HSBC Bank Malta Plc

Management Reports • Feb 21, 2024

National Storage Mechanism | Additional information RNS Number : 9285D HSBC Bank plc 21 February 2024 Risk overview The group continuously identifies, assesses, manages and monitors risks. This process, which is informed by its risk factors and the results of its stress testing programme, gives rise to the classification of certain financial and non-financial risks. Changes in the assessment of these risks may result in adjustments to the group's business strategy and, potentially, its risk appetite. Our banking risks include credit risk, treasury risk, market risk, climate risk, resilience risk (including cybersecurity risk), regulatory compliance risk, financial crime and fraud risk and model risk. We also incur insurance risk. In addition to these banking risks, we have identified top and emerging risks with the potential to have a material impact on our financial results, our reputation and the sustainability of our long-term business model. The exposure to our risks and risk management of these are explained in more detail in the Risk section on pages 22 to 86. Our suite of top and emerging risks is subject to regular review by senior governance forums. During 2023, we removed Ibor transition as a top risk given the cessation of the publication of US dollar Libor in June 2023. We continue to monitor closely the identified risks and ensure management actions are in place, as required. The risk from digitalisation and technological advances has been added reflecting their increasing impact on the banking sector. Externally driven Geopolitical and macroeconomic risk ~ Our operations and portfolios are exposed to risks associated with political instability, civil unrest and military conflict, which could lead to disruption of our operations, physical risk to our staff and/or physical damage to our assets. Conflicts and geopolitical tensions, including the ongoing Russia-Ukraine and Israel-Hamas wars, are creating a more complicated business environment. Despite expected reductions, interest rates in Europe and the UK, are nevertheless likely to remain high in 2024, which could slow the growth of the economies in which the group operates and affect our credit portfolio. Credit risk } We regularly undertake detailed reviews of our portfolios and proactively manage credit facilities to customers and sectors likely to come under stress as a result of current macroeconomic and geopolitical events, including UK recessionary pressures and impacts of the Russia-Ukraine and Israel-Hamas wars. We remain focused on assessing and managing the impacts of the cost of living crisis and higher interest rates on our customers as well as inflationary pressures across our major markets. Particular emphasis has been maintained on the Commodity Traders, Leverage, Construction and Building Materials, Automotives, Retail, 'Consumer Spend' and Commercial Real Estate sectors. We have increased the frequency and depth of our monitoring activities with stress tests and other sectoral reviews performed to identify portfolios or customers who are likely to experience financial difficulty through the slowdown in economic activity. Cyber threat and unauthorised access to systems } The risk of service disruption or loss of data resulting from technology failures or malicious activities by internal or external threats remains heightened. We seek to continue to monitor changes to the threat landscape, including those arising from geopolitical events, and the impact this may have on third party risk management. We operate a continuous improvement programme to help protect our technology operations and to counter a fast-evolving cyber threat environment. Evolving regulatory environment risk ~ The regulatory and compliance risk environment remains complex, in part due to the UK's Financial Conduct Authority's ('FCA') implementation of its Consumer Duty in July 2023. There continues to be an intense regulatory focus on ESG matters, including on 'green' products. Regulatory scrutiny of financial institutions, following banking failures in 2023, may result in new or additional regulatory requirements impacting the group in the short to medium term. Financial crime and fraud risk ~ We are exposed to financial crime risk from our customers, staff and third-parties engaging in criminal activity. The financial crime risk environment continues to evolve, due to increasingly complex geopolitical challenges, the macroeconomic outlook, evolving financial crime regulations, rapid technological developments, an increasing number of national data privacy requirements and the increasing sophistication of fraud. As a result, we will continue to face the possibility of regulatory enforcement and reputational risk. Environmental, social and governance risk ~ We are subject to ESG risks, including in relation to climate change, nature and human rights. These risks have increased owing to the pace and volume of regulatory developments globally, increasing frequency of severe weather events, and due to stakeholders placing more emphasis on financial institutions' actions and investment decisions in respect of ESG matters. Failure to meet these evolving expectations may result in financial and non-financial risks, including reputational, legal and regulatory compliance risks. Digitalisation and technological advances ��� Developments in technology and changes in regulations continue to enable new entrants to the banking industry and new products and services offered by competitors. This challenges us to continue to innovate with new digital capabilities and adapt our products, to attract, retain and best serve our customers. Along with opportunities, new technology, including generative Artificial intelligence ('AI'), can introduce risks and we seek to ensure these are understood and managed with appropriate controls. Internally driven People risk �� Our businesses, functions and countries in the region are exposed to risks associated with employee retention, talent availability, and compliance with employment laws and regulations. The group has undertaken notable transformation activities through 2023 and several structural changes were achieved. Elevated workloads while transitioning into new operating models have exposed the various businesses and functions to capacity and capability risks. Employment practices and relation risks across the region continue to be mitigated through continuous and transparent engagement with employees' representative bodies and regulators and are on a reducing trend. Strong oversight is maintained on all aspects of people risk management, including monitoring hiring activities and levels of employee attrition to ensure that effective workforce forecasting is supporting business demands. Failure to manage these risks may impact the delivery of our strategic objectives or lead to regulatory sanctions or legal claims. Internally driven (continued) IT systems infrastructure and resilience } We continue to monitor and improve our IT systems and network resilience, both on our premises and on the Cloud to minimise service disruption and improve customer experience. To support the business strategy, we remain focused on strengthening our end to end management, building and deploying controls and system monitoring capabilities. We continue to seek to reduce the complexity of our technology estate and consolidate our core banking systems onto a single strategic platform. Execution risk } Failure to effectively prioritise, manage and/or deliver transformation across the group impacts our ability to achieve our strategic objectives. Given the complexity and volume of change planned throughout 2024, we aim to continue to monitor, manage and oversee change execution risk to ensure our change portfolio and initiatives continue to deliver the right outcomes for our customers, people, regulators, investors and communities. 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. The model landscape continues to be impacted by regulatory requirements driving material changes to the way model risk is managed across the banking industry. The PRA's Supervisory Statement (SS 1/23) 'Model Risk Management Principles for Banks' issued in May 2023 requires increased oversight and controls on the management of model risks across the bank. We continue strengthening the dialogue with regulators within the region to ensure our deliverables meet their expectations. New technologies, including AI and generative AI, are driving a need for enhanced model risk controls. Data risk } We use data to serve our customers and run our operations, often in real-time within digital experiences and processes. If our data is not accurate and timely, our ability to serve customers, operate with resilience or meet regulatory requirements could be impacted. We seek to ensure that non-public data is kept confidential, and that we comply with the regulations that govern data privacy and cross-border movement of data. Third-party risk ~ We procure goods and services from a range of third parties. Due to the current macroeconomic and geopolitical climate, the risk of service disruption in our supply chain has heightened. We continue to strengthen our controls, oversight and risk management policies and processes to select and manage third parties, including our third parties' own supply chains, particularly for key activities that could affect our operational resilience. ��� New risk introduced in 2023 ~ Risk has heightened during 2023 } Risk remains at the same level as 2022 �� Risk has decreased during 2023 On behalf of the Board Kavita Mahtani Director 20 February 2024 Registered number 00014259 Risk Contents 22 Our approach to risk 22 Our risk appetite 23 Risk management 23 Stress testing 24 Key developments and risk profile 24 Key developments in 2023 24 Top and emerging risks 25 Externally driven 28 Internally driven 29 Our material banking and insurance risks 31 Credit risk 71 Treasury risk 81 Market risk 85 Climate risk 86 Resilience risk 87 Cybersecurity Risk 88 Regulatory compliance risk 88 Financial crime risk 89 Model risk 89 Insurance manufacturing operations risk Overview Our approach to risk Our risk appetite We recognise the importance of a strong risk culture, which refers to our shared attitudes, values and standards that shape behaviours 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 - Strong capital position, defined by regulatory and internal ratios. - Liquidity and funding management for each entity on a stand-alone basis. Operating model - Ambition to generate returns in line with our risk appetite and strong risk management capability. - Ambition to deliver sustainable earnings and consistent returns for shareholders. Business practice - Zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational risk or damage has not been considered and/or mitigated. - No appetite for deliberately or knowingly causing detriment to consumers arising from our products and services or incurring a breach of the letter or spirit of regulatory requirements. - No appetite for inappropriate market conduct by a member of staff or by any group business. 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 defined as the risk to achieving our strategy or objectives as a result of inadequate or failed internal processes, people and systems, or from external events. Our Risk Management Framework An established risk governance framework and ownership structure seeks to ensure oversight of, and accountability for, the effective management of risk within the group. HSBC's Risk Management Framework ('RMF') fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions. Integral to the RMF are risk appetite, stress testing and the identification of emerging risks. Our Risk Committee focuses on risk governance and seeks to ensure a forward-looking view of risks and their mitigation. The Risk Committee is a committee of the Board and has responsibility for oversight and advice to the Board on, amongst other things, the bank's risk appetite, tolerance and strategy, systems of risk management, internal control and compliance. Additionally, members of the Risk Committee attend meetings of the bank's Nomination, Remuneration and Governance Committee at which the alignment of the reward structures to risk appetite is considered. In carrying out its responsibilities, the Risk Committee is closely supported by the Chief Risk Officer, the Chief Financial Officer, the Head of Internal Audit and the Head of Compliance, together with other business functions on risks within their respective areas of responsibility. Responsibility for managing 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 oversight of our risks through our various specialist Risk Stewards, as well as the accountability held by the Chief Risk Officer. Non-financial risk includes some of the most material risks HSBC faces, such as cyber-attacks, poor customer outcomes and loss of data and the current geopolitical risks. Actively managing non-financial risks is crucial to serving our customers effectively and having a positive impact on society. During 2023 we continued to strengthen the control environment and our approach to the management of non-financial risks, as is broadly set out in our Risk Management Framework. The management of non-financial risk focuses on governance and risk appetite, providing a single view of the non-financial risks that matter most, and 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 our Enterprise Risk Management function, headed by the group Head of Enterprise Risk Management. Three lines of defence 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. To create a robust control environment to manage risks, we use an activity-based three lines of defence model, whereby the activity a member of staff undertakes drives which line they reside within. 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, encouraging collaboration and enabling efficient coordination of risk and control activities. The three lines 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 Internal Audit function, which provides independent assurance that the group's risk management approach and processes are designed and operating effectively. Risk appetite We formally articulate our risk appetite through our risk appetite statement ('RAS'), which is approved by the Board on the recommendation of the Risk Committee. Setting out our risk appetite ensures that planned business activities provide an appropriate balance of return for the risk we are taking, and 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 consists of qualitative statements and quantitative metrics, covering financial and non-financial risks. It is fundamental to the development of business line strategies, strategic and business planning and senior management balanced scorecards. Performance against the RAS is reported to the Risk Management Meeting ('RMM') so that any actual performance that falls outside the approved risk appetite is discussed and appropriate mitigating actions are determined. This reporting allows risks to be promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture. Risk management Stress testing Stress testing is an important tool that is used by banks, as part of their internal risk management, and by regulators to assess vulnerabilities in individual banks and/or the financial banking sector under hypothetical adverse scenarios. The results of stress testing are used to assess banks' resilience to a range of adverse shocks and to assess their capital and liquidity adequacy. HSBC Bank plc is subject to regulatory stress testing in several jurisdictions. These requirements are increasing in frequency and granularity. They include the programmes of the BoE, Prudential Regulation Authority ('PRA') and the European Banking Authority ('EBA'). Assessment by regulators is on both a quantitative and qualitative basis, the latter focusing on our portfolio quality, data provision, stress testing capability and capital planning processes. A number of internal macroeconomic and event-driven scenarios specific to the European region were considered and reported to senior management during the course of the year. The selection of stress scenarios is based upon the output of our top and emerging risks identified and our risk appetite. The results help the Board and senior management to set our risk appetite and confirm the strength of our strategic and financial plans. Our risk appetite is set at a level that enables the group to withstand future stress impacts. The macroeconomic internal stress tests, conducted throughout 2023, considered combinations of various potential impacts as identified in our top and emerging risks, in particular the impact of the Russia-Ukraine war, geopolitical tensions and trade wars, interest rate shocks and a deep recession, supply chain disruption and operational risk. We also conduct reverse stress tests each year for HSBC Bank plc 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. Recovery and resolution plans Recovery and resolution plans form part of the integral framework safeguarding HSBC Bank plc financial stability. The recovery plan, together with stress testing, help us understand the likely outcomes of adverse business or economic conditions and in the identification of appropriate risk mitigating actions. Climate Risk In 2023, we have considered four bespoke scenarios that were designed to articulate our view of the range of potential outcomes for global climate change. The scenarios explore a wide range of physical and transition risks that could materialise under certain technological, behavioural and political assumptions: the Net-Zero - Corporate Strategy scenario, which aligns with the HSBC Group's net zero strategy and is consistent with the Paris Agreement; the Baseline - Current Commitments scenario, which assumes that climate action is limited to the current governmental commitments and pledges; the Delayed Transition scenario, which assumes that climate action is delayed until 2030; and the Downside Physical Risk scenario, which assumes muted climate action limited to current governmental policies. We consider our Current Commitments scenario as the most likely scenario to transpire over the next five years. Under the Current Commitments scenario, we expect moderate levels of losses relating to transition risks. Based on this scenario the potential impact on expected credit losses is not considered material over the next five years, as the impacts of climate risk will emerge later in the following decades. Key developments and risk profile 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. - Through our climate risk programme, we have continued to embed climate considerations throughout the firm, including updating the scope of our programme to cover all risk types, expanding the scope of climate related training and developing new climate risk metrics to monitor and manage exposures. We completed an Internal Scenario Analysis exercise which focused on generating more granular insights which we are using improve our understanding of our risk exposures for use in risk management, business decision making, and to meet ongoing regulatory expectations. - We enhanced our processes, framework and 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 deployed industry leading technology and advanced analytics capabilities into new markets to improve our ability to identify suspicious activities and prevent financial crime. - 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 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 the European region and the group's businesses, for any risks that may require escalation. We update our top and emerging risks as necessary. Our current top and emerging risks are as follows. Externally driven Geopolitical and macroeconomic risk The group faces elevated geopolitical risks, with the Russia-Ukraine war continuing to have global economic and political implications. The Israel-Hamas war is also increasing tensions in the Middle East, leading to recent attacks on shipping in the Red Sea and resulting counter-measures, which have begun to disrupt supply chains. The group is monitoring and assessing the impacts of these wars. The Russia-Ukraine war has continued to elevate geopolitical instability which could have continued ramifications for the group and its customers. We continue to monitor and respond to financial sanctions and trade restrictions that have been adopted in response. These sanctions and trade restrictions are complex, novel and evolving. In particular, the US, the UK and the EU, as well as other countries, have imposed significant sanctions and trade restrictions against Russia. Such sanctions and restrictions target 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. These countries have also enacted more generally applicable investment, export, and import bans and restrictions. In December 2023, the US established a new secondary sanctions regime, providing itself broad discretion to impose severe sanctions on non-US banks that are knowingly or even unknowingly engaged in certain transactions or services involving Russia's military-industrial base. This creates challenges associated with the detection or prevention of third-party activities beyond HSBC's control. The imposition of such sanctions against any non-US HSBC entity could result in significant adverse commercial, operational, and reputational consequences for HSBC, including the restriction or termination of the non-US HSBC entity's ability to access the US financial system and the freezing of the entity's assets that are subject to US jurisdiction. In response to such sanctions and trade restrictions, as well as asset flight, Russia has implemented certain countermeasures, including the expropriation of foreign assets. Our business in Russia principally serves multinational corporate clients headquartered in other countries. Following a strategic review, HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) has entered into an agreement to sell its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company). While we remain committed to the sale of our business in Russia, the outcome of the sale became less certain and remains subject to regulatory approval. Economic and financial risks also remain significant, and we continue to monitor our risk profile closely in the context of uncertainty over global macroeconomic policies. A fall in global energy and food prices from the highs of 2022 facilitated a process of disinflation across key economies during 2023. Following the reduction in global inflation rates, central banks in most developed markets are expected to have concluded monetary policy tightening in the second half of 2023. A further fall in inflation is expected to enable interest rate reductions through 2024, although forecasts still assume that they remain materially higher than in recent years. Higher financing costs will raise interest payment burdens for many counterparties. Fiscal deficits are also expected to remain large in both developed and emerging markets, as public spending on items including social welfare, defence and climate transition initiatives is expected to remain high. In many countries, the fiscal response to the Covid-19 pandemic has also left a very high public debt burden. Against a backdrop of slower economic growth and high interest rates, a rise in borrowing costs could increase the financial strains on highly indebted sovereigns. Macroeconomic, financial and geopolitical risks have all impacted our macroeconomic scenarios. Our Central scenario, which has the highest probability weighting in our IFRS 9 'Financial Instruments' calculations of ECL, assumes that GDP growth across our key markets will remain low in 2024, followed by moderate recovery in 2025. It is anticipated that inflation will converge towards central banks' target rates by early 2025. Similarly, interest rates are expected to decline but remain materially higher than in recent years. We also consider scenarios where commodity prices are materially higher, inflation and interest rates rise and a global recession follows, although we assign these scenarios a lower probability of occurring. Forecasts remain uncertain, 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. Uncertainty remains with respect to the relationship between the economic factors and 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. For further details of our Central and other scenarios, see 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 41. A Memorandum of Understanding ('MoU') was signed on 27 June 2023, setting out a framework for voluntary regulatory cooperation in financial services between the UK and the EU, including through the establishment of a Joint UK-EU Financial Regulatory Forum. This is expected to provide a platform on which both parties will be able to discuss financial services-related issues, including future equivalence determinations. Negotiations between the UK and the EU over the operation of the Northern Ireland Protocol concluded in February 2023. In January 2024, an additional agreement titled, "Safeguarding the Union" was signed. Together, these agreements provide a greater degree of certainty over the regulatory arrangements governing the movement of goods between Great Britain, Northern Ireland and the EU. In February 2024, the Northern Ireland Executive was reinstated after a power-sharing agreement was reached by key political parties. Challenges remain in the UK-EU relationship following the UK's withdrawal from the EU. Over the medium to long term, the UK's withdrawal from the EU may continue to adversely impact the terms of EU market access for our UK based clients. We are monitoring the situation closely, including the potential impacts on our customers. Our business could also be adversely affected by economic or political developments in regions of the world outside Europe. This reflects our extensive business links, through members of the HSBC Group and other entities, in Asia and elsewhere. Tensions between China and the US, extending to the UK, the EU, India and other countries, and political developments in Hong Kong and Taiwan, may adversely affect the group. The US, the UK, the EU and other countries have imposed various sanctions and trade restrictions on China. In response to foreign sanctions and trade restrictions, China has also announced sanctions, trade restrictions and laws that could impact the group and its customers. Further sanctions, counter-sanctions and trade restrictions may adversely affect the group, its customers and the markets in which the group operates, by creating regulatory, reputational and market risks. Mitigating actions - We closely monitor geopolitical and economic developments in our 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 continue to monitor the EU's relationship with the UK, and assess the potential impact on our people, operations and portfolios. - We continue to monitor our risk profile closely in the context of the current geopolitical and macroeconomic situation, and given the significant uncertainties, additional mitigating actions may be required. - We have taken steps, where necessary, to enhance physical security in geographical areas deemed to be at high risk from terrorism and military conflicts. Credit risk Despite ongoing macro economic and geopolitical challenges predominantly driven by the Russia-Ukraine war, prolonged high inflation and rising energy costs, our credit portfolio remains stable and resilient with no material concentration risk. Economic prospects for credit risk across our key markets will be driven by a number of factors including how inflationary pressures are managed across the EU and the UK, and whether a global recession develops, exacerbated by the ongoing Russia-Ukraine war. The Israel-Hamas war is also being monitored closely. Mitigating actions - Reviews of key credit portfolios are undertaken regularly to seek to ensure that individual customer or portfolio risks are understood and our management of the level of facilities offered through a period of low economic growth is appropriate. - We continue to monitor high risk wholesale industry sectors closely via quarterly industry risk appetite reviews and in 2023 we also undertook specific reviews of portfolios showing vulnerability such as Commodity Traders, Leverage, Construction and Building Materials, Automotives, Retail, 'Consumer Spend' and Commercial Real Estate. - Detailed performance monitoring is reviewed on a monthly basis, which includes early warning indicators and a view of concentration risks. Portfolio limits and exposures are re-assessed and reductions implemented where appropriate. - We stress test portfolios of particular concern to identify sensitivity to loss under a range of scenarios, with management actions being taken to seek to rebalance exposures and to manage risk appetite where necessary. Cyber threat and unauthorised access to systems Together with other organisations, we continue to operate in an increasingly hostile cyber threat environment. These threats include potential unauthorised access to customer accounts, and attacks on our systems or those of our third-party suppliers. These threats require ongoing investment in business and technical controls to defend against them. Mitigating actions - Our cyber intelligence and threat analysis team continually evaluate threat levels for the most prevalent cyber-attack types and their potential outcomes (see page 80 - cross-reference to Cybersecurity). To further protect the group and our customers and to help ensure the safe expansion of our business lines, 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 seek to enhance our cybersecurity capabilities, including Cloud security, identity and access management, metrics and data analytics, and third-party security reviews. An important part of our defence strategy is conducting cybersecurity training and awareness campaigns so that our colleagues remain aware of cybersecurity issues and know how to report incidents. - We regularly report and review cyber risk and control effectiveness at executive and non-executive Board level. We also report it across our businesses and functions to help ensure appropriate visibility and governance of the risk and its mitigating actions. - We participate globally in industry bodies and working groups to collaborate on tactics employed by cyber-crime groups and to collaborate in helping to defend against, detect and prevent cyber-attacks on financial organisations. - We experience numerous attempts to compromise our cybersecurity. We respond to cybersecurity attacks in accordance with our cybersecurity framework and applicable laws, rules and regulations. To date, none of these attacks have had a material impact on our business or operations. Evolving regulatory environment risk We aim to keep abreast of the emerging regulatory compliance and conduct risk agenda. Current focus areas include but are not limited to: ESG agenda developments, including in particular managing the risks of 'greenwashing'; ensuring good customer outcomes, including addressing customer vulnerabilities due to cost of living pressures; enhancements to regulatory reporting controls; and employee compliance, including the use of e-communication channels. We monitor regulatory developments closely and engage with regulators, as appropriate, to help ensure new regulatory requirements are implemented effectively and in a timely way. The competitive landscape in which the group operates may be impacted by future regulatory changes and government intervention. Mitigating actions - We monitor for regulatory developments to understand the evolving regulatory landscape and seek to respond with changes in a timely way. - We continue to support work that is focused on the implementation of UK Consumer Duty requirements. - We engage with governments and regulators to seek to make a contribution to regulations and to try and ensure that new requirements are considered properly and can be implemented effectively. - We hold regular meetings with relevant authorities to discuss strategic contingency plans, including those arising from geopolitical issues. - Our simplified conduct approach has been embedded to align to our purpose and values, in particular the value 'we take responsibility'. Financial crime and fraud risk Financial institutions remain under considerable regulatory scrutiny regarding their ability to detect and prevent financial crime. In 2023, these risks were exacerbated by rising geopolitical tensions and ongoing macroeconomic factors. These challenging developments require 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 a 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 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 seek to manage sanctions and trade restrictions through the use of reasonably designed policies, procedures and controls, which are subject to ongoing testing, auditing and enhancements. - 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 with 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 financial crime risks are 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 ('ESG') risk We are subject to financial and non-financial risks associated with ESG-related matters. Our current areas of focus include climate risk, nature-related risks and human rights risks. These can impact us both directly and indirectly through our business activities and relationships. Our assessment of climate risks covers three distinct time periods, comprising: short term, which 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 climate change results in changes to macroeconomic and financial variables which negatively impact our trading book exposures. - We may face impacts from physical risk on our own operations and premises, 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 risks if we fail to make sufficient progress towards the HSBC Group's ESG ambitions, targets and commitments, if we fail to meet evolving regulatory expectations and requirements on the management of climate and broader ESG risks, or if we knowingly or unknowingly make inaccurate, unclear, misleading, or unsubstantiated claims regarding sustainability to our stakeholders. - Requirements, policy objectives, expectations or views may vary by jurisdiction and stakeholder in relation to ESG related matters. We may be subject to potentially conflicting approaches to ESG matters in certain jurisdictions, which may impact our ability to conduct certain business within those jurisdictions or result in additional regulatory compliance, reputational, political or litigation risks. These risks may also arise from divergence in the implementation of ESG, climate policy and financial regulation in the many regions in which we operate, including initiatives to apply and enforce policy and regulation with extraterritorial effect. - We may face financial reporting risk in relation to our climate-related and broader ESG disclosures, as any data, methodologies, scenarios and reporting standards we have used may evolve over time in line with market practice, regulation or developments in science. We may also face the risk of making reporting errors due to issues relating to the availability, accuracy and verifiability of data and system, process and control challenges. Any changes and reporting errors 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 the HSBC Group's climate-related targets in the future and this could result in reputational, legal, and regulatory risks. - We may face model risk, as the uncertain and evolving impacts of climate change and data and methodology limitations present challenges to creating reliable and accurate model outputs. - We may face climate and broader ESG-related litigation and regulatory enforcement risks, either directly if stakeholders think that we are not adequately managing climate and broader ESG-related 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. Nature risk can manifest through macroeconomic, market, credit, reputational, legal and regulatory risks, for the group as well as our clients and 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. We remained aligned to the HSBC Group's materiality-based approach in developing our climate risk management capabilities across our businesses by prioritising sectors, portfolios and counterparties with the highest impacts. Mitigating actions - A dedicated Environmental Risk Oversight Forum is responsible for shaping and overseeing our approach and providing support in managing climate and sustainability risk. - The Europe Reputational Risk Committee considers climate-related matters arising from customers, transactions and third parties that either present a serious potential reputational risk to HSBC Bank plc (or the HSBC Group) or merit a decision to ensure a consistent risk management approach across the regions, global businesses and global functions. - Our climate risk programme continues to follow the HSBC Group's programme set to support the development of 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. - We have supported the HSBC Group in the development and implementation of an enhanced transition engagement questionnaire, which is used by Relationship Managers to collect information through discussions with our clients in high transition risk sectors, to support their transition away from high carbon activities. - We implement HSBC Group's sustainability risk policies as part of its broader reputational risk framework. We focus our policies on sensitive sectors which may have a high adverse impact on people or on the environment and in which we have a significant number of customers. In January 2024, the HSBC Group updated its 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. The HSBC Group also updated its thermal coal phase-out policy, which aims to drive thermal coal phase-out aligned to science-based timeframes. The HSBC Group takes a risk-based approach in the way that it identifies transactions and clients to which its energy and thermal coal phase-out policies apply, and report on relevant exposures, adopting approaches proportionate to risk and materiality. - In 2023, the HSBC Group conducted pilot exercises to assess nature risk exposures, focusing on our HSBC Continental Europe portfolios in line with regulatory expectations. - In 2023, the HSBC Group provided practical guidance and training, where relevant, to our colleagues across the group on how to identify and manage human rights risks. For further details of our approach to climate risk management, see 'Climate risk' on page 78. 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 us 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 the group. As with the use of all 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 asses 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 People risk While the overall trend in employee turnover has been improving, certain markets in the European region are still facing elevated inflation, higher turnover rates, and labour market complexities. Our success in delivering our strategic priorities and managing the regulatory and legislative environment depends on the development and retention of our leadership and high-performing employees. Mitigating actions The ability to continue to attract, develop and retain talent is primarily impacted by a competitive labour market alongside heightened inflationary pressures, coupled with business change impacts on employees. Compliance with employment laws and regulations remains a priority. - We seek to promote a diverse and inclusive workforce, provide active support to employees, and continue to build the speak up culture. - We monitor people risks that could arise from organisational restructuring. Improved capacity and enhanced workload management through demand planning review and strengthening is applied. - Focus and emphasis is maintained on our strategy, values and purpose. 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 in the group is well understood. - Strong Senior management oversight is maintained on political, legislative, and regulatory challenges to help mitigate the effect of external factors which may impact our employment practices. - We carefully monitor the impact of the rising cost of living across the region. Our fixed pay principles consider the impact of inflation on our employees across the region recognising the pay pressure. - Focus is maintained on Future Skills development, with curriculums made available to all employees through the HSBC University. - We develop succession plans for key management roles, with consistent oversight from the group's Executive Committee. - 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. IT systems infrastructure and operational resilience We operate in an extensive and complex technology landscape, which needs to remain resilient in order to support customers, the group and markets where we operate. Risks arise where technology is not understood, maintained, or developed appropriately. We remain committed to investing in the reliability and resilience of our IT systems and critical services. The group does so in order to help protect its customers, affiliates and counterparties, and to help ensure they do not receive disruption to services that could result in reputational, legal and regulatory consequences. Increased pressure has been seen on our business operations and customer support centres as our people, processes and systems have responded to meet the current economic environment. The group's strategy includes simplification of our technology estate to reduce complexity and costs; this includes consolidation of our core banking systems onto a single strategic platform. This platform will leverage existing and known technology, and will be simpler and easier to maintain. However, as with any strategic transformation programme risks associated with implementation must be managed continuously. Mitigating actions - We continue to invest in transforming how software solutions are developed, delivered and maintained to improve system resilience. - We continue to upgrade many of our IT systems, simplify our service provision and replace older IT infrastructure and applications. - We manage implementation risks arising from the simplification of our technology estate continuously via oversight of these risks at all levels of the programme and reporting up to our Risk Committee. Execution risk In order to deliver our Strategic objectives and meet mandatory regulatory requirements, it is important for the group to maintain a strong focus on change execution risk. Change execution risk remains elevated driven by the current scale, complexity and pace of the group's strategic and regulatory change initiatives. This requires robust management of significant resource and time sensitive programmes that are expected to be executed in 2024. 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 as our other material risks. - Our 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's Change Oversight Governance function oversees the prioritisation, strategic alignment and management of change execution risk for our Change portfolios and initiatives. Model risk Model risk arises whenever business decision making includes reliance on models. We use models in both financial and non-financial contexts and 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. We continued to prioritise the redevelopment of internal ratings-based ('IRB'), internal model approach ('IMA') and internal model methods ('IMM') models, as part of the IRB repair and Basel III programmes with a key focus on enhancing the quality of data used as model inputs. A new suite of IRB models for local corporates used in France is undergoing regulatory approval from the Prudential Regulation Authority ('PRA') and European Central Bank ('ECB'). A comprehensive development and application plan of key regulatory capital models has been submitted to both regulators and has been designed to help ensure that HSBC meets both the PRA and ECB increased expectations on model risk management. Climate risk modelling is a key focus as our commitment to ESG has become a critical part of the group's strategy. Model risk remains a key area of focus given the regulatory scrutiny in this area, with local regulatory exams taking place across the group and revised principles on model risk published by the PRA (SS1/23) and expected to come into force in 2024 and further developments in policy expected from other regulators. Mitigating actions - We have continued to embed the enhanced monitoring, review and challenge of IRB and expected credit loss model performance through our Model Risk Management function. The Model Risk Management team aims to provide strong and effective review and challenge of any future redevelopment of these models. - Model Risk Management works closely with our lines of business to ensure that our models meet regulatory requirements as well as risk management, pricing, liquidity and capital management needs. 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 multidisciplinary 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. We need to meet external regulatory obligations and laws that cover data, such as the Basel Committee on Banking Supervision's 239 guidelines 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 have made improvements to our data policies. We are implementing an updated control framework to help enhance the end-to-end management of data risk. - We aim 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 seek to continue to modernise our data and analytics infrastructure through investments in Cloud technology, data visualisation, machine learning and artificial intelligence. - We educate our employees on data risk and data management. We deliver regular mandatory training on how to protect and manage data appropriately. Third Party risk We use third parties to provide a range of goods and services. It is critical that we ensure that 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 continuously seek to improve our control framework for the use of third-party providers to seek to ensure risks associated with these arrangements are understood and managed effectively by our businesses and functions across the group. - We continue to enhance the management of our intra-group arrangements and external third-party arrangements. - We are implementing the changes required by new regulations as set by our regulators. - Our material banking and insurance risks The material risk types associated with our banking and insurance manufacturing operations are described in the following tables. Description of risks - banking operations (continued) Credit risk (see page 30) The risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from certain other products such as guarantees and derivatives. Credit risk is: - measured as the amount that could be lost if a customer or counterparty fails to make repayments; - monitored using various internal risk management measures and within limits approved by individuals within a framework of delegated authorities; and - managed through a robust risk control framework that 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 (see page 68) The risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, including the risk of adverse impact on earnings or capital due to structural foreign exchange exposures and changes in market interest rates, and including the financial risks arising from historic and current provision of pensions and other post employment benefits to staff and their dependants. 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 appetites set as target and minimum ratios; - monitored and projected against appetites and using stress and scenario testing; and - managed through control of resources in conjunction with risk profiles and cashflows. Market risk (see page 76) The risk that movements in market factors such as foreign exchange rates, interest rates, credit spreads, equity prices and commodity prices will reduce our income or the value of our portfolios. Exposure to market risk is separated into two portfolios: - trading portfolios; and - non-trading portfolios. Market risk exposures arising from our insurance operations are discussed on page 83. 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, including the sensitivity of net interest income and the sensitivity of structural foreign exchange; and - managed using risk limits approved by the group's RMM and the RMM in various global businesses. Climate risk (see page 78) 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 can 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 may arise, impacting HSBC Bank plc, where the HSBC Group fails to meet its 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 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 using risk appetite statements; and - managed through adherence to risk appetite thresholds and through specific policies, enhancements to processes and the development of tools. Resilience risk, including cybersecurity risk (see page 79) Resilience risk is the risk that we are unable to provide critical services to our customers, affiliates, and counterparties as a result of sustained and significant operational disruption. Resilience risk arises from failures or inadequacies in processes, people, systems or external events. These may be driven by rapid technological innovation, changing behaviours of our consumers, cyber-threats and attacks, cross border dependencies, and third party relationships. 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 continuous monitoring and thematic reviews. Regulatory compliance risk (see page 80) Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct and breaching related financial services regulatory standards. Regulatory compliance risk arises from the failure to observe the letter and spirit of relevant laws, codes, rules, regulations and standards of good practice. This could result in poor market or customer outcomes leading 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 (see page 81) Financial crime risk is the risk of knowingly or unknowingly helping parties to commit or to further potentially illegal activity through HSBC, including money laundering, fraud, bribery and corruption, tax evasion, sanctions breaches, and terrorist 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 of, and assessment by, 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. Model risk (see page 82) Model risk is the potential for adverse consequences from business decisions informed by models, which can be exacerbated by errors in methodology, design or the way they are used. Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models. Model risk is: - measured by reference to model performance tracking and the output of detailed technical reviews, with key metrics including model review statuses and findings; - monitored against model risk appetite statements, insight from the independent review function, feedback from internal and external audits, and regulatory reviews; and - managed by creating and communicating appropriate policies, procedures and guidance, training colleagues in their application, and supervising their adoption to ensure operational effectiveness. Our insurance manufacturing subsidiaries are regulated separately from our banking operations. Risks in our insurance entities are managed using methodologies and processes that are subject to group oversight. Our insurance operations are also subject to some of the same risks as our banking operations, and these are covered by the group's risk management processes. There are though specific risks inherent to the insurance operations as noted below. Description of risks - insurance manufacturing operations Financial risk (see page 82) For insurance entities, Financial risk includes the risk of not being able to effectively 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 risks arises from: - market risk affecting the fair values of financial assets or their future cash flows; - credit risk; and - liquidity risk of entities not being able 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 that outlines clear and consistent policies, principles and guidance. This includes using product design and asset liability matching and bonus rates. Insurance risk (see page 82) The risk that, over time, the cost of the contract, 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 though a framework of approved limits and delegated authorities; and - managed through a robust risk control framework that outlines clear and consistent policies, principles and guidance. This includes using product design, underwriting, reinsurance and claims-handling procedures. Credit risk Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. Credit risk arises principally from direct lending, trade finance and leasing business, but also from certain other products, such as guarantees and derivatives. Credit risk management Key developments in 2023 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 IFRS 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. For further details, see 'Top and emerging risks' on page 23. Governance and structure We have established HSBC Group-wide credit risk management and related IFRS 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 Chief Executive together with the authority to sub-delegate them. The Credit risk sub-function in Risk is responsible for the key policies and processes for managing credit risk, which include formulating credit policies and risk rating frameworks, guiding the 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 across HSBC a strong culture of responsible lending and a robust risk policy and control framework; - to both partner and challenge global 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 process IFRS 9 'Financial Instruments' process The IFRS 9 process comprises three main areas: modelling and data; implementation; and governance. Modelling, data and forward economic guidance The HSBC Group has established IFRS 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 for generating unbiased and independent global economic scenarios. Scenarios are subject to a process of review and challenge by a dedicated central team, and individually for each region. 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. Implementation 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 Management review forums are established in order to review and approve the impairment results. Regional management review forums have representatives from Credit Risk and Finance. Required members of the forums are the heads of Wholesale Credit, Market Risk, and Wealth and Personal Banking Risk, as well as the global business Chief Financial Officers and the Chief Accounting Officer. 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. The group uses a number of controls and measures to minimise undue concentration of exposure in the group's portfolios across industry, country and customer groups. These include portfolio and counterparty limits, approval and review controls, and stress testing. Credit quality of financial instruments (Audited) Our risk rating system facilitates the internal ratings-based approach under the Basel framework adopted by the HSBC 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 The CRR 10-grade scale summarises a more granular underlying 23-grade scale of obligor 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 Retail lending credit quality is based on a 12-month point-in-time probability-weighted PD. Credit quality classification 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 probability of default % Internal credit rating 12 month probability-weighted PD % Quality classification1,2 Strong BBB and above A- and above CRR1 to CRR21 0 - 0.169 Band 1 and 2 0.000 - 0.500 Good BBB- to BB BBB+ to BBB- CRR3 0.170 - 0.740 Band 3 0.501 - 1.500 Satisfactory BB- to B and unrated BB+ to B and unrated CRR4 to CRR5 0.741 - 4.914 Band 4 and 5 1.501 - 20.000 Sub-standard B- to C B- to C CRR6 to CRR8 4.915 - 99.999 Band 6 20.001 - 99.999 Credit impaired Default Default CRR9 to CRR10 100 Band 7 100 1 Customer risk rating ('CRR'). 2 12-month point-in-time probability-weighted 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 Financial Statements. Forborne loans and advances (Audited) Forbearance measures consist of concessions towards an obligor that is experiencing or 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. The group definition of forborne captures non-payment-related concessions, such as covenant waivers. For details of our policy on forbearance, see Note 1.2(i) in the financial statements. Credit quality of forborne loans 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 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) Under the IFRS 9, 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 reassessed. 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 ('DPD'), 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. Credit risk in 2023 At 31 December 2023, gross loans and advances to customers and banks of ��91bn increased by ��0.1bn, compared with 31 December 2022. This included adverse foreign exchange movements of ��1.5bn. Excluding foreign exchange movements, balance of personal loans and advances to customers increased by ��7.4bn. This was mainly driven by an increase in France due to retention of a portfolio of home loans and other loans previously classified as assets held for sale, offset by decrease of ��3.2bn in wholesale loans and advances to customers and decrease in loans and advances to banks by ��2.6bn. At 31 December 2023, the allowance for ECL excluding foreign exchange movements in relation to loans and advances to customers increased by ��5m from 31 December 2022. This was attributable to: - a ��51m decrease in wholesale loans and advances to customers, of which ��6m was driven by stages 1 and 2, ��51m by stage 3 offset by ��6m increase in POCI. - a ��56m increase in personal loans and advances to customers, of which ��14m was driven by stages 1 and 2 and ��42m by stage 3. This is largely due to the inclusion of HBBM in HSBC Bank plc. Stage 3 balances at 31 December 2023 remained broadly stable compared with 31 December 2022. The ECL charge for 2023 was ��169m, inclusive of recoveries due to the impact of continued economic uncertainty, rising interest rates and inflationary pressures. Summary of credit risk This Credit Risk section includes new and redesigned disclosures addressing the recommendations of the Disclosures on Expected Credit Losses ('DECL') Taskforce's third report published in September 2022. Sections impacted: - Stage 2 decomposition for loans and advances to customers and banks as at 31 December 2023; - Alignment of management judgemental adjustments to the DECL definition with additional qualitative and quantitative granularity; - Reconciliation of changes in gross carrying amount and allowances for loans and advances to banks and customers; - Reconciliation of changes in nominal amount and allowances for loan commitments and financial guarantees. Comparative information for the prior period has not been presented in the Annual Report and Accounts 2023 as we recognised and prioritised the importance of increasing the comparability of our external disclosures within the timeline recommended by the DECL Taskforce. While prior period information can be valuable in certain contexts, we believe the prospective expansion of the level of disclosures out-weights the benefits of presenting data from prior years. The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS 9 are applied and the associated allowance for ECL. The allowance for ECL decreased from ��1,370m at 31 December 2022 to ��1,217m at 31 December 2023. The allowance for ECL at 31 December 2023 comprised of ��1,159m (2022: ��1,283m) in respect of assets held at amortised cost, ��58m (2022: ��87m) in respect of loans and other credit related commitments, and financial guarantees, and ��23m (2022: ��24m) in respect of debt instruments measured at FVOCI. Summary of financial instruments to which the impairment requirements in IFRS 9 are applied (Audited) 31 Dec 2023 31 Dec 2022 Gross carrying/nominal amount Allowance for ECL1 Gross carrying/nominal amount Allowance for ECL1 The group ��m ��m ��m ��m Loans and advances to customers at amortised cost 76,579 (1,088) 73,717 (1,103) Loans and advances to banks at amortised cost 14,372 (1) 17,152 (43) Other financial assets measured at amortised cost 273,728 (70) 269,815 (137) - cash and balances at central banks 110,618 - 131,434 (1) - items in the course of collection from other banks 2,114 - 2,285 - - reverse repurchase agreements - non trading 73,494 - 53,949 - - financial investments 8,861 - 3,248 - - prepayments, accrued income and other assets2 56,845 (6) 55,694 (3) - assets held for sale6 21,796 (64) 23,205 (133) Total gross carrying amount on-balance sheet 364,679 (1,159) 360,684 (1,283) Loans and other credit-related commitments 125,616 (42) 126,457 (67) Financial guarantees3 2,401 (16) 5,327 (20) Total nominal amount off-balance sheet4 128,017 (58) 131,784 (87) 492,696 (1,217) 492,468 (1,370) Fair value Memorandum allowance for ECL5 Fair value Memorandum allowance for ECL5 ��m ��m ��m ��m Debt instruments measured at fair value through other comprehensive income ('FVOCI') 37,427 (23) 29,248 (24) 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 which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 108 includes both financial and non-financial assets, including cash collateral and settlement accounts. 3 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 4 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 5 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 income statement. 6 For further details on gross carrying amounts and allowances for ECL related to assets held for sale, see 'Assets held for sale' on page 38. Summary of financial instruments to which the impairment requirements in IFRS 9 are applied (continued) (Audited) 31 Dec 2023 31 Dec 2022 Gross carrying/nominal amount Allowance for ECL1 Gross carrying/nominal amount Allowance for ECL1 The bank ��m ��m ��m ��m Loans and advances to customers at amortised cost 32,800 (357) 37,370 (378) Loans and advances to banks at amortised cost 11,670 - 14,529 (43) Other financial assets measured at amortised cost 174,304 (3) 169,321 (3) - cash and balances at central banks 61,128 - 78,442 (1) - items in the course of collection from other banks 1,877 - 1,863 - - reverse repurchase agreements-non trading 56,973 - 43,055 - - financial investments 12,029 - 6,378 - - prepayments, accrued income and other assets2 42,206 (3) 39,583 (2) - assets held for sale 91 - - - Total gross carrying amount on-balance sheet 218,774 (360) 221,220 (424) Loans and other credit-related commitments 34,799 (22) 35,692 (31) Financial guarantees3 1,106 (9) 1,363 (12) Total nominal amount off-balance sheet4 35,905 (31) 37,055 (43) 254,679 (391) 258,275 (467) Fair value Memorandum allowance for ECL5 Fair value Memorandum allowance for ECL5 ��m ��m ��m ��m Debt instruments measured at FVOCI 16,307 (5) 12,206 (4) 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 which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the consolidated balance sheet on page 114 includes both financial and non-financial assets, including cash collateral and settlement accounts. 3 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 4 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 5 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 income statement. The following table provides an overview of the group's and bank'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 since initial recognition on 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. - Purchased or originated credit-impaired ('POCI'): Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses on which a lifetime ECL is recognised. Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2023 (Audited) Gross carrying/nominal amount2 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total The group ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m % % % % % Loans and advances to customers at amortised cost 66,356 7,881 2,310 32 76,579 (75) (125) (882) (6) (1,088) 0.1 1.6 38.2 18.8 1.4 - personal 11,447 1,370 214 - 13,031 (20) (17) (71) - (108) 0.2 1.2 33.2 - 0.8 - corporate and commercial 42,982 5,981 1,773 32 50,768 (48) (98) (673) (6) (825) 0.1 1.6 38.0 18.8 1.6 - non-bank financial institutions 11,927 530 323 - 12,780 (7) (10) (138) - (155) 0.1 1.9 42.7 - 1.2 Loans and advances to banks at amortised cost 14,256 116 - - 14,372 (1) - - - (1) - - - - - Other financial assets measured at amortised cost 272,557 989 182 - 273,728 (5) (8) (57) - (70) - 0.8 31.3 - - Loan and other credit-related commitments 118,242 7,197 174 3 125,616 (13) (21) (8) - (42) - 0.3 4.6 - - - personal 1,246 27 3 - 1,276 - - - - - - - - - - - corporate and commercial 58,225 4,815 155 3 63,198 (11) (17) (7) - (35) - 0.4 4.5 - 0.1 - financial 58,771 2,355 16 - 61,142 (2) (4) (1) - (7) - 0.2 6.3 - - Financial guarantees1 2,078 251 72 - 2,401 (2) (1) (13) - (16) 0.1 0.4 18.1 - 0.7 - personal 32 2 - - 34 - - - - - - - - - - - corporate and commercial 1,057 68 71 - 1,196 (1) (1) (13) - (15) 0.1 1.5 18.3 - 1.3 - financial 989 181 1 - 1,171 (1) - - - (1) 0.1 - - - 0.1 At 31 Dec 2023 473,489 16,434 2,738 35 492,696 (96) (155) (960) (6) (1,217) - 0.9 35.1 17.1 0.2 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 DPD and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets by those less than 30 DPD and greater than 30 DPD and therefore presents those financial assets 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 at 31 December 2023 (Audited) Gross carrying amount Allowance for ECL ECL coverage % of which: of which: of which: of which: of which: of which: Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 The group ��m ��m ��m ��m ��m ��m % % % Loans and advances to customers at amortised cost: 7,881 234 298 (125) (4) (1) 1.6 1.7 0.3 - personal 1,370 183 87 (17) (3) (1) 1.2 1.6 1.1 - corporate and commercial 5,981 51 207 (98) (1) - 1.6 2.0 - - non-bank financial institutions 530 - 4 (10) - - 1.9 - - Loans and advances to banks at amortised cost 116 - 10 - - - - - - Other financial assets measured at amortised cost 989 14 9 (8) - - 0.8 - - 1 Up-to-date accounts in stage 2 are not shown in amounts presented above. 2 The days past due amounts presented above are on a contractual basis. Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2022 (continued) (Audited) Gross carrying/nominal amount2 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total The group ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m % % % % % Loans and advances to customers at amortised cost 63,673 7,817 2,224 3 73,717 (51) (145) (907) - (1,103) 0.1 1.9 40.8 - 1.5 - personal 5,293 615 105 - 6,013 (9) (15) (31) - (55) 0.2 2.4 29.5 - 0.9 - corporate and commercial 46,671 6,479 1,851 3 55,004 (40) (123) (774) - (937) 0.1 1.9 41.8 - 1.7 - non-bank financial institutions 11,709 723 268 - 12,700 (2) (7) (102) - (111) - 1.0 38.1 - 0.9 Loans and advances to banks at amortised cost 16,673 414 65 - 17,152 (6) (21) (16) - (43) - 5.1 24.6 - 0.3 Other financial assets measured at amortised cost 267,830 1,662 323 - 269,815 (14) (17) (106) - (137) - 1.0 32.8 - 0.1 Loan and other credit-related commitments 116,994 9,300 163 - 126,457 (13) (32) (22) - (67) - 0.3 13.5 - 0.1 - personal 2,004 107 5 - 2,116 - - - - - - - - - - - corporate and commercial 60,659 7,625 157 - 68,441 (12) (28) (22) - (62) - 0.4 14.0 - 0.1 - financial 54,331 1,568 1 - 55,900 (1) (4) - - (5) - 0.3 - - - Financial guarantees1 4,715 528 84 - 5,327 (1) (2) (17) - (20) - 0.4 20.2 - 0.4 - personal 20 2 1 - 23 - - - - - - - - - - - corporate and commercial 2,946 387 82 - 3,415 (1) (1) (17) - (19) - 0.3 20.7 - 0.6 - financial 1,749 139 1 - 1,889 - (1) - - (1) - 0.7 - - 0.1 At 31 Dec 2022 469,885 19,721 2,859 3 492,468 (85) (217) (1,068) - (1,370) - 1.1 37.4 - 0.3 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. Stage 2 days past due analysis at 31 December 2022 (continued) (Audited) Gross carrying amount Allowance for ECL ECL coverage % of which: of which: of which: of which: of which: of which: Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 The group ��m ��m ��m ��m ��m ��m % % % Loans and advances to customers at amortised cost 7,817 93 331 (145) (2) (2) 1.9 2.2 0.6 - personal 615 43 9 (15) (2) (1) 2.4 4.7 11.1 - corporate and commercial 6,479 50 296 (123) - (1) 1.9 0.0 0.3 - non-bank financial institutions 723 - 26 (7) - - 1.0 - - Loans and advances to banks at amortised cost 414 - 8 (21) - - 5.1 - - Other financial assets measured at amortised cost 1,662 25 12 (17) - (2) 1.0 - 16.7 1 Up-to-date accounts in stage 2 are not shown in amounts presented above. 2 The days past due amounts presented above are on a contractual basis. Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2023 (Audited) Gross carrying/nominal amount2 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total The bank ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m % % % % % Loans and advances to customers at amortised cost 28,806 3,229 740 25 32,800 (15) (47) (289) (6) (357) 0.1 1.5 39.1 24.0 1.1 - personal 1,809 817 13 - 2,639 (2) (2) (2) - (6) 0.1 0.2 15.4 - 0.2 - corporate and commercial 17,611 2,026 421 25 20,083 (10) (38) (151) (6) (205) 0.1 1.9 35.9 24.0 1.0 - non-bank financial institutions 9,386 386 306 - 10,078 (3) (7) (136) - (146) - 1.8 44.4 - 1.4 Loans and advances to banks at amortised cost 11,644 26 - - 11,670 - - - - - - - - - - Other financial assets measured at amortised cost 174,271 24 9 - 174,304 - (1) (2) - (3) - 4.2 22.2 - - Loan and other credit-related commitments 30,672 4,109 15 3 34,799 (7) (14) (1) - (22) - 0.3 6.7 - 0.1 - personal 330 1 2 - 333 - - - - - - - - - - - corporate and commercial 14,891 1,884 5 3 16,783 (5) (10) - - (15) - 0.5 - - 0.1 - financial 15,451 2,224 8 - 17,683 (2) (4) (1) - (7) - 0.2 12.5 - - Financial guarantees1 896 184 26 - 1,106 (1) - (8) - (9) 0.1 - 30.8 - 0.8 - personal - 1 - - 1 - - - - - - - - - - - corporate and commercial 518 9 25 - 552 - - (8) - (8) - - 32.0 - 1.4 - financial 378 174 1 - 553 (1) - - - (1) 0.3 - - - 0.2 At 31 Dec 2023 246,289 7,572 790 28 254,679 (23) (62) (300) (6) (391) - 0.8 38.0 21.4 0.2 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. Stage 2 days past due analysis at 31 December 2023 (Audited) Gross carrying amount Allowance for ECL ECL coverage % of which: of which: of which: of which: of which: of which: Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 The bank ��m ��m ��m ��m ��m ��m % % % Loans and advances to customers at amortised cost: 3,229 157 78 (47) (1) - 1.5 0.6 - - personal 817 157 78 (2) (1) - 0.2 0.6 - - corporate and commercial 2,026 - - (38) - - 1.9 - - - non-bank financial institutions 386 - - (7) - - 1.8 - - Loans and advances to banks at amortised cost 26 - - - - - - - - Other financial assets measured at amortised cost 24 - - (1) - - 4.2 - - 1 Up-to-date accounts in stage 2 are not shown in amounts presented above. 2 The days past due amounts presented above are on a contractual basis. Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2022 (continued) (Audited) Gross carrying/nominal amount2 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total The bank ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m % % % % % Loans and advances to customers at amortised cost 33,919 2,576 875 - 37,370 (19) (35) (324) - (378) 0.1 1.4 37.0 - 1.0 - personal 3,090 482 12 - 3,584 (2) (7) (3) - (12) 0.1 1.5 25.0 - 0.3 - corporate and commercial 20,314 1,547 595 - 22,456 (16) (27) (204) - (247) 0.1 1.7 34.3 - 1.1 - non-bank financial institutions 10,515 547 268 - 11,330 (1) (1) (117) - (119) - 0.2 43.7 - 1.1 Loans and advances to banks at amortised cost 14,299 165 65 - 14,529 (5) (22) (16) - (43) - 13.3 24.6 - 0.3 Other financial assets measured at amortised cost 169,276 24 21 - 169,321 (2) (1) - - (3) - 4.2 - - - Loan and other credit-related commitments 32,427 3,225 40 - 35,692 (9) (15) (7) - (31) - 0.5 17.5 - 0.1 - personal 874 10 2 - 886 - - - - - - - - - - - corporate and commercial 16,565 2,297 38 - 18,900 (8) (13) (7) - (28) - 0.6 18.4 - 0.1 - financial 14,988 918 - - 15,906 (1) (2) - - (3) - 0.2 - - - Financial guarantees1 1,194 133 36 - 1,363 - (1) (11) - (12) - 0.8 30.6 - 0.9 - personal 2 1 - - 3 - - - - - - - - - - - corporate and commercial 775 17 35 - 827 - - (11) - (11) - - 31.4 - 1.3 - financial 417 115 1 - 533 - (1) - - (1) - 0.9 - - 0.2 At 31 Dec 2022 251,115 6,123 1,037 - 258,275 (35) (74) (358) - (467) - 1.2 34.5 - 0.2 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. Stage 2 days past due analysis at 31 December 2022 (continued) (Audited) Gross carrying amount Allowance for ECL ECL coverage % of which: of which: of which: of which: of which: of which: Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 Stage 2 1 to 29 DPD1,2 30 and > DPD1,2 The bank ��m ��m ��m ��m ��m ��m % % % Loans and advances to customers at amortised cost: 2,576 26 6 (35) (1) (1) 1.4 3.8 16.7 - Personal 482 26 6 (7) (1) (1) 1.5 3.8 16.7 - Corporate and commercial 1,547 - - (27) - - 1.7 - - - Non-bank financial institutions 547 - - (1) - - 0.2 - - Loans and advances to banks at amortised cost 165 - - (22) - - 13.3 - - Other financial assets measured at amortised cost 24 - - (1) (1) - 4.2 - - 1 Up-to-date accounts in stage 2 are not shown in amounts presented above. 2 The days past due amounts presented above are on a contractual basis. Stage 2 decomposition as at 31 December 2023 The following disclosure presents the stage 2 decomposition of gross carrying amount and allowances for ECL for loans and advances to customers and banks. It also sets out the reasons why an exposure is classified as stage 2 and therefore presented as a significant increase in credit risk at 31 December 2023. The quantitative classification shows gross carrying amount and allowances for ECL for which the applicable reporting date PD measure exceeds defined quantitative thresholds for retail and wholesale exposures, as set out in Note1.2 'Summary of material accounting policies', on page 120. The qualitative classification primarily accounts for customer risk rating ('CRR') deterioration, watch-and-worry and retail management judgemental adjustments. A summary of our current policies and practices for the significant increase in credit risk is set out in 'Summary of material accounting policies' on page 120. Loans and advances to customers and banks1,2 At 31 Dec 2023 Gross carrying amount Allowance for ECL Loans and advances to customers Loans and advances to customers Personal Corporate and commercial Non-bank financial institutions Loans and advances to banks at amortised cost Total Stage 2 Personal Corporate and commercial Non-bank financial institutions Loans and advances to banks at amortised cost Total Stage 2 The group ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m Quantitative 820 3,589 423 91 4,923 (12) (56) (8) - (76) Qualitative 547 2,186 103 15 2,851 (5) (42) (2) - (49) of which: forbearance 3 260 1 - 264 - (2) - - (2) 30 DPD backstop 3 206 4 10 223 - - - - - Total stage 2 1,370 5,981 530 116 7,997 (17) (98) (10) - (125) ECL Coverage % 1.2 1.6 1.9 - 1.6 The bank Quantitative 321 1,801 386 26 2,534 (1) (21) (7) - (29) Qualitative 496 225 - - 721 (1) (17) - - (18) of which: forbearance 1 6 - - 7 - - - - - 30 DPD backstop - - - - - - - - - - Total stage 2 817 2,026 386 26 3,255 (2) (38) (7) - (47) ECL Coverage % 0.2 1.9 1.8 - 1.4 Loans and advances to customers1 At 31 Dec 2022 Gross carrying amount Allowance for ECL ECL Coverage % Total Personal Corporate and commercial Non-bank financial institutions Total Personal Corporate and commercial Non-bank financial institutions Total The group ��m ��m ��m ��m ��m ��m ��m ��m % Quantitative 557 3,310 379 4,246 (12) (71) (2) (85) 2.0 Qualitative 56 2,874 319 3,249 (3) (51) (5) (59) 1.8 30 DPD backstop 2 295 25 322 - (1) - (1) 0.3 Total stage 2 615 6,479 723 7,817 (15) (123) (7) (145) 1.9 The bank Quantitative 456 1,109 314 1,879 (6) (13) (1) (20) 1.1 Qualitative 26 438 233 697 (1) (14) - (15) 2.2 30 DPD backstop - - - - - - - - - Total stage 2 482 1,547 547 2,576 (7) (27) (1) (35) 1.4 1 Where balances satisfy more than one of the above three criteria for determining a significant increase in credit risk, the corresponding gross exposure and ECL have been assigned in order of categories presented. 2 Stage 2 decomposition for loans and advances to banks and Personal lending products have been reported for the first time at 31 December 2023 following the adoption of the recommendations of the DECL Taskforce's third report. Assets held for sale (Audited) At 31 December 2023, the most material balances held for sale arose from our retail banking operations in France. Disclosures relating to assets held for sale are provided in the following credit risk tables, primarily where the disclosure is relevant to the measurement of these financial assets: - Maximum exposure to credit risk (page 40); - Distribution of financial instruments by credit quality at 31 December (page 54); Although there was a reclassification on the balance sheet, there was no separate income statement reclassification. As a result, charges for loan impairment losses shown in the credit risk disclosures include loan impairment charges relating to financial assets classified as 'assets held for sale'. 'Loans and other credit-related commitments' and 'financial guarantees', as reported in credit disclosures, also include exposures and allowances relating to financial assets classified as 'assets held for sale'. Loans and advances to customers and banks measured at amortised cost (Audited) Total gross loans and advances Impairment allowances on loans and advances ��m ��m As reported 90,951 (1,089) Reported in 'Assets held for sale' 21,512 (64) At 31 Dec 2023 112,463 (1,153) As reported 90,869 (1,146) Reported in 'Assets held for sale' 21,325 (131) At 31 Dec 2022 112,194 (1,277) At 31 December 2023, gross loans and advances of our retail banking operations in France were ��21.4bn, and the related impairment allowance for ECL was ��0.1bn. Lending balances held for sale continue to be measured at amortised cost less allowances for impairment and, therefore, such carrying amounts may differ from fair value. These lending balances are part of associated disposal groups that are measured in their entirety at the lower of carrying amount and fair value less costs to sell. Any difference between the carrying amount of these assets and their sales price is part of the overall gain or loss on the associated disposal group as a whole. For further details of the carrying amount and the fair value at 31 December 2023 of loans and advances to banks and customers classified as held for sale, see Note 35 on the financial statements. Gross loans and impairment allowances on loans and advances to customers and banks reported in 'Assets held for sale' (Audited) Retail banking operations in France Other1 Total Gross Loans ��m ��m ��m Loans and advances to customers at amortised cost: 13,319 90 13,409 Personal 10,916 - 10,916 Corporate and Commercial 2,362 - 2,362 Non-bank financial institutions 41 90 131 Loans and advances to banks at amortised cost 8,103 - 8,103 At 31 Dec 2023 21,422 90 21,512 Impairment allowance Loans and advances to customers at amortised cost: (64) - (64) Personal (61) - (61) Corporate and Commercial (3) - (3) Non-bank financial institutions - - - Loans and advances to banks at amortised cost - - - At 31 Dec 2023 (64) - (64) Loans and advances to customers at amortised cost: 20,852 342 21,194 Personal 18,835 253 19,088 Corporate and Commercial 1,975 89 2,064 Non-bank financial institutions 42 - 42 Loans and advances to banks at amortised cost - 131 131 At 31 Dec 2022 20,852 473 21,325 Impairment allowance Loans and advances to customers at amortised cost: (76) (51) (127) Personal (73) (38) (111) Corporate and Commercial (3) (13) (16) Non-bank financial institutions - - - Loans and advances to banks at amortised cost - (4) (4) At 31 Dec 2022 (76) (55) (131) 1 2023 balances comprising assets held for sale relating to the planned transfer of hedge fund administration services. The table below analyses the amount of ECL charges arising from assets held for sale and assets not held for sale. The charges arising from assets held for sale during the period primarily relate to the retail banking operations in France. Changes in expected credit losses and other credit impairment (Audited) 2023 2022 ��m ��m ECL charges arising from: - Asset held for sale 5 4 - Asset not held for sale 164 218 At 31 Dec 169 222 Credit exposure Maximum exposure to credit risk (Audited) This section provides information on balance sheet items and their offsets as well as loan and other credit-related commitments. The offset of derivatives remains in line with the movements in maximum exposure amounts. 'Maximum exposure to credit risk' table The following table presents our maximum exposure before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). The table excludes trading assets, financial assets designated and otherwise mandatorily measured at fair value trough profit and loss, and financial investments measured at fair value through other comprehensive income as their carrying amount best represents the net exposure to credit risk. Equity securities are also excluded 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; 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. The offset in the table relates to amounts where there is a legally enforceable right of offset in the event of counterparty default and where, as a result, there is a net exposure for credit risk purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes. No offset has been applied to off-balance sheet collateral. In the case of derivatives the offset column also includes collateral received in cash and other financial assets. Other credit risk mitigants While not disclosed as an offset in the following 'Maximum exposure to credit risk' table, other arrangements are in place which 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 balance sheet and short positions in securities. In addition, for financial assets held as part of linked insurance/investment contracts the credit risk is predominantly borne by the policyholder. See Note 28 on the financial statements for further details of collateral in respect of certain loans and advances and derivatives. Collateral available to mitigate credit risk is disclosed in the 'Collateral and other credit enhancement' section on page 63. Maximum exposure to credit risk (Audited) 2023 2022 Maximum exposure Offset Net Maximum exposure Offset Net The group ��m ��m ��m ��m ��m ��m Loans and advances to customers held at amortised cost 75,491 (9,322) 66,169 72,614 (8,149) 64,465 - personal 12,923 - 12,923 5,958 (1) 5,957 - corporate and commercial 49,943 (8,570) 41,373 54,067 (7,269) 46,798 - non-bank financial institutions 12,625 (752) 11,873 12,589 (879) 11,710 Loans and advances to banks at amortised cost 14,371 (6) 14,365 17,109 (145) 16,964 Other financial assets held at amortised cost 272,558 (15,283) 257,275 268,083 (10,882) 257,201 - cash and balances at central banks 110,618 - 110,618 131,433 - 131,433 - items in the course of collection from other banks 2,114 - 2,114 2,285 - 2,285 - reverse repurchase agreements - non trading 73,494 (15,283) 58,211 53,949 (10,882) 43,067 - financial investments 8,861 - 8,861 3,248 - 3,248 - assets held for sale 20,368 - 20,368 21,214 - 21,214 - prepayments, accrued income and other assets 57,103 - 57,103 55,954 - 55,954 Derivatives 174,116 (173,718) 398 225,238 (224,444) 794 Total on-balance sheet exposure to credit risk 536,536 (198,329) 338,207 583,044 (243,620) 339,424 Total off-balance sheet 153,695 - 153,695 150,270 - 150,270 - financial and other guarantees1 21,908 - 21,908 22,425 - 22,425 - loan and other credit-related commitments 131,787 - 131,787 127,845 - 127,845 At 31 Dec 690,231 (198,329) 491,902 733,314 (243,620) 489,694 The bank ��m ��m ��m ��m ��m ��m Loans and advances to customers held at amortised cost 32,443 (9,310) 23,133 36,992 (8,132) 28,860 - personal 2,633 - 2,633 3,572 - 3,572 - corporate and commercial 19,878 (8,570) 11,308 22,209 (7,264) 14,945 - non-bank financial institutions 9,932 (740) 9,192 11,211 (868) 10,343 Loans and advances to banks at amortised cost 11,670 - 11,670 14,486 - 14,486 Other financial assets held at amortised cost 174,413 (14,733) 159,680 169,367 (10,427) 158,940 - cash and balances at central banks 61,128 - 61,128 78,441 - 78,441 - items in the course of collection from other banks 1,877 - 1,877 1,863 - 1,863 - reverse repurchase agreements - non trading 56,973 (14,733) 42,240 43,055 (10,427) 32,628 - financial investments 12,029 - 12,029 6,378 - 6,378 - assets held for sale 160 - 160 - - - - prepayments, accrued income and other assets 42,246 - 42,246 39,630 - 39,630 Derivatives 153,765 (153,744) 21 196,714 (196,505) 209 Total on-balance sheet exposure to credit risk 372,291 (177,787) 194,504 417,559 (215,064) 202,495 Total off-balance sheet 43,740 - 43,740 44,673 - 44,673 - financial and other guarantees1 8,491 - 8,491 8,231 - 8,231 - loan and other credit-related commitments 35,249 - 35,249 36,442 - 36,442 At 31 Dec 416,031 (177,787) 238,244 462,232 (215,064) 247,168 1 'Financial and other guarantees' represents 'Financial guarantees' and 'Performance and other guarantees' as disclosed in Note 31, net of ECL. Concentration of exposure We have a number of businesses with a broad range of products. We operate in a number of markets with the majority of our exposures in UK and France. For an analysis of: - financial investments, see Note 15 on the financial statements; - trading assets, see Note 10 on the financial statements; - derivatives, see page 65 and Note 14 on the financial statements; and - loans and advances by industry sector and by the location of the principal operations of the lending subsidiary or by the location of the lending branch, see page 61 for wholesale lending and page 66 for personal lending. Credit deterioration of financial instruments (Audited) A summary of our current policies and practices regarding the identification, treatment and measurement of stage 1, stage 2 and stage 3 (credit impaired) and POCI financial instruments can be found in Note 1.2(i) on the financial statements. 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 levels 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 as modelled outcomes better reflected the key risks at 31 December 2023. Methodology At 31 December 2023, four scenarios are 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 is done with reference to historically observed quarterly changes in the values of macroeconomic variables. The fourth scenario, Downside 2, is designed to represent management's view of severe downside risks. It is a globally consistent, narrative-driven scenario, that explores a more extreme economic outcomes than those captured by the consensus scenarios. In this scenario, variables do not, by design, revert to long-term trend expectations 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 calibrated to a 5% probability. The Central scenario is assigned the remaining 75%. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances. However, management may depart from this probability-based scenario weighting approach when the economic outlook and forecasts are determined to be particularly uncertain and risks are elevated. In the fourth quarter of 2023, the weights were consistent with the calibrated scenario probabilities, as key risk metrics implied a decline in the uncertainty attached to the Central scenario, compared with the fourth quarter of 2022. Economic forecasts for the Central scenario remained stable and the dispersion within consensus forecast panels remained low, even as the Israel-Hamas war escalated. Risks, including the economic consequences of a broader war in the Middle East, were 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, compared with the third quarter of 2023. The key exception was with regard to monetary policy, where expectations for interest rate cuts were brought forward. There continue 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 were captured by higher commodity and goods prices, the re-acceleration of inflation, a further rise in interest rates and 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. Expectations of lower GDP growth in many markets in 2024 are driven by the assumed lagged effects of higher interest rates and inflation in Europe. In the scenario, household discretionary income remains under pressure and business margins deteriorate amid higher refinancing costs. Growth only returns to its long-term expected trend in later years, once inflation reverts back towards central bank targets and interest rates stabilise at lower levels. 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 main markets are expected to slow down in 2024, followed by a moderate recovery in 2025. The slowdown in the UK is particularly notable in this scenario, with growth close to zero through much of 2024. In the scenario, weaker growth is caused by high interest rates, which act to deter consumption and investment. - In most markets, unemployment is expected to 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. It is anticipated that inflation converges towards central banks' target rates by early 2025. - Weak conditions in housing markets are expected to persist through 2024 and 2025 in many of our main markets, including the UK, as higher interest rates and, in many cases, declining prices, depress activity. - 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. - Policy interest rates in key markets are forecast to have peaked and are projected to decline in 2024. In the longer term, they are expected to remain at a higher level than in recent years. - The Brent crude oil price is forecast to average around $75 per barrel over the projection period. The Central scenario was created with forecasts available in late November, and reviewed continually until the end of December 2023. In accordance with HSBC's scenario framework, a probability weight of 75% has been assigned to the Central scenario for UK and France. The following tables describe key macroeconomic variables in the consensus Central scenario. Consensus Central scenario 2024-2028 (as at 4Q23) UK France GDP (annual average growth rate, %) 2024 0.3 0.8 2025 1.2 1.5 2026 1.7 1.6 2027 1.6 1.5 2028 1.6 1.5 5-year average1 1.3 1.4 Unemployment rate (%) 2024 4.7 7.5 2025 4.6 7.3 2026 4.3 7.0 2027 4.2 6.8 2028 4.2 6.8 5-year average1 4.4 7.1 House prices (annual average growth rate, %) 2024 (5.5) (1.0) 2025 0.1 2.4 2026 3.5 4.0 2027 3.0 4.4 2028 3.0 4.0 5-year average1 0.8 2.8 Inflation (annual average growth rate, %) 2024 3.2 2.7 2025 2.2 1.8 2026 2.2 1.7 2027 2.3 1.9 2028 2.3 2.1 5-year average1 2.4 2.0 Central bank policy rate (annual average, %) 2024 5.0 3.6 2025 4.3 2.8 2026 3.9 2.6 2027 3.8 2.6 2028 3.7 2.7 5-year average1 4.1 2.9 1 The five-year average is calculated over a projected period of 20 quarters from 1Q24 to 4Q28. Consensus Central scenario 2023-2027 (as at 4Q22) UK France GDP (annual average growth rate, %) 2023 (0.8) 0.2 2024 1.3 1.6 2025 1.7 1.5 2026 1.7 1.4 2027 1.7 1.4 5-year average1 1.1 1.2 Unemployment rate (%) 2023 4.4 7.6 2024 4.6 7.5 2025 4.3 7.3 2026 4.1 7.2 2027 4.1 7.2 5-year average1 4.3 7.3 House prices (annual average growth rate, %) 2023 0.2 1.8 2024 (3.8) 2.0 2025 0.7 3.1 2026 2.1 3.5 2027 2.7 3.6 5-year average1 0.4 2.8 Inflation (annual average growth rate, %) 2023 6.9 4.6 2024 2.5 2.0 2025 2.1 1.8 2026 2.0 1.7 2027 2.0 1.7 5-year average1 3.1 2.4 Central bank policy rate (annual average, %) 2023 4.4 2.7 2024 4.2 2.7 2025 3.7 2.4 2026 3.4 2.3 2027 3.1 2.3 5-year average1 3.8 2.5 1 The five-year average is calculated over a projected period of 20 quarters from 1Q23 to 4Q27. The graphs compare the Central scenario at the end of 2022 with economic expectations at the end of 2023. GDP growth: Comparison of Central scenarios UK Note: Real GDP shown as year-on-year percentage change. France Note: Real GDP shown as year-on-year percentage change. 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 a de-escalation in geopolitical tensions, as the Israel- Hamas and Russia-Ukraine wars move towards conclusions, and the US-China relationship improves. The following tables describe key macroeconomic variables in the consensus Upside scenario. Consensus Upside scenario 2024-2028 (as at 4Q23) UK France GDP level (%, start-to-peak)1 10.8 (4Q28) 10.4 (4Q28) Unemployment rate (%, min)2 3.1 (4Q24) 6.2 (4Q25) House price index (%, start-to-peak)1 13.0 (4Q28) 19.6 (4Q28) Inflation rate (YoY % change, min)3 1.3 (2Q25) 1.5 (3Q24) Central bank policy rate (%, min)2 3.7 (3Q28) 2.6 (2Q26) 1 Cumulative change to the highest level of the series during the 20-quarter projection. 2 Lowest projected unemployment or policy interest rate in the scenario. 3 Lowest projected year-on-year percentage change in inflation in the scenario. Consensus Upside scenario 2023-2027 (as at 4Q22) UK France GDP level (%, start-to-peak)1 14.6 (4Q27) 10.2 (4Q27) Unemployment rate (%, min)2 3.5 (4Q23) 6.5 (4Q24) House price index (%, start-to-peak)1 7.8 (4Q27) 17 (4Q27) Inflation rate (YoY % change, min)3 0.7 (1Q24) 0.8 (4Q23) Central bank policy rate (%, min)2 3.1 (4Q27) 2.3 (3Q26) 1 Cumulative change to the highest level of the series during the 20-quarter projection. 2 Lowest projected unemployment or policy interest rate in the scenario. 3 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, 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 Israel-Hamas war 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 following tables describe key macroeconomic variables in the consensus Downside scenario. Consensus Downside scenario 2024-2028 (as at 4Q23) UK France GDP level (%, start-to-trough)1 (1.0) (2Q25) (0.3) (2Q24) Unemployment rate (%, max)2 6.4 (1Q25) 8.5 (4Q24) House price index (%, start-to-trough)1 (12.0) (2Q25) (1.2) (3Q24) Inflation rate (YoY % change, max)3 4.1 (1Q24) 3.8 (2Q24) Central bank policy rate (%, max)2 5.7 (1Q24) 4.2 (1Q24) 1 Cumulative change to the lowest level of the series during the 20-quarter projection. 2 The highest projected unemployment or policy interest rate in the scenario. 3 The highest projected year-on-year percentage change in inflation in the scenario. Consensus Downside scenario 2023-2027 (as at 4Q22) UK France GDP level (%, start-to-trough)1 (3.0) (1Q25) (0.9) (2Q23) Unemployment rate (%, max)2 5.8 (2Q24) 8.8 (4Q23) House price index (%, start-to-trough)1 (15.0) (4Q24) (0.7) (3Q23) Inflation rate (YoY % change, max)3 10.8 (1Q23) 7.2 (1Q23) Central bank policy rate (%, max)2 5.1 (3Q23) 3.4 (4Q23) 1 Cumulative change to the lowest level of the series during the 20-quarter projection. 2 The highest projected unemployment or policy interest 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 tables describe key macroeconomic variables in the Downside 2 scenario. Downside 2 scenario 2024-2028 (as at 4Q23) UK France GDP level (%, start-to-trough)1 (8.8) (2Q25) (6.6) (1Q25) Unemployment rate (%, max)2 8.4 (2Q25) 10.2 (4Q25) House price index (%, start-to-trough)1 (30.2) (4Q25) (14.5) (2Q26) Inflation rate (YoY % change, max)3 10.1 (2Q24) 8.6 (2Q24) Central bank policy rate (%, max)2 6.0 (1Q24) 5.2 (1Q24) 1 Cumulative change to the lowest level of the series during the 20-quarter projection. 2 The highest projected unemployment or policy interest rate in the scenario. 3 The highest projected year-on-year percentage change in inflation in the scenario. Downside 2 scenario 2023-2027 (as at 4Q22) UK France GDP level (%, start-to-trough)1 (7.5) (2Q24) (7.4) (2Q24) Unemployment rate (%, max)2 8.7 (2Q24) 10.3 (4Q24) House price index (%, start-to-trough)1 (32.9) (1Q25) (11.4) (2Q25) Inflation rate (YoY % change, max)3 13.5 (2Q23) 10.4 (2Q23) Central bank policy rate (%, max)2 5.6 (4Q23) 4.1 (4Q23) 1 Cumulative change to the lowest level of the series during the 20-quarter projection. 2 The highest projected unemployment or policy interest rate in the scenario. 3 The highest projected year-on-year percentage change in inflation in the scenario. The following graphs show the historical and forecasted GDP growth rate for the various economic scenarios in UK and France. UK France Scenario weighting In reviewing the economic environment and the level of risk and uncertainty, management has considered both global and country-specific factors. In the fourth quarter of 2023, key considerations around uncertainty attached to the Central scenario projections focused on: - the risks 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, particularly in the UK. Although these risk factors remain significant, management assessed that they were adequately reflected in scenarios at their calibrated probability. It was noted that despite the Israel-Hamas war, 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 probability calibration framework. This entailed assigning a 75% probability weighting to the Central scenario in our major markets. The consensus Upside scenario was awarded a 10% weighting, and the consensus Downside scenario was given 10%. The Downside 2 was assigned a 5% weighting. In the UK, the Central scenario reflects a very weak growth environment in which recession risks remain high. Management concluded that the consensus outlook for France was also consistent with its view of the economic outlook, while assessments of uncertainty were also aligned to historical averages. In fourth quarter of 2022, management varied the applied scenario weights to reflect greater uncertainty around the inflation and interest rate outlook, amid supply disruption to energy and food commodity markets due to the Russia-Ukraine war. Those factors were reflected in the measures of risk and uncertainty used to inform judgements around the Central scenario. In particular, large forecast changes were observed, alongside wide dispersion of forecasts around consensus estimates and heightened financial market volatility. The following tables describe the probabilities assigned in each scenario. Scenario weightings, % Standard weights UK France 4Q23 Upside scenario 10 10 10 Central scenario 75 75 75 Downside scenario 10 10 10 Downside 2 scenario 5 5 5 4Q22 Upside scenario 10 5 5 Central scenario 75 60 60 Downside scenario 10 25 25 Downside 2 scenario 5 10 10 At 31 December 2023, the consensus Upside and Central scenarios for all markets had a combined weighting of 85%. At 31 December 2022, the UK and France had a combined weighting of 65%. Critical estimates and judgements The calculation of ECL under IFRS 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 HSBC Bank plc and the wider economy face; 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 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 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, allowance for ECL estimates are derived based on discounted cash flow ('DCF') calculations for internal forward-looking scenarios specific to individual borrower circumstances (see page 123). 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, using historical relationships between default rates and macroeconomic variables. These are included within IFRS 9 ECL estimates using either economic response models or models that contain internal, external and macroeconomic variables. The macroeconomic 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, using national level house price index forecasts 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 IFRS 9, management judgemental adjustments are typically short-term increases or decreases to the modelled allowance for ECL at either a customer, segment or portfolio level where management believes allowances do not sufficiently reflect the credit risk/ expected credit losses at the reporting date. These can relate to risks or uncertainties that 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 judgemental adjustments are considered for balances and allowance for 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 judgemental adjustments are reviewed under the governance process for IFRS 9 (as detailed in the section 'Credit risk management' on page 30). 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. Management judgemental adjustments made in estimating the scenario-weighted reported allowance for ECL at 31 December 2023 are set out in the following table. Management judgemental adjustments to ECL at 31 December 20231 Retail Wholesale2 Total ��m ��m ��m Banks, sovereigns, government entities and low-risk counterparties (14) (13) (27) Corporate lending adjustments - (36) (36) Retail lending Inflation-related adjustments 8 - 8 Other macroeconomic-related adjustments 7 - 7 Other retail lending adjustments 2 - 2 Total 3 (49) (46) Management judgemental adjustments to ECL at 31 December 2022 Retail Wholesale2 Total ��m ��m ��m Banks, sovereigns, government entities and low-risk counterparties (16) (2) (18) Corporate lending adjustments - (100) (100) Retail lending Inflation-related adjustments 8 - 8 Other macroeconomic-related adjustments 3 - 3 Other retail lending adjustments 7 - 7 Total 2 (102) (100) 1 Management judgemental adjustments presented in the table reflect increases or (decreases) to allowance for ECL, respectively. 2 The wholesale portfolio corresponds to adjustments to the performing portfolio (stage 1 and stage 2). Management judgemental adjustments at 31 December 2023 were a decrease to allowance for ECL of ��49m for the wholesale portfolio and an increase to allowance for ECL of ��3m for the retail portfolio. During 2023, management judgemental adjustments reflected an evolving macroeconomic outlook and the relationship of the modelled allowance for ECL to this outlook and to late-breaking and sector-specific risks. At 31 December 2023, wholesale management judgemental adjustments were a decrease to allowance for ECL of ��49m (31 December 2022: ��102m decrease). - Adjustments relating to low credit-risk exposures decreased allowance for ECL by ��13m at 31 December 2023 (31 December 2022: ��2m decrease). The adjustments mainly relate to standard, monthly adjustments for bank and sovereign exposures secured by Export Credit Agency guarantees; the benefit from which is not recognised in the inbound data. Total net adjustments are broadly flat in comparison to 31 December 2022. - Adjustments to corporate exposures decreased allowance for ECL by ��36m at 31 December 2023 (31 December 2022: ��100m decrease). The reduction in adjustment is mainly related to standard, monthly adjustments for corporate exposures secured by Export Credit Agency which is not recognised in the inbound data. The reduction in allowance for ECL for these exposures has been partially offset by management overlay to reflect increased risk on exposures in France. At 31 December 2023, retail management judgemental adjustments were an increase to allowance for ECL of ��3m (31 December 2022: ��2m increase). - Retail lending inflation-related adjustments increased allowance for ECL by ��8m (31 December 2022: ��8m increase). These adjustments addressed where increasing inflation and interest rates results in affordability risks which were not fully captured by the modelled output. - Other macroeconomic-related adjustments increased allowance for ECL by ��7m (31 December 2022: ��3m increase). These adjustments were primarily in relation to country-specific risks related to future macroeconomic conditions not fully captured by the modelled output. - Banks, sovereigns, government entities and low-risk counterparties adjustments decreased allowance for ECL by ��14m (31 December 2022: ��16m decrease). These adjustments related to the re-alignment of PD between reporting and origination date for certain parts of the portfolio. - Other retail lending adjustments increased allowance for ECL by ��2m (31 December 2022: ��7m increase), reflecting all other data, model and management judgemental adjustments. 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 allowance for 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 allowances. The allowance for 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 allowances for loans at the balance sheet date. 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 allowance for 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 effect of macroeconomic factors are not necessarily the key consideration when performing individual assessment of allowances 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 credit risk exposures the sensitivity analysis includes allowance for ECL for defaulted obligors of loans and advances. 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 judgmental 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 IFRS 9 ECL sensitivity to future economic conditions1,2,3 UK France ��m ��m At 31 December 2023 Reported allowance for ECL 67 78 Consensus Central scenario allowance for ECL 55 81 Consensus Upside scenario allowance for ECL 38 72 Consensus Downside scenario allowance for ECL 87 99 Downside 2 scenario allowance for ECL 276 112 Reported gross carrying amount2 144,215 142,389 IFRS 9 ECL sensitivity to future economic conditions UK France ��m ��m At 31 December 2022 Reported allowance for ECL 84 94 Consensus Central scenario allowance for ECL 64 87 Consensus Upside scenario allowance for ECL 51 77 Consensus Downside scenario allowance for ECL 91 104 Downside 2 scenario allowance for ECL 271 124 Reported gross carrying amount2 143,037 148,417 1 Allowance for ECL sensitivity includes off-balance sheet financial instruments. These are subject to significant measurement uncertainty. 2 Includes low credit-risk financial instruments such as debt instruments at FVOCI, which have high carrying amounts but low ECL under all the above scenarios. 3 Excludes defaulted obligors. For a detailed breakdown of performing and non-performing wholesale portfolio exposures, see page 61. Retail analysis IFRS 9 ECL sensitivity to future economic conditions1 UK France2 ��m ��m At 31 December 2023 Reported allowance for ECL 2 74 Consensus Central scenario allowance for ECL 2 74 Consensus Upside scenario allowance for ECL 2 72 Consensus Downside scenario allowance for ECL 3 75 Downside 2 scenario allowance for ECL 4 78 Reported gross carrying amount 1,925 17,187 IFRS 9 ECL sensitivity to future economic conditions1 UK France2 ��m ��m At 31 December 2022 Reported allowance for ECL 7 87 Consensus Central scenario allowance for ECL 6 86 Consensus Upside scenario allowance for ECL 6 84 Consensus Downside scenario allowance for ECL 7 88 Downside 2 scenario allowance for ECL 12 92 Reported gross carrying amount 2,037 18,987 1 Allowance for ECL sensitivities exclude portfolios utilising less complex modelling approaches. 2 Includes balances and allowance for ECL which have been reclassified from 'loans and advances to customers' to 'assets held for sale' in the balance sheet at 31 December 2023. This also includes any balances and allowance for ECL which continue to be reported as personal lending in 'loans and advances to customers' that are in accordance with the basis of inclusion for retail sensitivity analysis. Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees 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. In addition, a reconciliation by stage of the group's gross carrying amount and allowances for loans and advances to banks and customers and a reconciliation by stage of the group's nominal amount and allowances for loan commitments and financial guarantees were included in this section following the adoption of the recommendations of the DECL Taskforce's third report. 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 only reflect 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')/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 represent 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 guarantees1 (Audited) Non credit - impaired Credit - impaired 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 The group ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2023 168,371 (71) 18,059 (200) 2,536 (962) 3 - 188,969 (1,233) Transfers of financial instruments 690 (56) (1,336) 89 646 (33) - - - - - transfers from stage 1 to stage 2 (14,106) 11 14,106 (11) - - - - - - - transfers from stage 2 to stage 1 15,023 (66) (15,023) 66 - - - - - - - transfers to stage 3 (247) - (551) 39 798 (39) - - - - - transfers from stage 3 20 (1) 132 (5) (152) 6 - - - - Net remeasurement of ECL arising from transfer of stage - 48 - (26) - - - - - 22 Net new and further lending/repayments 4,626 (1) (1,916) 22 (442) 125 33 - 2,301 146 Changes to risk parameters - credit quality - (1) - (28) - (305) - (6) - (340) Changes to model used for ECL calculation - (3) - 18 - - - - - 15 Assets written off - - - - (248) 246 - - (248) 246 Credit related modifications that resulted in derecognition - - - - (94) 75 - - (94) 75 Foreign exchange (2,398) 2 (231) 2 (49) 17 - - (2,678) 21 Others2 (9,061) (9) 869 (24) 207 (66) (1) - (7,986) (99) At 31 Dec 2023 162,228 (91) 15,445 (147) 2,556 (903) 35 (6) 180,264 (1,147) ECL income statement change for the period 43 (14) (180) (6) (157) Recoveries 5 Others (12) Total ECL income statement change for the period (164) Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (continued) (Audited) At 31 Dec 2023 12 months ended 31 Dec 2023 Gross carrying/ nominal amount Allowance for ECL ECL (charge)/release ��m ��m ��m As above 180,264 (1,147) (164) Other financial assets measured at amortised cost 273,728 (70) - Non-trading reverse purchase agreement commitments 38,704 - - Performance and other guarantees not considered for IFRS 9 (7) Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement 492,696 (1,217) (171) Debt instruments measured at FVOCI 37,427 (23) 2 Total allowance for ECL/total income statement ECL change for the period N/A (1,240) (169) 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2023, these amounted to ��(1.64)bn and were classified as stage 1 with no ECL. Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (continued) (Audited) Non credit - impaired Credit - impaired 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 The group ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2022 179,612 (118) 17,471 (188) 2,779 (923) 2 (2) 199,864 (1,231) Transfers of financial instruments: (14,449) (26) 13,625 59 824 (33) - - - - - transfers from stage 1 to stage 2 (25,027) 15 25,027 (15) - - - - - - - transfers from stage 2 to stage 1 10,847 (42) (10,847) 42 - - - - - - - transfers to stage 3 (340) 2 (600) 35 940 (37) - - - - - transfers from stage 3 71 (1) 45 (3) (116) 4 - - - - Net remeasurement of ECL arising from transfer of stage - 29 - (24) - (10) - - - (5) Net new and further lending/repayments 9,912 7 (11,270) 29 (703) 90 1 - (2,060) 126 Changes to risk parameters - credit quality - 32 - (101) - (318) - 2 - (385) Changes to model used for ECL calculation - 4 - 10 - - - - - 14 Assets written off - - - - (165) 165 - - (165) 165 Credit related modifications that resulted in derecognition - - - - (1) 1 - - (1) 1 Foreign exchange 5,764 (3) 744 (11) 88 (34) - - 6,596 (48) Others2,3 (12,468) 4 (2,511) 26 (286) 100 - - (15,265) 130 At 31 Dec 2022 168,371 (71) 18,059 (200) 2,536 (962) 3 - 188,969 (1,233) ECL Income statement change for the period 72 (86) (238) 2 (250) Recoveries 2 Others 28 Total ECL income statement change for the period (220) Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (continued) (Audited) At 31 Dec 2022 12 months ended 31 Dec 2022 Gross carrying/ nominal amount Allowance for ECL ECL (charge)/ release ��m ��m ��m As above 188,969 (1,233) (220) Other financial assets measured at amortised cost 269,815 (137) (3) Non-trading reverse purchase agreement commitments 33,684 - - Performance and other guarantees not considered for IFRS 9 6 Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement 492,468 (1,370) (217) Debt instruments measured at FVOCI 29,248 (24) (5) Total allowance for ECL/total income statement ECL change for the period N/A (1,394) (222) 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2022, these amounted to ��4bn and were classified as stage 1 with no ECL. 3 Total includes ��21bn of gross carrying loans and advances to customers and banks, which were classified to assets held for sale and a corresponding allowance for ECL of ��131m reflecting business disposals as disclosed in Note 35 'Assets held for sale and liabilities of disposal groups held for sale' on page 184. Reconciliation of changes in gross carrying amount and allowances for loans and advances to banks and customers (Audited) Non credit - impaired Credit - impaired Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL The group ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2023 80,347 (55) 8,230 (166) 2,289 (922) 3 - 90,869 (1,143) Transfers of financial instruments (98) (42) (500) 78 598 (36) - - - - - transfers from stage 1 to stage 2 (7,192) 10 7,192 (10) - - - - - - - transfers from stage 2 to stage 1 7,301 (51) (7,301) 51 - - - - - - - transfers to stage 3 (226) - (465) 39 691 (39) - - - - - transfers from stage 3 19 (1) 74 (2) (93) 3 - - - - Net remeasurement of ECL arising from transfer of stage - 36 - (22) - - - - - 14 Changes due to modifications not derecognised - - - - - - - - - - Net new and further lending/repayments 3,230 (9) (923) 15 (401) 94 30 - 1,936 100 Changes to risk parameters - credit quality - 1 - (10) - (289) - (6) - (304) Changes to models used for ECL calculation - 2 - 4 - - - - - 6 Assets written off - - - - (248) 246 - - (248) 246 Credit-related modifications that resulted in derecognition - - - - (94) 75 - - (94) 75 Foreign exchange (1,264) 1 (148) 1 (48) 17 - - (1,460) 19 Others1 (1,603) (10) 1,338 (25) 214 (67) (1) - (52) (102) At 31 Dec 2023 80,612 (76) 7,997 (125) 2,310 (882) 32 (6) 90,951 (1,089) ECL income statement change for the period - 30 - (13) - (195) - (6) - (184) Recoveries 5 Others (20) Total ECL income statement change for the period (199) 1 Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2023, these amounted to ��(1.17)bn and were classified as stage 1 with no ECL. Reconciliation of changes in nominal amount and allowances for loan commitments and financial guarantees1 (Audited) Non credit - impaired Credit - impaired Stage 1 Stage 2 Stage 3 POCI Total Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL The group ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2023 88,024 (16) 9,829 (34) 247 (40) - - 98,100 (90) Transfers of financial instruments 788 (14) (836) 11 48 3 - - - - - transfers from stage 1 to stage 2 (6,914) 1 6,914 (1) - - - - - - - transfers from stage 2 to stage 1 7,722 (15) (7,722) 15 - - - - - - - transfers to stage 3 (21) - (86) - 107 - - - - - - transfers from stage 3 1 - 58 (3) (59) 3 - - - - Net remeasurement of ECL arising from transfer of stage - 12 - (4) - - - - - 8 Net new and further lending/repayments 1,396 8 (993) 7 (41) 31 3 - 365 46 Changes to risk parameters - credit quality - (2) - (18) - (16) - - - (36) Changes to models used for ECL calculation - (5) - 14 - - - - - 9 Assets written off - - - - - - - - - - Credit-related modifications that resulted in derecognition - - - - - - - - - - Foreign exchange (1,134) 1 (83) 1 (1) - - - (1,218) 2 Others2 (7,458) 1 (469) 1 (7) 1 - - (7,934) 3 At 31 Dec 2023 81,616 (15) 7,448 (22) 246 (21) 3 - 89,313 (58) ECL income statement change for the period - 13 - (1) - 15 - - - 27 Recoveries - Others 8 Total ECL income statement change for the period 35 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2023, these amounted to ��(0.47)bn and were classified as stage 1 with no ECL. Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (Audited) Non credit - impaired Credit - impaired 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 The bank ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2023 78,523 (33) 6,099 (73) 1,016 (358) - - 85,638 (464) Transfers of financial instruments (171) (20) 104 20 67 - - - - - - transfers from stage 1 to stage 2 (8,257) 5 8,257 (5) - - - - - - - transfers from stage 2 to stage 1 8,085 (25) (8,085) 25 - - - - - - - transfers to stage 3 (1) - (137) 3 138 (3) - - - - - transfers from stage 3 2 - 69 (3) (71) 3 - - - - Net remeasurement of ECL arising from transfer of stage - 19 - (15) - - - - - 4 Net new and further lending/repayments (5,964) 7 1,247 24 (178) 54 28 - (4,867) 85 Changes to risk parameters - credit quality - 3 - (34) - (107) - (6) - (144) Changes to model used for ECL calculation - (3) - 19 - - - - - 16 Assets written off - - - - (37) 37 - - (37) 37 Credit related modifications that resulted in derecognition - - - - (89) 75 - - (89) 75 Foreign exchange (142) 1 (9) - (1) - - - (152) 1 Others2 (4,768) 3 107 (2) 3 1 - - (4,658) 2 At 31 Dec 2023 67,478 (23) 7,548 (61) 781 (298) 28 (6) 75,835 (388) ECL income statement change for the period 26 (6) (53) (6) (39) Recoveries - Others (12) Total ECL income change for the period (51) Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (continued) At 31 Dec 2023 12 months ended 31 Dec 2023 Gross carrying/ nominal amount Allowance for ECL ECL (charge)/release ��m ��m ��m As above 75,835 (388) (51) Other financial assets measured at amortised cost 174,304 (3) - Non-trading reverse purchase agreement commitments 4,540 - - Performance and other guarantees not considered for IFRS 9 4 Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement 254,679 (391) (47) Debt instruments measured at FVOCI 16,307 (5) (2) Total allowance for ECL/total income statement ECL change for the period n/a (396) (49) 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2023, these amounted to ��(1.9)bn and were classified as stage 1 with no ECL. Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (continued) (Audited) Non-credit - impaired Credit - impaired 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 The bank ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m 1 Jan 2022 65,710 (56) 5,657 (58) 1,088 (276) (1) - 72,454 (390) Transfers of financial instruments: (959) (3) 774 21 185 (18) - - - - - transfers from stage 1 to stage 2 (6,499) 6 6,499 (6) - - - - - - - transfers from stage 2 to stage 1 5,554 (9) (5,554) 9 - - - - - - - transfers to stage 3 (53) - (172) 18 225 (18) - - - - - transfers from stage 3 39 - 1 - (40) - - - - - Net remeasurement of ECL arising from transfer of stage - 6 - (11) - - - - - (5) Net new and further lending/repayments 7,528 (3) (351) 16 (203) 7 - - 6,974 20 Changes to risk parameters - credit quality - 17 - (48) - (131) - - - (162) Changes to model used for ECL calculation - 7 - 10 - - - - - 17 Assets written off - - - - (62) 62 - - (62) 62 Credit related modifications that resulted in derecognition - - - - - - - - - - Foreign exchange 210 - 19 (3) 8 (2) 1 - 238 (5) Others2 6,034 (1) - - - - - - 6,034 (1) At 31 Dec 2022 78,523 (33) 6,099 (73) 1,016 (358) - - 85,638 (464) ECL income statement change for the period 27 (33) (124) - (130) Recoveries Recoveries - Others Others 18 Total ECL income statement change for the period (112) Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (continued) At 31 Dec 2022 12 months ended 31 Dec 2022 Gross carrying/nominal amount Allowance for ECL ECL (charge)/release ��m ��m ��m As above 85,638 (464) (112) Other financial assets measured at amortised cost 169,321 (3) (1) Non-trading reverse purchase agreement commitments 3,316 - - Performance and other guarantees not considered for IFRS 9 1 Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement 258,275 (467) (112) Debt instruments measured at FVOCI 12,206 (4) 2 Total allowance for ECL/total income statement ECL change for the period n/a (471) (110) 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2022, these amounted to ��3bn and were classified as stage 1 with no ECL. Reconciliation of changes in gross carrying amount and allowances for loans and advances to banks and customers (Audited) Non credit - impaired Credit - impaired Total Stage 1 Stage 2 Stage 3 POCI Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL Gross carrying amount Allowance for ECL The bank ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2023 48,219 (23) 2,741 (57) 941 (340) - - 51,901 (420) Transfers of financial instruments 280 (9) (396) 11 116 (2) - - - - - transfers from stage 1 to stage 2 (3,380) 4 3,380 (4) - - - - - - - transfers from stage 2 to stage 1 3,659 (13) (3,659) 13 - - - - - - - transfers to stage 3 (1) - (135) 2 136 (2) - - - - - transfers from stage 3 2 - 18 - (20) - - - - - Net remeasurement of ECL arising from transfer of stage - 10 - (12) - - - - - (2) Net new and further lending/repayments (4,431) 1 810 24 (192) 51 25 - (3,788) 76 Changes to risk parameters - credit quality - 1 - (18) - (110) - (6) - (133) Changes to models used for ECL calculation - 2 - 5 - - - - - 7 Assets written off - - - - (37) 37 - - (37) 37 Credit-related modifications that resulted in derecognition - - - - (89) 75 - - (89) 75 Foreign exchange (172) 1 (7) - (3) - - - (182) 1 Others1 (3,446) 2 107 - 4 - - - (3,335) 2 At 31 Dec 2023 40,450 (15) 3,255 (47) 740 (289) 25 (6) 44,470 (357) ECL income statement change for the period 14 (1) (59) (6) (52) Recoveries - Others (12) Total ECL income statement change for the period (64) 1 Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2023, these amounted to ��(2.1)bn and were classified as stage 1 with no ECL. Reconciliation of changes in nominal amount and allowances for loan commitments and financial guarantees1 (Audited) Non credit - impaired Credit - impaired Stage 1 Stage 2 Stage 3 POCI Total Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL Nominal amount Allowance for ECL The bank ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2023 30,304 (10) 3,358 (16) 75 (18) - - 33,737 (44) Transfers of financial instruments (451) (11) 500 9 (49) 2 - - - - - transfers from stage 1 to stage 2 (4,877) 1 4,877 (1) - - - - - - - transfers from stage 2 to stage 1 4,426 (12) (4,426) 12 - - - - - - - transfers to stage 3 - - (2) 1 2 (1) - - - - - transfers from stage 3 - - 51 (3) (51) 3 - - - - Net remeasurement of ECL arising from transfer of stage - 9 - (3) - - - - - 6 Net new and further lending/repayments (1,533) 6 437 - 14 3 3 - (1,079) 9 Changes to risk parameters - credit quality - 2 - (16) - 3 - - - (11) Changes to models used for ECL calculation - (5) - 14 - - - - - 9 Assets written off - - - - - - - - - - Credit-related modifications that resulted in derecognition - - - - - - - - - - Foreign exchange 30 - (2) - 2 - - - 30 - Others2 (1,322) 1 - (2) (1) 1 - - (1,323) - At 31 Dec 2023 27,028 (8) 4,293 (14) 41 (9) 3 - 31,365 (31) ECL income statement change for the period 12 (5) 6 - 13 Recoveries - Others - Total ECL income statement change for the period 13 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2 Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2023, these amounted to ��0.2bn and were classified as stage 1 with no ECL. 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 PD, 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 stages 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 31. Distribution of financial instruments by credit quality at 31 December 2023 (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The group ��m ��m ��m ��m ��m ��m ��m ��m In-scope for IFRS 9 ECL Loans and advances to customers held at amortised cost 32,567 18,634 19,627 3,409 2,342 76,579 (1,088) 75,491 - personal 8,702 2,612 1,388 115 214 13,031 (108) 12,923 - corporate and commercial 18,044 12,815 14,876 3,228 1,805 50,768 (825) 49,943 - non-bank financial institutions 5,821 3,207 3,363 66 323 12,780 (155) 12,625 Loans and advances to banks held at amortised cost 13,247 415 710 - - 14,372 (1) 14,371 Cash and balances at central banks 110,570 - 48 - - 110,618 - 110,618 Items in the course of collection from other banks 2,109 5 - - - 2,114 - 2,114 Reverse repurchase agreements - non-trading 57,144 13,183 3,128 39 - 73,494 - 73,494 Financial investments 8,840 - 21 - - 8,861 - 8,861 Assets held for sale 19,461 1,232 852 95 156 21,796 (64) 21,732 Other assets 54,903 647 1,225 44 26 56,845 (6) 56,839 - endorsements and acceptances 224 6 20 - - 250 - 250 - accrued income and other 54,679 641 1,205 44 26 56,595 (6) 56,589 Debt instruments measured at fair value through other comprehensive income1 35,513 2,241 760 82 - 38,596 (23) 38,573 Out-of-scope for IFRS 9 Trading assets 34,923 8,555 6,378 820 - 50,676 - 50,676 Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 2,439 965 1,536 5 - 4,945 - 4,945 Derivatives 155,106 15,499 3,457 46 8 174,116 - 174,116 Assets held for sale 101 - - - - 101 - 101 Total gross carrying amount on balance sheet 526,923 61,376 37,742 4,540 2,532 633,113 (1,182) 631,931 Percentage of total credit quality (%) 83 10 6 1 0 100 Loans and other credit-related commitments 83,907 27,038 13,012 1,482 177 125,616 (42) 125,574 Financial guarantees 1,270 530 503 26 72 2,401 (16) 2,385 In-scope: Irrevocable loan commitments and financial guarantees 85,177 27,568 13,515 1,508 249 128,017 (58) 127,959 Loans and other credit-related commitments 3,269 2,091 806 42 5 6,213 - 6,213 Performance and other guarantees 9,582 5,357 3,917 484 208 19,548 (25) 19,523 Out-of-scope: Revocable loan commitments and non-financial guarantees 12,851 7,448 4,723 526 213 25,761 (25) 25,736 1 For the purposes of this disclosure gross carrying amount is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying amount of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Distribution of financial instruments by credit quality at 31 December 2022 (continued) (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The group ��m ��m ��m ��m ��m ��m ��m ��m In-scope for IFRS 9 ECL Loans and advances to customers held at amortised cost 27,997 19,618 19,612 4,263 2,227 73,717 (1,103) 72,614 - personal 2,019 2,928 858 103 105 6,013 (55) 5,958 - corporate and commercial 19,352 13,393 16,496 3,910 1,853 55,004 (937) 54,067 - non-bank financial institutions 6,626 3,297 2,258 250 269 12,700 (111) 12,589 Loans and advances to banks held at amortised cost 14,637 790 1,634 26 65 17,152 (43) 17,109 Cash and balances at central banks 131,379 - 55 - - 131,434 (1) 131,433 Items in the course of collection from other banks 2,281 - 4 - - 2,285 - 2,285 Reverse repurchase agreements - non-trading 43,777 7,953 2,219 - - 53,949 - 53,949 Financial investments 3,028 - 220 - - 3,248 - 3,248 Assets held for sale 19,419 1,598 1,773 124 291 23,205 (133) 23,072 Other assets 53,967 708 948 39 32 55,694 (3) 55,691 - endorsements and acceptances 208 4 25 - 6 243 - 243 - accrued income and other 53,759 704 923 39 26 55,451 (3) 55,448 Debt instruments measured at fair value through other comprehensive income1 28,248 2,471 626 105 - 31,450 (24) 31,426 Out-of-scope for IFRS 9 Trading assets 26,961 4,323 9,966 298 - 41,548 - 41,548 Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 1,945 331 669 1 - 2,946 - 2,946 Derivatives 199,167 21,128 4,886 29 28 225,238 - 225,238 Assets held for sale 107 - - - - 107 - 107 Total gross carrying amount on balance sheet 552,913 58,920 42,612 4,885 2,643 661,973 (1,307) 660,666 Percentage of total credit quality (%) 84 9 6 1 - 100 Loans and other credit-related commitments 82,801 23,578 17,523 2,392 163 126,457 (67) 126,390 Financial guarantees 2,924 1,171 995 153 84 5,327 (20) 5,307 In-scope: Irrevocable loan commitments and financial guarantees 85,725 24,749 18,518 2,545 247 131,784 (87) 131,697 Loans and other credit-related commitments 1,168 183 90 14 1 1,456 - 1,456 Performance and other guarantees 9,791 3,583 3,074 599 89 17,136 (18) 17,118 Out-of-scope: Revocable loan commitments and non-financial guarantees 10,959 3,766 3,164 613 90 18,592 (18) 18,574 1 For the purposes of this disclosure gross carrying amount is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying amount of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Distribution of financial instruments by credit quality at 31 December 2023 (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The bank ��m ��m ��m ��m ��m ��m ��m ��m In-scope for IFRS 9 ECL Loans and advances to customers held at amortised cost 20,450 6,782 4,140 663 765 32,800 (357) 32,443 - personal 1,782 179 658 7 13 2,639 (6) 2,633 - corporate and commercial 11,468 4,572 2,941 656 446 20,083 (205) 19,878 - non-bank financial institutions 7,200 2,031 541 - 306 10,078 (146) 9,932 Loans and advances to banks held at amortised cost 11,275 339 56 - - 11,670 - 11,670 Cash and balances at central banks 61,128 - - - - 61,128 - 61,128 Items in the course of collection from other banks 1,877 - - - - 1,877 - 1,877 Reverse repurchase agreements - non-trading 43,053 11,008 2,873 39 - 56,973 - 56,973 Financial investments 12,029 - - - - 12,029 - 12,029 Assets held for sale 91 - - - - 91 - 91 Other assets 41,956 136 100 5 9 42,206 (3) 42,203 - endorsements and acceptances 221 6 - - - 227 - 227 - accrued income and other 41,735 130 100 5 9 41,979 (3) 41,976 Debt instruments measured at fair value through other comprehensive income1 16,094 56 504 - - 16,654 (5) 16,649 Out-of-scope for IFRS 9 Trading assets 22,987 8,386 6,077 818 - 38,268 - 38,268 Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 473 908 1,505 2 - 2,888 - 2,888 Derivatives 136,081 14,639 3,009 36 - 153,765 - 153,765 Total gross carrying amount on balance sheet 367,494 42,254 18,264 1,563 774 430,349 (365) 429,984 Percentage of total credit quality (%) 85.4 9.8 4.2 0.4 0.2 100 Loans and other credit-related commitments 24,980 6,929 2,394 478 18 34,799 (22) 34,777 Financial guarantees 649 218 209 4 26 1,106 (9) 1,097 In-scope: Irrevocable loan commitments and financial guarantees 25,629 7,147 2,603 482 44 35,905 (31) 35,874 Loans and other credit-related commitments 226 160 70 15 - 471 - 471 Performance and other guarantees 5,669 1,157 517 49 3 7,395 (1) 7,394 Out-of-scope: Revocable loan commitments and non-financial guarantees 5,895 1,317 587 64 3 7,866 (1) 7,865 Distribution of financial instruments by credit quality at 31 December 2022 In-scope for IFRS 9 ECL Loans and advances to customers held at amortised cost 21,601 9,291 4,838 765 875 37,370 (378) 36,992 - personal 1,837 927 797 10 13 3,584 (12) 3,572 - corporate and commercial 12,018 6,001 3,230 613 594 22,456 (247) 22,209 - non-bank financial institutions 7,746 2,363 811 142 268 11,330 (119) 11,211 Loans and advances to banks held at amortised cost 13,764 512 163 25 65 14,529 (43) 14,486 Cash and balances at central banks 78,442 - - - - 78,442 (1) 78,441 Items in the course of collection from other banks 1,863 - - - - 1,863 - 1,863 Reverse repurchase agreements - non-trading 33,159 7,763 2,133 - - 43,055 - 43,055 Financial investments 6,190 - 188 - - 6,378 - 6,378 Assets held for sale - - - - - - - - Other assets 39,376 95 81 10 21 39,583 (2) 39,581 - endorsements and acceptances 205 4 3 - 6 218 - 218 - accrued income and other 39,171 91 78 10 15 39,365 (2) 39,363 Debt instruments measured at fair value through other comprehensive income1 12,827 64 307 - - 13,198 (4) 13,194 Out-of-scope for IFRS 9 Trading assets 18,479 4,226 9,213 298 - 32,216 - 32,216 Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 149 214 651 1 - 1,015 - 1,015 Derivatives 174,548 18,118 4,031 17 - 196,714 - 196,714 Total gross carrying amount on balance sheet 400,398 40,283 21,605 1,116 961 464,363 (428) 463,935 Percentage of total credit quality (%) 86.2 8.7 4.7 0.2 0.2 100 Loans and other credit-related commitments 25,143 6,577 3,200 732 40 35,692 (31) 35,661 Financial guarantees 729 205 388 5 36 1,363 (12) 1,351 In-scope: Irrevocable loan commitments and financial guarantees 25,872 6,782 3,588 737 76 37,055 (43) 37,012 Loans and other credit-related commitments 493 183 91 14 1 782 - 782 Performance and other guarantees 5,338 1,083 417 42 6 6,886 (7) 6,879 Out-of-scope: Revocable loan commitments and non-financial guarantees 5,831 1,266 508 56 7 7,668 (7) 7,661 1 For the purposes of this disclosure gross carrying amount is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying amount of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The group ��m ��m ��m ��m ��m ��m ��m ��m Loans and advances to customers at amortised cost 32,567 18,634 19,627 3,409 2,342 76,579 (1,088) 75,491 - stage 1 31,644 17,295 16,071 1,346 - 66,356 (75) 66,281 - stage 2 923 1,339 3,556 2,063 - 7,881 (125) 7,756 - stage 3 - - - - 2,310 2,310 (882) 1,428 - POCI - - - - 32 32 (6) 26 Loans and advances to banks at amortised cost 13,247 415 710 - - 14,372 (1) 14,371 - stage 1 13,220 414 622 - - 14,256 (1) 14,255 - stage 2 27 1 88 - - 116 - 116 - stage 3 - - - - - - - - - POCI - - - - - - - - Other financial assets measured at amortised cost 253,027 15,067 5,274 178 182 273,728 (70) 273,658 - stage 1 252,841 14,788 4,843 85 - 272,557 (5) 272,552 - stage 2 186 279 431 93 - 989 (8) 981 - stage 3 - - - - 182 182 (57) 125 - POCI - - - - - - - - Loans and other credit-related commitments 83,907 27,038 13,012 1,482 177 125,616 (42) 125,574 - stage 1 81,341 25,083 10,962 856 - 118,242 (13) 118,229 - stage 2 2,566 1,955 2,050 626 - 7,197 (21) 7,176 - stage 3 - - - - 174 174 (8) 166 - POCI - - - - 3 3 - 3 Financial guarantees 1,270 530 503 26 72 2,401 (16) 2,385 - stage 1 1,269 483 322 4 - 2,078 (2) 2,076 - stage 2 1 47 181 22 - 251 (1) 250 - stage 3 - - - - 72 72 (13) 59 - POCI - - - - - - - - At 31 Dec 2023 384,018 61,684 39,126 5,095 2,773 492,696 (1,217) 491,479 Debt instruments at FVOCI1 - stage 1 35,473 2,241 722 - - 38,436 (9) 38,427 - stage 2 40 - 38 82 - 160 (14) 146 - stage 3 - - - - - - - - - POCI - - - - - - - - At 31 Dec 2023 35,513 2,241 760 82 - 38,596 (23) 38,573 Loans and advances to customers at amortised cost 27,997 19,618 19,612 4,263 2,227 73,717 (1,103) 72,614 - stage 1 27,183 18,885 16,313 1,292 - 63,673 (51) 63,622 - stage 2 814 733 3,299 2,971 - 7,817 (145) 7,672 - stage 3 - - - - 2,224 2,224 (907) 1,317 - POCI - - - - 3 3 - 3 Loans and advances to banks at amortised cost 14,637 790 1,634 26 65 17,152 (43) 17,109 - stage 1 14,502 565 1,605 1 - 16,673 (6) 16,667 - stage 2 135 225 29 25 - 414 (21) 393 - stage 3 - - - - 65 65 (16) 49 - POCI - - - - - - - - Other financial assets measured at amortised cost 253,851 10,259 5,219 163 323 269,815 (137) 269,678 - stage 1 253,572 9,893 4,324 41 - 267,830 (14) 267,816 - stage 2 279 366 895 122 - 1,662 (17) 1,645 - stage 3 - - - - 323 323 (106) 217 - POCI - - - - - - - - Loans and other credit-related commitments 82,801 23,578 17,523 2,392 163 126,457 (67) 126,390 - stage 1 79,931 21,530 14,570 963 - 116,994 (13) 116,981 - stage 2 2,870 2,048 2,953 1,429 - 9,300 (32) 9,268 - stage 3 - - - - 163 163 (22) 141 - POCI - - - - - - - - Financial guarantees 2,924 1,171 995 153 84 5,327 (20) 5,307 - stage 1 2,895 1,058 727 35 - 4,715 (1) 4,714 - stage 2 29 113 268 118 - 528 (2) 526 - stage 3 - - - - 84 84 (17) 67 - POCI - - - - - - - - At 31 Dec 2022 382,210 55,416 44,983 6,997 2,862 492,468 (1,370) 491,098 Debt instruments at FVOCI1 - stage 1 28,047 2,384 547 - - 30,978 (10) 30,968 - stage 2 201 87 79 105 - 472 (14) 458 - stage 3 - - - - - - - - - POCI - - - - - - - - At 31 Dec 2022 28,248 2,471 626 105 - 31,450 (24) 31,426 1 For the purposes of this disclosure gross carrying amount is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying amount of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation (continued) (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The bank ��m ��m ��m ��m ��m ��m ��m ��m Loans and advances to customers at amortised cost 20,450 6,782 4,140 663 765 32,800 (357) 32,443 - stage 1 19,730 5,933 2,860 283 - 28,806 (15) 28,791 - stage 2 720 849 1,280 380 - 3,229 (47) 3,182 - stage 3 - - - - 740 740 (289) 451 - POCI - - - - 25 25 (6) 19 Loans and advances to banks at amortised cost 11,275 339 56 - - 11,670 - 11,670 - stage 1 11,268 339 37 - - 11,644 - 11,644 - stage 2 7 - 19 - - 26 - 26 - stage 3 - - - - - - - - - POCI - - - - - - - - Other financial assets measured at amortised cost 160,134 11,144 2,973 44 9 174,304 (3) 174,301 - stage 1 160,131 11,137 2,964 39 - 174,271 - 174,271 - stage 2 3 7 9 5 - 24 (1) 23 - stage 3 - - - - 9 9 (2) 7 - POCI - - - - - - - - Loans and other credit-related commitments 24,980 6,929 2,394 478 18 34,799 (22) 34,777 - stage 1 23,092 5,754 1,657 169 - 30,672 (7) 30,665 - stage 2 1,888 1,175 737 309 - 4,109 (14) 4,095 - stage 3 - - - - 15 15 (1) 14 - POCI - - - - 3 3 - 3 Financial guarantees 649 218 209 4 26 1,106 (9) 1,097 - stage 1 648 172 76 - - 896 (1) 895 - stage 2 1 46 133 4 - 184 - 184 - stage 3 - - - - 26 26 (8) 18 - POCI - - - - - - - - At 31 Dec 2023 217,488 25,412 9,772 1,189 818 254,679 (391) 254,288 Debt instruments at FVOCI1 - stage 1 16,094 56 499 - - 16,649 (3) 16,646 - stage 2 - - 5 - - 5 (2) 3 - stage 3 - - - - - - - - - POCI - - - - - - - - At 31 Dec 2023 16,094 56 504 - - 16,654 (5) 16,649 Loans and advances to customers at amortised cost 21,601 9,291 4,838 765 875 37,370 (378) 36,992 - stage 1 20,937 9,032 3,849 101 - 33,919 (19) 33,900 - stage 2 664 259 989 664 - 2,576 (35) 2,541 - stage 3 - - - - 875 875 (324) 551 - POCI - - - - - - - - Loans and advances to banks at amortised cost 13,764 512 163 25 65 14,529 (43) 14,486 - stage 1 13,663 502 134 - - 14,299 (5) 14,294 - stage 2 101 10 29 25 - 165 (22) 143 - stage 3 - - - - 65 65 (16) 49 - POCI - - - - - - - - Other financial assets measured at amortised cost 159,030 7,858 2,402 10 21 169,321 (3) 169,318 - stage 1 159,026 7,857 2,393 - - 169,276 (2) 169,274 - stage 2 4 1 9 10 - 24 (1) 23 - stage 3 - - - - 21 21 - 21 - POCI - - - - - - - - Loans and other credit-related commitments 25,143 6,577 3,200 732 40 35,692 (31) 35,661 - stage 1 24,007 5,971 2,329 120 - 32,427 (9) 32,418 - stage 2 1,136 606 871 612 - 3,225 (15) 3,210 - stage 3 - - - - 40 40 (7) 33 - POCI - - - - - - - - Financial guarantees 729 205 388 5 36 1,363 (12) 1,351 - stage 1 729 200 265 - - 1,194 - 1,194 - stage 2 - 5 123 5 - 133 (1) 132 - stage 3 - - - - 36 36 (11) 25 - POCI - - - - - - - - At 31 Dec 2022 220,267 24,443 10,991 1,537 1,037 258,275 (467) 257,808 Debt instruments at FVOCI1 - stage 1 12,827 64 302 - - 13,193 (1) 13,192 - stage 2 - - 5 - - 5 (3) 2 - stage 3 - - - - - - - - - POCI - - - - - - - - At 31 Dec 2022 12,827 64 307 - - 13,198 (4) 13,194 1 For the purposes of this disclosure gross carrying amount is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying amount of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Credit���impaired loans (Audited) 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; 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 which are considered defaulted or otherwise credit-impaired. Forbearance The following table shows the gross carrying amounts of the group's holdings of forborne loans and advances to customers by industry sector and by stages. A summary of our current policies and practices for forbearance is set out in 'Credit risk management' on page 32. Forborne loans and advances to customers at amortised costs by stage allocation Performing - forborne Non-performing - forborne Total - forborne Stage 2 Stage 3 POCI Total The group ��m ��m ��m ��m Gross carrying amount Gross carrying amount Personal 88 127 - 215 - first lien residential mortgages 66 120 - 186 - guaranteed loans in respect of residential property 19 6 - 25 - other personal lending which is secured 1 - - 1 - credit cards 1 - - 1 - other personal lending which is unsecured 1 1 - 2 Wholesale 1,545 788 24 2,357 - corporate and commercial 1,510 778 24 2,312 - non-bank financial institutions 35 10 - 45 At 31 Dec 2023 1,633 915 24 2,572 Allowance for ECL Personal (4) (39) - (43) - first lien residential mortgages (4) (39) - (43) - guaranteed loans in respect of residential property - - - - - other personal lending which is secured - - - - - credit cards - - - - - other personal lending which is unsecured - - - - Wholesale (15) (267) (6) (288) - corporate and commercial (14) (263) (6) (283) - non-bank financial institutions (1) (4) - (5) At 31 Dec 2023 (19) (306) (6) (331) The group Gross carrying amount Personal 29 32 - 61 - first lien residential mortgages 24 27 - 51 - other personal lending which is secured 3 4 - 7 - credit cards 1 - - 1 - other personal lending which is unsecured 1 1 - 2 Wholesale 1,816 726 - 2,542 - corporate and commercial 1,804 722 - 2,526 - non-bank financial institutions 12 4 - 16 At 31 Dec 2022 1,845 758 - 2,603 Allowance for ECL Personal (2) (4) - (6) - first lien residential mortgages (2) (4) - (6) - other personal lending which is secured - - - - - credit cards - - - - - other personal lending which is unsecured - - - - Wholesale (25) (252) - (277) - corporate and commercial (24) (252) - (276) - non-bank financial institutions (1) - - (1) At 31 Dec 2022 (27) (256) - (283) Forborne loans and advances to customers at amortised costs by stage allocation (continued) Performing - forborne Non-performing - forborne Total - forborne Stage 2 Stage 3 POCI Total The bank ��m ��m ��m ��m Gross carrying amount Personal 1 8 - 9 - first lien residential mortgages - 7 - 7 - credit cards 1 - - 1 - other personal lending which is unsecured - 1 - 1 Wholesale 125 265 24 414 - corporate and commercial 125 265 24 414 At 31 Dec 2023 126 273 24 423 Allowance for ECL Personal - (1) - (1) - first lien residential mortgages - (1) - (1) - credit cards - - - - - other personal lending which is unsecured - - - - Wholesale (4) (126) (6) (136) - corporate and commercial (4) (126) (6) (136) At 31 Dec 2023 (4) (127) (6) (137) The bank Gross carrying amount Personal 1 7 - 8 - first lien residential mortgages - 6 - 6 - credit cards 1 - - 1 - other personal lending which is unsecured - 1 - 1 Wholesale 106 364 - 470 - corporate and commercial 106 364 - 470 At 31 Dec 2022 107 371 - 478 Allowance for ECL Personal - (1) - (1) - first lien residential mortgages - (1) - (1) - credit cards - - - - - other personal lending which is unsecured - - - - Wholesale (1) (158) - (159) - corporate and commercial (1) (158) - (159) At 31 Dec 2022 (1) (159) - (160) Wholesale lending This section provides further details on the major countries and industries comprising wholesale loans and advances to customers and banks. Product granularity is also provided by stage with geographical data presented for loans and advances to customers and banks, loans and other credit-related commitments and financial guarantees. The table below provides a breakdown by industry sector and stage of the group's gross carrying amount and allowances for ECL for wholesale loans and advances to banks and customers. Counterparties or exposures are classified when presenting comparable economic characteristics, or engaged in similar activities so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions. Therefore, the industry classification does not adhere to Nomenclature des Activit��s ��conomiques dans la Communaut�� Europ��enne ('NACE'), which is applicable to other financial regulatory reporting. Total wholesale lending for loans and advances to banks and customers by stage distribution Gross carrying amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m Corporate and commercial 42,982 5,981 1,773 32 50,768 (48) (98) (673) (6) (825) - agriculture, forestry and fishing 299 7 28 - 334 (1) - (9) - (10) - mining and quarrying 584 157 162 - 903 (1) (3) - - (4) - manufacture 8,267 1,465 348 - 10,080 (6) (17) (123) - (146) - electricity, gas, steam and air-conditioning supply 1,254 98 69 - 1,421 (2) (1) (6) - (9) - water supply, sewerage, waste management and remediation 359 42 5 - 406 - - (4) - (4) - construction and real estate 4,470 464 192 26 5,152 (11) (11) (55) (6) (83) - wholesale and retail trade, repair of motor vehicles and motorcycles 9,118 689 186 1 9,994 (5) (6) (107) - (118) - transportation and storage 2,085 969 151 - 3,205 (2) (7) (101) - (110) - accommodation and food 758 174 38 - 970 (2) (5) (11) - (18) - publishing, audiovisual and broadcasting 3,400 262 28 - 3,690 (3) (15) (16) - (34) - professional, scientific and technical activities 4,841 844 322 5 6,012 (6) (12) (157) - (175) - administrative and support services 5,032 358 115 - 5,505 (6) (7) (56) - (69) - public administration and defence, compulsory social security 4 - - - 4 - - - - - - education 23 3 1 - 27 - - - - - - health and care 91 4 5 - 100 - - (2) - (2) - arts, entertainment and recreation 61 36 3 - 100 - (1) (1) - (2) - other services 1,196 289 70 - 1,555 (3) (2) (23) - (28) - activities of households 1 - - - 1 - - - - - - extra-territorial organisations and bodies activities 1 - - - 1 - - - - - - government 1,123 109 50 - 1,282 - - (2) - (2) - asset-backed securities 15 11 - - 26 - (11) - - (11) Non-bank financial institutions 11,927 530 323 - 12,780 (7) (10) (138) - (155) Loans and advances to banks 14,256 116 - - 14,372 (1) - - - (1) At 31 Dec 2023 69,165 6,627 2,096 32 77,920 (56) (108) (811) (6) (981) By geography UK 32,334 2,229 648 25 35,236 (11) (45) (258) (6) (320) France 24,264 2,669 1,148 6 28,087 (27) (40) (447) - (514) Germany 5,129 913 121 - 6,163 (2) (16) (40) - (58) Other countries 7,438 816 179 1 8,434 (16) (7) (66) - (89) At 31 Dec 2023 69,165 6,627 2,096 32 77,920 (56) (108) (811) (6) (981) Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1 Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m Corporate and commercial 59,282 4,883 226 3 64,394 (12) (18) (20) - (50) Financial 59,760 2,536 17 - 62,313 (3) (4) (1) - (8) At 31 Dec 2023 119,042 7,419 243 3 126,707 (15) (22) (21) - (58) By geography Europe 119,042 7,419 243 3 126,707 (15) (22) (21) - (58) - of which: UK 27,612 4,704 13 3 32,332 (5) (14) (1) - (20) - of which: France 81,739 1,405 77 - 83,221 (5) (3) (7) - (15) - of which: Germany 5,896 915 111 - 6,922 (1) (5) - - (6) 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. Total wholesale lending for loans and advances to banks and customers by stage distribution (continued) Gross carrying amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m Corporate and commercial 46,671 6,479 1,851 3 55,004 (40) (123) (774) - (937) - agriculture, forestry and fishing 166 20 29 - 215 - (1) (12) - (13) - mining and quarrying 943 1 - - 944 (2) - - - (2) - manufacture 9,963 1,228 317 2 11,510 (7) (13) (78) - (98) - electricity, gas, steam and air- conditioning supply 1,838 165 78 - 2,081 (1) (1) (6) - (8) - water supply, sewerage, waste management and remediation 208 6 5 - 219 - - (4) - (4) - construction 571 107 47 - 725 (1) (3) (14) - (18) - wholesale and retail trade, repair of motor vehicles and motorcycles 8,397 645 178 1 9,221 (4) (6) (114) - (124) - transportation and storage 2,980 1,418 157 - 4,555 (6) (13) (56) - (75) - accommodation and food 668 209 46 - 923 (2) (5) (11) - (18) - publishing, audiovisual and broadcasting 3,292 90 36 - 3,418 (2) (1) (14) - (17) - real estate 3,955 784 199 - 4,938 (5) (16) (124) - (145) - professional, scientific and technical activities 2,568 564 211 - 3,343 (2) (12) (95) - (109) - administrative and support services 8,177 957 312 - 9,446 (7) (38) (173) - (218) - public administration and defence, compulsory social security 33 - - - 33 - - - - - - education 30 4 3 - 37 - - (1) - (1) - health and care 153 25 88 - 266 - (1) (49) - (50) - arts, entertainment and recreation 86 70 5 - 161 - (2) (2) - (4) - other services 1,330 38 76 - 1,444 (1) - (19) - (20) - activities of households 3 - - - 3 - - - - - - extra-territorial organisations and bodies activities 39 - - - 39 - - - - - - government 1,255 137 64 - 1,456 - - (2) - (2) - asset-backed securities 16 11 - - 27 - (11) - - (11) Non-bank financial institutions 11,709 723 268 - 12,700 (2) (7) (102) - (111) Loans and advances to banks 16,673 414 65 - 17,152 (6) (21) (16) - (43) At 31 Dec 2022 75,053 7,616 2,184 3 84,856 (48) (151) (892) - (1,091) By geography UK 36,885 2,187 825 - 39,897 (15) (47) (309) - (371) France 25,940 3,331 850 2 30,123 (16) (67) (435) - (518) Germany 5,197 1,155 313 - 6,665 - (21) (107) - (128) Other countries 7,031 943 196 1 8,171 (17) (16) (41) - (74) At 31 Dec 2022 75,053 7,616 2,184 3 84,856 (48) (151) (892) - (1,091) Total wholesale lending for loans and other credit-related commitments and financial guarantees1 by stage distribution (continued) Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m Corporate and commercial 63,605 8,012 239 - 71,856 (13) (29) (39) - (81) Financial 56,080 1,707 2 - 57,789 (1) (5) - - (6) At 31 Dec 2022 119,685 9,719 241 - 129,645 (14) (34) (39) - (87) By geography Europe 119,685 9,719 241 - 129,645 (14) (34) (39) - (87) - of which: UK 29,090 3,665 59 - 32,814 (9) (17) (7) - (33) - of which: France 75,886 2,796 38 - 78,720 (2) (5) (14) - (21) - of which: Germany 10,748 2,749 100 - 13,597 (1) (11) - - (12) 1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. Collateral and other credit enhancement (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 group 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 following tables. Collateral on loans and advances Collateral held is analysed separately for commercial real estate and for other corporate, commercial and financial (non-bank) lending. The following tables include off-balance sheet loan commitments, primarily undrawn credit lines. The collateral measured in the following tables consists of 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 as explained further on page 123. Other corporate, commercial and financial (non-bank) loans and advances Other corporate, commercial and financial (non-bank) loans are analysed separately in the following table, which focuses on the countries containing the majority of our loans and advances balances. 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. Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories (by stage) (Audited) Gross carrying/nominal amount ECL coverage Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ��m ��m ��m ��m ��m % % % % % Not collateralised 115,898 10,983 1,617 6 128,504 - 1.0 43.8 - 0.7 Fully collateralised by LTV ratio 8,709 908 101 - 9,718 0.1 1.2 23.8 - 0.4 - less than 50% 2,221 342 41 - 2,604 0.2 1.5 24.4 - 0.7 - 51% to 75% 1,830 196 29 - 2,055 0.1 1.0 20.7 - 0.4 - 76% to 90% 336 149 13 - 498 - 0.7 38.5 - 1.2 - 91% to 100% 4,322 221 18 - 4,561 - 1.8 22.2 - 0.2 Partially collateralised (A): LTV > 100% 3,709 821 404 1 4,935 0.1 0.5 12.1 - 1.1 - collateral value on A 2,963 595 135 1 3,694 Total at 31 Dec 2023 128,316 12,712 2,122 7 143,157 - 1.0 36.8 - 0.7 of which: UK Not collateralised 42,157 5,901 622 - 48,680 - 0.9 38.7 - 0.6 Fully collateralised by LTV ratio 4,464 168 11 - 4,643 - - 27.3 - 0.1 - less than 50% 654 119 6 - 779 - - 16.7 - 0.1 - 51% to 75% 1,031 47 3 - 1,081 - - - - - - 76% to 90% 33 - 2 - 35 - - 100.0 - 5.7 - 91% to 100% 2,746 2 - - 2,748 - - - - - Partially collateralised (B): LTV > 100% 229 19 7 - 255 - - 42.9 - 1.2 - collateral value on B 150 - 2 - 152 Total UK at 31 Dec 2023 46,850 6,088 640 - 53,578 - 0.9 38.6 - 0.6 of which: France Not collateralised 59,349 2,634 715 6 62,704 - 1.1 53.8 - 0.7 Fully collateralised by LTV ratio 2,110 341 26 - 2,477 0.1 1.2 15.4 - 0.4 - less than 50% 1,047 146 12 - 1,205 0.1 0.7 16.7 - 0.3 - 51% to 75% 614 115 4 - 733 0.2 0.9 25.0 - 0.4 - 76% to 90% 87 19 8 - 114 - - 12.5 - 0.9 - 91% to 100% 362 61 2 - 425 - 3.3 50.0 - 0.7 Partially collateralised (C): LTV > 100% 3,038 787 390 1 4,216 - 0.4 10.0 - 1.0 - collateral value on C 2,418 583 129 1 3,131 Total France at 31 Dec 2023 64,497 3,762 1,131 7 69,397 - 1.0 37.8 - 0.7 of which: Germany Not collateralised 8,949 1,603 173 - 10,725 - 1.1 20.8 - 0.5 Fully collateralised by LTV ratio 624 113 12 - 749 - 0.9 25.0 - 0.5 - less than 50% - - - - - - - - - - - 51% to 75% - - - - - - - - - - - 76% to 90% - - - - - - - - - - - 91% to 100% 624 113 12 - 749 - 0.9 25.0 - 0.5 Partially collateralised (D): LTV > 100% - - - - - - - - - - - collateral value on D - - - - - Total Germany at 31 Dec 2023 9,573 1,716 185 - 11,474 - 1.1 21.1 - 0.5 Wholesale lending - other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries/territories (by stage) (Audited) Gross carrying/nominal amount ECL coverage Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total ��m ��m ��m ��m ��m % % % % % Not collateralised 117,166 13,074 1,795 2 132,037 - 0.9 40.3 - 0.7 Fully collateralised by LTV ratio 10,444 1,132 80 - 11,656 0.1 1.5 26.3 - 0.4 - less than 50% 2,456 515 26 - 2,997 0.2 1.7 23.1 - 0.7 - 51% to 75% 3,321 272 6 - 3,599 0.1 1.5 33.3 - 0.2 - 76% to 90% 354 4 11 - 369 - - 36.4 - 1.1 - 91% to 100% 4,313 341 37 - 4,691 - 1.2 21.6 - 0.3 Partially collateralised (A): LTV > 100% 4,542 509 172 - 5,223 0.1 1.4 23.8 - 1.0 - collateral value on A 3,664 426 125 - 4,215 Total at 31 Dec 2022 132,152 14,715 2,047 2 148,916 - 1.0 38.4 - 0.7 of which: UK Not collateralised 46,080 4,219 673 - 50,972 - 0.8 31.2 - 0.5 Fully collateralised by LTV ratio 6,300 327 10 - 6,637 0.1 1.2 10.0 - 0.1 - less than 50% 1,643 224 2 - 1,869 0.2 0.4 - - 0.2 - 51% to 75% 2,161 84 3 - 2,248 - 3.6 33.3 - 0.2 - 76% to 90% 234 2 2 - 238 - - - - - - 91% to 100% 2,262 17 3 - 2,282 - - - - - Partially collateralised (B): LTV > 100% 169 23 11 - 203 - - 27.3 - 1.5 - collateral value on B 77 13 3 - 93 Total UK at 31 Dec 2022 52,549 4,569 694 - 57,812 - 0.8 30.8 - 0.5 of which: France Not collateralised 53,960 4,581 668 2 59,211 - 1.0 57.9 - 0.8 Fully collateralised by LTV ratio 2,146 239 12 - 2,397 - 1.7 33.3 - 0.3 - less than 50% 491 122 7 - 620 - 0.8 28.6 - 0.6 - 51% to 75% 1,050 69 2 - 1,121 - 1.4 50.0 - 0.2 - 76% to 90% 36 1 1 - 38 - - - - - - 91% to 100% 569 47 2 - 618 - 4.3 50.0 - 0.3 Partially collateralised (C): LTV > 100% 3,797 472 159 - 4,428 0.1 1.5 23.3 - 1.0 - collateral value on C 3,128 405 122 - 3,655 Total France at 31 Dec 2022 59,903 5,292 839 2 66,036 - 1.1 51.0 - 0.8 of which: Germany Not collateralised 11,577 3,269 348 - 15,194 - 0.9 28.7 - 0.9 Fully collateralised by LTV ratio 809 228 24 - 1,061 - 0.9 29.2 - 0.8 - less than 50% - - - - - - - - - - - 51% to 75% - - - - - - - - - - - 76% to 90% - - - - - - - - - - - 91% to 100% 809 228 24 - 1,061 - 0.9 29.2 - 0.8 Partially collateralised (D): LTV > 100% - - - - - - - - - - - collateral value on D - - - - - Total Germany at 31 Dec 2022 12,386 3,497 372 - 16,255 - 0.9 28.8 - 0.9 Other credit risk exposures In addition to collateralised lending, other credit enhancements are employed and methods used to mitigate credit risk arising from financial assets. These are described in more detail below: - Some securities issued by governments, banks and other financial institutions benefit from additional credit enhancement 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; - Trading loan and advances mainly pledged against cash collaterals are posted to satisfy margin requirements. There is limited credit risk on trading loans and advances since in the event of default of the counterparty these would be set off against the related liability. Reverse repos and stock borrowings are by their nature collateralised. Collateral accepted as security that the group is permitted to sell or repledge under these arrangements is described on page 164 of the financial statements. - 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. For further information on these arrangements, see Note 31 on the financial statements. Derivatives 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 market factors such as interest rates, exchange rates or asset prices. 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 valuation adjustment ('CVA'). The International Swaps and Derivatives Association ('ISDA') master agreement is our preferred agreement for documenting derivatives activity. It is common, and our preferred practice, for the parties involved in a derivative transaction to execute a credit support annex ('CSA') in conjunction with the ISDA master agreement. Under a CSA, collateral is passed between the parties to mitigate the counterparty risk inherent in outstanding positions. The majority of our CSAs are with financial institutional clients. We manage the counterparty exposure on our OTC derivative contracts by using collateral agreements with counterparties and netting agreements. Currently, we do not actively manage our general OTC derivative counterparty exposure in the credit markets, although we may manage individual exposures in certain circumstances. We place strict policy restrictions on collateral types and as a consequence the types of collateral received and pledged are, by value, highly liquid and of a strong quality, being predominantly cash. Where a collateral type is required to be approved outside the collateral policy, approval is required from a committee of senior representatives from Markets, Legal and Risk. See Note 28 on the financial statements for details regarding legally enforceable right of offset in the event of counterparty default and collateral received in respect of derivatives. Personal lending This section provides further details on the countries and products comprising personal loans and advances to customers. Further product granularity is also provided by stage, with geographical data presented for loans and advances to customers, loan and other credit-related commitments, and financial guarantees. Total personal lending for loans and advances to customers at amortised costs by stage distribution Gross Carrying amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ��m ��m ��m ��m ��m ��m ��m ��m By portfolio First lien residential mortgages 4,915 1,029 193 6,137 (14) (15) (63) (92) - of which: interest only (including offset) 820 292 27 1,139 - (1) (11) (12) - affordability including ARMs 221 4 - 225 (1) (1) - (2) Other personal lending 6,532 341 21 6,894 (6) (2) (8) (16) - guaranteed loans in respect of residential property 5,497 314 11 5,822 - - - - - Other personal lending which is secured 756 19 1 776 (1) - - (1) - credit cards 121 4 1 126 (2) (1) (1) (4) - Other personal lending which is unsecured 129 3 8 140 (3) (1) (7) (11) - motor vehicle finance 29 1 - 30 - - - - - IPO Loans - - - - - - - - - second lien residential mortgages - - - - - - - - At 31 Dec 2023 11,447 1,370 214 13,031 (20) (17) (71) (108) By geography UK1 1,810 818 13 2,641 (2) (2) (3) (7) France 5,811 356 37 6,204 - (1) (15) (16) Germany 116 14 - 130 - - - - Other countries 3,710 182 164 4,056 (18) (14) (53) (85) At 31 Dec 2023 11,447 1,370 214 13,031 (20) (17) (71) (108) Total personal lending for loans and other credit-related commitments and financial guarantees2 by stage distribution Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ��m ��m ��m ��m ��m ��m ��m ��m UK 330 2 2 334 - - - - France 517 24 1 542 - - - - Germany - - - - - - - - Other countries 431 3 - 434 - - - - At 31 Dec 2023 1,278 29 3 1,310 - - - - 1 Includes primarily first lien residential mortgages in Channel Islands and Isle of Man. 2 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. Total personal lending for loans and advances to customers at amortised costs by stage distribution (continued) Gross carrying amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ��m ��m ��m ��m ��m ��m ��m ��m By portfolio First lien residential mortgages 4,155 511 81 4,747 (7) (7) (22) (36) - of which: interest only (including offset) 878 53 30 961 - (1) (12) (13) - affordability including ARMs 353 6 - 359 (1) (1) - (2) Other personal lending 1,138 104 24 1,266 (2) (8) (9) (19) - guaranteed loans in respect of residential property - - - - - - - - - Other personal lending which is secured 982 70 9 1,061 (1) (4) (2) (7) - credit cards 61 23 7 91 - (2) - (2) - Other personal lending which is unsecured 95 11 8 114 (1) (2) (7) (10) At 31 Dec 2022 5,293 615 105 6,013 (9) (15) (31) (55) By geography UK1 3,090 482 13 3,585 (2) (9) (3) (14) France 50 3 36 89 - - (17) (17) Germany 163 32 - 195 - - - - Other countries 1,990 98 56 2,144 (7) (6) (11) (24) At 31 Dec 2022 5,293 615 105 6,013 (9) (15) (31) (55) Total personal lending for loans and other credit-related commitments and financial guarantees2 by stage distribution (continued) Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ��m ��m ��m ��m ��m ��m ��m ��m UK 875 11 2 888 - - - - France 637 32 3 672 - - - - Germany 155 57 - 212 - - - - Other countries 357 9 1 367 - - - - At 31 Dec 2022 2,024 109 6 2,139 - - - - 1 Includes primarily first lien residential mortgages in Channel Islands and Isle of Man. 2 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. Collateral on loans and advances 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. Personal lending - residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage (Audited) Gross carrying/nominal amount ECL coverage Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ��m ��m ��m ��m % % % % Fully collateralised by LTV ratio 5,019 1,011 125 6,155 0.3 1.2 22.4 0.9 - less than 50% 2,320 448 59 2,827 0.2 0.9 15.3 0.6 - 51% to 70% 1,753 352 28 2,133 0.2 1.1 21.4 0.7 - 71% to 80% 594 121 11 726 0.5 1.7 27.3 1.1 - 81% to 90% 271 59 15 345 0.7 1.7 33.3 2.3 - 91% to 100% 81 31 12 124 1.2 3.2 41.7 5.6 Partially collateralised (A): LTV > 100% 77 19 68 164 - 15.8 52.9 23.8 - collateral value on A 33 16 54 103 Total at 31 Dec 2023 5,096 1,030 193 6,319 0.3 1.5 33.2 1.5 of which: UK Fully collateralised by LTV ratio 1,752 814 10 2,576 - - 10.0 - - less than 50% 863 354 9 1,226 - - 11.1 0.1 - 51% to 70% 559 295 1 855 - - - - - 71% to 80% 179 96 - 275 - - - - - 81% to 90% 102 48 - 150 - - - - - 91% to 100% 49 21 - 70 - - - - Partially collateralised (B): LTV > 100% 9 1 - 10 - - - - - collateral value on B 3 1 - 4 Total UK at 31 Dec 2023 1,761 815 10 2,586 - - 10.0 - of which: France Fully collateralised 280 36 6 322 - - 16.7 0.3 - less than 50% 108 17 5 130 - - - - - 51% to 70% 126 15 - 141 - - - - - 71% to 80% 30 3 - 33 - - - - - 81% to 90% 14 1 - 15 - - - - - 91% to 100% 2 - 1 3 - - 100.0 33.3 Partially collateralised (C): LTV > 100% 4 - 14 18 - - 64.3 50.0 - collateral value on C 4 - 14 18 Total France at 31 Dec 2023 284 36 20 340 - - 50.0 2.9 (Audited) Gross carrying/nominal amount ECL coverage Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total ��m ��m ��m ��m % % % % Fully collateralised by LTV ratio 4,340 510 65 4,915 0.1 1.4 16.9 0.5 - less than 50% 2,199 203 46 2,448 0.1 1.5 13.0 0.4 - 51% to 70% 1,482 196 14 1,692 0.4 3.0 42.2 0.5 - 71% to 80% 442 66 3 511 0.2 1.5 33.3 0.6 - 81% to 90% 202 39 1 242 - - - 0.4 - 91% to 100% 15 6 1 22 - - 100.0 4.5 Partially collateralised (A): LTV > 100% 50 1 16 67 - - 68.8 16.4 - collateral value on A 10 1 - 11 Total at 31 Dec 2022 4,390 511 81 4,982 0.1 1.4 27.2 0.7 of which: UK Fully collateralised by LTV ratio 2,376 428 10 2,814 - 0.5 10.0 0.1 - less than 50% 1,255 151 9 1,415 - 0.7 11.1 0.1 - 51% to 70% 849 173 1 1,023 0.2 1.1 - 0.2 - 71% to 80% 198 60 - 258 - - - - - 81% to 90% 63 38 - 101 - - - - - 91% to 100% 11 6 - 17 - - - - Partially collateralised (B): LTV > 100% 11 1 - 12 - - - - - collateral value on B 6 1 - 7 Total UK at 31 Dec 2022 2,387 429 10 2,826 - 0.5 10.0 0.1 of which: France Fully collateralised 3 - 7 10 - - 14.3 10.0 - less than 50% 3 - - 3 - - - - - 51% to 70% - - 6 6 - - - - - 71% to 80% - - - - - - - - - 81% to 90% - - - - - - - - - 91% to 100% - - 1 1 - - 100.0 100.0 Partially collateralised (C): LTV > 100% - - 16 16 - - 62.5 62.5 - collateral value on C - - - - Total France at 31 Dec 2022 3 - 23 26 - - 47.8 42.3 Treasury risk Overview 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, as well as 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 (Audited) 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, to meet regulatory requirements. 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. For further details, refer to our Pillar 3 Disclosures at 31 December 2023. Treasury risk management Key developments in 2023 - Following high-profile banking failures in the first quarter of 2023, we reviewed our liquidity monitoring and metric assumptions as part of our internal liquidity adequacy assessment process ('ILLAP') cycle to ensure they continued to cover observed and emerging risks. - Effective July 2023, the Bank of England's Financial Policy Committee doubled the UK countercyclical capital buffer rate from 1% to 2%, in line with the usual 12���month implementation lag. The change increased our CET1 requirement by approximately 0.3 percentage point. - We further stabilised our net interest income against a backdrop of fluctuating interest rate expectations as the trajectory of inflation for major economies was reassessed. - We acquired HBBM in October 2023 to better align the HSBC Group corporate structure with management responsibilities. This was partially funded by equity issuance to HSBC Holdings plc. - Asset de-risking remained a focus for our pension plans over 2023 and we have worked with the fiduciaries of the plans to implement a number of de-risking strategies over the year. These have included improving the hedging position of our German plans by reducing the exposure to movements in interest rates and transitioning to lower risk investment strategies for two of our smaller plans enabling them to become better positioned to cope with future volatility. - We completed the sale of our retail banking operations in France in January 2024. Governance and structure The Chief Risk Officer is the accountable risk steward for all treasury risks. The Chief Financial Officer is the risk owner for all treasury risks, with the exception of pension risk which is co-owned with the regional heads of Performance & Reward. Capital risk, liquidity risk, interest rate risk in the banking book, structural foreign exchange risk and transactional foreign exchange risk are the responsibility of the Executive Committee and the Risk Committee. Treasury actively manages these risks on an ongoing basis, supported by the Asset and Liability Management Committee ('ALCO') and local ALCOs, overseen by Treasury Risk Management. Pension risk is overseen by the Pension Risk Management Meeting. Capital, liquidity and funding risk management processes Assessment and risk appetite Our capital management policy is supported by a global capital management framework. The framework sets out our approach to determining key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities ('MREL'), and the leverage ratio. Our internal capital adequacy assessment process ('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 and management, performance and planning, risks to capital, and the implications of 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, interest rate risk in the banking book and Group risk. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach. The group's ICAAP supports the determination of the capital risk appetite and target ratios, as well as enabling the assessment and determination of capital requirements by regulators. Subsidiaries prepare ICAAPs in line with global guidance, while considering their local regulatory regimes to determine their own risk appetites and ratios. HSBC Holdings provides our MREL, including equity and non-equity capital. These investments are funded by HSBC Holdings' own equity capital and MREL-eligible debt. MREL includes own funds and liabilities that can be written down or converted into capital resources in order to absorb losses or recapitalise a bank in the event of its failure. In line with the HSBC Group's existing structure and business model, HSBC has three resolution groups - the European resolution group (of which HSBC Bank plc forms part), the Asian resolution group and the US resolution group. We aim to ensure that management has oversight of our liquidity and funding risks at group and entity level through robust governance, in line with our risk management framework. We manage liquidity and funding risk in accordance with globally consistent policies, procedures and reporting standards. We are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through our ILAAP, which ensures that we have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the setting of risk tolerance and risk appetite. It also assesses our capability to manage liquidity and funding effectively. These metrics are set and managed locally but are subject to robust global review and challenge to ensure consistency of approach and application of the HSBC Group's policies and controls. Planning and performance Capital and RWA plans form part of the annual financial resource plan that is approved by the Board. Capital and RWA forecasts are submitted to the ALCO on a monthly basis, and capital and RWAs are monitored and managed against the plan. The responsibility for global capital allocation principles rests with the HSBC Group Chief Financial Officer, supported by the HSBC Group Capital Management Meeting. This is a specialist forum addressing capital management, reporting into Holdings ALCO. Through our internal governance processes, we seek to strengthen discipline over our investment and capital allocation decisions, and to ensure that returns on investment meet management's objectives. The group's strategy is to allocate capital to businesses and entities to support growth objectives where returns above internal hurdle levels have been identified and in order to meet their regulatory and economic capital needs. We evaluate and manage business returns by using a return on average tangible equity measure and a related economic profit measure. Funding and liquidity plans also form part of the financial resource plan. The Board-level appetite measures are the liquidity coverage ratio ('LCR') and net stable funding ratio ('NSFR'), together with an internal liquidity metric. In addition, we use a wider set of measures to manage an appropriate funding and liquidity profile, including legal entity depositor concentration limits, intra-day liquidity, forward-looking funding assessments and other key measures. Risks to capital and liquidity Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs, capital and/or liquidity position. Downside and Upside scenarios are assessed against our management objectives, and mitigating actions are assigned as necessary. We closely monitor future regulatory developments and continue to evaluate the impact of these upon our capital and liquidity requirements, particularly those related to the UK's implementation of the outstanding measures to be implemented from the Basel III reforms ('Basel 3.1'). Regulatory developments In November 2022, the PRA consulted on the implementation of Basel III Reforms ('Basel 3.1') in the UK. In September 2023, it announced that the implementation date of Basel 3.1 would be delayed by six months to 1 July 2025. In December 2023, the PRA published near-final rules in relation to the market risk, credit valuation adjustment, counterparty credit risk and operational risk elements of the package, together with information on the planned review of the Pillar 2 framework. The PRA intends to publish the near-final rules on the remaining parts, namely credit risk, the output floor and reporting and disclosure, in the second quarter of 2024. We continue to assess the impact of the proposed rules, noting that the output floor is not expected to apply to HSBC Bank plc on either a solo or consolidated basis. Our subsidiaries will be subject to Basel 3.1 rules, including potentially the output floor, as determined by their local regulators. Regulatory reporting processes and controls The quality of regulatory reporting remains a key priority for management and regulators. We are progressing with a comprehensive programme to strengthen our processes, improve consistency and enhance controls across regulatory reports. The ongoing programme of work focuses on our material regulatory reports and is being phased over a number of years. This programme includes data enhancement, transformation of the reporting systems and an uplift to the control environment over the report production process. While this programme continues, there may be further impacts on some of our regulatory ratios, such as the CET1, LCR and NSFR, as we implement recommended changes and continue to enhance our controls across the process. Stress testing and recovery planning The group uses stress testing to inform management of the capital and liquidity needed to withstand internal and external shocks, including a global economic downturn or a systems failure. Stress testing results are also used to inform risk mitigation actions, input into global business performance measures through tangible equity allocation, and recovery and resolution planning, as well as to re-evaluate business plans where analysis shows capital, liquidity and/or returns do not meet their target. In addition to a range of internal stress tests, we are subject to supervisory stress testing by the PRA and Bank of England. Our subsidiaries may also be subject to supervisory stress tests, including by the European Banking Authority and the European Central Bank. The results of regulatory stress testing and our internal stress tests are used when assessing our internal capital and liquidity requirements through the ICAAP and ILAAP. The outcomes of stress testing exercises carried out by the PRA and other regulators inform the setting of regulatory minimum ratios and buffers. We maintain recovery plans for the group and material entities, which set out potential options management could take in a range of stress scenarios that could result in a breach of capital or liquidity buffers. They also set out the framework and governance arrangements to support restoring the group to a stable and viable position, and so lowering the probability of failure from either idiosyncratic company-specific stress or systemic market-wide issues. Our recovery plans provide detailed actions that management would consider taking in a stress scenario should our position deteriorate and threaten to breach risk appetite and regulatory minimum levels. This is to help ensure that we can stabilise our financial position and recover from financial losses in a stress environment. The HSBC Group, including HSBC Bank plc, also has capabilities, resources and arrangements in place to address the unlikely event that HSBC might not be recoverable and would therefore need to be resolved by regulators. The HSBC Group and the BoE publicly disclosed the status of HSBC's progress against the BoE's Resolvability Assessment Framework in June 2022, following the submission of HSBC's inaugural resolvability self-assessment in October 2021. The HSBC Group has continued to enhance its resolvability capabilities since this time and submitted its second self-assessment in October 2023. A subsequent update was provided to the BoE in January 2024. Further public disclosure by the HSBC Group and the BoE as to HSBC's progress against the Resolvability Assessment Framework will be made in June 2024. Overall, our recovery and resolution planning helps safeguard the group's financial and operational stability. The HSBC Group is committed to further developing its recovery and resolution capabilities, including in relation to the Bank of England's Resolvability Assessment Framework. Measurement of interest rate risk in the banking book 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 held to hedge positions held with trading intent. Interest rate risk that can be economically hedged may be transferred to the Markets Treasury business. Hedging is generally executed through interest rate derivatives or fixed-rate government bonds. Any interest rate risk that Markets Treasury cannot economically hedge is not transferred and will remain within the global business where the risks originate. The following measures are used by Treasury to monitor and control interest rate risk in the banking book including: - Net Interest Income ('NII') sensitivity and banking net interest income ('BNII') sensitivity - Economic Value of Equity ('EVE') Sensitivity; and - Non-Trading Value at Risk ('VaR'). Net interest income and Banking Net Interest Income ('BNII') 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 (simulation modelling), where all other economic variables are held constant. This monitoring is undertaken at an entity level. HSBC Bank plc calculates both one-year and five-year NII sensitivities across a range of interest rate scenarios. NII sensitivity figures represent the effect of pro forma movements in projected yield curves based on a static balance sheet size and structure. The exception to this is where the size of the balances or repricing is deemed interest rate sensitive, for example, early prepayment of mortgages. These sensitivity calculations do not incorporate actions that would be taken by Markets Treasury or in the business that originates the risk to mitigate the effect of interest rate movements. The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the 'up-shock' scenario. The sensitivity calculations in the 'down-shock' scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable. During 2023, we introduced an additional metric to measure and manage the sensitivity of our income to interest rate shocks. In addition to Net Interest Income Sensitivity, we now also monitor Banking Net Interest Income Sensitivity. HSBC has a significant quantity of Trading Book assets that are funded by Banking Book liabilities and the NII sensitivity measure does not include the sensitivity of the internal transfer income from this funding. Banking net interest income sensitivity includes an adjustment on top of NII sensitivity to reflect this. Going forwards, this will be our primary metric for monitoring and management of net interest income sensitivity. As at 31 December 2023, the 12 month BNII sensitivity for the bank to an immediate 100bps parallel shock to interest rates is ��96m for an upwards shock, and ��(96)m for a downwards shock. This assessment is based on a static balance sheet with no management actions, a 50% pass-on assumption on certain interest bearing deposits and excludes pensions. Economic value of equity sensitivity 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. Non-trading Value at Risk Non-trading portfolios comprise positions that primarily arise from the interest rate management of our retail and commercial banking assets and liabilities, financial investments measured at FVOCI, debt instruments measured at amortised cost, and exposures arising from our insurance operations. The following table summarises the main business areas where non-trading market risks reside, and the market risk measures used to monitor and limit exposures. Non-trading risk - Interest rates - Credit spreads Value at risk | Sensitivity | Stress testing Non-trading portfolios Value at risk of the non-trading portfolios (Audited) The non-trading VaR in 2023 was driven by interest rate risk in the banking book arising from Markets Treasury and ALCM book positions. The non-trading VaR averaged ��29m this year, with the low of ��16.9m coming in Q1, and high in Q2 at ��37.4m. Throughout 2023, markets remained volatile, driven by continued geopolitical events and the shifting of the path of central bank interest rate hikes and the terminal Central Bank's rate expectations, driven by changing economic growth and inflation outlooks. During the first half of the year, the non-trading VaR trended upwards into the month of May as the Markets Treasury business took advantage of the higher yield environment, increasing G3 sovereign bond holdings, on an outright basis in Q2 contributing to a peak in the non-trading VaR of ��37.4m. During the second half of the year the VaR remained steady over the period to end the year at ��32.7m as Markets Treasury actively managed risk within their limits. Daily VaR (non-trading portfolios), 99% 1 day (��m) The group's non-trading VaR for the year is shown in the table below. Non-trading VaR, 99% 1 day (Audited) Interest rate ('IR') Credit spread ('CS') Portfolio diversification1 Total2 ��m ��m ��m ��m Balance at 31 Dec 2023 32.0 7.6 (6.8) 32.7 Average 28.8 8.3 (8.1) 29.0 Maximum 40.0 13.3 - 37.4 Minimum 14.5 6.1 - 16.9 Balance at 31 Dec 2022 17.1 7.2 (5.6) 18.6 Average 26.3 6.7 (5.0) 28.0 Maximum 39.7 11.9 - 40.9 Minimum 16.3 4.2 - 17.8 1 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 occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for this measure. 2 The total VaR is non-additive across risk types due to diversification effect. Other Risk Non-trading book foreign exchange exposures are outlined below. Structural foreign exchange exposures 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 the pound sterling as our presentation currency in our consolidated financial statements. Therefore, our consolidated balance sheet is affected by exchange differences between the pound sterling and all the other functional currencies of underlying foreign operations. Our structural foreign exchange exposures are managed with the primary objective of ensuring, where practical, that our most constraining capital ratio is largely protected from the effect of changes in exchange rates. For capital efficiency reasons, we rely on net investment hedges held at HSBC Holdings plc level to manage our structural foreign exchange positions. For further details of our structural foreign exchange exposures, see page 74. Transaction foreign exchange exposures Transactional foreign exchange risk arises primarily from day-to-day transactions in the banking book generating profit and loss or FVOCI 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 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 Markets Treasury business within agreed limits. Pension risk management processes HSBC provides future pension benefits on a defined contribution basis from many of its European operations. However, there remain future defined benefit pensions provided in the region. Pension plans are run by local fiduciaries in line with local legislative requirements. The largest pension plan is the HSBC Germany Pension Scheme which is regulated by the German Company Benefits Act (Gesetz zur Verbesserung der betrieblichen Altersversorgung - Betriebsrentengesetz - BetrAVG). 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, it 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 either interest rates or inflation, causing an increase in the value of the 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 are assessed using a 1-in-200-year stress test. Scenario analysis and other stress tests are also used to support pension risk management. To fund the benefits associated with defined benefit plans, sponsoring group companies, and in some instances employees, make regular contributions in accordance with advice from actuaries and in consultation with the plan's fiduciaries where relevant. These contributions are normally set to ensure that there are sufficient funds to meet the cost of the accruing benefits for the future service of active members. However, higher contributions are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution rates are typically revised annually or once every three years, depending on the plan. The defined benefit plans invest contributions in a range of investments designed to limit the risk of assets failing to meet a plan's liabilities. Any changes in expected returns from the investments may also change future contribution requirements. In pursuit of these long-term objectives, an overall target allocation of the defined benefit plan assets between asset classes is established. In addition, each permitted asset class has its own benchmarks, such as stock market or property valuation indices or liability characteristics. The benchmarks are reviewed at least once every three to five years and more frequently if required by local legislation or circumstances. The process generally involves an extensive asset and liability review. Capital risk in 2023 Capital overview Capital adequacy metrics At 31 Dec 31 Dec 2023 20221,2 Risk-weighted assets ('RWAs') (��m) Credit risk 61,983 66,887 Counterparty credit risk 17,066 17,981 Market risk 15,525 16,826 Operational risk 12,875 11,547 Total RWAs 107,449 113,241 Capital on a transitional basis (��m) Common equity tier 1 ('CET1') capital 19,230 18,411 Tier 1 capital 23,124 22,304 Total capital 37,131 35,414 Capital ratios on a transitional basis (%) Common equity tier 1 17.9 16.3 Total tier 1 21.5 19.7 Total capital ratio 34.6 31.3 Leverage ratio (fully phased-in) Tier 1 capital (��m) 23,124 22,304 Total leverage ratio exposure measure (��m) 455,852 416,814 Leverage ratio (%) 5.1 5.4 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 2 From November 2023, we reverted to the on-shored UK version of closely correlated currency list (CIR(EU) 2019/2091) from the previously applied EBA list (CIR(EU) 2021/249). Comparative data have been re-presented. References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK's version of such regulation and/or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law. Capital figures and ratios in the table above are calculated in accordance with the revised Capital Requirements Regulation and Directive, as implemented ('CRR II'). Leverage ratios are calculated using the end point definition of capital and the IFRS 9 regulatory transitional arrangements. Own funds Own funds disclosure (Audited) At 31 Dec 31 Dec 2023 2022 Ref* ��m ��m Common equity tier 1 ('CET1') capital: instruments and reserves 1 Capital instruments and the related share premium accounts 1,801 1,217 - ordinary shares 1,801 1,217 2,3 Retained earnings, accumulated other comprehensive income (and other reserves)1 17,886 19,414 5 Minority interests (amount allowed in consolidated CET1) 77 72 5a Independently reviewed interim net profits net of any foreseeable charge or dividend 742 (1,459) 6 Common equity tier 1 capital before regulatory adjustments1 20,506 19,244 28 Total regulatory adjustments to common equity tier 1 (1,276) (833) 29 Common equity tier 1 capital1 19,230 18,411 36 Additional tier 1 capital before regulatory adjustments 3,941 3,942 43 Total regulatory adjustments to additional tier 1 capital (47) (49) 44 Additional tier 1 capital 3,894 3,893 45 Tier 1 capital1 23,124 22,304 51 Tier 2 capital before regulatory adjustments 14,403 13,559 57 Total regulatory adjustments to tier 2 capital (396) (449) 58 Tier 2 capital 14,007 13,110 59 Total capital1 37,131 35,414 * The references identify the lines prescribed in the template, that are applicable and where there is a value. 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. At 31 December 2023, our common equity tier 1 ('CET1') capital ratio increased to 17.9% from 16.3% at 31 December 2022. The key drivers of the increase in our CET1 ratio were: - a 0.9 percentage point increase from RWA reduction due to balance sheet reductions and upstream risk parameter refinements mainly in corporate lending and overdraft, further supplemented by favourable FX movements. - a 0.9 percentage point increase from capital generation through profits and issuance of share capital net of dividend payment. - a (0.2) percentage point decrease from unfavourable FX movement and other movements in own funds. Throughout 2023, we complied with the PRA's regulatory capital adequacy requirements, including those relating to stress testing. Risk-weighted assets RWA movement by key driver Total RWAs ��m RWAs at 1 Jan 20231 113,241 Asset size (698) Asset quality (760) Model updates (339) Methodology and policy (2,476) Acquisitions, disposals and transfers 2,285 Foreign exchange movement (3,804) Total RWA movement (5,792) RWAs at 31 Dec 2023 107,449 1 From November 2023, we reverted to the on-shored UK version of closely correlated currency list (CIR(EU) 2019/2091) from the previously applied EBA list (CIR(EU) 2021/249). Comparative data have been re-presented. RWAs decreased by ��(5.8)bn during the year, including a decrease of ��(3.8)bn due to favourable foreign currency translation differences. Asset size Asset size decreased by ��(0.7)bn driven mainly by a decrease in Credit risk RWAs by ��(2.2)bn due to balance sheet reductions mainly in corporate lending and due to management initiatives. This was further supplemented by a Market risk RWAs fall of ��(0.5)bn due to lower structural foreign exchange exposures. This was partially offset by the Operational Risk RWA increase by ��1.1bn mainly driven by higher average revenue in the annual recalculation of operational risk and a ��0.9bn increase in Counterparty Credit Risk RWA driven by an increase in cash exposures and the Securities Financing Transactions portfolio. Asset quality The ��(0.8)bn decrease in RWAs is mainly due to portfolio mix changes in Credit Risk and Counterparty Credit Risk. Model updates The ��(0.3)bn decrease in RWAs is mainly due to implementation of a new Incremental Risk Charge model in Market Risk. This was further supplemented by a decrease in Credit Risk driven by a change in approach to report multilateral development banks' exposures under the STD method, partially offset by an increase due to implementation of the new Retail EAD model. Acquisitions and disposals The ��2.3bn increase is mainly due to the acquisition of HBBM and PBLU, which was offset by a ��(0.4)bn decrease due to strategic disposals including the sale of our branch operations in Greece. Methodology and policy The ��(2.5)bn decrease was primarily driven by RWA initiatives and risk parameter refinements in Credit Risk and Counterparty Credit Risk. Leverage ratio Our leverage ratio was 5.1% at 31 December 2023, down from 5.4% at 31 December 2022. The increase in leverage exposure is primarily due to growth in the balance sheet, which led to a fall by 0.5 percentage points in the leverage ratio. This is partly offset by a rise of 0.2 percentage points due to an increase in the tier 1 capital. Leverage ratio At 31 Dec 31 Dec 2023 2022 ��bn ��bn Tier 1 capital 23,124 22,304 Total leverage ratio exposure 455,852 416,814 % % Leverage ratio 5.1 5.4 Pillar 3 disclosure requirements Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make financial services firms more transparent by requiring publication of wide-ranging information on their risks, capital and management. Our Pillar 3 Disclosures at 31 December 2023 is published on our website, www.hsbc.com/investors. Structural foreign exchange exposures The group's structural foreign currency exposure is represented by the net assets or capital investments in subsidiaries, branches, joint arrangements or associates, the functional currencies of which are currencies other than the sterling. For our policies and procedures for managing structural foreign exchange exposures, see page 71 of the 'Risk management' section. Net structural foreign exchange exposures 2023 2022 ��m ��m Currency of structural exposure Euro 10,117 9,387 US Dollars 1,482 1,062 South African Rand 287 287 Armenian dram 118 116 Israeli New Shekel 107 85 Others, each less than ��100m 192 188 At 31 Dec 12,303 11,125 Liquidity and funding risk in 2023 Liquidity coverage ratio The LCR aims to ensure that a bank has sufficient unencumbered HQLA to meet its liquidity needs in a 30-calendar-day liquidity stress scenario. HQLA consist of cash or assets that can be converted into cash at little or no loss of value in markets. At 31 December 2023, all the group's principal operating entities were within the LCR risk tolerance level established by the Board and applicable under the LFRF. LCR1,2 At 31 Dec 31 Dec 2023 2022 % % HSBC Bank plc 148 143 In addition to the regulatory metric, the group manages liquidity via 'internal liquidity metric', which is being used to monitor and manage liquidity risk via a low-point measure across a 270-day horizon, taking into account recovery capacity. Net stable funding ratio The Net Stable Funding Ratio ('NSFR') requires institutions to maintain sufficient stable funding relative to required stable funding, and reflects a bank's long-term funding profile (funding with a term of more than a year). At 31 December 2023, all the group's principal operating entities were within the NSFR risk tolerance level established by the Board and applicable under the LFRF. NSFR1 At 31 Dec 31 Dec 2023 2022 % % HSBC Bank plc 116 115 Depositor concentration and term funding maturity concentration The LCR and NSFR metrics assume a stressed outflow based on a portfolio of depositors within each depositor segment. To ensure the validity of these assumptions in the sense that the deposit base is sufficiently diversified, the depositor concentration is monitored on an ongoing basis. In addition to this, operating entities monitor the term funding maturity concentration metric to ensure they are not overly exposed to term funding concentration of wholesale market counterparts by the current maturity profile in any defined period. Liquid assets The table below shows the weighted liquidity value of assets categorised as liquid, which is used for the purposes of calculating the LCR metric. This reflects the stock of unencumbered liquid assets at the reporting date, using the regulatory definition of liquid assets. Liquid assets2 At Estimated liquidity value At Estimated liquidity value 31 Dec 2023 31 Dec 2022 ��m ��m HSBC Bank plc Level 1 88,678 93,500 Level 2a 8,699 5,726 Level 2b 6,051 3,270 1 The LCR and NSFR ratios presented in this table are based on average value. The LCR is the average of the preceding 12 months. The NSFR is the average of preceding quarters. Prior period numbers have been restated for consistency. 2 In December 2022, a strategic data enhancement for HSBC Bank plc was implemented which resulted in a reclassification of some securities. This reclassification drove a reduction in total High Quality Liquid Assets and corresponding LCR as of 31 December 2022. Prior period numbers have been restated for consistency. Sources of funding Our primary sources of funding are customer current accounts, repo and wholesale securities. The following 'Funding sources and uses' table provides a consolidated view of how our balance sheet is funded, and should be read in light of the LFRF, which requires operating entities to manage liquidity and funding risk on a stand-alone basis. The table analyses our consolidated balance sheet according to the assets that primarily arise from operating activities and the sources of funding primarily supporting these activities. Assets and liabilities that do not arise from operating activities are presented at other balance sheet lines. In 2023, the level of customer accounts continued to exceed the level of loans and advances to customers. The positive funding gap was predominantly deployed in liquid assets, cash and balances with central banks and financial investments, as required by the LFRF. Funding sources and uses for the group 2023 20221 2023 20221 ��m ��m ��m ��m Sources Uses Customer accounts 222,941 215,948 Loans and advances to customers 75,491 72,614 Deposits by banks 22,943 20,836 Loans and advances to banks 14,371 17,109 Repurchase agreements - non-trading 53,416 32,901 Reverse repurchase agreements - non-trading 73,494 53,949 Debt securities in issue 13,443 7,268 Cash collateral, margin and settlement accounts 52,154 51,858 Cash collateral, margin and settlement accounts 53,094 60,385 Assets held for sale 20,368 21,214 Liabilities of disposal groups held for sale 20,684 24,711 Trading assets 100,696 79,878 Subordinated liabilities 14,920 14,528 - reverse repos 8,510 8,729 Financial liabilities designated at fair value 32,545 27,282 - stock borrowing 8,713 5,627 Insurance contract liabilities 20,595 20,004 - other trading assets 83,473 65,522 Trading liabilities 42,276 41,265 Financial investments 46,368 32,604 - repos 7,929 8,213 Cash and balances with central banks 110,618 131,433 - stock lending 2,190 1,773 Other balance sheet assets 209,410 255,987 - other trading liabilities 32,157 31,279 At 31 Dec 702,970 716,646 Total equity 24,505 23,233 Other balance sheet liabilities 181,608 228,285 At 31 Dec 702,970 716,646 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. Contingent liquidity risk arising from committed lending facilities The group provides customers with committed facilities such as standby facilities to corporate customers and committed backstop lines to conduits sponsored by the group. All of the undrawn commitments provided to conduits or external customers are accounted for in the LCR and NSFR in line with the applicable regulations. This ensures that under a stress scenario any additional outflow generated by increased utilisation of these committed facilities by either customers or the group's sponsored conduits is appropriately reflected in our liquidity and funding position. In relation to commitments to customers, the table below shows the level of undrawn commitments outstanding in terms of the five largest single facilities and the largest market sector. The group's contractual exposures at 31 December monitored under the contingent liquidity risk limit structure 2023 2022 ��bn ��bn Commitments to conduits Multi-seller conduits1 - total lines 3.6 3.7 - largest individual lines 0.2 0.2 Securities investment conduits - total lines 1.0 1.3 Commitments to customers - five largest 2 3.5 3.7 - largest market sector3 14.4 13.3 1 Exposures relate to the Regency multi-seller conduit. This vehicle provides funding to group customers by issuing debt secured by a diversified pool of customer-originated assets. 2 Represents the undrawn balance for the five largest committed liquidity facilities provided to customers, other than those facilities to conduits. 3 Represents the undrawn balance for the total of all committed liquidity facilities provided to the largest market sector, other than those facilities to conduits. Asset encumbrance and collateral management An asset is defined as encumbered if it has been pledged as collateral against an existing liability and, as a result, is no longer available to the group to secure funding, satisfy collateral needs or be sold to reduce the funding requirement. Collateral is managed on an operating entity basis consistent with the approach to managing liquidity and funding. Available collateral held in an operating entity is managed as a single consistent collateral pool from which each operating entity will seek to optimise the use of the available collateral. The objective of this disclosure is to facilitate an understanding of available and unrestricted assets that could be used to support potential future funding and collateral needs. The disclosure is not designed to identify assets which would be available to meet the claims of creditors or to predict assets that would be available to creditors in the event of a resolution or bankruptcy. Summary of assets available to support potential future funding and collateral needs (on- and off-balance sheet) 2023 2022 ��m ��m Total on-balance sheet assets at 31 Dec 702,970 717,353 Less: - reverse repo/stock borrowing receivables and derivative assets (264,834) (293,543) - other assets that cannot be pledged as collateral (59,134) (51,974) Total on-balance sheet assets that can support funding and collateral needs at 31 Dec 379,002 371,836 Add: off-balance sheet assets - fair value of collateral received in relation to reverse repo/stock borrowing/derivatives that is available to sell or repledge 224,836 180,233 Total assets that can support future funding and collateral needs 603,838 552,069 Less: - on-balance sheet assets pledged (97,077) (98,124) - re-pledging of off-balance sheet collateral received in relation to reverse repo/stock borrowing/derivatives (175,100) (136,777) Assets available to support funding and collateral needs at 31 Dec 331,661 317,168 Market risk Overview Market risk is the risk that movements in market factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices will reduce the group's income or the value of its portfolios. Exposure to market risk is separated into two portfolios. Trading portfolios comprise positions arising from market-making and warehousing of customer-derived positions. Non-trading portfolios including Markets Treasury comprise positions that primarily arise from the interest rate management of the group's retail and commercial banking assets and liabilities, financial investments designated as held-to-collect-and-sale ('HTCS'), and exposures arising from the group's insurance operations. Key developments in 2023 There were no material changes to our policies and practices for the management of market risk in 2023. Market risk governance (Audited) The following diagram summarises the main business areas where trading market risks reside, and the market risk measures used to monitor and limit exposures. Trading risk - Foreign exchange and commodities - Interest rates - Credit spreads - Equities Value at risk | Sensitivity | Stress testing Where appropriate, we apply similar risk management policies and measurement techniques to trading portfolios. Our objective 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 Chief Risk Officer. These limits are allocated across business lines and to the group and its subsidiaries. The majority of HSBC's total VaR and almost all trading VaR reside in GBM. Each major operating entity 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. The Traded Risk function enforces the controls around trading in permissible instruments approved for each site as well as following completion of the new product approval process. Traded Risk also restricts trading in the more complex derivative products to offices with appropriate levels of product expertise and robust control systems. Market risk measures Monitoring and limiting market risk exposures Our objective is to manage and control market risk exposures while maintaining a market profile consistent with the group's risk appetite. We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, VaR, and stress testing. Sensitivity analysis Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios, including interest rates, foreign exchange rates, credit spreads and equity prices, such as the effect of a one basis point change in yield. We use sensitivity measures to monitor the market risk positions within each risk type. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining the level of limits set. Value at risk VaR is a technique that estimates the potential losses on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market risk management and is calculated for all trading positions regardless of how the group capitalises those exposures. Where there is not an approved internal model, the group uses the appropriate local rules to capitalise exposures. The VaR models for trading portfolios are predominantly based on historical simulation. The VaR is calculated at a 99% confidence level for a one-day holding period. Where we do not calculate VaR explicitly, we use alternative tools like Stress Testing. The VaR models derive plausible future scenarios from past series of recorded market rates and prices, taking into account inter-relationships between different markets and rates such as interest rates and foreign exchange rates. The models also incorporate the effect of option features on the underlying exposures. The historical simulation models used incorporate the following features: - Historical market rates and prices are calculated with reference to foreign exchange rates and commodity prices, interest rates, equity prices and the associated volatilities; - Potential market movements utilised for VaR are calculated with reference to data from the past two years; and - VaR measures are calculated to a 99% confidence level and use a one-day holding period. The nature of the VaR models means that an increase in observed market volatility will most likely lead to an increase in VaR without any changes in the underlying positions. VaR model limitations Although a valuable guide to risk, VaR should always be viewed in the context of its limitations. For example: - the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature; - the use of a holding period assumes that all positions can be liquidated or the risks offset during that period. This may not fully reflect the market risk arising at times of severe illiquidity, when the holding period may be insufficient to liquidate or hedge all positions fully; - the use of a 99% confidence level by definition does not take into account losses that might occur beyond this level of confidence; and - VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures. Risk not in VaR framework Other basis risks which are not completely covered in VaR are complemented by our risk not in VaR ('RNIV') calculations, and are integrated into our capital framework. Risk factors are reviewed on a regular basis and either incorporated directly in the VaR models, where possible, or quantified through the VaR-based RNIV approach or a stress test approach within the RNIV framework. The outcome of the VaR-based RNIV is included in the VaR calculation; a stressed VaR RNIV is also computed for the risk factors considered in the VaR-based RNIV approach. Stress-type RNIVs include a deal contingent derivatives capital charge to capture risk for these transactions and a de-peg risk measure to capture risk to pegged and heavily managed currencies. Stress testing Stress testing is an important procedure that is integrated into our market risk management tool to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables. In such scenarios, losses can be much greater than those predicted by VaR modelling. Stress testing is implemented at legal entity, regional and overall HSBC Group levels. A standard set of scenarios is utilised consistently across all regions within the HSBC Group. Scenarios are tailored to capture the relevant events or market movements at each level. The risk appetite around potential stress losses for the group is set and monitored against referral limits. Market risk reverse stress tests are undertaken on the premise that there is a fixed loss. The stress testing process identifies which scenarios lead to this loss. The rationale behind the reverse stress test is to understand scenarios which are beyond normal business settings that could have contagion and systemic implications. Stressed VaR and stress testing, together with reverse stress testing and the management of gap risk, provide management with insights regarding the 'tail risk' beyond VaR for which the group's appetite is limited. Trading portfolios Back-testing 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. This measure of profit and loss does not align with how risk is dynamically hedged, and is not therefore necessarily indicative of the actual performance of the business. The number of hypothetical loss back-testing exceptions, together with a number of other indicators, is 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 HSBC Group entity hierarchy. Defined benefit pension plans Market risk also arises within the Bank's defined benefit pension plans to the extent that the obligations of the plans are not fully matched by assets with determinable cash flows. Refer to the Pension risk management processes section on page 71 for additional information. Market risk in 2023 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 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 Fed policy and bond yields expectations. Investor sentiment remained resilient in credit markets. High-yield and investment-grade credit spreads were 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 Value at risk of the trading portfolios (Audited) The Trading VaR predominantly resides within Markets Securities Services where it amounted to ��25.4m as of 31 December 2023 compared with ��31.2m as of 31 December 2022. The Trading VaR peaked at ��55.4m in September owing to the sensitivity of the trading book to interest rates moves, coupled with a large volatility in the rates market. The lower than market expected inflation data in developed markets led to a general decrease of volatility from beginning of November; as a result, the Trading VaR decreased in the last two months of the year and remained fairly stable, ranging between ��19m and ��31.7m. Daily VaR (trading portfolios), 99% 1 day (��m) . The group's trading VaR for the year is shown in the table below. Trading VaR, 99% 1 day (Audited) Foreign exchange ('FX') and commodity Interest rate ('IR') Equity ('EQ') Credit Spread ('CS') Portfolio Diversification1 Total2 ��m ��m ��m ��m ��m ��m Balance at 31 Dec 2023 6.2 20.1 11.0 5.2 (17.0) 25.4 Average 11.4 25.8 10.0 9.2 (24.1) 32.3 Maximum 17.2 50.2 14.7 12.7 - 55.4 Minimum 5.6 13.8 7.8 5.2 - 19.0 Balance at 31 Dec 2022 7.5 26.4 13.6 8.6 (24.9) 31.2 Average 10.0 15.3 11.7 13.0 (22.8) 27.2 Maximum 21.5 49.2 17.1 22.9 - 60.0 Minimum 3.3 8.2 6.8 7.0 - 14.2 1 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 occurs on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for this measure. 2 The total VaR is non-additive across risk types due to diversification effect and it includes VaR RNIV. Back-Testing In 2023, HSBC Bank plc did not experience any back-testing exceptions against the Hypothetical P&L and Actual P&L. Climate Risk Overview Our Climate risk approach is aligned to the framework outlined by the Taskforce for Climate-related Financial Disclosures ('TCFD'), which identifies two primary drivers of climate risk: - physical risk, which arises arising from the increased frequency and severity of extreme weather events, such as hurricanes and floods, or chronic gradual shifts in weather patterns or sea level rise; 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, action or inaction. In addition to these primary drivers of climate risk we have also 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 Group failing to meet its net zero commitments or failing to meet external expectations related to net zero, impacting HSBC Bank plc, because of inadequate ambition and/or plans, poor execution, or inability to adapt to changes in 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 our stakeholders. Approach We recognise 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. HSBC Bank plc may be affected by climate risks either directly or indirectly through our relationships with our customers and through macro impacts on the economies we serve, which could result in both financial and non-financial impacts. Our climate risk approach aims to effectively manage the material climate risks that could impact our operations, financial performance and stability, and reputation. It is informed by the evolving expectations of our regulators. We remain aligned with HSBC Group, in developing our climate risk capabilities across our business, by prioritizing sectors, portfolios and counterparties with the highest impacts. We continue to make progress in enhancing our climate risk capabilities and recognise it is a long-term iterative process. We aim to regularly review our 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 our approach to reflect how the risks associated with climate change continue to evolve in the real world, and maturing how we embed climate risk factors into strategic planning, transactions and decision making across our businesses. In 2023, the HSBC Group refreshed their assessment of how climate risk may impact HSBC taxonomy risk types, with the assessment focusing on a 12-month time horizon. It also considers additional short term (up to 2025), medium term (2026 - 2035) and long term (2036 - 2050) time horizons. The assessment is refreshed annually, and results may change as our understanding of climate risk and how it impacts HSBC evolves. Climate risk management Key developments in 2023 Our climate risk programme continues to support the development of our climate risk management capabilities, expanding the scope of climate-related training and developing new climate risk metrics to monitor and manage exposures. We enhanced our internal scenario analysis through improvements of our use of customer transition plans data. We have enhanced and expanded the use of a client transition engagement questionnaire to better understand our exposure to the highest transition risk sectors and we continue to engage with our customers to understand and support their transition away from high carbon activities. While the HSBC Group have made progress in enhancing our climate risk framework, further work remains. This includes the need to develop additional metrics and tools to measure our exposure to climate-related risks, and to incorporate these tools within decision making. Governance and structure The group's Board takes overall responsibility for our ESG strategy, overseeing executive management in developing the approach, execution and associated reporting. We continue to aim to deepen our understanding of the drivers of climate risk as well as aim to manage our exposure. The Environmental Risk Oversight Forum (formerly the Climate Risk Oversight Forum) oversees risk activities relating to climate and sustainability risk management, including the transition and physical risks from climate change. The Europe Reputational Risk Committee considers climate-related matters arising from customers, transactions and third parties that either present a serious potential reputational risk to HSBC Bank plc (or the HSBC Group) or merit a decision to ensure a consistent approach to reputational risk management across the regions, global businesses and global functions. The group's Risk Management Meeting and Risk Committee receive regular updates on our climate risk profile and progress of our climate risk programme. Risk appetite Our climate risk appetite forms part of the HSBC Group's risk appetite statement and supports the business in delivering our net zero ambition effectively and sustainably. Our climate risk appetite statement is approved and overseen by the Board. It is supported by risk appetite metrics and tolerance thresholds. We have also defined additional key management information metrics. Both the risk appetite statement and key management information metrics are reported on a quarterly basis for oversight by the HSBC Bank plc Risk Management Meeting and the HSBC Bank plc Risk Committee receive regular updates on our climate risk profile and progress of our climate risk programme. Challenges Whilst HSBC Group have continued to develop our climate risk framework, our remaining challenges include: - The diverse range of data sources and data structures needed for climate related reporting drives data accuracy and reliability risks. - Data limitations on customer assets and supply chains, and methodology gaps, which hinder our ability to assess physical risks accurately. - Data gaps on customer emissions and transition plan and methodology gaps, which limit our ability to assess transition risks accurately. - Limitations in our management of net zero alignment risk 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. Resilience Risk Overview Resilience risk is the risk that we are unable to provide critical services to our customers, affiliates and counterparties as a result of sustained and significant operational disruption. Resilience risk arises from failures or inadequacies in processes, people, systems or external events. Key developments in 2023 The Operational and Resilience Risk sub-function seeks to provide robust Risk Steward oversight of the management of risk by our businesses, functions and legal entities. This includes effective and timely independent challenge and expert advice. During the year, we carried out a number of initiatives to seek to keep pace with geopolitical, regulatory and technology changes and to strengthen the management of resilience risk: - We focused on enhancing our understanding of our risk and control environment, by updating our risk taxonomy and control libraries, including Change Execution risk, and refreshing risk and control assessments. - We have continued to monitor geopolitical events, such as the Russia-Ukraine and Israel-Hamas wars, for any potential impact they may have on our colleagues and operations. - 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 control and oversight of our material third parties by our global businesses and functions in the region. - 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. 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's Risk Management Meeting, chaired by the Europe Chief Risk Officer, with an escalation path to the HSBC Group Risk Management Meeting and HSBC Group Risk Committee. Key risk management process Operational resilience is our ability to anticipate, prevent, adapt, respond to, recover and learn from operational disruption while minimising customer and market impact. Resilience is determined by assessing whether we are able to continue to provide our important business services, within an agreed level. 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 our risk steward opinion papers to formal governance, at least four times a year. 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. Business operations continuity We continue to monitor the Israel-Hamas war and remain ready to take measures to help ensure business continuity should the situation require. There has been no significant impact to our services in nearby markets where the group operates. However in light of potential disruption, businesses and functions in these and nearby markets are reviewing existing plans and responses to minimise any impact. Cybersecurity Risk Overview The threat of cyber-attacks remains a concern for our organisation, as it does across the financial sector and other industries. As cyber-attacks continue to evolve, failure to protect our operations may result in the loss of sensitive data, disruption for our customers and our business, or financial loss. This could have a negative impact on our customers and our reputation, among other risks. We continue to monitor ongoing geopolitical events and changes to the cyber threat landscape and take proactive measures with the aim to reduce any impact to our customers. We invest in business and technical controls to help prevent, detect, and mitigate cyber threats. Our cybersecurity controls follow a 'defence in depth' approach, making use of multiple security layers, recognising the complexity of our environment. Our ability to detect and respond to attacks through round-the-clock security operations centre capabilities is intended to help reduce the impact of attacks. We have a cyber intelligence and threat analysis team, which proactively collects and analyses internal and external cyber information to continuously evaluate threat levels for the most prevalent attack types and their potential outcomes. We actively participate in the broader cyber intelligence community, including by sharing technical expertise in investigations, alongside others in the financial services industry and government agencies around the world. Key developments in 2023 We have continued to work with our suppliers, financial infrastructure bodies and other non-traditional third parties, in an effort to help reduce the threat of cyber-attacks impacting our business services. We have a third-party security risk management process in place to assess, identify and manage the risks associated with cybersecurity threats to our third-party relationships. The process includes risk-based cybersecurity due diligence reviews that assess third parties' cybersecurity programmes against our standards and requirements. In 2023, we further strengthened our cyber defences and enhanced our cybersecurity capabilities with the objective to help reduce the likelihood and impact of unauthorised access, security vulnerabilities being exploited, data leakage, third-party security exposure, and advanced malware. These defences build upon a proactive data analytical approach to help identify advanced targeted threats and malicious behaviour. Governance and structure We operate a three lines of defence model, aligned to the enterprise risk management framework, to help ensure oversight and challenge of our cybersecurity capabilities and priorities. In the first line of defence, we have risk owners within global businesses and functions who are accountable for identifying and managing cyber risk. They work with cybersecurity control owners to apply the appropriate risk treatment in line with our risk appetite. Our controls are designed to be executed in line with our policies and are reviewed and challenged by our risk stewards representing the second line of defence.They are independently assured by the Global Internal Audit function, the third line of defence. The assessment and management of our cybersecurity risks across the HSBC Group is led and coordinated by a Global Chief Information Security Officer, supported by regional and business level chief information security officers. Our regional chief information security officer covering Europe and the UK has extensive experience in financial services, security and resilience as well as in strategy, governance, risk management and regulatory compliance. In the event of incidents, the Global Chief Information Security Officer and relevant supporting information security officers are informed by our security operations team and are engaged in alignment with our cybersecurity incident response protocols. Key risk management processes We have a robust suite of cybersecurity policies, procedures, and key controls designed to help ensure that the organisation is well managed, with effective oversight and control. This includes but is not limited to defined information security responsibilities for employees, contractors, and third parties, as well as standard procedures for cyber incident identification, investigation, mitigation, and reporting. Key performance indicators, control effectiveness, and other matters related to cybersecurity, including significant cyber incidents, are presented on a regular basis to various management risk and control committees, including to the Board, the Risk Management Meeting, and across global businesses, functions, and regions. This is done to facilitate ongoing awareness and management of our cybersecurity position. Our cybersecurity capabilities are regularly assessed against the National Institute of Standards and Technology (NIST) framework by independent third parties and we proactively collaborate with regulators to participate in regular testing activities. In addition, HSBC engages external independent third parties to support our penetration and threat-led penetration testing, which help to identify our vulnerabilities to cyber threats and test our security resilience. Cyber training and awareness We understand the important role our people play in protecting against cybersecurity threats. Our mission is to equip every colleague with the appropriate tools and behaviours they need to keep our organisation and customers' data safe. We provide cybersecurity training and awareness to our people, ranging from our top executives to IT developers to front-line relationship managers around the world. We host an annual cyber awareness month for all colleagues, covering topics such as online safety at home, social media safety, safe hybrid working, and cyber incidents and response. Our dedicated cybersecurity training and awareness team provides a wide range of education and guidance to both customers and our colleagues about how to spot and prevent online fraud. Regulatory compliance risk Overview Regulatory compliance risk is the risk associated with breaching our duty to clients and other counterparties, inappropriate market conduct and breaching related financial services regulatory standards. Regulatory compliance risk arises from the failure to observe relevant laws, codes, rules and regulations and can manifest itself in poor market or customer outcomes and lead to fines, penalties and reputational damage to our business. 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 adoption of new tooling to support enterprise-wide horizon scanning for new regulatory obligations and to manage our regulatory reporting inventories. Climate risk has been integrated into regulatory compliance policies and processes, with enhancements being made to the Product Governance Framework and controls in order to ensure the effective consideration of Climate risk, in particular Greenwashing. In July 2023, the FCA rules and guidance for the new Consumer Duty became effective setting higher expectations for the standard of care firms give to consumers. The rules require that firms consider the needs, characteristics, and objectives of their customers and how they behave at every stage of the customer journey. As well as enhancing processes to ensure delivery of good retail customer outcomes, the firm has implemented measures to evidence how those outcomes are being met. Governance and structure The Compliance function has now been restructured and integrated into a combined Risk and Compliance function. In Europe, a new Chief Compliance Officer has been appointed responsible for all Regulatory and Financial Crime Compliance teams across the region. Regulatory Compliance and Financial Crime teams in all markets and lines of business continue to work to identify and manage regulatory and financial crime compliance risks across the region. They also work together and with all relevant stakeholders to ensure we achieve good conduct outcomes and provide enterprise-wide support on the Compliance risk agenda in collaboration with the regional Risk function. Key risk management processes The Europe Regulatory Conduct function is engaged in setting policies, standards and risk appetite to guide the management of regulatory compliance risks. It also devises clear frameworks and support processes to mitigate such risks. The capability provides oversight, review and challenge to the Country Chief Compliance Officers and their teams to help them identify, assess and mitigate regulatory compliance risks, where required. The regulatory compliance risk policies are regularly reviewed. Policies and procedures require the prompt identification and escalation of any actual or potential regulatory breach. Relevant reportable events are escalated to the HSBC Bank plc RMM and to the HSBC Group Risk Committee, as appropriate. Conduct of business Our purpose-led conduct approach aims to guide us to do the right thing and to focus on the impact we have on our customers and the financial markets in which we operate. It complements our purpose and values and - together with more formal policies and the tools we have to do our jobs - provides a clear path to achieving our purpose and delivering our strategy. For further information on our Purpose-led Conduct Approach, see www.hsbc.com/who-we-are/esg-and-responsible-business/our-conduct. Regulators and governments We proactively engage with regulators and governments to facilitate strong relationships through virtual and in-person meetings and by responding to consultations individually and jointly via industry bodies. Financial crime risk 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. 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 economic sanctions and trade restrictions that have been imposed on Russia, 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 capability for customer account monitoring in additional entities and global businesses including in the UK, the Channel Islands and the Isle of Man. - We deployed a next generation capability to increase our monitoring coverage on correspondent banking activity in France. - We successfully introduced the required changes to our transaction screening capability to accommodate the global change to payment systems formatting under ISO20022 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 Financial Crime function has been restructured in 2023 as part of the continued effort to review the effectiveness of our governance framework to manage financial crime risk. The Regional Head of Financial Crime and HSBC Bank plc Money Laundering Reporting Officer reports now to the Chief Compliance Officer for Europe, while the HSBC Bank plc Risk Management Meeting retains oversight of matters relating to money laundering, fraud, bribery and corruption, tax evasion, sanctions and export control breaches, terrorist financing and proliferation financing. Key risk management processes We will not tolerate knowingly conducting business with individuals or entities believed to be engaged in criminal activity. We require everybody in HSBC to play their role in maintaining effective systems and controls to prevent and detect financial crime. Where we believe we have identified suspected criminal activity or vulnerabilities in our control framework, we will take appropriate mitigating action. We manage financial crime risk because it is the right thing to do to protect our customers, shareholders, staff, the communities in which we operate, as well as the integrity of the financial system on which we all rely. We operate in a highly regulated industry in which these same policy goals are codified in law and regulation. We are committed to complying with the law and regulation of all the markets in which we operate in HSBC Bank plc and applying a consistently high financial crime standard. In cases where material differences exist between the law and regulation of these markets, our policy adopts the highest standard while acknowledging the primacy of local law. 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, protecting the integrity of the financial system and the communities we serve. We participate in numerous public-private partnerships and information-sharing initiatives around the Europe region, including holding leadership positions in many. In 2023, our focus remained on measures to improve information sharing, including typologies of financial crime and highlighting key tools in the fight against it. Within the European Police agency, Europol, we maintained a presence, and lent our expertise to working groups, as well as advocacy teams focused on how financial crime risk management frameworks can deliver more effective outcomes in detecting and deterring criminal activity, including tackling evolving criminal behaviour such as fraud. We continued our engagement in the Joint Money Laundering Intelligence Task Force in the UK, particularly on sanctions matters. Safeguarding the financial system We have continued our efforts to combat financial crime and reduce its impact on our organisation, customers and the communities that we serve. Financial crime includes fraud, bribery and corruption, tax evasion, sanctions and export control violations, money laundering, terrorist financing and proliferation financing. We are committed to acting with integrity and have built a strong financial crime risk management framework across all global businesses and all countries and territories in which we operate. The financial crime risk framework, which is overseen by the HSBC Bank plc Board, is supported by our financial crime policies that are designed to enable adherence to applicable laws and regulations globally. Annual mandatory training is provided to all colleagues, with additional targeted training tailored to certain individuals. We carry out regular risk assessments, identifying where we need to respond to evolving financial crime threats, as well as monitor and test our financial crime risk management programme. We continue to invest in new technology, including through the deployment of a capability to monitor correspondent banking activity, the enhancements to our fraud monitoring capability and our trade screening controls, and the application of machine learning to improve the accuracy and timeliness of our detection capabilities. Our adoption of these new technologies is expected to continue to enhance our ability to respond quickly to unusual activity and be more granular in our risk assessments. This will help us to protect our customers, shareholders, staff, the communities in which we operate and the integrity of the financial system on which we all rely, while providing actionable information to government authorities through our reporting. Anti-bribery and anti-corruption Our global Financial Crime policy requires that all activity must be: conducted without intent to bribe or corrupt; reasonable and transparent; considered to not be lavish nor disproportionate to the professional relationship; appropriately documented with business rationale; and authorised at an appropriate level of seniority. There were no concluded, nor live active, legal cases regarding bribery or corruption brought against HSBC or its employees in 2023. The policy requires that we identify and mitigate the risk of our customers and third parties committing bribery or corruption. We utilise anti-money laundering controls, including customer due diligence and transaction monitoring, to identify and mitigate the risk that our customers are involved in bribery or corruption. We perform a bribery risk assessment on all third parties, and impose risk-based controls on the third parties that expose us to bribery or corruption risk. Model risk Overview Model risk is the risk of inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions. Model risk arises in both financial and non-financial contexts whenever business decision making includes reliance on models. Key developments in 2023 We are part of the HSBC's Global Model Risk Management Programme to enhance model risk oversight and controls to satisfy the regulatory requirements published by the PRA. In addition, we enhanced our risk management in the following areas: - In response to regulatory capital charges, we redeveloped, validated and submitted to the PRA and ECB our models for the internal ratings-based ('IRB') approach for credit risk, internal model method ('IMM') for counterparty credit risk and internal model approach ('IMA') for market risk. These new models have been built to enhanced standards using improved data as a result of investment in processes and systems. We have continued to improve our risk governance decision making, to ensure senior executives have appropriate oversight and visibility issues impacting model performance and compliance to regulatory requirements. - We deployed new models impacted by changes to alternative rate setting mechanisms due to the Ibor transition. - We initiated the development and validation of models impacted by the new Fundamental Review of Trading Book requirements. - Our businesses and functions continue to be more involved in the prioritisation, development, and management of models, and hiring colleagues who have strong model risk skills. They also put an enhanced focus on key model risk drivers such as data quality and model methodology. - We are proposing enhanced model risk appetite measures to support our businesses and functions in managing model risk more efficiently. - We continued to support businesses in the programme of work related to climate risk and models using advanced analytics and machine learning, continue to be a critical areas of focus in coming years. We also enhanced governance standards and strengthened skills to increase the level of review and challenge provided. - We continued the transformation of the Model Risk Management team, with further enhancements to the independent model validation processes, including new systems and working practices. Key senior hires were made during the year to lead the business areas and regions to strengthen oversight and expertise within the function. Governance and structure The group's Model Risk Committee is chaired by our Chief Risk Officer and provides oversight of model risk. The committee includes senior leaders and risk owners across the lines of business and Risk and focuses on model-related concerns and key model risk metrics. Key risk management processes We use a variety of modelling approaches, including regression, simulation, sampling, machine learning and judgmental scorecards for a range of business applications. These activities include customer selection, product pricing, financial crime transaction monitoring, creditworthiness evaluation and financial reporting. HSBC Bank plc responsibility for managing model risk is delegated from the group's RMM to the group's Model Risk Committee, which is chaired by the group's Chief Risk Officer. This committee regularly reviews our model risk management policies and procedures, and requires 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 on a regular basis through the use of risk management information, risk appetite metrics and top and emerging risks. We regularly review the effectiveness of these processes, including the model oversight committee structure, to help ensure appropriate understanding and ownership of model risk is embedded in the businesses and functions. Insurance manufacturing operations risk Overview The key risks for our insurance manufacturing operations are market risks, in particular interest rate and equity, credit risks and insurance underwriting risks. 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 bank, is less material for our insurance operations. HSBC's insurance business 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 though digital is increasing. For the insurance products we manufacture, the majority of sales are 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 HSBC Group. 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. We distribute insurance products in all of our geographical regions. Insurance products are sold through all global businesses, but predominantly by WPB and CMB through our branches and direct channels. Insurance manufacturing operations risk management Key developments in 2023 The insurance manufacturing subsidiaries follow the HSBC Group's risk management framework. In addition, there are specific policies and practices relating to the risk management of insurance contracts, which have not changed materially over 2023. During the year, there was continued market volatility observed across interest rates, equity and credit markets and foreign exchange rates. This was 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, IFRS 17 'Insurance Contracts' (which became effective on 1 January 2023). Given the fundamental change the new accounting standard represented in insurance accounting, this change presented additional financial reporting and model risks for the HSBC Group which were managed via the IFRS 17 implementation project. Governance (Audited) Insurance manufacturing risks are managed to a defined risk appetite, which is aligned to the bank's risk appetite and risk management framework, including the three lines of defence model. For details on the governance framework, see page 22. The HSBC Group Insurance Risk Management Meeting oversees the control framework globally and is accountable to the WPB Risk Management Meeting on risk matters relating to the insurance business. The monitoring of the risks within the insurance operations is carried out by Insurance Risk teams. The Bank's risk stewardship functions support the Insurance Risk teams in their respective areas of expertise. Stress and scenario testing (Audited) Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and HSBC Group-wide regulatory stress tests, including, as may be required from time to time, the Bank of England stress test of the banking system, HSBC's Group Internal Stresses, and individual country insurance regulatory stress tests. The results of these stress tests and the adequacy of management action plans to mitigate these risks are considered in the HSBC Bank plc ICAAP and the entities' regulatory Own Risk and Solvency Assessments ('ORSAs'), which are produced by all material entities. Management and mitigation of key risk types Market risk (Audited) All our insurance manufacturing subsidiaries have market risk mandates and limits 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 and other financial instruments to protect against adverse market movements. - We design new products to mitigate market risk, such as changing the investment return sharing portion between policyholders and the shareholder. Credit risk 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 Capital risk for our insurance manufacturing subsidiaries is assessed in the group's 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 less material for the insurance business. It is managed by cash flow matching and maintaining sufficient cash resources, investing in high credit-quality investments with deep and liquid markets, monitoring investment concentrations and restricting them where appropriate, and establishing committed contingency borrowing facilities. Insurance manufacturing subsidiaries complete quarterly liquidity risk reports and an annual review of the liquidity risks to which they are exposed. Insurance underwriting risk Our insurance manufacturing subsidiaries primarily use the following frameworks and processes to manage and mitigate insurance underwriting risks: - a formal approval process for launching new products or making changes to products; - a product pricing and profitability framework, which requires initial and ongoing assessment of the adequacy of premiums charged on new insurance contracts to meet the risks associated with them; - a framework for customer underwriting; - reinsurance, which cedes risks to third-party reinsurers to keep risks within risk appetite, reduce volatility and improve capital efficiency; and - oversight of expense and reserve risks by entity Financial Reporting Committees. Insurance manufacturing operations risk in 2023 Measurement The following table shows the composition of assets and liabilities by contract type. Balance sheet of insurance manufacturing subsidiaries by type of contract (Audited) Life Direct Participating and investment DPF contracts2 Life other3 Other contracts4 Shareholder assets and liabilities Total ��m ��m ��m ��m ��m Financial assets 21,284 101 942 1,331 23,658 - trading assets - financial assets designated and otherwise mandatorily measured at fair value through profit or loss 13,101 78 935 776 14,890 - derivatives 92 - - 5 97 - financial investments - at amortised cost 218 - - 14 232 - financial investments at fair value through other comprehensive income 6,947 - - 452 7,399 - other financial assets5 926 23 7 84 1,040 Insurance contract assets - 41 - - 41 Reinsurance contract assets - 145 - - 145 Other assets and investment properties 748 75 - 82 905 Total assets at 31 Dec 2023 22,032 362 942 1,413 24,749 Liabilities under investment contracts designated at fair value - - 1,002 - 1,002 Insurance contract liabilities 20,289 306 - - 20,595 Reinsurance contract liabilities - 33 - - 33 Deferred tax - - - 2 2 Other liabilities - - - 1,966 1,966 Total liabilities at 31 Dec 2023 20,289 339 1,002 1,968 23,598 Total equity at 31 Dec 2023 - - - 1,151 1,151 Total liabilities and equity at 31 Dec 2023 20,289 339 1,002 3,119 24,749 Financial assets 20,623 93 883 1,156 22,755 - trading assets - - - - - - financial assets designated and otherwise mandatorily measured at fair value through profit or loss 11,562 85 883 634 13,164 - derivatives 232 - - 11 243 - financial investments - at amortised cost 298 - - 20 318 - financial investments at fair value through other comprehensive income 7,497 - - 394 7,891 - other financial assets5 1,034 8 - 97 1,139 Insurance contract assets - 43 - - 43 Reinsurance contract assets - 121 - - 121 Other assets and investment properties 726 13 - 131 870 Total assets at 31 Dec 20221 21,349 270 883 1,287 23,789 Liabilities under investment contracts designated at fair value - - 944 - 944 Insurance contract liabilities 19,719 285 - - 20,004 Reinsurance contract liabilities - 33 - - 33 Deferred tax - - - - - Other liabilities - - - 1,837 1,837 Total liabilities at 31 Dec 20221 19,719 318 944 1,837 22,818 Total equity at 31 Dec 20221 - - - 971 971 Total liabilities and equity at 31 Dec 20221 19,719 318 944 2,808 23,789 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 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 direct 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 intercompany balances with other non-insurance legal entities. Key risk types Market risk (Audited) Description and exposure Market risk is the risk of changes in market factors affecting the bank's 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 investment contracts with discretionary participating features ('DPF') issued in France. These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in fixed interest assets with a proportion allocated to other asset classes, to provide customers with the potential for enhanced returns. DPF products expose the bank to the risk of variation in asset returns, which will impact our participation in the investment performance. In addition, in some scenarios the asset returns can become insufficient to cover the policyholders' financial guarantees, in which case the shortfall has to be met by the bank. Amounts are held against the cost of such guarantees, calculated by stochastic modelling in the larger entities. The cost of such guarantees are generally not material and form part of insurance fulfilment cash flows. For unit-linked contracts, market risk is substantially borne by the policyholder, but some market risk exposure typically remains as fees earned are related to the market value of the linked assets. Sensitivities (Audited) The following table provides the impacts on the contractual service margin, profit after tax and equity of our insurance manufacturing subsidiaries from reasonably possible effects of changes in selected interest rate, equity price and growth assets scenarios for the year. These sensitivities are prepared in accordance with current IFRS Accounting Standards and are based on changing one assumption at a time with other variables being held constant which in practice could be correlated. All policies and underline investments are in respective functional currencies, no material exposure to FX change. Due in part to the impact of the cost of guarantees and hedging strategies, which may be in place, the relationship between the contractual service margin, 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 sensitivities presented allow for adverse changes in policyholder behaviour that may arise in response to changes in market rates. The method used for deriving sensitivity information and significant variables did not change from the previous period. Sensitivity of the group's insurance manufacturing subsidiaries to market risk factors3 2023 20221 Effect on profit after tax Effect on CSM Effect on total equity Effect on profit after tax Effect on CSM Effect on total equity ��m ��m ��m ��m ��m ��m +100 basis point parallel shift in yield curves 1 5 (25) 4 29 (22) - Insurance & Reinsurance Contracts 6 8 6 7 29 7 - Financial Instruments (5) (3) (31) (3) - (29) -100 basis point parallel shift in yield curves (8) (59) 18 (13) (109) 13 - Insurance & Reinsurance Contracts (13) (62) (13) (16) (109) (16) - Financial Instruments 5 3 31 3 - 29 +100 basis point shift in credit spreads (3) (34) (30) (3) (30) (29) - Insurance & Reinsurance Contracts (2) (34) (2) (2) (30) (2) - Financial Instruments (1) - (28) (1) - (27) -100 basis point shift in credit spreads 4 36 31 4 57 30 - Insurance & Reinsurance Contracts 3 36 3 3 57 3 - Financial Instruments 1 - 28 1 - 27 10% increase in growth assets2 32 65 32 26 78 26 - Insurance & Reinsurance Contracts 6 65 6 4 78 4 - Financial Instruments 26 - 26 22 - 22 10% decrease in growth assets2 (32) (64) (32) (28) (78) (28) - Insurance & Reinsurance Contracts (6) (64) (6) (5) (78) (5) - Financial Instruments (26) - (26) (23) - (23) 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 2 'Growth assets' primarily comprise equity securities and investment properties and variability in growth asset fair value constitutes a market risk to group's insurance manufacturing subsidiaries. 3 Sensitivities presented for 'Insurance & 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. 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 84. The credit quality of the reinsurers' share of liabilities under insurance contracts is assessed as 'satisfactory' or higher as defined on page 31, with 100% of the exposure being neither past due nor impaired. Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholder; therefore our exposure is primarily related to liabilities under non-linked insurance and investment contracts and shareholders' funds. The credit quality of these financial assets is included in the table on page 54. The risk associated with credit spread volatility is to a large extent mitigated by holding debt securities to maturity, and sharing a degree of credit spread experience with policyholders. Liquidity risk (Audited) Description and exposure Liquidity risk is the risk that an insurance operation, though solvent, either does not have sufficient financial resources available to meet its obligations when they fall due, or can secure them only at excessive cost. Liquidity risk may be able to be shared with policyholders for products with participating features. The remaining contractual maturity of investment contract liabilities is included within 'Financial liabilities designated at fair value' in Note 23. 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 20221 Amounts Payable on Demand Carrying Amount for these Contracts Amounts Payable on Demand Carrying Amount for these Contracts ��m ��m ��m ��m Life direct participating and investment DPF contracts 17,880 20,289 20,164 19,719 Life other contracts - 306 51 285 At 31 Dec 17,880 20,595 20,215 20,004 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. Insurance underwriting risk Description and exposure 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, lapse and expense rates. 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 84 analyses our insurance manufacturing exposures by type of contract. The insurance underwriting risk profile and related exposures remain largely consistent with those observed at 31 December 2022. Sensitivities 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 IFRS Accounting Standards, which have changed following the adoption of IFRS 17 'Insurance Contracts', effective from 1 January 2023. Further information about the adoption of IFRS 17 is provided on page 186. 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. We are most sensitive to a change in lapse rates in France. 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. This risk is generally greatest for smaller entities. 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 expected coverage periods of the related insurance contracts. Sensitivity of group's insurance manufacturing subsidiaries to insurance underwriting risk factors (Audited) At 31 Dec 2023 Effect on CSM (gross)2 Effect on profit after tax (gross)2 Effect on profit after tax (net)3 Effect on total equity (gross)2 Effect on total equity (net)3 ��m ��m ��m ��m ��m 10% increase in mortality and/or morbidity rates (61) (11) (5) (11) (5) 10% decrease in mortality and/or morbidity rates 67 4 4 4 4 10% increase in lapse rates (60) (8) (8) (8) (8) 10% decrease in lapse rates 66 5 7 5 7 10% increase in expense rates (28) (4) (3) (4) (3) 10% decrease in expense rates 28 2 3 2 3 At 31 Dec 20221 10% increase in mortality and/or morbidity rates (67) (5) (4) (5) (4) 10% decrease in mortality and/or morbidity rates 72 1 3 1 3 10% increase in lapse rates (53) (5) (5) (5) (5) 10% decrease in lapse rates 56 4 5 4 5 10% increase in expense rates (26) (2) (2) (2) (2) 10% decrease in expense rates 26 1 1 1 1 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 2 The 'gross' sensitivities impacts are provided before considering the impacts of reinsurance contracts held as risk mitigation. 3 The 'net' sensitivities impacts are provided before considering the impacts of reinsurance contracts held as risk mitigation. This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com. RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. 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