within MSS and Insurance, these Committees are overseen by

the Group's Valuation Committee Review Group and the Group Insurance Valuation and Impairment Committee respectively.

Financial liabilities measured at fair value

In certain circumstances, the group records its own debt in issue at fair value, based on quoted prices in an active market for the specific

instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are

either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for

similar instruments. In both cases, the fair value includes the effect of applying the credit spread which is appropriate to the group's liabilities.

The change in fair value of issued debt securities attributable to the group’s own credit spread is computed as follows: for each security at each

reporting date, an externally verifiable price is obtained or a price is derived using credit spreads for similar securities issued by the Group. Then,

using discounted cash flow, each security is valued using an appropriate market discount curve. The difference in the valuations is attributable to

the group’s own credit spread. This methodology is applied consistently across all securities.

Structured notes issued and certain other hybrid instruments are included within ‘Financial liabilities designated at fair value’ and are measured

at fair value. Thecredit spread applied to these instruments is derived from the spreads at which the group issues structured notes.

Gains and losses arising from changes in the credit spread of liabilities issued by the group, recorded in other comprehensive income, reverse

over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount.

Fair value hierarchy

Fair values of financial assets and liabilities are determined according to the following hierarchy:

– Level 1 – valuation technique using quoted market price. These are financial instruments with quoted prices for identical instruments in

active markets that the group can access at the measurement date.

– Level 2 – valuation technique using observable inputs. These are financial instruments with quoted prices for similar instruments in active

markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all

significant inputs are observable.

– Level 3 – valuation technique with significant unobservable inputs. These are financial instruments valued using valuation techniques where

one or more significant inputs are unobservable.

Notes on the Consolidated Financial Statements

136 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Financial instruments carried at fair value and bases of valuation

Fair Value Hierarchy

Level 1 Level 2 Level 3

Third-party

total

Inter-

company

Total

HK$m HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2023

Assets

Trading assets

637,806 294,184 9,260 941,250 — 941,250

Derivatives 938 268,318 2,143 271,399 137,854 409,253

Financial assets designated and otherwise mandatorily

measured at fair value through profit or loss

182,874 402,113 122,586 707,573 — 707,573

Financial investments 1,077,040 329,689 3,542 1,410,271 — 1,410,271

Liabilities

Trading liabilities

66,685 36,363 2 103,050 — 103,050

Derivatives 2,048 303,584 2,409 308,041 142,175 450,216

Financial liabilities designated at fair value

— 142,071 28,657 170,728 — 170,728

At 31 Dec 2022

Assets

Trading assets

486,547 203,975 9,283 699,805 — 699,805

Derivatives 1,018 330,356 3,301 334,675 168,202 502,877

Financial assets designated and otherwise mandatorily

measured at fair value through profit or loss

155,276 395,935 101,819 653,030 — 653,030

Financial investments 959,318 276,315 4,308 1,239,941 — 1,239,941

Liabilities

Trading liabilities

74,201 68,246 6 142,453 — 142,453

Derivatives 2,422 393,444 1,712 397,578 154,151 551,729

Financial liabilities designated at fair value

— 133,009 34,734 167,743 — 167,743

1 These balances exclude HK$15,043m Level 2 assets (2022: HK$2,333m) and HK$224,187m Level 2 liabilities (2022: HK$183,821m) held with HSBC

Group entities.

2 Derivatives balances with HSBC Group entities are largely under ‘Level 2’.

Transfers between Level 1 and Level 2 fair values

Assets Liabilities

Financial

investments

Trading

assets

Designated

and

otherwise

mandatorily

measured at

fair value Derivatives

Trading

liabilities

Designated

at fair value Derivatives

HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2023

Transfers from Level 1 to Level 2 94,475 60,546 13,386 — 296 — —

Transfers from Level 2 to Level 1 69,552 40,626 19,403 — 1,591 — —

At 31 Dec 2022

Transfers from Level 1 to Level 2 29,781 23,312 20,020 — 132 — —

Transfers from Level 2 to Level 1 60,104 36,025 26,053 — 1,443 — —

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarter. Transfers into and out of levels of the fair

value hierarchy are primarily attributable to changes in observability of valuation inputs and price transparency.

Fair value adjustments

We adopt the use of fair value adjustments when we take into consideration additional factors not incorporated within the valuation model that

would otherwise be considered by a market participant. We classify fair value adjustments as either ‘risk-related’ or ‘model-related’. The majority

of these adjustments relate to MSS. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or

losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair

value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.

Bid-offer

HKFRS 13 requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate

mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net

portfolio market risks were closed using available hedging instruments or by disposing of, or unwinding the position.

Uncertainty

Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these

circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for

uncertain parameters and/or model assumptions, than those used in the group’s valuation model.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 137

Credit valuation adjustment (‘CVA’) and debit valuation adjustment (‘DVA’)

The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect the possibility that the counterparty may

default and the group may not receive the full market value of the transactions.

The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that the group may default, and that the group

may not pay the full market value of the transactions.

The group calculates a separate CVA and DVA for each legal entity, and for each counterparty to whichthe entity has exposure. With the

exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not

netted across group entities.

The group calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of the group, to the

group’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, the

group calculates the DVA by applying the PD of the group, conditional on the non-default of the counterparty, to the expected positive exposure

of the counterparty to the group and multiplying the result by the loss expected in the event of default. Both calculations are performed over the

life of the potential exposure.

For most products the group uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to

calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting

agreements and collateral agreements with the counterparty.

The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk is an adverse correlation between the counterparty’s

probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the currency

of the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specific approach is applied to

reflect this risk in the valuation.

Funding fair value adjustment (‘FFVA’)

The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of

the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available and is adjusted

for events that may terminate the exposure, such as the default of the group or the counterparty. The FFVA and DVA are calculated

independently.

Model limitation

Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all current and future

material market characteristics. In these circumstances, model limitation adjustments are adopted.

Inception profit (Day 1 profit or loss reserves)

Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable

inputs.

Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3

Assets Liabilities

Financial

investments

Trading

assets

Designated

and

otherwise

mandatorily

measured

at fair value

through

profit or

loss

Derivatives Total

Trading

liabilities

Designated

at fair

value Derivatives Total

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Private equity and related

investments

2,886 48 108,278 — 111,212 1 — — 1

Structured notes — — 23 — 23 — 28,657 — 28,657

Others 656 9,212 14,285 2,143 26,296 1 — 2,409 2,410

At 31 Dec 2023 3,542 9,260 122,586 2,143 137,531 2 28,657 2,409 31,068

Private equity and related

investments

3,742 16 90,773 — 94,531 6 — — 6

Structured notes — — — — — — 34,734 — 34,734

Others 566 9,267 11,046 3,301 24,180 — — 1,712 1,712

At 31 Dec 2022 4,308 9,283 101,819 3,301 118,711 6 34,734 1,712 36,452

Private equity and related investments

The fair value of a private equity investment (including private equity, infrastructure and private credit, primarily held to support our Insurance

business, and strategic investments) is estimated on the basis of an analysis of the investee’s financial position and results, risk profile,

prospects and other factors; by reference to market valuations for similar entities quoted in an active market; the price at which similar

companies have changed ownership; or from published net asset values (‘NAVs’) received. If necessary, adjustments are made to the NAV of

funds to obtain the best estimate of fair value.

Notes on the Consolidated Financial Statements

138 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Structured notes

The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded

derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes

issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios.

Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign

exchange rates.

Derivatives

OTC derivative valuation models calculate the present value of expected future cash flows, based upon ‘no arbitrage’ principles. For many vanilla

derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some

differences in market practice. Inputs to valuation models are determined from observable market data wherever possible, including prices

available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but

can be determined from observable prices via model calibration procedures or estimated from historical data or other sources.

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy

Movement in Level 3 financial instruments

Assets Liabilities

Financial

investments

Trading

assets

Designated

and

otherwise

mandatorily

measured at

fair value

through

profit or

loss Derivatives

Trading

liabilities

Designated

at fair

value

Derivatives

HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 1 Jan 2023 4,308 9,283 101,819 3,301 6 34,734 1,712

Total gains or losses recognised in profit orloss — (441) 7,105 (1,411) (9) (218) 488

– net income or losses from financial instruments held

for trading or managed on a fair value basis

— (441) — (1,411) (9) (218) 488

– changes in fair value of financial instruments

mandatorily measured at fair value through profit or

loss

— — 7,105 — — — —

Total gains or losses recognised in other

comprehensive income (‘OCI’)

(664) (90) 120 14 — (154) (7)

– financial investments: fair value gains or losses (618) — — — — 11 —

– exchange differences (46) (90) 120 14 — (165) (7)

Purchases 2,112 6,169 24,749 — — — —

New issuances — — — — — 6,360 —

Sales (212) (2,278) (4,249) — — — —

Settlements (2,004) (5,501) (10,657) 10 1 (5,249) (322)

Transfers out (696) (1,505) — (370) (6) (8,367) (266)

Transfers in 698 3,623 3,699 599 10 1,551 804

At 31 Dec 2023 3,542 9,260 122,586 2,143 2 28,657 2,409

Unrealised gains or losses recognised in profit or loss

relating to assets and liabilities held at 31Dec 2023

— (1,183) 1,428 837 — (21) (591)

– net income or losses from financial instruments held

for trading or managed on a fair value basis

— (1,183) — 837 — — (591)

– changes in fair value of other financial instruments

mandatorily measured at fair value through profit or

loss

— — 1,428 — — (21) —

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 139

Movement in Level 3 financial instruments (continued)

Assets Liabilities

Financial

investments

Trading

assets

Designated

and

otherwise

mandatorily

measured

at fair value

through

profit or

loss Derivatives

Trading

liabilities

Designated

at fair value Derivatives

HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2021 3,674 3,246 74,652 3,294 — 20,449 2,130

Impact on transition to HKFRS17 11,352

At 1 Jan 2022 3,674 3,246 86,004 3,294 — 20,449 2,130

Total gains or losses recognised in profit orloss — (952) 1,337 669 3 (851) 214

– net income or losses from financial instruments held for

trading or managed on a fair value basis

— (952) — 669 3 — 214

– changes in fair value of financial instruments mandatorily

measured at fair value through profit or loss

— — 1,337 — — (851) —

Total gains or losses recognised in other comprehensive

income (‘OCI’)

676 (81) (39) (25) — (1,001) (83)

– financial investments: fair value gains or losses 812 — — — — (5) —

– exchange differences (136) (81) (39) (25) — (996) (83)

Purchases 1,670 6,480 28,923 — — — —

New issuances — — — — — 5,936 —

Sales (71) (644) (214) — — — —

Settlements (1,641) (4,742) (14,003) (557) — 12,130 (553)

Transfers out — (772) (289) (394) — (2,671) (190)

Transfers in — 6,748 100 314 3 742 194

At 31 Dec 2022 4,308 9,283 101,819 3,301 6 34,734 1,712

Unrealised gains or losses recognised in profit or loss

relating to assets and liabilities held at 31Dec 2022

— (734) (1,691) 2,631 — (19) (78)

– net income or losses from financial instruments held for

trading or managed on a fair value basis

— (734) — 2,631 — — (78)

– changes in fair value of other financial instruments

mandatorily measured at fair value through profit or loss

— — (1,691) — — (19) —

1 Includes structured deposits where the settlement balance represents the net of matured and new deposits.

2 Includes net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or

loss of HK$6,780m (2022: HK$1,065m).

Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarter. Transfers into and out of levels of the fair

value hierarchy are primarily attributable to observability of valuation inputs and price transparency.

Effect of changes in significant unobservable assumptions to reasonably possible

alternatives

Sensitivity of fair values to reasonably possible alternative assumptions

2023 2022

Reflected in profit or

loss Reflected in OCI Reflected in profit or loss Reflected in OCI

Favourable

changes

Un-

favourable

changes

Favourable

changes

Un-

favourable

changes

Favourable

changes

Un-

favourable

changes

Favourable

changes

Un-

favourable

changes

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Derivatives, trading assets and trading

liabilities

284 (345) — — 242 (308) — —

Financial assets and liabilities designated and

otherwise mandatorily measured at fair value

through profit or loss

6,163 (6,163) — — 5,101 (5,101) — —

Financial investments — — 170 (170) — — 187 (187)

At 31 Dec 6,447 (6,508) 170 (170) 5,343 (5,409) 187 (187)

1 ‘Derivatives, trading assets and trading liabilities’ are presented as one category to reflect the manner in which these instruments are risk-managed.

The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take

account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most

favourable or the most unfavourable change from varying the assumptions individually.

Notes on the Consolidated Financial Statements

140 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Key unobservable inputs to Level 3 financial instruments

The following table lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs at 31December 2023.

Quantitative information about significant unobservable inputs in Level 3 valuations

Fair value 2023 2022

Assets Liabilities

Key valuation

techniques

Key unobservable

inputs

Full range

of inputs

Full range

of inputs

HK$m HK$m Lower Higher Lower Higher

Private equity and related investments 111,212 1 See below See below

Structured notes 23 28,657

– equity-linked notes 23 10,021

Model – Option model Equity volatility 6 % 71 % 6% 142%

Model – Option model Equity correlation 34 % 98 % 38% 98%

– FX-linked notes — 13,424 Model – Option model FX volatility 3 % 34 % 4% 37%

– other — 5,212

Others

26,296 2,410

At 31 Dec 2023 137,531 31,068

1 ‘Others’ includes a range of smaller asset holdings.

Private equity and related investments

Given the bespoke nature of the analysis in respect of each holding, it is not practical to quote a range of key unobservable inputs. The key

unobservable inputs would be price and correlation. The valuation approach includes using a range of inputs that include company specific

financials, traded comparable companies multiples, published net asset values and qualitative assumptions, which are not directly comparable or

quantifiable.

Volatility

Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and

maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The

range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price.

Correlation

Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one. It is

used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of

instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is

used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.

Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, group's trade prices, proxy

correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects the wide

variation in correlation inputs by market price pair.

Inter-relationships between key unobservable inputs

Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be

correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events.

Furthermore, the effect of changing market variables on the group's portfolio will depend on the group’s net risk position in respect of each

variable.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 141

Fair values of financial instruments not carried at fair value

Fair values of financial instruments not carried at fair value and bases of valuation

Fair Value Hierarchy

Carrying

amount

Quoted

market price

Level 1

Observable

inputs

Level 2

Significant

unobservable

inputs

Level 3 Total

HK$m HK$m HK$m HK$m HK$m

At 31 Dec 2023

Assets

Reverse repurchase agreements – non-trading 831,186 — 831,199 — 831,199

Loans and advances to banks 563,801 — 554,613 9,093 563,706

Loans and advances to customers 3,557,076 — 96,749 3,410,874 3,507,623

Financial investments – at amortised cost 618,941 523,921 87,610 — 611,531

Liabilities

Repurchase agreements – non-trading 521,984 — 521,850 — 521,850

Deposits by banks 182,146 — 182,135 — 182,135

Customer accounts 6,261,051 — 6,261,771 — 6,261,771

Debt securities in issue 87,745 — 88,050 — 88,050

Subordinated liabilities — — — — —

At 31 Dec 2022

Assets

Reverse repurchase agreements – non-trading 927,976 — 927,190 — 927,190

Loans and advances to banks 515,847 — 511,173 4,452 515,625

Loans and advances to customers 3,695,068 — 56,307 3,619,294 3,675,601

Financial investments – at amortised cost 509,766 404,442 93,420 780 498,642

Liabilities

Repurchase agreements – non-trading 351,093 — 349,133 — 349,133

Deposits by banks 198,908 — 198,905 — 198,905

Customer accounts 6,113,709 — 6,114,290 — 6,114,290

Debt securities in issue 100,909 — 101,414 — 101,414

Subordinated liabilities 3,119 — 2,191 — 2,191

1 Amounts with HSBC Group entities are not reflected here. Further details are set out in Note 32.

The fair values above are stated at a specific date and may be significantly different from the amounts which will actually be paid on the maturity

or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values given the size of

the portfolios measured. Accordingly, these fair values do not represent the value of these financial instruments to the group as a going

concern.

Other financial instruments not carried at fair value are typically short term in nature or re-priced to current market rates frequently. Accordingly,

their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks, items in the course of

collection from and transmission to other banks, Hong Kong Government certificates of indebtedness, Hong Kong currency notes in circulation,

other financial assets and other financial liabilities, all of which are measured at amortised cost.

Valuation

Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market

participants at the measurement date. It does not reflect the economic benefits and costs that the group expects to flow from an instrument’s

cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market

prices are available may differ from those of other companies.

Repurchase and reverse repurchase agreements – non-trading

Fair values approximate carrying amounts as these balances are generally short dated.

Loans and advances to banks and customers

To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar

characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated

using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers

reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment

rates, using assumptions that the group believes are consistent with those that would be used by market participants in valuing such loans; new

business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades.

From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans.

The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants’ expectations of credit

losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit impaired loans,

fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.

Financial investments

The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are

determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.

Notes on the Consolidated Financial Statements

142 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Deposits by banks and customer accounts

The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are

estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

Debt securities in issue and subordinated liabilities

Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for

similar instruments.

Interest rate benchmark reform

Financial instruments yet to transition to alternative benchmarks, by main

benchmark

USD Libor JPY Libor Sibor THBFIX SOR Others

At 31 Dec 2023

HK$m HK$m HK$m HK$m HK$m HK$m

Non-derivative financial assets

9,805 — 14,607 182 — 2,723

Non-derivative financial liabilities 93,634 4,426 — — — 73

Derivative notional contract amount 974 — — 59,541 34,468 —

At 31 Dec 2022

Non-derivative financial assets

172,370 — 30,338 1,036 799 3,577

Non-derivative financial liabilities 120,096 9,192 — — — 264

Derivative notional contract amount 8,506,925 — — 215,868 159,923 59,472

1 Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (GBP Libor, Mumbai

Interbank Forward Offer Rate ('MIFOR'), Canadian dollar offered rate (‘CDOR’) and Mexican Interbank equilibrium interest rate (‘TIIE’)).

2 Gross carrying amount excluding allowances for expected credit losses.

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

including Hong Kong, Singapore, Thailand, Australia, India and Japan. The amounts provide an indication of the extent of the group's exposure to

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

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

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

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

Structured entities

The group is involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets, conduits and

investment funds, established either by the group or a third party.

Consolidated structured entities

The group primarily uses consolidated structured entities to securitise customer loans and advances it originates to diversify its sources of

funding for asset origination and capital efficiency purposes. The loans and advances are transferred by the group to the structured entities for

cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. The group's transactions with

these entities are not significant.

Unconsolidated structured entities

The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by the group. The group entersinto transactions with

unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 143

Nature and risks associated with the group’s interests in unconsolidated structured entities

Securitisations

HSBC

managed

funds

Non-HSBC

managed

funds Other Total

Total asset values of the entities (HK$bn)

0–4 91 106 244 28 469

4–15 3 41 200 — 244

15–39 — 12 101 — 113

39–196 — 3 71 — 74

196+ — 1 3 — 4

Number of entities at 31 Dec 2023 94 163 619 28 904

HK$m HK$m HK$m HK$m HK$m

Total assets in relation to the group's interests in the unconsolidated

structured entities

23,907 44,309 121,399 7,868 197,483

– trading assets — 3,970 — 7 3,977

– financial assets designated and otherwise mandatorily measured at

fair value through profit or loss

— 40,339 121,399 — 161,738

– derivatives — — — 1 1

– loans and advances to customers 23,907 — — 7,785 31,692

– other assets — — — 75 75

Total liabilities in relation to the group's interests in the unconsolidated

structured entities

— — — 274 274

– derivatives — — — 274 274

Other off balance sheet commitments 22 14,969 33,263 6,888 55,142

The group’s maximum exposure at 31 Dec 2023 23,929 59,278 154,662 14,482 252,351

Securitisations

HSBC

managed

funds

Non-HSBC

managed

funds Other Total

Total asset values of the entities (HK$bn)

0–4 55 92 271 27 445

4–15 7 42 173 — 222

15–39 — 12 98 — 110

39–196 — 3 59 — 62

196+ — 1 11 — 12

Number of entities at 31 Dec 2022 62 150 612 27 851

HK$m HK$m HK$m HK$m HK$m

Total assets in relation to the group's interests in the unconsolidated

structured entities

17,564 34,071 109,351 5,245 166,231

– trading assets — 2,527 — 82 2,609

– financial assets designated and otherwise mandatorily measured at fair

value through profit or loss

— 31,544 109,351 — 140,895

– derivatives — — — 10 10

– loans and advances to customers 17,564 — — 5,070 22,634

– other assets — — — 83 83

Total liabilities in relation to the group's interests in the unconsolidated

structured entities

— — — 223 223

– derivatives — — — 223 223

Other off balance sheet commitments 1,395 11,753 30,862 11,342 55,352

The group's maximum exposure at 31 Dec 2022 18,959 45,824 140,213 16,364 221,360

The maximum exposure to loss from the group’s interests in unconsolidated structured entities represents the maximum loss it could incur as a

result of its involvement with these entities regardless of the probability of the loss being incurred.

– For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential future

losses.

– For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying

value of these interests at the balance sheet reporting date.

The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate the group’s

exposure to loss.

Securitisations

The group has interests in unconsolidated securitisation vehicles through holding notes issued by these entities.

HSBC managed funds

The group establishes and manages money market funds and non-money market investment funds to provide customers with investment

opportunities. The group, as fund manager, may be entitled to receive management and performance fees based on the assets under

management. The group may also retain units in these funds.

Non-HSBC managed funds

The group purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs.

Notes on the Consolidated Financial Statements

144 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Other

The group has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide

finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to the interest disclosed

above, the group enters into derivative contracts, reverse repos and stock borrowing transactions with structured entities. These interests arise

in the normal course of business for the facilitation of third-party transactions and risk management solutions.

Structured entities sponsored by the group

The amount of assets transferred to and income received from such sponsored entities during 2023 and 2022 were not significant.

Bank balance sheet and statement of changes in equity

Bank balance sheet at 31 December 2023

2023 2022

HK$m HK$m

Assets

Cash and balances at central banks 186,468 169,595

Items in the course of collection from other banks 18,186 22,886

Hong Kong Government certificates of indebtedness 328,304 341,354

Trading assets 797,026 587,760

Derivatives 394,366 481,979

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 4,184 5,431

Reverse repurchase agreements – non-trading 480,579 468,799

Loans and advances to banks 368,246 298,225

Loans and advances to customers 1,903,294 1,951,155

Financial investments 1,229,117 947,830

Amounts due from Group companies 528,903 720,765

Investments in subsidiaries 112,544 109,211

Interests in associates and joint ventures 39,830 39,830

Goodwill and intangible assets 25,288 23,659

Property, plant and equipment 71,465 71,555

Deferred tax assets 1,019 1,304

Prepayments, accrued income and other assets 228,031 214,624

Total assets 6,716,850 6,455,962

Liabilities

Hong Kong currency notes in circulation 328,304 341,354

Items in the course of transmission to other banks 22,201 26,601

Repurchase agreements – non-trading 433,902 307,661

Deposits by banks 127,980 155,423

Customer accounts 3,942,813 3,740,697

Trading liabilities 66,851 95,097

Derivatives 432,976 532,325

Financial liabilities designated at fair value 52,120 49,396

Debt securities in issue 33,434 26,584

Retirement benefit liabilities 993 898

Amounts due to Group companies 632,493 563,368

Accruals and deferred income, other liabilities and provisions 146,633 132,141

Current tax liabilities 10,368 3,537

Deferred tax liabilities 10,700 9,267

Subordinated liabilities

—

3,119

Total liabilities 6,241,768 5,987,468

Equity

Share capital 180,181 180,181

Other equity instruments 52,465 52,386

Other reserves 12,578 3,143

Retained earnings 229,858 232,784

Total equity 475,082 468,494

Total equity and liabilities 6,716,850 6,455,962

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 145

Bank statement of changes in equity for the year ended 31 December 2023

Other reserves

capital

Other

equity

instruments

Retained

earnings

Property

revaluation

reserve

Financial

assets at

FVOCI

reserve

Cash

flow

hedge

reserve

Foreign

exchange

reserve Other

Total

equity

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

At 1 Jan 2023 180,181 52,386 232,784 37,768 (9,303) (930) (20,368) (4,024) 468,494

Profit for the year — — 86,734 — — — — — 86,734

Other comprehensive income/(expense)

(net of tax)

— — (5,421) 3,766 6,388 2,913 (811) — 6,835

– debt instruments at fair value through

other comprehensive income

— — — — 6,860 — — — 6,860

– equity instruments designated at fair

value through other comprehensive

income

— — — — (346) — — — (346)

– cash flow hedges

— — — — — 2,904 — — 2,904

– changes in fair value of financial

liabilities designated at fair value upon

initial recognition arising from changes

in own credit risk

— — (5,354) — — — — — (5,354)

– property revaluation

— — — 3,766 — — — — 3,766

– remeasurement of defined benefit

asset/liability

— — (67) — — — — — (67)

– exchange differences — — — — (126) 9 (811) — (928)

Total comprehensive income/

(expense) for the year

— — 81,313 3,766 6,388 2,913 (811) — 93,569

Other equity instruments issued

— 7,850 — — — — — — 7,850

Other equity instruments redeemed

— (7,771) (406) — — — — — (8,177)

Dividends to shareholders

— — (86,356) — — — — — (86,356)

Movement in respect of share-based

payment arrangements

— — (105) — — — — (157) (262)

Transfers and other movements

— — 2,628 (2,665) 404 2 (405) — (36)

At 31 Dec 2023 180,181 52,465 229,858 38,869 (2,511) 1,985 (21,584) (4,181) 475,082

At 1 Jan 2022 172,335 44,615 205,791 36,900 1,524 63 (15,369) (3,900) 441,959

Profit for the year — — 54,987 — — — — — 54,987

Other comprehensive income/(expense)

(net of tax)

— — 4,600 2,948 (10,829) (993) (4,999) — (9,273)

– debt instruments at fair value through

other comprehensive income

— — — — (11,369) — — — (11,369)

– equity instruments designated at fair

value through other comprehensive

income

— — — — 540 — — — 540

– cash flow hedges — — — — — (993) — — (993)

– changes in fair value of financial

liabilities designated at fair value upon

initial recognition arising from changes

in own credit risk

— — 4,432 — — — — — 4,432

– property revaluation — — — 2,948 — — — — 2,948

– remeasurement of defined benefit

asset/liability

— — 168 — — — — — 168

– exchange differences — — — — — — (4,999) — (4,999)

Total comprehensive income/(expense)

for the year

— — 59,587 2,948 (10,829) (993) (4,999) — 45,714

Shares issued

7,846 — — — — — — — 7,846

Other equity instruments issued

— 7,771 — — — — — — 7,771

Dividends to shareholders

— — (34,821) — — — — — (34,821)

Movement in respect of share-based

payment arrangements

— — 127 — — — — (127) —

Transfers and other movements

— — 2,100 (2,080) 2 — — 3 25

At 31 Dec 2022 180,181 52,386 232,784 37,768 (9,303) (930) (20,368) (4,024) 468,494

1 Ordinary share capital includes preference shares which have been redeemed or bought back via payments out of distributable profits in previous

years.During 2022, 3,138.4m new ordinary shares were issued at an issue price of HK$2.5 each.

2 During 2023, an additional tier 1 capital instrument amounting to US$1,000m was issued for which there were no issuance costs.

During 2022, an additional tier 1 capital instrument amounting to US$1,000m was issued for which there were US$10m issuance

costs.

3 During 2023, an additional tier 1 capital instrument was redeemed at fair value US$(1,041)m.

4 The other reserves mainly comprise share of associates’ other reserves, purchase premium arising from transfer of business from fellow subsidiaries,

property revaluation reserve relating to transfer of properties to a fellow subsidiary and the share-based payment reserve. The share-based payment

reserve is used to record the amount relating to share awards and options granted to employees of the group directly by HSBC Holdings plc.

5 Including distributions paid on perpetual subordinated loans classified as equity under HKFRS.

6 The movements include transfers from the property revaluation reserve to retained earnings in relation to depreciation of revalued properties.

Notes on the Consolidated Financial Statements

146 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Effects of adoption of HKFRS 17

On 1 January 2023 the group adopted HKFRS 17 ‘Insurance

Contracts’ and as required by the standard applied the requirements

retrospectively with comparatives restated from the transition date,

1January 2022. The tables below provide the transition restatement

impact on the group’s consolidated balance sheet as at 1 January

2022, as well as the group consolidated income statement and the

group consolidated statement of comprehensive income for the year

ended 31 December 2022.

Further information about the effect of adoption of HKFRS 17 is

provided in Note 1 Basis of preparation and material accounting

policies on page 89 to 99.

Under

HKFRS 4

Removal of

PVIF and

HKFRS 4

balances

Remeasure-

ment effect

of HKFRS 9

re-

designations

Recognition

of HKFRS 17

fulfilment

cash flows

Recognition

of HKFRS 17

contractual

service

margin Tax effect

Under

HKFRS 17

Total

movements

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Assets

Financial assets designated and

otherwise mandatorily measured at fair

value through profit or loss

202,399 — 473,454 — — — 675,853 473,454

Loans and advances to banks 432,247

—

(4,436)

— — —

427,811 (4,436)

Loans and advances to customers 3,840,939

—

(9,983)

— — —

3,830,956 (9,983)

Financial investments 2,051,575

—

(420,963)

— — —

1,630,612 (420,963)

Goodwill and intangible assets 95,181 (63,765)

— — — —

31,416 (63,765)

Deferred tax assets 3,353

— — — —

4,091 7,444 4,091

All other assets 3,277,699 (34,272)

—

31,213 (316) — 3,274,324 (3,375)

Total assets 9,903,393 (98,037) 38,072 31,213 (316) 4,091 9,878,416 (24,977)

Liabilities and equity

Liabilities

Insurance contract liabilities 638,145 (638,145)

—

624,056 66,935

—

690,991 52,846

Deferred tax liabilities 32,522

— — — —

(10,479) 22,043 (10,479)

All other liabilities 8,309,215 431

—

7,908 (250) — 8,317,304 8,089

Total liabilities 8,979,882 (637,714)

—

631,964 66,685 (10,479) 9,030,338 50,456

Total shareholders’ equity 856,809 492,823 35,612 (548,755) (58,262) 12,695 790,922 (65,887)

Non-controlling interests 66,702 46,854 2,460 (51,996) (8,739) 1,875 57,156 (9,546)

Total equity 923,511 539,677 38,072 (600,751) (67,001) 14,570 848,078 (75,433)

Total liabilities and equity 9,903,393 (98,037) 38,072 31,213 (316) 4,091 9,878,416 (24,977)

HKFRS 17 transition impact on the group consolidated balance sheet at 1 January 2022

Transition drivers

Removal of PVIF and HKFRS 4 balances

The PVIF intangible asset of HK$63,765m previously reported under

HKFRS 4 within ‘Goodwill and intangible assets’ arose from the

upfront recognition of future profits associated with in-force insurance

contracts. The PVIF intangible asset is no longer reported following

the transition to HKFRS 17, as future profits are deferred within the

CSM. Other HKFRS 4 insurance contract assets (shown above within

‘All other assets’) and insurance contract liabilities are removed on

transition, to be replaced with HKFRS 17 balances.

Remeasurement effect of HKFRS 9 re-designations

Loans and advances and debt securities supporting associated

insurance liabilities of HK$429,016m were re-designated from an

amortised cost classification to fair value through profit and loss, and

HK$6,366m from fair value through other comprehensive income to

fair value through profit or loss. The re-designations were made in

order to more closely align the asset accounting with the valuation of

the associated insurance liabilities. The re-designation of amortised

cost assets generated a net increase to assets of HK$38,072m

because the fair value measurement on transition was higher than the

previous amortised cost carrying amount.

Recognition of HKFRS 17 fulfilment cash flows

The measurement of the insurance contracts liabilities under HKFRS

17 is based on groups of insurance contracts and includes a liability

for fulfilling the insurance contract, such as premiums, expenses,

insurance benefits and claims including policyholder returns and the

cost of guarantees. These are recorded within the fulfilment cash

flow component of the insurance contract liability, together with the

risk adjustment for non-financial risk.

Recognition of the HKFRS 17 contractual service margin

The CSM is a component of the insurance contract liability and

represents the future unearned profit associated with insurance

contracts that will be released to the profit and loss over the expected

coverage period.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 147

Tax effect

The removal of deferred tax liabilities primarily results from the removal of the associated PVIF intangible asset, and new deferred tax assets are

reported, where appropriate, on temporary differences between the new HKFRS 17 accounting balances and their associated tax bases.

HKFRS 17 transition impact on the reported group consolidated income statement for the year ended 31 December 2022

Under

HKFRS 4

Removal

of PVIF

and

HKFRS 4

balances

Remeasure-

ment effect

of HKFRS 9

re-

designations

Insurance

finance

income/

(expense)

Contrac-

tual

service

margin

Onerous

contracts

Experience

variance

and other

Attribut-

able

expenses

Tax

effect

Under

HKFRS 17

HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m HK$m

Net interest income 126,852 — (16,974) — — — — — — 109,878

Net fee income 36,600 — — — — — — 1,965 — 38,565

Net income from financial

instruments held for trading or

managed on a fair value basis

41,674 — (398) — — — — — — 41,276

Net expense from assets and

liabilities of insurance

businesses, including related

derivatives, measured at fair

value through profit or loss

(13,194) — (81,720) — — — — — — (94,914)

Changes in fair value of

designated debts issued and

related derivatives

(703) — — — — — — — — (703)

Changes in fair value of other

financial instruments

mandatorily measured at fair

value through profit or loss

34 — 6 — — — — — — 40

Gains less losses from financial

investments

47 — 5 — — — — — — 52

Net insurance premium income 80,415 (80,415) — — — — — — — —

Insurance finance income/

(expense)

— — — 97,187 — — — — — 97,187

Insurance service result — — — — 5,968 (1,343) 352 — — 4,977

– insurance revenue — — — — 5,968 — 4,755 — — 10,723

– insurance service expense — — — — — (1,343) (4,403) — — (5,746)

Other operating income/(loss) 3,781 707 — 274 — — (317) — — 4,445

Total operating income 275,506 (79,708) (99,081) 97,461 5,968 (1,343) 35 1,965 — 200,803

Net insurance claims and

benefits paid and movement in

liabilities to policyholders

(69,814) 69,814 — — — — — — — —

Net operating income before

change in expected credit

losses and other credit

impairment charges

205,692 (9,894) (99,081) 97,461 5,968 (1,343) 35 1,965 — 200,803

Change in expected credit

losses and other credit

impairment charges

(16,365) — (5) — — — — — — (16,370)

Net operating income 189,327 (9,894) (99,086) 97,461 5,968 (1,343) 35 1,965 — 184,433

Total operating expenses (110,508) — — — — — — 3,970 — (106,538)

Operating profit 78,819 (9,894) (99,086) 97,461 5,968 (1,343) 35 5,935 — 77,895

Share of profit in associates and

joint ventures

18,792 — — — — — — — — 18,792

Profit before tax 97,611 (9,894) (99,086) 97,461 5,968 (1,343) 35 5,935 — 96,687

Tax expense (15,507) — — — — — — — (489) (15,996)

Profit for the year 82,104 (9,894) (99,086) 97,461 5,968 (1,343) 35 5,935 (489) 80,691

Notes on the Consolidated Financial Statements

148 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Transition drivers

Removal of PVIF and HKFRS 4 balances

As a result of the removal of the PVIF intangible asset, the associated

revenue of HK$256m in 2022 that was previously reported within

'Other operating income' is no longer reported under HKFRS 17. This

includes the removal of the value of new business and changes to

PVIF intangible asset from valuation adjustments and experience

variances.

On the implementation of HKFRS 17 new income statement line

items associated with insurance contract accounting were introduced.

Consequently, the previously reported HKFRS 4 line items ‘Net

insurance premium income’, and ‘Net insurance claims and benefits

paid and movement in liabilities to policyholders’ were also removed.

Remeasurement effect of HKFRS 9 re-designations

Following the re-designation of financial assets supporting associated

insurance liabilities to fair value through profit or loss classification,

the related income statement reporting also changed. Under our

previous HKFRS 4 based reporting convention, these assets

generated interest income of HK$16,974m in 2022, which is no

longer reported in 'Net interest income' under HKFRS 17. To the

extent that this interest income was shared with policyholders, the

corresponding policyholder sharing obligation was previously included

within the ‘Net insurance claims and benefits paid and movement in

liabilities to policyholders’ line.

Following re-designation to fair value through profit or loss, gains and

losses from changes in the fair value of underlying assets, together

with interest income earned, are both reported within ‘Net expense

from assets and liabilities of insurance businesses, including related

derivatives, measured at fair value through profit or loss’. Similar to an

HKFRS 4 basis, HKFRS 17 accounting provides for an offset. While

this offset was reported within the claims line under HKFRS 4, under

HKFRS 17 it is reported within the ‘Insurance finance income/

(expense)’ line described below.

Introduction of HKFRS 17 income statement

Insurance finance income/(expense)

'Insurance finance income' of HK$97,187m in 2022 represents the

change in the carrying amount of insurance contracts arising from the

effect of, and changes in, the time value of money and financial risk.

For VFA contracts, which represent more than 97%

of insurance contracts, the 'insurance finance income/(expense)'

includes the changes in the fair value of underlying items (excluding

additions and withdrawals). It therefore has an offsetting impact to

investment income earned on underlying assets supporting insurance

contracts. This includes an offsetting impact to the gains and losses

on assets re-designated on transition to fair value through profit or

loss, and which is now included in ‘Net expense from assets and

liabilities of insurance businesses, including related derivatives,

measured at fair value through profit or loss’.

Contractual service margin

Revenue is recognised for the release of the CSM associated with the

in-force business, which was allocated at a rate of approximately

8.4% during 2022. The CSM release is largely impacted by the

constant measure allocation approach for investment services, but

may vary over time primarily due to changes in the total amount of

CSM reported on the balance sheet from factors such as new

business written, changes to levels of actual returns earned on

underlying assets, or changes to assumptions.

Onerous contracts

Losses on onerous contracts are taken to the income statement as

incurred.

Experience variance and other

Experience variance and other represents the expected expenses,

claims and recovery of acquisition cash flows which are reported as

part of the insurance service revenue. This is offset with the actual

expenses and claims incurred in the year and amortisation of

acquisition cash flows which are reported as part of insurance service

expense.

Attributable expenses

Directly attributable expenses are the costs associated with

originating and fulfilling an identified portfolio of insurance contracts.

These costs include distribution fees paid to third parties as part of

originating insurance contracts together with appropriate allocations

of fixed and variable overheads which are included within the

fulfilment cash flows and are no longer shown on the operating

expenses line.

HKFRS 17 transition impact on the group consolidated statement of comprehensive income

2022 2022

Under

HKFRS 17

Under

HKFRS 4

HK$m HK$m

Total equity at 1 Jan 848,078 923,511

of which:

– Retained earnings 422,462 488,055

– Financial assets at FVOCI reserve 3,575 3,869

Profit for the year 80,691 82,104

Debt instruments at fair value through other comprehensive income (13,705) (13,675)

Equity instruments designated at fair value through other comprehensive income 865 865

Other comprehensive expense for the year, net of tax (27,333) (27,344)

Total comprehensive income for the year 40,518 41,950

Other movements (24,216) (24,198)

Total equity at 31 Dec 864,380 941,263

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 149

The group's consolidated balance sheet at transition date and at 31 December 2022

Under HKFRS 17 Under HKFRS 4

31 Dec 1 Jan 31 Dec 31 Dec

2022 2022 2022 2021

HK$m HK$m HK$m HK$m

Assets

Cash and balances at central banks 232,740 276,857 232,740 276,857

Items in the course of collection from other banks 28,557 21,632 28,557 21,632

Hong Kong Government certificates of indebtedness 341,354 332,044 341,354 332,044

Trading assets 699,805 777,450 699,805 777,450

Derivatives 502,877 365,167 502,771 365,167

Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 653,030 675,853 226,451 202,399

Reverse repurchase agreements – non-trading 927,976 803,775 927,976 803,775

Loans and advances to banks 515,847 427,811 519,024 432,247

Loans and advances to customers 3,695,068 3,830,956 3,705,149 3,840,939

Financial investments 1,749,707 1,630,612 2,221,361 2,051,575

Amounts due from Group companies 140,485 112,621 140,546 112,719

Interests in associates and joint ventures 185,898 188,485 185,898 188,485

Goodwill and intangible assets 36,863 31,416 102,419 95,181

Property, plant and equipment 130,926 129,827 130,926 129,827

Deferred tax assets 7,582 7,444 3,856 3,353

Prepayments, accrued income and other assets 349,128 266,466 355,319 269,743

Total assets 10,197,843 9,878,416 10,324,152 9,903,393

Liabilities

Hong Kong currency notes in circulation 341,354 332,044 341,354 332,044

Items in the course of transmission to other banks 33,073 25,701 33,073 25,701

Repurchase agreements – non-trading 351,093 255,374 351,093 255,374

Deposits by banks 198,908 280,310 198,908 280,310

Customer accounts 6,113,709 6,177,182 6,113,709 6,177,182

Trading liabilities 142,453 92,723 142,453 92,723

Derivatives 551,729 355,791 551,745 355,791

Financial liabilities designated at fair value 167,743 138,965 167,743 138,965

Debt securities in issue 100,909 67,364 100,909 67,364

Retirement benefit liabilities 1,655 1,890 1,655 1,890

Amounts due to Group companies 398,261 356,277 398,705 356,233

Accruals and deferred income, other liabilities and provisions 246,614 227,245 238,726 219,206

Insurance contract liabilities 654,922 690,991 700,758 638,145

Current tax liabilities 6,009 2,385 6,002 2,378

Deferred tax liabilities 21,912 22,043 32,937 32,522

Subordinated liabilities 3,119 4,053 3,119 4,054

Total liabilities 9,333,463 9,030,338 9,382,889 8,979,882

Equity

Share capital 180,181 172,335 180,181 172,335

Other equity instruments 52,386 44,615 52,386 44,615

Other reserves 108,837 151,510 109,235 151,804

Retained earnings 466,148 422,462 533,518 488,055

Total shareholders‘ equity 807,552 790,922 875,320 856,809

Non-controlling interests 56,828 57,156 65,943 66,702

Total equity 864,380 848,078 941,263 923,511

Total liabilities and equity 10,197,843 9,878,416 10,324,152 9,903,393

Business disposals and acquisitions

Business disposals

Our New Zealand loan portfolio

In August 2023, the Hongkong and Shanghai Banking Corporation Limited (acting through its New Zealand Branch) entered into an agreement

with Pepper New Zealand Limited, a wholly-owned subsidiary of Pepper Money Limited, to sell its New Zealand retail mortgage loan portfolio.

The sale was classified as held for sale in the third quarter of 2023 and was completed on 1 December 2023.

Our retail business in Mauritius

In November 2023, the Hongkong and Shanghai Banking Corporation Limited (acting through its Mauritius Branch) entered into an agreement

with ABSA Bank (Mauritius) Limited, a wholly-owned subsidiary of ABSA Bank Group Limited, to sell its Wealth and Personal Banking business.

The sale is expected to complete in the second half of 2024 subject to regulatory approvals.

Notes on the Consolidated Financial Statements

150 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Business acquisitions

Acquisition of Citibank China’s wealth management portfolio

In October 2023, HSBC Bank (China) Company Limited, a wholly-owned subsidiary of the Hongkong and Shanghai Banking Corporation Limited,

entered into an agreement to acquire Citibank China’s retail wealth management portfolio in mainland China. The portfolio comprises assets

under management and deposits, and the associated wealth customers. Upon completion, the acquired business will be integrated into HSBC

Bank China’s Wealth and Personal Banking operations. The transaction is expected to complete in the first half of 2024.

Acquisition of Silkroad Property Partners Singapore

In October 2023, HSBC Global Asset Management Singapore Limited entered into an agreement to acquire 100% of the shares of Silkroad

Property Partners Pte Ltd (‘Silkroad’). Silkroad is a Singapore headquartered Asia-Pacific-focused, real estate investment manager. The

acquisition was completed on 31 January 2024.

Legal proceedings and regulatory matters

The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart

from the matters described below, the group considers that none of these matters are material. The recognition of provisions is determined in

accordance with the accounting policies set out in Note 1.2(n) of the Annual Report and Accounts 2023. While the outcomes of legal

proceedings and regulatory matters are inherently uncertain, management believes that, based on the information available to it, appropriate

provisions have been made in respect of these matters as at 31 December 2023. Any provision recognised does not constitute an admission of

wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory

matters as a class of contingent liabilities.

Tax-related investigations

Various tax administration, regulatory and law enforcement authorities around the world are conducting investigations in connection with

allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking solicitation. The Bank continues to cooperate with

these investigations.

Based on the facts currently known, it is not practicable at this time for the Bank to predict the resolution of these matters, including the timing

or any possible impact on the Bank, which could be significant.

Korean short selling investigation

In December 2023, the Korean Securities and Futures Commission issued a decision to impose a fine on the Bank in connection with trades in

breach of Korean short selling rules and to refer the case to the Korean Prosecutors' Office for investigation.

There are many factors that may affect the range of outcomes, and the resulting financial impact, of this matter, which could be significant.

Other regulatory investigations, reviews and litigation

The Bank and/or certain of its affiliates are subject to a number of enquiries and examinations, requests for information, investigations and

reviews by various regulators and competition and law enforcement authorities, as well as legal proceedings including litigation, arbitration and

other contentious proceedings, in connection with various matters arising out of their ordinary course of businesses and operations.

At the present time, the Bank does not expect the ultimate resolution of any of these matters to be material to the Group’s financial position;

however, given the uncertainties involved in legal proceedings and regulatory matters, there can be no assurance regarding the eventual

outcome of a particular matter or matters.

Ultimate holding company

The ultimate holding company of the Bank is HSBC Holdings plc, which is incorporated in England.

The largest group in which the accounts of the Bank are consolidated is that headed by HSBC Holdings plc. The consolidated accounts of HSBC

Holdings plc are available to the public on the HSBC Group’s website at www.hsbc.com or may be obtained from 8 Canada Square, London E14

5HQ, United Kingdom.

Events after the balance sheet date

On 31 January 2024, HSBC Global Asset Management Singapore Limited completed the acquisition of the Asia-Pacific-focused, real estate

investment manager, Silkroad Property Partners Pte Ltd.

Approval of financial statements

The consolidated financial statements were approved and authorised for issue by the Board of Directors on 21 February 2024.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 151

Additional cautionary statement regarding ESG and climate-related data,

metrics and forward-looking statements

The Annual Report and Accounts 2023 contains a number of forward-

looking statements (as defined above) with respect to the Group’s

(including the group’s) ESG targets, commitments, ambitions, climate-

related pathways, processes and plans, and the methodologies and

scenarios the Group (including the group) uses, or intends to use, to

assess the Group’s (including the group's) progress in relation to

these ('ESG-related forward-looking statements').

In preparing the ESG-related information contained in the Annual

Report and Accounts 2023, the group has relied on a number of key

judgements, estimations and assumptions of the Group and the

processes and issues involved are complex. The Group has used ESG

(including climate) data, models and methodologies that it considers,

as of the date on which they were used, to be appropriate and

suitable to understand and assess climate change risk and its impact,

to analyse financed emissions - and operational and supply chain

emissions, to set ESG-related targets and to evaluate the

classification of sustainable finance and investments. However, these

data, models and methodologies are often new, are rapidly evolving

and are not of the same standard as those available in the context of

other financial information, nor are they subject to the same or

equivalent disclosure standards, historical reference points,

benchmarks or globally accepted accounting principles. In particular, it

is not possible to rely on historical data as a strong indicator of future

trajectories in the case of climate change and its evolution. Outputs of

models, processed data and methodologies are also likely to be

affected by underlying data quality, which can be hard to assess and

the Group expects industry guidance, market practice, and regulations

in this field to continue to change. The Group (including the group)

also face challenges in relation to its ability to access data on a timely

basis, lack of consistency and comparability between data that is

available and its ability to collect and process relevant data.

Consequently, the ESG-related forward-looking statements and ESG

metrics disclosed in the Annual Report and Accounts 2023 carry an

additional degree of inherent risk and uncertainty.

Due to the unpredictable evolution of climate change and its future

impact and the uncertainty of future policy and market response to

ESG-related issues and the effectiveness of any such response, the

Group (including the group) may have to re-evaluate its progress

towards its ESG ambitions, commitments and targets in the future,

update the methodologies it uses or alter its approach to ESG

(including climate) analysis and may be required to amend, update and

recalculate its ESG disclosures and assessments in the future, as

market practice and data quality and availability develop.

No assurance can be given by or on behalf of the group as to the

likelihood of the achievement or reasonableness of any projections,

estimates, forecasts, targets, commitments, ambitions, prospects or

returns contained herein. Readers are cautioned that a number of

factors, both external and those specific to the Group (including the

group), could cause actual achievements, results, performance or

other future events or conditions of the group to differ, in some cases

materially, from those stated, implied and/or reflected in any ESG-

related forward-looking statement or metric due to a variety of risks,

uncertainties and other factors (including without limitation those

referred to below):

– Climate change projection risk: this includes, for example, the

evolution of climate change and its impacts, changes in the

scientific assessment of climate change impacts, transition

pathways and future risk exposure and limitations of climate

scenario forecasts;

– ESG projection risk: ESG metrics are complex and are still subject

to development. In addition, the scenarios employed in relation to

them, and the models that analyse them have limitations that are

sensitive to key assumptions and parameters, which are

themselves subject to some uncertainty, and cannot fully capture

all of the potential effects of climate, policy and technology-driven

outcomes;

– Changes in the ESG regulatory landscape: this involves changes in

government approach and regulatory treatment in relation to ESG

disclosures and reporting requirements, and the current lack of a

single standardised regulatory approach to ESG across all sectors

and markets;

– Variation in reporting standards: ESG reporting standards are still

developing and are not standardised or comparable across all

sectors and markets, new reporting standards in relation to

different ESG metrics are still emerging;

– Data availability, accuracy, verifiability and data gaps: the Group’s

(including the group’s) disclosures are limited by the availability of

high-quality data in some areas and the Group’s (including the

group’s) own ability to timely collect and process such data as

required. Where data is not available for all sectors or consistently

year on year, there may be an impact to the Group’s (including the

group’s) data quality scores. While the Group (including the group)

expects its data quality scores to improve over time, as companies

continue to expand their disclosures to meet growing regulatory

and stakeholder expectations, there may be unexpected

fluctuations within sectors year on year, and/or differences

between the data quality scores between sectors. Any such

changes in the availability and quality of data over time, or the

Group’s (including the group’s) ability to collect and process such

data, could result in revisions to reported data going forward,

including on financed emissions, meaning that such data may not

be reconcilable or comparable year-on year;

– Developing methodologies and scenarios: the methodologies and

scenarios the Group (including the group) uses to assess financed

emissions and set ESG-related targets may develop over time in

line with market practice, regulation and/or developments in

science, where applicable. Such developments could result in

revisions to reported data, including on financed emissions or the

classification of sustainable finance and investments, meaning that

data outputs may not be reconcilable or comparable year-on year;

and

– Risk management capabilities: global actions, including the

Group’s (and the group’s) own actions, may not be effective in

transitioning to net zero and in managing relevant ESG risks,

including in particular climate, nature-related and human rights

risks, each of which can impact the Group (including the group)

both directly and indirectly through its customers, and which may

result in potential financial and non-financial impacts to the Group

(including the group). In particular:

– the Group (including the group) may not be able to achieve its

ESG targets, commitments and ambitions (including with

respect to the positions set forth in the Group’s thermal coal

phase-out policy and its energy policy, and its targets to reduce

its on-balance sheet financed emissions and, where applicable,

facilitated emissions in its portfolio of selected high-emitting

sectors), which may result in the Group’s (including the

group's) failure to achieve some or all of the expected benefits

of its strategic priorities; and

– the Group (including the group) may not be able to develop

sustainable finance and ESG-related products consistent with

the evolving expectations of its regulators, and its capacity to

measure the environmental and social impacts from its

financing activity may diminish (including as a result of data and

model limitations and changes in methodologies), which may

affect its ability to achieve its ESG targets, commitments and

ambitions, including its net zero ambition, its targets to reduce

its on-balance sheet financed emissions and, where applicable,

facilitated emissions in its portfolio of selected high-emitting

sectors and the positions set forth in its thermal coal phase-out

policy and energy policy, and increase the risk of greenwashing.

Additional Information

152 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023

Any forward-looking statements made by or on behalf of the Group

(including the group) speak only as of the date they are made. The

Group (including the group) expressly disclaims any obligation to

revise or update these ESG forward-looking statements, other than as

expressly required by applicable law.

Written and/or oral ESG-related forward-looking statements may also

be made in the Group’s (including the group’s) periodic reports to its

regulators, public offering or disclosure documents, press releases

and other written materials, and in oral statements made by the

Group’s (including the group’s) Directors, officers or employees to

third parties, including financial analysts.

The Group’s data dictionaries and methodologies for preparing the

above ESG-related metrics and third-party limited assurance reports

can be found on: www.hsbc.com/who-we-are/esg-and-responsible-

business/esg-reporting-centre.

The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2023 153

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The FSC™ recycled label means that the materials used

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The Hongkong and Shanghai Banking Corporation Limited

HSBC Main Building

1 Queen's Road Central, Hong Kong

Telephone: (852) 2822 1111