HSBC Bank Malta Plc

Annual Report • Feb 21, 2023

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HSBC Bank plc Annual Report and Accounts 2022 Registered number - 00014259 Contents Page Strategic Report Highlights 3 Key themes of 2022 4 Key financial metrics 5 About HSBC Group 6 Purpose and strategy 6 Our Global Businesses 9 ESG Overview 10 Key Performance Indicators 14 Economic background and outlook 15 Financial summary 16 Risk overview 24 Report of the Directors Risk 26 Corporate Governance Report 94 – Directors 94 – Company Secretary 95 – Board of Directors 95 – Directors‘ emoluments 96 – Board committees 96 – Dividends 99 – Internal control 99 – Employees 101 – Auditors 102 – Articles of association, conflicts of interest and indemnification of directors 102 – Statement on going concern 103 – Statement of directors' responsibilities in respect of the financial statements 104 Independent Auditors’ Report 105 Financial Statements Financial statements 113 Notes on the financial statements 124 Presentation of Information This document comprises the Annual Report and Accounts 2022 for HSBC Bank plc (‘the bank’ or 'the company') and its subsidiaries (together ‘the group’). ’We’, ‘us’ and ‘our’ refer to HSBC Bank plc together with its subsidiaries. It contains the Strategic Report, the Report of the Directors, the Statement of Directors’ Responsibilities and Financial Statements, together with the Independent Auditors’ Report, as required by the UK Companies Act 2006. References to ‘HSBC’, 'HSBC Group' or ‘Group’ within this document mean HSBC Holdings plc together with its subsidiaries. HSBC Bank plc is exempt from publishing information required by The Capital Requirements Country-by-Country Reporting Regulations 2013, as this information is published by its parent, HSBC Holdings plc. This information is available on HSBC’s website: www.hsbc.com. Pillar 3 disclosures for the group are also available on www.hsbc.com, under Investors. Contents of the linked websites are not incorporated into this document. All narrative disclosures, tables and graphs within the Strategic Report and Report of the Directors are unaudited unless otherwise stated. Our reporting currency is £ sterling. Unless otherwise specified, all $ symbols represent US dollars. Cautionary Statement Regarding Forward- Looking Statements This Annual Report and Accounts 2022 contains certain forward- looking statements with respect to the company’s financial condition; results of operations and business, including the strategic priorities; financial, investment and capital targets; and the company’s ability to contribute to the Group’s Environmental, social and governance (‘ESG’) targets, commitments and ambitions described herein. Statements that are not historical facts, including statements about the company’s beliefs and expectations, are forward-looking statements. Words such as ‘may’, ‘will’, ‘should’, ‘expects’, ‘targets’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, or the negative thereof, other variations thereon or similar expressions are intended to identify forward-looking statements. These statements are based on current plans, information, data, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. The company makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward- looking statements. Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by the company’s Directors, officers or employees to third parties, including financial analysts. Forward- looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to: •changes in general economic conditions in the markets in which the company operates, such as new, continuing or deepening recessions, prolonged inflationary pressures and fluctuations in employment and creditworthy customers beyond those factored into consensus forecasts (including, without limitation, as a result of the Russia-Ukraine war and, to a lesser extent, the Covid-19 pandemic); the Russia-Ukraine war and the Covid-19 pandemic and their impact on global economies and the markets where the company operates, which could have a material adverse effect on (among other things) the company’s financial condition, results of operations, prospects, liquidity, capital position and credit ratings; deviations from the market and economic assumptions that form the basis for the company’s ECL measurements (including, without limitation, as a result of the Russia-Ukraine war, inflationary pressures and the Covid-19 pandemic); changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding or capital markets, which may affect the company’s ability to meet its obligations under financing facilities or to fund new loans, investments and businesses; geopolitical tensions or diplomatic developments, both in Europe and in other regions such as Asia, producing social instability or legal uncertainty, such as the Russia-Ukraine war (including the continuation and escalation thereof) and the related imposition of sanctions and trade restrictions, the UK’s relationship with the EU, supply chain restrictions and disruptions, sustained increases in energy prices and key commodities and diplomatic tensions between China and the US, extending to the UK and the EU, alongside other potential areas of tension, which may adversely affect the group by creating regulatory, reputational and market risks; the efficacy of government, customer, and the company’s and the Group’s actions in managing and mitigating ESG risks, in particular climate risk, nature-related risks and human rights risks, and in supporting the global transition to net zero carbon emissions, each of which can impact the company both directly and indirectly through its customers and which may result in potential financial and non-financial impacts; illiquidity and HSBC Bank plc Annual Report and Accounts 2022 1 downward price pressure in national real estate markets; adverse changes in central banks’ policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over- indebted countries; adverse changes in the funding status of public or private defined benefit pensions; societal shifts in customer financing and investment needs, including consumer perception as to the continuing availability of credit; exposure to counterparty risk, including third parties using us as a conduit for illegal activities without the company’s knowledge; the discontinuation of certain key Ibors and the development of near risk-free benchmark rates, as well as the transition of legacy Ibor contracts to near risk-free benchmark rates, which exposes the company to material execution risks, including in relation to the effectiveness of the Group’s Ibor remediation strategy, and increases some financial and non-financial risks; and price competition in the market segments that the company serves; •changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities in the principal markets in which the company operates and the consequences thereof (including, without limitation, actions taken as a result of the impact of the Russia-Ukraine war on inflation and as a result of the Covid-19 pandemic); initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks, which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; changes to tax laws and tax rates applicable to the company, including the imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; the UK’s relationship with the EU, which continues to be characterised by uncertainty and political disagreement, particularly with respect to the regulation of financial services, despite the signing of the Trade and Cooperation Agreement ('TCA') between the UK and the EU; changes in UK macro-economic and fiscal policy as a result of the change in UK government leadership, which may result in fluctuations in the value of the pound sterling; general changes in government policy that may significantly influence investor decisions; the costs, effects and outcomes of regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate, including increased competition from non-bank financial services companies; and •factors specific to the company and the Group, including the company’s success in adequately identifying the risks it faces, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques); the company’s ability to achieve its financial, investment, capital targets and the achievement of the Group’s ESG targets, commitments and ambitions, which may result in the company’s failure to achieve any of the expected benefits of its strategic priorities; model limitations or failure, including, without limitation, the impact that high inflationary pressures, rising interest rates and the consequences of the Covid-19 pandemic have had on the performance and usage of financial models, which may require the company to hold additional capital, incur losses and/or use compensating controls, such as judgemental post-model adjustments, to address model limitations; changes to the judgements, estimates and assumptions the company bases its financial statements on; changes in the company’s ability to meet the requirements of regulatory stress tests; a reduction in the credit ratings assigned to the company or any of its subsidiaries, which could increase the cost or decrease the availability of the company’s funding and affect its liquidity position and net interest margin; changes to the reliability and security of the company’s data management, data privacy, information and technology infrastructure, including threats from cyber-attacks, which may impact its ability to service clients and may result in financial loss, business disruption and/ or loss of customer services and data; the accuracy and effective use of data, including internal management information that may not have been independently verified; changes in insurance customer behaviour and insurance claim rates; the company’s dependence on loan payments and dividends from subsidiaries to meet its obligations; changes in accounting standards, including the implementation of IFRS 17 ‘Insurance Contracts’, which may have a material impact on the way the company prepares its financial statements and (with respect to IFRS 17) may negatively affect the profitability of HSBC’s insurance business; changes in the company’s ability to manage third-party, fraud and reputational risks inherent in its operations; employee misconduct, which may result in regulatory sanctions and/or reputational or financial harm; changes in skill requirements, ways of working and talent shortages, which may affect the company’s ability to recruit and retain senior management and diverse and skilled personnel; and changes in the company’s ability to develop sustainable finance and climate-related products consistent with the evolving expectations of its regulators, and the company’s capacity to measure the climate impact from its financing activity (including as a result of data limitations and changes in methodologies), which may affect the Group’s ability to achieve its climate ambition, targets and commitments, and increase the risk of greenwashing. Effective risk management depends on, among other things, the company’s ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; the company’s success in addressing operational, legal and regulatory, and litigation challenges; and other risks and uncertainties we identify in ‘Top and emerging risks’ on page 28 of the Annual Report and Accounts 2022. Strategic Report | Highlights HSBC Bank plc Annual Report and Accounts 2022 2 Highlights For the year ended 31 December 2022 Reported (loss)/profit before tax (£m) £(959)m (2021: £1,023m); (2020: £(1,614)m) Reported revenue (£m) £4,646m (2021: £6,120m); (2020: £5,900m) Reported risk-weighted assets at period end (£bn) £114bn (2021: £107bn); (2020: £124bn) . Adjusted profit/(loss) before tax (£m) £1,724m (2021: £1,577m); (2020: £(184)m) Total assets at period end (£bn) £717bn (2021: £597bn); (2020: £681bn) Common equity tier 1 ratio at period end (%) 16.8% (2021: 17.8%); (2020: 15.1%) HSBC Bank plc Annual Report and Accounts 2022 3 Key themes of 2022 HSBC Bank plc continued to support the Group through progress on our strategic aims, although challenges in the geopolitical and economic environment remain. Financial Performance Our financial performance in 2022 reflected losses associated with our restructuring initiatives, including impairments of businesses which have been classified as held-for-sale. These items resulted in a reported loss before tax. On an adjusted basis, profit before tax increased due to the benefit of higher interest rates and a strong performance in MSS. Costs decreased driven by the impact of our transformation and cost-saving initiatives. Expected credit losses returned to a charge for the year compared with a net release in 2021. Read more on pages 16 to 22. Strategic Transformation We have continued to progress in our areas of strength and simplify the group in order to streamline our operating model and seek to improve returns. During the course of 2022, we continued to prepare for the completion of the sale of our French retail operations, announced the sale of our Greece branch operations and entered into a sale agreement for our Russia business. We remain focused on implementing our Intermediate Parent Undertaking (‘IPU’), in line with European Union ('EU') Capital Requirements Directive ('CRD'): HSBC Continental Europe ('HBCE') acquired HSBC Trinkaus & Burkhardt GmbH (‘HSBC Germany’) and HSBC Bank Malta ('HBMT'), and expect to acquire HSBC Private Bank (Luxembourg) SA in the first half of 2023, subject to receipt of pending regulatory approvals. More information can be found on pages 6 and 7. Climate Ambition The Group is committed to a net zero future and recognises that our planet urgently needs drastic and lasting action to protect our communities, businesses and the natural environment from the damaging effects of climate change. The Group believe they can make the most significant impact by working with its customers to support their transition to a net zero global economy. Since 2020, HSBC Bank plc has supported our customers' transition to net zero and helped build a sustainable future by providing and facilitating $86.2bn of sustainable finance, $18.9bn of sustainable investment and $0.1bn of sustainable infrastructure, as defined in the Group’s Sustainable Finance Data Dictionary 2022. This financing and investment contributes towards the Group's ambition to provide and facilitate $750bn to $1tn of sustainable financing and investment by 2030. The $86.2bn of sustainable finance includes lending facilities provided and capital markets facilitated transactions. 1 The detailed definitions of the contributing activities for sustainable finance are available in the Group’s revised Sustainable Finance Data Dictionary 2022. For the Group’s ESG Data Pack, Sustainable Finance Data Dictionary and third-party limited assurance report, see www.hsbc.com/who-we-are/esg-and-responsible-business/esg- reportingcentre Strategic Report | Key themes of 2022 | Key financial metrics 4 HSBC Bank plc Annual Report and Accounts 2022 Key financial metrics 2022 2021 2020 For the year (£m) (Loss)/profit before tax (reported basis) (959) 1,023 (1,614) Profit/(loss) before tax (adjusted basis)1 1,724 1,577 (184) Net operating income before change in expected credit losses and other credit impairment charges (reported basis)2 4,646 6,120 5,900 (Loss)/profit attributable to the parent company (408) 1,041 (1,488) At 31 December (£m) Total equity attributable to shareholders of the parent company 23,875 23,584 23,666 Total assets 717,353 596,611 681,150 Risk-weighted assets3,8 114,171 106,703 124,353 Loans and advances to customers (net of impairment allowances) 72,614 91,177 101,491 Customer accounts 215,948 205,241 195,184 Capital ratios (%)3,8 Common equity tier 1 16.8 17.8 15.1 Tier 1 20.2 21.4 18.5 Total capital 31.7 31.9 27.5 Leverage ratio (%)4,8 5.5 4.2 4.0 Performance, efficiency and other ratios (annualised %) Return on average ordinary shareholders’ equity5 (3.1) 4.3 (7.9) Return on tangible equity (%)6 5.5 6.1 (2.7) Cost efficiency ratio (reported basis)7 115.2 89.2 113.6 Cost efficiency ratio (adjusted basis)7 70.9 80.9 89.6 Ratio of customer advances to customer accounts 33.6 44.4 52.0 1Adjusted performance is computed by adjusting reported results for the effect of significant items as detailed on pages 18 to 20. 2Net operating income before change in expected credit losses and other credit impairment charges is also referred to as revenue. 3Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. These include the regulatory transitional arrangements for IFRS 9 'Financial Instruments', which are explained further on page 80. 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. 4The leverage ratio is calculated using the end point definition of capital and the IFRS 9 regulatory transitional arrangements, in line with the UK leverage rules that were implemented on 1 January 2022, and excludes central bank claims and cash pooling netting. Comparatives for 2021 are reported based on the disclosure rules in force at that time, and include claims on central banks. 5The return on average ordinary shareholders’ equity is defined as profit attributable to shareholders of the parent company divided by the average total shareholders’ equity. 6The RoTE is calculated by adjusting reported profit attributable to ordinary shareholders by excluding movements in PVIF and significant items (net of tax), divided by average tangible shareholders' equity excluding fair value of own debt, debit valuation adjustment (‘DVA’) and other adjustments for the period. The calculation of this measure includes the UK bank levy incurred for the first time in 2021, which was previously paid by the Group. Comparative data have not been re-presented. 7Reported cost efficiency ratio is defined as total operating expenses (reported) divided by net operating income before change in expected credit losses and other credit impairment charges (reported), while adjusted cost efficiency ratio is defined as total operating expenses (adjusted) divided by net operating income before change in expected credit losses and other credit impairment charges (adjusted). 8From 30 September 2022, investments in non-financial institution subsidiaries or participations have been measured on an equity accounting basis in compliance with UK regulatory requirements. Comparatives for prior periods have been represented on a consistent basis with the current year. HSBC Bank plc Annual Report and Accounts 2022 5 About HSBC Group With assets of $3.0tn and operations in 62 countries and territories at 31 December 2022, HSBC is one of the largest banking and financial services organisations in the world. Approximately 39 million customers bank with the Group and the Group employs around 219,000 full-time equivalent staff. The Group has around 182,000 shareholders in 128 countries and territories. Purpose and strategy HSBC's purpose and ambition The Group's purpose is ‘Opening up a world of opportunity’ and the Group's ambition is to be the preferred international financial partner for the Group's clients. HSBC values HSBC values help define who we are as an organisation and are key to our long-term success. We value difference Seeking out different perspectives. We succeed together Collaborating across boundaries. We take responsibility Holding ourselves accountable and taking the long view. We get it done Moving at pace and making things happen. HSBC Group strategy The Group is implementing its strategy at pace across the four strategic pillars aligned to its purpose, values and ambition announced in February 2021. The Group's strategy centres on four key pillars: focus on our areas of strength, digitise at scale to adapt our operating model for the future; energise our organisation for growth and support the transition to a net zero global economy. Focus on our strengths: in each of our global businesses, the Group will focus on areas where we are strongest and have opportunities to grow. Digitise at scale: the Group will focus investments in areas such as technology, to improve our customers’ experience while ensuring security and resilience. These investments in technology will also help drive down costs, including through automating our middle and back offices and building solutions to free up office footprint. Energise for growth: the Group is moving to a leaner and simpler organisation that is energised and fit for the future. The Group aims to inspire a dynamic culture and champion inclusion across the organisation, as well as help employees develop future skills. Transition to net zero: the Group's ambition is to support the transition to a net zero global economy. The Group has set out an ambitious plan to aim to become a net zero bank, to support customers in their transition, and to unlock new climate solutions. HSBC in Europe Europe is an important part of the global economy, accounting for roughly 40% of global trade and one-quarter of global Gross Domestic Product (UNCTAD, IMF 2021). In addition, Europe is the world’s top exporter of services and second largest exporter of manufactured goods (UNCTAD, IMF 2021). HSBC Bank plc facilitates trade within Europe and between Europe and other jurisdictions where the HSBC Group has a presence. With assets of £717bn at 31 December 2022, HSBC Bank plc is one of Europe’s largest banking and financial services organisations. We employ around 14,400 people across our locations. HSBC Bank plc is responsible for HSBC’s European business, apart from UK retail and most UK commercial banking activity which, post ring-fencing, are managed by HSBC UK Bank plc. HSBC Bank plc operates as one integrated business with two main hubs in London and Paris. HSBC Bank plc is present in 20 markets1. We are organised around the principal operating units detailed below, which represent the region to customers, regulators, employees and other stakeholders. The London hub consists of the UK non-ring fenced bank, which provides overall governance and management for the Europe region as a whole and is a global centre of excellence for wholesale banking for the Group. HBCE comprises our Paris hub, its EU branches (Belgium, Czech Republic, Greece, Ireland, Italy, Luxembourg, Netherlands, Poland, Spain and Sweden), Germany and Malta. We are creating an integrated Continental European bank anchored on Paris to better serve our clients and simplify our organisation. 1Full list of markets where HSBC Bank plc has a presence: Armenia, Belgium, Channel Islands and Isle of Man, Czech Republic, France, Germany, Greece, Ireland, Italy, Israel, Luxembourg, Malta, Netherlands, Poland, Russia, South Africa, Spain, Sweden, Switzerland and the UK. HSBC Bank plc's strategy and progress on our 2022 commitments Our ambition in Europe is to be the leading international wholesale bank connecting East and West, with a complementary Wealth business, an efficient operating model and a robust control framework (see our global businesses on page 9). HSBC Bank plc exists to open up a world of opportunity for our customers by connecting them to international markets. Europe is the largest trading region in the world and Asia is Europe’s biggest and fastest growing external trading partner (UNCTAD, IMF 2021). We are well positioned to capitalise on this opportunity and play a pivotal role for the Group. We expect Europe to continue to deliver change in 2023 to drive our ambition, the majority of announced transformation has been completed (see 'Focus on our strengths' for more information). In parallel to completing our transformation work, we are repositioning for growth and are well placed to seek to deliver strong financial performance. Further detail can be found below. In 2022, Europe faced significant inflationary pressure, resulting in rapid central bank interest rate rises. We expect to continue operating in a volatile environment. Further information as to how we have and will continue to support and engage with our stakeholders can be found on page 10. Below we provide a progress update on our commitments and strategic initiatives for 2022. Focus on our strengths Through our transformation programme we are building a leaner, simpler bank with a sharper strategic focus. We have redesigned our franchise around the needs of our international clients and maintaining product and service capability where clients demand them. We intend to be a market leader in sustainable financing and assist the Group in meeting its climate ambition for net zero operations and supply chain by 2030. New regulation in the EU provides an opportunity to simplify our structure. In response to the requirement for an IPU in line with EU CRD V, HBCE acquired HSBC Germany and HBMT in the second half of 2022, and expects to acquire HSBC Private Bank (Luxembourg) SA in the first half of 2023. This remains subject to regulatory approvals for which the process has now started. During 2022, HBCE has continued to prepare for the completion of the sale, of our French retail business which is expected in the second half of 2023, subject to regulatory approval. Until Strategic Report | About HSBC Group | Purpose and strategy 6 HSBC Bank plc Annual Report and Accounts 2022 completion of the planned transaction, the business remains part of, and will be managed by HBCE. Please see Note 34: Assets held for sale and liabilities of disposal groups held for sale, for further financial information on the transaction on page 186. Following a strategic review of our business in Greece, an agreement has been signed to sell HBCE’s branch operations in Greece to Pancreta Bank SA. The transaction is subject to regulatory approval and is expected to complete in the first half of 2023. Following a strategic review of HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc), we have stopped taking on new business and clients in our Russian operations. The value of foreign currency customer deposits and RUB deposits is now minimal. HSBC Europe BV has entered into an agreement to sell its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company), subject to regulatory and governmental approvals. Such sale is currently expected to occur in the first half of 2023. HSBC Group has implemented a new operating model for its Private Banking activities, in which HSBC Private Bank (Luxembourg) SA will become a central hub for HBCE’s Private Banking clients. These clients will be served via a Paris branch of HSBC Private Bank (Luxembourg) SA. This will enable us to provide an enhanced product range to clients leveraging our infrastructure in Luxembourg. Digitise at scale We continue to invest in the digitisation of our global businesses, which is central to our strategy. Within Europe, Wealth and Personal Banking (‘WPB’) is focused on enhancing our engagement between clients and relationship managers, and allowing clients to self-serve at a time that suits them. For example, we further enhanced our digital portfolio and risk analysis platform, which furthered Private Bank advisers' ability to make suitable investment recommendations to clients using a more holistic approach to risk management. For our Retail customers, we have placed efforts into reducing paper waste in connection with the bank statements, with 33,000 bank statements viewed or downloaded in the Channel Islands. Looking ahead, we will seek to deploy secure and private communications via social media channels between clients and relationship managers. We also plan to introduce new ESG-centred reporting. We are committed to maintaining our core strength in Global Payments Solutions ('GPS'), formerly known as Global Liquidity and Cash Management ('GLCM'). In 2022, we successfully delivered Real Time Payment capability in Luxembourg. GPS have improved our offering for customers in HSBCnet by enabling new features such as allowing customers to track and create recurring SEPA payments. GPS also enhanced the Liquidity Management Dashboard functionality, improving customers' ability to create and manage cash flow forecasts. By December 2022, we had 288 customers using the dashboard. Our strategy within Global Trade and Receivables Finance (‘GTRF’) Europe is to help make trade easier, faster and safer, whilst seeking to deliver sustainable and profitable growth. Throughout 2022, we enhanced our digital channel HSBCnet and strengthened collaborations with third-party platforms. Examples of third-party collaboration include Komgo, a bank-agnostic platform that provides solutions to our customers to manage trade finance needs, and Contour, a blockchain solution that fully digitises letters of credit. As at year end, 85% of trade transactions across Europe were conducted digitally as we continue to see an increase in clients adopting digital solutions. For digital currencies and assets, we have made significant progress in 2022 in building a strategic tokenisation platform ('HSBC Orion') in Global Banking and Markets. HSBC Orion launched the world's first GBP tokenised bond in January 2023. The platform allows natively digital bonds to be registered and issued, fully supports both primary and secondary market trading and is part of our ambition to widen the adoption of digital assets. In Foreign Exchange we continue to enhance our electronic trading infrastructure to provide improved risk management to our clients. Our focus is to support customers' FX and cross-border payment needs through improved pricing tools and e-trading. Energise for growth Empowering our organisation and energising our employees is critical to Europe’s success and remains a key focus. We made good progress against our people strategy including our diversity and inclusion agenda and are committed to offering colleagues the opportunities to develop their skills whilst building our talent pipelines to support the achievement of our strategic priorities. We are committed to increasing diverse representation in Europe, especially at senior levels and in 2023 we aim to significantly increase sponsorship and accountability for achieving our goals. Our Diversity and Inclusion Council defines and drives specific actions across our D&I strands, supported by our pan-European Employee Resource Group 'Inclusive Europe'. To support the Group's climate ambitions to become net zero in its operations and supply chain by 2030, and align its financed emissions to the Paris Agreement goal of net zero by 2050, the Group launched the Sustainability Academy in 2022. The Academy is available to all colleagues across the Group and serves as a central point for colleagues to access learning plans and curated resources, and develop practical skills. The Group have partnered with some leading educational institutions such as Imperial College Business School and will continue to update the academy with new research and content related to ESG issues, including those related to social and governance issues. We have strengthened the training we provide to leaders to help them support colleagues through the changing environment we are facing. We have continued the executive development programme for our most senior leaders, which focuses on the shifting expectations of our enterprise wide leadership cadre, embedding the clarity and alignment to achieve our goals and tackling strategic change. For our Managing Director population, we have taken into consideration that leadership development will vary depending on individual career experiences and tenure in role. Our executive curriculum contains an array of programmes to meet varying leadership development personas and topics focus on a range of issues including critical skills areas such as influence, inclusion, and Agile methodologies. During 2022, we launched two Managing Director development programmes: 1) Shaping your Leadership; to help new Managing Directors sharpen their focus and define how they will ‘show-up’ as one of HSBC's most senior leaders, 2) Shaping HSBC, which focuses on the experimentation required to enhance the leadership skills that will drive adaptability, innovation and unleash the talent of our people to enable HSBC to thrive in a time of disruption and complexity. We continue to focus on the development of people managers who are key to shaping the experience of, and development of, our colleagues. We have recently refreshed our core People Manager Excellence curriculum which covers 40 skills structured around four modules that are available in face-to-face and virtual formats. The modules focus on: 1) Your Role; connecting managers with HSBCs purpose and personal energetic leadership, 2) Your People; creating energy, commitment and high performance within your team, 3) Your work; managing productivity and delivering against outcomes, and 4) Your Team; building high performing collaborative teams. Complimentary digital learning pathways will also be made available to support the development contained within the four modules. HSBC Bank plc Annual Report and Accounts 2022 7 Transition to net zero Part of the Group’s ambition to be a net zero bank is to achieve net zero carbon emissions in our operations and supply chain by 2030. The Group has three elements to the strategy: reduce, replace and remove. The Group plan to first focus on reducing carbon emissions from consumption, and then replacing remaining emissions with low-carbon alternatives in line with the Paris Agreement. The Group plan to remove the remaining emissions that cannot be reduced or replaced by procuring, in accordance with prevailing regulatory requirements, high-quality offsets at a later stage. In October 2020, the Group announced an ambition to reduce its energy consumption by 50% by 2030, against a 2019 baseline. In 2022, HSBC Bank plc implemented energy efficiency measures and a strategic reduction of our office footprint, across our office spaces and data centres. These measures include: •Embedding 100% renewable energy in our Germany offices; •Further installation of LED lighting and optimisation of lighting timing controls in France, Switzerland, Spain and Germany; and •Improvements to heating, ventilation and air conditioning systems throughout the HSBC Bank plc office portfolio to reduce energy consumption and increase efficiency. As part of the Group's ambition to achieve 100% renewable power across our operations by 2030, HSBC Bank plc continue to look for opportunities to procure green energy in each of our markets. HSBC Bank plc is managing the gradual resumption of employee travel in line with the Group's aim to halve travel emissions by 2030 compared with pre-pandemic levels. For further information on the transition to net zero, please see the ESG review in the Group’s Annual Reports and Accounts for the year ended 31 December 2022. Supporting our Customers The Group understands that financial institutions have a critical role to play in achieving the transition to a net zero global economy. The most significant contribution we can make is by mobilising finance to support our portfolio of customers in their transition to decarbonise. Since 2020, HSBC Bank plc has supported our customers' transition to net zero and helped build a sustainable future by providing and facilitating $86.2bn of sustainable finance, $18.9bn of sustainable investment and $0.1bn of sustainable infrastructure, as defined in the Group’s Sustainable Finance Data Dictionary 2022. This financing and investment contributes towards the Group's ambition to provide and facilitate $750bn to $1tn of sustainable financing and investment by 2030. The $86.2bn of sustainable finance includes lending facilities provided and capital markets facilitated transactions. Given the Group's global presence and relationships with our customers across industries, the Group recognise the role it can play in catalysing the global transition to net zero. The Group is well positioned to finance the transition in developing and emerging economies, mobilising capital to help enable sustainable business models and an inclusive, just and resilient transition. For example, in 2022, HBCE acted as a sustainability coordinator, book runner and mandated lead arranger for a $150m sustainability-linked revolving credit facility for company: Nordic Semiconductor. The technology company which specialises in designing ultra-low power performance wireless systems, incorporated for the first time, sustainability-linked key performance indicators and an ESG roadmap within its business to help achieve their sustainability targets by 2030. The breakdown of the Group’s sustainable finance and investment progress is included in its ESG Data pack. The detailed definitions of the contributing activities for sustainable finance are available in the Group's Sustainable Finance Data Dictionary 2022. For the Group's ESG Data Pack, Sustainable Finance Data Dictionary and PwC Assurance Report, see www.hsbc.com/who-we-are/esg-and- responsible-business/esg-reporting-centre. Unlocking New Climate Solutions The Group understands the need to find new solutions to increase the pace of change if the world is to achieve the Paris Agreement's goal of net zero by 2050. Therefore, the Group is working closely with a range of partners to accelerate investment in natural resources, technology and sustainable infrastructure to reduce emissions and help address climate change. HSBC Group partnered with the World Resources Institute and World Wildlife Fund ('WWF') in 2020 to launch its $100m philanthropic programme, Climate Solutions Partnership, with the aim to accelerate support for innovative solutions tackling climate change. This five-year philanthropic initiative aims to identify and remove barriers to scale for climate change solutions. As part of this, in France, two projects are being delivered in partnership with the French National Forestry Office and the Earthworm Foundation. These projects aim to better enable CO2 capture, preserve biodiversity and engage the community, helping to support a net zero and sustainable future. Strategic Report | Purpose and strategy | Our Global Businesses 8 HSBC Bank plc Annual Report and Accounts 2022 Our Global Businesses The Group manages its products and services through its three global businesses: Global Banking and Markets ('GBM'); Commercial Banking ('CMB'); Wealth and Personal Banking ('WPB'); and the Corporate Centre (comprising: certain legacy assets, central stewardship costs, and interests in our associates and joint ventures). Business segments Our operating model has the following material segments: a GBM business which is further split into three reportable segments: MSS, GB and GBM Other (as defined below), CMB, WPB and a Corporate Centre. These segments are supported by Digital Business Services and eleven global functions, including Risk, Finance, Compliance, Legal, Marketing and Human Resources. Markets & Securities Services (‘MSS’) Global Banking (‘GB’) GBM Other Commercial Banking (‘CMB’) Wealth and Personal Banking ('WPB') Markets & Securities Services is a products group that services customers of all Global Businesses and institutional clients across the financial sector globally. We offer clients a range of services and capabilities including trading, financing and securities services across asset classes and geographies, supported by dedicated sales and research teams. Our European teams play a key role in providing access to FX, commodities, Equities and Fixed Income offerings, bridging emerging and developed markets, and collaborating with other global businesses to provide clients across the Group with commoditised and bespoke solutions that seek to support their growth ambitions. Global Banking delivers tailored financial solutions to corporate and institutional clients worldwide opening up opportunities through the strength of our global network and capabilities. We provide a comprehensive suite of services including capital markets, advisory, lending, trade services and global payments services. Our European teams take a client-centric approach bringing together relationship and product expertise to deliver financial solutions customised to suit our clients’ growth ambitions and financial objectives. We work closely with our business partners including MSS, WPB and CMB, to provide a range of tailored products and services that seek to meet the needs of international clients across the company. Global Banking Europe operates as an integral part of the global business and contributes significant revenues to other regions, particularly Asia, through our European client base, supporting the Europe ambition to be the leading international wholesale bank, partly by benefiting from the client network managed outside Europe. GBM Other primarily comprises Principal Investments and GBM’s share of the Group’s Markets Treasury function. The Principal Investments portfolio is focused on delivering investments that align to the group’s strategy and seeks to deliver strong returns across a diversified portfolio. Our commitment to sustainable private equity funds contributes directly to the Group’s aim to provide and facilitate $750bn and $1tn of sustainable finance and investment by 2030. We have a clear strategy to be the leading international corporate bank in Europe. We help connect our European customers to our international network of relationship managers and product specialists; supporting their growth ambitions and targets. Our products are designed to support clients in their international growth and range from term loans to region-wide treasury and trade solutions. We see the greatest opportunity to deliver and grow value for the Group by supporting European clients with international subsidiaries in Asia and other regions; our internal performance measures are aligned to this outcome. Commercial Banking is at the centre of creating revenue synergies within the Group: we collaborate closely with our Global Banking and Markets colleagues to provide expertise in capital finance and advisory solutions to support our Commercial Banking clients. Our trade teams within Commercial Banking also provide import and export finance solutions to Global Banking and Markets clients. We also support our clients to unlock efficiencies in their Treasury structures through our Global Payments Solutions team. As the European economy pivots to a net zero carbon economy, we are expanding our services and products to provide customers with innovative sustainable finance solutions and ensuring our relationship managers are positioned to support our clients’ transition to net zero. In Europe, Wealth and Personal Banking serves customers with their financial needs through a number of business areas including Retail Banking, Private Banking, Wealth Management, Insurance and Asset Management. Our core retail proposition offers a full suite of products including personal banking, mortgages, loans, credit cards, savings, investments and insurance. Alongside this, WPB offers various propositions in certain markets, including Premier; as well as wealth solutions, financial planning and international services. In the Channel Islands and the Isle of Man, we serve local Islanders as well as international customers, the majority of whom are customers of HSBC in other markets, through our HSBC Expat proposition. Our Private Banking proposition serves high net worth and ultra- high net worth clients. Whilst these clients are based all over the world, booking centres are based in the Channel Islands and Isle of Man, France and Germany, which facilitate customers with a total relationship balance greater than $2m. The range of services available to private banking clients includes investment management, Private Wealth Solutions and bespoke lending such as lending against financial assets and residential mortgage financing for high-end properties. Private Banking hosts a ‘Next Generation’ programme of events to support our clients’ next generation in building and retaining the wealth within the family. The private bank offers this through its philanthropy advisory to our clients, which looks at business succession planning. We continue to focus on meeting the needs of our customers, the communities we serve, and our people, whilst working to build the bank of the future. Adjusted profit/(loss) before tax by business segment £472m £486m £(329)m £785m £577m (2021: £(8)m); (2020: £20m) (2021: £589m); (2020: £55m) (2021: £99m); (2020: £(52)m) (2021: £490m); (2020: £152m) (2021: £323m); (2020: £(132)m) Our global businesses are presented on an adjusted basis, which is consistent with the way in which we assess the performance of our global businesses. HSBC Bank plc Annual Report and Accounts 2022 9 ESG Overview We conduct our business to support the sustained success of our customers, employees and other stakeholders. Our approach We are guided by the Group's purpose to open up a world of opportunity for our colleagues, customers and communities. Our purpose is underpinned by the Group's values: we value difference; we succeed together; we take responsibility; and we get it done. The Group's purpose and values help us to deliver our strategy and unlock long-term value for our stakeholders. As an international bank with significant breadth and scale, we understand that our climate, economies, societies, supply chains and people’s lives are interconnected.The Group recognise they can play an important role in tackling ESG challenges. The Group focuses its efforts on three areas: the transition to net zero, building inclusion and resilience, and acting responsibly. Fair outcomes We are focused on running a strong and sustainable business that puts the customer first, values good governance, and gives our stakeholders confidence in how we do what we do. Our conduct approach helps to guide us to do the right thing and to focus on the impact we have for our customers and the financial markets in which we operate. For further information on conduct, see page 6. For further details on our purpose-led conduct approach framework, see www.hsbc.com/who-we-are. Our section 172 statement, detailing our Directors’ responsibility to stakeholders, can be found on page 12. Our colleagues We aspire to open up a world of opportunity for our colleagues and build an inspiring, dynamic culture where the best talent want to work. We value difference and we continue to build an inclusive workforce that is representative of the communities we serve. We set and report on progress made against the Group-wide gender and ethnic diversity goals. Understanding the experience of colleagues is central to our efforts. Through our employee Snapshot survey, we capture our colleagues’ views on topics such as hybrid working and well- being. In 2022, over 8,000 colleagues responded to the survey across Europe, a participation rate of 54%. Developing the skills of colleagues is critical to energising our organisation. We foster a culture of learning through a range of resources that provide colleagues with a breadth of educational materials and development opportunities. Our Climate ambition The Group has set a climate ambition to become net zero in its operations and its supply chain by 2030, and align its financed emissions to the Paris Agreement goal of net zero by 2050. In 2022, the Group expanded coverage of sectors for on-balance sheet financed emissions targets, recognising the challenge of evolving methodologies and data limitations. Transition to net zero represents one of the Group’s four strategic pillars. At the core of it is an ambition to support our customers on their transition to net zero, so that the greenhouse gas emissions from our portfolio of clients reaches net zero by 2050. The summary of the Group’s Transition to net zero disclosure can be found on page 47 of the HSBC Holdings plc ESG review 2022. Engaging with our stakeholders Engaging with our stakeholders is core to being a responsible business. To determine material topics that our stakeholders are interested in, we conduct a number of activities throughout the year, including engagements outlined in the table below. Our stakeholders How we engage Material topics highlighted by the engagement Customers Our customers’ voices are heard through our interactions with them, surveys and by listening to their complaints Customer advocacy Employees Our colleagues’ voices are heard through our employee Snapshot survey, Exchange meetings, and our ‘speak-up’ channels, including our global whistleblowing platform, HSBC Confidential Employee training Diversity and inclusion Employee engagement Investors Our ordinary shares are held by our parent HSBC Holdings plc, however external parties invest in our bond issuance. We engage with these investors via our investor relations programme which enables investor queries alongside a broader programme of management meetings and market engagement Strategic progress ESG policies Risk management Communities We welcome dialogue with external stakeholders, including non- governmental organisations (‘NGOs’) and other civil societies groups. We engage directly on specific issues and by taking part in external forums and working groups Financial Inclusion and Community Investment Regulators and governments We proactively engage with regulators and governments to facilitate strong relationships via virtual and in-person meetings, responses to consultations individually and jointly via the industry bodies Anti-bribery and Corruption Suppliers Our ethical and environmental code of conduct for suppliers of goods and services sets out how we intend to engage with our suppliers on ethical and environmental performance Supply Chain Management Human Rights Supporting our stakeholders facing a rising cost of living We know that many of our customers are facing increasing cost of living pressures from higher inflation, and we are committed to helping them. Colleagues across our global businesses have been contacting our customers to provide them with access to support. Our ESG metrics and targets The Group has established targets that guide how we do business, including how we operate and how we serve our customers. These include targets designed to help us achieve our environmental and social sustainability goals. They also help us to improve employee advocacy, the diversity of senior leadership and strengthen our market conduct. The targets for these measures are linked to the pillars of our ESG strategy: transitioning to net zero, building inclusion and resilience, and acting responsibly. To help us achieve our ESG ambitions, a number of measures are included in the annual incentive scorecards of the Europe Chief Executive and Executive Committee members. Below we set out how we have made progress against the ESG- related ambitions and targets. Strategic Report | ESG Overview 10 HSBC Bank plc Annual Report and Accounts 2022 Environmental – Transition to net zero One of the Group’s strategic pillars is to support the transition to a net zero global economy. The Group’s ambition is to align its financed emissions to the Paris Agreement goal to achieve net zero by 2050. The Paris Agreement aims to limit the rise in global temperatures to well below 2°C, preferably to 1.5°C, above pre- industrial levels. The transition to net zero is one of the biggest challenges for our generation. Success will require governments, customers and finance providers to work together. The Group’s global footprint means that many of its clients operate in high-emitting sectors and regions that face the greatest challenge in reducing emissions. This means that the Group’s transition will be challenging but is an opportunity to make an impact. The Group recognises that to achieve its climate ambition it needs to be transparent on the opportunities, challenges, related risks and progress it makes. To deliver on the ambition requires enhanced processes and controls, and new sources of data. The Group continues to invest in climate resources and skills, and develop its business management process to integrate climate impacts. Until systems, processes, controls and governance are enhanced, certain aspects of the Group’s reporting will rely on manual sourcing and categorisation of data. In 2023, the Group will continue to expand its disclosures. Reporting will need to evolve to keep pace with market developments. At the end of 2022, HSBC Bank plc achieved 63% cumulative reduction in absolute operational greenhouse gas emissions compared to a 2019 baseline in France, Germany, Switzerland and Malta. HSBC Bank plc continues to work to support the Group's ambition to achieve net zero in its own operations and supply chain by 2030. Since 2020, HSBC Bank plc has supported our customers' transition to net zero and helped build a sustainable future by providing and facilitating $86.2bn of sustainable finance, $18.9bn of sustainable investment and $0.1bn of sustainable infrastructure, as defined in the Group’s Sustainable Finance Data Dictionary 2022. This financing and investment contributes towards the Group's ambition to provide and facilitate $750bn to $1tn of sustainable financing and investment by 2030. The $86.2bn of sustainable finance includes lending facilities provided and capital markets facilitated transactions. We continue to engage with our clients on their transition plans and to provide them with financing solutions to support their sustainability goals. For further information regarding the Group’s environmental footprint, please visit https://www.hsbc.com/who-we-are/our- climate-strategy/becoming-a-net-zero-bank. Social – Build inclusion and resilience •Our Snapshot employee engagement1 score was 47% as at the end of 2022, an increase of 1% compared to 2021; •Our ethnic diversity goal2 for 2022 was to increase black heritage colleagues in senior leadership roles in the UK to 2.2%. We exceeded this target and reached 2.4%; and •In 2022, we reached 24.6% senior leadership3 roles held by women up from 23.8% in 2021. Governance – Acting responsibly 96%4 of HSBC Bank plc staff completed conduct training in 2022, which covers Conduct and Regulatory Compliance topics including: market abuse, conflicts of interest and treating customers fairly. 1Employee engagement index is our headline measure of how employees feel about HSBC. HSBC Bank plc’s score is low compared to the Group, key contributors are ongoing transformation and the challenging external environment in Europe. However, we are seeing year on year improvements and will continue to embed a positive and inclusive culture where our colleagues can thrive. 2Our 2022 ethnicity goal of 2.2% includes UK RFB and NRFB. 3Senior leadership is classified as those at band 3 and above in the Group's global career band structure. Our 2022 gender diversity target of 26.4% is cascaded by Group and inclusive of our operations in Bermuda; we reached 25.1% by end of 2022 at the regional level. We missed our 2022 target, our focus on improving gender balance in senior leadership across Europe remains a priority for HSBC Bank plc executive committee for 2023. 4The completion rate shown relates to the 2021/22 ‘Taking Responsibility’ Compliance training module which is categorised as ‘required’ learning for Global employees. Unlike with mandatory training, a formal target is not established for ‘required’ learning modules and non-completion is performance managed. Responsible Business Culture We have the responsibility to protect our customers, our communities and the integrity of the financial system. In this section, we outline our requirements under the Non-Financial Reporting Directive. Environmental matters More information about the Group's assessment of climate risk can be found in the HSBC Holdings plc Annual Report and Accounts 2022. Employee matters We are opening up a world of opportunity for our colleagues through building an inclusive organisation that values difference, takes responsibility and seeks different perspectives for the overall benefit of our customers. We promote an environment where our colleagues can expect to be treated with dignity and respect. We are an organisation that acts where we find behaviours that fall short. Our index measuring colleagues’ confidence in speaking up is at 67% in 2022. At times our colleagues may need to speak up about behaviours in the workplace. We encourage colleagues to speak to their line manager in the first instance, and our annual employee Snapshot survey showed 82% feel comfortable doing so. We recognise that at times people may not feel comfortable speaking up through the usual channels. HSBC Confidential is our global whistleblowing channel, allowing our colleagues past and present to raise concerns confidentially and, if preferred, anonymously (subject to local laws). We aspire to be an organisation that is representative of the communities which we serve. To achieve this, we set goals that will build sustainable lasting change. We are focused on increasing women and black heritage colleagues in senior leadership roles and whilst we have made good progress, we know there is more to be done. To support our ambition, we encourage our colleagues to self- identify their ethnicity data where legally permissible. At a European level, we are limited in our collection of ethnicity data and can only report in: UK, Channel Islands and the Isle of Man ('CIIOM'), and South Africa. However, we are continuing to drive open dialogue and action to strengthen our employee networks and improved our diversity data where possible. Communities The Group has a long-standing commitment to help support the communities in which it operates. Through charitable partnerships and volunteering opportunities, our people share their skills and create a positive impact on society. The Group's global reach is its unique strength and bringing together diverse people, ideas and perspectives, helps us open up opportunities and build a more inclusive world. In 2022, HSBC Bank plc continued to work with our charity partners across Europe to promote employability and financial capabilities in disadvantaged communities, and respond to local needs: –HBCE partnered with charities Cresus and Adie to deliver programmes that enhance financial capability and entrepreneurship amongst disadvantaged individuals in their respective communities. HSBC Bank plc Annual Report and Accounts 2022 11 –HBMT supported local disadvantaged young people through its charitable partnership with the Prince's Trust Foundation and the 'Prince's Trust International Achieve programme' to develop employable skills. In 2022, HSBC Bank plc collectively donated £1.8m to charitable programmes and was further supported by our employees' contribution of 1,540 volunteer hours in various community activities and projects during work time. Human rights Our commitment to respecting human rights, principally as they apply to our employees, our suppliers and through our financial services lending, is set out in our Statement on Human Rights. This statement, along with our statements under the UK’s Modern Slavery Act, is available on www.hsbc.com/who-we-are/esg-and- responsible-business/esg-reporting-centre. Anti-corruption and anti-bribery We are committed to high standards of ethical behaviour and operate a zero-tolerance approach to bribery and corruption. We consider such activity to be unethical and contrary to good corporate governance. HSBC requires compliance with all applicable anti-bribery and corruption ('AB&C') laws in all markets and jurisdictions in which we operate. These include the UK Bribery Act and France’s ’Sapin II’ law. We have a global AB&C policy, which gives practical effect to these laws and regulations, but also requires compliance with the spirit of laws and regulations to demonstrate our commitment to ethical behaviours and conduct as part of our environmental, social and corporate governance. The global AB&C policy sets out the key principles and minimum control requirements that enable HSBC to mitigate bribery and corruption risk. Mandatory AB&C training is provided to all staff, with additional targeted training tailored to the roles of individuals. HSBC carries out regular risk assessments, monitoring and testing of its AB&C programme and maintains clear whistleblowing policies and processes to ensure that individuals can confidentially report concerns. Non-Financial Information Statement Disclosures required pursuant to the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 can be found on the following pages: Environmental matters (including the impact of the company’s business on the environment) Page 11 The company’s employees Pages 10 to 13 and 101 to 102 Social matters Page 11 Respect for human rights Page 12 Anti-corruption and anti-bribery matters Page 12 Business model Page 9 Principal risks Page 24 HSBC creates value by providing products and services to meet our customers' needs. We aim to do so in a way that fits seamlessly into their lives. This helps us to build long-lasting relationships with our customers. HSBC maintains trust by striving to protect our customers’ data and information, and delivering fair outcomes for them and if things go wrong, we need to address complaints in a timely manner. Operating with high standards of conduct is central to our long- term success and underpins our ability to serve our customers. Our Conduct Framework guides activities to strengthen our business and increases our understanding of how the decisions we make affect customers and other stakeholders. Details on our Conduct Framework are available at www.hsbc.com/Conduct. Section 172 statement This section, from pages 12 to 13 forms our section 172 statement and addresses the requirements of the Companies (Miscellaneous Reporting) Regulations 2018. It describes how the Directors have performed their duty to promote the success of the bank, including how they have considered and engaged with stakeholders and, in particular, how they have taken account of the matters set out in section 172(1)(a) to (f) of the Companies Act 2006 (the 'Act'). The Board considered a range of factors when making decisions and is supported in the discharge of its responsibilities by: a.an induction programme and ongoing training for Directors to provide an understanding of our business and financial performance and prospects; b.management processes which help ensure that proposals presented to Board and committee meetings for decision include information relevant to determine the action that would most likely promote the success of the bank and involve engagement with stakeholders where relevant, to support appropriate decision making; and c.agenda planning for Board and committee meetings to provide sufficient time for the consideration and discussion of key matters. Stakeholder Engagement The Board understands the importance of effective engagement with its stakeholders and is committed to open and constructive dialogue. Engagement with stakeholders takes place at the holding company level and at the operational level. On certain issues, the Board may engage directly with stakeholders. The outcomes from such stakeholder engagement feeds into Board discussions and decision making. This approach allows the Board to better understand the impact of the bank's actions on its stakeholders and respond to the challenges facing the bank. The relevance of each stakeholder group varies depending on the specific decision being taken by the Board. Not every decision the Board makes will necessarily result in a positive outcome for all stakeholders. As a result of both its direct stakeholder interactions and the reporting and information on stakeholder engagement it receives about its six key stakeholders, namely customers, employees, shareholders and investors, regulators and governments, suppliers, and communities, the Board seeks to understand, and have regard to, the interests and priorities of these stakeholders. The two examples provided below of principal discussions and decisions taken by the Board in 2022 show how the Directors and Board respectively discharged their individual and collective responsibility for promoting the long-term success of the bank and took different stakeholder considerations into account in reaching a decision or forming a view. For further details regarding the role of the Board and the way in which it makes decisions, including key activities during 2022, please see page 95 to 96. Customers As one of Europe’s largest banking and financial services organisations our corporate and institutional customers are at the core of the bank's business model: without customers there would be no bank. We have a clear vision to be the leading international wholesale bank in Europe, complemented by a targeted wealth and personal banking business. The Board strives to ensure it has a broad understanding of customers, their needs and challenges, and to give full consideration to these when its approval is sought on matters such as material acquisitions, disposals, investments, large scale change or transformation programmes. Throughout 2022, geopolitical and economic uncertainty has given our customers additional challenges and senior management have engaged directly with customers to better understand their issues and difficulties and how the bank can respond to them. During this period, the Board has been provided with customer feedback and key performance indicators, such as net promoter scores, customer complaints, customer on-boarding times and satisfaction survey results. The Board schedule also included Commercial Banking, Wealth and Personal Banking, Global Banking and Markets deep dive strategy sessions which incorporated discussions on customer interactions, customer surveys, complaints feedback and product developments to meet customers’ needs. Strategic Report | ESG Overview 12 HSBC Bank plc Annual Report and Accounts 2022 Employee (Workforce Engagement) Employees are critical to the success of the bank, its sustainability and long-term future. Understanding employee sentiment and how we are addressing feedback is a key area of Board focus. During the year, the Board received regular updates from senior management on the progression of our people priorities covering various employee-focused initiatives across culture, leadership, talent, skills, inclusion, wellbeing and colleague experience. Further information on people priorities can be found under Employee at page 101-102. Feedback from employees is gathered via various mechanisms including surveys, exchange meetings and 'speak up' channels and reported to the Board. The Board is presented bi-annually with a culture dashboard which has been developed to track progress in embedding a positive and inclusive culture across the business. Board focus on employees was heightened due to the ongoing transformation programme and the need for continuing consideration of the impact on employees when making Board decisions. The Board remained committed to building active communication and feedback channels with employees across the region in 2022. During the year, three cohorts were specifically targeted given their importance to the bank’s strategy and their role in building a robust leadership pipeline. These included: i) Executive Committee member’s direct reports, ii) Subsidiary Board members, and iii) Flagship Talent programme including participants from Accelerating Female Leaders, Explore, and Accelerating into Leadership programmes. Further details of the bank’s engagement with employees can be found on pages 10 to 11 and 101 to 102. Shareholders and Investors The bank is a wholly owned subsidiary of HSBC Holdings plc and, as such, the Board took into account the implications of its decisions with regard to its shareholder, HSBC Holdings plc, and its debt security investors. Examples of how it fulfilled this include: •the Board Chair and Committee Chairs engaged with Group counterparts and attended Group forums and Group committee meetings, together with Executive Directors, to engage on common issues and strategic priorities; •Board review and approval of HSBC Bank plc specific components of Group programmes; and •Board consideration of the strength of the balance sheet to ensure that the ability to pay principal or interest on its debt securities was not at risk. Regulators and Governments During the year, Directors met regularly with regulators both in the UK and Europe. It is central to the success of the bank that it has constructive relationships with regulators and governments and that there is a mutual understanding on expectations and challenges given their impact on customers, the business model and the bank’s strategy. The Board receives regular updates on how HSBC interacts with regulators globally and at the European level. Understanding regulators’ views and priorities in this way shapes and influences Board discussions and decision making. Suppliers Suppliers are critical to supporting the infrastructure and operations of the business and we work with suppliers to ensure mutually beneficial relationships. Examples of Board engagement with suppliers during 2022 include: •the Chief Operating Officer’s regular reports on third-party supplier matters covering key suppliers’ operational resilience and how we work with suppliers to mitigate impact to our customers; and •oversight of progress of implementing contractual changes with third party suppliers to adopt new Standard Contractual Clauses to meet 'Schrems II decision' data requirements. Communities The bank has legal, regulatory and social responsibilities to the communities in which it operates and the environment and is conscious of the need to manage the societal and environmental impact of its business when making decisions. During the year the Board received regular updates on matters spanning human rights and environmental and climate issues. Principal Decisions Set out below are some of the principal decisions made by the Board during 2022. In each case, in taking such decisions, the Directors exercised their statutory duties under section 172(1) (a)- (f) of the Companies Act 2006. Liability Management Exercise – Tender Offer A key regulatory responsibility of the Board is to periodically assess the bank’s capital and liquidity position and associated risks in a structured way, while also considering management proposals in support of the bank’s financial strength and capital efficiency. Mindful of the bank’s continued focus on balance sheet optimisation, and broader regulatory expectations, management undertook an exercise to review potential liability management actions relating to its issued debt securities. The review resulted in a formal proposal being brought to the Board, recommending the bank make an invitation to holders of certain legacy debt securities to tender any and all of such debt securities for purchase by the bank for cash, subject to certain conditions being satisfied. Prior to approval, the Board constructively challenged and engaged with senior management to consider the capital and liquidity impact on the bank’s balance sheet. As part of its considerations, the Board took in to account the impact of the project on the bank’s key stakeholders, in particular its investors in such instruments and its obligations to, and relationship with, its regulators. In considering stakeholders, the Board also considered its minimum requirements for own funds and eligible liabilities and how the legacy securities were treated from a regulatory capital perspective. In reaching its decision, the Board acknowledged the rationale for the proposal in the context of seeking to further enhance efficiencies in the bank’s capital structure. The Board also acknowledged the Bank of England’s (‘BoE’) resolvability assessment of major UK banks, which welcomed action being taken, where it is appropriate and proportionate to do so, to reduce the stock of legacy capital securities issued from non- resolution entities to holders outside the group. Having taken all of these and other factors into account, and subject to market and economic conditions, the Board approved the proposed tender offer in respect of the chosen legacy securities, which was subsequently announced on 14 November 2022. European Transformation – Malta Transfer For a number of years, management have considered the most appropriate organisational structure within Continental Europe to help execute the bank’s Europe transformation strategy. In addition to this review, management acknowledged the need for banking entities to comply with the requirement under the CRD V to establish an EU IPU structure by the end of 2023. The review included a formal proposal being brought to the Board in October 2022, recommending the sale of HSBC Europe BV’s entire shareholding in HBMT to the group’s EU IPU, HBCE. Prior to approval, the Board reviewed and assessed options presented by management to achieve compliance with the CRD V requirements. The Board constructively engaged with management to consider the financial and regulatory implications and the likely consequence of the proposal on the bank’s key stakeholders, as appropriate. Mindful of longer-term consequences of decisions and the impact on operations, as well as HBMT’s local listing, the Board also carefully considered the approach to valuation and purchaser protections for the transaction. HSBC Bank plc Annual Report and Accounts 2022 13 In reaching its decision, the Board acknowledged the rationale for the recommendation in the context of regulatory expectations and that HBCE had also provided its in-principle approval for the recommendation. Having taken these factors into consideration, including an assessment of the financial merits and risks, investor and regulatory engagement, the Board agreed to proceed with the proposal, as subsequently completed on 30 November 2022. Tax Our approach to tax We are committed to applying both the letter and the spirit of the law in all territories where we operate, and have adopted the UK Code of Practice for the Taxation of Banks. As a consequence, we seek to pay our fair share of tax in the countries in which we operate. We continue to strengthen our processes to help ensure our banking services are not associated with any arrangements known or suspected to facilitate tax evasion. HSBC continues to apply global initiatives to improve tax transparency such as: •the US Foreign Account Tax Compliance Act (‘FATCA’); •the Organisation for Economic Co-operation and Development ('OECD') Standard for Automatic Exchange of Financial Account Information (also known as the Common Reporting Standard); •the CRD IV Country by Country Reporting; •the OECD Base Erosion and Profit Shifting (‘BEPS’) initiative; and •the UK legislation on the corporate criminal offence (‘CCO’) of failing to prevent the facilitation of tax evasion. We do not expect the BEPS or similar initiatives adopted by national governments to adversely impact our results. Key Performance Indicators The Board of Directors tracks the group’s progress in implementing its strategy with a range of financial and non- financial measures or key performance indicators (‘KPIs’). Progress is assessed by comparison with the group strategic priorities, operating plan targets and historical performance. The group reviews its KPIs regularly in light of its strategic objectives and may adopt new or refined measures to better align the KPIs to HSBC’s strategy and strategic priorities. Financial KPIs 2022 2021 2020 (Loss)/profit before tax (reported) (£m) (959) 1,023 (1,614) Profit/(loss) before tax (adjusted) (£m) 1,724 1,577 (184) Cost efficiency ratio (reported) (%) 115.2 89.2 113.6 Cost efficiency ratio (adjusted) (%) 70.9 80.9 89.6 Return on tangible equity (%) 5.5 6.1 (2.7) Common equity tier 1 capital ratio (%) 16.8 17.8 15.1 Profit/(loss) before tax (reported/adjusted): Reported profit/ (loss) before tax is the profit/(loss) as reported under IFRS. Adjusted profit/(loss) before tax adjusts the reported profit/(loss) for the effect of significant items as detailed on pages 18 to 19. Reported loss before tax in 2022 was £(959)m compared with a profit before tax of £1,023m in 2021. This was primarily driven by lower reported revenue, which reflected an impairment on the planned disposal of our retail banking operations in France and losses associated with the planned sale of our operations in Russia and Greece. Expected credit losses and other credit impairment charges ('ECL') were a net charge, largely reflecting stage 3 charges in Global Banking and CMB. This compared with a net release in 2021 primarily related to Covid-19 related allowances built up in 2020. Reported operating expenses were lower primarily driven by lower variable pay and the impact of our transformation cost-saving initiatives partly offset by higher restructuring and other related costs. Share of profit/(loss) from associates recognised a loss of £30m compared with a gain of £191m in 2021. Adjusted profit before tax was £1,724m, up £146m compared with £1,577m in 2021. This was driven by a strong revenue performance and lower operating expenses, partly offset by higher ECL. The increase in revenue was largely driven by higher net interest income in all of our global businesses, mainly due to interest rate rises. Revenue in Markets and Securities Services ('MSS') was also strong, mainly in Global Foreign Exchange and Equities. This was driven by increased client activity due to elevated market volatility and the macroeconomic impacts from rising inflation and increasing interest rates, and reflecting robust risk management. This was partly offset by lower valuation gains in Principal Investments ('PI') compared with 2021. Operating expenses decreased, driven by lower performance related pay and the impact of our transformation cost-saving initiatives. Reported cost efficiency ratio was 26.0 percentage points higher compared with 2021 driven by lower revenue partly offset by lower operating expenses. Reported revenue decreased by 24.1% and operating expenses decreased by 2.0%, mainly driven by the factors mentioned above. Adjusted cost efficiency ratio improved by 10.0 percentage points from 2021, reflecting higher revenue and lower costs. Revenue increased by 7.1%, due to higher net interest income driven by the high interest rate environment and higher trading revenue in MSS. Operating expenses decreased by 6.1%, mainly driven by factors mentioned above. Return on tangible equity (‘RoTE’) is computed by adjusting reported profit attributable to ordinary shareholders by excluding movements in PVIF and significant items (net of tax), divided by average tangible shareholders' equity excluding fair value of own debt, debit valuation adjustment (‘DVA’) and other adjustments for the period. The adjustment to reported results and reported equity excludes amounts attributable to non-controlling interests. We provide RoTE as a way of assessing our performance, which is closely aligned to our capital positions. CET1 capital ratio represents the ratio of common equity tier 1 capital to total risk-weighted assets ('RWA'). CET1 capital is the highest quality form of capital comprising shareholders’ equity and related non-controlling interests less regulatory deductions and adjustments. The group seeks to maintain a strong capital base to support the development of its business and meet regulatory capital requirements at all times. The CET1 capital ratio of 16.8% in 2022 decreased by 1.0% from 2021, mainly due to an increase in RWAs. Non-financial KPIs We monitor a range of non-financial KPIs focusing on customers, people, culture and values, including customer service satisfaction, employee engagement and diversity and sustainability. For details on customer service and satisfaction please refer below; for the remaining non-financial KPIs, refer to the Non- financial reporting section on page 11 and Corporate Governance section on pages 94 to 102. Customer service, awards and satisfaction MSS Our customers are at the heart of what we do and we are committed to delivering services and capabilities that meet their needs and help them fulfil their ambitions. In 2022, we won numerous awards and consistently ranked highly with our European clients, including winning Currency Manager of the Year at the European Pension Awards, Best Prime Broker – Emerging Markets at the HFM European Services Awards (for the 10th consecutive year), ranking number one for ‘UK Research’, ‘UK Overall Broker’ and ‘Emerging EMEA Equity Research, Sales Strategic Report | ESG Overview | Key performance indicators | Economic background and outlook 14 HSBC Bank plc Annual Report and Accounts 2022 and Corporate Access’ in the Institutional Investor 2022 Survey and also ranking number one for ‘UK Fund Accounting and Administration provider’, ‘Top 200 Asset Managers’ and ‘Rest of the World’ in the R&M Investor Services Survey for Europe. These accolades, coupled with multiple milestones and achievements in sustainable finance, demonstrate our leading capabilities to support clients locally and connect them to markets and expertise in the East, as well the key role Europe plays in supporting the Group’s strategic priorities. GB Within Global Banking Europe we remain committed to providing excellent customer experience and continue to strive towards improving our proposition to meet client needs. In 2022, HSBC received industry recognition across a number of product capabilities offered to our Global Banking clients including being recognised as number one Best Services for Trade Finance in Western Europe by Euromoney in their Trade Finance Survey and number one for Cash Management in the UK in the 2022 Euromoney Market Leaders survey. Aligned with our purpose of opening up opportunities for our clients, HSBC also won six bond awards from Environmental Finance in 2022. These awards also highlight the continued strength and differentiation of our Sustainability capabilities globally as well as the role we play in Europe helping our clients transition to net zero. CMB Customer experience and satisfaction are priorities for Commercial Banking in Europe. We measure a number of operational metrics on customer service levels and gather direct customer feedback to ensure our solutions and channels remain relevant and fit for our customers’ digital needs today. Our centralised booking model in Paris for our pan-European customers enables us to regionally cover and manage customers through a consistent and streamlined level of service. This also ensures our Relationship Managers can support and cover customers using a common toolkit. Looking ahead, we will continue to measure how we deploy resources to our customers looking to expand and grow internationally, whilst also supporting them with their transition plans to achieve net zero. WPB Enhancing customer experience and improving satisfaction remains integral to our strategy. This is monitored through a number of customer satisfaction metrics covering branch, contact centre and digital channels. One example is iNPS ('Interactions Net Promoter Score') which measures interactions with our customers. In 2022 Channel Islands and Isle of Man ('CIIOM') Islands iNPS scored 14 against a target of 15 for mobile and 46 against a target of 50 for Premier Relationship Managers. The Expat proposition scored 24 against a target of 6 for Online, and Premier Relationship Managers scored 55 against a target of 46. We recognise the importance of customer feedback and continue to enhance our insights to gain a better understanding of our clients to provide a more personalised and relevant service. Digital continues to be a principal area of investment; enhancing customer experience, reducing processing costs and driving the sustainability agenda. We are on track to transition 30% of cheques (up to the value of £500) away from the branch to mobile, improving customer service with 2,500 cheques deposited to date. Private Banking remains committed to enhancing our digital capabilities and offering, with improved internal platforms and software to support the delivery of excellent client service. Within Switzerland, Luxembourg and Channel Islands service improvements have been delivered within the E-Banking platform including client access to on-demand statements. We recognise that enhancing customer satisfaction is an evolving process and are committed to ensure our investments and focus are prioritised to achieve this. Economic background and outlook UK Falling real incomes are driving the UK's economic slowdown UK consumer price inflation remains very high. In January 2023, the annual inflation rate fell to 10.1%, the third consecutive monthly fall. While inflation may have peaked at 11.1% in October, cost pressures are still high and inflation could remain close to 10% through Q1 2023 before decreasing further. Thanks partly to falls in wholesale energy prices, the BoE forecasts that headline inflation could fall below 4% by Q4 2023. Underlying inflation pressures could prove more persistent. In December 2022, UK services inflation hit its highest rate since 1992, though it fell back in January 2023. The UK labour market continues to be characterised by a constrained supply of workers, across sectors and skill levels, which could also add to core inflation pressure. The unemployment rate was close to multi- decade lows at 3.7% in the three months ended December 31, 2022. Wage growth, while strong, has not kept pace with inflation. Total nominal average weekly earnings were up 5.9% year-on-year in the three months ended December 31, 2022, while real pay on the same basis fell by 3.1%. The real-terms income squeeze contributed to a fall in GDP of 0.2% quarter-on-quarter in Q3 2022, though an extra Bank Holiday for the Queen’s funeral may also have played a role. However, GDP was flat in Q4 2022, meaning the UK economy narrowly avoided slipping into technical recession. Even so, the underlying growth picture still looks challenging. The BoE has raised Bank Rate at each policy meeting since December 2021, taking it to 4.0% in February 2023. This has already started to weigh on the housing market, with benchmark price indices showing falls in October and November 2022. In early February 2023, market prices implied that UK Bank Rate would peak at over 4.5% in mid-2023 with cuts expected to begin from Q4 2023. Eurozone Headline inflation falling and growth slowing The eurozone economy was resilient through the second half of 2022. GDP grew 0.3% quarter on quarter in Q3, with a strong contribution from household spending despite high inflation. Preliminary data showed that the eurozone economy expanded again in Q4 2022, with GDP rising 0.1% quarter on quarter. The modest expansion means the eurozone also avoided slipping in to recession in 2022. With household savings rates still high, this resilience partly reflects government support measures. Eurozone inflation remains high, even though it is estimated to have already reached its peak, having hit an all-time high of 10.6% in October 2022 and falling to 8.5% in the preliminary estimate for January 2023. These elevated rates of inflation will weigh on real-terms incomes and, in turn, household spending. As the recent falls in wholesale energy prices start to feed through to consumers, headline inflation should fall further during the course of 2023. Declines in core inflation have been less pronounced, with core inflation of 5.2% in January 2023. The ongoing inflationary squeeze on real-terms incomes means that a mild eurozone recession still seems likely, even though indicators of economic activity in early 2023 were resilient. The depth of any recession should be backstopped by a supportive labour market, not least because in Europe many firms can make use of government-backed short-time working schemes. HSBC Bank plc Annual Report and Accounts 2022 15 Financial summary Use of alternative performance measures Our reported results are prepared in accordance with International Financial Reporting Standards ('IFRSs'), as detailed in the Financial Statements starting on page 113. In measuring our performance, we supplement our IFRS figures with non-IFRS measures, which constitute alternative performance measures under European Securities and Markets Authority guidance and non-GAAP financial measures defined and presented in accordance with US Securities and Exchange Commission rules and regulations. These measures include those derived from our reported results in order to eliminate factors that distort year-on-year comparisons. The ‘adjusted performance’ measure used throughout this report is described below. All alternative performance measures are described and reconciled to the closest reported financial measure when used. Adjusted performance Adjusted performance is computed by adjusting reported results for the year-on-year effects of significant items that distort year- on-year comparisons. We use ‘significant items’ to describe collectively the group of individual adjustments excluded from reported results when arriving at adjusted performance. These items are ones that management and investors would ordinarily identify and consider separately when assessing performance to understand better the underlying trends in the business. We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant and providing insight into how management assesses year-on-year performance. Summary consolidated income statement for the year ended 2022 2021 2020 £m £m £m Net interest income 1,904 1,754 1,898 Net fee income 1,261 1,413 1,400 Net income from financial instruments measured at fair value 1,751 3,432 2,314 Gains less losses from financial investments (60) 60 95 Net insurance premium income 1,787 1,906 1,559 Losses/gains recognised on Assets held for sale (1,947) 67 — Other operating income 356 527 417 Total operating income1 5,052 9,159 7,683 Net insurance claims, benefits paid and movement in liabilities to policyholders (406) (3,039) (1,783) Net operating income before change in expected credit losses and other credit impairment charges2 4,646 6,120 5,900 Change in expected credit losses and other credit impairment charges (222) 174 (808) Net operating income 4,424 6,294 5,092 Total operating expenses excluding impairment of goodwill and other intangible assets1 (5,365) (5,416) (5,903) Impairment of goodwill and other intangible assets 12 (46) (802) Operating (loss)/profit (929) 832 (1,613) Share of (loss)/profit in associates and joint ventures (30) 191 (1) (Loss)/profit before tax (959) 1,023 (1,614) Tax credit 561 23 136 (Loss)/profit for the year (398) 1,046 (1,478) (Loss)/profit attributable to the parent company (408) 1,041 (1,488) Profit attributable to non-controlling interests 10 5 10 1Total operating income and expense include significant items as detailed on pages 16 to 19. 2Net operating income before change in expected credit losses and other credit impairment charges is also referred to as revenue. Reported performance Reported loss before tax was £(959)m, compared with a profit before tax in 2021 of £1,023m, a decrease of £1,982m. The reported loss in 2022 included impairments of £1,947m, mainly due to the reclassification of our retail banking operations in France to held for sale, and net ECL charges compared with a net release in 2021. This was partly offset by a reduction in operating expenses. Reported revenue was £1,474m lower, largely reflecting impairments on the planned disposals of our retail banking operations in France, and our operations in Russia and Greece in 2022. Revenue also decreased in GBM Other mainly driven by lower favourable valuation gains in PI and a net loss of £91m from the buy-back of legacy securities to optimise the bank’s future funding costs. This decrease was partly offset by a strong performance in Markets and Securities Services ('MSS') and higher revenue from interest rate rises, notably in Global Payments Solutions ('GPS') in Global Banking and CMB. During 3Q22, we renamed our Global Liquidity and Cash Management ('GLCM') business to Global Payments Solutions as we reshape our payments proposition into a technology-enabled, globally connected payments franchise, to better support our clients‘ needs and facilitate commerce. In WPB, revenue grew supported by higher interest rates and higher revenue in insurance manufacturing driven by assumption updates, primarily reflecting favourable investment assumptions on asset management rebates for unit-linked investments and profit-sharing levels. Reported operating expenses decreased, mainly driven by lower performance-related pay and the impact of our transformation cost-saving initiatives. This was partly offset by higher restructuring and other related costs. In addition, there was also a loss compared with a gain in 2021 recognised from our share of profit/(loss) from associates. Net interest income (‘NII’) increased by £150m or 9% compared with the prior year. This included higher net interest expense in Corporate Centre (up by £565m compared with 2021) associated with funding of our Markets business in MSS generating trading income. Excluding this, NII was up by £694m mainly in CMB (£277m) and Global Banking (£335m) driven by the higher interest rate environment, notably in GPS. Net fee income decreased by £152m or 11% compared with the prior year, notably in Global Debt Markets in MSS and Global Banking, driven by lower underwriting fees as market activity fell Strategic Report | Financial summary 16 HSBC Bank plc Annual Report and Accounts 2022 due to the effect of the Russia-Ukraine war and wider macroeconomic uncertainties. This compared with a strong 2021 when corporates raised finance as initial Covid-19 restrictions were eased. This reduction was partly offset by higher income in GPS, as volumes grew and we delivered on our strategic initiatives. Net income from financial instruments measured at fair value decreased by £1,681m or 49%, primarily in WPB. This decrease was driven by lower returns on financial assets supporting insurance contracts where the policyholder is subject to part or all of the investment risk. This adverse movement resulted in a corresponding movement in liabilities to policyholders, reflecting the extent to which policyholders participate in the investment performance of the associated assets. The offsetting movements are recorded in net insurance claims and benefits paid and movement in liabilities to policyholders. The decrease in WPB was partly offset by higher revenue in MSS, mainly reflecting strong client activity and robust risk management, notably in Global Foreign Exchange, due to elevated market volatility resulting from the Russia-Ukraine war and macroeconomic impacts from rising inflation and increasing interest rates. Revenue also benefited from favourable fair value movements in preference shares holdings in VISA in CMB and WPB. Gains less losses from financial investments decreased by £120m, mainly driven by losses on the disposal of bonds held at fair value through other comprehensive income ('FVOCI') in Markets Treasury. This compared with gains in the prior year. Net insurance premium income decreased by £119m or 6%, in WPB, from insurance manufacturing revenue driven by lower new business volumes. Losses/gains recognised on Assets held for sale of £(1,947m) mainly driven by an impairment on the planned disposals of the retail banking operations in France £1,711m, branch operations in Russia of £212m and Greece of £87m in 2022. This compared with a gain of £65m from sale of a property in Germany in 2021. Net insurance claims, benefits paid and movement in liabilities to policyholders decreased by £2,633m or 87% in the insurance business in WPB. The decrease was driven by lower returns on financial assets supporting contracts where the policyholder is subject to part or all of the investment risks. The losses recognised on the financial assets measured at fair value through profit and loss that are held to support these insurance contract liabilities are reported in 'Net income from financial instruments designated at fair value'. Other operating income decreased by £171m or 32%, mainly in GBM Other due to lower intercompany recharge recoveries from other entities in the Group, with an offsetting decrease in operating expenses. This was partly offset by higher revenue in insurance manufacturing in WPB driven by assumption updates. Changes in expected credit losses and other credit impairment charges (‘ECL’) were a charge of £222m in 2022, compared with a release of £174m in 2021. The charge in 2022 was mainly driven by higher stage 3 charges in Global Banking and in CMB reflecting heightened levels of uncertainty and inflationary pressures. This compared with a net release of stage 1 and stage 2 allowances in 2021 primarily relating to Covid-19 related allowances built up in 2020. Total operating expenses excluding impairment of goodwill and other intangible assets decreased by £51m or 1%, mainly driven by lower variable pay and the impact of continued cost discipline as well as lower intercompany costs recharges. This was partly offset by an increase of £137m in restructuring and other related costs. Impairment of goodwill and other intangible assets was a release of £12m compared with an impairment charge on non- financial assets of £(46)m in 2021. Share of (loss)/profit in associates and joint ventures was a loss of £30m compared with a profit of £191m in 2021 due to the recovery in asset valuations. The loss in 2022 included a £24m true-up of prior year valuations in the underlying investments of an associate. Tax credit of £561m was £538m higher compared with 2021. The effective tax rate of 58.5% for 2022 was driven by underlying losses before tax, non-recurring items including recognition of previously unrecognised deferred tax assets in France and a tax credit of £105m from movement in provisions for uncertain tax positions. The tax credit in 2021 of £23m included favourable non-recurring items in respect of tax rate changes, prior period adjustments and the recognition of previously unrecognised deferred tax assets in France. HSBC Bank plc Annual Report and Accounts 2022 17 Adjusted performance Significant revenue items by business segment – (gains)/losses for the year ended MSS GB GBM Other CMB WPB Corporate Centre Total £m £m £m £m £m £m £m 31 Dec 2022 Reported revenue 2,446 1,571 (108) 1,433 (80) (616) 4,646 Significant revenue items (33) — 100 (1) 1,572 498 2,136 – fair value movements on financial instruments1 (35) — (6) (1) — (1) (43) – restructuring and other related costs2 2 — 106 — — 126 234 – European restructurings — — — — 1,572 373 1,945 Adjusted revenue 2,413 1,571 (8) 1,432 1,492 (118) 6,782 31 Dec 2021 Reported revenue 2,043 1,367 310 1,096 1,276 28 6,120 Significant revenue items 12 — 269 (1) (1) (69) 210 – fair value movements on financial instruments1 12 — (5) (1) (1) — 5 – restructuring and other related costs2 — — 274 — — (69) 205 Adjusted revenue 2,055 1,367 579 1,095 1,275 (41) 6,330 31 Dec 2020 Reported revenue 1,966 1,381 437 1,132 1,035 (51) 5,900 Significant revenue items 2 — 187 1 — (93) 97 – fair value movements on financial instruments1 2 — 2 1 — (2) 3 – restructuring and other related costs2 — — 185 — — (91) 94 Adjusted revenue 1,968 1,381 624 1,133 1,035 (144) 5,997 1Includes fair value movements on non-qualifying hedges and debit valuation adjustments on derivatives. 2Includes losses associated with the RWA reduction commitments. Significant cost items by business segment – (recoveries)/charges for the year ended MSS GB GBM Other CMB WPB Corporate Centre Total £m £m £m £m £m £m £m 31 Dec 2022 Reported operating expenses (1,940) (932) (402) (663) (917) (499) (5,353) Significant cost items — — 84 70 9 384 547 – restructuring and other related costs — — 68 61 2 327 458 – European restructurings — — 16 9 7 57 89 Adjusted operating expenses (1,940) (932) (318) (593) (908) (115) (4,806) 31 Dec 2021 Reported operating expenses (2,064) (918) (588) (611) (981) (300) (5,462) Significant cost items — — 103 (1) 6 236 344 – restructuring and other related costs — — 103 (1) 6 213 321 – European restructurings — — — — — 23 23 Adjusted operating expenses (2,064) (918) (485) (612) (975) (64) (5,118) 31 Dec 2020 Reported operating expenses (1,950) (878) (1,351) (773) (1,169) (584) (6,705) Significant cost items 1 — 679 114 41 498 1,333 – restructuring and other related costs — — 218 79 5 377 679 – European restructurings — — — — — — — – settlements and provisions in connection with legal and regulatory 1 — — — — 8 9 – impairment of other intangible assets — — 461 35 36 113 645 Adjusted operating expenses (1,949) (878) (672) (659) (1,128) (86) (5,372) Strategic Report | Financial summary 18 HSBC Bank plc Annual Report and Accounts 2022 Net impact on profit/(loss) before tax by business segment MSS GB GBM Other CMB WPB Corporate Centre Total £m £m £m £m £m £m £m 31 Dec 2022 Reported profit/(loss) before tax 505 486 (513) 716 (1,004) (1,149) (959) Net impact on reported profit and loss (33) — 184 69 1,581 882 2,683 – Significant revenue items (33) — 100 (1) 1,572 498 2,136 – Significant cost items — — 84 70 9 384 547 Adjusted profit/(loss) before tax 472 486 (329) 785 577 (267) 1,724 31 Dec 2021 Reported profit/(loss) before tax (20) 589 (273) 492 318 (83) 1,023 Net impact on reported profit and loss 12 — 372 (2) 5 167 554 – Significant revenue items 12 — 269 (1) (1) (69) 210 – Significant cost items — — 103 (1) 6 236 344 Adjusted profit/(loss) before tax (8) 589 99 490 323 84 1,577 31 Dec 2020 Reported profit/(loss) before tax 17 55 (918) 37 (173) (632) (1,614) Net impact on reported profit and loss 3 — 866 115 41 405 1,430 – Significant revenue items 2 — 187 1 — (93) 97 – Significant cost items 1 — 679 114 41 498 1,333 Adjusted profit/(loss) before tax 20 55 (52) 152 (132) (227) (184) Adjusted performance Adjusted profit before tax was £1,724m, up £147m or 9% compared with 2021. This reflected higher revenue and lower operating expenses partly offset by higher ECL and a loss in our share of profit in associates and joint ventures compared with a gain in 2021. Adjusted revenue increased by £452m or 7% compared with 2021. This increase was primarily in Global Payments Solutions (‘GPS’) within Global Banking and CMB, driven by the positive impact of interest rate rises and balance sheet growth. In MSS, strong revenue performance, notably in Global Foreign Exchange, Securities Services and Equities, was driven by strong client activity and robust risk management. Revenue also increased in WPB reflecting higher net interest income driven by rising interest rates and higher revenue in insurance manufacturing driven by assumption updates. This increase was partly offset by a reduction in GBM Other, mainly driven by lower favourable valuation gains in PIs and a net loss from the buy-back of legacy securities to optimise the bank’s future funding costs. Adjusted ECL were a net charge of £222m compared with a net credit of £174m in 2021. In 2022, the net charge was mainly driven higher stage 3 charges in Global Banking and CMB. This compared with a net release of stage 1 and stage 2 allowances in 2021 reflecting an improved economic outlook and stabilisation of credit risk. Adjusted operating expenses decreased by £312m or 6%, mainly reflecting the impact of our transformation cost-saving initiatives and lower performance-related pay. In addition, there was a lower UK bank levy charge, which included a credit of £44m relating to 2021 charges, and lower VAT costs in France due to an update in the VAT recovery rate and the recognition of a recovery of VAT paid in 2021. Share of (loss)/profit in associates and joint ventures was a loss of £30m compared with a profit of £191m in 2021. The loss in 2022 included a £24m true-up of prior year valuations in the underlying investments of the Business Growth Fund ('BGF'). Markets and Securities Services Adjusted profit before tax was £472m compared with a loss before tax of £(8)m in 2021. This was driven by strong revenue performance and lower operating expenses. Adjusted revenue increased by £358m or 17%, mainly in Global Foreign Exchange (up by £305m). This was driven by increased client activity due to elevated market volatility and the macroeconomic impacts from rising inflation, increasing interest rates and a strengthening of the US dollar, resulting in a strong trading performance. Revenue also increased in Securities Services (up £72m) driven by higher interest rates and transaction volumes. In Equities, revenue was higher by £32m as 2022 included a one-off gain on disposal of an associate of £61m following a merger event. This increase was partly offset lower client activity as a result of inflation concerns and lack of investor appetite in 2022. In Securities Financing, revenue was down by £49m, mainly due to margin compression in repurchase agreements (‘repos’). This reflected volatility due to the macro-economic environment, including central bank policies on interest rates. By contrast, revenue was up in Prime Finance driven by growth in client franchise revenue, up 10%, despite challenging market conditions. Revenue also decreased in Global Debt Markets (down by £23m), mainly driven by lower primary issuances and reduced client activity due to challenging market conditions. Adjusted operating expenses decreased by £124m or 6%, largely driven by a decrease in performance-related pay and the impact of our transformation cost-saving initiatives; partly offset by the impact of higher inflation. Global Banking Adjusted profit before tax was £486m, a decrease of £103m or 17% compared with 2021. This was largely driven by higher ECL, partly offset by higher revenue. Adjusted revenue increased by £204m or 15%, mainly in GPS (up by £389m) driven by margin growth reflecting the rising global interest rate environment and strategic initiatives to grow fee income. In contrast, Capital Markets and Advisory revenue decreased by £124m, in line with the reduced market fee pool and adverse valuation movements on leveraged loans. Adjusted ECL were a net charge of £153m compared with a net credit of £139m in 2021. The net charge in 2022 was mainly driven by higher stage 3 charges, notably in non-bank financial institutions and real estate sectors. This compared with a net release of stage 1 and stage 2 allowances in 2021 primarily relating to Covid-19 related allowances built up in 2020. Adjusted operating expenses were £14m or 2% higher compared with 2021, reflecting the impact of higher inflation and strategic investments, partly offset by the impact of our ongoing cost discipline. Global Banking and Markets Other Adjusted loss before tax was £(329)m, compared with a profit before tax of £99m in 2021. This was largely driven by lower revenue, partly offset by lower operating expenses. HSBC Bank plc Annual Report and Accounts 2022 19 Adjusted revenue decreased by £587m, mainly in PIs driven by lower valuation gains of £209m compared with 2021. Revenue also decreased driven by a net loss from the buy-back of legacy securities to optimise the bank’s future funding costs, and also lower intercompany recoveries of costs from other entities in the Group. There was also a decrease in revenue allocated from Markets Treasury. Adjusted operating expenses decreased by £167m or 35% compared with 2021, reflecting the move of certain GBM costs from the bank to other entities in the Group (offset by lower intercompany recoveries in revenue). The decrease in operating expenses was also driven by lower UK Bank levy in 2022, which included a credit relating to 2021 charges. Commercial Banking CMB performed strongly in 2022 as we continued to implement our strategy to focus on serving our international customers. Adjusted profit before tax was £785m, up by £295m compared with 2021. This was mainly driven by higher revenue and lower operating expenses, partly offset by ECL charges. Adjusted revenue increased by £337m or 31% compared with 2021. This was primarily in GPS (up by £294m) driven by the higher interest rate environment and growth in average deposit balances. There was also an increase in collaboration revenue from MSS products (up £36m), notably Global Foreign Exchange. Additionally, revenue also benefited from favourable fair value movements in our holding of preference shares in VISA and an increase in revenue from Markets Treasury. This was partly offset by a decrease in Credit and Lending revenue of £43m, in part due to an increase in the cost of funds. Adjusted ECL were a net charge of £54m compared with a net release of £7m in 2021. The net charge in 2022 was largely driven by stage 3 charges in France and Germany, partly offset by a release of stage 1 and stage 2 allowances. This compared with a net release in 2021 of Covid-19-related allowances previously built up in 2020. Adjusted operating expenses decreased by £19m or 3%, driven by continued cost discipline on discretionary spend and through hiring efficiencies, as well as from the impact of our cost- saving initiatives. The decrease was also driven by an update in the VAT recovery rate and the recognition of a recovery of VAT paid in 2021 in France. Wealth and Personal Banking ('WPB') Adjusted profit before tax of £577m, up £254m compared with 2021. This was primarily due to higher revenue and lower operating expenses, partly offset by higher ECL. Adjusted revenue increased by £217m or 17%, mainly CIIOM from deposits (up £147m) due to the higher interest rate environment and growth in average balances. Revenue also increased in insurance manufacturing (up by £58m) due to assumptions changes and experience variances, primarily reflecting favourable investment assumptions on asset management rebates for unit-linked investments and profit- sharing levels. There were also favourable fair value movements in our holding of preference shares in VISA of £33m. Adjusted ECL were a net charge of £7m compared with a net release of £23m in 2021. The net charge in 2022 mainly reflected a more normalised level of charges including provisions relating to a deterioration in the forward economic outlook due to heightened levels of uncertainty and inflationary pressures. The net release in 2021 was from Covid-19-related allowances previously built up in 2020. Adjusted operating expenses decreased by £67m or 7%. This was driven by the benefits of our cost-saving initiatives and a reduction due to the increase in the VAT recovery rate and the recognition of a recovery of VAT paid in 2021 in France. Corporate Centre Adjusted loss before tax of £267m compared with a profit before tax of £84m in 2021. This was mainly driven by a loss in associates and joint ventures compared with a gain in the first half of 2021, as well as lower revenue. Adjusted revenue was lower by £77m, mainly driven by the non- recurrence of a fair value gain of £32m in 2021 from a long- standing investment in a Germany-based brokerage company. There was also lower valuation gains of £12m in Legacy Credit portfolios. Adjusted ECL were £5m higher compared with 2021, mainly driven by losses in Legacy Credit. Adjusted operating expenses increased by £51m, largely driven by higher margin on recharges from UK ServCo and higher intercompany recharges from entities in the Group. Shares of (loss)/profit in associates and joint ventures was a loss of £28m, of which £24m was due to a true-up of prior year valuations in the underlying investments of the BGF. This compared with a profit of £191m in 2021 due to the recovery in asset valuations. Dividends The consolidated reported profit for the year attributable to the shareholders of the bank was £(408)m. A special dividend was declared/paid on CET1 capital in 2022. Further information about the results is given in the consolidated income statement on page 114. Strategic Report | Financial summary 20 HSBC Bank plc Annual Report and Accounts 2022 Review of business position Summary consolidated balance sheet at 31 Dec 2022 2021 £m £m Total assets 717,353 596,611 – cash and balances at central banks 131,433 108,482 – trading assets 79,878 83,706 – financial assets designated and otherwise mandatorily measured at fair value through profit or loss 15,881 18,649 – derivatives 225,238 141,221 – loans and advances to banks 17,109 10,784 – loans and advances to customers 72,614 91,177 – reverse repurchase agreements – non-trading 53,949 54,448 – financial investments 32,604 41,300 – assets held for sale 21,214 9 – other assets 67,433 46,835 Total liabilities 693,337 572,896 – deposits by banks 20,836 32,188 – customer accounts 215,948 205,241 – repurchase agreements – non-trading 32,901 27,259 – trading liabilities 41,265 46,433 – financial liabilities designated at fair value 27,287 33,608 – derivatives 218,867 139,368 – debt securities in issue 7,268 9,428 – liabilities of disposal groups held for sale 24,711 — – liabilities under insurance contracts 19,987 22,264 – other liabilities 84,267 57,107 Total equity 24,016 23,715 Total shareholders’ equity 23,875 23,584 Non-controlling interests 141 131 Total reported assets were 20.2% higher than at 31 December 2021. The group maintained a strong and liquid balance sheet with the ratio of customer advances to customer accounts decreasing to 33.6% from 44.4% as at 31 December 2021 driven by reclassification of French retail loans following the announcement of the sale to assets held for sale as well as ongoing loan book optimisation efforts. Assets Cash and balances at central banks increased by 21.2% as a result of increased customer deposits and decreased balances in reverse repos and advances to customers. Trading assets and financial assets designated at fair value slightly reduced due to a reduction in Prime business and GDM activities on the basis of market conditions in 2022. Derivative assets increased by 59.5% due to market movements in interest rates and FX rates. Non-trading reverse repos decreased by 0.9% primarily due to changes in market conditions. Financial investments decreased by 21.1% as a result of optimisation strategy. Liabilities Customer accounts increased by 5.2%, which is consistent with our funding strategy to grow customer deposits and increase stable funding. Total of trading liabilities and financial liabilities designated at fair value balances has decreased by 14.4%. Debt securities in issue decreased by 22.9% in line with the funding strategy. Non-trading repos increased by 20.7% as a result of market activities. Derivative liabilities increased by 57.0%. This is in line with derivative assets as the underlying risk is broadly matched. Equity Total shareholder's equity remained broadly unchanged as compared to 2021. HSBC Bank plc Annual Report and Accounts 2022 21 Net interest margin Net interest margin is calculated by dividing net interest income as reported in the income statement by the average balance of interest-earning assets. Average balances are based on daily averages of the group’s activities. Net interest income 2022 2021 2020 £m £m £m Interest income 6,535 3,149 4,086 Interest expense (4,631) (1,395) (2,188) Net interest income 1,904 1,754 1,898 Average interest-earning assets 372,159 354,324 369,617 % % % Gross interest yield1 1.53 0.51 0.74 Less: gross interest payable1 (1.23) (0.01) (0.27) Net interest spread2 0.30 0.50 0.47 Net interest margin3 0.51 0.50 0.51 1Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’). Gross interest payable is the average annualised interest cost as a percentage of average interest-bearing liabilities. 2Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing liabilities. 3Net interest margin is net interest income expressed as an annualised percentage of AIEA. Summary of interest income by asset type 2022 2021 2020 Average balance Interest income Yield1 Average balance Interest income Yield1 Average balance Interest income Yield1 £m £m % £m £m % £m £m % Short term funds and loans and advances to banks 144,826 1,115 0.77 119,025 (221) (0.19) 90,841 (113) (0.12) Loans and advances to customers 91,882 2,177 2.37 99,151 1,585 1.60 116,518 2,058 1.77 Reverse repurchase agreements – non-trading 56,144 1,099 1.96 57,630 (132) (0.23) 68,573 22 0.03 Financial investments 37,949 633 1.67 45,142 497 1.10 51,335 652 1.27 Other interest-earning assets 41,358 686 1.66 33,376 67 0.20 42,350 118 0.28 Total interest-earning assets 372,159 5,710 1.53 354,324 1,796 0.51 369,617 2,737 0.74 1Interest yield calculations include negative interest on assets recognised as interest expense in the income statement. Summary of interest expense by type of liability and equity 2022 2021 2020 Average balance Interest expense Cost1 Average balance Interest expense Cost1 Average balance Interest expense Cost1 £m £m % £m £m % £m £m % Deposits by banks 31,930 55 0.17 32,891 (186) (0.57) 28,812 (60) (0.21) Customer accounts 164,681 1,742 1.06 150,048 95 0.06 143,807 321 0.22 Repurchase agreements – non-trading 31,898 680 2.13 32,916 (192) (0.58) 38,829 (129) (0.33) Debt securities in issue – non-trading 29,385 589 2.00 38,727 258 0.67 52,781 546 1.03 Other interest-bearing liabilities 50,301 739 1.47 36,811 68 0.18 47,384 160 0.34 Total interest-bearing liabilities 308,195 3,805 1.23 291,393 43 0.01 311,613 838 0.27 1Interest payable calculations include negative interest on liabilities recognised as interest income in the income statement. Strategic Report | Financial summary 22 HSBC Bank plc Annual Report and Accounts 2022 Reconciliation of alternative performance measures Return on average ordinary shareholders’ equity and return on average tangible equity Return on average ordinary shareholders’ equity (‘RoE’) is computed by taking profit attributable to the ordinary shareholders of the parent company (‘reported results’), divided by average ordinary shareholders’ equity (‘reported equity’) for the period. The adjustment to reported results and reported equity excludes amounts attributable to non-controlling interests and holders of preference shares and other equity instruments. Return on average tangible equity (‘RoTE’) is computed by adjusting reported results for the movements in the present value of in-force long-term insurance business (‘PVIF’) and for impairment of goodwill and other intangible assets (net of tax), divided by average reported equity adjusted for goodwill, intangibles and PVIF for the period. RoTE excluding significant items is annualised profit attributable to ordinary shareholders, excluding changes in PVIF, significant items and bank levy (net of tax), divided by average tangible shareholders’ equity excluding fair value of own debt, DVA and other adjustments for the period. We provide RoTE ratio in addition to RoE as a way of assessing our performance, which is closely aligned to our capital position. Return on average ordinary shareholders’ equity and return on average tangible equity Year ended 31 Dec 31 Dec 31 Dec 2022 2021 2020 £m £m £m Profit Profit attributable to the ordinary shareholders of the parent company (611) 847 (1,643) Decrease/(increase) in PVIF (net of tax) (105) (149) 59 Profit attributable to the ordinary shareholders, excluding other intangible assets impairment and PVIF (716) 698 (1,584) Significant items (net of tax) 1,753 468 1,050 Profit attributable to the ordinary shareholders, excluding PVIF and significant items 1,037 1,166 (534) Equity Average total shareholders’ equity 23,550 23,629 24,457 Effect of average preference shares and other equity instruments (3,888) (3,722) (3,722) Average ordinary shareholders’ equity 19,662 19,907 20,735 Effect of PVIF (net of tax) (727) (553) (464) Significant items and other adjustments (net of tax) (240) (92) (733) Average tangible equity excluding PVIF, significant items and other adjustments 18,695 19,262 19,538 Ratio Return on average ordinary shareholders’ equity (annualised) (3.1) 4.3 (7.9) Return on average tangible equity (annualised) (3.8) 3.6 (8.1) Adjusted Return on average tangible equity (annualised) 5.5 6.1 (2.7) HSBC Bank plc Annual Report and Accounts 2022 23 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, 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 of the Report of the Directors on pages 26 to 93. We have reviewed our list of top and emerging risks and changed the title of 'Regulatory focus on conduct of business' risk to 'Evolving regulatory environment' risk to reflect the broad regulatory agenda, including conduct. Credit risk has been added to reflect the current economic environment. Risk Description Externally driven Geopolitical and macroeconomic risk p 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. Heightened geopolitical tensions including the ongoing Russia-Ukraine war, alongside the economic impacts that continue to result from the Covid-19 pandemic, have also disrupted supply chains globally. These events and rising inflation in the European region have created a marked economic slowdown which will affect our customers and our business. 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 the Russia-Ukraine war and the recessionary pressures across Europe. Particular emphasis has been maintained on the Real Estate, Construction and Contracting, Retail and Leverage portfolios. 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 u We face a risk of service disruption from external and internal malicious activity. In response to the recent geopolitical events, we have further strengthened our monitoring approach. We operate a continuous improvement programme to protect our technology operations, and to counter a fast evolving cyber threat environment. Evolving regulatory environment risk u The compliance risk environment remains complex, given heightened geopolitical tensions and consequent macroeconomic impacts. There remains increased regulatory focus on operational and cyber resilience, economic impacts (including on customers), crypto-asset-related risks and sanctions, and wider anti-money laundering controls. These, alongside an increased focus on how financial services organisations demonstrate active management of and compliance with regulatory obligations and wider expectations, may result in change requirements across the group in the short to medium term. We continue to monitor regulatory and wider industry developments closely and engage with regulators as appropriate. Financial crime and fraud risk p We continue to support our customers against a backdrop of complex geopolitical, socio-economic and technological challenges, including the Russia-Ukraine war. We are monitoring the impacts of the Russia-Ukraine war on the group, and using our sanctions compliance capabilities to respond to evolving sanctions regulations, noting the challenges that arise in implementing the unprecedented volume and diverse set of sanctions and trade restrictions. Ibor transition q We remain exposed to regulatory compliance, legal and resilience risks as contracts transition away from demising Ibor benchmarks to new reference rates. As a result, we continue to consider the fairness of client outcomes, our compliance with regulatory expectations and the operation of our systems and processes. The key risks are diminishing in line with our process implementation as we have transitioned all but a small number of contracts in demised Ibors, and are well progressed in transitioning contracts in remaining demising Ibors, specifically US dollar Libor. Environmental, social and governance risk p We are subject to ESG risks relating to climate change, greenwashing, nature and human rights. This risk has increased owing to the pace and volume of regulatory developments globally and 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 for the group, including adverse reputational consequences. Strategic Report | Risk overview 24 HSBC Bank plc Annual Report and Accounts 2022 Risk Description Internally driven People risk p We monitor workforce capacity and capability requirements in line with our published growth strategy, in conjunction with risks related to employment relations practices, culture, and conduct. People risk has heightened in 2022 compared to 2021, mainly resulting from the many transformation and restructuring activities concomitantly happening in the region. The main risk drivers the region is exposed to are capacity and capability risks associated with talent attraction and retention, coupled with the effects of the current geopolitical tensions on our employees and markets' economies. Strong oversight continues to be maintained over people risks arising from change activity. Measures are being rolled out to support our people while transitioning to new business models as well as with challenges resulting from the current heightened inflationary pressures. IT systems infrastructure and operational resilience p 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 strengthened our end to end management, build and deployment controls and system monitoring capabilities. We are seeing increased demand on customer support centres and our business operations as a result of the current economic environment and there is additional focus on our operational resilience. 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 p Failure to effectively prioritise, manage and/or deliver transformation within the group impacts our ability to achieve our strategic objectives. Given the scale, complexity and pace of strategic change within the group, we must monitor, manage and oversee change execution risk to make sure our change portfolio and initiatives continue to deliver the right outcomes for our customers, people, regulators, investors and communities. Model risk u Evolving regulatory requirements are driving material changes to the way model risk is managed across the banking industry, with particular focus on capital models. New technologies such as machine learning are driving changes to the model landscape, and the group’s strategic focus on climate risk requires the development of new methods that will effectively model climate- related factors and activities. A key area of focus is ensuring our standards, processes and controls are adequate to identify, measure and manage the resulting model risks. New Bank of England guidance on model risk management will require greater focus on the management of model risks across the bank. Data risk p 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 need to ensure that data is kept confidential, and that we comply with the growing number of laws and increasing expectations from regulators concerning data privacy controls and the cross-border movement of data. Third party risk u We procure services and goods from a range of third parties. It is critical that we have appropriate risk management policies and processes over the selection and governance of third parties. This includes third parties’ supply networks, 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. ● New risk introduced in 2022 p Risk has heightened during 2022 u Risk remains at the same level as 2021 q Risk has decreased during 2022 On behalf of the Board David Watts Director 20 February 2023 Registered number 00014259 HSBC Bank plc Annual Report and Accounts 2022 25 Risk Page Our approach to risk 26 Our risk appetite 26 Risk management 27 Key developments and risk profile 27 Top and emerging risks 28 Externally driven 28 Internally driven 32 Our material banking and insurance risks 34 Credit risk 36 Treasury risk 75 Market risk 84 Climate risk 86 Resilience risk 87 Regulatory compliance risk 87 Financial crime risk 88 Model risk 89 Insurance manufacturing operations risk Overview 90 . 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. We seek to build our business for the long term by balancing social, environmental and economic considerations in the decisions we make. Our strategic priorities are underpinned by our endeavour to operate in a sustainable way. This helps us to carry out our social responsibility and manage the risk profile of the business. We are committed to managing and mitigating climate- related risks, both physical and transition, and continue to incorporate consideration of these into how we manage and oversee risks internally and with our customers. The following principles guide the group’s overarching appetite for risk and determine how our businesses and risks are managed. Financial position •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 appropriate 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 ensures 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 ensures 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 2022 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 the Operational and Resilience Risk function, headed by the group Head of Operational and Resilience Risk. 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. Report of the Directors | Risk 26 HSBC Bank plc Annual Report and Accounts 2022 •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 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 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 2022, 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, and operational risk. In Q4 2022, the Group participated in the BoE Annual Cyclical Scenario ('ACS') stress testing exercise. The ACS focused on higher global interest rates in the face of a series of global cost shocks and high and persistent global inflation. Unemployment, also increased sharply. The impact of traded risk shocks was included, linked to a financial market scenario consistent with the content and calibration of the macroeconomic scenario. This stress scenario was more severe than the Global Financial Crisis for both the UK and the world. The scenario reflected the impact of weaker household real income growth, lower confidence and tighter financial conditions resulting in severe domestic and global recessions. The BoE will publish the results in summer 2023. In response to regulatory requirements and internal drivers, separately to the stress tests already mentioned, we are developing our capabilities to model the impact of climate risk on our bank, specifically physical and transition risk. In 2022, we have considered four bespoke scenarios that were designed to articulate our view of the range of potential outcomes for global climate change. In our climate scenario analysis, we consider, separately: transition risk arising from the process of moving to a net zero economy, including changes in policy, technology, consumer behaviour and stakeholder perception, which will each impact borrowers’ operating income, financing requirements and asset values; and physical risk arising from the increased frequency and severity of weather events, such as hurricanes and floods, or chronic shifts in weather patterns, which will each impact property values, repair costs and lead to business interruptions. These scenarios, which reflect different levels of physical and transition risk and are varied by severity and probability, were: the Net Zero scenario, which aligns with the Group net zero strategy and is consistent with the Paris Agreement; the Current Commitments scenario, which assumes that climate action is limited to the current governmental commitments and pledges; the Downside Transition Risk scenario, which assumes that climate action is delayed until 2030; and the Downside Physical Risk scenario, which assumes climate action is 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. However, the rise in global warming will lead to increasing levels of physical risk losses in later years. 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 2022 We actively managed the risks related to the Russia-Ukraine war and broader macroeconomic and geopolitical uncertainties, as well as other key risks described in this section. In addition, we enhanced our risk management in the following areas: •We have continued to improve our risk governance decision making, particularly with regard to the governance of treasury risk to ensure senior executives have appropriate oversight and visibility of macroeconomic trends around inflation and interest rates. •We enhanced our enterprise risk reporting processes to place a greater focus on our emerging risks, including by capturing the materiality, oversight and individual monitoring of these risks. •We have further strengthened our third-party risk policy and processes to improve control and oversight of our material third parties that are key to maintaining our operational resilience, and to meet new and evolving regulatory requirements. •We have continued to embed, the governance and oversight around model adjustments, related processes for IFRS 9 models and financial reporting processes. •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 continued to improve the effectiveness of our financial crime controls, deploying advanced analytics capabilities into our markets. We are refreshing our financial crime policies, ensuring they remain up-to-date and address changing and emerging risks. We continue to monitor regulatory changes. HSBC Bank plc Annual Report and Accounts 2022 27 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 Russia-Ukraine war has had far-reaching geopolitical and economic implications. The group is monitoring the impacts of the war and continues to respond to the further economic sanctions and trade restrictions that have been imposed on Russia in response. In particular, significant sanctions and trade restrictions against Russia have been put in place by the US, the UK and the EU, as well as other countries. Such sanctions and restrictions have specifically targeted certain Russian government officials, politically exposed persons, business people, Russian oil imports, energy products, financial institutions and other major Russian companies, as well as more generally applicable investment, export, and import bans and restrictions. In response to such sanctions and trade restrictions, as well as asset flight, Russia has implemented certain countermeasures. Further sanctions, trade restrictions and Russian counter sanctions may adversely affect the group, its customers and the markets in which we operate by creating regulatory, reputational and market risks. Our business in Russia principally serves multinational corporate clients headquartered in other countries, is not accepting new business or customers, and is consequently on a declining trend. 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), subject to regulatory and governmental approvals. Global commodity markets have been significantly impacted by the Russia-Ukraine war and localised Covid-19 outbreaks, leading to continued supply chain disruptions. This has resulted in European product shortages and increased prices for both energy and non-energy commodities, such as food. Despite falls in wholesale energy prices in late 2022 and early 2023, which may provide relief, ongoing pass-through of input price rises means we do not expect underlying inflationary pressures to ease significantly in the near term. These issues have exacerbated inflation across the region. Prolonged spells of relatively mild seasonal weather, and diversification of fuel services have nevertheless helped Europe to substantially reduce risks of energy rationing over the winter months. Rising global inflation has prompted the ECB to tighten monetary policy. The combined pressure of inflation and interest rate rises may lead to pressures on customers and their ability to repay debt. The ECB has increased its benchmark rate by 300bps since July 2022. Further interest rate increases by the ECB are anticipated in light of inflation forecasts. Investors appear less willing to tolerate expansionary fiscal policies in the context of high debt ratios. An economic slowdown, possibly a recession in parts of the EU and the UK, could slow the pace of tightening in our major markets. However, should interest rates need to rise beyond what is currently expected, a realignment of market expectations could cause turbulence in financial asset prices. Second order impacts from the Russia-Ukraine war and other geopolitical events remain uncertain and may lead to significant credit losses on specific exposures, which may not be fully captured in our ECL estimates. Higher inflationary concerns and interest rate expectations across the region are also having an impact on ECL. In line with existing practice we have continued to carry out enhanced monitoring of model outputs and the use of model overlays, including management adjustments based on the expert judgement of senior credit risk managers to reflect current market inflation and interest rate conditions where they have not been incorporated in the underlying macroeconomic scenarios. Inflation and rising interest rates have been considered both directly in certain models, and assessed via adjustments where not directly considered. Whilst many of the government programmes implemented during the Covid-19 pandemic to support businesses and individuals have ceased, these have impacted the level of credit losses, which in turn may have impacted the longer-term reliability of loss and capital models. Negotiations between the UK and the EU over the operation of the Northern Ireland Protocol are continuing. While there are signs that differences may be diminishing, failure to reach agreement could have implications for the future operation of the EU-UK TCA. In June 2022, the UK government published proposed legislation that seeks to amend the Protocol in a number of respects. In response, the EU launched infringement procedures against the UK, and is evaluating the UK response, received in September 2022. If the proposed legislation were to pass, and infringement procedures progressed, it could further complicate the terms of trade between the UK and the EU and potentially prevent progress in other areas such as financial services. 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 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. High Covid-19 vaccination rates and acquired population immunity in 2022 across the European region have reduced the public health risks and the need for restrictions. New Covid-19 variants and sub- variants pose a continuing risk and could result in the European governments reintroducing restrictions, potentially impacting our personal and business customers. Our Central macroeconomic scenario, which has the highest probability weighting in our IFRS 9 ‘Financial Instruments’ calculations of ECL, assumes low growth and a higher inflation environment. However, due to the rapidly changing economic conditions, the potential for forecast dispersion and volatility remain high, impacting the degree of accuracy and certainty of our Central scenario forecast. The level of volatility depends on various factors, including but not limited to: commodity price increases, supply chain constraints and the monetary policy response to inflation. There is also uncertainty with respect to the relationship between the economic drivers and the historical loss experience, which has required adjustments to modelled ECLs 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 48. Mitigating actions •We closely monitor geopolitical and economic developments including the impacts of the Russia-Ukraine war and undertake scenario analysis and stress testing where appropriate. This helps us to take portfolio actions where necessary, including seeking to ensure enhanced monitoring and amending our risk appetite. •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. Report of the Directors | Risk 28 HSBC Bank plc Annual Report and Accounts 2022 Credit risk Credit risk has increased driven chiefly by the impacts and uncertainty caused by the current geopolitical and macroeconomic environment. Economic prospects and therefore the outlook 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. 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 the economic downturn is appropriate. •We continue to monitor high risk wholesale industry sectors closely and in 2022 we undertook specific reviews of portfolios showing vulnerability such as Real Estate, Retail, Construction and Contracting and Wholesale Trade. •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, attacks on our systems or those of our third-party suppliers and require ongoing investment in business and technical controls to defend against them. Mitigating actions •We continuously evaluate threat levels for the most prevalent cyber-attack types and their potential outcomes. To further protect the group and our customers and help ensure the safe expansion of our business lines, we continue to strengthen our controls to reduce the likelihood and impact of advanced malware, data leakage, exposure through third parties and security vulnerabilities. •We 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 ensuring our colleagues remain aware of cybersecurity issues and know how to report incidents. •We report and review cyber risk and control effectiveness at executive and non-executive Board level. We also report 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 defending, detecting and preventing cyber- attacks on financial organisations. Evolving regulatory environment risk We aim to keep abreast of the emerging regulatory compliance and conduct agenda, which currently includes, but is not limited to: ESG matters; ensuring good customer outcomes; addressing customer vulnerabilities due to cost of living pressures; regulatory compliance; regulatory reporting; employee compliance, including use of e-communication channels; and the proposed reforms to the UK financial services sector, known as the Edinburgh Reforms. 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 focussed on the implementation of UK Consumer Duty requirements. •We engage with governments and regulators 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, which continues to evolve. Challenges include managing conflicting laws and approaches to legal and regulatory regimes, and implementing the unprecedented volume and diverse set of sanctions, notably as a result of the Russia-Ukraine war. Amid rising inflation and increasing cost of living pressures, we face increasing regulatory expectations with respect to increases in internal and external fraud and the abuse of vulnerable customers for financial crime. The digitisation of financial services continues to have an impact on the payments ecosystem, with an increasing number of market entrants and payment mechanisms, not all of which are subject to the same level of regulatory scrutiny or regulations as financial institutions. This presents ongoing challenges in terms of maintaining required levels of payment transparency, notably where financial institutions serve as intermediaries. Developments around digital assets and currencies have continued at pace, with an increasing regulatory and enforcement focus on the financial crimes linked to these types of assets. Expectations with respect to the intersection of ESG issues and financial crime as our organisation, customers and suppliers transition to net zero, continue to increase, focussed on potential ‘greenwashing,’ human rights issues and environmental crimes. We also continue to face increasing challenges presented by national data privacy requirements, which may affect our ability to manage financial crime risks holistically and effectively. Mitigating actions •We continue to manage sanctions and trade restrictions through the use of, and enhancements to, our existing controls. •We continue to develop our fraud controls, and invest in capabilities to fight financial crime through the application of advanced analytics and artificial intelligence. •We are looking at the impact of a rapidly changing payments ecosystem, as well as risks associated with direct and indirect exposure to digital assets and currencies, in an effort to ensure our financial crime controls remain appropriate. •We are assessing our existing policies and control framework so that developments relating to the ESG space are considered and the risks mitigated. •We engage with regulators, policymakers and relevant international bodies, seeking to address data privacy challenges through international standards, guidance and legislation. HSBC Bank plc Annual Report and Accounts 2022 29 Ibor transition Interbank offered rates (‘Ibors’) have previously been used extensively to set interest rates on different types of financial transactions and for valuation purposes, risk measurement and performance benchmarking. Following the UK’s Financial Conduct Authority (‘FCA’) announcement in July 2017 that it would no longer continue to persuade or require panel banks to submit rates for the London interbank offered rate (‘Libor’) after 2021, we have been actively working to transition legacy contracts from Ibors to products linked to near risk-free replacement rates (‘RFRs’) or alternative reference rates. The publication of sterling, Swiss franc, euro and Japanese yen Libor interest rate benchmarks, as well as Euro Overnight Index Average (‘Eonia’), ceased from the end of 2021. The group’s Ibor transition programme, which is tasked with the development of RFR products and the transition of legacy Ibor products, has continued to support the transition of a limited number of remaining contracts in sterling and Japanese yen Libor, which were published using a ‘synthetic’ interest rate methodology during 2022. The remaining ‘tough legacy’ sterling contracts have required protracted client discussions where contracts are complex or restructuring of facilities is required. Following the cessation of publication of ‘synthetic’ Japanese yen Libor after 31 December 2022, and the announcements by the FCA, in September and November 2022, that ‘synthetic’ sterling Libor rates will cease to be published on 31 March 2023 for one and six- month sterling Libor, or 31 March 2024 for three-month sterling Libor, we have or are prepared to transition or remediate the remaining few contracts outstanding as at 31 December 2022 in advance of those cessation dates. For the cessation of the publication of US dollar Libor from 30 June 2023, we have implemented the majority of required processes, technology and RFR product capabilities throughout the group in preparation for upcoming market events and continue to transition outstanding legacy contracts through the first half of 2023. We continue to make steady progress with the transition of the outstanding legacy committed lending facilities. Transition of our derivatives portfolio is progressing well with most clients reliant on industry mechanisms to transition to RFRs. For the limited number of bilateral derivatives trades where an alternative transition path is required client engagement is continuing. For certain products and contracts, including bonds and syndicated loans, we remain reliant on the continued support of agents and third parties, but we continue to progress those contracts requiring transition. We continue to monitor contracts that may be potentially more challenging to transition and may need to rely upon legislative solutions. Additionally, following the FCA’s consultation in November 2022 proposing that US dollar Libor is to be published using a ‘synthetic’ methodology for a defined period, we will continue to work with our clients to support them through the transition of their products if transition is not completed by 30 June 2023. We remain mindful of the various factors that have an impact on the Ibor remediation strategy for our regulatory capital instruments, including, but not limited to, timescales for cessation of relevant Ibor rates. We remain committed in seeking to remediate or mitigate relevant risks relating to Ibor-demise, as appropriate, on our outstanding regulatory capital instruments before the relevant calculation dates, which may occur post-cessation of the relevant Ibor rate or rates. For US dollar Libor and other demising Ibors, we continue to be exposed to, and actively monitor, risks including: •Regulatory compliance and conduct risks, as the transition of legacy contracts to RFRs or alternative rates, or sales of products referencing RFRs, may not deliver fair client outcomes; •Resilience and operational risks, as changes to manual and automated processes, made in support of new RFR methodologies, and the transition of large volumes of Ibor contracts may lead to operational issues; •Legal risk, as issues arising from the use of legislative solutions and from legacy contracts that the group is unable to transition may result in unintended or unfavourable outcomes for clients and market participants, which could potentially increase the risk of disputes; •Model risk, as there is a risk that changes to our models, to replace Ibor-related data, adversely affect the accuracy of model outputs; and •Market risk, because as a result of differences in Libor and RFR interest rates, we are exposed to basis risk resulting from the asymmetric adoption of rates across assets, liabilities and products. While the level of risk is diminishing in line with our process implementation and continued transition of contracts, we will continue to monitor these risks through the remainder of the transition of legacy contracts. Throughout 2023, we continue to be committed to engaging with our clients and investors to seek to complete an orderly transition of contracts that reference the remaining demising Ibors. Mitigating actions •The group Ibor transition programme, which is overseen by the group Chief Risk Officer, will continue to deliver IT and operational processes to meet its objectives. •We carry out extensive training, communication and client engagement to facilitate appropriate selection of new rates and products. •We have dedicated teams in place to support the transition. •We have actively transitioned legacy contracts and ceased entering into new contracts based on demised or demising Ibors, other than those allowed under regulatory exemptions, and implemented associated monitoring and controls. •We assess, monitor and dynamically manage risks arising from Ibor transition, and implement specific mitigating controls when required. •We continue to actively engage with regulatory and industry bodies to mitigate risks relating to ‘tough legacy’ contracts. Report of the Directors | Risk 30 HSBC Bank plc Annual Report and Accounts 2022 Financial instruments impacted by Ibor reforms Interest Rate Benchmark Reform Phase 2, the amendments to IFRS's issued in August 2020, represents the second phase of the IASB’s project on the effects of interest rate benchmark reform. The amendments address issues affecting financial statements when changes are made to contractual cash flows and hedging relationships. Under these amendments, changes made to a financial instrument measured at other than fair value through profit or loss that are economically equivalent and required by interest rate benchmark reform, do not result in the derecognition or a change in the carrying amount of the financial instrument. Instead they require the effective interest rate to be updated to reflect the change in the interest rate benchmark. In addition, hedge accounting will not be discontinued solely because of the replacement of the interest rate benchmark if the hedge meets other hedge accounting criteria. (Audited) Financial instruments yet to transition to alternative benchmarks, by main benchmark3 USD Libor GBP Libor Others1 At 31 Dec 2022 £m £m £m Non-derivative financial assets2 Loans and advances to customers 4,350 83 18 Financial investments 1,072 — — Others 554 35 — Total non-derivative financial assets 5,976 118 18 Non-derivative financial liabilities Subordinated liabilities 1,287 — — Others 560 — — Total non-derivative financial liabilities 1,847 — — Derivative notional contract amount Foreign exchange 6,754 — — Interest rate 1,636,679 56 2,031 Others — — 487 Total derivative notional contract amount 1,643,433 56 2,518 At 31 Dec 2021 Non-derivative financial assets2 Loans and advances to customers 5,999 2,562 26 Financial investments 1,171 140 — Others 693 499 — Total non-derivative financial assets 7,863 3,201 26 Non-derivative financial liabilities2 0 Subordinated liabilities 1,145 — — Others 479 181 — Total non-derivative financial liabilities 1,624 181 — Derivative notional contract amount 0 Foreign exchange 8,288 1,568 1,080 Interest rate 1,567,577 215,377 77,738 Total derivative notional contract amount 1,575,865 216,945 78,818 1Comprises financial instruments referencing other significant benchmark rates yet to transition to alternative benchmarks (euro Libor, Swiss franc Libor, Eonia, SOR, THBFIX, MIFOR and Sibor). Announcements were made by regulators during 2022 on the cessation of the Canadian dollar offered rate (‘CDOR’), and Mexican Interbank equilibrium interest rate (‘TIIE’), which will eventually transition to the Canadian overnight repo rate average (‘CORRA’), and a new Mexican overnight fall-back rate, respectively. Therefore, CDOR, and TIIE are also included in Others during the current period. 2Gross carrying amount excluding allowances for expected credit losses. The amounts in the above table relate to the group's main operating entities where we have material exposures impacted by Ibor reform, including in the United Kingdom, France and Germany. The amounts provide an indication of the extent of the group’s exposure to the Ibor benchmarks that are due to be replaced. Amounts are in respect of financial instruments that: •contractually reference an interest rate benchmark that is planned to transition to an alternative benchmark; •have a contractual maturity date beyond the date by which the reference interest rate benchmark is expected to cease; and •are recognised on the group’s consolidated balance sheet. Environmental, social and governance ('ESG') risk We are subject to financial and non-financial risks associated with ESG related matters. Our current areas of focus are climate risk, nature-related risks and human rights risks. These can impact us both directly and indirectly through our business activities and relationships. Focus on climate-related risk in particular increased over 2022, owing to the importance, pace and volume of policy development and regulatory changes on climate risk management, stress testing and scenario analysis and disclosures. Climate change can have an impact across HSBC’s risk taxonomy through both transition risk, arising from the move to a low-carbon economy, such as through policy, regulatory and technological changes, and physical risk impacts due to increasing severity and/or frequency of severe weather or other climatic events, such as rising sea levels and flooding, which could affect our ability to conduct our day-to-day operations. Our most material risks in terms of managing climate risk relate to corporate financing within our banking portfolio. We continue to explore and test methodologies for quantifying how climate risks could impact the individual credit profiles of our clients across various sectors. Our credit risk policy further embeds climate risk considerations into our corporate credit decisions. We are also developing and rolling out a climate risk assessment, also known as the client Transition Engagement Questionnaire, to corporate clients to help determine the level of transition risk exposure which may affect our credit decisioning and helping to ensure that the transition plans are consistent with HSBC Group’s targets and commitments. HSBC Bank plc Annual Report and Accounts 2022 31 We also delivered training to select colleagues in the Risk function to raise awareness of how climate risk is likely to impact certain high transition risk sectors and the associated credit risk considerations. In addition to financial risks arising in our corporate banking portfolio, we could also face increased reputational, legal and regulatory risks as we make progress towards the HSBC Group's net zero ambition, with stakeholders likely to place greater focus on our actions, such as the development of climate-related policies, the HSBC Group’s and our disclosures and financing and investment decisions relating to the HSBC Group’s ambition. We will face additional risks if we are perceived to mislead stakeholders regarding our climate strategy, the climate impact of a product or service, or regarding the commitments of our customers. Climate risk may also impact on model risk, as the uncertain impacts of climate change and data and methodology limitations present challenges to creating reliable and accurate model outputs. We face reporting risk in relation to our climate disclosures, as any data, methodologies and standards we have used may evolve over time in line with market practice, regulation or owing to developments in climate science. While emissions reporting has improved over time, data remains of limited quality and consistency. The use of inconsistent or incomplete data and models could result in suboptimal decision making. Any changes could result in revisions to our internal frameworks and reported data, and could mean that reported figures are not reconcilable or comparable year on year. We may also have to re-evaluate our progress towards the HSBC Group’s climate-related targets in future and this could result in reputational, legal and regulatory risks. There is increasing evidence that a number of nature-related risks beyond climate change, which include risks that can be represented more broadly by impact and dependence on nature, can and will have significant economic impact. These risks arise when the provision of natural services, such as water availability, air quality, and soil quality, is compromised by overpopulation, urban development, natural habitat and ecosystem loss, ecosystem degradation arising from economic activity and other environmental stresses beyond climate change. They can show themselves in various ways, including through macroeconomic, market, credit, reputational, legal and regulatory risks, for both HSBC and our customers. We continue to engage with investors, regulators and customers on nature-related risks to evolve our approach and understand best practice risk mitigation. Regulation and disclosure requirements in relation to human rights, and to modern slavery in particular, are increasing. Businesses are expected to be transparent about their efforts to identify and respond to the risk of negative human rights impacts arising from their business activities and relationships. Mitigating actions •Our product design, management and governance processes have been adapted to help ensure that climate risk factors are effectively and consistently considered. We also aim to enhance our approach to greenwashing risk management. •We have established a climate risk appetite which helps support the oversight and management of the risks from climate change and supports the business on helping to deliver the HSBC Group’s climate ambition in a safe and sustainable way. The metrics implemented include exposure to high risk transition sectors in our wholesale portfolio. We continue to review our risk appetite to try and ensure that it captures the most material climate risks and develop appropriate metrics to measure and monitor these risks. •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 help 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 December 2022, the HSBC Group announced an updated 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. In addition, the HSBC Group also expanded on its thermal coal phase-out policy in which the HSBC Group committed not to provide new finance or advisory services for the specific purpose of the conversion of existing coal-to-gas fired power plants or new metallurgical coal mines. We intend to use our relationships to partner with corporate customers to help them transition to cleaner and safer energy alternatives. •In 2021, the HSBC Group joined several industry working groups dedicated to helping assess, and manage, nature- related risks, such as the Taskforce on Nature-related Financial Disclosure (‘TNFD’). We will use these outputs to help assess the availability of internal nature related data, and identify opportunities to enhance our capabilities further. •In 2022, building on an earlier review which had identified modern slavery and discrimination as priority human rights issues, the HSBC Group conducted a comprehensive review to refresh our salient human rights issues, which are the human rights at risk of the most severe negative impact through our business activities and relationships. The review identified five salient human rights issues, including the right to decent work and the right to equality and freedom from discrimination, amongst others. The HSBC Group incorporated additional human rights elements into its existing procurement processes and supplier code of conduct, we are applying the approach being developed by HSBC Group to inform our own management of this risk. •Climate stress tests and scenarios are being used to further improve our understanding of our risk exposures for use in risk management and business decision making. For further details on our approach to climate risk management, see ‘Climate risk’ on page 86. Internally driven People risk Our success in delivering our strategic priorities and managing the regulatory and legislative environment proactively depends on the development and retention of our leadership and high-performing employees. The ability to continue to attract, develop and retain talent is primarily impacted by a competitive labour market across the EU and the UK, coupled with heightened inflationary pressures. While challenges resulting from transformation continued in 2022, these are expected to reduce as we progress with programme execution. The current people risk outlook is expected to remain heightened for the first half of 2023. Mitigating actions •We seek to promote a diverse and inclusive workforce and provide active support across a wide range of health and wellbeing activities. We continue to build our speak up culture through active campaigns. •We monitor people risks that have arisen from organisational restructuring. Talent attraction and retention actions are rolled out; focus and emphasis on our strategy, values and purpose are maintained; and improved capacity and enhanced workload management through demand planning review and strengthening are applied. •We aim to have robust plans in place, driven by senior management, to help mitigate the effect of external factors that may impact our employment practices. Political, legislative, and regulatory challenges are closely monitored to try and minimise the impact on the attraction and retention of talent and key performers. Report of the Directors | Risk 32 HSBC Bank plc Annual Report and Accounts 2022 •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 that exists and the related people risk impact. •We deploy a Future Skills Curriculum to all employees through the HSBC University to help provide skills that will enable employees and HSBC to be successful in the future. •We continue to develop succession plans for key management roles, with actions agreed and reviewed on a regular basis by the group's Executive Committee. IT systems infrastructure and operational resilience We operate an extensive and complex technology landscape, which must 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 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. The target state 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. We invest both to improve system resilience and to test service continuity. We continue to ensure security is built into our software development life cycle and to seek to improve our testing processes and tools. •We continue to upgrade 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 execution risk. This requires robust management of significant resource-intensive and time-sensitive programmes that are due to execute in 2023. Risks arising from the magnitude and complexity of change planned in 2023 may include regulatory censure, reputational damage and/or financial losses. Current major initiatives include managing the operational implications of the planned disposal of our retail banking operations in France, large transformation programmes including the simplification and integration of our IT systems and other restructuring programmes across Europe. Mitigating actions •Change execution risk was added to our risk taxonomy and control library in 2022, so that the risk can be defined, assessed, managed, reported and overseen in the same way as the group's other material risks. •Our prioritisation and governance processes for significant programmes are monitored by the HSBC Bank plc and Group‘s Executive Committees. •We continue to work to strengthen our change management practices in order to try and deliver sustainable change, increased adoption of agile ways of working, and a more consistent standard of delivery. For HSBC Bank plc, this includes strengthening the embedding of an improved Group- wide change framework which sets out the mandatory principles and standards to be adhered to when leading and delivering change. 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. Significant increases in global inflation and interest rates have impacted the reliability and accuracy of both credit risk and traded risk models. 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 number of these models have been submitted to the PRA and the European Central Bank (‘ECB’) for feedback and approval is in progress. Some IMM models have been approved for use and feedback has been received for some IRB models. Climate risk modelling is a key focus as our commitment to sustainability has become a critical part of the group’s strategy. Mitigating actions •We have continued to embed the enhanced monitoring, review and challenge of expected loss model performance through our Model Risk Management function as part of a broader quarterly process to determine loss levels. The Model Risk Management team aims to provide strong and effective review and challenge of any future redevelopment of these models. •Model Risk Management works closely with 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 advanced machine learning techniques are validated and monitored to try and ensure that model risks arising from the usage of those algorithms have adequate oversight and review. •A framework to manage the range of risks that are generated by these advanced techniques is being developed to try and capture the multi-disciplinary nature of these risks. 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 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. HSBC Bank plc Annual Report and Accounts 2022 33 •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 delivered 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. Risks arising from the use of third-party providers and their supply chain may be harder to identify. It is critical that we ensure we have appropriate risk management policies, processes and practices over the selection, governance and oversight of third parties and their supply chain, particularly for key activities that could affect our operational resilience. Any deficiency in the management of risks associated with our third parties could affect our ability to support our customers and meet regulatory expectations. Mitigating actions •We have enhanced 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 effective management of our intra- group arrangements as we have for external third-party arrangements using the same control standards. •We are implementing the changes required by 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 Risks Arising from Measurement, monitoring and management of risk Credit risk (see page 36) 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. Treasury risk (see page 75) 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 84) 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 90. 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 risk management meeting (‘RMM’) and the RMM in various global businesses. Report of the Directors | Risk 34 HSBC Bank plc Annual Report and Accounts 2022 Description of risks – banking operations (continued) Risks Arising from Measurement, monitoring and management of risk Climate risk (see page 86) Climate risk relates to the financial and non-financial impacts that may arise as a result of climate change and the move to a greener economy. Climate risk 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; and •greenwashing risk, which arises from the act of knowingly or unknowingly misleading stakeholders regarding our strategy relating to climate, the climate impact/benefit of a product or service, or the climate commitments or performance of our customers. Climate risk is: •measured using a variety of risk appetite metrics and Key Management Indicators, which assess the impact of climate risk across the risk taxonomy; •monitored using stress testing; and •managed through adherence to risk appetite thresholds and via specific policies. Resilience risk (see page 87) 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 87) 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 88) 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 89) 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. HSBC Bank plc Annual Report and Accounts 2022 35 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 Risks Arising from Measurement, monitoring and management of risk Financial risk (see page 90) 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 90) 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 2022 There were no material changes to the policies and practices for the management of credit risk in 2022. We continued to apply the requirements of IFRS 9 ‘Financial Instruments’ within the Credit Risk sub-function. For certain retail portfolios we enhanced the significant increase in credit risk (‘SICR’) approach to capture relative movements in probability of default ('PD') since origination. For our retail portfolios, we adopted the EBA ‘Guidelines on the application of definition of default’ during 2022 and, for our wholesale portfolios, these guidelines were adopted during 2021. Adoption of these guidelines did not have a material impact on our portfolios and comparative disclosures have not been restated. We actively managed the risks related to macroeconomic uncertainties, including inflation, fiscal and monetary policy, the Russia-Ukraine war, broader geopolitical uncertainties, the continued risks resulting from the Covid-19 pandemic. For further details, see ‘Top and emerging risks’ on page 28. Governance and structure We have established group-wide credit risk management and related IFRS 9 processes. We continue to actively assess the impact of economic developments in key markets on specific customers, customer segments or portfolios. As credit conditions change, we take mitigating action, including the revision of risk appetites or limits and tenors, as appropriate. In addition, we continue to evaluate the terms under which we provide credit facilities within the context of individual customer requirements, the quality of the relationship, local regulatory requirements, market practices and our local market position. Credit risk sub-function (Audited) Credit approval authorities are delegated by the Board to the 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 the group 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 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 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 team, as well as regional groupings. Each quarter, the scenarios and probability weights are reviewed and checked for consistency with the economic conjuncture and current economic and financial risks. These are subject to final review and approval by senior management in a Forward Economic Guidance Global Business Impairment Committee. Report of the Directors | Risk 36 HSBC Bank plc Annual Report and Accounts 2022 Implementation A centralised impairment engine performs the ECL calculation using data, which is subject to a number of validation checks and enhancements, from a variety of client, finance and risk systems. Where possible, these checks and processes are performed in a globally consistent and centralised manner. Governance 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 are engaged in similar activities or operate in the same geographical areas/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 Group to support the calculation of our minimum credit regulatory capital requirement. The five credit quality classifications each encompass a range of granular internal credit rating grades assigned to wholesale and retail lending businesses, and the external ratings attributed by external agencies to debt securities. 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 1Customer risk rating (‘CRR’). 212-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. In 2022, we expanded our definition of forborne to capture non- payment-related concessions, such as covenant waivers. For our wholesale portfolio, we began identifying non-payment-related concessions in 2021 when our internal policies were changed. For our retail portfolios, we began identifying them during 2022. The comparative disclosures have been presented under the prior definition of forborne for the wholesale and retail portfolios. For details of our policy on derecognised renegotiated loans, see Note 1.2(i) on 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. HSBC Bank plc Annual Report and Accounts 2022 37 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) For details of our accounting policy on the write-off of loans and advances, see Note 1.2(i) on the financial statements. Unsecured personal facilities, including credit cards, are generally written off at between 150 and 210 days past due. The standard period runs until the end of the month in which the account becomes 180 days contractually delinquent. However, in exceptional circumstances to achieve a fair customer outcome, and in line with regulatory expectations, they may be extended further. For secured facilities, write-off should occur upon repossession of collateral, receipt of proceeds via settlement, or determination that recovery of the collateral will not be pursued. Any secured assets maintained on the balance sheet beyond 60 months of consecutive delinquency-driven default require additional monitoring and review to assess the prospect of recovery. There are exceptions in a few countries and territories where local regulation or legislation constrain earlier write-off, or where the realisation of collateral for secured real estate lending takes more time. Write-off, either partially or in full, may be earlier when there is no reasonable expectation of further recovery, for example, in the event of a bankruptcy or equivalent legal proceedings. Collection procedures may continue after write-off. Credit risk in 2022 At 31 December 2022, gross loans and advances to customers and banks of £91bn decreased by £12bn, compared with 31 December 2021. This included favourable foreign exchange movements of £3bn and a £22bn decrease due to a reclassification of businesses to assets held for sale, including our retail banking operations in France. The reclassification of assets held for sale resulted in a decrease of loans and advances to customers, of which £2bn pertaining to wholesale and £19bn to personal banking. For loans and advances to banks, the reclassification resulted in a decrease of £1bn. Excluding foreign exchange movements and the reclassification of assets held for sale, there was £1bn decrease in personal loans and advances, offset by £1bn increase in wholesale loans and advances to customers. Loans and advances to banks increased by £7bn. At 31 December 2022, the allowance for ECL excluding foreign exchange movements and the reclassification of assets held for sale, in relation to loans and advances to customers increased by £50m from 31 December 2021. This was attributable to: •a £46m increase in wholesale loans and advances to customers, of which £44m was driven by stages 1 and 2; and •a £4m increase in personal loans and advances to customers, of which £7m was driven by stages 1 and 2. Stage 3 balances at 31 December 2022 remained broadly stable compared with 31 December 2021. The ECL charge for 2022 was £222m, inclusive of recoveries. Inflation, recession and high interest rates combined with an unstable geopolitical environment and the effects of a global supply chain disruption have contributed to elevated degrees of uncertainty during the year. At 31 December 2022, as a result of this uncertainty, additional stage 1 and 2 allowances have been recorded. Report of the Directors | Risk 38 HSBC Bank plc Annual Report and Accounts 2022 Summary of credit risk The following disclosure presents the gross carrying/nominal amount of financial instruments to which the impairment requirements in IFRS9 are applied and the associated allowance for ECL. The allowance for ECL increased from £1,240m at 31 December 2021 to £1,370m at 31 December 2022. The allowance for ECL at 31 December 2022 comprised of £1,283m (2021: £1,168m) in respect of assets held at amortised cost, £87m (2021: £72m) in respect of loans and other credit related commitments, and financial guarantees, and £24m (2021: £19m) 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 2022 31 Dec 2021 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 73,717 (1,103) 92,331 (1,154) – personal 6,013 (55) 25,394 (163) – corporate and commercial 55,004 (937) 56,087 (964) – non-bank financial institutions 12,700 (111) 10,850 (27) Loans and advances to banks at amortised cost 17,152 (43) 10,789 (5) Other financial assets measured at amortised cost 269,755 (137) 202,137 (9) – cash and balances at central banks 131,434 (1) 108,482 — – items in the course of collection from other banks 2,285 — 346 — – Hong Kong Government certificates of indebtedness — — — — – reverse repurchase agreements – non trading 53,949 — 54,448 — – financial investments 3,248 — 10 — – other assets2 55,634 (3) 38,851 (9) – assets held for sale6 23,205 (133) — — Total gross carrying amount on balance sheet 360,624 (1,283) 305,257 (1,168) Loans and other credit related commitments 126,457 (67) 115,695 (55) – personal 2,116 — 2,269 (1) – corporate and commercial 68,441 (62) 63,352 (48) – financial 55,900 (5) 50,074 (6) Financial guarantees3 5,327 (20) 11,054 (17) – personal 23 — 26 — – corporate and commercial 3,415 (19) 9,894 (16) – financial 1,889 (1) 1,134 (1) Total nominal amount off balance sheet4 131,784 (87) 126,749 (72) 492,408 (1,370) 432,006 (1,240) 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') 29,248 (24) 41,188 (19) 1The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision. 2Includes only those financial instruments 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 116 includes both financial and non-financial assets, including cash collateral and settlement accounts. 3Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 4Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 5Debt 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. 6For further details on gross carrying amounts and allowances for ECL related to assets held for sale, see ‘Assets held for sale’ on page 186. HSBC Bank plc Annual Report and Accounts 2022 39 Summary of financial instruments to which the impairment requirements in IFRS 9 are applied (continued) (Audited) 31 Dec 2022 31 Dec 2021 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 37,370 (378) 34,286 (350) – personal 3,584 (12) 3,680 (6) – corporate and commercial 22,456 (247) 21,182 (308) – non-bank financial institutions 11,330 (119) 9,424 (36) Loans and advances to banks at amortised cost 14,529 (43) 6,782 (4) Other financial assets measured at amortised cost 169,321 (3) 135,033 (1) – cash and balances at central banks 78,442 (1) 63,008 — – items in the course of collection from other banks 1,863 — 211 — – reverse repurchase agreements-non trading 43,055 — 39,708 — – financial investments 6,378 — 3,337 — – other assets2 39,583 (2) 28,769 (1) Total gross carrying amount on balance sheet 221,220 (424) 176,101 (355) Loans and other credit related commitments 35,692 (31) 31,255 (29) – personal 886 — 589 — – corporate and commercial 18,900 (28) 19,175 (26) – financial 15,906 (3) 11,491 (3) Financial guarantees3 1,363 (12) 1,270 (7) – personal 3 — 3 — – corporate and commercial 827 (11) 527 (6) – financial 533 (1) 740 (1) Total nominal amount off balance sheet4 37,055 (43) 32,525 (36) 258,275 (467) 208,626 (391) Fair value Memorandum allowance for ECL5 Fair value Memorandum allowance for ECL5 £m £m £m £m Debt instruments measured at FVOCI 12,206 (4) 23,152 (4) 1The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision. 2Includes only those financial instruments 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 116 includes both financial and non-financial assets, including cash collateral and settlement accounts. 3Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 4Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 5Debt 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 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. Report of the Directors | Risk 40 HSBC Bank plc Annual Report and Accounts 2022 Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2022 (Audited) Gross carrying/nominal amount2 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI3 Total Stage 1 Stage 2 Stage 3 POCI3 Total Stage 1 Stage 2 Stage 3 POCI3 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 267,770 1,662 323 — 269,755 (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 469,825 19,721 2,859 3 492,408 (85) (217) (1,068) — (1,370) — 1.1 37.4 — 0.3 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 3Purchased or originated credit-impaired (‘POCI’). Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when they are 30 days past due (‘DPD’) and are transferred from stage 1 to stage 2. The following disclosure presents the ageing of stage 2 financial assets by those less than 30 days 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 2022 (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 — 0.3 – 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 1Days past due (‘DPD’). Up-to-date accounts in stage 2 are not shown in amounts presented above. 2The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted. HSBC Bank plc Annual Report and Accounts 2022 41 Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2021 (continued) (Audited) Gross carrying/nominal amount2 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI3 Total Stage 1 Stage 2 Stage 3 POCI3 Total Stage 1 Stage 2 Stage 3 POCI3 Total The group £m £m £m £m £m £m £m £m £m £m % % % % % Loans and advances to customers at amortised cost 80,730 9,121 2,478 2 92,331 (86) (158) (908) (2) (1,154) 0.1 1.7 36.6 100.0 1.2 – personal 24,255 686 453 — 25,394 (22) (16) (125) — (163) 0.1 2.3 27.6 — 0.6 – corporate and commercial 46,237 8,066 1,782 2 56,087 (58) (137) (767) (2) (964) 0.1 1.7 43.0 100.0 1.7 – non-bank financial institutions 10,238 369 243 — 10,850 (6) (5) (16) — (27) 0.1 1.4 6.6 — 0.2 Loans and advances to banks at amortised cost 10,750 39 — — 10,789 (4) (1) — — (5) — 2.6 — — — Other financial assets measured at amortised cost 202,048 47 42 — 202,137 — — (9) — (9) — — 21.4 — — Loan and other credit- related commitments 107,922 7,571 202 — 115,695 (25) (22) (8) — (55) — 0.3 4.0 — — – personal 2,152 114 3 — 2,269 (1) — — — (1) — — — — — – corporate and commercial 56,325 6,829 198 — 63,352 (20) (20) (8) — (48) — 0.3 4.0 — 0.1 – financial 49,445 628 1 — 50,074 (4) (2) — — (6) — 0.3 — — — Financial guarantees1 10,215 740 99 — 11,054 (3) (7) (7) — (17) — 0.9 7.1 — 0.2 – personal 23 2 1 — 26 — — — — — — — — — — – corporate and commercial 9,257 540 97 — 9,894 (2) (7) (7) — (16) — 1.3 7.2 — 0.2 – financial 935 198 1 — 1,134 (1) — — — (1) 0.1 — — — 0.1 At 31 Dec 2021 411,665 17,518 2,821 2 432,006 (118) (188) (932) (2) (1,240) — 1.1 33.0 100.0 0.3 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 3Purchased or originated credit-impaired (‘POCI’). Stage 2 days past due analysis at 31 December 2021 (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 9,121 56 237 (158) (1) (1) 1.7 1.8 0.4 – personal 686 49 29 (16) (1) (1) 2.3 2.0 3.4 – corporate and commercial 8,066 7 199 (137) — — 1.7 0.0 — – non-bank financial institutions 369 — 9 (5) — — 1.4 — — Loans and advances to banks at amortised cost 39 — — (1) — — 2.6 — — Other financial assets measured at amortised cost 47 — — — — — — — — 1Days past due (‘DPD’). Up-to-date accounts in stage 2 are not shown in amounts presented above. 2The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted. Report of the Directors | Risk 42 HSBC Bank plc Annual Report and Accounts 2022 Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2022 (Audited) Gross carrying/nominal amount2 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI3 Total Stage 1 Stage 2 Stage 3 POCI3 Total Stage 1 Stage 2 Stage 3 POCI3 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 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 3Purchased or originated credit-impaired (‘POCI’). Stage 2 days past due analysis at 31 December 2022 (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 — — 1Days past due (‘DPD’). Up-to-date accounts in stage 2 are not shown in amounts presented above. 2The days past due amounts presented above are on a contractual basis and include the benefit of any customer relief payment holidays granted. HSBC Bank plc Annual Report and Accounts 2022 43 Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at 31 December 2021 (continued) (Audited) Gross carrying/nominal amount2 Allowance for ECL ECL coverage % Stage 1 Stage 2 Stage 3 POCI3 Total Stage 1 Stage 2 Stage 3 POCI3 Total Stage 1 Stage 2 Stage 3 POCI3 Total The bank £m £m £m £m £m £m £m £m £m £m % % % % % Loans and advances to customers at amortised cost 30,105 3,197 984 — 34,286 (33) (47) (270) — (350) 0.1 1.5 27.4 — 1.0 – personal 3,544 88 48 — 3,680 (1) (2) (3) — (6) — 2.3 6.3 — 0.2 – corporate and commercial 17,608 2,893 681 — 21,182 (28) (45) (235) — (308) 0.2 1.6 34.5 — 1.5 – non-bank financial institutions 8,953 216 255 — 9,424 (4) — (32) — (36) — — 12.5 — 0.4 Loans and advances to banks at amortised cost 6,775 7 — — 6,782 (3) (1) — — (4) — 14.3 — — 0.1 Other financial assets measured at amortised cost 134,984 21 28 — 135,033 — — (1) — (1) — — 3.6 — — Loan and other credit-related commitments 28,911 2,301 43 — 31,255 (15) (11) (3) — (29) 0.1 0.5 7.0 — 0.1 – personal 585 2 2 — 589 — — — — — — — — — — – corporate and commercial 17,010 2,124 41 — 19,175 (12) (11) (3) — (26) 0.1 0.5 7.3 — 0.1 – financial 11,316 175 — — 11,491 (3) — — — (3) — — — — — Financial guarantees1 1,060 150 60 — 1,270 (1) — (6) — (7) 0.1 — 10.0 — 0.6 – personal 2 1 — — 3 — — — — — — — — — — – corporate and commercial 437 31 59 — 527 — — (6) — (6) — — 10.2 — 1.1 – financial 621 118 1 — 740 (1) — — — (1) 0.2 — — — 0.1 At 31 Dec 2021 201,835 5,676 1,115 — 208,626 (52) (59) (280) — (391) — 1.0 25.1 — 0.2 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2Represents the maximum amount at risk should the contracts be fully drawn upon and clients default. 3Purchased or originated credit-impaired (‘POCI’). Stage 2 days past due analysis at 31 December 2021 (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 30 and > DPD1 Stage 2 1 to 29 DPD1 30 and > DPD1 Stage 2 1 to 29 DPD1 30 and > DPD1 The bank £m £m £m £m £m £m % % % Loans and advances to customers at amortised cost: 3,197 19 6 (47) (1) — 1.5 5.3 — – Personal 88 19 6 (2) (1) — 2.3 5.3 — – Corporate and commercial 2,893 — — (45) — — 1.6 — — – Non-bank financial institutions 216 — — — — — — — — Loans and advances to banks at amortised cost 7 — — (1) — — 14.3 — — Other financial assets measured at amortised cost 21 — — — — — — — — 1Days past due (‘DPD’). Up-to-date accounts in stage 2 are not shown in amounts presented above. Stage 2 decomposition as at 31 December 2022 The following disclosure presents the stage 2 decomposition of gross carrying amount and allowances for ECL for loans and advances to customers. 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 2022. The quantitative classification shows gross carrying values and allowances for ECL for which the applicable reporting date PD measure exceeds defined quantitative thresholds for retail and wholesale exposures. The qualitative classification primarily accounts for credit risk rating (‘CRR’) deterioration, watch-and-worry and retail management judgemental adjustments. For further details on our approach to the assessment of significant increase in credit risk, see 'Summary of significant accounting policies' on page 126. Report of the Directors | Risk 44 HSBC Bank plc Annual Report and Accounts 2022 Loans and advances to customers at 31 December 20221 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 backstop2 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 backstop2 — — — — — — — — — Total stage 2 482 1,547 547 2,576 (7) (27) (1) (35) 1.4 1Where 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. 2Days past due (‘DPD’). Loans and advances to customers at 31 December 20211 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 561 3,611 162 4,334 (13) (41) (1) (55) 1.3 Qualitative 102 4,260 198 4,560 (2) (96) (4) (102) 2.2 30 DPD backstop2 23 195 9 227 (1) — — (1) 0.4 Total stage 2 686 8,066 369 9,121 (16) (137) (5) (158) 1.7 The bank Quantitative 26 1,731 95 1,852 (2) (9) — (11) 0.6 Qualitative 62 1,162 121 1,345 — (36) — (36) 2.7 30 DPD backstop2 — — — — — — — — — Total stage 2 88 2,893 216 3,197 (2) (45) — (47) 1.5 1Where 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. 2Days past due (‘DPD’). Assets held for sale (Audited) During 2022, gross loans and advances and related impairment allowances were reclassified from ‘loans and advances to customers’ and ‘loans and advances to banks’ to ‘assets held for sale’ in the balance sheet. At 31 December 2022, the most material balances held for sale came from our retail banking operations 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 47); •Distribution of financial instruments by credit quality at 31 December (page 57); 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 90,869 (1,146) Reported in ‘Assets held for sale’ 21,325 (131) At 31 Dec 2022 112,194 (1,277) At 31 December 2022, gross loans and advances of our retail banking operations in France were £21bn, 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 2022 of loans and advances to banks and customers classified as held for sale, see note 34. HSBC Bank plc Annual Report and Accounts 2022 45 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: 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) 1Comprising assets held for sale relating to the planned sale of our branch operations in Greece and of our business in Russia. The table below analyses the amount of ECL (charges)/releases arising from assets held for sale. The charges during the period primarily relate to the retail banking operations in France. Changes in expected credit losses and other credit impairment (Audited) 2022 2021 £m £m ECL charges arising from: – Asset held for sale 4 — – Asset not held for sale 218 — At 31 Dec 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 on 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 financial instruments whose carrying amount best represents the net exposure to credit risk and it excludes equity securities as they are not subject to credit risk. For the financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount; 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 69. Report of the Directors | Risk 46 HSBC Bank plc Annual Report and Accounts 2022 Maximum exposure to credit risk (Audited) 2022 2021 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 72,614 (8,149) 64,465 91,177 (7,057) 84,120 – personal 5,958 (1) 5,957 25,231 — 25,231 – corporate and commercial 54,067 (7,269) 46,798 55,123 (6,228) 48,895 – non-bank financial institutions 12,589 (879) 11,710 10,823 (829) 9,994 Loans and advances to banks at amortised cost 17,109 (145) 16,964 10,784 (88) 10,696 Other financial assets held at amortised cost 268,023 (10,882) 257,141 202,455 (10,239) 192,216 – cash and balances at central banks 131,433 — 131,433 108,482 — 108,482 – items in the course of collection from other banks 2,285 — 2,285 346 — 346 – reverse repurchase agreements – non trading 53,949 (10,882) 43,067 54,448 (10,239) 44,209 – financial investments 3,248 — 3,248 10 — 10 – asset held for sale 21,214 — 21,214 – other assets 55,894 — 55,894 39,169 — 39,169 Derivatives 225,238 (224,444) 794 141,221 (139,668) 1,553 Total on balance sheet exposure to credit risk 582,984 (243,620) 339,364 445,637 (157,052) 288,585 Total off-balance sheet 150,270 — 150,270 146,261 — 146,261 – financial and other guarantees1 22,425 — 22,425 26,840 — 26,840 – loan and other credit-related commitments 127,845 — 127,845 119,421 — 119,421 At 31 Dec 733,254 (243,620) 489,634 591,898 (157,052) 434,846 The bank Loans and advances to customers held at amortised cost 36,992 (8,132) 28,860 33,936 (7,047) 26,889 – personal 3,572 — 3,572 3,674 — 3,674 – corporate and commercial 22,209 (7,264) 14,945 20,874 (6,224) 14,650 – non-bank financial institutions 11,211 (868) 10,343 9,388 (823) 8,565 Loans and advances to banks at amortised cost 14,486 — 14,486 6,778 — 6,778 Other financial assets held at amortised cost 169,367 (10,427) 158,940 135,109 (9,045) 126,064 – cash and balances at central banks 78,441 — 78,441 63,008 — 63,008 – items in the course of collection from other banks 1,863 — 1,863 211 — 211 – reverse repurchase agreements – non trading 43,055 (10,427) 32,628 39,708 (9,045) 30,663 – financial investments 6,378 — 6,378 3,337 — 3,337 – other assets 39,630 — 39,630 28,845 — 28,845 Derivatives 196,714 (196,505) 209 125,787 (123,964) 1,823 Total on balance sheet exposure to credit risk 417,559 (215,064) 202,495 301,610 (140,056) 161,554 Total off-balance sheet 44,673 — 44,673 41,034 — 41,034 – financial and other guarantees1 8,231 — 8,231 8,592 — 8,592 – loan and other credit-related commitments 36,442 — 36,442 32,442 — 32,442 At 31 Dec 462,232 (215,064) 247,168 342,644 (140,056) 202,588 1‘Financial and other guarantees’ represents 'Financial guarantees' and 'Performance and other guarantees' as disclosed in Note 30, 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 72 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 67 for wholesale lending and page 72 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 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 judgemental adjustments are used to address late-breaking events, data and model limitations, model deficiencies and expert credit judgements. Amid a deterioration in the economic and geopolitical environment, management judgements and estimates continued to be subject to a high degree of uncertainty in relation to assessing economic scenarios for impairment allowances in 2022. Inflation, economic contraction and high interest rates combined with an unstable geopolitical environment and the effects of global supply chain disruptions have contributed to elevated levels of uncertainty during the year. At 31 December 2022, as a result of this uncertainty, additional stage 1 and 2 impairment allowances were recognised. Management continued to reflect a degree of caution both in the selection of economic scenarios and their weightings, and in the use of management judgemental adjustments, described in more detail below. HSBC Bank plc Annual Report and Accounts 2022 47 At 31 December 2022, there was a reduction in management judgemental adjustments compared with 31 December 2021. Adjustments related to Covid-19 and for sector-specific risks were reduced as scenarios and modelled outcomes better reflected the key risks at 31 December 2022. Methodology Four economic scenarios are used to capture the current economic environment and to articulate management’s view of the range of potential outcomes. Scenarios produced to calculate ECL are aligned to HSBC’s top and emerging risks. Three of the scenarios are drawn from consensus forecasts and distributional estimates. The Central scenario is deemed the ‘most likely’ scenario, and usually attracts the largest probability weighting, while the outer scenarios represent the tails of the distribution, which are less likely to occur. The Central scenario is created using the average of a panel of external forecasters. Consensus Upside and Downside scenarios are created with reference to distributions for select markets that capture forecasters’ views of the entire range of outcomes. In the later years of the scenarios, projections revert to long-term consensus trend expectations. In the consensus outer scenarios, reversion to trend expectations is done mechanically with reference to historically observed quarterly changes in the values of macroeconomic variables. The fourth scenario, Downside 2, is designed to represent management’s view of severe downside risks. It is a globally consistent narrative-driven scenario that explores more extreme economic outcomes than those captured by the consensus scenarios. In this scenario, variables do not, by design, revert to long-term trend expectations. They may instead explore alternative states of equilibrium, where economic activity moves permanently away from past trends. The consensus Downside and the consensus Upside scenarios are each constructed to be consistent with a 10% probability. The Downside 2 is constructed with a 5% probability. The Central scenario is assigned the remaining 75%. This weighting scheme is deemed appropriate for the unbiased estimation of ECL in most circumstances. However, management may depart from this probability-based scenario weighting approach when the economic outlook is determined to be particularly uncertain and risks are elevated. In light of ongoing risks, management deviated from this probability weighting in the fourth quarter of 2022, and assigned additional weight to outer scenarios. Description of economic scenarios The economic assumptions presented in this section have been formed by HSBC with reference to external forecasts specifically for the purpose of calculating ECL. Economic forecasts remain subject to a high degree of uncertainty. Upside and Downside scenarios are constructed so that they encompass the potential crystallisation of a number of key macro-financial risks. At the end of 2022, risks to the economic outlook included the persistence of inflation and its consequences on monetary policy. Rapid changes to public policy also increased forecast uncertainty. In Europe, risks relating to energy pricing and supply security remain significant. Geopolitical risks also remain significant and include the possibility of a prolonged and escalating Russia- Ukraine war, continued disagreements between the US and other countries with China over a range of economic and strategic issues, and the evolution of the UK’s relationship with the EU. Economic forecasts for our main markets deteriorated in the fourth quarter as GDP growth slowed. In Europe high inflation and rising interest rates have reduced real household incomes and raised business costs, dampening consumption and investment and lowering growth expectations. The effects of higher interest rate expectations and lower growth are evident in asset price expectations, with house prices forecasts, in particular, significantly lower. The scenarios used to calculate ECL in the Annual Report and Accounts 2022 are described below. The consensus Central scenario HSBC’s Central scenario reflects a low growth and higher inflation environment across many of our key markets. The scenario features an initial period of below-trend GDP growth in most of our main markets as higher inflation and tighter monetary policy causes a squeeze on business margins and households’ real disposable income. Growth returns to its long term expected trend in later years as central banks bring inflation back to target. Our Central scenario assumes that inflation peaked in most of our key markets at the end of 2022 but remains high through 2023 before moderating as energy prices stabilise and supply chain disruptions abate. Central banks are expected to keep raising interest rates until midway through 2023. Inflation is forecast to revert to target in most markets, by early 2024. Global GDP is expected to grow by 1.6% in 2023 in the Central scenario and the average rate of global GDP growth is 2.5% over the five-year forecast period. This is below the average growth rate over the five-year period prior to the onset of the pandemic. The key features of our Central scenario are: •Economic activity in European and North American markets continues to weaken. Most major economies are forecast to grow in 2023, but at very low rates. Hong Kong and mainland China are expected to see a recovery in economic activity from 2023 as Covid-19 related restrictions are lifted. •In most markets, unemployment rises moderately from historic lows as economic activity slows. Labour markets remain fairly tight across our key markets. •Inflation is expected to remain elevated across many of our key markets driven by energy and food prices. Inflation is subsequently expected to converge back towards central banks target rate over the next two years of the forecast. •Policy interest rates in key markets will continue to rise in the near term but at a slower pace. Interest rates will stay elevated but start to ease as inflation returns to target. •The West Texas Intermediate oil price is forecast to average $72 per barrel over the projection period. The Central scenario was first created with forecasts available in November, and reviewed continuously until late December. Probability weights assigned to the Central scenario are 60% for UK and France. The following table describes key macroeconomic variables and the probabilities assigned in the consensus Central scenario. Report of the Directors | Risk 48 HSBC Bank plc Annual Report and Accounts 2022 Central scenario 2023–2027 UK France % % GDP growth rate 2023: Annual average growth rate (0.8) 0.2 2024: Annual average growth rate 1.3 1.6 2025: Annual average growth rate 1.7 1.5 5-year average 1.1 1.2 Unemployment rate 2023: Annual average rate 4.4 7.6 2024: Annual average rate 4.6 7.5 2025: Annual average rate 4.3 7.3 5-year average 4.3 7.3 House price growth 2023: Annual average growth rate 0.2 1.8 2024: Annual average growth rate (3.8) 2.0 2025: Annual average growth rate 0.7 3.1 5-year average 0.4 2.8 Inflation rate 2023: Annual average rate 6.9 4.6 2024: Annual average rate 2.5 2.0 2025: Annual average rate 2.1 1.8 5-year average 3.1 2.4 Probability 60.0 60.0 The graphs compare the respective Central scenario at the year end 2021 with current economic expectations at the end of 2022. GDP growth: Comparison 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 faster resolution of supply chain issues; a rapid conclusion to the Russia-Ukraine war; de-escalation of tensions between the US and China; relaxation of Covid-19 policies in Asia; and improved relations between the UK and the EU. The following table describes key macroeconomic variables and the probabilities assigned in the consensus Upside scenario. Consensus Upside scenario 'best outcome' UK France % % GDP growth rate 4.4 (4Q24) 3.1 (1Q24) Unemployment rate 3.5 (4Q23) 6.5 (4Q24) House price growth 4.2 (1Q23) 3.7 (1Q23) Inflation rate 0.7 (1Q24) 0.8 (4Q23) Probability 5 5 Note: Extreme point in the consensus Upside is ‘best outcome’ in the scenario, for example the highest GDP growth and the lowest unemployment rate, in the first two years of the scenario. The date on which the extreme is reached is indicated in parenthesis. For inflation, lower inflation is interpreted as the ‘best’ outcome. Downside scenarios Downside scenarios explore the intensification and crystallisation of a number of key economic and financial risks. High inflation and the tighter monetary policy response have become key concerns for global growth. In the downside scenarios, supply chain disruptions intensify, exacerbated by an escalation in the spread of Covid-19 and rising geopolitical tensions drive inflation higher. There also remains a risk that energy and food prices rise further due to the Russia-Ukraine war, increasing pressure on household budgets and firms' costs. The possibility of inflation expectations becoming detached from central bank targets also remains a risk. A wage-price spiral triggered by higher inflation and pandemic related labour supply shortages across could put sustained upward pressure on wages, aggravating cost pressures and the squeeze on household real incomes and corporate margins. In turn, it raises the risk of a more forceful policy response from central banks, a steeper trajectory for interest rates and ultimately, deep economic recession. The risks relating to Covid-19 are centred on the emergence of a new variant with greater vaccine resistance that necessitates a stringent public health policy. In Asia, with the reopening of China in December, management of Covid-19 remains a key source of uncertainty, with the rapid spread of the virus posing a heightened risk of a new variant emerging. The geopolitical environment also presents risks, including: • a prolonged Russia-Ukraine war with escalation beyond Ukraine’s borders; • the deterioration of the trading relationship between the UK and the EU over the Northern Ireland Protocol; and • continued differences between the US and other countries with China, which could affect sentiment and restrict global economic activity. The consensus Downside scenario In the consensus Downside scenario, economic activity is considerably weaker compared with the Central scenario. In this scenario, GDP growth weakens below the Central scenario, unemployment rates rise and asset prices fall. HSBC Bank plc Annual Report and Accounts 2022 49 The scenario features a temporary supply side shock that keeps inflation higher than the baseline, before the effects of weaker demand begin to dominate leading to a fall in commodity prices and to lower inflation. The following table describes key macroeconomic variables and the probabilities assigned in the consensus Downside scenario. Consensus Downside scenario 'worst outcome' UK France % % GDP growth rate (3.5) (3Q23) (1.4) (3Q23) Unemployment rate 5.8 (2Q24) 8.8 (4Q23) House price growth (10.1) (2Q24) (0.6) (4Q23) Inflation rate (min) (0.4) (4Q24) 0.3 (4Q24) Inflation rate (max) 10.8 (1Q23) 7.2 (1Q23) Probability 25 25 Note: Extreme point in the consensus Downside is ‘worst outcome’ in the scenario, for example lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. The date on which the extreme is reached is indicated in parenthesis. Due to the nature of the shock to inflation in the downside scenarios, both the lowest and the highest point is shown in the tables. Downside 2 scenario The Downside 2 scenario features a deep global recession and reflects management's view of the tail of the economic distribution. It incorporates the crystallisation of a number of risks simultaneously, including further escalation of the Russia-Ukraine war, worsening of supply chain disruptions and the emergence of a vaccine-resistant Covid-19 variant that necessitates a stringent public health policy response globally. This scenario features an initial supply-side shock that pushes up inflation and interest rates higher. This impulse is expected to prove short lived as a large downside demand pressure causes commodity prices to correct sharply and global price inflation to fall as a severe and prolonged recession takes hold. The following table describes key macroeconomic variables and the probabilities assigned in the Downside 2 scenario. Downside 2 scenario 'worst outcome' UK France % % GDP growth rate (6.9) (3Q23) (6.8) (4Q23) Unemployment rate 8.7 (2Q24) 10.3 (4Q24) House price growth (22.9) (2Q24) (6.4) (2Q24) Inflation rate (min) (2.3) (2Q24) (2.5) (2Q24) Inflation rate (max) 13.5 (2Q23) 10.4 (2Q23) Probability 10 10 Note: Extreme point in the Downside 2 is ‘worst outcome’ in the scenario, for example lowest GDP growth and the highest unemployment rate, in the first two years of the scenario. The date on which the extreme is reached is indicated in parenthesis. Due to the nature of the shock to inflation in the downside scenarios, both the lowest and the highest point is shown in the tables. Scenario weighting In reviewing the economic conjuncture, the level of uncertainty and risk, management has considered both global and country- specific factors. This has led management to assign scenario probabilities that are tailored to its view of uncertainty in individual markets. Key consideration around uncertainty attached to the Central scenario projections focused on: • the progression of the Covid-19 pandemic in Asian countries and announcement of removal of Covid-19 measures and travel restrictions in mainland China and Hong Kong; • further tightening of monetary policy and impact on borrowing costs in interest rate sensitive sectors, such as housing; •the risks to gas supply security in Europe and subsequent impact on inflation and commodity prices and growth; and •the ongoing risks to global supply chains. In the UK, the surge in price inflation and a squeeze on household real incomes have led to strong monetary policy responses from central bank. Higher interest rates have increased recession risks and the prospects for outright decline in house prices. The UK faces additional challenges from the rise in energy prices and accompanying deterioration in the terms of trade. For the UK, the consensus Upside and Central scenarios had a combined weighting of 65%. In France, uncertainties around the outlook remain elevated due to high inflation and Europe’s exposure to the Russia-Ukraine war through the economic costs incurred from the imposition of sanctions, trade disruption and energy dependence on Russia. The consensus Upside and Central scenarios had a combined weighting of 65%. The following graphs show the historical and forecasted GDP growth rate for the various economic scenarios in UK and France. UK France Critical accounting estimates and judgements The calculation of ECL under IFRS 9 involves significant judgements, assumptions and estimates. The level of estimation uncertainty and judgement has remained elevated since 31 December 2021, including judgements relating to: •the selection and weighting of economic scenarios, given rapidly changing economic conditions and a wide dispersion of economic forecasts. There is judgement in making assumptions about the effects of inflation and interest, global growth, supply chain disruption; and •estimating the economic effects of those scenarios on ECL, particularly as the historical relationship between macroeconomic variables and defaults might not reflect the dynamics of current macroeconomic conditions. How economic scenarios are reflected in ECL calculations Models are used to reflect economic scenarios on ECL estimates. As described above, modelled assumptions and linkages based on historical information could not alone produce relevant information under the conditions experienced in 2022, and management judgemental adjustments were still required to support modelled outcomes. Report of the Directors | Risk 50 HSBC Bank plc Annual Report and Accounts 2022 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 2022. For our wholesale portfolios, a global methodology is used for the estimation of the term structure of probability of default (‘PD’) and loss given default (‘LGD’). For PDs, we consider the correlation of forward economic guidance to default rates for a particular industry in a country. For LGD calculations, we consider the correlation of forward economic guidance to collateral values and realisation rates for a particular country and industry. PDs and LGDs are estimated for the entire term structure of each instrument. For impaired loans, LGD estimates take into account independent recovery valuations provided by external consultants where available or internal forecasts corresponding to anticipated economic conditions and individual company conditions. In estimating the ECL on impaired loans that are individually considered not to be significant, we incorporate forward economic guidance proportionate to the probability-weighted outcome and the Central scenario outcome of the performing population. For our retail portfolios, the impact of economic scenarios on PD is modelled at a portfolio level. Historical relationships between observed default rates and macroeconomic variables are integrated into IFRS 9 ECL estimates by using economic response models. The impact of these scenarios on PD is modelled over a period equal to the remaining maturity of the underlying asset or assets. The impact on LGD is modelled for mortgage portfolios by forecasting future loan-to-value (‘LTV’) profiles for the remaining maturity of the asset by using national level forecasts of the house price index and applying the corresponding LGD expectation. These models are based largely on historical observations and correlations with default rates. Management judgemental adjustments are described below. Management judgemental adjustments In the context of IFRS 9, management judgemental adjustments are short-term increases or decreases to the ECL at either a customer, segment or portfolio level to account for late-breaking events, model and data limitations and deficiencies, and expert credit judgement applied following management review and challenge. This includes refining model inputs and outputs and using adjustments to ECL based on management judgement and higher- level quantitative analysis for impacts that are difficult to model. The effects of management judgemental adjustments are considered for balances and ECL when determining whether or not a significant increase in credit risk has occurred and are attributed or allocated to a stage as appropriate. This is in accordance with the internal adjustments framework. Management judgemental adjustments are reviewed under the governance process for IFRS 9 (as detailed in the section ‘Credit risk management’ on page 36). 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 ECL at 31 December 2022 are set out in the following table. Management judgemental adjustments to ECL at 31 December 20221 Retail Wholesale 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 Pandemic-related economic recovery adjustments — — — Other retail lending adjustments 7 — 7 Total 2 (102) (100) Management judgemental adjustments to ECL at 31 December 2021 Retail Wholesale Total £m £m £m Low-risk counterparties (banks,sovereigns and government entities) — (4) (4) Corporate lending adjustments — 31 31 Retail lending probability of default adjustments — — — Retail model default timing adjustments — — — Macroeconomic-related adjustments 17 — 17 Pandemic-related economic recovery adjustments 3 — 3 Other retail lending adjustments — — — Total 20 27 47 1 Management judgemental adjustments presented in the table reflect increases or (decreases) to ECL, respectively. Management judgemental adjustments at 31 December 2022 were a decrease to ECL of £102m for the wholesale portfolio and an increase to ECL of £2m for the retail portfolio. During 2022, management judgemental adjustments reflected an evolving macroeconomic outlook and the relationship of the modelled ECL to this outlook and to late-breaking and sector- specific risks. At 31 December 2022, wholesale management judgemental adjustments were an ECL decrease of £102m (31 December 2021: £27m increase). •Adjustments relating to low credit-risk exposures decreased ECL by £2m at 31 December 2022 (31 December 2021: £4m 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. The reduction in ECL for these exposures was mostly offset by a management overlay on a Russian Bank exposure due to sanctions. Total net adjustments are broadly flat in comparison to 31 December 2021. •Adjustments to corporate exposures decreased ECL by £100m at 31 December 2022 (31 December 2021: £31m increase). The adjustments mainly relate to standard, monthly adjustments for corporate exposures secured by Export Credit Agency guarantees and government Covid-19 guarantees; the benefit from which is not recognised in the inbound data. The reduction in ECL for these exposures has been partially offset by management overlays to reflect increased risk on an individual exposure in France and increased risk on certain sub- sectors within France. In comparison to December 2021, the level of management overlay has significantly reduced as modelled results increasingly reflect the macroeconomic environment and portfolio risk, resulting in a net underlay rather than overlay. HSBC Bank plc Annual Report and Accounts 2022 51 At 31 December 2022, retail management judgemental adjustments were an ECL increase of £2m (31 December 2021: £20m increase). •Retail lending inflation-related adjustments increased ECL by £8m (31 December 2021: nil). 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 ECL by £3m (31 December 2021: £17m increase). These adjustments were primarily in relation to country-specific risks related to future macroeconomic conditions. •Banks, sovereigns, government entities and low-risk counterparties adjustments decreased ECL by £16m (31 December 2021: nil). 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 ECL by £7m (31 December 2021: nil), reflecting all other data, model and management judgemental adjustments. •Pandemic-related economic recovery adjustments were removed during 2022 as scenarios stabilised. Economic scenarios sensitivity analysis of ECL estimates Management considered the sensitivity of the ECL outcome against the economic forecasts as part of the ECL governance process by recalculating the ECL under each scenario described above for selected portfolios, applying a 100% weighting to each scenario in turn. The weighting is reflected in both the determination of a significant increase in credit risk and the measurement of the resulting ECL. The ECL calculated for the Upside and Downside scenarios should not be taken to represent the upper and lower limits of possible ECL outcomes. The impact of defaults that might occur in the future under different economic scenarios is captured by recalculating ECL for loans at the balance sheet date. There is a particularly high degree of estimation uncertainty in numbers representing more severe risk scenarios when assigned a 100% weighting. For wholesale credit risk exposures, the sensitivity analysis excludes ECL and financial instruments related to defaulted (stage 3) obligors. It is generally impracticable to separate the effect of macroeconomic factors in individual assessments of obligors in default. The measurement of stage 3 ECL is relatively more sensitive to credit factors specific to the obligor than future economic scenarios, and loans to defaulted obligors are a small portion of the overall wholesale lending exposure, even if representing the majority of the allowance for ECL. Therefore, the sensitivity analysis to macroeconomic scenarios does not capture the residual estimation risk arising from wholesale stage 3 exposures. 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 ECL for loans and advances to customers related to defaulted obligors. This is because the retail ECL for secured mortgage portfolios including loans in all stages is sensitive to macroeconomic variables. Wholesale and retail sensitivity The wholesale and retail sensitivity tables present the 100% weighted results. These exclude portfolios held by the insurance business and small portfolios, and as such cannot be directly compared with personal and wholesale lending presented in other credit risk tables. Additionally, 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 risk profiles 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. Wholesale analysis IFRS 9 ECL sensitivity to future economic conditions1,2,3 UK France £m £m ECL of loans and advances to customers at 31 December 2022 Reported ECL 84 94 Consensus scenarios Central scenario 64 87 Upside scenario 51 77 Downside scenario 91 104 Downside 2 scenario 271 124 Gross carrying amount2 143,037 148,417 IFRS 9 ECL sensitivity to future economic conditions UK France £m £m ECL of loans and advances to customers at 31 December 2021 Reported ECL 104 98 Consensus scenarios Central scenario 90 89 Upside scenario 71 78 Downside scenario 109 120 Downside 2 scenario 189 138 Gross carrying amount2 142,450 120,955 1ECL sensitivity includes off-balance sheet financial instruments that are subject to significant measurement uncertainty. 2Includes 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 67. Retail analysis IFRS 9 ECL sensitivity to future economic conditions1 UK France2 £m £m ECL of loans and advances to customers at 31 December 2022 Reported ECL 7 87 Consensus scenarios Central scenario 6 86 Upside scenario 6 84 Downside scenario 7 88 Downside 2 scenario 12 92 Gross carrying amount 2,037 18,987 IFRS 9 ECL sensitivity to future economic conditions1 UK France £m £m ECL of loans and advances to customers at 31 December 2021 Reported ECL 5 91 Consensus scenarios Central scenario 4 91 Upside scenario 4 91 Downside scenario 5 92 Downside 2 scenario 10 93 Gross carrying amount 2,007 18,295 1ECL sensitivities exclude portfolios utilising less complex modelling approaches. 2Includes balances and ECL which have been reclassified from ‘loans and advances to customers’ to ‘assets held for sale’ in the balance sheet. This also includes any balances and 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. Report of the Directors | Risk 52 HSBC Bank plc Annual Report and Accounts 2022 Reconciliation of changes in gross carrying/ nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees The following disclosure provides a reconciliation by stage of the group’s gross carrying/nominal amount and allowances for loans and advances to banks and customers, including loan commitments and financial guarantees. Movements are calculated on a quarterly basis and therefore fully capture stage movements between quarters. If movements were calculated on a year-to-date basis they would 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’)/probability of default (‘PD’) movements of the financial instruments transferring stage. This is captured, along with other credit quality movements in the ‘changes in risk parameters – credit quality’ line item. Changes in ‘New financial assets originated or purchased’, ‘Assets derecognised (including final repayments)’ and ‘Changes to risk parameters – further lending/repayments’ represent the impact from volume movements within the group’s lending portfolio. Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial 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 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) New financial assets originated or purchased 47,763 (30) — — — — — — 47,763 (30) Asset derecognised (including final repayments) (27,882) 4 (2,625) 13 (442) 110 — — (30,949) 127 Changes to risk parameters – further lending/repayments (9,969) 33 (8,645) 16 (261) (20) 1 — (18,874) 29 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) HSBC Bank plc Annual Report and Accounts 2022 53 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 release/ (charge) £m £m £m As above 188,969 (1,233) (220) Other financial assets measured at amortised cost 269,755 (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 492,408 (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) 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2Includes 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. 3Total 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 34 ‘Assets held for sale and liabilities of disposal groups held for sale’ on page 186. 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 2021 184,715 (180) 31,726 (378) 3,352 (1,050) 40 (12) 219,833 (1,620) Transfers of financial instruments: 5,245 (66) (5,617) 90 372 (24) — — — — – transfers from stage 1 to stage 2 (8,431) 14 8,431 (14) — — — — — — – transfers from stage 2 to stage 1 13,714 (78) (13,714) 78 — — — — — — – transfers to stage 3 (93) — (401) 28 494 (28) — — — — – transfers from stage 3 55 (2) 67 (2) (122) 4 — — — — Net remeasurement of ECL arising from transfer of stage — 43 — (22) — (5) — — — 16 New financial assets originated or purchased 72,348 (55) — — — — — — 72,348 (55) Asset derecognised (including final repayments) (57,098) 6 (3,481) 32 (454) 95 (3) 2 (61,036) 135 Changes to risk parameters – further lending/repayments (16,766) 76 (3,927) 62 (213) 40 (29) 2 (20,935) 180 Changes to risk parameters – credit quality — 54 — 7 — (176) — — — (115) Changes to model used for ECL calculation — 2 — 9 — — — — — 11 Assets written off — — — — (152) 152 (5) 5 (157) 157 Credit related modifications that resulted in derecognition — — — — — — — — — — Foreign exchange (7,512) 2 (1,060) 10 (126) 46 (1) 1 (8,699) 59 Others2 (1,320) — (170) 2 — (1) — — (1,490) 1 At 31 Dec 2021 179,612 (118) 17,471 (188) 2,779 (923) 2 (2) 199,864 (1,231) ECL Income statement change for the period 126 88 (46) 4 172 Recoveries 3 Others (23) Total ECL income statement change for the period 152 Report of the Directors | Risk 54 HSBC Bank plc Annual Report and Accounts 2022 Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (continued) (Audited) At 31 Dec 2021 12 months ended 31 Dec 2021 Gross carrying/ nominal amount Allowance for ECL ECL release /(charge) £m £m £m As above 199,864 (1,231) 152 Other financial assets measured at amortised cost 202,137 (9) (1) Non-trading reverse purchase agreement commitments 30,005 — — Performance and other guarantees not considered for IFRS 9 0 0 18 Summary of financial instruments to which the impairment requirements in IFRS 9 are applied/Summary consolidated income statement 432,006 (1,240) 169 Debt instruments measured at FVOCI 41,188 (19) 5 Total allowance for ECL/total income statement ECL change for the period N/A (1,259) 174 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2021, these amounted to £(1)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 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) New financial assets originated or purchased 11,825 (15) — — — — — — 11,825 (15) Asset derecognised (including final repayments) (6,459) 1 (272) 2 (21) 2 — — (6,752) 5 Changes to risk parameters – further lending/repayments 2,162 11 (79) 14 (182) 5 — — 1,901 30 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 — Others 18 Total ECL income change for the period (112) HSBC Bank plc Annual Report and Accounts 2022 55 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 release/ (charge) £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) 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2Includes 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/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 2021 78,422 (121) 14,161 (213) 1,395 (363) 2 (2) 93,980 (699) Transfers of financial instruments: 4,795 (27) (4,840) 39 45 (12) — — — — – transfers from stage 1 to stage 2 (2,261) 3 2,261 (3) — — — — — — – transfers from stage 2 to stage 1 7,043 (29) (7,043) 29 — — — — — — – transfers to stage 3 — — (59) 13 59 (13) — — — — – transfers from stage 3 13 (1) 1 — (14) 1 — — — — Net remeasurement of ECL arising from transfer of stage — 13 — (1) — (1) — — — 11 New financial assets originated or purchased 11,532 (31) — — — — — — 11,532 (31) Asset derecognised (including final repayments) (11,861) 2 (1,836) 17 (80) 4 (2) 1 (13,779) 24 Changes to risk parameters – further lending/repayments (13,051) 58 (1,813) 32 (190) 4 — — (15,054) 94 Changes to risk parameters – credit quality — 48 — 59 — 13 — — — 120 Changes to model used for ECL calculation — 2 — 9 — — — — — 11 Assets written off — — — — (78) 78 (1) 1 (79) 79 Credit related modifications that resulted in derecognition — — — — — — — — — — Foreign exchange (76) — (15) — (4) 1 — — (95) 1 Others2 (4,051) — — — — — — — (4,051) — At 31 Dec 2021 65,710 (56) 5,657 (58) 1,088 (276) (1) — 72,454 (390) ECL income statement change for the period 92 116 20 1 229 Recoveries 1 Others (23) Total ECL income statement change for the period 207 Report of the Directors | Risk 56 HSBC Bank plc Annual Report and Accounts 2022 Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees1 (continued) At 31 Dec 2021 12 months ended 31 Dec 2021 Gross carrying/ nominal amount Allowance for ECL ECL release/ (charge) £m £m £m As above 72,454 (390) 207 Other financial assets measured at amortised cost 135,033 (1) 1 Non-trading reverse purchase agreement commitments 1,139 — — 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 208,626 (391) 212 Debt instruments measured at FVOCI 23,152 (4) 5 Total allowance for ECL/total income statement ECL change for the period n/a (395) 217 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. 2Includes the period on period movement in exposures relating to other HSBC Group companies. As at 31 December 2021, these amounted to £(4)bn 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 probability of default (‘PD’), whereas stages 1 and 2 are determined based on relative deterioration of credit quality since initial recognition. Accordingly, for non-credit-impaired financial instruments, there is no direct relationship between the credit quality assessment and stages 1 and 2, though typically the lower credit quality bands exhibit a higher proportion in stage 2. The five credit quality classifications 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 37. Distribution of financial instruments by credit quality at 31 December 2022 (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The group £m £m £m £m £m £m £m £m In-scope for IFRS 9 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 Prepayments, accrued income and other assets 53,972 708 896 26 32 55,634 (3) 55,631 – endorsements and acceptances 208 4 25 — 6 243 — 243 – accrued income and other 53,764 704 871 26 26 55,391 (3) 55,388 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 552,918 58,920 42,560 4,872 2,643 661,913 (1,307) 660,606 HSBC Bank plc Annual Report and Accounts 2022 57 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 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 Loan and other credit related commitments for loans and advances to customers 48,627 23,501 17,422 2,390 163 92,103 (66) 92,037 Loan and other credit-related commitments for loans and advances to banks 34,174 77 101 2 — 34,354 (1) 34,353 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 1For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Distribution of financial instruments by credit quality at 31 December 2021 (continued) (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The group £m £m £m £m £m £m £m £m In-scope for IFRS 9 Loans and advances to customers held at amortised cost 41,339 20,531 23,469 4,512 2,480 92,331 (1,154) 91,177 – personal 18,956 4,136 1,793 56 453 25,394 (163) 25,231 – corporate and commercial 16,533 13,867 19,597 4,305 1,785 56,087 (964) 55,123 – non-bank financial institutions 5,850 2,528 2,079 151 242 10,850 (27) 10,823 Loans and advances to banks held at amortised cost 8,649 320 1,815 5 — 10,789 (5) 10,784 Cash and balances at central banks 108,133 198 151 — — 108,482 — 108,482 Items in the course of collection from other banks 343 — 3 — — 346 — 346 Reverse repurchase agreements – non-trading 47,071 6,355 1,022 — — 54,448 — 54,448 Financial investments 2 — 8 — — 10 — 10 Assets held for sale — — — — — — — — Prepayments, accrued income and other assets 36,558 666 1,574 11 42 38,851 (9) 38,842 – endorsements and acceptances 105 61 23 — 7 196 — 196 – accrued income and other 36,453 605 1,551 11 35 38,655 (9) 38,646 Debt instruments measured at fair value through other comprehensive income1 36,410 1,899 1,406 118 — 39,833 (19) 39,814 Out-of-scope for IFRS 9 Trading assets 28,110 5,331 8,985 350 — 42,776 — 42,776 Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 2,246 304 2,644 3 — 5,197 — 5,197 Derivatives 111,471 25,487 4,054 207 2 141,221 — 141,221 Assets held for sale Total gross carrying amount on balance sheet 420,332 61,091 45,131 5,206 2,524 534,284 (1,187) 533,097 Percentage of total credit quality 78.7% 11.4% 8.4% 1.0% 0.5% 100.0% Loans and other credit-related commitments 71,741 21,860 20,018 1,874 202 115,695 (55) 115,640 Financial guarantees 8,412 1,088 1,245 210 99 11,054 (17) 11,037 In-scope: Irrevocable loan commitments and financial guarantees 80,153 22,948 21,263 2,084 301 126,749 (72) 126,677 Loans and other credit-related commitments 2,134 1,114 432 94 7 3,781 — 3,781 Performance and other guarantees 7,738 4,359 3,130 490 116 15,833 (31) 15,802 Out-of-scope: Revocable loan commitments and non-financial guarantees 9,872 5,473 3,562 584 123 19,614 (31) 19,583 1For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Report of the Directors | Risk 58 HSBC Bank plc Annual Report and Accounts 2022 Distribution of financial instruments by credit quality at 31 December 2022 (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The bank £m £m £m £m £m £m £m £m In-scope for IFRS 9 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 Prepayments, accrued income and 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% 100.0% 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 1For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. HSBC Bank plc Annual Report and Accounts 2022 59 Distribution of financial instruments by credit quality at 31 December 2021 (continued) (Audited) Gross carrying/notional amount Allowance for ECL Net Strong Good Satisfactory Sub- standard Credit impaired Total The bank £m £m £m £m £m £m £m £m In-scope for IFRS 9 Loans and advances to customers held at amortised cost 16,993 9,038 6,467 804 984 34,286 (350) 33,936 – personal 1,909 850 860 13 48 3,680 (6) 3,674 – corporate and commercial 8,120 6,649 5,003 729 681 21,182 (308) 20,874 – non-bank financial institutions 6,964 1,539 604 62 255 9,424 (36) 9,388 Loans and advances to banks held at amortised cost 6,427 166 187 2 — 6,782 (4) 6,778 Cash and balances at central banks 63,008 — — — — 63,008 — 63,008 Items in the course of collection from other banks 211 — — — — 211 — 211 Reverse repurchase agreements – non-trading 32,877 5,916 915 — — 39,708 — 39,708 Financial investments 3,337 — — — — 3,337 — 3,337 Prepayments, accrued income and other assets 28,524 121 94 2 28 28,769 (1) 28,768 – endorsements and acceptances 90 61 13 — 7 171 — 171 – accrued income and other 28,434 60 81 2 21 28,598 (1) 28,597 Debt instruments measured at fair value through other comprehensive income1 21,748 64 1,039 — — 22,851 (4) 22,847 Out-of-scope for IFRS 9 Trading assets 18,318 5,082 8,470 350 — 32,220 — 32,220 Other financial assets designated and otherwise mandatorily measured at fair value through profit or loss 138 — 2,504 2 — 2,644 — 2,644 Derivatives 98,698 24,160 2,854 75 — 125,787 — 125,787 Total gross carrying amount on balance sheet 290,279 44,547 22,530 1,235 1,012 359,603 (359) 359,244 Percentage of total credit quality 80.7% 12.4% 6.3% 0.3% 0.3% 100.0% Loans and other credit-related commitments 20,446 6,663 3,651 452 43 31,255 (29) 31,226 Financial guarantees 630 89 471 20 60 1,270 (7) 1,263 In-scope: Irrevocable loan commitments and financial guarantees 21,076 6,752 4,122 472 103 32,525 (36) 32,489 Loans and other credit-related commitments 620 383 126 86 1 1,216 — 1,216 Performance and other guarantees 4,846 1,939 480 56 13 7,334 (7) 7,327 Out-of-scope: Revocable loan commitments and non-financial guarantees 5,466 2,322 606 142 14 8,550 (7) 8,543 1For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Report of the Directors | Risk 60 HSBC Bank plc Annual Report and Accounts 2022 Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage distribution (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 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 253,856 10,259 5,167 150 323 269,755 (137) 269,618 – stage 1 253,577 9,893 4,272 28 — 267,770 (14) 267,756 – 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 382,215 55,416 44,931 6,984 2,862 492,408 (1,370) 491,038 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 1For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. HSBC Bank plc Annual Report and Accounts 2022 61 Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage distribution (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 Loans and advances to customers at amortised cost 41,339 20,531 23,469 4,512 2,480 92,331 (1,154) 91,177 – stage 1 40,831 19,376 19,077 1,446 — 80,730 (86) 80,644 – stage 2 508 1,155 4,392 3,066 — 9,121 (158) 8,963 – stage 3 — — — — 2,478 2,478 (908) 1,570 – POCI — — — — 2 2 (2) — Loans and advances to banks at amortised cost 8,649 320 1,815 5 — 10,789 (5) 10,784 – stage 1 8,620 311 1,814 5 — 10,750 (4) 10,746 – stage 2 29 9 1 — — 39 (1) 38 – stage 3 — — — — — — — — – POCI — — — — — — — — Other financial assets measured at amortised cost 192,107 7,219 2,758 11 42 202,137 (9) 202,128 – stage 1 192,105 7,214 2,727 2 — 202,048 — 202,048 – stage 2 2 5 31 9 — 47 — 47 – stage 3 — — — — 42 42 (9) 33 – POCI — — — — — — — — Loans and other credit-related commitments 71,741 21,860 20,018 1,874 202 115,695 (55) 115,640 – stage 1 71,074 19,960 16,337 551 — 107,922 (25) 107,897 – stage 2 667 1,900 3,681 1,323 — 7,571 (22) 7,549 – stage 3 — — — — 202 202 (8) 194 – POCI — — — — — — — — Financial guarantees 8,412 1,088 1,245 210 99 11,054 (17) 11,037 – stage 1 8,340 951 849 75 — 10,215 (3) 10,212 – stage 2 72 137 396 135 — 740 (7) 733 – stage 3 — — — — 99 99 (7) 92 – POCI — — — — — — — — At 31 Dec 2021 322,248 51,018 49,305 6,612 2,823 432,006 (1,240) 430,766 Debt instruments at FVOCI1 – stage 1 36,005 1,825 1,292 — — 39,122 (10) 39,112 – stage 2 405 74 114 118 — 711 (9) 702 – stage 3 — — — — — — — — – POCI — — — — — — — — At 31 Dec 2021 36,410 1,899 1,406 118 — 39,833 (19) 39,814 1For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. Report of the Directors | Risk 62 HSBC Bank plc Annual Report and Accounts 2022 Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage distribution (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 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 1For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. HSBC Bank plc Annual Report and Accounts 2022 63 Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage distribution (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 16,993 9,038 6,467 804 984 34,286 (350) 33,936 – stage 1 16,757 8,305 4,964 79 — 30,105 (33) 30,072 – stage 2 236 733 1,503 725 — 3,197 (47) 3,150 – stage 3 — — — — 984 984 (270) 714 – POCI — — — — — — — — Loans and advances to banks at amortised cost 6,427 166 187 2 — 6,782 (4) 6,778 – stage 1 6,427 160 186 2 — 6,775 (3) 6,772 – stage 2 — 6 1 — — 7 (1) 6 – stage 3 — — — — — — — — – POCI — — — — — — — — Other financial assets measured at amortised cost 127,957 6,037 1,009 2 28 135,033 (1) 135,032 – stage 1 127,956 6,037 991 — — 134,984 — 134,984 – stage 2 1 — 18 2 — 21 — 21 – stage 3 — — — — 28 28 (1) 27 – POCI — — — — — — — — Loans and other credit-related commitments 20,446 6,663 3,651 452 43 31,255 (29) 31,226 – stage 1 20,307 6,469 2,135 — — 28,911 (15) 28,896 – stage 2 139 194 1,516 452 — 2,301 (11) 2,290 – stage 3 — — — — 43 43 (3) 40 – POCI — — — — — — — — Financial guarantees 630 89 471 20 60 1,270 (7) 1,263 – stage 1 630 89 324 17 — 1,060 (1) 1,059 – stage 2 — — 147 3 — 150 — 150 – stage 3 — — — — 60 60 (6) 54 – POCI — — — — — — — — At 31 Dec 2021 172,453 21,993 11,785 1,280 1,115 208,626 (391) 208,235 Debt instruments at FVOCI1 – stage 1 21,748 64 1,035 — — 22,847 (2) 22,845 – stage 2 — — 4 — — 4 (2) 2 – stage 3 — — — — — — — — – POCI — — — — — — — — At 31 Dec 2021 21,748 64 1,039 — — 22,851 (4) 22,847 1For the purposes of this disclosure gross carrying value is defined as the amortised cost of a financial asset, before adjusting for any loss allowance. As such the gross carrying value of debt instruments at FVOCI as presented above will not reconcile to the balance sheet as it excludes fair value gains and losses. 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. Report of the Directors | Risk 64 HSBC Bank plc Annual Report and Accounts 2022 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 37. Forborne loans and advances to customers at amortised costs by stage allocation Stage 1 Stage 2 Stage 3 POCI Total The group £m £m £m £m £m 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) The group Gross carrying amount Personal — — 132 — 132 – first lien residential mortgages — — 96 — 96 – other personal lending — — 36 — 36 Wholesale 49 192 706 2 949 – corporate and commercial 49 192 702 2 945 – non-bank financial institutions — — 4 — 4 At 31 Dec 20211 49 192 838 2 1,081 Allowance for ECL Personal — — (15) — (15) – first lien residential mortgages — — (11) — (11) – other personal lending — — (4) — (4) Wholesale (1) (5) (218) (2) (226) – corporate and commercial (1) (5) (218) (2) (226) – non-bank financial institutions — — — — — At 31 Dec 20211 (1) (5) (233) (2) (241) 1Forborne exposures and allowances for ECL at 31 December 2021 have not been restated and agreed with the policies and disclosures presented in the Annual Report and Accounts 2021. Following the adoption of the EBA ‘Guidelines on the application of definition of default’, retail and wholesale loans are identified as forborne and classified as either performing or non-performing when we modify the contractual terms due to financial difficulty of the borrower. At 31 December 2022, we reported £1,845m (31 December 2021: £241m) of performing forborne loans. The increase of £1,604m was mainly driven by the inclusion of non-payment-related concessions in the forbearance assessment since 1 January 2022. HSBC Bank plc Annual Report and Accounts 2022 65 Forborne loans and advances to customers at amortised costs by stage allocation (continued) Stage 1 Stage 2 Stage 3 POCI Total The bank £m £m £m £m £m 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) The bank Gross carrying amount Personal — — 3 — 3 – first lien residential mortgages — — 2 — 2 – other personal lending — — 1 — 1 Wholesale 40 158 431 — 629 – corporate and commercial 40 158 431 — 629 At 31 Dec 20211 40 158 434 — 632 Allowance for ECL Personal — — — — — – first lien residential mortgages — — — — — – other personal lending — — — — — Wholesale (1) (2) (124) — (127) – corporate and commercial (1) (2) (124) — (127) At 31 Dec 20211 (1) (2) (124) — (127) 1Forborne exposures and allowances for ECL at 31 December 2021 have not been restated and agreed with the policies and disclosures presented in the Annual Report and Accounts 2021. Report of the Directors | Risk 66 HSBC Bank plc Annual Report and Accounts 2022 Wholesale lending This section provides further details on the countries and industries comprising wholesale loans and advances to customers and banks. Industry 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. 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 The group £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 country 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 Nominal amount Allowance for ECL 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 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) 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. HSBC Bank plc Annual Report and Accounts 2022 67 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 The group £m £m £m £m £m £m £m £m £m £m Corporate and commercial 46,237 8,066 1,782 2 56,087 (58) (137) (767) (2) (964) – agriculture, forestry and fishing 157 7 7 — 171 — — (5) — (5) – mining and quarrying 1,207 86 58 — 1,351 (1) (1) (5) — (7) – manufacture 7,327 1,624 281 2 9,234 (8) (14) (72) (2) (96) – electricity, gas, steam and air- conditioning supply 2,891 49 30 — 2,970 (3) (1) (4) — (8) – water supply, sewerage, waste management and remediation 215 — 4 — 219 — — (4) — (4) – construction 641 116 97 — 854 (2) (2) (40) — (44) – wholesale and retail trade, repair of motor vehicles and motorcycles 7,743 889 192 — 8,824 (4) (8) (132) — (144) – transportation and storage 3,254 1,570 205 — 5,029 (9) (20) (56) — (85) – accommodation and food 831 409 80 — 1,320 (4) (10) (20) — (34) – publishing, audiovisual and broadcasting 2,390 81 50 — 2,521 (2) (2) (12) — (16) – real estate 4,849 891 280 — 6,020 (9) (32) (159) — (200) – professional, scientific and technical activities 2,522 669 221 — 3,412 (3) (8) (60) — (71) – administrative and support services 8,765 1,204 178 — 10,147 (9) (21) (161) — (191) – public administration and defence, compulsory social security 376 180 — — 556 — — — — — – education 22 5 3 — 30 — (1) (1) — (2) – health and care 473 47 6 — 526 (1) (4) (5) — (10) – arts, entertainment and recreation 104 116 5 — 225 — (3) (3) — (6) – other services 1,427 66 85 — 1,578 (3) (2) (28) — (33) – activities of households — 2 — — 2 — — — — — – government 1,027 45 — — 1,072 — — — — — – asset-backed securities 16 10 — — 26 — (8) — — (8) Non-bank financial institutions 10,238 369 243 — 10,850 (6) (5) (16) — (27) Loans and advances to banks 10,750 39 — — 10,789 (4) (1) — — (5) At 31 Dec 2021 67,225 8,474 2,025 2 77,726 (68) (143) (783) (2) (996) By country UK 27,765 3,001 832 — 31,598 (34) (43) (233) — (310) France 29,287 3,492 572 1 33,352 (27) (62) (396) (1) (486) Germany 4,628 1,175 328 — 6,131 — (17) (73) — (90) Other countries 5,545 806 293 1 6,645 (7) (21) (81) (1) (110) At 31 Dec 2021 67,225 8,474 2,025 2 77,726 (68) (143) (783) (2) (996) . 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 The group £m £m £m £m £m £m £m £m £m £m Corporate and commercial 65,582 7,369 295 — 73,246 (22) (27) (15) — (64) Financial 50,380 826 2 — 51,208 (5) (2) — — (7) At 31 Dec 2021 115,962 8,195 297 — 124,454 (27) (29) (15) — (71) By geography Europe 115,962 8,195 297 — 124,454 (27) (29) (15) — (71) – of which: UK 25,662 2,910 87 — 28,659 (16) (11) (3) — (30) – of which: France 77,664 1,273 37 — 78,974 (3) (3) (4) — (10) – of which: Germany 10,113 3,693 127 — 13,933 (4) (8) (1) — (13) 1Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. Report of the Directors | Risk 68 HSBC Bank plc Annual Report and Accounts 2022 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 repos 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 Commercial 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 loss calculations. CDS mitigants are not reported in the following tables. Collateral on loans and advances 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 129. 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. HSBC Bank plc Annual Report and Accounts 2022 69 Wholesale lending – corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries by stage (excluding commercial real estate) (Audited) of which: Total UK France Germany Gross carrying/ nominal amount ECL coverage Gross carrying/ nominal amount ECL coverage Gross carrying/ nominal amount ECL coverage Gross carrying/ nominal amount ECL coverage The group £m % £m % £m % £m % Stage 1 Not collateralised 117,166 — 46,080 — 53,960 — 11,577 — Fully collateralised 10,444 0.1 6,300 0.1 2,146 — 809 — LTV ratio: – less than 50% 2,456 0.2 1,643 0.2 491 — — — – 51% to 75% 3,321 0.1 2,161 — 1,050 — — — – 76% to 90% 354 — 234 — 36 — — — – 91% to 100% 4,313 — 2,262 — 569 — 809 — Partially collateralised (A): 4,542 0.1 169 — 3,797 0.1 — — – collateral value on A 3,664 77 3,128 — Total 132,152 — 52,549 — 59,903 — 12,386 — Stage 2 Not collateralised 13,074 0.9 4,219 0.8 4,581 1.0 3,269 0.9 Fully collateralised 1,132 1.5 327 1.2 239 1.7 228 0.9 LTV ratio: – less than 50% 515 1.7 224 0.4 122 0.8 — — – 51% to 75% 272 1.5 84 3.6 69 1.4 — — – 76% to 90% 4 — 2 — 1 — — — – 91% to 100% 341 1.2 17 — 47 4.3 228 0.9 Partially collateralised (B): 509 1.4 23 — 472 1.5 — — – collateral value on B 426 13 405 — Total 14,715 1.0 4,569 0.8 5,292 1.1 3,497 0.9 Stage 3 Not collateralised 1,795 40.3 673 31.2 668 57.9 348 28.7 Fully collateralised 80 26.3 10 10.0 12 33.3 24 29.2 LTV ratio: – less than 50% 26 23.1 2 — 7 28.6 — — – 51% to 75% 6 33.3 3 33.3 2 50.0 — — – 76% to 90% 11 36.4 2 — 1 — — — – 91% to 100% 37 21.6 3 — 2 50.0 24 29.2 Partially collateralised (C): 172 23.8 11 27.3 159 23.3 — — – collateral value on C 125 3 122 — Total 2,047 38.4 694 30.8 839 51.0 372 28.8 POCI Not collateralised 2 — — — 2 — — — Fully collateralised — — — — — — — — LTV ratio: – less than 50% — — — — — — — — – 51% to 75% — — — — — — — — – 76% to 90% — — — — — — — — – 91% to 100% — — — — — — — — Partially collateralised (D): — — — — — — — — – collateral value on D — — — — Total 2 — — — 2 — — — At 31 Dec 2022 148,916 0.7 57,812 0.5 66,036 0.8 16,255 0.9 Report of the Directors | Risk 70 HSBC Bank plc Annual Report and Accounts 2022 Wholesale lending – corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of collateral for key countries by stage (excluding commercial real estate) (continued) (Audited) of which: Total UK France Germany Gross carrying/ nominal amount ECL coverage Gross carrying/ nominal amount ECL coverage Gross carrying/ nominal amount ECL coverage Gross carrying/ nominal amount ECL coverage The group £m % £m % £m % £m % Stage 1 Not collateralised 109,435 0.1 40,298 0.1 52,583 — 11,479 — Fully collateralised 10,399 0.1 6,133 0.1 2,221 0.1 708 — LTV ratio: – less than 50% 2,450 0.2 1,649 0.1 587 — — — – 51% to 75% 3,543 0.1 2,124 0.0 989 0.1 — — – 76% to 90% 801 0.1 446 0.0 349 — — — – 91% to 100% 3,605 — 1,914 — 296 — 708 — Partially collateralised (A): 3,424 0.1 85 — 3,248 0.1 — — – collateral value on A 2,661 51 2,555 — Total 123,258 0.1 46,516 0.1 58,052 — 12,187 — Stage 2 Not collateralised 11,024 0.9 4,365 0.9 1,890 1.5 3,942 0.6 Fully collateralised 1,675 1.1 608 0.8 639.4 1.1 243 0.4 LTV ratio: – less than 50% 689 1.7 217 1.4 350 1.1 — — – 51% to 75% 253 0.8 217 0.9 34 2.9 — — – 76% to 90% 271 0.4 165 0.0 106 0.9 — — – 91% to 100% 462 0.9 9 — 149 1.3 243 0.4 Partially collateralised (B): 1,573.2 0.9 4 0.0 1,567 0.9 — — – collateral value on B 1,408 3 1,404 — Total 14,272 0.9 4,977 0.9 4,096.4 1.2 4,185 0.5 Stage 3 Not collateralised 1,598 37.2 669 25.1 378 86.0 393 17.8 Fully collateralised 148 16.2 77 7.8 10 50.0 24 16.7 LTV ratio: – less than 50% 76 18.4 41 7.3 6 50.0 — — – 51% to 75% 22 13.6 19 10.5 2 50.0 — — – 76% to 90% 18 5.6 17 — 1 — — — – 91% to 100% 32 15.6 — — 1 100.0 24 16.7 Partially collateralised (C): 216 27.3 35 17.1 165 27.3 — — – collateral value on C 152 22 123 — Total 1,962 34.6 781 23.0 553 67.8 417 17.7 POCI Not collateralised — — — — — — — — Fully collateralised — — — — — — — — LTV ratio: – less than 50% — — — — — — — — – 51% to 75% — — — — — — — — – 76% to 90% — — — — — — — — – 91% to 100% — — — — — — — — Partially collateralised (D): 2 100.0 — — 2 100.0 — — – collateral value on D 2 — 2 — Total 2 100.0 — — 2 100.0 — — At 31 Dec 2021 139,494 0.6 52,274 0.5 62,703 0.7 16,789 0.6 . 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 165 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 30 on the financial statements. HSBC Bank plc Annual Report and Accounts 2022 71 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 value 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 The group £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 Nominal amount Allowance for ECL Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total The group £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 — — — — 1Includes primarily first lien residential mortgages in Channel Islands and Isle of Man. 2Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. Report of the Directors | Risk 72 HSBC Bank plc Annual Report and Accounts 2022 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 The group £m £m £m £m £m £m £m £m By portfolio First lien residential mortgages 6,723 173 234 7,130 (11) (5) (65) (81) – of which: interest only (including offset) 3,134 115 94 3,343 (1) (2) (27) (30) – affordability including ARMs 451 2 6 459 (3) — (1) (4) Other personal lending 17,532 513 219 18,264 (11) (11) (60) (82) – guaranteed loans in respect of residential property 14,387 332 38 14,757 (5) (2) (1) (8) – Other personal lending which is secured 2,535 136 100 2,771 (3) (4) (24) (31) – credit cards 318 22 11 351 (1) (2) (1) (4) – Other personal lending which is unsecured 292 23 70 385 (2) (3) (34) (39) At 31 Dec 2021 24,255 686 453 25,394 (22) (16) (125) (163) By geography UK1 3,543 88 49 3,680 (1) (3) (3) (7) France 18,500 497 239 19,236 (10) (10) (75) (95) Germany 161 47 — 208 — — — — Other countries 2,051 54 165 2,270 (11) (3) (47) (61) At 31 Dec 2021 24,255 686 453 25,394 (22) (16) (125) (163) 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 The group £m £m £m £m £m £m £m £m UK 586 3 2 591 — — — — France 1,076 20 2 1,098 — — — — Germany 136 85 — 221 — — — — Other countries 377 8 — 385 (1) — — (1) At 31 Dec 2021 2,175 116 4 2,295 (1) — — (1) 1Includes primarily first lien residential mortgages in Channel Islands and Isle of Man. 2Excludes 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 adjustment for obtaining and selling the collateral and in particular loans shown as collateralised or partially collateralised may also benefit from other forms of credit mitigants. HSBC Bank plc Annual Report and Accounts 2022 73 Personal lending: residential mortgage loans including loan commitments by level of collateral for key countries (Audited) of which: Total UK France Gross exposure ECL coverage Gross exposure ECL coverage Gross exposure ECL coverage The group £m % £m % £m % Stage 1 Fully collateralised 4,340 0.1 2,376 — 3 — LTV ratio: – less than 50% 2,199 0.1 1,255 — 3 — – 51% to 60% 744 0.1 429 — — — – 61% to 70% 738 0.3 420 0.2 — — – 71% to 80% 442 0.2 198 — — — – 81% to 90% 202 — 63 — — — – 91% to 100% 15 — 11 — — — Partially collateralised (A): 50 — 11 — — — LTV ratio: – 101% to 110% 4 — 3 — — — – 111% to 120% 3 — 1 — — — – greater than 120% 43 — 7 — — — – collateral value on A 10 6 — Total 4,390 0.1 2,387 — 3 — Stage 2 Fully collateralised 510 1.4 428 0.5 — — LTV ratio: – less than 50% 203 1.5 151 0.7 — — – 51% to 60% 105 1.9 90 1.1 — — – 61% to 70% 91 1.1 83 — — — – 71% to 80% 66 1.5 60 — — — – 81% to 90% 39 — 38 — — — – 91% to 100% 6 — 6 — — — Partially collateralised (B): 1 — 1 — — — LTV ratio: – 101% to 110% 1 — 1 — — — – 111% to 120% — — — — — — – greater than 120% — — — — — — – collateral value on B 1 1 — Total 511 1.4 429 0.5 — — Stage 3 Fully collateralised 65 16.9 10 10.0 7 14.3 LTV ratio: – less than 50% 46 13.0 9 11.1 — — – 51% to 60% 5 20.0 1 — — — – 61% to 70% 9 22.2 — — 6 — – 71% to 80% 3 33.3 — — — — – 81% to 90% 1 — — — — — – 91% to 100% 1 100.0 — — 1 100.0 Partially collateralised (C): 16 68.8 — — 16 62.5 LTV ratio: – 101% to 110% — — — — — — – 111% to 120% — — — — — — – greater than 120% 16 68.8 — — 16 62.5 – collateral value on C — — — Total 81 27.2 10 10.0 23 47.8 At 31 Dec 2022 4,982 0.7 2,826 0.1 26 42.3 Report of the Directors | Risk 74 HSBC Bank plc Annual Report and Accounts 2022 Personal lending: residential mortgage loans including loan commitments by level of collateral for key countries (continued) (Audited) of which: Total UK France Gross exposure ECL coverage Gross exposure ECL coverage Gross exposure ECL coverage The group £m % £m % £m % Stage 1 Fully collateralised 6,915 0.2 2,789 — 2,088 — LTV ratio: – less than 50% 3,400 0.1 1,308 — 1,110 0.1 – 51% to 60% 1,274 0.2 540 — 431 — – 61% to 70% 1,074 0.2 452 — 296 — – 71% to 80% 776 0.3 358 — 177 — – 81% to 90% 345 0.3 113 — 48 — – 91% to 100% 46 — 18 — 26 — Partially collateralised (A): 90 — 11 — 50 — LTV ratio: – 101% to 110% 18 — 2 — 12 — – 111% to 120% 9 — 1 — 5 — – greater than 120% 63 — 8 — 33 — – collateral value on A 63 4 50 Total 7,005 0.2 2,800 — 2,138 — Stage 2 Fully collateralised 169 3.0 46 — 83 1.2 LTV ratio: – less than 50% 91 2.2 18 — 48 2.1 – 51% to 60% 25 4.0 6 — 13 — – 61% to 70% 34 2.9 17 — 12 — – 71% to 80% 15 6.7 5 — 7 — – 81% to 90% 3 — — — 2 — – 91% to 100% 1 — — — 1 — Partially collateralised (B): 5 — — — 2 — LTV ratio: – 101% to 110% 1 — — — — — – 111% to 120% 1 — — — — — – greater than 120% 3 — — — 2 — – collateral value on B 4 — 3 Total 174 2.9 46 — 85 1.2 Stage 3 Fully collateralised 204 24.5 9 11.1 62 21.0 LTV ratio: – less than 50% 94 12.8 6 16.7 24 20.8 – 51% to 60% 31 19.4 3 — 8 25.0 – 61% to 70% 34 23.5 — — 19 10.5 – 71% to 80% 13 38.5 — — 3 33.3 – 81% to 90% 14 42.9 — — 4 25.0 – 91% to 100% 18 72.2 — — 4 50.0 Partially collateralised (C): 30 53.3 — — 24 58.3 LTV ratio: – 101% to 110% 2 50.0 — — 2 50.0 – 111% to 120% 2 50.0 — — 2 50.0 – greater than 120% 26 53.8 — — 20 60.0 – collateral value on C 6 — 6 Total 234 28.2 9 11.1 86 31.4 At 31 Dec 2021 7,413 1.1 2,855 — 2,309 1.3 Treasury risk Overview Treasury risk is the risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfy regulatory requirements, as well as the risk to our earnings or capital due to structural and transactional foreign exchange exposures and changes in market interest rates, together with pension and insurance risk. Treasury risk arises from changes to the respective resources and risk profiles driven by customer behaviour, management decisions or the external environment. 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, meeting both consolidated and local regulatory requirements at all times. HSBC Bank plc Annual Report and Accounts 2022 75 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 2022. Treasury risk management Key developments in 2022 •Our CET1 ratio decreased from 17.8% at 31 December 2021 to 16.8% at 31 December 2022. This included a 1.6 percentage point impact from the disposal of the retail banking operations in France and a 1.2 percentage point impact from RWA growth due to implementation of new regulations, increased volatility in the market and the impact of FX movements. Share issuance, profits and other movements added 1.8 percentage points to the ratio. •The Group Board approved a new interest rate risk in the banking book (‘IRRBB’) strategy in September, with the objective of increasing our stabilisation of NII, with consideration given to any capital or other constraints, and then adopting a managed approach based on interest rates and outlook. •We took steps to reduce the duration risk of our Treasury hold- to-collect-and-sell portfolio, which is accounted for at FVOCI primarily to reduce the capital impact from rising interest rates. This risk reduction lowered the hold-to-collect-and-sell stressed value at risk (‘SVaR’) exposure of this portfolio from 532m at the end of 2021 to 353m at the end of 2022. •We implemented a new hold-to-collect business model to better reflect our management strategy to stabilise NII. This portfolio of High Quality Liquid Assets ('HQLA') will form a greater part of our liquid asset buffer going forward, as well as being a hedge to our structural interest rate risk. •We enhanced the monitoring and forecasting of our capital positions as a result of the Russia-Ukraine war, although there were no material capital or liquidity direct impacts from the increased uncertainty on the forward economic outlook. There was also limited direct impact on our pension plans, as the most material plans had little or no direct investments in Russia or Ukraine. •Work continued over 2022 to implement and improve de- risking strategies for our pension plans with a particular focus on asset de-risking in Germany. In light of the increased market volatility we have reviewed the investment strategies of our pension plans to ensure that they remain appropriate and the pension plans continue to cope with future volatility. •The cost of living has continued to increase throughout Europe over 2022 and there are a number of pension risks arising from this issue. The main areas where this impacts pensions are across investment strategy, actuarial factors, pension increases and members' behaviours. We have worked with the fiduciaries of the pension plan to ensure impact to plans and members is understood and monitored. •HBCE signed a framework agreement with Promontoria MMB SAS (‘My Money Group’) and its subsidiary Banque des Caraïbes SA, for the sale of its retail banking business in France. The sale, which is subject to regulatory approvals, is anticipated to complete in the second half of 2023. The impact of classifying the disposal group as held for sale resulted in a 1.6 percentage point reduction in the group‘s CET1 ratio, which will be partly offset by the reduction in RWAs upon closing. •The Group performed its inaugural resolvability self-assessment to meet the BoE requirements, which came into effect on 1 January 2022. This was incorporated into the BoE publication of their findings from the first assessment of the resolvability of the eight major UK firms as part of the Resolvability Assessment Framework. 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 treasury risks with the exception of pension risk which is co- owned together with the regional heads of Performance & Reward. Capital, liquidity, interest rate risk in the banking book and non- trading book foreign exchange risk are the responsibility of the Executive Committee and the Risk Committee. The Treasury function actively manages these risks on an on-going basis, supported by the Asset and Liability Management Committee (‘ALCO’), overseen by Treasury Risk Management and the Risk Management Meeting (‘RMM’). 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 approach to determining key capital risk appetites including CET1, total capital, minimum requirements for own funds and eligible liabilities (‘MREL’), and 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, and interest rate risk in the banking book. Climate risk is also considered as part of the ICAAP, and we are continuing to develop our approach. The ICAAP supports the determination of our capital risk appetite and target ratios, as well as enables 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. 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 at an operating entity level in accordance with globally consistent policies, procedures and reporting standards. This ensures that obligations can be met in a timely manner, in the jurisdiction where they fall due. Operating entities are required to meet internal minimum requirements and any applicable regulatory requirements at all times. These requirements are assessed through our internal liquidity adequacy assessment process (‘ILAAP’), which ensures that operating entities have robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of liquidity risk over an appropriate set of time horizons, including intra-day. The ILAAP informs the validation of risk tolerance and the setting of risk appetite. It also assesses the capability to manage liquidity and funding effectively. 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 Group’s policies and controls. Planning and performance Capital and risk-weighted asset (‘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. 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. Our 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 Report of the Directors | Risk 76 HSBC Bank plc Annual Report and Accounts 2022 regulatory and economic capital needs. We evaluate and manage business returns by using a RoTE measure. Funding and liquidity plans also form part of the financial resource plan that is approved by the Board. The Board-level appetite measures are the 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. We closely monitor future regulatory changes 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 Our capital adequacy ratios have been affected by regulatory developments in 2022, including changes to internal-ratings based (’IRB’) modelling requirements and the UK’s implementation of the revisions to the Capital Requirements Regulation and Directive (’CRR II’). The PRA’s final rules on NSFR were implemented and have been reflected in disclosures since the first quarter of 2022. With effect from 1 January 2023 IFRS 17 Insurance Contracts comes into force. We expect this to reduce the group’s CET1 ratio by 0.3 percentage points because we value our insurance subsidiaries under the equity method in our capital adequacy reporting. Also from the same date, the group will be subject to a binding minimum leverage ratio, set according to PRA rules. Future changes to our ratios will occur with the implementation of Basel 3.1. The PRA published its consultation on the implementation of Basel 3.1 in the UK during the last quarter of 2022, with a proposed implementation date of 1 January 2025. The proposal includes five-year transitional provisions for certain elements of the reform. 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 our prudential regulatory reporting, focussing on PRA requirements initially. We commissioned a number of independent external reviews, some at the request of our regulators, including one on our credit risk RWA reporting process, which concluded in December 2022. These reviews have so far resulted in improvements in the accuracy of reported RWAs and LCR in accordance with policies, which have been reflected in our year-end regulatory reported ratios. Our prudential regulatory reporting programme is being phased over a number of years, prioritising RWA, capital and liquidity reporting in the early stages of the programme. 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, allocation of financial resources, 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 in many jurisdictions. These include the programmes of the BoE, the EBA and the ECB. 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 feed into 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. The recovery plan sets out the framework and governance arrangements to support restoring us 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 material entities’ recovery plans provide detailed actions that management would consider taking in a stress scenario should their positions deteriorate and threaten to breach risk appetite and regulatory minimum levels. This is to help ensure that entities can stabilise their financial position and recover from financial losses in a stress environment. The group also has capabilities, resources and arrangements in place to address the unlikely event that we might not be recoverable and would therefore need to be resolved by regulators. We have contributed to the Group's inaugural resolvability assessment framework (‘RAF’) self-assessment during 2021 to meet the BoE’s requirements, which came into effect on 1 January 2022. Overall, our recovery and resolution planning helps safeguard the Group’s financial and operational stability. The Group is committed to further developing its recovery and resolution capabilities, including in relation to the BoE’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; •Economic Value of Equity ('EVE') Sensitivity; and •Non-Trading Value at Risk ('VaR'). Net interest income sensitivity A principal part of our management of non-traded interest rate risk is to monitor the sensitivity of expected Net Interest Income (NII) under varying interest rate scenarios (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. HSBC Bank plc Annual Report and Accounts 2022 77 The NII sensitivity calculations assume that interest rates of all maturities move by the same amount in the ‘up-shock’ scenario. The sensitivity calculations in the ‘down-shock’ scenarios reflect no floors to the shocked market rates. However, customer product-specific interest rate floors are recognised where applicable. Economic value of equity sensitivity 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. Risk types Non-trading risk •Interest rates •Credit spreads Risk measure Value at risk | Sensitivity | Stress testing Non-trading portfolios Value at risk of the non-trading portfolios (Audited) Non-trading VaR includes the interest rate risk in the banking book transferred to and managed by Markets Treasury and the exposures generated by the portfolio of HQLA held by Markets Treasury to meet liquidity requirements. The non-trading VaR reduced materially during 2022 from £29.4m to end the year at £18.6m and was predominately driven by interest rate risk. The volatile market conditions driven by geopolitical events and concerns around high inflation led the Markets Treasury business to materially reduce the holdings of outright and asset swapped UK and US Government bonds. The rationale for the execution was to firstly protect the value of the Held to Collect and Sale portfolio and secondly to reduce the entities sensitivity to the increase of interest rates. There was a spike in the VaR during September due to a recalibration of the VaR model to incorporate the market volatility, however the Markets Treasury business took further action to reduce their Interest Rate sensitivity following change in the UK fiscal stance and increase in uncertainty leading the bond market to sell off sharply and bond yields rise to multi year highs. The daily levels of total non-trading VaR over the last year are set out in the graph below. Daily VaR (non-trading portfolios), 99% 1 day (£m) Report of the Directors | Risk 78 HSBC Bank plc Annual Report and Accounts 2022 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 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 Balance at 31 Dec 2021 28.7 9.0 (8.4) 29.4 Average 26.6 10.0 (5.6) 31.0 Maximum 34.6 12.7 — 37.8 Minimum 18.0 7.2 — 22.5 1Portfolio 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. 2The 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 represent net assets or capital investments in subsidiaries, branches, joint arrangement or associates, together with any associated hedges, the functional currencies of which are currencies other than pound sterling. An entity’s functional currency is that of the primary economic environment in which the entity operates. We use the pound sterling as our presentation currency in our consolidated financial statements because sterling forms the major currency in which we transact and fund our business. Exchange rate differences on structural exposures are recognised in other comprehensive income (‘OCI’). The structural foreign exchange exposures are managed within limits such that the capital ratios and the capital ratios of individual banking subsidiaries are largely protected from the effect of changes in exchange rates. We may hedge certain structural foreign exchange positions, either at entity level, or by relying on hedges held in other group entities, subject to approved limits. 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 and managed within limits with the exception of limited residual foreign exchange exposure arising from timing differences or for other reasons. Transactional foreign exchange exposure generated through OCI reserves is managed by the Markets Treasury business within agreed appetite. 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 Trinkaus & Burkhardt 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 is assessed using a one-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. HSBC Bank plc Annual Report and Accounts 2022 79 Capital risk in 2022 Capital overview Capital adequacy metrics At 31 Dec 31 Dec 2022 2021 Risk-weighted assets ('RWAs') (£m) Credit risk 68,821 69,929 Counterparty credit risk 17,981 16,434 Market risk 15,822 9,828 Operational risk 11,547 10,512 Total RWAs 114,171 106,703 Capital on a transitional basis (£m) Common equity tier 1 ('CET1') capital 19,184 18,963 Tier 1 capital 23,077 22,825 Total capital 36,187 33,992 Capital ratios on a transitional basis (%) Common equity tier 1 16.8 17.8 Total tier 1 20.2 21.4 Total capital ratio 31.7 31.9 Leverage ratio (transitional) 2 Tier 1 capital (£m) 23,077 22,825 Total leverage ratio exposure measure (£m) 417,587 536,518 Leverage ratio (%) 5.5 4.3 Leverage ratio (fully phased-in) 2 Tier 1 capital (£m) 23,077 22,652 Total leverage ratio exposure measure (£m) 417,587 536,518 Leverage ratio (%) 5.5 4.2 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. Regulatory transitional arrangements for IFRS 9 ‘Financial Instruments’ We have adopted the regulatory transitional arrangements in CRR II for IFRS 9, including paragraph four of article 473a. Our capital and ratios are presented under these arrangements throughout the table above. Without their application, our CET1 ratio would be 16.8%. The IFRS 9 regulatory transitional arrangements allow banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use. The impact is defined as: •the increase in loan loss allowances on day one of IFRS 9 adoption; and •any subsequent increase in expected credit losses (‘ECL’) in the non-credit-impaired book thereafter. Any add-back must be tax-effected and accompanied by a recalculation of exposure and RWAs. The impact is calculated separately for portfolios using the standardised (‘STD’) and internal ratings based (‘IRB’) approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses. In the current period, the add-back to the capital base amounted to £24m under the STD approach with tax impacts of £5m which resulted in a net add-back of £19m. Own funds Own funds disclosure (Audited) At 31 Dec 31 Dec 2022 2021 Ref £m £m Common equity tier 1 (‘CET1’) capital: instruments and reserves 1 Capital instruments and the related share premium accounts 1,217 797 – ordinary shares 1,217 797 2 Retained earnings1,2 16,177 15,511 3 Accumulated other comprehensive income (and other reserves)1,2 4,010 2,931 5 Minority interests (amount allowed in consolidated CET1) 72 57 5a Independently reviewed interim net profits net of any foreseeable charge or dividend3 (1,459) 625 6 Common equity tier 1 capital before regulatory adjustments2 20,017 19,921 28 Total regulatory adjustments to common equity tier 1 (833) (958) 29 Common equity tier 1 capital2 19,184 18,963 36 Additional tier 1 capital before regulatory adjustments 3,942 3,906 43 Total regulatory adjustments to additional tier 1 capital (49) (44) 44 Additional tier 1 capital 3,893 3,862 45 Tier 1 capital2 23,077 22,825 51 Tier 2 capital before regulatory adjustments 13,559 11,591 57 Total regulatory adjustments to tier 2 capital (449) (424) 58 Tier 2 capital 13,110 11,167 59 Total capital2 36,187 33,992 The references identify the lines prescribed in the European Banking Authority template, which are applicable and where there is a value. 1 These disclosures are based on updated rules implemented from 1 January 2022 including the PRA’s disclosure templates and instructions which came into force at that time. The presentation of comparatives has been amended only for CRR II grandfathered instruments to align to the updated template’s rows and instructions. 2 From 30 September 2022, investments in non-financial institution subsidiaries or participations have been measured on an equity accounting basis in compliance with UK regulatory requirements. Comparatives for prior periods have been represented on a consistent basis with the current year. 3 This row includes losses that have been recognised and deducted as they arose and were therefore not subject to an independent review. Report of the Directors | Risk 80 HSBC Bank plc Annual Report and Accounts 2022 At 31 December 2022, our common equity tier 1 ('CET1') capital ratio decreased to 16.8% from 17.8% at 31 December 2021. The key drivers of the fall in our CET1 ratio were: •a 1.6 percentage point impact from the expected loss on reclassification of our retail banking operations in France to held for sale; •a 1.2 percentage point impact from RWA growth due to implementation of new regulations and increased volatility in the market and due to impact of FX movement Share issuance, profits and other movements added 1.8 percentage points to the CET1 ratio. Throughout 2022, 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 2022 106,703 Asset size 3,531 Asset quality 296 Model updates (2,804) Methodology and policy (937) Foreign exchange movement 7,382 Total RWA movement 7,468 RWAs at 31 Dec 2022 114,171 RWAs increased by £7.5bn during the year, including an increase of £7.4bn due to foreign currency translation differences. Asset size Asset size increased by £3.5bn driven by an increase in Market Risk RWA by £4.5bn mainly attributable to heightened market risk volatility, and an increase in transactional and structural foreign exchange exposure. This was partially offset by £0.7bn decrease in Credit Risk RWAs due to other balance sheet movements. Asset quality Credit Risk increased marginally by £0.3bn due to portfolio mix changes. Model updates The £2.8bn decrease in RWAs was mainly driven by the implementation of new models for retail credit risk and equity prices (in market risk). Methodology and policy The £0.9bn decrease in RWA is mainly driven by synthetic securitization and by risk parameter refinements, partially offset by increases due to implementation of CRR II rules. Leverage ratio Our leverage ratio is 5.5% at 31 December 2022, up from 4.2% at 31 December 2021. The improvement was primarily due to the exclusion of central bank claims and cash pooling netting following the implementation of the PRA UK leverage ratio framework from 1 January 2022 and a rise in tier 1 capital. 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 2022 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 79 of the ‘Risk management’ section. Net structural foreign exchange exposures 2022 2021 £m £m Currency of structural exposure Euro 10,007 8,068 US Dollars 1,062 1,470 South African Rand 287 285 Israeli New Shekel 85 169 Others, each less than £150m 305 319 At 31 Dec 11,746 10,311 HSBC Bank plc Annual Report and Accounts 2022 81 Liquidity and funding risk in 2022 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 2022, all the group’s principal operating entities were within the LCR risk tolerance level established by the Board and applicable under the LFRF. The following table displays the individual LCR levels for HSBC Bank plc's principal operating entities on the European Commission Delegated Regulation basis. Operating entities’ LCRs1,2,3 At 31 Dec 31 Dec 2022 2021 % % HSBC Bank plc 143 142 HSBC Continental Europe 150 142 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 2022, all the group’s principal operating entities were within the NSFR risk tolerance level established by the Board and applicable under the LFRF. Operating entities’ NSFRs1,2 At 31 Dec 31 Dec 2022 2021 % % HSBC Bank plc 115 115 HSBC Continental Europe 140 130 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 sufficient 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 of the group’s principal operating entities The table below shows the unweighted 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. Operating entities' liquid assets1,2,3 At Estimated liquidity value At Estimated liquidity value 31 Dec 2022 31 Dec 2021 £m £m HSBC Bank plc Level 1 93,500 88,423 Level 2a 5,726 3,195 Level 2b 3,270 3,473 HSBC Continental Europe Level 1 74,852 39,159 Level 2a 781 450 Level 2b 173 142 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 response to the requirement for an IPU in line with EU Capital Requirements Directive ('CRD V'), HBCE completed the change of control transactions for HSBC Germany ('HTDE') and HSBC Malta ('HBMT') on 30 November 2022. The average for LCR and NSFR includes the impact of inclusion of two entities for Nov-22 and Dec-22. 3 In December 2022, a strategic data enhancement 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. Report of the Directors | Risk 82 HSBC Bank plc Annual Report and Accounts 2022 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 2022, 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 2022 2021 2022 2021 £m £m £m £m Sources Uses Customer accounts 215,948 205,241 Loans and advances to customers 72,614 91,177 Deposits by banks 20,836 32,188 Loans and advances to banks 17,109 10,784 Repurchase agreements – non-trading 32,901 27,259 Reverse repurchase agreements – non-trading 53,949 54,448 Debt securities in issue 7,268 9,428 Cash collateral, margin and settlement accounts 51,858 34,907 Cash collateral, margin and settlement accounts 60,385 37,076 Assets held for sale 21,214 9 Liabilities of disposal groups held for sale 24,711 — Trading assets 79,878 83,706 Subordinated liabilities 14,528 12,488 – reverse repos 8,729 8,626 Financial liabilities designated at fair value 27,287 33,608 – stock borrowing 5,627 6,498 Liabilities under insurance contracts 19,987 22,264 – other trading assets 65,522 71,862 Trading liabilities 41,265 46,433 Financial investments 32,604 41,300 – repos 8,213 7,663 Cash and balances with central banks 131,433 108,482 – stock lending 1,773 1,637 Other balance sheet assets 256,694 171,798 – other trading liabilities 31,279 37,133 At 31 Dec 717,353 596,611 Total equity 24,016 23,715 Other balance sheet liabilities 228,221 146,911 At 31 Dec 717,353 596,611 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 2022 2021 £bn £bn Commitments to conduits Multi-seller conduits1 – total lines 3.7 4.2 – largest individual lines 0.2 0.2 Securities investment conduits – total lines 1.3 1.3 Commitments to customers – five largest 2 3.7 10.4 – largest market sector3 13.3 7.7 1Exposures 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. 2Represents the undrawn balance for the five largest committed liquidity facilities provided to customers, other than those facilities to conduits. 3Represents 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. HSBC Bank plc Annual Report and Accounts 2022 83 Summary of assets available to support potential future funding and collateral needs (on- and off-balance sheet) 2022 2021 £m £m Total on-balance sheet assets at 31 Dec 717,353 596,611 Less: – reverse repo/stock borrowing receivables and derivative assets (293,543) (207,513) – other assets that cannot be pledged as collateral (51,974) (48,350) Total on-balance sheet assets that can support funding and collateral needs at 31 Dec 371,836 340,748 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 180,233 202,794 Total assets that can support future funding and collateral needs 552,069 543,542 Less: – on-balance sheet assets pledged (98,124) (93,513) – re-pledging of off-balance sheet collateral received in relation to reverse repo/stock borrowing/derivatives (136,777) (151,378) Assets available to support funding and collateral needs at 31 Dec 317,168 298,651 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 2022 There were no material changes to our policies and practices for the management of market risk in 2022. 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. Risk types Trading risk •Foreign exchange and commodities •Interest rates •Credit spreads •Equities Risk measure 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 model 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 incorporates 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. Report of the Directors | Risk 84 HSBC Bank plc Annual Report and Accounts 2022 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 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 back-testing exceptions is used to gauge how well the models are performing. We consider enhanced internal monitoring of a VaR model if more than five profit exceptions or more than five loss exceptions occur in a 250-day period. We back-test our VaR at set levels of our 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 79 for additional information. Market risk in 2022 The volatility in financial markets was elevated in 2022 driven by high inflation and the geopolitical risk around Ukraine. During the first half of the year, Russia-Ukraine war led supply chain disruptions increasing energy and food prices. The Zero-Covid policy in China added to the supply chain disruptions. Central Banks around the world (both from Developed and Emerging markets) aggressively started raising policy rates to tame the surging inflation. The US and Europe imposed multiple sanctions on Russia leading to large sell off of the Russian assets. The global equity markets sold off and IPO dried off. The fixed income prices fell responding to increasing rates. The USD index rallied with JPY, EUR and GBP depreciating. The Credit market sold off with new issuances drying up. European markets also underperformed as Russia retaliated by cutting of gas supply to Europe. US and European governments aggressively intervened in the energy market by releasing Oil from strategic reserve driving Oil prices down. Supply chain disruption also eased leading to Inflation coming down in second half of 2022. However, volatility in financial markets remained elevated particularly in the UK as the cost of living crisis intensified. In addition, a change in the UK fiscal stance in late September 2022 led to the pound sterling reaching record lows and to significant turmoil in the market for long-dated UK government bonds, which was exacerbated by rapid deleveraging of liability-driven investment funds used by pension schemes. Trading portfolios Value at risk of the trading portfolios (Audited) The Trading VaR predominantly resides within Market Securities Services where it was £31.2m as at 31 December 2022, compared with £19m at 31 December 2021. The Total Trading VaR peaked at £60m in September owing to the sensitivity of the trading book to interest rate moves, coupled with a large volatility in the rates market. When the central banks started to intervene beginning of Q4, the market volatility started to ease; as a result, the Trading VaR decreased and remained fairly stable over the last three months of the year, ranging between £31.2m and £38.15m. HSBC Bank plc Annual Report and Accounts 2022 85 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 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 Balance at 31 Dec 2021 4.5 10.0 10.5 14.9 (20.9) 19.0 Average 7.1 12.8 10.2 12.6 (20.4) 22.3 Maximum 19.3 26.7 14.9 16.7 — 31.9 Minimum 3.7 9.3 6.3 9.2 — 17.3 1Portfolio 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. 2The total VaR is non-additive across risk types due to diversification effect and it includes VaR RNIV. Back-testing HSBC Bank plc experienced 11 back testing exceptions against the Hypothetical P&L and 9 back testing exceptions against the Actual P&L. The hypothetical back testing exceptions were driven by losses from defensive positioning in rates, equity, credit and FX exposures on days when markets rallied. In addition, there were two actual back testing exceptions driven by one off changes in reserves (such as month end adjustment) and two actual back testing exceptions driven by losses from the unwinding of a large trade. Climate Risk Overview Climate risks have the potential to cause both financial and non- financial impacts for HSBC Bank plc. Financial impacts could materialise, for example, through greater transactional losses and/ or increased capital requirements. Non-financial impacts could materialise if our own assets or operations are impacted by extreme weather or chronic changes in weather patterns, or as a result of business decisions to help achieve the HSBC Group’s climate ambition. We remain aligned to the HSBC Group climate ambition to align HSBC Group’s own operations and supply chain to net zero by 2030, and the financed emissions from the HSBC Group’s portfolio of customers to net zero by 2050. The HSBC Group announced in March 2022 that it intends to publish a climate transition plan in 2023, and committed to a science-aligned phase-down of fossil fuel finance, and a review of its wider financing and investment policies critical to achieving net zero by 2050. This follows the HSBC Group’s thermal coal phase out policy, which was announced in 2021. Key developments in 2022 •HSBC Bank plc's risk appetite statement is approved by the Board and includes the measures we intend to take to enable the delivery of our climate ambition and meet our commitments. •Through our dedicated 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 as well as publishing a new greenwashing risk management framework. •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. Report of the Directors | Risk 86 HSBC Bank plc Annual Report and Accounts 2022 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. A dedicated Climate Risk Oversight Forum is responsible for shaping and overseeing our approach and providing support in managing climate risk. The group's Risk Management Meeting and Risk Committee receive regular updates on our climate risk profile and progress of our climate risk programme. Key risk management processes We are integrating climate risk into the policies, processes and controls across many areas of our organisation, and we will continue to update these as our climate risk management capabilities mature over time. We continue to enhance our climate risk scoring tool, which will enable us to assess our customers’ exposures to climate risk. 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 2022 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 focus on understanding of our risk and control environment, by updating our risk taxonomy and control libraries, and refreshing risk and control assessments. •We implemented heightened monitoring and reporting of cyber, third party, business continuity and payment/sanctions risks resulting from the Russia-Ukraine war and enhanced controls and key processes where needed. •We provide analysis and reporting of non-financial risks providing easy to access risk and control information and metrics that enable management to focus on non-financial risks in their decision-making and appetite setting. •We aimed to further strengthen our non-financial risk governance and senior leadership and improved our coverage and Risk Steward oversight, for data privacy and change execution. Governance and structure The Operational and Resilience Risk target operating model provides a globally consistent approach, which allows us to define a group view across resilience risks, strengthening our risk management oversight while operating effectively as part of a simplified non-financial risk structure. We view resilience risk across nine sub-risk types related to: failure to manage third parties; technology and cybersecurity; transaction processing; failure to protect people and places from physical malevolent acts; business interruption and incident risk; data risk; change execution risk; building unavailability; and workplace safety. Risk appetite and key escalations for resilience risk are reported to our Risk Management Meeting (chaired by the HSBC Bank plc Chief Risk Officer) and to our 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 most important services, within an agreed level. This is achieved via day-to-day oversight, periodic and ongoing assurance, such as deep dive review and controls testing, which may result in challenges being raised to the business by Risk Stewards. Further challenge is also raised in the form of quarterly Risk Steward opinion papers to formal governance. We accept we will not be able to prevent all disruption but we prioritise investment to continually improve the response and recovery strategies for our most important business services. Business operations continuity We continue to monitor the situation in Russia and Ukraine, 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. Publications from the UK Government, EU Commission and the National Grid, amongst others, advised on potential plans for power cuts and energy restrictions across the UK and Continental Europe during the winter period. In light of potential disruption, businesses and functions in these markets are reviewing existing plans and responses to minimise the impact. 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 2022 The dedicated programme to embed our updated purpose-led conduct approach has concluded. Work to map applicable regulations to our risks and controls continues in 2023 alongside adoption of new 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, and in particular Greenwashing, risks. A major change initiative that begun in 2022 was the introduction of the UK Consumer Duty (which will begin to be implemented in July 2023) and measures resulting from ongoing thematic reviews into the workings of the retail, small to medium enterprises (‘SME’) and wholesale banking sectors and the provision of financial advice to consumers in the UK particularly. A number of the issues arising from this work have been exacerbated by the cost of living crisis affecting the UK and the EU, and we may see further regulatory intervention as a result, in particular to protect vulnerable customers. Governance and structure The structure of the Compliance function is substantively unchanged and the Group Regulatory Conduct capability and Group Financial Crime capability both continue to work closely with the regional Chief Compliance Officers and their respective teams to help them identify and manage regulatory and financial crime compliance risks across the Group. 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 Group’s Risk function. HSBC Bank plc Annual Report and Accounts 2022 87 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. It also devises clear frameworks and support processes to mitigate regulatory compliance 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 Group Risk Committee, as appropriate. Conduct of business Our 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 2022 We regularly review the effectiveness of our financial crime risk management framework, which includes consideration of the complex and dynamic nature of sanctions compliance risk. In 2022, we adapted our policies, procedures and controls to respond to the unprecedented volume and diverse set of sanctions and trade restrictions imposed against Russia following its invasion of Ukraine. We also continued to make progress with several key financial crime risk management initiatives, including: • We enhanced our screening and non-screening controls to aid the identification of potential sanctions risk related to Russia, as well as risk arising from export control restrictions. • We deployed a key component of our intelligence-led, dynamic risk assessment capabilities for customer account monitoring in our Non-Ring Fenced Bank for CMB and in our Jersey market for domestic customers in retail and wholesale, while building toward other markets in Europe. Global Social Network Analysis was deployed in December for correspondent banking in the UK, bringing a broader, more holistic review of potential financial crime risk. • We reconfigured our transaction screening capability in readiness for the global change to payment systems formatting under ISO20022 requirements, and enhanced transaction screening capabilities by implementing automated alert discounting. • We strengthened the first party lending fraud framework, reviewed and published an updated fraud policy and associated control library, and continued to develop fraud detection tools. Governance and Structure The structure of the Financial Crime function remained substantively unchanged in 2022, although we continued 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 continues to report to the EMEA Head of Compliance, 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 by streamlining and de-duplicating policy requirements. We also strengthened our financial crime risk taxonomy and control libraries and our investigative and monitoring capabilities through technology deployments. We developed more targeted metrics, and have also enhanced 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 2022, 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. ESG disclosures 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. Report of the Directors | Risk 88 HSBC Bank plc Annual Report and Accounts 2022 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. We are confident our adoption of these new technologies will 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. Our anti-bribery and corruption policy Our global AB&C 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 2022. Our global AB&C 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. Skilled Person & Independent Consultant In August 2022, the Board of Governors of the Federal Reserve System terminated its 2012 cease-and-desist order, with immediate effect. This order was the final remaining regulatory enforcement action that HSBC had entered into in 2012. In June 2021, the UK Financial Conduct Authority had already determined that no further Skilled Person work was required under section 166 of the Financial Services and Markets Act. The Group Risk Committee retains oversight of matters relating to financial crime, including any remaining remedial activity not yet completed as part of previous recommendations. In December 2022, the 3-year DPA our Swiss private bank entered into with the DOJ was dismissed. This dismissal confirms that our Swiss private bank complied in all material terms with the DPA obligations by establishing or enhancing the relevant governance, controls, training and internal assurance reviews and allows the private banking business in Switzerland to move forward while maintaining the robust control environment put in place to combat tax evasion in the future. 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 2022 We managed the risks related to the Russia-Ukraine war and broader macroeconomic and geopolitical uncertainties, as well as the continued risks resulting from the Covid-19 pandemic and other key risks described in this section. 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, particularly regarding the governance of treasury risk to ensure senior executives have appropriate oversight and visibility of macroeconomic trends around inflation and interest rates. •We redeveloped and validated models impacted by changes to alternative rate setting mechanisms due to the Ibor transition. •We embedded the changes made to our control framework for our financial reporting processes to address the control weaknesses that emerged as a result of significant increases in adjustments and overlays that were applied to compensate for the impact of the Covid-19 pandemic on models. •Our businesses and functions continue to be more involved in the 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 enhanced the reporting that supports the 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, which have become critical areas of focus that will grow in importance in 2023 and beyond. We also added further qualified specialist skills to the model risk teams to manage the increased model risk in these areas. •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. HSBC Bank plc Annual Report and Accounts 2022 89 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 relatively minor for our insurance operations. HSBC’s insurance business We sell insurance products through a range of channels including our branches, insurance salesforces, direct channels and third- party distributors. The majority of sales are through an integrated bancassurance model that provides insurance products principally for customers with whom we have a banking relationship, although the proportion of sales though digital is increasing. The insurance products we manufacture, the majority of sales are of savings, universal life and protection contracts. We choose to manufacture these insurance products in HSBC subsidiaries based on an assessment of operational scale and risk appetite. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit and investment income within the Group. 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 2022 The insurance manufacturing subsidiaries follow the Group’s risk management framework. In addition, there are specific policies and practices relating to the risk management of insurance contracts. There has been continued market volatility observed over 2022 across interest rates, equity markets and foreign exchange rates. This has been predominantly driven by geopolitical factors and wider inflationary concerns. One area of key risk management focus over 2022 was the implementation of the new accounting standard, IFRS17 Insurance Contracts. Given the fundamental nature of the impact of the accounting standard on insurance accounting, this presents additional financial reporting and model risks for the Bank. Governance 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 26. The 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 Stress testing forms a key part of the risk management framework for the insurance business. We participate in local and Group-wide regulatory stress tests, 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'). Management and mitigation of key risk types Market risk 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 discretionary participating features (‘DPF’). The effect is that a significant portion of the market risk is borne by the policyholder. •We use asset and liability matching where asset portfolios are structured to support projected liability cash flows. The Group manages its assets using an approach that considers asset quality, diversification, cash flow matching, liquidity, volatility and target investment return. We use models to assess the effect of a range of future scenarios on the values of financial assets and associated liabilities, and ALCOs employ the outcomes in determining how best to structure asset holdings to support liabilities. •We use derivatives to protect against adverse market movements. •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. In certain cases, entities use reinsurance to manage capital risk. Liquidity risk is relatively minor for the insurance business. It is managed by cash flow matching and maintaining sufficient cash resources, investing in high credit- quality investments with deep and liquid markets, monitoring investment concentrations and restricting them where appropriate, and establishing committed contingency borrowing facilities. Insurance manufacturing subsidiaries complete quarterly liquidity risk reports and an annual review of the liquidity risks to which they are exposed. Report of the Directors | Risk 90 HSBC Bank plc Annual Report and Accounts 2022 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 thresholds to third party reinsurer thereby limiting our exposure; and •oversight of expense and reserving risks by entity Financial Reporting Committees. Insurance manufacturing operations risk in 2022 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) With DPF Unit- linked Other contracts1 Shareholder assets and liabilities Total £m £m £m £m £m Financial assets 17,029 2,888 191 2,593 22,701 – financial assets designated and otherwise mandatorily measured at fair value through profit or loss 9,171 2,880 80 1,033 13,164 – derivatives 232 — — 11 243 – financial investments – at amortised cost 298 — — 20 318 – financial investments – at fair value through other comprehensive income 6,332 — 107 1,452 7,891 – other financial assets2 996 8 4 77 1,085 Reinsurance assets — 40 112 — 152 PVIF3 — — — 1,076 1,076 Other assets and investment properties 725 1 1 68 795 Total assets at 31 Dec 2022 17,754 2,929 304 3,737 24,724 Liabilities under investment contracts designated at fair value — 948 — — 948 Liabilities under insurance contracts 17,624 2,062 301 — 19,987 Deferred tax4 129 5 — 106 240 Other liabilities — — — 1,796 1,796 Total liabilities at 31 Dec 2022 17,753 3,015 301 1,902 22,971 Total equity at 31 Dec 2022 — — — 1,753 1,753 Total liabilities and equity at 31 Dec 2022 17,753 3,015 301 3,655 24,724 Financial assets 19,384 2,924 254 2,704 25,266 – financial assets designated and otherwise mandatorily measured at fair value through profit or loss 9,876 2,859 89 1,236 14,060 – derivatives 47 — — 1 48 – financial investments – at amortised cost 815 — — 42 857 – financial investments – at fair value through other comprehensive income 7,490 — 104 1,327 8,921 – other financial assets2 1,156 65 61 98 1,380 Reinsurance assets — 53 104 — 157 PVIF3 — — — 811 811 Other assets and investment properties 748 1 — 59 808 Total assets at 31 Dec 2021 20,132 2,978 358 3,574 27,042 Liabilities under investment contracts designated at fair value — 1,031 — — 1,031 Liabilities under insurance contracts 19,998 1,938 328 — 22,264 Deferred tax4 133 6 — 46 185 Other liabilities — — — 2,003 2,003 Total liabilities at 31 Dec 2021 20,131 2,975 328 2,049 25,483 Total equity at 31 Dec 2021 — — — 1,559 1,559 Total liabilities and equity at 31 Dec 2021 20,131 2,975 328 3,608 27,042 1‘Other contracts’ includes term assurance and credit life insurance. 2Comprise mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities. 3Present value of in-force long-term insurance business. 4'Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF. HSBC Bank plc Annual Report and Accounts 2022 91 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 and foreign exchange rates. Lapse risk exposure on products with premium financing has increased over the year as rising interest rates have led to an increase in the cost of financing for customers. 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. The cost of such guarantees is accounted for as a deduction from the present value of in-force 'PVIF' asset, unless the cost of such guarantees is already explicitly allowed for within the insurance contracts liabilities. The table below shows the total reserve held for the cost of guarantees, the range of investment returns on assets supporting these products and the implied investment return that would enable the business to meet the guarantees. The cost of guarantees decreased to £100m (2021: £299m) primarily due to increases in interest rates and unfavourable equity performances in France. 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. Financial return guarantees (Audited) 2022 2021 Investment returns implied by guarantee Long-term investment returns on relevant portfolios Cost of guarantees Investment returns implied by guarantee Long-term investment returns on relevant portfolios Cost of guarantees % % £m % % £m Capital — 1.6 - 2.0 18 — 0.8 - 2.0 127 Nominal annual return 2.6 2.0 49 2.6 2.2 92 Nominal annual return 4.5 2.0 33 4.5 2.2 80 At 31 Dec 100 299 Sensitivities The following table illustrates the effects of selected interest rate and equity price scenarios on our profit for the year and the total equity of our insurance manufacturing subsidiaries. Where appropriate, the effects of the sensitivity tests on profit after tax and equity incorporate the impact of the stress on the PVIF. Due in part to the impact of the cost of guarantees and hedging strategies which may be in place, the relationship between the profit and total equity and the risk factors is non- linear. Therefore, the results disclosed should not be extrapolated to measure sensitivities to different levels of stress. For the same reason, the impact of the stress is not 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 differences between the impacts on profit after tax and equity are driven by the changes in value of the bonds measured at FVOCI, which are only accounted for in equity. Sensitivity of the group’s insurance manufacturing subsidiaries to market risk factors (Audited) 2022 2021 Effect on profit after tax Effect on total equity Effect on profit after tax Effect on total equity £m £m £m £m +100 basis point parallel shift in yield curves 34 12 119 96 -100 basis point parallel shift in yield curves (48) (22) (229) (203) 10% increase in equity prices 65 65 46 46 10% decrease in equity prices (66) (66) (49) (49) 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 91. The credit quality of the reinsurers’ share of liabilities under insurance contracts is assessed as ‘satisfactory’ or higher as defined on page 37, 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 57. Report of the Directors | Risk 92 HSBC Bank plc Annual Report and Accounts 2022 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 shared with policyholders for products with DPF. The following table shows the expected undiscounted cash flows for insurance contract liabilities at 31 December 2022. The profile of the expected maturity of insurance contracts at 31 December 2022 remained comparable with 2021. The remaining contractual maturity of investment contract liabilities is included within ‘Financial liabilities designated at fair value’ in Note 27. Expected maturity of insurance contract liabilities (Audited) Expected cash flows (undiscounted) Within 1 year 1-5 years 5-15 years Over 15 years Total £m £m £m £m £m Unit-linked 147 368 818 1,433 2,766 With DPF and Other contracts 1,132 4,645 8,555 11,886 26,218 At 31 Dec 2022 1,279 5,013 9,373 13,319 28,984 Unit-linked 230 565 927 926 2,648 With DPF and Other contracts 1,341 5,102 7,318 6,415 20,176 At 31 Dec 2021 1,571 5,667 8,245 7,341 22,824 . 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 91 analyses our insurance manufacturing exposures by type of contract. The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2021. Sensitivities The table below shows the sensitivity of profit and total equity to reasonably possible changes in non-economic assumptions across all our insurance manufacturing subsidiaries. Mortality and morbidity risk is typically associated with life insurance contracts. The effect on profit of an increase in mortality or morbidity depends on the type of business being written. Sensitivity to lapse rates depends on the type of contracts being written. An increase in lapse rates typically has a negative effect on profit due to the loss of future income on the lapsed policies. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. 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. Sensitivity analysis (Audited) 2022 2021 £m £m Effect on profit after tax and total equity at 31 Dec 10% increase in mortality and/or morbidity rates (24) (20) 10% decrease in mortality and/or morbidity rates 25 19 10% increase in lapse rates (33) (19) 10% decrease in lapse rates 35 20 10% increase in expense rates (28) (40) 10% decrease in expense rates 28 40 HSBC Bank plc Annual Report and Accounts 2022 93 Corporate Governance Report The statement of corporate governance practices set out on pages 94 to 102, together with the information incorporated by reference, constitutes the Corporate Governance Report of the bank. The following disclosures, read together with those in the Strategic Report, including the section 172 statement on pages 12 and 14 and reporting on employee engagement on pages 10 to 13 describe how the Board has discharged its responsibilities relating to section 172 of the Companies Act 2006 (the 'Act'), as well as the requirements under the Companies (Miscellaneous Reporting) Regulations 2018 (the 'Reporting Regulations'). Engagement with employees, suppliers, customers and other key stakeholders: Stakeholder Page Section Customers Page 12 How we do business Page 12 section 172 statement Employees Page 12 How we do business Pages 12 and 13 section 172 statement Pages 101 to 101 Corporate Governance statement Communities Pages 11 How we do business Regulators and governments Page 13 How we do business Page 12 section 172 statement Suppliers Page 13 How we do business Page 12 section 172 statement The bank, together with the wider Group, is committed to high standards of corporate governance. The Group has a comprehensive range of principles, policies and procedures influenced by the UK Corporate Governance Code with requirements in respect of Board independence, composition and effectiveness to ensure that the Group is well managed, with appropriate oversight and control. During the year, the bank adhered to these corporate governance principles, policies and procedures, as applicable. Board of Directors As at 31 December 2022, the Board comprised 10 Directors including the Chair, non-executive Directors, and two executive Directors, being the Chief Executive Officer and the Chief Financial Officer. All Directors are subject to election or re-election at each Annual General Meeting's ('AGM') of the bank. The Directors serving at 31 December 2022 are set out below. Directors Stephen O'Connor (61) Chair of the Board Chair of the Nomination, Remuneration & Governance Committee Appointed to the Board: May 2018. Chair of the Board since August 2018. Stephen is a non-executive Director and Vice Chair of HBCE, Chairman of Quantile Group Limited and its subsidiary Quantile Technologies Limited, and a Director of the London Stock Exchange plc. He is also a non-executive Director of the Financial Markets Standards Board. He has more than 25 years’ investment banking experience in London and New York. Former appointments include: Senior Independent Director, Chairman of the Risk Committee and member of both the Audit and Nomination Committees of the London Stock Exchange Group; Chairman of the International Swaps and Derivatives Association; and Managing Director and a member of the Fixed Income Management Committee at Morgan Stanley. Colin Bell (55) Executive Director and Chief Executive Officer Chair of the Executive Committee Appointed to the Board and as Chief Executive Officer: February 2021. Colin Bell joined HSBC in July 2016 and most recently held the role of Group Chief Compliance Officer until February 2021. He is a member of the Supervisory Board, and Remuneration, Nomination and Mediation Committees of HSBC Trinkaus & Burkhardt GmbH. Before joining HSBC, Colin worked at UBS, where he was Global Head of Compliance and Operational Risk Control. He has more than 10 years of experience in managing risk and financial crime, following 16 years in the British Army. During his time in the Army, he held a variety of command and staff appointments, including operational tours of Iraq and Northern Ireland, time in the Ministry of Defence, a NATO appointment and completion of the Advanced Command and Staff Course. David Watts (56) Executive Director and Chief Financial Officer Member of the Executive Committee Appointed to the Board and as Chief Financial Officer: December 2021. David is a Member of the Supervisory Board of HSBC Trinkaus & Burkhardt GmbH. He joined the HSBC Group in 1994 and was previously a Director and Chief Financial Officer of HSBC UK Bank plc. Former HSBC Group roles include: Chief Financial Officer and Head of Finance for HSBC Bank plc; Chief Financial Officer for Global Commercial Banking; Chief Financial Officer for the Middle East and North Africa, Chief Financial Officer for Group HSBC Technology and Operations; Chief Financial Officer for Global Banking; Head of Financial Control for Global Banking & Markets HSBC Securities (USA) Inc; Head of Group Cost and Investment Reporting & Analysis; and Manager Treasury Services, France. Patrick Clackson (58) Independent non-executive Director Member of the Audit Committee Appointed to the Board: September 2022. Former appointments include: Chief Financial Officer, Chief Operations Officer and Chief Executive Officer at Barclays Capital (now Barclays CIB). He also held several non-executive positions whilst with Barclays, BarCap as Head of Business Transformation and Structural Reform, as well as EMEA Chief Executive Officer, Chief Operations Officer, Chief Financial Officer and Head of Risk. Between 1986-1996 he was employed in the audit and financial services advisory teams of PwC, London. Norma Dove-Edwin (57) Independent non-executive Director Member of the Transformation, Operational Resilience and Technology Committee Appointed to the Board: October 2021. Norma is as Chief Information Officer of ESO at National Grid Plc. She is also a non-executive Director of Pod Point Group Holdings plc. Former appointments include: Group Chief Data and Information Officer at Places for People and a number of positions at British American Tobacco Plc including as Head of Global Data Services. Report of the Directors | Corporate Governance Report 94 HSBC Bank plc Annual Report and Accounts 2022 Yukiko Omura (67) Independent non-executive Director Member of the Audit Committee Appointed to the Board: May 2018. Yukiko is the senior independent non-executive Director of The Private Infrastructure Development Group Limited (‘PIDG’). She also serves as a non-executive Director of Assured Guaranty Ltd, and a member of the Supervisory Board of Nishimoto HD Co. Ltd. She has more than 35 years’ international professional experience in both the public and private financial sectors, performing senior roles for JP Morgan, Lehman Brothers, UBS and Dresdner Bank. Yukiko is the Consumer Duty Champion for the Board and helps support the Chair and Chief Executive Officer by encouraging regular dialogue at the Board level on how the Bank is embedding Consumer Duty and focusing on customer outcomes. Former appointments include: Chair of GuarantCo Limited, a subsidiary of PIDG; Under-Secretary General and COO/Vice President of the International Fund for Agricultural Development; and Executive Vice President and CEO of the Multilateral Investment Guarantee Agency of the World Bank Group. Juliet Ellis (56) Independent non-executive Director Chair of the Transformation, Operational Resilience and Technology Committee, member of the Risk Committee and the Nomination, Remuneration & Governance Committee Appointed to the Board: January 2021. Former appointments include: Dual role as European Head of Operations and Global Head of Shared Services and Banking Operations and other senior management positions at Morgan Stanley. Prior to 2007 she performed senior roles within Goldman Sachs International. Dr Eric Strutz (58) Independent non-executive Director Chair of the Risk Committee and member of the Nomination, Remuneration & Governance Committee and Transformation, Operational Resilience and Technology Committee Appointed to the Board: October 2016. Eric is a member of the Supervisory Board and Risk Committee and Chair of the Audit Committee of HSBC Trinkaus & Burkhardt GmbH. He is also a director of the HBCE and Chair of the HBCE Risk Committee and member of the HBCE Audit Committee. Other appointments include Chair of the Audit Committee of Global Blue Group Holding AG, and a member of the Advisory Board and Chairman of the Audit & Risk Committee of Luxembourg Investment Company 261 Sarl. Former appointments include: Vice Chairman and Lead Independent Director of Partners Group Holding AG, where he also Chaired the Risk and Audit Committee; Chief Financial Officer of Commerzbank Group; Partner and Director of the Boston Consulting Group; and non-executive Director of Mediobanca Banca di Credito Finanziario SpA. John Trueman Deputy Chairman and non-executive Director Member of the Audit Committee, the Risk Committee and the Nomination, Remuneration & Governance Committee Appointed to the Board: September 2004. Deputy Chairman since December 2013. Former appointments include: Chairman and member of the Risk Committee of HSBC Global Asset Management Limited and Deputy Chairman of S.G. Warburg & Co Ltd. Andrew Wright (62) Chair of the Audit Committee and member of the Risk Committee and Nomination, Remuneration & Governance Committee Appointed to the Board: May 2018. Andrew is a member of the Supervisory Board and Audit Committee and Chair of the Risk Committee of HSBC Trinkaus & Burkhardt GmbH. Former appointments include: Treasurer to the Prince of Wales and the Duchess of Cornwall, a role he held from May 2012 until June 2019; Global Chief Financial Officer for the Investment Bank at UBS AG; Chief Financial Officer, Europe and the Middle East at Lehman Brothers; and Chief Financial Officer for the Private Client and Asset Management Division at Deutsche Bank. Board Changes during 2022 and following the year-end Mary Marsh retired as a Director at the conclusion of the bank’s AGM held on 17 May 2022. Norma Dove-Edwin was appointed as a member of the Transformation, Operational Resilience and Technology Committee with effect from 1 June 2022. Juliet Ellis was appointed as a member of the Nomination, Remuneration & Governance Committee with effect from 1 August 2022. Patrick Clackson was appointed as a non-executive Director and member of the Audit Committee with effect from 1 September 2022. John Trueman retired from the Board as a Director with effect from 31 December 2022. Lewis O’Donald will join the Board as an independent non- executive Director and member of the Risk Committee with effect from 23 February 2023. Company Secretary The responsibilities of the Company Secretary include ensuring good governance practices at Board level and effective information flows within the Board and its committees and between senior management and the non-executive Directors. Alison Campbell was Company Secretary of the bank until 31 December 2022 and Philip Miller was appointed as Company Secretary from 1 January 2023. Board of Directors Key responsibilities The Board, led by the Chair, is responsible amongst other matters for: (i) promoting the long-term success of the bank and delivering sustainable value to shareholders and other stakeholders; (ii) entrepreneurial leadership of the bank within a framework of prudent and effective controls which enables risks to be assessed and managed; (iii) setting the bank's strategy and risk appetite statement, including monitoring the bank's risk profile; (iv) establishing and monitoring the effectiveness of procedures for maintenance of a sound system of control and risk management, and compliance with statutory and regulatory obligations; and (v) approving the capital and operating plans and material transactions on the recommendation of management. The role of the non-executive Directors is to support the development of proposals on strategy, hold management to account and ensure the executive Directors are discharging their responsibilities properly by promoting a culture that encourages constructive challenge. Non-executive Directors also review the performance of management in meeting agreed goals and HSBC Bank plc Annual Report and Accounts 2022 95 objectives. The Chair regularly meets with the non-executive Directors without executive Directors in attendance after Board meetings, and otherwise, as necessary. Operation of the Board During 2022, the Board was required to meet at least four times; seven additional meetings were scheduled to help facilitate, amongst other things, the execution of the bank’s transformation strategy, the bank’s SEC Registration. The Board agenda is agreed with the Chair, working closely with the Company Secretary, in advance of scheduled meetings. The agenda is informed by forward-looking planning and additional emerging matters that require Board oversight or approval. The Chief Risk Officer, General Counsel, and Company Secretary are regular attendees at Board meetings, and other senior executives attend to contribute their subject matter expertise and insight, as required. Board activities during 2022 During 2022, the areas of focus for the Board included in the implementation of approved strategy and execution of the bank’s transformation programme across the region, supporting senior management and overseeing performance, risk and capital. The Board considered performance against financial and other strategic objectives, key business challenges, emerging risks, business development and relationships with the bank’s key stakeholders. 'Deep dives' on key aspects of the bank's business were also conducted to consider the performance and strategy of targeted businesses and countries. Throughout the year, the Board received regular updates from management including the implementation of regulatory programmes, technology, operations and resilience, as well as people, culture and talent. In addition, several information and development sessions were facilitated during the year on specific areas of interest including with respect to Recovery and Resolution Planning, technology, and ESG-related matters. During the year the Board also approved financial, capital, liquidity and funding plans put forward by management and monitored the implementation of plans. Further information on the principal decisions made by the Board during 2022 is located in the section 172 statement on pages 12 to 14. Directors’ emoluments Details of the emoluments of the Directors of the bank for 2022, disclosed in accordance with the Act, are shown in Note 5 ‘Employee compensation and benefits’. Non-executive Directors do not have service contracts and are engaged through letters of appointment. There are no obligations in the non-executive Directors’ letters of appointment that could give rise to payments other than fees due or payments for loss of office. Board committees The Board delegates oversight of certain audit, risk, remuneration, nomination and governance matters to its committees. With the exception of the Executive Committee which is chaired by the Chief Executive Officer, each Board committee is chaired by a non- executive Board member and has a remit to cover specific topics in accordance with their respective terms of reference approved by the Board. Only non-executive Directors are members of Board committees. The Chair of each non-executive Board Committee reports to the Board on the activities of the Committee since the previous Board meeting. Board and Committee effectiveness and performance The Board understands the importance of, and benefits that derive from regular reviews of the effectiveness of the Board and its committees. An effectiveness review was facilitated by the bank’s Company Secretary in 2022 which included a series of interviews with the Directors. Feedback was provided on a number of areas, including the Board’s composition and skills, stakeholder engagement, the cadence and logistics of Board meetings, management reporting, Director induction and training, Director and management engagement and debate, and Board priorities for 2022-23. Outcomes and recommendations were reported to the Board and an action plan was produced. Work has progressed during 2022 to address these recommendations. An annual review of the terms of reference for the Board and its committees was facilitated by the Corporate Governance and Secretariat function. This concluded that the Board and its committees had complied with their respective terms of reference during 2022. Executive Directors are also subject to performance evaluation which helps to determine the level of variable pay they receive each year. At the date of this report, the following are the principal Committees of the Board: Audit Committee Key Responsibilities The Audit Committee is accountable to the Board and has non- executive responsibility for oversight of financial reporting related matters, internal controls over financial reporting and implementation of the group policies and procedures for capturing and responding to whistleblower concerns. The committee's key responsibilities include: (i) monitoring and assessing the integrity of the financial statements, formal announcements and supplementary regulatory information in relation to the bank's financial performance; (ii) reviewing, as applicable, compliance with accounting standards, listing rules, and other requirements in relation to financial reporting; (iii) reviewing and monitoring the relationship with the external auditor; and (iv) overseeing the work of Internal Audit and monitoring and assessing the effectiveness, performance, resourcing, independence and standing of the function. The committee has responsibility for the oversight of the bank’s whistleblowing arrangements, and receives regular updates on matters relating to the whistleblowing arrangements that are in place. Committee activities during 2022 In addition to significant accounting judgements, key matters considered by the committee during the year were regulatory reporting and control enhancements, disposal groups, IFRS 17 implementation, the development of climate-related disclosure, the bank’s financial resources and capital, transformation of the Finance function, the independence, fees and performance of the external auditor, PwC UK, and updates on key issues identified by Internal Audit related to the bank and its subsidiaries. During the year, the committee dedicated time in overseeing management’s preparation for the Bank’s registration with the U.S. Securities and Exchange Commission (‘SEC’) and wider programme preparation to achieve compliance with the U.S. Sarbanes-Oxley Act of 2002 ('SOX'). The committee also received updates from the Chairs of the audit committees of key subsidiaries of the Bank, updates from the external auditor on the progress and findings of their audit, and bi annual updates on the tax position of the bank and its subsidiaries. Operation of the Committee The committee held seven scheduled meetings during the year and held separate meetings with each of the Chief Finance Officer, the Chief Risk Officer, the Head of Internal Audit and representatives of the external auditor without management present. An additional meeting was convened in May 2022 to review the bank’s draft SEC registration statement and relevant documentation prior to the Board’s approval. The committee meets regularly with the bank’s senior financial and Internal Audit management and the external auditors to consider, among other matters, the bank’s financial reporting, the Report of the Directors | Corporate Governance Report 96 HSBC Bank plc Annual Report and Accounts 2022 nature and scope of audit reviews, the effectiveness of the systems of internal control relating to financial reporting and the monitoring of the Finance function transformation programme. The Chief Financial Officer, Financial Controller, Chief Risk Officer, Head of Internal Audit, and Company Secretary are standing attendees and regularly attend committee meetings to contribute their subject matter expertise and insight. Other members of senior management routinely attended meetings of the committee. The external auditor attended all meetings. During 2022, the committee continued to actively engage with the bank’s key subsidiaries and key subsidiary audit committees, with regular reporting throughout the year. The key subsidiary audit committee chairs attended and participated in the April Audit Committee meeting to consider important HSBC-wide and regional specific matters. The Chair of the committee regularly meets with the Chair of the Group Audit Committee ('GAC') to help maintain connectivity with the Group and develop deeper understanding on judgements around key matters. Further, from time to time the Chair is invited to attend meetings of the GAC on relevant topics. The Chair of the GAC also attended a committee meeting in November 2022. The committee comprises three independent non-executive Directors. The current members are Andrew Wright (Chair), Yukiko Omura, and Patrick Clackson. Significant accounting judgements and related matters considered by the Audit Committee ('AC') for the year ended 31 December 2022 included: Key area Action taken Interim and annual reporting The AC considered key matters in relation to interim and annual reporting, including changes to segmental reporting and US filings 20-F and 6-K following the bank’s registration at the SEC. Disposals The AC considered the financial and accounting impacts of the planned disposals of the retail banking business in France, the Greece branch operations and the bank in Russia. In particular, the AC considered judgements related to the timing of recognition of assets as held-for-sale, the re-measurement of those assets and losses arising, which has a significant impact in the year ended 31 December 2022. Expected credit loss ('ECL') The AC considered key judgements in relation to ECL, in particular multiple economic scenarios and post-model adjustments due to economic uncertainty and the Russia-Ukraine war. Valuation of financial instruments The AC considered key valuation metrics and judgements involved in the determination of the fair value of financial instruments. The AC also considered management’s analysis of exit losses upon the novation of certain derivative portfolios and the determination that there was insufficient evidence to support the introduction of fair value adjustments in respect of these. Going concern The AC considered a wide range of information relating to present and potential conditions, including projections for profitability, cash flows, liquidity and capital. Impairment of investment in subsidiaries The AC reviewed management's periodic assessment of impairment of investments in subsidiaries and paid particular attention to the sensitivities to cash flow projections and long-term growth rate and discount rate assumptions. Management assessed that there had been a partial reversal of impairment of the bank's investment in HBCE in the year ended 31 December 2022, with due regard to the planned sale of the retail banking business in France. Appropriateness of provisioning for legal proceedings and regulatory matters The AC received reports from management on the recognition and measurement of provisions and contingent liabilities for legal proceedings and regulatory matters, including investigations by regulators and competition and law-enforcement authorities. Regulatory reporting The AC reviewed management’s efforts to strengthen and simplify the end-to-end operating and control model, including independent external reviews of key aspects of regulatory reporting. IBOR transition The AC considered the implications of benchmark interest rate reform, including the recognition and measurement of financial instruments and related disclosures. Controls The AC considered the financial control environment on an ongoing basis through the year, reviewing and challenging remediation actions undertaken and enhancements made. This included confirmation of mitigating controls where programmes of work had not fully completed by the year end. Areas of particular focus in 2022 have been Model Risk Governance, controls over use of external market data, accounting and tax implications of Merger and Acquisition ('M&A') transactions, general ledger substantiation and Financial Statement Disclosures. Tax The AC reviewed management’s judgements on the recognition and measurement of deferred tax assets and liabilities, in particular those arising from the planned sale of retail banking activities in France, and the accounting and disclosure of retrospective VAT assessments issued by HMRC. Environmental, Social and Governance (‘ESG’) Reporting The AC considered regulatory developments in ESG Reporting, in particular at 31 December 2022 for bank subsidiaries in the European Union. IFRS 17 implementation The AC reviewed accounting policy judgements in relation to the retrospective implementation of IFRS 17 Insurance Contracts on 1 January 2023, and preparation of transitional disclosure. Restructuring provisions The AC considered key judgements in relation to restructuring provisions, mainly relating to transformation in Continental Europe and Germany. Risk Committee Key Responsibilities The Risk Committee is accountable to the Board and has overall non-executive responsibility for oversight of risk-related matters and the risks impacting the bank. The committee's key responsibilities include: (i) advising the Board on risk appetite and risk tolerance related matters; (ii) reviewing and recommending key regulatory submissions to the Board; (iii) overseeing and advising the Board on all risk-related matters, including financial and non-financial risks and reviewing the effectiveness of the bank's conduct framework; (iv) reviewing, challenging and satisfying itself that the bank's stress testing framework, governance and internal controls are robust; and (v) reviewing the effectiveness of the bank's risk management framework and internal control systems (other than internal financial controls overseen by the Audit Committee). HSBC Bank plc Annual Report and Accounts 2022 97 Committee activities during 2022 Key matters considered by the committee during the year included the bank’s approach to the financial and non-financial risks in the context of capital and liquidity, retail, wholesale credit and market risks including, financial crime and fraud, geopolitical, operational, people and climate-related risks. The committee also reviewed and challenged management on key regulatory processes, including the bank’s internal capital adequacy assessment process ('ICAAP') and the internal liquidity adequacy assessment process ('ILAAP'), recovery and resolution plans, the outcome of stress tests (including annual cyclical scenario, cyber and solvency) undertaken during the year, and the bank’s capital liquidity and funding plans. Deep dives on key aspects of the bank’s business were conducted to consider specific climate risk related matters including the bank’s thermal coal phase-out policy. The committee worked closely with the Transformation, Operational Resilience and Technology Committee during the year to ensure appropriate alignment in the review and discussion on operational resilience and technology risk-related matters. Operation of the Committee The committee held eight scheduled meetings during the year. The Chief Risk Officer, Chief Financial Officer and Head of Internal Audit are standing attendees and regularly attend committee meetings to contribute their subject matter expertise and insight. The Chair and members of the committee also hold private meetings with the Chief Risk Officer, following quarterly scheduled meetings. The committee reviews and challenges current and forward- looking risk issues, and the regional senior business leaders are regularly invited to participate at committee meetings, working together with functional and regional leaders across all three lines of defence. The Chair and members of the committee meet regularly with the bank’s senior financial, risk, internal audit and compliance management and the external auditors to consider and discuss, among other matters, specific risk matters and priorities, risk reports and internal audit reports and the effectiveness of compliance activities. The Chair meets regularly with the committee secretary to ensure the committee meets its governance responsibilities. During 2022 the committee continued to actively engage with the bank’s key subsidiaries and key subsidiary risk committees, with regular reporting from the respective Chairs throughout the year. The Chair of the committee attended several Group-led meetings to help promote connectivity, escalation and cascade of important topics. The committee comprises a majority of independent non-executive Directors. The current members are Eric Strutz (Chair), Juliet Ellis and Andrew Wright. Transformation, Operational Resilience and Technology Committee Key Responsibilities The Transformation, Operational Resilience and Technology Committee was established to assist the Board and Risk Committee with their respective responsibilities in relation to the bank's transformation strategy, operational resilience, as well as the governance and oversight of technology. During the year, on recommendation of the Board, the Group Nomination & Corporate Governance Committee approved the continuation of the committee to continue necessary engagement allowing a more detailed oversight of the matters within its remit. The committee's key responsibilities include: (i) reviewing progress of the transformation strategy and the steps management have taken to manage risk, and to monitor progress against set objectives; (ii) reviewing the effectiveness of governance frameworks to set and oversee the internal control environment in relation to technology; (iii) reviewing regional technology strategy, ensuring it is aligned with the adopted business strategies of the bank; and (iv) overseeing and challenging management on execution of operational resilience objectives and deliverables. Committee activities during 2022 Key matters considered by the committee during the year included review and oversight of Information Technology (‘IT’) and Cloud strategies and governance, the bank’s operating systems, operational resilience and technology infrastructure, including operational resilience of critical IT and other business services, information and cyber security risks, and major IT change programmes. The committee also reviewed and challenged management on the progress and associated risks with respect of the transformation strategy, including transformation governance, key change programmes and initiatives underway, including those related to outsourced technology services and meeting regulatory requirements and expectations. Operation of the Committee The committee held seven scheduled meetings during 2022. The Board Chair, Chief Operating Officer, Chief Information Officer, Chief Risk Officer, Head of Internal Audit, and Head of Strategy and Planning, Chief of Staff (Europe CEO), are standing attendees and regularly attend Committee meetings to contribute their subject matter expertise and insight. The current members are Juliet Ellis (Chair), Norma Dove-Edwin, and Eric Strutz. Nomination, Remuneration & Governance Committee Key Responsibilities The Nomination, Remuneration & Governance Committee has responsibility for: (i) leading the process for Board appointments and for identifying and nominating, for the approval of the Board, candidates for appointment to the Board and its committees; (ii) the endorsement of the appointment of individuals to certain Board and management positions of the bank's subsidiaries, including proposed fees payable to non-executive Directors on subsidiary boards; (iii) reviewing the implementation and appropriateness of the Group’s director remuneration policy and the remuneration of the bank’s senior executives, including the identification of the Material Risk Taker population for the purposes of the CRD; (iv) reviewing and developing the corporate governance framework on behalf of the Board and ensuring it is consistent with best corporate governance standards and practices while remaining appropriate to the size, complexity and strategy of the bank; and (v) overseeing compliance with the HSBC Group Subsidiary Accountability Framework ('SAF'). Further information in relation to HSBC’s approach to remuneration for group employees is available in the Director’s remuneration report on pages 276-278 of HSBC’s Annual Report and Accounts 2022 available on https://www.hsbc.com/investors/ results-and-announcements/annual-report. Committee activities during 2022 As a UK regulated subsidiary of HSBC Holdings plc, the bank has both internal and external responsibilities for succession planning. During the year the committee undertook a review of its succession plan and the Board and Board Committee's composition in keeping with best practice and applicable policies, including SAF. Report of the Directors | Corporate Governance Report 98 HSBC Bank plc Annual Report and Accounts 2022 As part of its review, the committee identified opportunities to further strengthen the skills and experience required for the Board. The committee commenced a search process to identify a new non-executive Director for appointment to the Board with a successful recommendation to the Board for approval secured in the appointment of Patrick Clackson. Further information in relation to Board and committee changes throughout the year can be found on page 95. Additionally, the committee reviewed and approved an updated Board Continuity Plan (‘BCP’) which is in place to cover any unexpected or temporary absence of non-executive Directors who hold SMF responsibilities in relation to the Bank. In overseeing compliance with SAF, the committee reviewed of the Board composition and succession planning for all of the bank's material subsidiaries. Other activities during the year included, the review of key remuneration matters for the bank and its subsidiaries in the context of HSBC’s remuneration framework, including variable and fixed pay allocations, aligned with the bank's risk appetite, and in keeping with the bank's strategy, culture and values, and long-term interests of the bank. The committee reviewed the annual pay review outcomes across the region and received regular updates on relevant subsidiary and regulatory matters. Operation of the Committee The committee held seven scheduled meetings during 2022, with additional meetings arranged to consider specific matters. The Head of HR and Head of Performance & Reward attend committee meetings on a regular basis to contribute their subject matter expertise and insight. Other senior executives attend periodically for specific items considered by the committee. The committee comprises four non-executive Directors. The current members are: Stephen O'Connor (Chair), Juliet Ellis, Eric Strutz, and Andrew Wright. Executive Committee The Executive Committee is a committee of the Board and has overall executive responsibility, under formal delegation, for the management and day-to-day running of the bank. The Committee is accountable to the Board for overseeing the execution of the bank’s strategy. The purpose of the Committee is to support the Chief Executive Officer of the bank in the performance of their duties and exercise of their powers, authorities and discretions in relation to the management of the bank and its subsidiaries. The committee meets on a regular basis and is chaired by the Chief Executive Officer. During 2022, in addition to its day-to-day oversight of the bank's operations, the committee reviewed business plans in light of geopolitical and macroeconomic developments in keeping with the Bank’s approved Risk Framework and Risk Appetite prior to formal recommendation to the Board for approval. The committee remained focused on the Bank’s strategic transformation and corporate restructuring across Europe, including the country exit of Russia, sale of branch operations in Greece and retail banking operations in France and the regulatory requirement to establish an IPU following the UK’s departure from the European Union. The committee is responsible for oversight of the performance across the bank's lines of business, review of the bank’s financial performance, cost management, and preparing the bank’s forward looking Financial Resource Plan. The committee received updates on regulatory remediation programmes and regulatory engagement themes across the region. Dividends Information about dividends paid during the year is provided on page 20 of the Strategic Report and in Note 8 to the financial statements. Internal control The Board is responsible for the establishment and operation of effective procedures for the maintenance of a sound system of internal control and risk management, adequate accounting, and compliance with statutory and regulatory obligations. The Board determine the aggregate level and types of risks the bank is willing to take in achieving its strategic objectives. To meet this requirement and to discharge its obligations under the FCA Handbook and the PRA Handbook, procedures have been designed for safeguarding assets against unauthorised use or disposal, for maintaining proper accounting records, and for ensuring the reliability and usefulness of financial information used within the business or for publication. These procedures provide reasonable assurance against material misstatement, errors, losses or fraud. They are designed to provide effective internal control within the group and accord with the Financial Reporting Council's guidance for Directors issued in 2014 (and subsequent relevant publications), internal control and related financial and business reporting. The procedures have been in place throughout the year and up to 20 February 2023, the date of approval of this Annual Report and Accounts 2022. The key risk management and internal control procedures include the following: •Global principles: The HSBC Group's Global Principles set an overarching standard for all other policies and procedures and are fundamental to the Group’s risk management structure. They inform and connect our purpose, values, strategy and risk management principles, guiding us to do the right thing and treat our customers and our colleagues fairly at all times. •Risk management framework ('RMF'): The RMF supports our Global Principles. It outlines the key principles and practices that we employ in managing material risks. It applies to all categories of risk and supports a consistent approach in identifying, assessing, managing and reporting the risks we accept and incur in our activities. •Delegation of authority within limits set by the Board: Subject to certain matters reserved for the Board, the Chief Executive Officer has been delegated authority limits and powers within which to manage the day-to-day affairs of the bank, including the right to sub-delegate those limits and powers. Each relevant executive has authority within which to manage the day-to-day affairs of the business or function for which he or she is accountable. Those individuals are required to maintain a clear and appropriate apportionment of significant responsibilities and to oversee the establishment and maintenance of systems of control that are appropriate to their business or function. Authorities to enter into credit and market risk exposures are delegated with limits to line management of group companies. However, credit proposals with specified higher-risk characteristics require the concurrence of the appropriate global function. Credit and market risks are measured and reported at subsidiary company level and aggregated for risk concentration analysis on a group- wide basis. HSBC Bank plc Annual Report and Accounts 2022 99 •Risk identification and monitoring: Systems and procedures are in place to identify, assess, control and monitor the material risk types facing the group as set out in the RMF. The group‘s risk measurement and reporting systems are designed to help ensure that material risks are captured with all the attributes necessary to support well-founded decisions, that those attributes are accurately assessed and that information is delivered in a timely manner for those risks to be successfully managed and mitigated. •Changes in market conditions/practices: Processes are in place to identify new risks arising from changes in market conditions/practices or customer behaviours, which could expose the group to heightened risk of loss or reputational damage. The group employs a top and emerging risks framework, which contains an aggregate of all current and forward-looking risks and enables it to take action that either prevents them materialising or limits their impact. •Responsibility for risk management: All employees are responsible for identifying and managing risk within the scope of their role as part of the three lines of defence model. This is an activity-based model to delineate management accountabilities and responsibilities for risk management and the control environment. The second line of defence sets the policy and guidelines for managing specific areas, provides advice and guidance in relation to the risk, and challenges the first line of defence (the risk owners) on effective risk management. •The Board has delegated to the Audit Committee oversight for the implementation of the group’s policies and procedures for capturing and responding to whistleblower concerns, ensuring confidentiality, protection and fair treatment of whistleblowers, and receiving reports arising from the operation of those policies as well as ensuring arrangements are in place for independent investigation. •Strategic plans: Strategic plans are prepared for global businesses, global functions and geographical regions within the framework of the HSBC Group’s overall strategy. The bank also prepares and adopts a Financial Resource Plan, which is informed by detailed analysis of risk appetite, describing the types and quantum of risk that the bank is prepared to take in executing its strategy and sets out the key business initiatives and the likely financial effects of those initiatives. •The effectiveness of the group’s system of risk management and internal control is reviewed regularly by the Board, the Risk Committee and the Audit Committee. •During 2022, the group continued to focus on operational resilience and invest in the non-financial risk infrastructure. There was a particular focus on material and emerging risks with progress made enhancing the end-to-end risk and control assessment process. The Risk Committee, supported by the TRT, and the Audit Committee received confirmation that executive management continued to take efforts to effect the necessary actions to remedy any failings or weaknesses identified through the operation of the group's framework of controls. Internal control over financial reporting The key risk management and internal control procedures over financial reporting include the following: •Entity level controls ('ELC'): The primary mechanism through which comfort over risk management and internal control systems is achieved, is through assessments of the effectiveness of controls to manage risk, and the reporting of risk and control issues on a regular basis through the various risk management and risk governance forums. ELCs are a defined suite of internal controls that have a pervasive influence over the entity as a whole. They include controls related to the control environment, such as the bank's values and ethics, the promotion of effective risk management and the overarching governance exercised by the Board and its non-executive committees. The design and operational effectiveness of ELCs are assessed annually as part of the assessment of the effectiveness of internal controls over financial reporting. If issues are significant to the group, they are notified to the Risk Committee, and also to the Audit Committee if concerning financial reporting matters. •Process level transactional controls: Key process level controls that mitigate risk of financial misstatement are identified, recorded and monitored in accordance with the risk framework. This includes the identification and assessment of relevant control issues against which action plans are tracked through to remediation. Further details on the group’s approach to risk management can be found on page 26. The Audit Committee has continued to receive regular updates on HSBC’s ongoing activities for improving the effective oversight of end- to-end business processes and management continues to identify opportunities for enhancing key controls, such as through the use of automation technologies. •External Reporting Forum: The External Reporting Forum reviews financial reporting disclosures to be made by the bank for accuracy and completeness. The integrity of disclosures is underpinned by structures and processes within the group's Finance and Risk functions that support rigorous analytical review of financial reporting and the maintenance of proper accounting records. •Disclosure Committee: Chaired by the Chief Financial Officer, the committee supports the discharge of the bank’s obligations under relevant legislation and regulation including the European Union’s Market Abuse Regulation ('EU MAR'), as amended by the Market Abuse (Amendment) (EU Exit) Regulations 2019, the New York Stock Exchange’s Listed Company Manual, U.S. Securities law and the rules and regulations of the SEC, and also any other listing and disclosure rules of the markets and exchanges on which the bank’s financial instruments are listed, including any other requirements that shall apply from time to time. •Financial reporting: The group’s financial reporting process is controlled using documented accounting policies and reporting formats, supported by detailed instructions and guidance on reporting requirements, issued to all reporting entities within the group in advance of each reporting period end. The submission of financial information from each reporting entity is supported by a certification by the responsible financial officer and analytical review procedures at subsidiary and group levels. •Subsidiary certifications: Certifications are provided to the Audit Committee and the Risk Committee (full and half yearly) and to the Nomination, Remuneration and Governance Committee (annually) from the audit, risk and remuneration committees of key material subsidiary companies confirming amongst other things that: –Audit – the financial statements of the subsidiary have been prepared in accordance with group policies, present fairly the state of affairs of the subsidiary and are prepared on a going concern basis; –Risk – the risk committee of the subsidiary has carried out its oversight activities consistent with and in alignment to the RMF; and –Remuneration – the remuneration committee of the subsidiary has discharged its obligations in overseeing the implementation and operation of HSBC’s Group Remuneration Policy. Report of the Directors | Corporate Governance Report 100 HSBC Bank plc Annual Report and Accounts 2022 Employees Health and safety We are committed to providing a safe and healthy working environment for everyone. We have adopted global policies, mandatory procedures, and incident and information reporting systems across the organisation that reflect our core values and are aligned to international standards. Our global health and safety performance is subject to ongoing monitoring and assurance. Our Chief Operating Officers have overall responsibility for engendering a positive health and safety culture and ensuring that global policies, procedures and systems are put into practice locally. They also have responsibility for ensuring all local legal requirements are met. We delivered a range of programmes in 2022 to help us understand and manage our health and safety risks: •We continued to provide enhancements to our workplaces to minimise the risks of Covid-19, including enhancing cleaning, improved ventilation and social distancing measures •We updated our advice and risk assessment methodology on working from home, providing more awareness and best practices on good ergonomics and wellbeing to be adopted as we transitioned to new ways of working upon return to the office •We delivered health and safety training and awareness to employees and contractors ensuring roles and responsibilities were clear and understood, especially in higher risk environments •We completed the annual safety inspection on all of our buildings, to ensure we were meeting our standards and continuously improving our safety performance •We continued to focus on enhancing the safety culture in our supply chain through our SAFER Together programme, covering the five key elements of best practice safety culture, including speaking up about safety, and recognising excellence •Our Safety Climate Survey continued to show high results and recognised that we encourage suggestions on how to improve health and safety and have good processes in place to communicate health and safety messages •Our Eat Well Live Well programme continued to be rolled out, notably in France and Germany, educating and informing our colleagues on how to make healthy food and drink choices. We enhanced the programme to provide digital educational and information resources, including a suite of videos and recipe ideas and to provide healthy vending options. •Protection of our colleagues and operations is of critical importance and we have effective controls in place to protect our people from natural disasters (i.e. storms and earthquakes). In 2022, there were 38 named storms that passed over 1,667 of our buildings, resulting in 0 injuries or material business impact. Employee health and safety 2022 2021 2020 Number of workplace fatalities — — — Number of major injuries to employees1 — 2 3 All injury rate per 100,000 employees 49 35 130 1 Fractures, dislocation, concussion, hospitalisation, unconsciousness. Diversity and Inclusion Our purpose, ‘Opening up a world of opportunity’, explains why we exist as an organisation and is the foundation of our diversity and inclusion strategy. Promoting diversity and fostering inclusion contributes to our ‘energise for growth’ priority. By valuing difference, we can make use of the unique expertise, capabilities, breadth and perspectives of our colleagues to the benefit of our customers. To achieve progress, we are focused on specific region-wide priorities for which we hold senior executives accountable. We are pleased to report on key progress made in 2022: Achievements •We have set up a HSBC Bank plc Diversity and Inclusion Council, chaired by the HSBC Bank plc CEO and consisting of the European Executive Committee to reinforce our commitments, engage more closely with our Employee Resources Groups and track progress and accountability. •Throughout 2022, we arranged multiple events and conferences to support our colleagues across our European countries, including ethnicity conferences attended by over 600 colleagues, 6 disability awareness events and six ethnicity exchanges in French and English. •We have continued supporting colleagues through our ERGs; we now have 47 ERGs in 20 markets across six diversity strands. •We have created D&I objectives for European people managers. •Focus on developing our middle management female colleagues through our flagship programmes 'uGrow' and 'Accelerated Female Leaders'. •We have a black heritage action plan in place to support our ethnicity goals, including a Black Heritage Sponsorship Programme being run in Global Banking and Markets. •3000+ hours spent on Inclusion Learning across the region •47.9% of employees in the UK, Channels Islands and Isle of Man and South Africa have declared their ethnicity in our 'HR Direct' system Gender diversity statistics Our overall female representation is improving and we are committed to building a strong pipeline of female talent to improve gender balance in senior leadership across Europe. By the end of 2022, we had reached 24.6% and are committed to doing more going forward. Female representation by management level: All grades – 51.9% GCB 6-8 Clerical grades – 65.1% GCB 4-5 Management – 43.7% GCB 0-3 Senior management – 24.6% Employment of people with a disability We strongly believe in providing equal opportunities for all employees. The employment of people with a disability is included in this commitment. The recruitment, training, development and promotion of people with a disability are based on the aptitudes and abilities of the individual. Should employees become disabled during their employments with us, efforts are made to continue their employment. Where necessary, we will provide appropriate training, facilities and reasonable equipment. For example, we recently established a telephone platform for instant sign translation for our deaf colleagues in France where the sign language translators exchange sign language by video. A number of countries have dedicated teams to ensure that barriers to work are removed for colleagues. Our Employee Resource Groups ('ERG'), supported by HR and business leadership are doing an important job of breaking down barriers. They offer a space for discussion between those with a disability and their allies for exchanges of inclusive best practices. Continuous work is done to ensure individual support is provided to make home office adjustments. Learning and talent development We aim to build a dynamic environment where our colleagues can develop skills and undertake experiences that help them fulfil their potential. Our approach helps us to meet our strategic priorities and support our colleagues’ career goals. HSBC Bank plc Annual Report and Accounts 2022 101 We expect all colleagues, regardless of their contract type, to complete global mandatory training each year. This training plays a critical role in shaping our culture, ensuring a focus on the issues that are fundamental to our work – such as sustainability, financial crime risk, and our intolerance of bullying and harassment. New joiners attend our Global Discovery programme designed to build their knowledge of the organisation and engage them with our purpose, values and strategy. HSBC University remains our home for skills development with access to face to face training and an extensive catalogue of digital content from partners such as LinkedIn Learning, Harvard Business Review podcast and Microsoft Learn. Powered by Degreed, our HSBC University platform provides tailored content aligned to employees chosen skills and development areas. Our Leadership development partners include Imperial College and London Business Schools who we work with on topics of strategic importance. For example, we launched the HSBC University Sustainability Academy in October 2022 providing a wealth of knowledge articles and structured learning pathways to grow awareness of climate and wider social sustainability matters that HSBC and its employees can play a role in resolving. My HSBC Career Portal is also available to all our employees which offers career development information and resources to help colleagues manage the various stages of their career, from joining through to career progression. However, we also recognise that most development happens while our colleagues work, through regular coaching, feedback, and performance management and we will extend the use of the HSBC Talent Marketplace platform in Europe in 2023 (the platform is already live in the UK). This will connect our employees to ‘on the job’ development opportunities across the HSBC Group, by means of matching individuals existing skills and career aspirations to live projects within the Group. HSBC Europe will also be able to call upon talent that exists across the Group, to supplement its own personnel, in the development of local initiatives and projects. Employee relations We consult with and, where appropriate, negotiate with employee representative bodies where we have them. We also aim to maintain well-developed communications and consultation programmes with all employee representative bodies and there have been no material disruptions to our operations from labour disputes during the past five years. Disclosure of information to auditors The directors are not aware that there is any relevant audit information (as defined in the Companies Act 2006) of which the bank’s auditors are unaware and processes are in place to ensure that the bank’s auditors are aware of any relevant audit information. Auditors PricewaterhouseCoopers LLP (‘PwC’) are the external auditors to the bank. PwC has expressed its willingness to continue in office and the Board recommends that PwC be re-appointed as the bank’s auditors. A resolution proposing the re-appointment of PwC as the bank’s auditors, and giving authority to the Audit Committee to determine its remuneration, will be submitted to the forthcoming AGM. Branches HSBC Bank plc provides a wide range of banking and financial services through 20 markets. HSBC Bank plc is simplifying its operating model to one integrated business supporting a wholesale banking hub for the EU in Paris and a wholesale banking hub for western markets in London. Further information on the bank’s branches are located in ‘HSBC in Europe’ on page 6. Disclosures required pursuant to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as updated by Companies (Miscellaneous Reporting) Regulations 2018 can be found on the following pages: Engagement with employees (Sch.7 Para 11 and 11A 2008/2018 Regs), s172 Statement) Pages 12 and 13 Engagement with suppliers, customers and others in a business relationship with the bank (Sch.7 Para 11B 2008 Regs) Pages 12 and 13 Policy concerning the employment of disabled persons (Sch.7 Para 10 2008 Regs) Page 101 Financial Instruments (Sch.7 Para 6 2008 Regs) Pages 36 to 75 Hedge accounting policy (Sch.7 Para 6 2008 Regs) Note 14, Pages 159 to 164 Articles of Association, Conflicts of interest and indemnification of Directors The bank's Articles of Association gives the Board authority to approve Directors’ conflicts and potential conflicts of interest. The Board has adopted policies and procedures for the approval of Directors’ conflicts or potential conflicts of interest. On appointment, new Directors are advised of the process for dealing with conflicts and a review of those conflicts that have been authorised, and the terms of those authorisations, is routinely undertaken by the Board. The Articles of Association of the bank contain a qualifying third- party indemnity provision, which entitles Directors and other officers to be indemnified out of the assets of the bank against claims from third parties in respect of certain liabilities. HSBC Group has granted, by way of deed poll, indemnities to the Directors, including former Directors who retired during the year, against certain liabilities arising in connection with their position as a Director of any Group company, including the bank and its subsidiaries. Directors are indemnified to the maximum extent permitted by law. The indemnities that constitute a 'qualifying third-party indemnity provision', as defined by section 234 of the Companies Act 2006, remained in force for the whole of the financial year (or, in the case of Directors appointed during 2022, from the date of their appointment). The deed poll is available for inspection at the registered office of HSBC Holdings plc. Additionally, Directors have the benefit of Directors’ and Officers’ liability insurance. Qualifying pension scheme indemnities have also been granted to the Trustees of the Group's pension schemes, which were in force for the whole of the financial year and remain in force as at the date of this report. Research and Development In the ordinary course, the lines of business develop new products and services. Events after the Balance Sheet Date In its assessment of events after the balance sheet date, the group has considered and concluded that there are no events requiring adjustment or disclosures in the financial statements. Report of the Directors | Corporate Governance Report 102 HSBC Bank plc Annual Report and Accounts 2022 Statement on going concern The Directors consider it appropriate to prepare the financial statements on the going concern basis. In making their going concern assessment, the Directors have considered a wide range of detailed information relating to present and potential conditions, including profitability, cash flows, capital requirements and capital resources. Further information relevant to the assessment is provided in the Strategic Report and the Report of the Directors, in particular: •a description of the group’s strategic direction; •a summary of the group's financial performance and a review of performance by business; •the group’s approach to capital management and its capital position; and •the top and emerging risks facing the group, as appraised by the Directors, along with details of the group's approach to mitigating those risks and its approach to risk management in general. In addition, the objectives, policies and processes for managing credit, liquidity and market risk are set out in the ‘Report of the Directors: Risk’. The Report of the Directors comprising pages 26 to 102 was approved by the Board on 20 February 2023 and is signed on its behalf: By order of the Board David Watts Director HSBC Bank plc 20 February 2023 Registered number 00014259 HSBC Bank plc Annual Report and Accounts 2022 103 Statement of directors' responsibilities in respect of the financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group and the company financial statements in accordance with UK-adopted international accounting standards. In preparing the group and company financial statements, the directors have also elected to comply with International Financial Reporting Standards issued by the International Accounting Standards Board (IFRSs as issued by IASB). The group and company have also prepared financial statements in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Under company law, directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss of the group for that period. In preparing the financial statements, the directors are required to: •select suitable accounting policies and then apply them consistently; •state whether applicable UK-adopted international accounting standards, international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and IFRSs issued by IASB have been followed, subject to any material departures disclosed and explained in the financial statements; •make judgements and accounting estimates that are reasonable and prudent; and •prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and company will continue in business. The directors are responsible for safeguarding the assets of the group and company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are also responsible for keeping adequate accounting records that are sufficient to show and explain the group’s and company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and company and enable them to ensure that the financial statements comply with the Companies Act 2006. The directors are responsible for the maintenance and integrity of the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors’ confirmations Each of the directors, whose names and functions are listed in Corporate Governance Report confirm that, to the best of their knowledge: •the group and company financial statements, which have been prepared in accordance with UK-adopted international accounting standards, international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and IFRSs issued by IASB, give a true and fair view of the assets, liabilities and financial position of the group and company, and of the loss of the group; and •the Strategic Report includes a fair review of the development and performance of the business and the position of the group and company, together with a description of the principal risks and uncertainties that it faces. On behalf of the Board David Watts Director HSBC Bank plc 20 February 2023 Registered number 00014259 Statement of Directors' Responsibilities 104 HSBC Bank plc Annual Report and Accounts 2022 Independent auditors’ report to the members of HSBC Bank plc Report on the audit of the financial statements Opinion In our opinion, HSBC Bank plc’s group financial statements and company financial statements (the 'financial statements'): •give a true and fair view of the state of the group’s and of the company’s affairs as at 31 December 2022 and of the group’s loss and the group’s and company’s cash flows for the year then ended; •have been properly prepared in accordance with UK-adopted international accounting standards as applied in accordance with the provisions of the Companies Act 2006; and •have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report and Accounts 2022 (the 'Annual Report'), which comprise: •the consolidated balance sheet as at 31 December 2022; •the consolidated income statement and consolidated statement of comprehensive income for the year then ended; •the consolidated statement of cash flows for the year then ended; •the consolidated statement of changes in equity for the year then ended; •the HSBC Bank plc balance sheet as at 31 December 2022; •the HSBC Bank plc statement of cash flows for the year then ended; •the HSBC Bank plc statement of changes in equity for the year then ended; and •the notes to the financial statements, which include a description of the significant accounting policies. Certain notes to the financial statements have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as ‘(Audited)’. The relevant disclosures are included in the Risk review section on pages 26 to 93. Our opinion is consistent with our reporting to the Audit Committee. Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union As explained in note 1.1(a) to the financial statements, the group and company, in addition to applying UK-adopted international accounting standards, have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. In our opinion, the group and company financial statements have been properly prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Separate opinion in relation to IFRSs as issued by the IASB As explained in note 1.1(a) to the financial statements, the group and company, in addition to applying UK-adopted international accounting standards, have also applied international financial reporting standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB'). In our opinion, the group and company financial statements have been properly prepared in accordance with IFRSs as issued by the IASB. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) ('ISAs (UK)'), International Standards on Auditing issued by the International Auditing and Assurance Standards Board ('ISAs') and applicable law. Our responsibilities under ISAs (UK) and ISAs are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, we declare that non-audit services prohibited by either the FRC’s Ethical Standard or Article 5(1) of Regulation (EU) No 537/2014 were not provided. Other than those disclosed in note 6, we have provided no non-audit services to the company or its controlled undertakings in the period under audit. HSBC Bank plc Annual Report and Accounts 2022 105 Our audit approach Overview Audit scope We performed audits of the complete financial information of two components, namely the UK non-ring-fenced bank and HSBC Continental Europe ('HBCE'). For five further components, specific audit procedures were performed over selected significant account balances and financial statement note disclosures. Key audit matters •Expected credit losses (‘ECL’) impairment of loans and advances (group and company) •Held for sale accounting (group) •Recognition of deferred tax assets (group); and •Impairment of investment in subsidiaries (company) Materiality •Overall group materiality: £230 million (2021: £218 million) based on 1% of Tier 1 capital. •Overall company materiality: £133 million (2021: £140 million) based on 1% of Tier 1 capital. •Performance materiality: £172 million (2021: £164 million) (group) and £99 million (2021: £105 million) (company). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Held for sale accounting (group) is a new key audit matter this year. Valuation of financial instruments (group and company), which was a key audit matter last year, is no longer included because the risk is reduced due to a reduction in the size of the level 3 asset backed securities portfolio, resulting in a lower risk of material misstatement. Otherwise, the key audit matters below are consistent with last year. Expected credit losses – Impairment of loans and advances (group and company) Nature of the key audit matter Determining expected credit losses (‘ECL’) involves management judgement and is subject to a high degree of estimation uncertainty. Management makes various assumptions when estimating ECL. The significant assumptions that we focused on in our audit included those with greater levels of management judgement and for which variations had the most significant impact on ECL. These included assumptions made in determining forward looking economic scenarios and their probability weightings (specifically the central and downside scenarios given these have the most material impact on ECL) and estimating expected cash flows and collateral valuations to assess the ECL of credit impaired wholesale exposures. The level of estimation uncertainty and judgement has remained high during 2022 as a result of the uncertain macroeconomic and geopolitical environment, high levels of inflation and a rising global interest rate environment. This leads to uncertainty around judgements made in determining the severity and probability weighting of macroeconomic variable forecasts across the different economic scenarios used in ECL models, and in the estimation of expected cash flows and collateral valuations on credit impaired stage 3 exposures. Management makes other assumptions which are less judgemental or for which variations have a less significant impact on ECL. These assumptions include: •The methodologies used in quantitative scorecards for determining customer risk ratings (‘CRRs’); •Model methodologies themselves; and •Quantitative and qualitative criteria used to assess significant increases in credit risk. Matters discussed with the Audit Committee We held discussions with the Audit Committee covering governance and controls over ECL. We discussed a number of areas including: •The severity of macroeconomic scenarios, and their related probability weightings; •The valuation of credit impaired exposures, with focus on assumptions made in the recoverability of significant wholesale exposures; and •The disclosures made in relation to ECL. Independent Auditors’ Report 106 HSBC Bank plc Annual Report and Accounts 2022 How our audit addressed the Key Audit Matter We assessed the design and effectiveness of governance and controls over the estimation of ECL. We observed management’s review and challenge in governance forums for (1) the determination of macroeconomic scenarios and their probability weightings and (2) the assessment of ECL for Wholesale exposures, including the assessment of ECL calculated on the largest credit-impaired stage 3 exposures. We also tested controls over: •The input of critical data into source systems and the flow and transformation of critical data from source systems to impairment models and management judgemental adjustments; •Credit reviews that determine CRRs for wholesale customers; •Independent model validation and monitoring; •The calculation and approval of management judgemental adjustments to modelled outcomes; •The identification of credit-impairment triggers; and •The calculation and approval of significant individual impairments relating to the largest wholesale credit-impaired exposures. We involved our economic experts in assessing the significant assumptions made in determining the severity and probability weighting of macroeconomic forecasts. These assessments considered the sensitivity of ECL to variations in the severity and probability weighting of macroeconomic forecasts. We involved our modelling experts in assessing the appropriateness of the significant assumptions and methodologies used for models and independently re- performed the calculations for a sample of those models. We further considered whether the judgements made in selecting the significant assumptions would give rise to indicators of possible management bias. In addition, we performed substantive testing over: •the compliance of ECL methodologies and assumptions with the requirements of IFRS 9; •the appropriateness and application of the quantitative and qualitative criteria used to assess significant increases in credit risk; •a sample of critical data used in the year end ECL calculation; •a sample of CRRs applied to wholesale exposures; and •a sample of calculations made in estimating expected cash flows for certain credit-impaired wholesale exposures. We evaluated and tested the Credit Risk disclosures made in the financial statements. Relevant references in the Annual Report and Accounts 2022 •Measurement uncertainty and sensitivity analysis of ECL estimates, page 47. •Audit Committee Report, page 97. •Credit risk, page 36. •Note 1.2(i) Impairment of amortised cost and FVOCI financial assets, page 129. Recognition of deferred tax assets (group) Nature of the key audit matter Recognition of deferred tax assets ('DTAs') relies on an assessment of the availability and timing of future deferred tax liabilities and taxable profits against which to recognise accumulated tax losses. Management judgement is required when assessing whether a deferred tax asset should be recognised, particularly when an entity has a history of recent losses and convincing evidence of future taxable profits is required. Judgements include assumptions regarding the forecast cash flows, determination of risk adjustments to such cash flows and the timing of the reversal of temporary differences. Management performed an assessment of the recoverability of deferred tax assets at 31 December 2022 and an additional deferred tax asset of £288 million has been recorded in HBCE. Matters discussed with the Audit Committee We discussed with the audit committee the key judgements made by management in assessing the recoverability of DTAs. We also discussed the appropriateness of the disclosures made in the annual report. How our audit addressed the Key Audit Matter We tested the design and operating effectiveness of controls over deferred tax asset recognition. With the support of our tax specialists we assessed the viability of management’s plans to recover deferred tax assets. We tested key inputs into the deferred tax recognition model, including forecast cash flows to approved plans and their consistency with other judgements. We challenged management on their methodology and underlying assumptions in arriving at their judgements, including in relation to availability of convincing other evidence of future taxable profits and determination of risk adjustments applied to those forecast taxable profits. In assessing these judgements we considered the historic taxable profits and losses and the evidence provided to support the judgement that the criteria for recognition had been reached. We challenged the achievability of management's forecast taxable profits, considering the achievement of historic forecasts and assessing the sensitivity of forecasts to reasonable variations in significant assumptions. We also evaluated assumptions made over the future reversal of deferred tax assets and liabilities. We evaluated and tested the disclosures made in the financial statements Relevant references in the Annual Report and Accounts 2022 •Audit Committee Report, page 97. •Note 1.2(l) Tax, page 133 •Note 7: Tax, page 143 HSBC Bank plc Annual Report and Accounts 2022 107 Held for sale accounting (group) Nature of the key audit matter The group has agreements to sell a number of businesses as part of executing its strategy. This has resulted in £21.2 billion of assets and £24.7 billion of liabilities being classified as held for sale as at 31 December 2022, in relation to businesses in France, Russia and Greece. In addition to the assets and liabilities classified as held for sale, a pre-tax loss of £1.7 billion has also been recognised in 2022 in relation to the sale of the business in France. For the assets and liabilities to be classified as held for sale, the sale needs to be considered highly probable and expected to complete within 12 months of the date of classification. We focused our audit on the areas with greater levels of management judgement relating to the highly probable assessment including the expected timing of completion, the appropriateness of disclosures relating to the highly probable assessment and the loss recognised in relation to the sale of business in France. Matters discussed with the Audit Committee We discussed with the Audit Committee the judgements made by management in determining if the highly probable threshold were met as at 31 December 2022. We also discussed the appropriateness of the disclosure made in the Annual Report which explained how management had concluded that transactions met the highly probable threshold as at 31 December 2022. How our audit addressed the Key Audit Matter We tested governance and controls in place over the management process to determine if the highly probable threshold had been met on assets and liabilities classified as held for sale. We assessed the key judgments made by management to determine whether the highly probable threshold was met as at 31 December 2022, including their assessment of remaining actions to complete the transaction, any regulatory requirements that need to be met, and the likelihood and expected timing of the transactions being approved by relevant regulators and shareholders. We also tested the completeness and accuracy of the assets and liabilities that were classified as held for sale and the loss on sale recognised in relation to the French business. We evaluated and tested the disclosures made in the Annual Report in relation to assets and liabilities classified as held for sale. Relevant references in the Annual Report and Accounts 2022 •Audit Committee Report, page 97. •Note 1.2(o): Critical accounting estimates and judgements, page 134. •Note 34: Assets held for sale and liabilities of disposal groups held for sale, page 186. Impairment of investment in subsidiaries (company) Nature of the key audit matter Management reviewed investments in subsidiaries for indicators of impairment or reversal of impairment previously recorded as at 31 December 2022. Where indicators were identified management estimated the recoverable amount using a value in use (‘VIU’) model. Management’s assessment resulted in a partial reversal of an impairment charge of £2 billion in relation to the investment in HBCE. This resulted in investment in subsidiaries of £10.6 billion at 31 December 2022. The methodology used to estimate the recoverable amount is dependent on various assumptions, both short term and long term in nature. These assumptions, which are subject to estimation uncertainty, are derived from a combination of management’s judgement, experts engaged by management and market data. The significant assumptions that we focused our audit on were those with greater levels of management judgement and for which variations had the most significant impact on the recoverable amount. Specifically, these included forecast cash flows for 2023 to 2027, regulatory capital requirements, long term growth rates and discount rates. Matters discussed with the Audit Committee We discussed the partial reversal of the impairment charge for HBCE, the appropriateness of methodologies used and significant assumptions with the audit committee, giving consideration to the macroeconomic outlook and HSBC’s strategy. We considered reasonable possible alternatives for significant assumptions. How our audit addressed the Key Audit Matter We tested controls in place over significant assumptions and the model used to determine the recoverable amounts. We assessed the appropriateness of the methodology used, and tested the mathematical accuracy of the calculations, to estimate the recoverable amounts. In respect of the significant assumptions, our testing included the following: •Challenging the achievability of management’s business plan and the prospects for HSBC’s businesses, as well as considering the achievement of historic forecasts; •Obtaining and evaluating evidence relating to significant assumptions, from a combination of historic experience and external market and other financial information; •Assessing whether the cash flows included in the model were in accordance with the relevant accounting standard; •Assessing the sensitivity of the VIU to reasonable variations in significant assumptions, both individually and in aggregate; and •Determining a reasonable range for the discount rate used within the model, with the assistance of our valuation experts, and comparing it to the discount rate used by management. We evaluated and tested the disclosures made in the financial statements in relation to investment in subsidiaries. Relevant references in the Annual Report and Accounts 2022 •Audit Committee Report, page 97. •Note 1.2(a) Consolidation and related policies, page 126. •Note 18: Investment in subsidiaries, page 166. Independent Auditors’ Report 108 HSBC Bank plc Annual Report and Accounts 2022 How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. The risks that HSBC faces are diverse, with the interdependencies between them being numerous and complex. In performing our risk assessment we engaged with a number of stakeholders to ensure we appropriately understood and considered these risks and their interrelationships. This included stakeholders within HSBC and our own experts within PwC. This engagement covered external factors across the geopolitical, macroeconomic and regulatory and accounting landscape, the impact of climate change risk as well as the internal environment at HSBC, driven by strategy and transformation. We evaluated and challenged management's assessment of the impact of climate change risk including their conclusion that there is no material impact on the financial statements. In making this evaluation we considered management’s use of stress testing and scenario analysis to arrive at the conclusion that there is no material impact on the financial statements. We considered management's assessment on the areas in the financial statements most likely to be impacted by climate risk, including: the impact on ECL on loans and advances to customers, for both physical and transition risk; the forecast cash flows from management’s five year business plan and long term growth rates used in estimating recoverable amounts as part of impairment assessments of investments in subsidiaries; the impact of climate related terms on the solely payments of principal and interest test for classification and measurement of loans and advances to customers; and climate risks relating to contingent liabilities as HSBC faces increased reputational, legal and regulatory risk as it progresses towards its climate ambition. Using our risk assessment, we tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. HSBC Bank plc is structured into five divisions being Markets & Securities Services, Global Banking, GBM Other, Commercial Banking and Wealth and Personal Banking, which are supported by a Corporate Centre. The divisions operate across a number of operations, subsidiary entities and branches (‘components’) throughout Europe. Within the group’s main consolidation and financial reporting system, the consolidated financial statements are an aggregation of the components. Each component submits their financial information to the group in the form of a consolidation pack. In establishing the overall approach to the group and company audit, we scoped using the balances included in the consolidation pack. We determined the type of work that needed to be performed over the components by us, as the group engagement team, or auditors within PwC UK and from other PwC network firms operating under our instruction (‘component auditors’). As a result of our scoping, for the group we determined that audits of the complete financial information of the UK non-ring-fenced bank ('UK NRFB') and HBCE were necessary, owing to their financial significance. We instructed component auditors, PwC UK and PwC France to perform the audits of these components. Our interactions with component auditors included regular communication throughout the audit, including the issuance of instructions, a review of working papers relating to the key audit matters and formal clearance meetings. The group audit engagement partner was also the partner on the audit of the UK NRFB significant component. We then considered the significance of other components in relation to primary statement account balances and note disclosures. In doing this we also considered the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). For five components, specific audit procedures were performed over selected significant account balances. For the remainder, the risk of material misstatement was mitigated through group audit procedures including testing of entity level controls and group and company level analytical review procedures. Certain group-level account balances were audited by the group engagement team. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Financial statements – group Financial statements – company Overall materiality £230 million (2021: £218 million). £133 million (2021: £140 million). How we determined it 1% of Tier 1 capital 1% of Tier 1 capital Rationale for benchmark applied Tier 1 capital is used as a benchmark as it is considered to be a key driver of HSBC Bank plc's decision making process and has been a primary focus for regulators. Tier 1 capital is used as a benchmark as it is considered to be a key driver of HSBC Bank plc's decision making process and has been a primary focus for regulators. Tier 1 capital was also used as the benchmark in the prior year. The basis for determining materiality was re-evaluated and we considered other benchmarks, such as profit before tax. Tier 1 capital is a common benchmark for wholly owned banking subsidiaries, because of the focus on financial stability. Tier 1 capital was determined to continue to be an appropriate benchmark given the importance of this metric to the HSBC Bank plc decision making process and to principal users of the financial statements, including the ultimate holding company HSBC Holdings plc. For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was £8 million to £230 million. Certain components were audited to a local statutory audit materiality that was also less than our overall group materiality. We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2021: 75%) of overall materiality, amounting to £172 million (2021: £164 million) for the group financial statements and £99 million (2021: £105 million)for the company financial statements. In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate. HSBC Bank plc Annual Report and Accounts 2022 109 We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £11 million (group audit) (2021: £11 million) and £6 million (company audit) (2021: £7 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Conclusions relating to going concern Our evaluation of the directors’ assessment of the group's and the company’s ability to continue to adopt the going concern basis of accounting included: •Performing a risk assessment to identify factors that could impact the going concern basis of accounting, including both internal risks (i.e., strategy execution) and external risks (i.e., macroeconomic conditions). •Understanding and evaluating the group and company’s financial forecasts and stress testing of liquidity and regulatory capital, including the severity of the stress scenarios that were used. •Understanding and evaluating credit agency ratings and actions. •Reading and evaluating the adequacy of the disclosures made in the financial statements in relation to going concern. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group's and the company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group's and the company's ability to continue as a going concern. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic report and Report of the Directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below. Strategic Report and Report of the Directors In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Report of the Directors for the year ended 31 December 2022 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Report of the Directors. Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of directors' responsibilities in respect of the financial statements, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below. Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to Financial Conduct Authority's ('FCA') regulations, the Prudential Regulation Authority's ('PRA') regulations, UK tax legislation and equivalent local laws and regulations applicable to other countries in which the company operates, and we considered the extent to which non-compliance might have a material effect on the financial statements. Independent Auditors’ Report 110 HSBC Bank plc Annual Report and Accounts 2022 We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue or reduce costs, creation of fictitious transactions to hide losses or to improve financial performance, and management bias in accounting estimates. The group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included: •Review of correspondence with and reports to the regulators, including the PRA and FCA; •Review of reporting to the Audit Committee and Risk Committee in respect of compliance and legal matters; •Review of a sample of legal correspondence with legal advisors; •Enquiries of management and review of internal audit reports in so far as they related to the financial statements; •Obtaining legal confirmations from legal advisors relating to material litigation and compliance matters; •Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to the determination of fair value for certain financial instruments, the determination of expected credit losses, impairment assessments of investments in subsidiaries and recognition of deferred tax assets; •Obtaining confirmations from third parties to confirm the existence of a sample of transactions and balances; and •Identifying and testing journal entries meeting specific fraud criteria, including those posted with certain descriptions, posted and approved by the same individual, backdated journals or posted by infrequent and unexpected users. There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non- compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected. A further description of our responsibilities for the audit of the financial statements in accordance with ISAs (UK) is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: •Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. •Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group’s and company’s internal control. •Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. •Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s and company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group to cease to continue as a going concern. •Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. •Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group and company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group and company audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Use of this report This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. HSBC Bank plc Annual Report and Accounts 2022 111 Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: •we have not obtained all the information and explanations we require for our audit; or •adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or •certain disclosures of directors’ remuneration specified by law are not made; or •the company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility Appointment Following the recommendation of the Audit Committee, we were appointed by the directors on 31 March 2015 to audit the financial statements for the year ended 31 December 2015 and subsequent financial periods. The period of total uninterrupted engagement is eight years, covering the years ended 31 December 2015 to 31 December 2022. Other matter As required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial statements form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no assurance over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS. Lawrence Wilkinson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 20 February 2023 Independent Auditors’ Report 112 HSBC Bank plc Annual Report and Accounts 2022 Financial statements Page Consolidated income statement 114 Consolidated statement of comprehensive income 115 Consolidated balance sheet 116 Consolidated statement of cash flows 117 Consolidated statement of changes in equity 118 HSBC Bank plc balance sheet 120 HSBC Bank plc statement of cash flows 121 HSBC Bank plc statement of changes in equity 122 Notes on the financial statements 1 Basis of preparation and significant accounting policies 124 2 Net fee income 135 3 Net income from financial instruments measured at fair value through profit or loss 136 4 Insurance business 136 5 Employee compensation and benefits 137 6 Auditors’ remuneration 143 7 Tax 143 8 Dividends 147 9 Segmental analysis 147 10 Trading assets 149 11 Fair values of financial instruments carried at fair value 149 12 Fair values of financial instruments not carried at fair value 157 13 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 159 14 Derivatives 159 15 Financial investments 164 16 Assets pledged, collateral received and assets transferred 165 17 Interests in associates and joint ventures 166 18 Investments in subsidiaries 166 19 Structured entities 167 20 Goodwill and intangible assets 169 21 Prepayments, accrued income and other assets 170 22 Trading liabilities 170 23 Financial liabilities designated at fair value 171 24 Accruals, deferred income and other liabilities 171 25 Provisions 172 26 Subordinated liabilities 173 27 Maturity analysis of assets, liabilities and off-balance sheet commitments 175 28 Offsetting of financial assets and financial liabilities 177 29 Called up share capital and other equity instruments 178 30 Contingent liabilities, contractual commitments, guarantees and contingent assets 180 31 Finance lease receivables 181 32 Legal proceedings and regulatory matters 181 33 Related party transactions 183 34 Assets held for sale and liabilities of disposal groups held for sale 186 35 Events after the balance sheet date 187 36 HSBC Bank plc’s subsidiaries, joint ventures and associates 187 HSBC Bank plc Annual Report and Accounts 2022 113 Consolidated income statement for the year ended 31 December 2022 2021 2020 Notes £m £m £m Net interest income 1,904 1,754 1,898 – interest income1,2 6,535 3,149 4,086 – interest expense3 (4,631) (1,395) (2,188) Net fee income 2 1,261 1,413 1,400 – fee income 2,606 2,706 2,674 – fee expense (1,345) (1,293) (1,274) Net income from financial instruments held for trading or managed on a fair value basis 3 2,875 1,733 1,758 Net (expense)/ income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss 3 (1,369) 1,214 254 Changes in fair value of long-term debt and related derivatives 3 102 (8) 17 Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss 3 143 493 285 Gains less losses from financial investments (60) 60 95 Net insurance premium income 4 1,787 1,906 1,559 (Losses)/gains recognised on Assets held for sale4 (1,947) 67 — Other operating income 356 527 417 Total operating income 5,052 9,159 7,683 Net insurance claims, benefits paid and movement in liabilities to policyholders 4 (406) (3,039) (1,783) Net operating income before change in expected credit losses and other credit impairment charges5 4,646 6,120 5,900 Change in expected credit losses and other credit impairment charges (222) 174 (808) Net operating income 4,424 6,294 5,092 Total operating expenses (5,353) (5,462) (6,705) – employee compensation and benefits 5 (1,762) (2,023) (2,340) – general and administrative expenses (3,463) (3,265) (3,092) – depreciation and impairment of property, plant and equipment and right of use assets (103) (110) (372) – amortisation and impairment of intangible assets 20 (25) (64) (901) Operating (loss)/profit (929) 832 (1,613) Share of (loss)/profit in associates and joint ventures 17 (30) 191 (1) (Loss)/profit before tax (959) 1,023 (1,614) Tax credit 7 561 23 136 (Loss)/profit for the year (398) 1,046 (1,478) (Loss)/profit attributable to the parent company (408) 1,041 (1,488) Profit attributable to non-controlling interests 10 5 10 For Notes on the financial statements, see page 124. 1Interest income includes £5,512m (2021: £1,986m; 2020: £2,773m) of interest recognised on financial assets measured at amortised cost; £422m (2021: £659m; 2020: £656m) of negative interest recognised on financial liabilities and £601m (2021: £504m; 2020: £657m) of interest recognised on financial assets measured at fair value through other comprehensive income. Include within this is £59m (2021: £61m; 2020: £57m) interest recognised on impaired financial assets. 2Interest revenue calculated using the effective interest method comprises interest recognised on financial assets measured at either amortised cost or fair value through other comprehensive income. 3Interest expense includes £3,740m (2021: £616m; 2020: £1,299) of interest on financial liabilities, excluding interest on financial liabilities held for trading or designated or otherwise mandatorily measured at fair value. 42022 balances include losses on disposal of businesses classified as held-for-sale as part of a broader restructuring of our European business. 5Net operating income before change in expected credit losses and other credit impairment charges is also referred to as 'revenue'. Financial statements 114 HSBC Bank plc Annual Report and Accounts 2022 Consolidated statement of comprehensive income for the year ended 31 December 2022 2021 2020 £m £m £m (Loss)/profit for the year (398) 1,046 (1,478) Other comprehensive (expense)/income Items that will be reclassified subsequently to profit or loss when specific conditions are met: Debt instruments at fair value through other comprehensive income (454) (237) 213 – fair value (losses)/gains (698) (247) 366 – fair value losses/(gains) transferred to the income statement on disposal 59 (63) (90) – expected credit losses/(recoveries) recognised in the income statement 6 (5) 8 – income taxes 179 78 (71) Cash flow hedges (943) (165) 118 – fair value (losses)/gains (1,418) (40) 86 – fair value losses/(gains) reclassified to the income statement 127 (202) 72 – income taxes 348 77 (40) Exchange differences 701 (603) 467 Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit asset/liability 38 44 (8) – before income taxes 56 61 (18) – income taxes (18) (17) 10 Equity instruments designated at fair value through other comprehensive income — 2 2 – fair value gains — 2 2 – income taxes — — — Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk 329 2 67 – fair value gains 462 3 93 – income taxes (133) (1) (26) Other comprehensive (expense)/income for the year, net of tax (329) (957) 859 Total comprehensive (expense)/income for the year (727) 89 (619) Attributable to: – shareholders of the parent company (739) 93 (653) – non-controlling interests 12 (4) 34 Total comprehensive (expense)/income for the year (727) 89 (619) HSBC Bank plc Annual Report and Accounts 2022 115 Consolidated balance sheet at 31 December 2022 2021 Notes £m £m Assets Cash and balances at central banks 131,433 108,482 Items in the course of collection from other banks 2,285 346 Trading assets 10 79,878 83,706 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 13 15,881 18,649 Derivatives 14 225,238 141,221 Loans and advances to banks 17,109 10,784 Loans and advances to customers 72,614 91,177 Reverse repurchase agreements – non-trading 53,949 54,448 Financial investments 15 32,604 41,300 Assets held for sale1 34 21,214 9 Prepayments, accrued income and other assets 21 61,379 43,118 Current tax assets 595 1,135 Interests in associates and joint ventures 17 728 743 Goodwill and intangible assets 20 1,167 894 Deferred tax assets 7 1,279 599 Total assets 717,353 596,611 Liabilities and equity Liabilities Deposits by banks 20,836 32,188 Customer accounts 215,948 205,241 Repurchase agreements – non-trading 32,901 27,259 Items in the course of transmission to other banks 2,226 489 Trading liabilities 22 41,265 46,433 Financial liabilities designated at fair value 23 27,287 33,608 Derivatives 14 218,867 139,368 Debt securities in issue 7,268 9,428 Liabilities of disposal groups held for sale1 34 24,711 — Accruals, deferred income and other liabilities 24 66,945 43,456 Current tax liabilities 130 97 Liabilities under insurance contracts 4 19,987 22,264 Provisions 25 424 562 Deferred tax liabilities 7 14 15 Subordinated liabilities 26 14,528 12,488 Total liabilities 693,337 572,896 Equity Total shareholders’ equity 23,875 23,584 – called up share capital 29 797 797 – share premium account 420 — – other equity instruments 29 3,930 3,722 – other reserves (6,368) (5,670) – retained earnings 25,096 24,735 Non-controlling interests 141 131 Total equity 24,016 23,715 Total liabilities and equity 717,353 596,611 1Includes businesses classified as held-for-sale as part of a broader restructuring of our European business. Refer to Note 34 'Assets held for sale and liabilities of disposal groups held for sale' on page 186. For Notes on the financial statements, see page 124. The accompanying notes on pages 124 to 190, and the audited sections of the 'Report of the Directors' on pages 26 to 102 form an integral part of these financial statements. The financial statements were approved by the Board of Directors on 20 February 2023 and signed on its behalf by: David Watts Director Financial statements 116 HSBC Bank plc Annual Report and Accounts 2022 Consolidated statement of cash flows for the year ended 31 December 2022 2021 2020 £m £m £m (Loss)/profit before tax (959) 1,023 (1,614) Adjustments for non-cash items Depreciation, amortisation and impairment1 128 174 1,273 Net loss/(gain) from investing activities2 2,002 (62) (99) Share of loss/(profit) in associates and joint ventures 30 (191) 1 Change in expected credit losses gross of recoveries and other credit impairment charges 253 (171) 810 Provisions including pensions 192 104 424 Share-based payment expense 46 96 78 Other non-cash items included in loss/(profit) before tax (242) (198) 135 Elimination of exchange differences3 (6,714) 4,926 (2,527) Changes in operating assets and liabilities 37,454 9,602 35,418 – change in net trading securities and derivatives (6,213) 8,157 8,070 – change in loans and advances to banks and customers (2,717) 11,149 6,780 – change in reverse repurchase agreements – non-trading 6,251 9,538 16,084 – change in financial assets designated and otherwise mandatorily measured at fair value 2,729 (2,429) 735 – change in other assets (7,329) 10,924 (7,513) – change in deposits by banks and customer accounts 19,835 7,940 28,262 – change in repurchase agreements – non-trading 5,641 (7,643) (14,482) – change in debt securities in issue (1,060) (7,943) (7,668) – change in financial liabilities designated at fair value (1,822) (7,191) (402) – change in other liabilities 21,297 (12,295) 5,432 – dividend received from associates 7 — — – contributions paid to defined benefit plans (10) (24) (22) – tax received/(paid) 845 (581) 142 Net cash from operating activities 32,190 15,303 33,899 – purchase of financial investments (13,227) (18,890) (21,037) – proceeds from the sale and maturity of financial investments 20,490 25,027 17,417 – net cash flows from the purchase and sale of property, plant and equipment (20) 52 (70) – net investment in intangible assets (28) (45) (150) – net cash outflow from investment in associates and acquisition of businesses and subsidiaries (29) (85) (371) – net cash flow on disposal of subsidiaries, businesses, associates and joint ventures — — 57 Net cash from investing activities 7,186 6,059 (4,154) – redemption of preference shares and other equity instruments 628 — (318) – subordinated loan capital issued 3,111 10,466 — – subordinated loan capital repaid4 (2,248) (10,902) (18) – dividends to the parent company (1,052) (194) (263) – funds received from the parent company 1,465 — 1,000 – dividends paid to non-controlling interests (2) (1) — Net cash from financing activities 1,902 (631) 401 Net increase in cash and cash equivalents 41,278 20,731 30,146 Cash and cash equivalents at 1 Jan 140,923 125,304 92,338 Exchange difference in respect of cash and cash equivalents 7,706 (5,112) 2,820 Cash and cash equivalents at 31 Dec5 189,907 140,923 125,304 Cash and cash equivalents comprise of – cash and balances at central banks 131,433 108,482 85,092 – items in the course of collection from other banks 2,285 346 243 – loans and advances to banks of one month or less 13,801 7,516 8,676 – reverse repurchase agreement with banks of one month or less 23,182 17,430 21,020 – treasury bills, other bills and certificates of deposit less than three months 294 235 685 – cash collateral and net settlement accounts 19,213 7,403 9,878 – cash and cash equivalents held for sale6 1,925 — — – less: items in the course of transmission to other banks (2,226) (489) (290) Cash and cash equivalents at 31 Dec5 189,907 140,923 125,304 1 Included within 2020 are the impact of impairment and write-offs related principally to our businesses in the UK and HSBC Continental Europe £(994)m. 2 2022 balances include losses on disposal of businesses classified as held-for-sale as part of a broader restructuring of our European business. 3 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense. 4 Subordinated liabilities changes during the year are attributable to cash flows from issuance £3,111m (2021: £10,466m; 2020: nil) and repayment of £(2,248)m (2021: £(10,902)m; 2020: £(18)m) of securities as presented in the Consolidated statement of cash flows. Non-cash changes during the year included foreign exchanges gains/(losses) £711m (2021: £(512)m; 2020: £351m) and fair value gains/(losses) £(427)m (2021: £(82)m; 2020: £69m). 5 At 31 December 2022, £23,395m (2021: £9,410m; 2020: £11,828m) was not available for use by the group, of which £1,601m (2021: £1,393m; 2020: £2,460m) related to mandatory deposits at central banks. 6 Includes £1,562m of cash and balances at central banks (excluding the expected cash contribution as part of the planned sale of our retail banking operations in France. For further details, see Note 34); £208m of reverse repurchase agreements with banks of one month or less, £114m of loans and advances to banks of one month or less and remaining £41m relates to other cash and cash equivalents. Interest received was £7,668m (2021: £4,285m; 2020: £5,424m), interest paid was £5,284m (2021: £2,919m; 2020: £3,725m) and dividends received were £431m (2021: £704m; 2020: £423m). HSBC Bank plc Annual Report and Accounts 2022 117 Consolidated statement of changes in equity for the year ended 31 December Other reserves Called up share capital & share premium Other equity instruments Retained earnings Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Group reorganisa- tion reserve ('GRR')7 Total share- holders’ equity Non- controlling interests Total equity £m £m £m £m £m £m £m £m £m £m At 1 Jan 2022 797 3,722 24,735 1,081 (7) 948 (7,692) 23,584 131 23,715 Loss for the year — — (408) — — — — (408) 10 (398) Other comprehensive (expense)/income (net of tax) — — 367 (449) (943) 694 — (331) 2 (329) – debt instruments at fair value through other comprehensive income — — — (449) — — — (449) (5) (454) – cash flow hedges — — — — (943) — — (943) — (943) – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1 — — 329 — — — — 329 — 329 – remeasurement of defined benefit asset/ liability — — 38 — — — — 38 — 38 – exchange differences — — — — — 694 — 694 7 701 Total comprehensive (expense)/ income for the year — — (41) (449) (943) 694 — (739) 12 (727) Capital securities issued during the period 420 208 — — — — — 628 — 628 Dividends to the parent company2 — — (1,052) — — — — (1,052) (2) (1,054) Net impact of equity-settled share-based payments — — 5 — — — — 5 — 5 Capital contribution3 — — 1,465 — — — — 1,465 — 1,465 Change in business combinations and other movements — — (16) — — — — (16) — (16) At 31 Dec 2022 1,217 3,930 25,096 632 (950) 1,642 (7,692) 23,875 141 24,016 At 1 Jan 2021 797 3,722 23,829 1,309 158 1,543 (7,692) 23,666 183 23,849 Profit for the year — — 1,041 — — — — 1,041 5 1,046 Other comprehensive (expense)/income (net of tax) — — 46 (234) (165) (595) — (948) (9) (957) – debt instruments at fair value through other comprehensive income — — — (236) — — — (236) (1) (237) – equity instruments designated at fair value through other comprehensive income — — — 2 — — — 2 — 2 – cash flow hedges — — — — (165) — — (165) — (165) – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1 — — 2 — — — — 2 — 2 – remeasurement of defined benefit asset/ liability — — 44 — — — — 44 — 44 – exchange differences — — — — — (595) — (595) (8) (603) Total comprehensive income/(expense) for the year — — 1,087 (234) (165) (595) — 93 (4) 89 Capital securities issued during the period — — — — — — — — — — Dividends to the parent company2 — — (194) — — — — (194) (1) (195) Net impact of equity-settled share-based payments — — (10) — — — — (10) — (10) Change in business combinations and other movements5 — — 23 6 — — — 29 (47) (18) At 31 Dec 2021 797 3,722 24,735 1,081 (7) 948 (7,692) 23,584 131 23,715 Financial statements 118 HSBC Bank plc Annual Report and Accounts 2022 Consolidated statement of changes in equity (continued) for the year ended 31 December Other reserves Called up share capital & share premium Other equity instruments Retained earnings Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Group reorganisa- tion reserve ('GRR')7 Total share- holders’ equity Non- controlling interests Total equity £m £m £m £m £m £m £m £m £m £m At 1 Jan 2020 797 3,722 24,449 1,089 40 1,098 (7,692) 23,503 509 24,012 Loss for the year — — (1,488) — — — — (1,488) 10 (1,478) Other comprehensive income (net of tax) — — 56 216 118 445 — 835 24 859 – debt instruments at fair value through other comprehensive income — — — 214 — — — 214 (1) 213 – equity instruments designated at fair value through other comprehensive income — — — 2 — — — 2 — 2 – cash flow hedges — — — — 118 — — 118 — 118 – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1 — — 67 — — — — 67 — 67 – remeasurement of defined benefit asset/ liability — — (11) — — — — (11) 3 (8) – exchange differences — — — — — 445 — 445 22 467 Total comprehensive (expense)/income for the year — — (1,432) 216 118 445 — (653) 34 (619) Dividends to the parent company2 — — (263) — — — — (263) — (263) Net impact of equity-settled share-based payments — — 11 — — — — 11 — 11 Capital contribution4 — — 1,000 — — — — 1,000 — 1,000 Change in business combinations and other movements6 — — 64 4 — — — 68 (360) (292) At 31 Dec 2020 797 3,722 23,829 1,309 158 1,543 (7,692) 23,666 183 23,849 1The cumulative amount of change in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a gain of £292m (2021: loss of £165m and 2020: loss of £189m). 2The dividends to the parent company includes dividend on ordinary share capital £850m (2021: nil and 2020: nil), coupon payment on additional tier 1 instrument £202m (2021: £194m and 2020: £212m) & dividend on preference share capital nil (2021: nil and 2020: £51m). 3 HSBC Holdings plc injected £1.5bn of CET1 capital into HSBC Bank plc during November 2022 which in turn injected into HSBC Continental Europe for funding the acquisition of HSBC Bank Malta plc and HSBC Trinkaus & Burkhardt GmbH. 4HSBC UK Holdings Limited (during 2021, parent company of the bank changed to HSBC Holdings plc) injected £1bn of CET1 capital into HSBC Bank plc during March 2020 to improve the capital base of the group, impacted by Covid-19. There was no new issuance of share capital. 5Additional shares were acquired in HSBC Trinkaus & Burkhardt GmbH and HSBC Bank Armenia cjsc, in 2021 increasing the group’s interest to 100%. 6Additional shares were acquired in HSBC Trinkaus & Burkhardt GmbH in May 2020, increasing the group’s interest from 80.67% to 99.33%. 7The Group reorganisation reserve ('GRR') is an accounting reserve resulting from the ring-fencing implementation. The GRR does not form part of regulatory capital. HSBC Bank plc Annual Report and Accounts 2022 119 HSBC Bank plc balance sheet at 31 December 2022 2021 Notes £m £m Assets Cash and balances at central banks 78,441 63,008 Items in the course of collection from other banks 1,863 211 Trading assets 10 67,623 70,790 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 13 1,618 3,215 Derivatives 14 196,714 125,787 Loans and advances to banks 14,486 6,778 Loans and advances to customers 36,992 33,936 Reverse repurchase agreements – non-trading 43,055 39,708 Financial investments 15 18,639 26,542 Prepayments, accrued income and other assets 21 43,907 31,490 Current tax assets 394 1,071 Investments in subsidiary undertakings 18 10,646 6,479 Goodwill and intangible assets 20 41 34 Deferred tax assets 7 608 509 Total assets 515,027 409,558 Liabilities and equity Liabilities Deposits by banks 13,594 14,655 Customer accounts 141,714 124,706 Repurchase agreements – non-trading 29,638 22,344 Items in the course of transmission to other banks 1,758 172 Trading liabilities 22 25,765 31,161 Financial liabilities designated at fair value 23 19,415 20,869 Derivatives 14 193,336 127,651 Debt securities in issue 4,656 5,658 Accruals, deferred income and other liabilities 24 47,982 30,170 Current tax liabilities 21 5 Provisions 25 167 250 Subordinated liabilities 26 14,252 12,218 Total liabilities 492,298 389,859 Equity Called up share capital 29 797 797 Share premium account 420 — Other equity instruments 29 3,930 3,722 Other reserves (6,073) (5,173) Retained earnings 23,655 20,353 Total equity 22,729 19,699 Total liabilities and equity 515,027 409,558 For Notes on the financial statements, see page 124. Profit after tax for the year was £2,743m (2021: £455m; 2020: loss after tax £(644)m. The accompanying notes on pages 124 to 190, and the audited sections of the 'Report of the Directors' on pages 26 to 102 form an integral part of these financial statements. The financial statements were approved by the Board of Directors on 20 February 2023 and signed on its behalf by: David Watts Director Financial statements 120 HSBC Bank plc Annual Report and Accounts 2022 HSBC Bank plc statement of cash flows for the year ended 31 December 2022 2021 2020 £m £m £m Profit/(loss) before tax 2,548 273 (936) Adjustments for non-cash items Depreciation, amortisation and impairment1 17 18 635 Net gain from investing activities2 (1,669) (34) (67) Change in expected credit losses gross of recoveries and other credit impairment charges 130 (216) 457 Provisions including pensions 91 42 154 Share-based payment expense 27 71 56 Other non-cash items included in loss/(profit) before tax (21) (7) 8 Elimination of exchange differences3 (2,109) 1,073 108 Changes in operating assets and liabilities 18,609 4,150 27,197 – change in net trading securities and derivatives (9,551) 11,761 11,580 – change in loans and advances to banks and customers (3,870) 9,712 8,568 – change in reverse repurchase agreements – non-trading 791 5,651 5,890 – change in financial assets designated and otherwise mandatorily measured at fair value 1,597 (1,350) 1,264 – change in other assets4 (10,912) 4,383 (3,771) – change in deposits by banks and customer accounts 15,947 1,903 12,062 – change in repurchase agreements – non-trading 7,294 (4,652) (9,331) – change in debt securities in issue (1,002) (9,698) 318 – change in financial liabilities designated at fair value (116) (3,831) 500 – change in other liabilities 17,343 (9,357) (71) – contributions paid to defined benefit plans (10) (21) (22) – tax received/(paid) 1,098 (351) 210 Net cash from operating activities 17,623 5,370 27,612 – purchase of financial investments (8,535) (15,185) (13,882) – proceeds from the sale and maturity of financial investments 17,022 18,285 11,791 – net cash flows from the purchase and sale of property, plant and equipment (2) (4) (9) – net investment in intangible assets (176) (8) (98) Net cash from investing activities 8,309 3,088 (2,198) – issue of ordinary share capital and other equity instruments 628 — – subordinated loan capital issued5 3,111 10,466 — – subordinated loan capital repaid5 (2,240) (10,791) (313) – funds received from the parent company 1,465 — 1,000 – dividends to the parent company (1,052) (194) (263) Net cash from financing activities 1,912 (519) 424 Net increase in cash and cash equivalents 27,844 7,939 25,838 Cash and cash equivalents at 1 Jan 83,814 77,605 51,235 Exchange difference in respect of cash and cash equivalents 3,652 (1,730) 532 Cash and cash equivalents at 31 Dec 115,310 83,814 77,605 Cash and cash equivalents comprise of: – cash and balances at central banks 78,441 63,008 48,777 – items in the course of collection from other banks 1,863 211 37 – loans and advances to banks of one month or less 11,353 4,323 5,338 – reverse repurchase agreement with banks of one month or less 13,917 9,779 14,558 – treasury bills, other bills and certificates of deposit less than three months 150 175 279 – cash collateral and net settlement accounts 11,344 6,490 8,630 – less: items in the course of transmission to other banks (1,758) (172) (14) Cash and cash equivalents at 31 Dec 115,310 83,814 77,605 1Included within 2020 is the impact of impairment related to our business in the UK (£531m). 2Included within 2022 is the impact of impairment reversal booked in Paris branch for investment in subsidiary. 3 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense. 4Includes additional investment in subsidiaries (2021: £17m; 2020: £443m). 5Subordinated liabilities changes during the year are attributable to cash flows from issuance £3,111m (2021: £10,466m; 2020: nil) and repayment of £(2,240)m (2021: £10,791m; 2020: £313m) of securities as presented in the HSBC Bank plc statement of cash flows. Non-cash changes during the year included foreign exchange gains(losses) £696m (2021: £489m; 2020: £329m) and fair value gains £(427)m (2021: £(82)m; 2020: £69m). Interest received was £5,023m (2021: £2,321m; 2020: £3,211m), interest paid was £3,891m (2021: £1,827m; 2020: £2,539m) and dividends received was £936m (2021: £902m; 2020: £555m). HSBC Bank plc Annual Report and Accounts 2022 121 HSBC Bank plc statement of changes in equity for the year ended 31 December Other reserves Called up share capital & share premium Other equity instruments Retained earnings Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Group reorganisation reserve (‘GRR’)7 Total shareholders’ equity £m £m £m £m £m £m £m £m At 1 Jan 2022 797 3,722 20,353 135 (82) 22 (5,248) 19,699 Profit for the year — — 2,743 — — — — 2,743 Other comprehensive income/(expense) (net of tax) — — 141 (257) (714) 71 — (759) – debt instruments at fair value through other comprehensive income — — — (258) — — — (258) – equity instruments designated at fair value through other comprehensive income — — — 1 — — — 1 – cash flow hedges — — — — (714) — — (714) – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1 — — 156 — — — — 156 – remeasurement of defined benefit asset/ liability — — (15) — — — — (15) – exchange differences — — — — — 71 — 71 Total comprehensive income/(expense) for the period — — 2,884 (257) (714) 71 — 1,984 Capital securities issued during the period 420 208 — — — — — 628 Dividends to the parent company2 — — (1,052) — — — — (1,052) Net impact of equity-settled share-based payments — — 5 — — — — 5 Capital contribution3 1,465 1,465 At 31 Dec 2022 1,217 3,930 23,655 (122) (796) 93 (5,248) 22,729 At 1 Jan 2021 797 3,722 20,099 351 55 43 (5,248) 19,819 Profit for the year — — 455 — — — — 455 Other comprehensive income/(expense) (net of tax) — — 14 (216) (137) (21) — (360) – debt instruments at fair value through other comprehensive income — — — (215) — — — (215) – equity instruments designated at fair value through other comprehensive income — — — (1) — — — (1) – cash flow hedges — — — — (137) — — (137) – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1 — — — — — — — — – remeasurement of defined benefit asset/ liability — — 14 — — — — 14 – exchange differences — — — — — (21) — (21) Total comprehensive income/(expense) for the period — — 469 (216) (137) (21) — 95 Dividends to the parent company2 — — (194) — — — — (194) Net impact of equity-settled share-based payments — — (10) — — — — (10) Change in business combinations and other movements5 — — (11) — — — — (11) At 31 Dec 2021 797 3,722 20,353 135 (82) 22 (5,248) 19,699 Financial statements 122 HSBC Bank plc Annual Report and Accounts 2022 HSBC Bank plc statement of changes in equity (continued) for the year ended 31 December Other reserves Called up share capital & share premium Other equity instruments Retained earnings Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Group reorganisation reserve (‘GRR’) Total shareholders' equity £m £m £m £m £m £m £m £m At 1 Jan 2020 797 3,722 19,876 182 (32) 77 (5,248) 19,374 Loss for the year — — (644) — — — — (644) Other comprehensive income/(expense) (net of tax) — — 107 170 87 (28) — 336 – debt instruments at fair value through other comprehensive income — — — 168 — — — 168 – equity instruments designated at fair value through other comprehensive income — — — 2 — — — 2 – cash flow hedges — — — — 87 — — 87 – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1 — — 92 — — — — 92 – remeasurement of defined benefit asset/ liability — — 15 — — — — 15 – exchange differences — — — — — (28) — (28) Total comprehensive (expense)/income for the period — — (537) 170 87 (28) — (308) Dividends to the parent company2 — — (263) — — — — (263) Net impact of equity-settled share-based payments — — 11 — — — — 11 Capital contribution4 — 1,000 — — — — 1,000 Change in business combinations and other movements6 — 12 (1) — (6) — 5 At 31 Dec 2020 797 3,722 20,099 351 55 43 (5,248) 19,819 1The cumulative amount of change in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a gain of £139m (2021: loss of £72m and 2020: loss of £76m). 2The dividends to the parent company includes dividend on ordinary share capital £850m (2021: nil and 2020: nil), coupon payment on additional tier 1 instrument £222m (2021: £194m and 2020: £212m) & dividend on preference share capital nil (2021: nil and 2020: £51m). 3 HSBC Holdings plc injected £1.5bn of CET1 capital into HSBC Bank plc during November 2022 which in turn injected into HSBC Continental Europe for funding the acquisition of HSBC Bank Malta plc and HSBC Trinkaus & Burkhardt GmbH. 4HSBC UK Holdings Limited (during 2021, parent company of the bank changed to HSBC Holdings plc) injected £1bn of CET1 capital into HSBC Bank plc during March 2020 to improve the capital base of the group, impacted by Covid-19. There was no new issuance of share capital. 5Additional shares were acquired in HSBC Trinkaus & Burkhardt GmbH in Feb 2021, increasing the group’s interest from 99.33% to 100.00%. 6Additional shares were acquired in HSBC Trinkaus & Burkhardt GmbH in May 2020, increasing the group’s interest from 80.67% to 99.33%. 7The Group reorganisation reserve ('GRR') is an accounting reserve resulting from the ring-fencing implementation. The GRR does not form part of regulatory capital. HSBC Bank plc Annual Report and Accounts 2022 123 Notes on the Financial Statements 1 Basis of preparation and significant accounting policies 1.1Basis of preparation (a)Compliance with International Financial Reporting Standards The consolidated financial statements of the group and the separate financial statements of HSBC Bank plc comply with UK-adopted international accounting standards and with the requirements of the Companies Act 2006, and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. These financial statements are also prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board (‘IASB’), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRSs as issued by the IASB for the periods presented. There were no unendorsed standards effective for the year ended 31 December 2022 affecting these consolidated and separate financial statements. Standards adopted during the year ended 31 December 2022 There were no new accounting standards or interpretations that had a significant effect on the group in 2022. Accounting policies have been consistently applied. (b)Future accounting developments Minor amendments to IFRSs The IASB has not published any minor amendments effective from 1 January 2022 that are applicable to the group. However, the IASB has published a number of minor amendments to IFRSs that are effective from 1 January 2023 and 1 January 2024. The group expects they will have an insignificant effect, when adopted, on the consolidated financial statements of the group and the separate financial statements of HSBC Bank plc. New IFRSs IFRS 17 ‘Insurance Contracts’ IFRS 17 ‘Insurance Contracts’ was issued in May 2017, with amendments to the standard issued in June 2020 and December 2021. Following the amendments, IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023 and is applied retrospectively, with comparatives restated from 1 January 2022. IFRS 17 has been adopted in its entirety for use in the UK while it has been adopted by the EU subject to certain optional exemptions. IFRS 17 sets out the requirements that the group will apply in accounting for insurance contracts it issues, reinsurance contracts it holds, and investment contracts with discretionary participation features. The group is at an advanced stage in the implementation of IFRS 17, having put in place accounting policies, data and models, and made progress with preparing 2022 comparative data. Below are set out our expectations of the impact of IFRS 17 compared with our current accounting policy for insurance contracts, which is set out in policy 1.2(j) on page 344. Under IFRS 17, no present value of in-force business (‘PVIF’) asset is recognised. Instead, the measurement of the insurance contracts liability is based on groups of insurance contracts and will include fulfilment cash flows, as well as the contractual service margin (‘CSM’), which represents the unearned profit. To identify groups of insurance contracts, individual contracts subject to similar dominant risk and managed together are identified as a portfolio of insurance contracts. Each portfolio is further separated by profitability group and issue date into periodic cohorts. The fulfilment cash flows comprise: •the best estimates of future cash flows, including amounts expected to be collected from premiums and payouts for claims, benefits and expenses, which are projected using assumptions based on demographic and operating experience; •an adjustment for the time value of money and financial risks associated with the future cash flows; and •an adjustment for non-financial risk that reflects the uncertainty about the amount and timing of future cash flows. In contrast to the group’s IFRS 4 accounting where profits are recognised upfront, the CSM will be systematically recognised in revenue, as services are provided over the expected coverage period of the group of contracts without any change to the overall profit of the contracts. Losses resulting from the recognition of onerous contracts are recognised in the income statement immediately. The CSM is adjusted depending on the measurement model of the group of insurance contracts. While the general measurement model (‘GMM’) is the default measurement model under IFRS 17, the group expects that the majority of its contracts will be accounted for under the variable fee approach (‘VFA’), which is mandatory to apply for insurance contracts with direct participation features upon meeting the eligibility criteria. IFRS 17 requires entities to apply IFRS 17 retrospectively as if IFRS 17 had always been applied, using the full retrospective approach (‘FRA’) unless it is impracticable. When FRA is impracticable such as when there is a lack of sufficient and reliable data, an entity has an accounting policy choice to use either the modified retrospective approach (‘MRA’) or the fair value approach (‘FVA’). The group will primarily apply the MRA for new business where FRA is impracticable. The group will make use of the other comprehensive income (‘OCI’) option for some contracts. Impact of IFRS 17 Changes to equity on transition are driven by the elimination of the PVIF asset, the re-designation of certain eligible financial assets in the scope of IFRS 9, the remeasurement of insurance liabilities and assets under IFRS 17, and the recognition of the CSM. IFRS 17 requires the use of current market values for the measurement of insurance liabilities. The shareholder’s share of the investment experience and assumption changes will be absorbed by the CSM and released over time to profit or loss under VFA. For contracts measured under GMM, the shareholder’s share of the investment volatility is recorded in profit or loss as it arises. Under IFRS 17, operating expenses will be lower as directly attributable costs will be incorporated in the CSM and recognised in the insurance service result. Notes on the Financial Statements 124 HSBC Bank plc Annual Report and Accounts 2022 While the profit over the life of an individual contract will be unchanged, its emergence will be later under IFRS 17. All of these impacts will be subject to deferred tax. Estimates of the opening balance sheet as at 1 January 2022 have been calculated and are presented below, showing separately the impact on the total assets, liabilities and equity of our insurance manufacturing operations. These estimates are based on accounting policies, assumptions, judgements and estimation techniques that remain subject to change. Total assets Total liabilities Total equity Impact of transition to IFRS 17, at 1 January 2022 £bn £bn £bn Balance sheet values at 1 January 2022 under IFRS 4 27.1 25.5 1.6 Removal of PVIF (0.8) — (0.8) Replacement of IFRS 4 liabilities with IFRS 17 — — — Removal of IFRS 4 liabilities and recording of IFRS 17 fulfilment cash flows — (0.9) 0.9 IFRS 17 contractual service margin — 0.9 (0.9) Re-measurement effect of IFRS 9 re-designations — — — Tax effect — (0.2) 0.2 Estimated balance sheet values at 1 January 2022 under IFRS 17 26.3 25.3 1.0 PVIF of £812m less deferred tax of £175m constitute the overall estimated reduction in intangible assets, after tax, of £637m on transition to IFRS 17. (c)Foreign currencies The functional currency of the bank is sterling, which is also the presentational currency of the consolidated financial statements of the group. Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets and liabilities measured at historical cost, which are translated using the rate of exchange at the initial transaction date. Exchange differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is recognised. In the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not sterling are translated into the group’s presentation currency at the rate of exchange at the balance sheet date, while their results are translated into sterling at the average rates of exchange for the reporting period. Exchange differences arising are recognised in other comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income are reclassified to the income statement. (d)Presentation of information Certain disclosures required by IFRSs have been included in the audited sections of this Annual Report and Accounts 2022 as follows: •disclosures concerning the nature and extent of risks relating to financial instruments and insurance contracts are included in the 'Report of the Directors: Risk’ on pages 26 to 93; •the 'Own funds' disclosure is included in the ‘Report of the Directors: Capital Risk in 2022’ on page 80; and •in publishing the parent company financial statements together with the group financial statements, the bank has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its individual income statement and related notes. (e)Critical accounting estimates and judgements The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted, as the 'critical accounting estimates and judgements' in section 1.2 below, it is possible that the outcomes in the next financial year could differ from those on which management’s estimates are based. This could result in materially different estimates and judgements from those reached by management for the purposes of these financial statements. Management’s selection of the group’s accounting policies that contain critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of judgement and estimation uncertainty involved. Management has considered the impact of climate-related risks on HSBC’s financial position and performance. While the effects of climate change are a source of uncertainty, as at 31 December 2022 management do not consider there to be a material impact on our critical judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular management has considered the known and observable potential impact of climate-related risks of associated judgements and estimates in our value in use calculations. (f)Segmental analysis HSBC Bank plc's chief operating decision maker is the group Chief Executive, supported by the group Executive Committee, and operating segments are reported in a manner consistent with the internal reporting provided to the group Chief Executive and the group Executive Committee. Measurement of segmental assets, liabilities, income and expenses is in accordance with the bank’s accounting policies. Segmental income and expenses include transfers between segments and these transfers are conducted at arm’s length. Shared costs are included in segments on the basis of the actual recharges made. The types of products and services from which each reportable segment derives its revenue are discussed in the ‘Strategic Report – Our global businesses’ on page 9 (g)Going concern The financial statements are prepared on a going concern basis, as the Directors are satisfied that the group and the company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the uncertainty in structural changes from the Covid-19 HSBC Bank plc Annual Report and Accounts 2022 125 pandemic, the Russia-Ukraine war, disrupted supply chains globally, climate change and other top and emerging risks, as well as from the related impacts on profitability, capital and liquidity. 1.2Summary of significant accounting policies (a)Consolidation and related policies Investments in subsidiaries Where an entity is governed by voting rights, the group consolidates when it holds – directly or indirectly – the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal. Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The bank's investments in subsidiaries are stated at cost less impairment losses. Impairment testing is performed where there is an indication of impairment, by comparing the recoverable amount of a cash-generating unit with its carrying amount. Critical accounting estimates and judgements Investments in subsidiaries are tested for impairment when there is an indication that the investment may be impaired, which involves estimations of value in use reflecting management’s best estimate of the future cash flows of the investment and the rates used to discount these cash flows, both of which are subject to uncertain factors as follows: Judgements Estimates •The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. Where such circumstances are determined to exist, management re-tests for impairment more frequently than once a year when indicators of impairment exist. This ensures that the assumptions on which the cash flow forecasts are based continue to reflect current market conditions and management's best estimate of future business prospects. •The future cash flows of each investment are sensitive to the cash flows projected for the periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. Forecasts are compared with actual performance and verifiable economic data, but they reflect management’s view of future business prospects at the time of the assessment. •The rates used to discount future expected cash flows can have a significant effect on their valuation, and are based on the costs of equity assigned to the investment. The cost of equity percentage is generally derived from a capital asset pricing model and the market implied cost of equity, which incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market rates and economic conditions beyond management’s control. •Key assumptions used in estimating impairment in subsidiaries are described in Note 18. Group sponsored structured entities The group is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing that entity or in bringing together relevant counterparties so the transaction that is the purpose of the entity could occur. The group is generally not considered a sponsor if the only involvement with the entity is merely administrative. Interests in associates and joint arrangements Joint arrangements are investments in which the group, together with one or more parties, has joint control. Depending on the group’s rights and obligations, the joint arrangement is classified as either a joint operation or a joint venture. The group classifies investments in entities over which it has significant influence, and those that are neither subsidiaries nor joint arrangements, as associates. The group recognises its share of the assets, liabilities and results in a joint operation. Investments in associates and interests in joint ventures are recognised using the equity method. The attributable share of the results and reserves of joint ventures and associates are included in the consolidated financial statements of the group based on either financial statements made up to 31 December or pro- rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and 31 December. Investments in associates and joint ventures are assessed at each reporting date and tested for impairment when there is an indication that the investment may be impaired. Goodwill on acquisition of interests in joint ventures and associates is not tested separately for impairment, but is assessed as part of the carrying amount of the investment. (b)Income and expense Operating income Interest income and expense Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value, are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method. However, as an exception to this, interest on debt instruments issued by the group for funding purposes that are designated under the fair value option to reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments is included in interest expense. Interest on credit-impaired financial assets is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Non-interest income and expense The group generates fee income from services provided at a fixed price over time, such as account service and card fees, or when the group delivers a specific transaction at a point in time, such as broking services and import/export services. With the exception of certain fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and HSBC’s performance as fund manager. Variable fees are recognised when all uncertainties are resolved. Fee income is generally earned from short-term contracts with payment terms that do not include a significant financing component. Notes on the Financial Statements 126 HSBC Bank plc Annual Report and Accounts 2022 The group acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades, the group acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement. The group recognises fees earned on transaction-based arrangements at a point in time when it has fully provided the service to the customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the agreement. Where the group offers a package of services that contains multiple non-distinct performance obligations, such as those included in account service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices. Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities. Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following: •‘Net income from financial instruments held for trading or managed on a fair value basis’: This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss. •‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’: This includes interest income, interest expense and dividend income in respect of financial assets and liabilities measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately identifiable from other trading derivatives. •‘Changes in fair value of designated debt instruments and related derivatives’: Interest paid on the debt instruments and interest cash flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch. •‘Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss’: This includes interest on instruments that fail the solely payments of principal and interest (‘SPPI’) test, see (d) below. The accounting policies for insurance premium income are disclosed in Note 1.2(j). (c)Valuation of financial instruments All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based on a quoted price in an active market or a valuation technique that uses only data from observable markets, the group recognises the difference as a trading gain or loss at inception (a ‘day 1 gain or loss’). In all other cases, the entire day 1 gain or loss is deferred and recognised in the income statement over the life of the transaction either until the transaction matures or is closed out or the valuation inputs become observable. The fair value of financial instruments is generally measured on an individual basis. However, in cases where the group manages a group of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments is measured on a net basis but the underlying financial assets and liabilities are presented separately in the financial statements, unless they satisfy the IFRS offsetting criteria. Financial instruments are classified into one of three fair value hierarchy levels, described in Note 11, ‘Fair values of financial instruments carried at fair value'. Critical accounting estimates and judgements The majority of valuation techniques employ only observable market data. However, certain financial instruments are classified on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the measurement of fair value is more judgemental: Judgements Estimates •An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, greater than 5% of the instrument’s valuation is driven by unobservable inputs. •‘Unobservable’ in this context means that there is little or no current market data available from which to determine the price at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used). •Details on the group’s level 3 financial instruments and the sensitivity of their valuation to the effect of applying reasonably possible alternative assumptions in determining their fair value are set out in Note 11. (d)Financial instruments measured at amortised cost Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost. The group accounts for regular way amortised cost financial instruments using trade date accounting. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs. The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be sold shortly after origination, the commitment to lend is recorded as a derivative. When the group intends to hold the loan, the loan commitment is included in the impairment calculations set out below. Non-trading reverse repurchase, repurchase and similar agreements When debt securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (‘reverse repos’) are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement. HSBC Bank plc Annual Report and Accounts 2022 127 Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo agreements. (e)Financial assets measured at fair value through other comprehensive income Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair value through other comprehensive income (‘FVOCI’). These comprise primarily debt securities. They are recognised on the trade date when HSBC enters into contractual arrangements to purchase and are normally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in other comprehensive income until the assets are sold. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income statement as ‘Gains less losses from financial instruments’. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is recognised in profit or loss. (f)Equity securities measured at fair value with fair value movements presented in other comprehensive income The equity securities for which fair value movements are shown in other comprehensive income are business facilitation and other similar investments where HSBC holds the investments other than to generate a capital return. Dividends from such investments are recognised in profit or loss. Gains or losses on the derecognition of these equity securities are not transferred to profit or loss. Otherwise, equity securities are measured at fair value through profit or loss. (g)Financial instruments designated at fair value through profit or loss Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below and are so designated irrevocably at inception: •the use of the designation removes or significantly reduces an accounting mismatch; •a group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; and •the financial liability contains one or more non-closely related embedded derivatives. Designated financial assets are recognised when HSBC enters into contracts with counterparties, which is generally on trade date, and are normally derecognised when the rights to the cash flows expire or are transferred. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in ‘Net income from financial instruments held for trading or managed on a fair value basis’ or ‘Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss’ or ‘Changes in fair value of designated debt and related derivatives’ except for the effect of changes in the liabilities' credit risk, which is presented in 'Other comprehensive income', unless that treatment would create or enlarge an accounting mismatch in profit or loss. Under the above criterion, the main classes of financial instruments designated by HSBC are: •Debt instruments for funding purposes that are designated to reduce an accounting mismatch: The interest and/or foreign exchange exposure on certain fixed-rate debt securities issued has been matched with the interest and/or foreign exchange exposure on certain swaps as part of a documented risk management strategy. •Financial assets and financial liabilities under unit-linked and non-linked investment contracts: A contract under which HSBC does not accept significant insurance risk from another party is not classified as an insurance contract, other than investment contracts with discretionary participation features (‘DPF’), but is accounted for as a financial liability. Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise be measured at either fair value through other comprehensive income or amortised cost. The related financial assets and liabilities are managed and reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in fair values to be recorded in the income statement and presented in the same line. •Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance evaluated on a fair value basis. (h)Derivatives Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other indices. Derivatives are recognised initially and are subsequently measured at fair value through profit or loss, with changes in fair value generally recorded in the income statement. Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value where doing so reduces an accounting mismatch, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt. Hedge accounting When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. The group uses these derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged. Fair value hedge Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. If a hedge relationship no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the cumulative adjustment to the carrying amount of the hedged item is amortised to the income statement on a Notes on the Financial Statements 128 HSBC Bank plc Annual Report and Accounts 2022 recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately. Cash flow hedge The effective portion of gains and losses on hedging instruments is recognised in other comprehensive income and the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship is recognised immediately in the income statement within ‘Net trading income’. The accumulated gains and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the hedged item affects profit or loss. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement. Derivatives that do not qualify for hedge accounting Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not applied. (i)Impairment of amortised cost and FVOCI financial assets Expected credit losses are recognised for loans and advances to banks and customers, non-trading reverse repurchase agreements, other financial assets held at amortised cost, debt instruments measured at fair value through other comprehensive income ('FVOCI'), and certain loan commitments and financial guarantee contracts. At initial recognition, an allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months, or less, where the remaining life is less than 12 months, (’12-month ECL’). In the event of a significant increase in credit risk, an allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’). Financial assets where 12-month ECL is recognised are considered to be ‘stage 1’; financial assets which are considered to have experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in ‘stage 3’. Purchased or originated credit-impaired financial assets ('POCI') are treated differently as set out below. Credit-impaired (stage 3) The group determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether contractual payments of either principal or interest are past due for more than 90 days, there are other indications that the borrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons relating to the borrower’s financial condition, or the loan is otherwise considered to be in default. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where regulatory rules permit default to be defined based on 180 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired. Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL allowance. Write-off Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier. Forbearance Loans are identified as forborne and classified as either performing or non-performing when the group modifies the contractual terms due to financial difficulty of the borrower. Non-performing forborne loans are stage 3 and classified as non-performing until they meet the cure criteria, as specified by applicable credit risk policy (for example, when the loan is no longer in default and no other indicators of default have been present for at least 12 months). Any amount written off as a result of any modification of contractual terms upon entering forbearance would not be reversed. In 2022, the group adopted the EBA Guidelines on the application of definition of default for our retail portfolios, which affects credit risk policies and our reporting in respect of the status of loans as credit impaired principally due to forbearance (or curing thereof). Further details are provided under 'Forborne loans and advances' on page 37. Performing forborne loans are initially stage 2 and remain classified as forborne until they meet applicable cure criteria (for example, they continue to not be in default and no other indicators of default are present for a period of at least 24 months). At this point, the loan is either stage 1 or stage 2 as determined by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). A forborne loan is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms, or if the terms of an existing agreement are modified such that the forborne loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances would generally be classified as POCI and will continue to be disclosed as forborne. Loan modifications other than forborne loans Loan modifications that are not identified as forborne are considered to be commercial restructurings. Where a commercial restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan contract) such that HSBC’s rights to the cash flows under the original contract have expired, the old loan is derecognised and the new loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at market rates and no payment-related concession has been provided. Modifications of certain higher credit risk wholesale loans are assessed for derecognition having regard to changes in contractual terms that either individually or in combination are judged to result in a substantially different financial instrument. Mandatory and general offer loan modifications that are not borrower specific, for example market-wide customer relief programmes generally do not result in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy. Changes made to these financial instruments that are HSBC Bank plc Annual Report and Accounts 2022 129 economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change of the interest rate benchmark. Significant increase in credit risk (stage 2) An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale. However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and included on a watch or worry list, are included in stage 2. For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default ('PD'), which encompasses a wide range of information including the obligor’s customer risk rating (‘CRR’), macro-economic condition forecasts and credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD for the remaining term estimated at origination with the equivalent estimation at reporting date. The quantitative measure of significance varies depending on the credit quality at origination as follows: Origination CRR Significance trigger – PD to increase by 0.1-1.2 15bps 2.1-3.3 30bps For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit migrations and to relative changes in external market rates. For loans originated prior to the implementation of IFRS 9, the origination PD does not include adjustments to reflect expectations of future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD must be approximated assuming through-the-cycle PDs and through-the-cycle migration probabilities, consistent with the instrument’s underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional CRR deterioration-based thresholds, as set out in the table below: Origination CRR Additional significance criteria – number of CRR grade notches deterioration required to identify as significant credit deterioration (stage 2) (> or equal to) 0.1 5 notches 1.1–4.2 4 notches 4.3–5.1 3 notches 5.2–7.1 2 notches 7.2–8.2 1 notch 8.3 0 notch Further information about the 23-grade scale used for CRR can be found on page 37. For Retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporate all available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12 months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into homogenous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold therefore identifies loans with a PD higher than would be expected from loans that are performing as originally expected and higher than that which would have been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs. As additional data becomes available, the retail transfer criteria approach continues to be refined to utilise a more relative approach for certain portfolios. These enhancements take advantage of the increase in origination related data in the assessment of significant increases in credit risk by comparing remaining lifetime PD to the comparable remaining term lifetime PD at origination based on portfolio-specific origination segments. These enhancements resulted in significant migrations of loans to customers gross carrying amounts from stage 1 to stage 2, but did not have a significant impact on the overall ECL for these portfolios in 2022 due to low loan-to- value ratios. Unimpaired and without significant increase in credit risk (stage 1) ECL resulting from default events that are possible within the next 12 months (’12-month ECL’) are recognised for financial instruments that remain in stage 1. Purchased or originated credit impaired Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. This population includes new financial instruments recognised in most cases following the derecognition of forborne loans. The amount of change in lifetime ECL for a POCI loan is recognised in profit or loss until the POCI loan is derecognised, even if the lifetime ECL are less than the amount of ECL included in the estimated cash flows on initial recognition. Movement between stages Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly Notes on the Financial Statements 130 HSBC Bank plc Annual Report and Accounts 2022 increased since initial recognition based on the assessments described above. In the case of non-performing forborne loans such financial instruments are transferred out of stage 3 when they no longer exhibit any evidence of credit impairment and meet the curing criteria as described above. Measurement of ECL The assessment of credit risk and the estimation of ECL are unbiased and probability-weighted, and incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money and considers other factors such as climate-related risks. In general, HSBC calculates ECL using three main components, a probability of default ('PD'), a loss given default ('LGD') and the exposure at default (‘EAD’). The 12-month ECL is calculated by multiplying the 12-month PD, LGD, and EAD. Lifetime ECL is calculated using the lifetime PD instead. The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the instrument respectively. The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected to be realised and the time value of money. HSBC makes use of the Basel II IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the following table: Model Regulatory capital IFRS 9 PD •Through the cycle (represents long-run average PD throughout a full economic cycle). •The definition of default includes a backstop of 90+ days past due, although this has been modified to 180+ days past due for some portfolios, particularly UK and US mortgages. •Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD). •Default backstop of 90+ days past due for all portfolios. EAD •Cannot be lower than current balance •Amortisation captured for term products LGD •Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn). •Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data. •Discounted using cost of capital. •All collection costs included. •Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral). •No floors. •Discounted using the original effective interest rate of the loan. •Only costs associated with obtaining/selling collateral included. Other •Discounted back from point of default to balance sheet date. While 12-month PDs are recalibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the Wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life. The ECL for Wholesale stage 3 is determined on an individual basis using a discounted cash flow (‘DCF’) methodology. The expected future cash flows are based on the credit risk officer’s estimates as of the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on its estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to the economic scenarios applied more generally by HSBC Group and the judgement of the credit risk officer in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios and work-out strategies is approximated and applied as an adjustment to the most likely outcome. Period over which ECL is measured Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL (be it 12-month or lifetime ECL) is the maximum contractual period over which HSBC is exposed to credit risk. However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand repayment and cancel the undrawn commitment does not serve to limit HSBC’s exposure to credit risk to the contractual notice period, the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period HSBC remains exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision. For wholesale overdraft facilities, credit risk management actions are taken no less frequently than on an annual basis. Forward-looking economic inputs HSBC applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions representative of its view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed methodology is disclosed in 'Measurement uncertainty and sensitivity analysis of ECL estimates' on page 48. HSBC Bank plc Annual Report and Accounts 2022 131 Critical accounting estimates and judgements The calculation of the group’s ECL under IFRS 9 requires the group to make a number of judgements, assumptions and estimates. The most significant are set out below: Judgements Estimates •Defining what is considered to be a significant increase in credit risk. •Selecting and calibrating the PD, LGD and EAD models, which support the calculations, including making reasonable and supportable judgements about how models react to current and future economic conditions. •Selecting model inputs and economic forecasts, including determining whether sufficient and appropriately weighted economic forecasts are incorporated to calculate unbiased expected loss. •Making management judgemental adjustments to account for late breaking events, model and data limitations and deficiencies, and expert credit judgements. •Selecting applicable recovery strategies for certain wholesale credit-impaired loans. •The section ‘Measurement uncertainty and sensitivity analysis of ECL estimates’, marked as audited from page 48 sets out the assumptions used in determining ECL, and provides an indication of the sensitivity of the result to the application of different weightings being applied to different economic assumptions. (j)Insurance contracts A contract is classified as an insurance contract where the group accepts significant insurance risk from another party by agreeing to compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk, but is accounted for as an insurance contract if the insurance risk is significant. In addition, the group issues investment contracts with discretionary participation features ('DPF') which are also accounted for as insurance contracts as required by IFRS 4 ‘Insurance Contracts’. Net insurance premium income Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are accounted for when liabilities are established. Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they relate. Net insurance claims and benefits paid and movements in liabilities to policyholders Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration. Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when notified. Reinsurance recoveries are accounted for in the same period as the related claim. Liabilities under insurance contracts Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by reference to the value of the relevant underlying funds or indices. Future profit participation on insurance contracts with DPF Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and management’s expectation of the future performance of the assets backing the contracts, as well as other experience factors such as mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by the contractual terms, regulation or past distribution policy. Investment contracts with DPF While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by IFRS 4. The group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting increase in the carrying amount of the liability. In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and losses on relevant assets are recognised in the income statement. Present value of in-force long-term insurance business The group recognises the value placed on insurance contracts, and investment contracts with DPF, that are classified as long-term and in-force at the balance sheet date, as an asset. The asset represents the present value of the equity holders’ interest in the issuing insurance companies’ profits expected to emerge from these contracts written at the balance sheet date. The present value of in-force long-term insurance business (‘PVIF’) is determined by discounting those expected future profits using appropriate assumptions in assessing factors such as future mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to the respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in ‘Other operating income’ on a gross of tax basis. Notes on the Financial Statements 132 HSBC Bank plc Annual Report and Accounts 2022 (k)Employee compensation and benefits Share-based payments The group enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for the provision of their services. The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement. Expenses are recognised when the employee starts to render service to which the award relates. Cancellations result from the failure to meet a non-vesting condition during the vesting period, and are treated as an acceleration of vesting recognised immediately in the income statement. Failure to meet a vesting condition by the employee is not treated as a cancellation, and the amount of expense recognised for the award is adjusted to reflect the number of awards expected to vest. Post-employment benefit plans The group operates a number of pension schemes including defined benefit, defined contribution and post-employment benefit schemes. Payments to defined contribution schemes are charged as an expense as the employees render service. Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating expenses. Remeasurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan assets, after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the plan. The costs of obligations arising from other post-employment plans are accounted for on the same basis as defined benefit pension plans. (l)Tax Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same statement in which the related item appears. Current tax is the tax expected to be payable on the taxable profit for the year and on any adjustment to tax payable in respect of previous years. The group provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. Payments associated with any incremental base erosion and anti-abuse tax are reflected in tax expense in the period incurred. Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply in the periods as the assets will be realised or the liabilities settled. In assessing the probability and sufficiency of future taxable profit, we consider the availability of evidence to support the recognition of deferred tax assets. taking into account the inherent risks in long-term forecasting, including climate change-related, and drivers of recent history of tax losses where applicable. We also consider the future reversal of existing taxable temporary differences and tax planning strategies, including corporate reorganisations. Current and deferred tax are calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date. Critical accounting judgements The recognition of deferred tax assets depends on judgements and estimates Judgements Estimates •Specific judgements supporting deferred tax assets are described in Note 7. The recognition of deferred tax assets is sensitive to estimates of future cash flows projected for periods for which detailed forecasts are available and to assumptions regarding the long-term pattern of cash flows thereafter, on which forecasts of future taxable profit are based, and which affect the expected recovery periods and the pattern of utilisation of tax losses and tax credits. The Group does not consider there to be a significant risk of a material adjustment to the carrying amount of the deferred tax assets in the next financial year but does consider this to be an area that is inherently judgemental. (m)Provisions, contingent liabilities and guarantees Provisions Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made. HSBC Bank plc Annual Report and Accounts 2022 133 Critical accounting estimates and judgements The recognition and measurement of provisions requires the group to make a number of judgements, assumptions and estimates. The most significant are set out below: Judgements Estimates •Determining whether a present obligation exists. Professional advice is taken on the assessment of litigation and similar obligations. •Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions. When matters are at an early stage, accounting judgements can be difficult because of the high degree of uncertainty associated with determining whether a present obligation exists, and estimating the probability and amount of any outflows that may arise. As matters progress, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous estimates as appropriate. At more advanced stages, it is typically easier to make estimates around a better defined set of possible outcomes. •Provisions for legal proceedings and regulatory matters remain very sensitive to the assumptions used in the estimate. There could be a wider range of possible outcomes for any pending legal proceedings, investigations or inquiries. As a result, it is often not practicable to quantify a range of possible outcomes for individual matters. It is also not practicable to meaningfully quantify ranges of potential outcomes in aggregate for these types of provisions, because of the diverse nature and circumstances of such matters and the wide range of uncertainties involved. Contingent liabilities, contractual commitments and guarantees Contingent liabilities Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities related to legal proceedings or regulatory matters, are not recognised in the financial statements but are disclosed unless the probability of settlement is remote. Financial guarantee contracts Liabilities under financial guarantee contracts that are not classified as insurance contracts are recorded initially at their fair value, which is generally the fee received or present value of the fee receivable. The bank has issued financial guarantees and similar contracts to other group entities. The group elects to account for certain guarantees as insurance contracts in the bank’s financial statements, in which case they are measured and recognised as insurance liabilities. This election is made on a contract by contract basis, and is irrevocable. (n)Impairment of non-financial assets Software under development is tested for impairment at least annually. Other non-financial assets are property, plant and equipment, intangible assets (excluding goodwill) and right-of-use assets. They are tested for impairment at the individual asset level when there is indication of impairment at that level, or at the CGU level for assets that do not have a recoverable amount at the individual asset level. In addition, impairment is also tested at the CGU level when there is indication of impairment at that level. For this purpose, CGUs are considered to be the principal operating legal entities divided by global business. Impairment testing compares the carrying amount of the non-financial asset or CGU with its recoverable amount, which is the higher of the fair value less costs of disposal or the value in use. The carrying amount of a CGU comprises the carrying value of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs. When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU. Impairment loss recognised in prior periods for non-financial assets is reversed when there has been a change in the estimate used to determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior periods. (o)Non-current assets and disposal groups held for sale HSBC classifies non-current assets or disposal groups (including assets and liabilities) as held for sale when their carrying amounts will be recovered principally through sale rather than through continuing use. To be classified as held for sale, the non-current asset or disposal group must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups), and the sale must be highly probable. For a sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group) and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify as a completed sale within one year from the date of classification and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Held-for-sale assets and disposal groups are measured at the lower of their carrying amount and fair value less costs to sell except for those assets and liabilities that are not within the scope of the measurement requirements of IFRS 5. If the carrying amount of the non- current asset (or disposal group) is greater than the fair value less costs to sell, an impairment loss for any initial or subsequent write down of the asset or disposal group to fair value less costs to sell is recognised. Any such impairment loss is first allocated against the non-current assets that are in scope of IFRS 5 for measurement. This first reduces the carrying amount of any goodwill allocated to the disposal group, and then to the other assets of the disposal group pro rata on the basis of the carrying amount of each asset in the disposal group. Thereafter, any impairment loss in excess of the carrying value of the non-current assets in scope of IFRS 5 for measurement is recognised against the total assets of the disposal group. Notes on the Financial Statements 134 HSBC Bank plc Annual Report and Accounts 2022 Critical accounting estimates and judgements The classification as held for sale depends on certain judgements Judgements Management judgement is required in determining whether the IFRS 5 held for sale criteria are met, including whether a sale is highly probable and expected to complete within one year of classification. The exercise of judgement will normally consider the likelihood of successfully securing any necessary regulatory or political approvals which are almost always required for sales of banking businesses. For large and complex plans judgement will also include an assessment of the enforceability of any binding sale agreement, the nature and magnitude of any disincentives for non-performance, and the ability of the counterparty to undertake necessary pre-completion preparatory work, comply with conditions precedent, and otherwise be able to comply with contractual undertakings to achieve completion within the expected timescale. Once classified as held for sale, judgement is required to be applied on a continuous basis to ensure that classification remains appropriate in future accounting periods. 2 Net fee income Net fee income by product type 2022 2021 2020 £m £m £m Account services 302 271 239 Funds under management 433 465 424 Cards 56 44 44 Credit facilities 235 246 250 Broking income 354 368 369 Imports/exports 44 40 41 Remittances 101 84 62 Underwriting 171 286 360 Global custody 203 200 220 Corporate finance 124 132 85 Securities others — (including stock lending) 81 76 — Trust income 49 43 45 Other 453 451 535 Fee income 2,606 2,706 2,674 Less: fee expense (1,345) (1,293) (1,274) Net fee income 1,261 1,413 1,400 Net fee income by global business MSS GB GBM Other CMB WPB Corporate Centre Total £m £m £m £m £m £m £m Year ended 31 Dec 2022 Fee income 1,301 817 70 425 592 (599) 2,606 Less: fee expense (1,439) (173) (55) (26) (246) 594 (1,345) Net fee income (138) 644 15 399 346 (5) 1,261 Year ended 31 Dec 2021 Fee income 1,251 861 89 415 633 (543) 2,706 Less: fee expense (1,245) (188) (83) (54) (255) 532 (1,293) Net fee income 6 673 6 361 378 (11) 1,413 Year ended 31 Dec 2020 Fee income 1,243 857 94 407 603 (530) 2,674 Less: fee expense (1,209) (172) (123) (51) (245) 526 (1,274) Net fee income 34 685 (29) 356 358 (4) 1,400 Net fee income includes £778m of fees earned on financial assets that are not at fair value through profit or loss (other than amounts included in determining the effective interest rate) (2021: £935m; 2020 £883m), £229m of fees payable on financial liabilities that are not at fair value through profit of loss (other than amounts included in determining the effective interest rate) (2021: £221m; 2020: £176m), £687m of fees earned on trust and other fiduciary activities (2021: £709m; 2020: £688m), and £69m of fees payable relating to trust and other fiduciary activities (2021: £61m; 2020 £68m). HSBC Bank plc Annual Report and Accounts 2022 135 3 Net income from financial instruments measured at fair value through profit or loss 2022 2021 2020 £m £m £m Net income arising on: Net Trading activities (2,840) 3 1,948 Other instruments managed on a fair value basis 5,715 1,730 (190) Net income from financial instruments held for trading or managed on a fair value basis 2,875 1,733 1,758 Financial assets held to meet liabilities under insurance and investment contracts (1,436) 1,305 290 Liabilities to customers under investment contracts 67 (91) (36) Net (expense)/income from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss (1,369) 1,214 254 Derivatives managed in conjunction with the group's issued debt securities (736) (337) 112 Other changes in fair value 838 329 (95) Changes in fair value of designated debt and related derivatives 102 (8) 17 Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss 143 493 285 Year ended 31 Dec 1,751 3,432 2,314 4 Insurance business Net insurance premium income Non-linked insurance Linked life insurance Investment contracts with DPF1 Total £m £m £m £m Gross insurance premium income 214 432 1,238 1,884 Reinsurers’ share of gross insurance premium income (96) (1) — (97) Year ended 31 Dec 2022 118 431 1,238 1,787 Gross insurance premium income 218 429 1,360 2,007 Reinsurers’ share of gross insurance premium income (100) (1) — (101) Year ended 31 Dec 2021 118 428 1,360 1,906 Gross insurance premium income 205 274 1,185 1,664 Reinsurers’ share of gross insurance premium income (100) (5) — (105) Year ended 31 Dec 2020 105 269 1,185 1,559 1Discretionary participation features. Net insurance claims and benefits paid and movement in liabilities to policyholders Non-linked insurance Linked life insurance Investment contracts with DPF1 Total £m £m £m £m Gross claims and benefits paid and movement in liabilities 44 238 177 459 – claims, benefits and surrenders paid 122 129 1,491 1,742 – movement in liabilities (78) 109 (1,314) (1,283) Reinsurers’ share of claims and benefits paid and movement in liabilities (64) 11 — (53) – claims, benefits and surrenders paid (57) (2) — (59) – movement in liabilities (7) 13 — 6 Year ended 31 Dec 2022 (20) 249 177 406 Gross claims and benefits paid and movement in liabilities 120 550 2,420 3,090 – claims, benefits and surrenders paid 126 106 1,554 1,786 – movement in liabilities (6) 444 866 1,304 Reinsurers’ share of claims and benefits paid and movement in liabilities (45) (6) — (51) – claims, benefits and surrenders paid (68) (1) — (69) – movement in liabilities 23 (5) — 18 Year ended 31 Dec 2021 75 544 2,420 3,039 Gross claims and benefits paid and movement in liabilities 143 300 1,404 1,847 – claims, benefits and surrenders paid 102 93 1,578 1,773 – movement in liabilities 41 207 (174) 74 Reinsurers’ share of claims and benefits paid and movement in liabilities (64) — — (64) – claims, benefits and surrenders paid (62) (3) — (65) – movement in liabilities (2) 3 — 1 Year ended 31 Dec 2020 79 300 1,404 1,783 1Discretionary participation features. Notes on the Financial Statements 136 HSBC Bank plc Annual Report and Accounts 2022 Liabilities under insurance contracts Non-linked insurance Linked life insurance Investment contracts with DPF1 Total £m £m £m £m Gross liabilities under insurance contracts at 1 Jan 2022 556 1,938 19,770 22,264 Claims and benefits paid (122) (129) (1,491) (1,742) Increase in liabilities to policyholders 44 238 177 459 Exchange differences and other movements2 20 15 (1,029) (994) Gross liabilities under insurance contracts at 31 Dec 2022 498 2,062 17,427 19,987 Reinsurers’ share of liabilities under insurance contracts (100) (40) — (140) Net liabilities under insurance contracts at 31 Dec 2022 398 2,022 17,427 19,847 Gross liabilities under insurance contracts at 1 Jan 2021 594 1,512 20,710 22,816 Claims and benefits paid (126) (106) (1,554) (1,786) Increase in liabilities to policyholders 120 550 2,420 3,090 Exchange differences and other movements2 (32) (18) (1,806) (1,856) Gross liabilities under insurance contracts at 31 Dec 2021 556 1,938 19,770 22,264 Reinsurers‘ share of liabilities under insurance contracts (93) (53) — (146) Net liabilities under insurance contracts at 31 Dec 2021 463 1,885 19,770 22,118 Gross liabilities under insurance contracts at 1 Jan 2020 576 1,295 19,638 21,509 Claims and benefits paid (102) (93) (1,578) (1,773) Increase in liabilities to policyholders 143 300 1,404 1,847 Exchange differences and other movements2 (23) 10 1,246 1,233 Gross liabilities under insurance contracts at 31 Dec 2020 594 1,512 20,710 22,816 Reinsurers‘ share of liabilities under insurance contracts (118) (47) — (165) Net liabilities under insurance contracts at 31 Dec 2020 476 1,465 20,710 22,651 1Discretionary participation features. 2'Exchange differences and other movements’ includes movements in liabilities arising from net unrealised investment gains recognised in other comprehensive income. The key factors contributing to the movement in liabilities to policyholders included movement in the market value of assets supporting policyholder liabilities, death claims, surrenders, lapses, new business, the declaration of bonuses and other amounts attributable to policyholders. 5 Employee compensation and benefits 2022 2021 2020 £m £m £m Wages and salaries 1,423 1,609 1,917 Social security costs 282 341 367 Post-employment benefits1 57 73 56 Year ended 31 Dec 1,762 2,023 2,340 1Includes £42m (2021: £37m; 2020: £36m) in employer contributions to the defined contribution pension plans. Average number of persons employed by the group during the year by global business1 2022 2021 2020 MSS 3,722 4,322 4,590 GB 2,155 2,458 2,857 GBM Other 81 140 158 CMB 2,748 3,023 3,396 WPB 6,484 6,709 6,807 Corporate Centre 215 171 58 Year ended 31 Dec 15,405 16,823 17,866 1Average numbers of headcount in corporate centre are allocated in respective businesses on the basis of amounts charged to the respective global businesses. Share-based payments 'Wages and salaries’ includes the effect of share-based payments arrangements, of which £45m were equity settled (2021: £96m; 2020: £76m), as follows: 2022 2021 2020 £m £m £m Restricted share awards 45 96 77 Savings-related and other share award option plans 1 1 2 Year ended 31 Dec 46 97 79 HSBC Bank plc Annual Report and Accounts 2022 137 HSBC share awards Award Policy Deferred share awards (including annual incentive awards, long-term incentive ('LTI') awards delivered in shares) and Group Performance Share Plan ('GPSP') •An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted. •Deferred awards generally require employees to remain in employment over the vesting period and are generally not subject to performance conditions after the grant date. An exception to these are the LTI awards, which are subject to performance conditions. •Deferred share awards generally vest over a period of three, four, five or seven years. •Vested shares may be subject to a retention requirement post-vesting. •Awards are subject to malus and clawback. International Employee Share Purchase Plan (‘ShareMatch’) •The plan was first introduced in Hong Kong in 2013 and now includes employees based in 31 jurisdictions. •Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency. •Matching awards are added at a ratio of one free share for every three purchased. •Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months. Movement on HSBC share awards 2022 2021 2020 Number Number Number (000s) (000s) (000s) Restricted share awards outstanding at 1 Jan 21,828 24,367 24,578 Additions during the year1 11,651 15,479 16,823 Released in the year1 (12,279) (16,690) (16,024) Forfeited in the year (746) (1,328) (1,010) Restricted share awards outstanding at 31 Dec 20,454 21,828 24,367 Weighted average fair value of awards granted (£) 4.96 4.49 5.58 1Includes a number of share option plans transferred from or to other subsidiaries of HSBC Holdings plc. HSBC share option plans Main plans Policy Savings-related share option plans (‘Sharesave’) •From 2014, eligible employees for the UK plan can save up to £500 per month with the option to use the savings to acquire shares. •These are generally exercisable within six months following either the third or fifth anniversary of the commencement of a three years or five years contract, respectively. •The exercise price is set at a 20% (2021: 20%) discount to the market value immediately preceding the date of invitation. Calculation of fair values The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the share price at the date of the grant. Movement on HSBC share option plans Savings-related share option plans Number WAEP1 (000s) £ Outstanding at 1 Jan 2022 6,936 2.87 Granted during the year2 (179) 3.96 Exercised during the year (173) 3.36 Expired during the year (177) 4.72 Forfeited during the year (625) 2.98 Outstanding at 31 Dec 2022 5,782 2.91 Weighted average remaining contractual life (years) 2.18 Outstanding at 1 Jan 2021 7,206 2.96 Granted during the year2 984 3.25 Exercised during the year (227) 3.97 Expired during the year (99) 4.70 Forfeited during the year (928) 3.68 Outstanding at 31 Dec 2021 6,936 2.87 Weighted average remaining contractual life (years) 2.98 Outstanding at 1 Jan 2020 4,245 4.78 Granted during the year2 5,909 2.56 Exercised during the year (107) 4.43 Expired during the year (78) 4.64 Forfeited during the year (2,763) 4.79 Outstanding at 31 Dec 2020 7,206 2.96 Weighted average remaining contractual life (years) 3.64 1Weighted average exercise price. 2Includes a number of share option plans transferred from or to other subsidiaries of HSBC Holdings plc. Notes on the Financial Statements 138 HSBC Bank plc Annual Report and Accounts 2022 Post-employment benefit plans We operate a number of pension plans throughout Europe for our employees. Some are defined benefit plans, of which HSBC Trinkaus & Burkhardt Pension Plan is the most prominent within the group. The group’s balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and the discounted value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future, or through potential future refunds from the schemes. In assessing whether a surplus is recoverable, the group has considered its current right to obtain a future refund or a reduction in future contributions together with the rights of third parties such as trustees. HSBC Trinkaus & Burkhardt Pension Plan The plan is a final salary scheme and is calculated based on the employee length of service multiplied by a predefined benefit accrual and earnings. The pension is paid when the benefit falls due and is a specified pension payment, lump-sum or combination thereof. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the operation of the plan. Its assets are held separately from the assets of the group. The strategic aim of the investment is to achieve, as continuously as possible, an increase in value over time. For this purpose, the fund invests mainly in government bonds, corporate bonds, investment funds and equities. It invests predominantly in developed regions. Overall, emphasis is placed on having a high degree of diversification. Plan assets were created to fund the pension obligations and separated through what is known as a contractual trust agreement ('CTA'). HSBC Trinkaus Vermögenstreu¬händer e. V. and HSBC Trinkaus Mitarbeitertreuhänder e. V. assume the role of trustee. Active members of the trustee constitute members of the Management Board, of the Supervisory Board and Bank employees. The Bank regularly aims to comprehensively finance the committed benefits externally. There is no obligation to allocate contributions to the CTA. The Bank is entitled to assets that are not needed to fund the committed benefits. No further additions to the plan assets are envisaged at the present time. In accordance with the Memorandum and Articles of Association, the revenues may only be used, for example, for pension payments or for reinvestment. Similarly, withdrawals may only be made in accordance with the Memorandum and Articles of Association. In so far as the benefits are directly committed and there is a shortfall in the CTA, provisions are created for these. The latest measurement of the defined benefit obligation of the plan at 31 December 2022 was carried out by Tim Voetmann and Hans- Peter Kieselmann, at Willis Towers Watson GmbH, who are Fellows of the German Association of Actuaries ('DAV'), using the projected unit credit method. The next measurement will have an effective date of 31 December 2023. Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans Fair value of plan assets Present value of defined benefit obligations Total £m £m £m Defined benefit pension plans 534 (531) 3 Defined benefit healthcare plans — (51) (51) At 31 Dec 2022 534 (582) (48) Total employee benefit liabilities (within ‘Accruals, deferred income and other liabilities’) (121) Total employee benefit assets (within ‘Prepayments, accrued income and other assets’) 73 Defined benefit pension plans 668 (742) (74) Defined benefit healthcare plans — (68) (68) At 31 Dec 2021 668 (810) (142) Total employee benefit liabilities (within ‘Accruals, deferred income and other liabilities’) (196) Total employee benefit assets (within ‘Prepayments, accrued income and other assets’) 54 HSBC Bank plc Annual Report and Accounts 2022 139 Defined benefit pension plans Net asset/(liability) under defined benefit pension plans Fair value of plan assets Present value of defined benefit obligations Net defined benefit asset/(liability) HSBC Trinkaus & Burkhardt Pension Plan2 Other plans HSBC Trinkaus & Burkhardt Pension Plan2 Other plans HSBC Trinkaus & Burkhardt Pension Plan2 Other plans £m £m £m £m £m £m At 1 Jan 2022 434 234 (438) (304) (4) (70) Service cost — — 4 (8) 4 (8) – current service cost — — 3 (9) 3 (9) – past service cost and gains from settlements — — 1 1 1 1 Net interest income/(cost) on the net defined benefit asset/(liability) (3) 5 (4) (5) (7) — Remeasurement effects recognised in other comprehensive income (51) (99) 94 98 43 (1) – return on plan assets (excluding interest income) (51) (99) — — (51) (99) – actuarial gains/(losses) financial assumptions — — 94 106 94 106 – actuarial gains/(losses) demographic assumptions — — — (2) — (2) – actuarial gains/(losses) experience assumptions — — — (6) — (6) – other changes — — — — — — Exchange differences 22 1 (20) (3) 2 (2) Benefits paid — (7) 10 13 10 6 Other movements1 3 (5) (3) 35 — 30 At 31 Dec 2022 405 129 (357) (174) 48 (45) At 1 Jan 2021 435 258 (489) (387) (54) (129) Service cost — — (7) (27) (7) (27) – current service cost — — (8) (11) (8) (11) – past service cost and gains from settlements — — 1 (16) 1 (16) Net interest income/(cost) on the net defined benefit asset/(liability) 3 4 (3) (3) — 1 Remeasurement effects recognised in other comprehensive income 17 (2) 26 16 43 14 – return on plan assets (excluding interest income) 17 (2) — — 17 (2) – actuarial gains/(losses) financial assumptions — — 26 7 26 7 – actuarial gains/(losses) demographic assumptions — — — — — — – actuarial gains/(losses) experience assumptions — — — 9 — 9 – other changes — — — — — — Exchange differences (28) (1) 29 9 1 8 Benefits paid — (15) 10 19 10 4 Other movements1 7 (10) (4) 69 3 59 At 31 Dec 2021 434 234 (438) (304) (4) (70) 1Other movements include contributions by the group, contributions by employees, administrative costs and tax paid by plan. 2The HSBC Trinkaus & Burkhardt Pension Plan and its comparatives have been disclosed as it is considered to be a prominent plan within the group. Figures disclosed comprise this prominent plan and other plans in Germany. HSBC Trinkaus & Burkhardt GmbH has not made contributions to the HSBC Trinkaus & Burkhardt Pension Plan during 2022. Benefits expected to be paid from the HSBC Trinkaus & Burkhardt Pension Plan to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows: Benefits expected to be paid from plans 2023 2024 2025 2026 2027 2028-2032 £m £m £m £m £m £m HSBC Trinkaus & Burkhardt Pension Plan1 11 10 12 11 12 66 1The duration of the defined benefit obligation is 13.7 Years for the HSBC Trinkaus & Burkhardt Pension Plan under the disclosure assumptions adopted (2021: 17.1). Notes on the Financial Statements 140 HSBC Bank plc Annual Report and Accounts 2022 Fair value of plan assets by asset classes 31 Dec 2022 31 Dec 2021 Value Quoted market price in active market No quoted market price in active market Thereof HSBC Value Quoted market price in active market No quoted market price in active market Thereof HSBC £m £m £m £m £m £m £m £m HSBC Trinkaus & Burkhardt Pension Plan Fair value of plan assets 405 352 53 — 434 377 57 — – equities 8 8 — — 11 11 — — – bonds 199 199 — — 112 112 — — – other 198 145 53 — 311 254 57 — Post-employment defined benefit plans’ principal actuarial financial assumptions The group determines the discount rates to be applied to its obligations in consultation with the plans’ local actuaries, on the basis of current average yields of high quality (AA-rated or equivalent) debt instruments with maturities consistent with those of the defined benefit obligations. Key actuarial assumptions Discount rate Inflation rate Rate of increase for pensions Rate of pay increase % % % % HSBC Trinkaus & Burkhardt Pension Plan At 31 Dec 2022 3.71 2.25 2.25 2.25 At 31 Dec 2021 1.14 1.75 1.75 1.75 Mortality tables and average life expectancy at age 60 Mortality table Life expectancy at age 60 for a male member currently: Life expectancy at age 60 for a female member currently: Aged 60 Aged 40 Aged 60 Aged 40 HSBC Trinkaus & Burkhardt Pension Plan At 31 Dec 2022 RT 2018G11 25.2 28.2 28.9 31.2 At 31 Dec 20212 RT 2018G11 20.6 23.4 24.0 26.3 1Heubeck tables: RT 2018G. These are generally accepted and used mortality tables for occupational pension plans in Germany, taking into account future mortality improvements and lighter mortality for higher-paid pensioners. 22021 data provided based on Heubeck tables for Life expectancy at age 65 for male/female members currently aged 65 or 45. The effect of changes in key assumptions HSBC Trinkaus & Burkhardt Pension Plan Obligation Financial impact of increase Financial impact of decrease 2022 2021 2020 2022 2021 2020 £m £m £m £m £m £m Discount rate – increase/decrease of 0.25% (7) (13) (15) 8 13 16 Inflation rate – increase/decrease of 0.25% 7 11 16 (5) (9) (12) Pension payments and deferred pensions – increase/decrease of 0.25% 5 9 10 (5) (8) (10) Pay – increase/decrease of 0.25% 1 2 4 (1) (2) (4) Change in mortality – increase of 1 Year 10 16 19 N/A N/A N/A The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this in unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit asset recognised in the balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period. HSBC Bank plc Annual Report and Accounts 2022 141 Directors’ emoluments The aggregate emoluments of the Directors of the bank, computed in accordance with the Companies Act 2006 as amended by statutory instrument 2008 No.410, were: 2022 2021 2020 £000 £000 £000 Fees1 1,410 1,525 1,256 Salaries and other emoluments2 2,294 3,569 2,321 Annual incentives3 979 694 576 Long-term incentives4 779 511 727 Year ended 31 Dec 5,462 6,299 4,880 1Fees paid to non-executive Directors. 2Salaries and other emoluments include Fixed Pay Allowances. 3Discretionary annual incentives for executive Directors are based on a combination of individual and corporate performance, and are determined by the Remuneration Committee of the bank’s parent company, HSBC Holdings plc. Incentive awards made to executive directors are delivered in the form of cash and HSBC Holdings plc shares. The total amount shown is comprised of £489,285 (2021: £346,959) in cash and £489,285 (2021: £346,959) in Restricted Shares, which is the upfront portion of the annual incentive granted in respect of performance year 2022. 4The amount shown is comprised of £380,893 (2021: £274,177) in deferred cash, £398,162 (2021: £237,259) in deferred Restricted Shares. These amounts relate to the portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2022. The total vesting period of deferred cash and share awards is no less than three years, with 33% of the award vesting on each of the first and second anniversaries of the date of the award, and the balance vesting on the third anniversary of the date of the award. The deferred share awards are subject to at least a six-month retention period upon vesting. Details of the Plans are contained within the Directors’ Remuneration Report of HSBC Holdings plc. The cost of any awards subject to service conditions under the HSBC Share Plan 2011 are recognised through an annual charge based on the fair value of the awards, apportioned over the period of service to which the award relates. No Director exercised share options over HSBC Holdings plc ordinary shares during the year. No Director is accruing retirement benefits under a money purchase scheme in respect of Directors’ qualifying services (2021: one Director). In addition, there were payments during 2022 under unfunded retirement benefit agreements to former Directors of £394,334 (2021: £396,363). The provision at 31 December 2022 in respect of unfunded pension obligations to former Directors amounted to £4,286,951 (2021: £5,387,505). Of these aggregate figures, the following amounts are attributable to the highest paid Director: 2022 2021 2020 £000 £000 £000 Salaries and other emoluments 1,641 1,399 1,392 Annual incentives1 859 558 417 Long-term incentives2 677 390 677 Year ended 31 Dec 3,177 2,347 2,486 1Awards made to the highest paid Director are delivered in the form of cash and HSBC Holdings plc shares. The amount shown comprises £429,285 (2021: £279,225) in cash and £429,285 (2021: £279,225) in Restricted Shares. 2The amount shown comprises £330,687 (2021: £209,492) in deferred cash, £345,818 (2021: £180,147) in deferred Restricted Shares. These amounts relate to a portion of the awards that will vest following the substantial completion of the vesting condition attached to these awards in 2022. The total vesting period of deferred cash and share awards is no less than three years, with 33% of the award vesting on each of the first and second anniversaries of the date of the award, and the balance vesting on the third anniversary of the date of the award. The share awards are subject to a six-month retention period upon vesting. No pension contributions were made by the bank in respect of services by the highest paid Director during the year (2021: £0). Notes on the Financial Statements 142 HSBC Bank plc Annual Report and Accounts 2022 6 Auditors’ remuneration 2022 2021 2020 £m £m £m Audit fees payable to PwC 11.3 10.4 11.3 Other audit fees payable 0.7 0.4 0.4 Year ended 31 Dec 12.0 10.8 11.7 Fees payable by the group to PwC 2022 2021 2020 £m £m £m Fees for HSBC Bank plc‘s statutory audit1 5.5 4.8 5.3 Fees for other services provided to the group 15.6 14.3 13.1 – audit of the group‘s subsidiaries2 5.8 5.6 6.0 – audit-related assurance services3 5.3 5.7 4.2 – other assurance services4 4.5 3.0 2.9 Year ended 31 Dec 21.1 19.1 18.4 1Fees payable to PwC for the statutory audit of the consolidated financial statements of the group and the separate financial statements of HSBC Bank plc. They exclude amounts payable for the statutory audit of the bank’s subsidiaries which have been included in ‘Fees for other services provided to the group’. 2Including fees payable to PwC for the statutory audit of the bank’s subsidiaries. 3Including services for assurance and other services that relate to statutory and regulatory filings, including interim reviews. 4Including permitted services relating to attestation reports on internal controls of a service organisation primarily prepared for and used by third- party end user, including comfort letters. Fees payable for non-audit services for HSBC Bank plc are not disclosed separately because such fees are disclosed on a consolidated basis for the group. 7 Tax Tax expense 2022 2021 2020 £m £m £m Current tax (283) (187) 195 – for this year (243) (245) 186 – adjustments in respect of prior years (40) 58 9 Deferred tax (278) 164 (331) – origination and reversal of temporary differences (444) 248 (339) – effect of changes in tax rates 33 (56) (26) – adjustments in respect of prior years 133 (28) 34 Year ended 31 Dec1 (561) (23) (136) 1In addition to amounts recorded in the income statement, a tax credit of £393m (2021: credit of £135m; 2020 charge of £135m) was recorded directly to equity. The group’s profits are taxed at different rates depending on the country in which the profits arise. The key applicable corporate tax rates in 2022 included the UK and France. The UK tax rate applying to HSBC Bank plc and its banking subsidiaries was 27% (2021: 27%), comprising 19% corporation tax plus 8% surcharge on UK banking profits. The applicable tax rate in France was 26% (2021: 28%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate. During 2022, legislation was enacted to reduce the UK banking surcharge rate from 8% to 3% from 1 April 2023, decreasing the tax credit for 2021 by £33m due to the remeasurement of deferred tax balances. The main rate of UK corporation tax will increase from 19% to 25% from 1 April 2023. In December 2021, the OECD published model rules that provided a template for countries to implement a new global minimum tax rate of 15%. These rules are due to be effective from 2024. In January 2022, the UK government opened a consultation on how the UK implements the rules. The impact on HSBC will depend on exactly how the UK implements the model rules, as well as the profitability and local tax liabilities of HSBC’s operations in each tax jurisdiction from 2024. In addition, potential changes to tax legislation and tax rates in the countries and territories in which we operate could increase our effective tax rate in the future. HSBC Bank plc Annual Report and Accounts 2022 143 Tax reconciliation The tax charged to the income statement differs from the tax expense that would apply if all profits had been taxed at the UK corporation tax rate as follows: 2022 2021 2020 £m % £m % £m % (Loss)/profit before tax (959) 1,023 (1,615) Tax expense Taxation at UK corporation tax rate (182) 19.0 194 19.0 (307) 19.0 Impact of taxing overseas profits at different rates (75) 7.8 7 0.7 (75) 4.6 UK banking surcharge (47) 4.9 (2) (0.2) (100) 6.2 Items increasing the tax charge in 2022: – adjustment in respect of prior years 93 (9.7) 30 2.9 45 (2.8) – UK and European Bank levies 50 (5.2) 72 7.0 31 (1.9) – impact of held for sale adjustments 47 (4.9) — — — — – adjustment to deferred tax on insurance contracts 36 (3.8) — — — — – impact of changes in tax rates 33 (3.4) (56) (5.5) (26) 1.6 – effect of profits in associates and joint ventures 5 (0.5) (43) (4.2) (3) 0.2 – local taxes and overseas withholding taxes 4 (0.4) (4) (0.4) 49 (3.0) – impact of temporary differences between French tax returns and IFRS — — 324 31.7 — — – other 1 (0.1) (34) (3.4) 34 (2.1) Items reducing the tax charge in 2022: – movements in unrecognised deferred tax (268) 27.9 (47) (4.6) 321 (19.9) – movement in uncertain tax positions (110) 11.5 5 0.5 1 (0.1) – non-taxable income and gains (93) 9.7 (92) (9.0) (55) 3.4 – deductions for AT1 coupon payments (55) 5.7 (53) (5.2) (51) 3.2 – tax impact of planned sale of French retail banking business — — (324) (31.7) — — Year ended 31 Dec (561) 58.5 (23) (2.3) (136) 8.4 The effective tax rate for the year was 58.5% (2021: (2.3)%; 2020: 8.4%), reflecting a tax credit arising on a loss before tax. The tax credit for 2022 was driven by underlying losses before tax and non-recurring items, including recognition of previously unrecognised deferred tax assets in France and a tax credit of £110m from movement in provisions for uncertain tax positions. The tax credit for 2021 included favourable non-recurring items in respect of tax rate changes, prior period adjustments and the recognition of previously unrecognised deferred tax assets in France. In 2021, the signing of a framework agreement for the planned sale of the French retail banking business resulted in a tax deduction (tax value of £324m) for a provision for loss on disposal which was recorded in the French tax return. A deferred tax liability of the same amount arose as a consequence of the temporary difference between the French tax basis and IFRS in respect of this provision. This temporary difference reversed in 2022 upon application of held for sale accounting for IFRS, resulting in the reversal of this deferred tax liability to the income statement. Accounting for taxes involves some estimation because tax law is uncertain and its application requires a degree of judgement, which authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account external advice where appropriate. We do not expect significant liabilities to arise in excess of the amounts provided. The current tax asset includes an estimate of tax recoverable from HMRC with regards to past dividends received from EU resident companies. The ultimate resolution of this matter involves litigation for which the outcome is uncertain. Notes on the Financial Statements 144 HSBC Bank plc Annual Report and Accounts 2022 Movement of deferred tax assets and liabilities Retirement benefits Loan impairment provisions Property, plant and equipment FVOCI investments Goodwill and intangibles Relief for tax losses2 Other1 Total The group £m £m £m £m £m £m £m £m Assets 74 53 215 — 212 381 — 935 Liabilities — (4) — (58) — — (289) (351) At 1 Jan 2022 74 49 215 (58) 212 381 (289) 584 Income statement (11) — 22 3 (201) 243 222 278 Other comprehensive income (18) — — 179 — — 215 376 Foreign exchange and other — — (1) 18 — 4 6 27 At 31 Dec 2022 45 49 236 142 11 628 154 1,265 Assets3 45 50 236 142 11 628 154 1,266 Liabilities3 — (1) — — — — — (1) Assets 63 66 171 — 157 418 — 875 Liabilities — (9) (6) 166) — — (117) (298) At 1 Jan 2021 63 57 165 166) 157 418 (117) 577 Income statement 28 (10) 51 3 55 (37) (254) (164) Other comprehensive income (17) 2 (1) 105 — — 82 171 At 31 Dec 2021 74 49 215 (58) 212 381 (289) 584 Assets3 74 53 215 — 212 381 — 935 Liabilities3 — (4) — (58) — — (289) (351) 1Other deferred tax assets and liabilities relate to share-based payments, cash flow hedges and temporary differences arising between IFRS and French tax returns. 2The deferred tax asset recognised in respect of tax losses mainly relates to France £(588)m, and US State tax losses of the New York branch of HSBC Bank plc £(28)m, all of which are supported by future profit forecasts. 3After netting off balances within countries, the balances as disclosed in the financial statements are as follows: deferred tax assets £1,279m (2021: £599m); and deferred tax liabilities £14m (2021:£15m). Management has assessed the likely availability of future taxable profits against which to recover the deferred tax assets of the Company and the Group, taking into consideration the reversal of existing taxable temporary differences, past business performance and forecasts of future business performance. The group’s net deferred tax asset of £1,265m (2021: £584m) included a net UK deferred tax asset of £498m (2021: £448m) and a net deferred asset of £597m (2021: £7m) in France, of which £588m (2021: £294m) related to tax losses which are expected to be substantially recovered within 10 years. Management is satisfied that although the Company recorded a UK tax loss in the year, the aforementioned evidence is sufficient to support recognition of all UK deferred tax assets. These deferred tax assets are supported by future profit forecasts for the whole of HSBC's UK tax group. This includes a number of companies which are not part of the HSBC Bank plc group, in particular HSBC UK Bank plc and its subsidiaries. Following the signing of a framework agreement in 2021 for the planned sale of the French retail banking business, that business is now excluded from our deferred tax recognition analysis as its sale is considered probable. Although the French consolidated tax group recorded a tax loss in 2020 and 2021, this would have been taxable profit if the effects of the retail banking business and other non- recurring items, mainly related to the restructuring of the European business, were excluded. The accounting loss for France in 2022 is driven by the loss on assets held for sale. Excluding this amount, the business in France recorded a profit in 2022. The French net deferred tax asset is supported by forecasts of taxable profit, also taking into consideration the history of profitability in the remaining businesses. HSBC Bank plc Annual Report and Accounts 2022 145 Movement of deferred tax assets and liabilities Retirement benefits Property, plant and equipment FVOCI Goodwill and intangibles Relief for tax losses2 Other1 Total The bank £m £m £m £m £m £m £m Assets2 17 207 — 191 69 48 532 Lliabilities2 — — (23) — — — (23) At 1 Jan 2022 17 207 (23) 191 69 48 509 Income statement (4) 24 — (191) (41) (6) (218) Other comprehensive income 1 — 98 — — 210 309 Foreign exchange and other adjustments — — — — 8 8 At 31 Dec 2022 14 231 75 — 28 260 608 Assets3 14 231 75 — 28 260 608 Liabilities3 — — — — — — — Assets 16 162 — 156 416 — 750 Liabilities — — (100) — — (104) (204) At 1 Jan 2021 16 162 (100) 156 416 (104) 546 Income statement 2 45 — 35 (347) 73 (192) Other comprehensive income (1) — 77 — — 77 153 Foreign exchange and other adjustments — — — — — 2 2 At 31 Dec 2021 17 207 (23) 191 69 48 509 Assets3 17 207 — 191 69 48 532 Liabilities3 — — (23) — — — (23) 1Other deferred tax assets and liabilities relate to fair value of own debt, loan impairment allowances, share-based payments and cash flow hedges. 2The deferred tax asset recognised in respect of losses mainly relates to US State tax losses of the New York branch of HSBC Bank plc,which are supported by future profit forecasts. 3After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets £608m (2021: £509m) and deferred tax liabilities nil (2021:nil). Unrecognised deferred tax The group The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was £1,017m (2021: £1,944m). These amounts include unused tax losses, tax credits and temporary differences of £912m (2021: £1,141m) arising in the New York branch of HSBC Bank plc and of nil (2021: £782m) arising in France. Of the unrecognised losses, £502m expire within 10 years (2021: £394m), and the remainder expire after 10 years or do not expire. The bank The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet was £912m (2021: £1,141m). These amounts include unused tax losses, tax credits and temporary differences arising in the New York branch of HSBC Bank plc of £912m (2021: £1,141m). Of the unrecognised losses, £402m expire within 10 years (2021: £394m), and the remainder expire after 10 years. There are no unrecognised deferred tax liabilities arising from the group’s investments in subsidiaries and branches. Notes on the Financial Statements 146 HSBC Bank plc Annual Report and Accounts 2022 8 Dividends Dividends to the parent company 2022 2021 2020 £ per share £m £ per share £m £ per share £m Dividends paid on ordinary shares In respect of previous year: Previous year: — — — — – first special dividend — — In respect of current year: Current year: — — — — – first special dividend1 1.067 850 – second special dividend — — — — Total 1.067 850 — — Dividends on preference shares classified as equity Dividend on HSBC Bank plc non-cumulative third dollar preference shares2 0.001 — 0.001 — 1.47 51 Total 0.001 — 0.001 — 1.47 51 Total coupons on capital securities classified as equity — 202 — 194 0 212 Dividends to parent — 1,052 — 194 0 263 1 Special dividend declared/paid on CET1 capital in 2022. 2 In 2021, the liquidation value of USD third dollar preference shares reduced to $0.01 per share. Total coupons on capital securities classified as equity 2022 2021 2020 First call date £m £m £m Undated Subordinated additional Tier 1 instruments Undated Subordinated Resettable Additional Tier 1 instrument 2015 Dec 2020 87 84 103 Undated Subordinated Resettable Additional Tier 1 instrument 2016 Jan 2022 11 12 11 Undated Subordinated Resettable Additional Tier 1 instrument 2018 Mar 2023 28 10 10 Undated Subordinated Resettable Additional Tier 1 instrument 2018 Mar 2023 10 28 28 Undated Subordinated Resettable Additional Tier 1 instrument 2019 Nov 2024 24 24 24 Undated Subordinated Resettable Additional Tier 1 instrument 2019 Nov 2024 8 7 8 Undated Subordinated Resettable Additional Tier 1 instrument 2019 Dec 2024 20 20 20 Undated Subordinated Resettable Additional Tier 1 instrument 2019 Jan 2025 8 9 8 Undated Subordinated Resettable Additional Tier 1 instrument 2022 Mar 2027 6 — — Total 202 194 212 9 Segmental analysis The Chief Executive, supported by the rest of the Executive Committee, is considered the Chief Operating Decision Maker (‘CODM’) for the purposes of identifying the group’s reportable segments. Business results are assessed by the CODM on the basis of adjusted performance that removes the effects of significant items from reported results. We therefore present a reconciliation between reported and adjusted results as required by IFRSs. Our operations are closely integrated and, accordingly, the presentation of data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and functions to the extent that they can be meaningfully attributed to businesses and countries. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity. Costs that are not allocated to businesses are included in Corporate Centre. Where relevant, income and expense amounts presented include the results of inter-segment funding along with inter-company and inter-business line transactions. All such transactions are undertaken on arm’s length terms. The intra-group elimination items for the businesses are presented in Corporate Centre. HSBC Bank plc Annual Report and Accounts 2022 147 Our businesses HSBC provides a comprehensive range of banking and related financial services to its customers through its global businesses. The products and services offered to customers are organised by these global businesses. Our operating model has the following material segments: WPB; CMB; a GBM business which is further split into three reportable segments MSS, GB and GBM Other reflecting the reorganisation of the GBM management structure during 2021 and a Corporate Centre. These segments are supported by Digital Business Services and eleven global functions, including Risk, Finance, Compliance, Legal, Marketing and Human Resources. These business segment are our reportable segments under IFRS 8 'Operating Segments'. By operating segment: Adjusted profit/(loss) before tax 2022 MSS GB GBM Other CMB WPB Corporate Centre Total £m £m £m £m £m £m £m Net operating income before change in expected credit losses and other credit impairment charges 2,413 1,571 (8) 1,432 1,492 (118) 6,782 – of which: net interest income/(expense) (54) 903 (16) 925 710 (564) 1,904 Change in expected credit losses and other credit impairment charges (1) (153) (1) (54) (7) (6) (222) Net operating income/(expense) 2,412 1,418 (9) 1,378 1,485 (124) 6,560 Total operating expenses (1,940) (932) (318) (593) (908) (115) (4,806) Operating profit/(loss) 472 486 (327) 785 577 (239) 1,754 Share of loss in associates and joint ventures — — (2) — — (28) (30) Adjusted profit/(loss) before tax 472 486 (329) 785 577 (267) 1,724 % % % % % % Adjusted cost efficiency ratio 80.4 59.3 n/a 41.4 60.9 70.9 2021 Net operating income/(expense) before change in expected credit losses and other credit impairment charges1 2,055 1,367 579 1,095 1,275 (41) 6,330 – of which: net interest income/(expense) (232) 568 224 649 567 (22) 1,754 Change in expected credit losses and other credit impairment charges 1 140 5 7 23 (2) 174 Net operating income/(expense) 2,056 1,507 584 1,102 1,298 (43) 6,504 Total operating expenses (2,064) (918) (485) (612) (975) (64) (5,118) Operating profit/(loss) (8) 589 99 490 323 (107) 1,386 Share of profit in associates and joint ventures — — — — — 191 191 Adjusted profit/(loss) before tax (8) 589 99 490 323 84 1,577 % % % % % % Adjusted cost efficiency ratio 100.4 67.2 83.9 55.9 76.5 80.9 2020 Net operating income/(expense) before change in expected credit losses and other credit impairment charges1 1,968 1,381 624 1,133 1,035 (144) 5,997 – of which: net interest income/(expense) (96) 651 46 686 664 (53) 1,898 Change in expected credit losses and other credit impairment charges 1 (448) (4) (322) (39) 4 (808) Net operating income/(expense) 1,969 933 620 811 996 (140) 5,189 Total operating expenses (1,949) (878) (672) (659) (1,128) (86) (5,372) Operating profit/(loss) 20 55 (52) 152 (132) (226) (183) Share of profit in associates and joint ventures — — — — — (1) (1) Adjusted profit/(loss) before tax 20 55 (52) 152 (132) (227) (184) % % % % % % Adjusted cost efficiency ratio 99.0 63.6 107.7 58.2 109.0 89.6 1Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. It includes inter- segment revenue which is eliminated in Corporate centre, amounting to £120m (2021: £124m; 2020: £167m). Reported external net operating income is attributed to countries on the basis of the location of the branch responsible for reporting the results or advancing the funds: 2022 2021 2020 £m £m £m Reported external net operating income by country 4,646 6,120 5,900 – United Kingdom 3,161 2,937 2,914 – France1 171 1,677 1,528 – Germany 732 887 814 – Other countries1 582 619 644 12022 balances include losses on disposal of businesses classified as held-for-sale as part of a broader restructuring of our European business. Notes on the Financial Statements 148 HSBC Bank plc Annual Report and Accounts 2022 Adjusted results reconciliation 2022 2021 2020 Adjusted Significant items Reported Adjusted Significant items Reported Adjusted Significant items Reported £m £m £m £m £m £m £m £m £m Revenue1 6,782 (2,136) 4,646 6,330 (210) 6,120 5,997 (97) 5,900 ECL (222) — (222) 174 — 174 (808) — (808) Operating expenses (4,806) (547) (5,353) (5,118) (344) (5,462) (5,372) (1,333) (6,705) Share of profit/(loss) in associates and joint ventures (30) — (30) 191 — 191 (1) — (1) Profit/(loss) before tax 1,724 (2,683) (959) 1,577 (554) 1,023 (184) (1,430) (1,614) 1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue. Adjusted profit/(loss) reconciliation 2022 2021 2020 £m £m £m Year ended 31 Dec Adjusted profit/(loss) before tax 1,724 1,577 (184) Significant items (2,683) (554) (1,430) – fair value movements on financial instruments1 43 (5) (3) – European restructurings (2,034) (23) — – restructuring and other related costs (692) (526) (773) – settlements and provisions in connection with legal and regulatory matters — — (9) – impairment of other intangible assets — — (645) Reported profit/(loss) before tax (959) 1,023 (1,614) 1 Includes fair value movements on non-qualifying hedges and debit valuation adjustments on derivatives. Balance sheet by business MSS GB GBM Other CMB WPB Corporate Centre Total £m £m £m £m £m £m £m 31 Dec 2022 Loans and advances to customers 2,785 37,523 115 25,219 6,826 146 72,614 Customer accounts 45,320 79,606 5,903 55,749 29,211 159 215,948 31 Dec 2021 Loans and advances to customers 2,016 37,685 197 23,529 27,574 176 91,177 Customer accounts 34,243 74,179 4,355 50,297 41,939 228 205,241 10 Trading assets The group The bank 2022 2021 2022 2021 £m £m £m £m Treasury and other eligible bills 3,712 2,451 3,061 1,872 Debt securities 21,873 27,004 13,960 17,794 Equity securities 38,330 40,930 35,407 38,570 Trading securities 63,915 70,385 52,428 58,236 Loans and advances to banks1 3,987 4,142 3,872 3,559 Loans and advances to customers1 11,976 9,179 11,323 8,995 At 31 Dec 79,878 83,706 67,623 70,790 1Loans and advances to banks and customers include reverse repos, stock borrowing and other accounts. 11 Fair values of financial instruments carried at fair value Control framework Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk taker. For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. In inactive markets, the group will source alternative market information to validate the financial instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable. The factors that are considered in this regard are, inter alia: •the extent to which prices may be expected to represent genuine traded or tradable prices; •the degree of similarity between financial instruments; •the degree of consistency between different sources; •the process followed by the pricing provider to derive the data; HSBC Bank plc Annual Report and Accounts 2022 149 •the elapsed time between the date to which the market data relates and the balance sheet date; and •the manner in which the data was sourced. For fair values determined using valuation models, the control framework may include, as applicable, development or validation by independent support functions of: (i) the logic within valuation models; (ii) the inputs to these models; (iii) any adjustments required outside the valuation models; and (iv) where possible, model outputs. Valuation models are subject to a process of due diligence and calibration before becoming operational and are calibrated against external market data on an ongoing basis. Financial liabilities measured at fair value In certain circumstances, the group records its own debt in issue at fair value, based on quoted prices in an active market for the specific instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which are based either on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread that is appropriate to the group’s liabilities. Structured notes issued and certain other hybrid instruments are included within trading liabilities and are measured at fair value. The spread applied to these instruments is derived from the spreads at which the group issues structured notes. Fair value hierarchy Fair values of financial assets and liabilities are determined according to the following hierarchy: •Level 1 – valuation technique using quoted market price: financial instruments with quoted prices for identical instruments in active markets that HSBC can access at the measurement date. •Level 2 – valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable. •Level 3 – valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable. Financial instruments carried at fair value and bases of valuation 2022 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total The group £m £m £m £m £m £m £m £m Recurring fair value measurements at 31 Dec Assets Trading assets 52,493 24,647 2,738 79,878 59,813 22,549 1,344 83,706 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 6,183 6,380 3,318 15,881 6,332 9,146 3,171 18,649 Derivatives 2,296 221,205 1,737 225,238 1,987 137,418 1,816 141,221 Financial investments 19,007 8,902 1,447 29,356 29,668 10,235 1,387 41,290 Liabilities Trading liabilities 26,258 14,592 415 41,265 32,886 12,967 580 46,433 Financial liabilities designated at fair value 938 23,888 2,461 27,287 1,020 30,467 2,121 33,608 Derivatives 1,744 214,645 2,478 218,867 1,105 135,809 2,454 139,368 The bank Recurring fair value measurements at 31 Dec Assets Trading assets 41,524 23,940 2,159 67,623 49,435 20,021 1,334 70,790 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 252 1,094 272 1,618 298 2,556 361 3,215 Derivatives 2,037 192,778 1,899 196,714 1,413 122,422 1,952 125,787 Financial investments 11,214 976 71 12,261 21,806 1,346 53 23,205 Liabilities Trading liabilities 11,771 13,591 403 25,765 19,367 11,240 554 31,161 Financial liabilities designated at fair value — 17,565 1,850 19,415 — 19,306 1,563 20,869 Derivatives 1,691 189,908 1,737 193,336 1,066 123,863 2,722 127,651 Transfers between Level 1 and Level 2 fair values Assets Liabilities Financial investments Trading assets Designated and otherwise mandatorily measured at fair value through profit or loss Derivatives Trading liabilities Designated at fair value Derivatives £m £m £m £m £m £m £m At 31 Dec 2022 Transfers from Level 1 to Level 2 126 1,194 — 39 — — — Transfers from Level 2 to Level 1 189 682 — 32 — — — At 31 Dec 2021 Transfers from Level 1 to Level 2 366 1,731 757 — 27 — — Transfers from Level 2 to Level 1 244 990 399 — 91 — — Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are normally attributable to observability of valuation inputs and price transparency. Notes on the Financial Statements 150 HSBC Bank plc Annual Report and Accounts 2022 Fair value adjustments Fair value adjustments are adopted when the group determines there are additional factors considered by market participants that are not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement, such as when models are enhanced and fair value adjustments may no longer be required. Fair value adjustments 2022 2021 MSS Corporate MSS Corporate £m £m £m £m Type of adjustment Risk-related 359 33 505 31 – bid-offer 188 — 190 — – uncertainty 50 — 37 1 – credit valuation adjustment 98 29 99 26 – debt valuation adjustment (64) — (27) — – funding fair value adjustment 87 4 206 4 – other — — — — Model-related 31 — 19 — – model limitation 31 — 19 — – other — — — — Inception profit (Day 1 P&L reserves) 64 — 65 — At 31 Dec 454 33 589 31 Bid-offer IFRS 13 ‘Fair value measurement’ requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position. Uncertainty Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, an adjustment may be necessary to reflect the likelihood that market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in the valuation model. Credit and debit valuation adjustments The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect the possibility that the counterparty may default, and that the group may not receive the full market value of the transactions. The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that HSBC may default, and that it may not pay the full market value of the transactions. HSBC calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments are not netted across the Group's entities. HSBC calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of HSBC, to HSBC’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and multiplying the result by the proportional loss expected in the event of default. Both calculations are performed over the life of the potential exposure. For most products, HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as counterparty netting agreements and collateral agreements with the counterparty. The methodologies do not, in general, account for ‘wrong-way risk’, which arises when the underlying value of the derivative prior to any CVA is positively correlated to the PD of the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied to reflect this risk in the valuation. Funding fair value adjustment The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where available, and is adjusted for events that may terminate the exposure, such as the default of HSBC or the counterparty. The FFVA and DVA are calculated independently. Model limitation Models used for portfolio valuation purposes may be based upon a simplified set of assumptions that do not capture all current and future material market characteristics. In these circumstances, model limitation adjustments are adopted. Inception profit (Day 1 P&L reserves) Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant unobservable inputs. The accounting for inception profit adjustments is discussed in Note 1. HSBC Bank plc Annual Report and Accounts 2022 151 Fair value valuation bases Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3 Assets Liabilities Financial Investments Held for trading Designated and otherwise mandatorily measured at fair value through profit or loss Derivatives Total Held for trading Designated at fair value Derivatives Total The group £m £m £m £m £m £m £m £m £m Private equity including strategic investments 85 59 3,058 — 3,202 104 — — 104 Asset-backed securities 275 170 78 — 523 — — — — Structured notes — — — — — — 2,461 — 2,461 Derivatives — — — 1,737 1,737 — — 2,478 2,478 Other portfolios 1,087 2,509 182 — 3,778 311 — — 311 At 31 Dec 2022 1,447 2,738 3,318 1,737 9,240 415 2,461 2,478 5,354 Private equity including strategic investments 79 1 2,898 — 2,978 7 — — 7 Asset-backed securities 495 97 — — 592 — — — — Structured notes — — — — — — 2,120 — 2,120 Derivatives — — — 1,816 1,816 — — 2,454 2,454 Other portfolios 813 1,246 273 — 2,332 573 1 — 574 At 31 Dec 2021 1,387 1,344 3,171 1,816 7,718 580 2,121 2,454 5,155 The bank Private equity including strategic investments 54 58 272 — 384 103 — — 103 Asset-backed securities 17 170 — — 187 — — — — Structured notes — — — — — — 1,850 — 1,850 Derivatives — — — 1,899 1,899 — — 1,728 1,728 Other portfolios — 1,931 — — 1,931 300 — 9 309 At 31 Dec 2022 71 2,159 272 1,899 4,401 403 1,850 1,737 3,990 Private equity including strategic investments 53 — 353 — 406 6 — — 6 Asset-backed securities — 97 — — 97 — — — — Structured notes — — — — — — 1,563 — 1,563 Derivatives — — — 1,952 1,952 — — 2,722 2,722 Other portfolios — 1,237 8 — 1,245 548 — — 548 At 31 Dec 2021 53 1,334 361 1,952 3,700 554 1,563 2,722 4,839 . Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, certain derivatives and predominantly all Level 3 Asset-backed securities are legacy positions. HSBC has the capability to hold these positions. Private equity including strategic investments The investment’s fair value is estimated: on the basis of an analysis of the investee’s financial position and results, risk profile, prospects and other factors; by reference to market valuations for similar entities quoted in an active market; the price at which similar companies have changed ownership; or from published net asset values (‘NAVs’) received. If necessary, adjustments are made to the NAV of funds to obtain the best estimate of fair value. Asset-backed securities While quoted market prices are generally used to determine the fair value of these securities, valuation models are used to substantiate the reliability of the limited market data available and to identify whether any adjustments to quoted market prices are required. For certain ABSs, such as residential mortgage-backed securities, the valuation uses an industry standard model with assumptions relating to prepayment speeds, default rates and loss severity based on collateral type, and performance, as appropriate. The valuations output is benchmarked for consistency against observable data for securities of a similar nature. Structured notes The fair value of Level 3 structured notes is derived from the fair value of the underlying debt security, and the fair value of the embedded derivative is determined as described in the paragraph below on derivatives. These structured notes comprise principally equity-linked notes, issued by HSBC, which provide the counterparty with a return linked to the performance of equity securities and other portfolios. Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity prices, and interest and foreign exchange rates. Derivatives OTC derivative valuation models calculate the present value of expected future cash flows, based upon ‘no-arbitrage’ principles. For many vanilla derivative products, the modelling approaches used are standard across the industry. For more complex derivative products, there may be some differences in market practice. Inputs to valuation models are determined from observable market data, wherever possible, including prices available from exchanges, dealers, brokers or providers of consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices through model calibration procedures or estimated from historical data or other sources. Notes on the Financial Statements 152 HSBC Bank plc Annual Report and Accounts 2022 Reconciliation of fair value measurements in Level 3 of the fair value hierarchy Movement in Level 3 financial instruments Assets Liabilities Financial Investments Trading assets Designated and otherwise mandatorily measured at fair value through profit or loss Derivatives Trading liabilities Designated at fair value Derivatives The group £m £m £m £m £m £m £m At 1 Jan 2022 1,387 1,344 3,171 1,816 580 2,121 2,454 Total gains/(losses) on assets and total (gains)/losses on liabilities recognised in profit or loss (6) (415) (84) 564 (223) (638) 723 – net income from financial instruments held for trading or managed on a fair value basis — (415) — 564 (223) — 723 – changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss — — (84) — — (638) — – gains less losses from financial investments at fair value through other comprehensive income (6) — — — — — — Total gains/(losses) recognised in other comprehensive income (‘OCI’)1 (145) 12 238 3 1 29 17 – financial investments: fair value gains/(losses) (232) — — — — — — – exchange differences 87 12 238 3 1 29 17 Purchases 601 2,067 562 — 151 — — New issuances — — — — 7 1,705 — Sales (142) (716) (594) — (120) (78) — Settlements (90) (323) (51) (731) (407) (575) (701) Transfers out (199) (283) (2) (473) (15) (564) (582) Transfers in 41 1,052 78 558 441 461 567 At 31 Dec 2022 1,447 2,738 3,318 1,737 415 2,461 2,478 Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2022 — (5) 49 565 2 30 2,339 – trading income/(expense) excluding net interest income — (5) — 565 2 — 2,339 – net income/(expense) from other financial instruments designated at fair value — — 49 — — 30 — At 1 Jan 2021 1,635 1,611 3,467 1,974 118 1,150 3,096 Total gains/(losses) on assets and total (gains)/losses on liabilities recognised in profit or loss 15 (77) 148 1,608 11 (316) 1,362 – net income from financial instruments held for trading or managed on a fair value basis — (77) — 1,608 11 — 1,362 – changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss — — 148 — — (316) — – gains less losses from financial investments at fair value through other comprehensive income 15 — — — — — — Total gains/(losses) recognised in other comprehensive income (‘OCI’)1 (75) (4) (152) (6) (1) (32) (8) – financial investments: fair value gains/(losses) (27) — — — — — — – exchange differences (48) (4) (152) (6) (1) (32) (8) Purchases 555 686 543 — 742 1 — New issuances — — — — 25 2,213 — Sales (417) (209) (813) — (3) (20) — Settlements (109) (506) (5) (1,722) (504) (1,053) (2,343) Transfers out (218) (668) (41) (368) (5) (137) (465) Transfers in 1 511 24 330 197 315 812 At 31 Dec 2021 1,387 1,344 3,171 1,816 580 2,121 2,454 Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2021 — (11) 51 846 — 102 (721) – trading income/(expense) excluding net interest income — (11) — 846 — — (721) – net income from other financial instruments designated at fair value — — 51 — — 102 — 1Included in ‘financial investments: fair value gains/(losses)’ in the current year and ‘exchange differences’ in the consolidated statement of comprehensive income. Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency. HSBC Bank plc Annual Report and Accounts 2022 153 Movement in Level 3 financial instruments (continued) Assets Liabilities Financial Investments Trading Assets Designated and otherwise mandatorily measured at fair value through profit or loss Derivatives Trading Liabilities Designated at fair value Derivatives The bank £m £m £m £m £m £m £m At 1 Jan 2022 53 1,334 361 1,952 554 1,563 2,722 Total gains/(losses) on assets and total (gains)/losses on liabilities recognised in profit or loss 2 (419) (91) 665 (216) (569) 45 – net income from financial instruments held for trading or managed on a fair value basis — (419) — 665 (216) — 45 – changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss — — (91) — — (569) — – gains less losses from financial investments at fair value through other comprehensive income 2 — — — — — — Total gains/(losses) recognised in other comprehensive income (‘OCI’)1 1 — 24 — — — — – financial investments: fair value gains/(losses) 1 — — — — — — – exchange differences — — 24 — — — — Purchases — 1,495 — — 151 — — New issuances — — — — — 1,682 — Sales — (659) (12) — (120) — — Settlements — (323) (8) (850) (392) (557) (1,025) Transfers out — (283) (2) (541) (15) (471) (606) Transfers in 15 1,014 — 673 441 202 601 At 31 Dec 2022 71 2,159 272 1,899 403 1,850 1,737 Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2022 — — — 688 — 19 3,020 – trading income/(expense) excluding net interest income — — — 688 — — 3,020 – net income/(expense) from other financial instruments designated at fair value — — — — — 19 — At 1 Jan 2021 141 1,583 311 2,032 103 651 3,287 Total gains/(losses) on assets and total (gains)/losses on liabilities recognised in profit or loss 1 (76) 77 1,730 12 (246) 1,443 – net income from financial instruments held for trading or managed on a fair value basis — (76) — 1,730 12 — 1,443 – changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss — — 77 — — (246) — – gains less losses from financial investments at fair value through other comprehensive income 1 — — — — — — Total gains/(losses) recognised in other comprehensive income (‘OCI’)1 (1) (3) (11) — — — — – financial investments: fair value gains/(losses) (1) — — — — — — – exchange differences — (3) (11) — — — — Purchases — 683 2 — 741 — — New issuances — — — — — 2,128 — Sales (2) (186) (13) — — — — Settlements (3) (505) (5) (1,778) (494) (950) (2,297) Transfers out (83) (668) — (375) (5) (153) (511) Transfers in — 506 — 343 197 133 800 At 31 Dec 2021 53 1,334 361 1,952 554 1,563 2,722 Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2021 — (11) 1 973 — 46 (949) – trading income/(expense) excluding net interest income — (11) — 973 — — (949) – net income from other financial instruments designated at fair value — — 1 — — 46 — 1Included in ‘financial investments: fair value gains/(losses)’ in the current year and ‘exchange differences’ in the consolidated statement of comprehensive income. Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency. Notes on the Financial Statements 154 HSBC Bank plc Annual Report and Accounts 2022 Effect of changes in significant unobservable assumptions to reasonably possible alternatives Sensitivity of Level 3 fair values to reasonably possible alternative assumptions 2022 2021 Reflected in profit or loss Reflected in OCI Reflected in profit or loss Reflected in OCI Favourable changes Un- favourable changes Favourable changes Un- favourable changes Favourable changes Un- favourable changes Favourable changes Un- favourable changes The group £m £m £m £m £m £m £m £m Derivatives, trading assets and trading liabilities1 201 (261) — — 92 (70) — — Designated and otherwise mandatorily measured at fair value through profit or loss 236 (235) — — 247 (247) — — Financial investments 9 (9) 27 (19) 15 (15) 51 (50) Year ended 31 Dec 446 (505) 27 (19) 354 (332) 51 (50) The bank Derivatives, trading assets and trading liabilities1 193 (253) — — 93 (72) — — Designated and otherwise mandatorily measured at fair value through profit or loss 45 (45) — — 64 (64) — — Financial investments — — 14 (6) 0 — 6 (5) Year ended 31 Dec 238 (298) 14 (6) 157 (136) 6 (5) 1Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these instruments are risk managed. Sensitivity of Level 3 fair values to reasonably possible alternative assumptions by instrument type 2022 2021 Reflected in profit or loss Reflected in OCI Reflected in profit or loss Reflected in OCI Favourable changes Un- favourable changes Favourable changes Un- favourable changes Favourable changes Un- favourable changes Favourable changes Un- favourable changes £m £m £m £m £m £m £m £m Private equity including strategic investments 225 (389) 8 (7) 232 (234) 7 (7) Asset-backed securities 28 (17) 12 (5) 39 (20) 1 — Structured notes 5 (5) — — 6 (6) — — Derivatives 44 (44) — — 29 (34) — — Other portfolios 144 (50) 7 (7) 48 (38) 43 (43) Total 446 (505) 27 (19) 354 (332) 51 (50) The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data. When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually. HSBC Bank plc Annual Report and Accounts 2022 155 Key unobservable inputs to Level 3 financial instruments Quantitative information about significant unobservable inputs in Level 3 valuations Fair value 2022 2021 Assets Liabilities Valuation techniques Key unobservable inputs Full range of inputs Full range of inputs £m £m Lower Higher Lower Higher Private equity including strategic investments 3,202 104 See below See below N/A N/A N/A N/A Asset-backed securities 523 — – CLO/CDO1 156 — Market proxy Bid quotes — 92 — 100 – Other ABSs 367 — Market proxy Bid quotes — 99 — 100 Structured notes — 2,461 – equity-linked notes — 2,042 Model – Option model Equity Volatility 6% 99% 6% 124% Equity Correlation 32% 99% 34% 99% – fund-linked notes — — Model – Option model Fund Volatility – FX-linked notes — 3 Model – Option model FX Volatility 3% 20% 3% 99% – other — 416 Derivatives 1,737 2,478 – Interest rate derivatives: 507 633 securitisation swaps 215 173 Model – Discounted cash flow Constant Prepayment 5% 10% 5% 50% long-dated swaptions 44 56 Model – Option model IR Volatility 9% 33% 15% 35% other 248 404 – FX derivatives: 447 304 FX options 418 294 Model – Option model FX Volatility 3% 46% 2% 99% other 29 10 – Equity derivatives: 688 1,324 long-dated single stock options 344 376 Model – Option model Equity Volatility 7% 153% 4% 138% other2 344 948 – Credit derivatives: 95 217 other 95 217 Other portfolios 3,778 311 – repurchase agreements 387 272 Model – Discounted cash flow IR Curve 1% 9% 1% 5% – other3 3,391 39 At 31 Dec 9,240 5,354 1Collateralised loan obligation/collateralised debt obligation. 2Other Equity Derivatives consists mainly of Swaps and OTC Options. 3Other consists of various instruments including investment in funds, repurchase agreement and bonds. Private equity including strategic investments Given the bespoke nature of the analysis in respect of each holding, it is not practical to quote a range of key unobservable inputs. The key unobservable inputs would be price and correlation. The valuation approach includes using a range of inputs that include company specific financials, traded comparable companies multiples, published net asset values and qualitative assumptions, which are not directly comparable or quantifiable. Prepayment rates Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the due date. They vary according to the nature of the loan portfolio and expectations of future market conditions, and may be estimated using a variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and macroeconomic modelling. Market proxy Market proxy pricing may be used for an instrument when specific market pricing is not available, but there is evidence from instruments with common characteristics. In some cases, it might be possible to identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence. Volatility Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike and maturity of the option. Certain volatilities, typically those of a longer-dated nature, are unobservable and estimated from observable data. The range of unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio. Correlation Correlation is a measure of the inter-relationship between two market prices, and is expressed as a number between minus one and one. It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations. Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market price pair. Notes on the Financial Statements 156 HSBC Bank plc Annual Report and Accounts 2022 Credit spread Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit spreads may be implied from market prices and may not be observable in more illiquid markets. Inter-relationships between key unobservable inputs Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other events. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC’s net risk position in respect of each variable. 12 Fair values of financial instruments not carried at fair value Fair values of financial instruments not carried at fair value and bases of valuation Fair value Carrying amount Quoted market price Level 1 Observable inputs Level 2 Significant unobservable inputs Level 3 Total The group £m £m £m £m £m At 31 Dec 2022 Assets Loans and advances to banks 17,109 — 17,112 — 17,112 Loans and advances to customers 72,614 — — 72,495 72,495 Reverse repurchase agreements – non-trading 53,949 — 53,949 — 53,949 Financial investments – at amortised cost 3,248 2,336 848 8 3,192 Liabilities Deposits by banks 20,836 — 20,900 — 20,900 Customer accounts 215,948 — 215,955 — 215,955 Repurchase agreements – non-trading 32,901 — 32,901 — 32,902 Debt securities in issue 7,268 — 7,124 132 7,256 Subordinated liabilities 14,528 — 14,434 — 14,434 At 31 Dec 2021 Assets Loans and advances to banks 10,784 — 10,786 — 10,786 Loans and advances to customers 91,177 — — 91,276 91,276 Reverse repurchase agreements – non-trading 54,448 — 54,448 — 54,448 Financial investments – at amortised cost 10 2 — 8 10 Liabilities Deposits by banks 32,188 — 32,102 — 32,102 Customer accounts 205,241 — 205,236 — 205,236 Repurchase agreements – non-trading 27,259 — 27,259 — 27,259 Debt securities in issue 9,428 — 9,286 144 9,430 Subordinated liabilities 12,488 — 13,118 — 13,118 Fair values of selected financial instruments not carried at fair value and bases of valuation – assets and disposal groups held for sale Fair value Carrying amount Quoted market price Level 1 Observable inputs Level 2 Significant unobservable inputs Level 3 Total $m $m $m $m $m At 31 Dec 2022 Assets Loans and advances to banks 127 — 131 — 131 Loans and advances to customers 21,067 — — 19,481 19,481 Reverse repurchase agreements – non-trading 208 — 208 — 208 Liabilities Deposits by banks 2 — 2 — 2 Customer accounts 20,478 — 20,393 — 20,393 Debt securities in issue 1,100 — 1,100 — 1,100 HSBC Bank plc Annual Report and Accounts 2022 157 Fair values of financial instruments not carried at fair value and bases of valuation Fair value Carrying amount Quoted market price Level 1 Observable inputs Level 2 Significant unobservable inputs Level 3 Total The bank £m £m £m £m £m At 31 Dec 2022 Assets Loans and advances to banks 14,486 — 14,508 — 14,508 Loans and advances to customers 36,992 — — 36,875 36,875 Reverse repurchase agreements – non-trading 43,055 — 43,055 — 43,055 Financial investments – at amortised cost 6,378 1,984 4,305 — 6,289 Liabilities Deposits by banks 13,594 — 13,594 — 13,594 Customer accounts 141,714 — 141,714 — 141,714 Repurchase agreements – non-trading 29,638 — 29,638 — 29,638 Debt securities in issue 4,656 — 4,656 — 4,656 Subordinated liabilities 14,252 — 14,139 — 14,139 At 31 Dec 2021 Assets Loans and advances to banks 6,778 — 6,881 — 6,881 Loans and advances to customers 33,936 — — 33,921 33,921 Reverse repurchase agreements – non-trading 39,708 — 39,708 — 39,708 Financial investments – at amortised cost1 3,337 — 3,300 — 3,300 Liabilities Deposits by banks 14,655 — 14,655 — 14,655 Customer accounts 124,706 — 124,706 — 124,706 Repurchase agreements – non-trading 22,344 — 22,344 — 22,344 Debt securities in issue 5,658 — 5,658 — 5,658 Subordinated liabilities 12,218 — 12,851 — 12,851 1 Fair value of Financial investment is represented to include the impact of inter-company. Other financial instruments not carried at fair value are typically short-term in nature and reprice to current market rates frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. They include cash and balances at central banks and items in the course of collection from and transmission to other banks, all of which are measured at amortised cost. Valuation Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It does not reflect the economic benefits and costs that HSBC expects to flow from an instrument’s cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no observable market prices are available may differ from those of other companies. Loans and advances to banks and customers To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of a pool of loans. The fair value of loans reflects expected credit losses at the balance sheet date and estimates of market participants’ expectations of credit losses over the life of the loans, and the fair value effect of repricing between origination and the balance sheet date. For credit impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered. Financial investments The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities. Deposits by banks and customer accounts The fair values of on-demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. Debt securities in issue and subordinated liabilities Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments. When quoted market prices are unavailable, these instruments are valued using valuation techniques, the inputs for which are derived from observable market data and, where relevant, from assumptions in respect of unobservable inputs. Repurchase and reverse repurchase agreements – non-trading Fair values approximate carrying amounts as balances are generally short dated. Notes on the Financial Statements 158 HSBC Bank plc Annual Report and Accounts 2022 13 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss The group The bank 2022 2021 2022 2021 Designated at fair value and otherwise mandatorily measured at fair value Designated at fair value and otherwise mandatorily measured at fair value Designated at fair value and otherwise mandatorily measured at fair value Designated at fair value and otherwise mandatorily measured at fair value £m £m £m £m Securities 14,581 15,738 318 418 – debt securities 1,975 2,584 44 146 – equity securities 12,606 13,154 274 272 Loans and advances to banks and customers 971 2,613 971 2,498 Other 329 298 329 299 At 31 Dec 15,881 18,649 1,618 3,215 14 Derivatives Notional contract amounts and fair values of derivatives by product contract type Notional contract amount Fair value – Assets Fair value – Liabilities Trading Hedging Trading Hedging Total Trading Hedging Total The group £m £m £m £m £m £m £m £m Foreign exchange 6,101,153 582 88,244 2 88,246 (86,119) (57) (86,176) Interest rate 10,141,018 56,144 206,689 433 207,122 (201,419) (819) (202,238) Equities 465,626 — 7,751 — 7,751 (8,175) — (8,175) Credit 146,522 — 865 — 865 (1,012) — (1,012) Commodity and other 57,594 — 1,053 — 1,053 (1,065) — (1,065) Offset (Note 28) (79,799) 79,799 At 31 Dec 2022 16,911,913 56,726 304,602 435 225,238 (297,790) (876) (218,867) Foreign exchange 4,737,254 4,045 49,775 266 50,041 (48,613) (67) (48,680) Interest rate 8,727,934 39,553 99,744 144 99,888 (96,297) (270) (96,567) Equities 498,980 — 9,718 — 9,718 (11,881) — (11,881) Credit 134,440 — 1,582 — 1,582 (2,159) — (2,159) Commodity and other 42,677 — 681 — 681 (770) — (770) Offset (Note 28) (20,689) 20,689 At 31 Dec 2021 14,141,285 43,598 161,500 410 141,221 (159,720) (337) (139,368) The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. Derivative asset and liability fair values increased during 2022, driven by yield curve movements and changes in foreign exchange rates. Notional contract amount Fair value – Assets Fair value – Liabilities Trading Hedging Trading Hedging Total Trading Hedging Total The bank £m £m £m £m £m £m £m £m Foreign exchange 6,049,682 582 87,459 2 87,461 (84,885) (56) (84,941) Interest rate 7,665,449 33,408 158,492 244 158,736 (157,315) (780) (158,095) Equities 439,588 — 7,626 — 7,626 (7,325) — (7,325) Credit 144,972 — 847 — 847 (982) — (982) Commodity and other 57,346 — 1,051 — 1,051 (1,000) — (1,000) Offset (59,007) 59,007 At 31 Dec 2022 14,357,037 33,990 255,475 246 196,714 (251,507) (836) (193,336) Foreign exchange 4,713,729 3,829 48,651 247 48,898 (47,771) (67) (47,838) Interest rate 6,846,965 27,206 80,798 193 80,991 (80,281) (240) (80,521) Equities 478,832 — 9,153 — 9,153 (11,896) — (11,896) Credit 132,582 — 1,558 — 1,558 (2,121) — (2,121) Commodity and other 41,308 — 677 — 677 (765) — (765) Offset (15,490) 15,490 At 31 Dec 2021 12,213,416 31,035 140,837 440 125,787 (142,834) (307) (127,651) Use of derivatives We undertake derivatives activity for three primary purposes: to create risk management solutions for clients, to manage the portfolio risks arising from client business, and to manage and hedge our own risks. Trading derivatives Most of the group's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities include market-making and risk management. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume. HSBC Bank plc Annual Report and Accounts 2022 159 Risk management activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client margin. Other derivatives classified as held for trading include non-qualifying hedging derivatives. Substantially all of the group's derivatives entered into with subsidiaries are managed in conjunction with financial liabilities designated at fair value. Derivatives valued using models with unobservable inputs The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had the valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is in the following table: Unamortised balance of derivatives valued using models with significant unobservable inputs The group The bank 2022 2021 2022 2021 £m £m £m £m Unamortised balance at 1 Jan 64 60 64 56 Deferral on new transactions 110 156 99 155 Recognised in the income statement during the year: (111) (152) (107) (147) – amortisation (59) (88) (56) (88) – subsequent to unobservable inputs becoming observable — (2) — (2) – maturity, termination or offsetting derivative (52) (60) (51) (57) – risk hedged — (2) — — Exchange differences and other 1 — — — Unamortised balance at 31 Dec1 64 64 56 64 1This amount is yet to be recognised in the consolidated income statement. Hedge accounting derivatives The group applies hedge accounting to manage the following risks: interest rate and foreign exchange. The Report of the Directors – Risk presents more details on how these risks arise and how they are managed by the group. Hedged risk components HSBC designates a portion of cash flows of a financial instrument or a group of financial instruments for a specific interest rate or foreign currency risk component in a fair value or cash flow hedge. The designated risks and portions are either contractually specified or otherwise separately identifiable components of the financial instrument that are reliably measurable. Risk-free or benchmark interest rates generally are regarded as being both separately identifiable and reliably measurable, except for the IBOR Reform transition where HSBC designates Alternative Benchmark Rates as the hedged risk which may not have been separately identifiable upon initial designation, provided HSBC reasonably expects it will meet the requirement within 24 months from the first designation date. The designated risk component accounts for a significant portion of the overall changes in fair value or cash flows of the hedged item(s). Fair value hedges The group enters into fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value due to movements in market interest rates on certain fixed rate financial instruments which are not measured at fair value through profit or loss, including debt securities held and issued. Hedging instrument by hedged risk Hedging instrument Carrying amount The group Notional amount1 Assets Liabilities Balance sheet presentation Change in fair value2 Hedged risk £m £m £m £m Interest rate3 26,649 428 (799) Derivatives 981 At 31 Dec 2022 26,649 428 (799) 981 Interest rate3 24,486 139 (270) Derivatives 159 At 31 Dec 2021 24,486 139 (270) 159 1The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. 2Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component. 3The hedged risk ‘interest rate’ includes inflation risk. Notes on the Financial Statements 160 HSBC Bank plc Annual Report and Accounts 2022 Hedged item by hedged risk Hedged item Ineffectiveness Carrying amount Accumulated fair value hedge adjustments included in carrying amount2 Change in fair value1 Recognised in profit and loss Profit and loss presentation The group Assets Liabilities Assets Liabilities Balance sheet presentation Hedged risk £m £m £m £m £m £m Interest rate3 15,446 — (1,095) — Financial assets at fair value through other comprehensive income (1,850) 31 Net income from financial instruments held for trading or managed on a fair value basis — — — — Loans and advances to banks — 713 — (31) — Loans and advances to customers (40) 431 — (15) — Reverse Repos (14) — 1,576 — (169) Debt securities in issue 398 — 5,686 — (659) Subordinated liabilities and deposits by banks4 556 At 31 Dec 2022 16,590 7,262 (1,141) (828) (950) 31 Interest rate3 14,099 — 167 — Financial assets at fair value through other comprehensive income (278) (9) Net income from financial instruments held for trading or managed on a fair value basis 1 — (2) — Loans and advances to banks (2) 997 — 7 — Loans and advances to customers (16) — 2,844 — 71 Debt securities in issue 24 — 5,841 — (77) Subordinated liabilities and deposits by banks4 104 At 31 Dec 2021 15,097 8,685 172 (6) (168) (9) 1Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component. 2The accumulated amounts of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were £10m (2021: £21m) for 'Financial assets at fair value through other comprehensive income', is nil (2021: nil) for 'Deposits by banks' and £13m (2021: £19m) for 'Debt securities in issue'. 3 The hedged risk ‘interest rate’ includes inflation risk. 4 The notional amount of non-dynamic fair value hedges was £6,312m (2021: £5,886m) of which the weighted-average maturity is March 2026 and the weighted average swap rate is 0.06% (2021: 0.06%) (negative). £6,312m (2021: £5,886m) of these hedges are internal to HSBC Group and composed by internal funding between HSBC Holdings and the group. Hedging instrument by hedged risk Hedging instrument Carrying amount Change in fair value2 The bank Notional amount1 Assets Liabilities Balance sheet presentation Hedged risk £m £m £m £m Interest rate3 18,391 242 (773) Derivatives 466 At 31 Dec 2022 18,391 242 (773) 466 Interest rate3 18,016 188 (234) Derivatives 27 At 31 Dec 2021 18,016 188 (234) 27 1The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. 2Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component. 3The hedged risk ‘interest rate’ includes inflation risk. Hedged item by hedged risk Hedged item Ineffectiveness Carrying amount Accumulated fair value hedge adjustments included in carrying amount2 Change in fair value1 Recognised in profit and loss The bank Assets Liabilities Assets Liabilities Balance sheet presentation Profit and loss presentation Hedged risk £m £m £m £m £m £m Interest rate3 9,072 — (642) — Financial assets at fair value through other comprehensive income (1,389) 31 Net income from financial instruments held for trading or managed on a fair value basis 7 — 3 — Loans and advances to customers — — — — — Reverse Repos — — 1,576 — (169) Debt securities in issue 398 — 5,653 — (659) Subordinated liabilities and deposits by banks4 556 At 31 Dec 2022 9,079 7,229 (639) (828) (435) 31 HSBC Bank plc Annual Report and Accounts 2022 161 Hedged item by hedged risk (continued) Hedged item Ineffectiveness Carrying amount Accumulated fair value hedge adjustments included in carrying amount2 Change in fair value1 Recognised in profit and loss The bank Assets Liabilities Assets Liabilities Balance sheet presentation Profit and loss presentation Hedged risk £m £m £m £m £m £m Interest rate3 9,232 — 159 — Financial assets at fair value through other comprehensive income (163) (8) Net income from financial instruments held for trading or managed on a fair value basis 6 — — — Loans and advances to customers — — 2,844 — 71 Debt securities in issue 24 — 5,810 — (77) Subordinated liabilities and deposits by banks4 104 At 31 Dec 2021 9,238 8,654 159 (6) (35) (8) 1Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component. 2The accumulated amounts of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains and losses were £10m (2021: £21m) for 'Financial assets at fair value through other comprehensive income', nil (2021: nil) for 'Deposits by banks' and £13m (2021: £19m) for 'Debt securities in issue'. 3The hedged risk ‘interest rate’ includes inflation risk. 4The notional amount of non-dynamic fair value hedges was £6,312m (2021: £5,886m), of which the weighted-average maturity is March 2026 and the weighted average swap rate is 0.06% (2021: 0.06%) (negative). Those hedges are internal to HSBC Group and composed by internal funding between HSBC Holdings and the group. Cash flow hedges The group's cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and foreign-currency basis. The group applies macro cash flow hedging for interest-rate risk exposures on portfolios of replenishing current and forecasted issuances of non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate cash flows representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges. The group also hedges the variability in future cash-flows on foreign-denominated financial assets and liabilities arising due to changes in foreign exchange market rates with cross-currency swaps; these are considered dynamic hedges. Hedging instrument by hedged risk4 Hedging instrument Hedged item Ineffectiveness Carrying amount Change in fair value2 Change in fair value3 Recognised in profit and loss Profit and loss presentation The group Notional amount1 Assets Liabilities Balance sheet presentation Hedged risk £m £m £m £m £m £m Foreign exchange 582 2 (57) Derivatives (84) (84) — Net income from financial instruments held for trading or managed on a fair value basis Interest rate 29,495 5 (20) (1,345) (1,334) (11) At 31 Dec 2022 30,077 7 (77) (1,429) (1,418) (11) Foreign exchange 4,042 266 (67) Derivatives 127 127 — Net income from financial instruments held for trading or managed on a fair value basis Interest rate 15,067 5 (2) (178) (167) (11) At 31 Dec 2021 19,109 271 (69) (51) (40) (11) Hedging instrument Hedged item Ineffectiveness Carrying amount Change in fair value2 Change in fair value3 Recognised in profit and loss Profit and loss presentation The bank Notional amount1 Assets Liabilities Balance sheet presentation Hedged risk £m £m £m £m £m £m Foreign exchange 582 2 (56) Derivatives (84) (84) — Net income from financial instruments held for trading or managed on a fair value basis Interest rate 15,017 2 (7) (1,021) (1,021) — At 31 Dec 2022 15,599 4 (63) (1,105) (1,105) — Notes on the Financial Statements 162 HSBC Bank plc Annual Report and Accounts 2022 Hedging instrument by hedged risk4 (continued) Hedging instrument Hedged item Ineffectiveness Carrying amount Change in fair value2 Change in fair value3 Recognised in profit and loss Profit and loss presentation The bank Notional amount1 Assets Liabilities Balance sheet presentation Hedged risk £m £m £m £m £m £m Foreign exchange 3,829 247 (67) Derivatives 127 127 — Net income from financial instruments held for trading or managed on a fair value basis Interest rate 9,190 5 (2) (119) (116) (3) At 31 Dec 2021 13,019 252 (69) 8 11 (3) 1The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. 2Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component. 3Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component. 4The amounts in the above table predominantly represent the bank's exposure. Sources of hedge ineffectiveness may arise from basis risk including, but not limited to timing differences between the hedged items and hedging instruments, and hedges using instruments with a non-zero fair value. Reconciliation of equity and analysis of other comprehensive income by risk type Interest rate Foreign exchange £m £m Cash flow hedging reserve at 1 Jan 2022 32 (39) Fair value (losses)/gains (1,334) (84) Fair value (gains) reclassified from cash flow hedge reserve to income statement in respect of: – hedged items that have affected profit or loss 53 74 Income taxes 348 — Cash flow hedging reserve at 31 Dec 2022 (901) (49) Cash flow hedging reserve at 1 Jan 2021 147 11 Fair value gains/(losses) (167) 127 Fair value (gains)/losses reclassified from cash flow hedge reserve to income statement in respect of: – hedged items that have affected profit or loss (25) (177) Income taxes 77 — Cash flow hedging reserve at 31 Dec 2021 32 (39) Interest rate benchmark reform: amendments to IFRS 9 and IAS 39 ‘Financial Instruments’ HSBC has applied both the first set of amendments (‘Phase 1’) and the second set of amendments (‘Phase 2’) to IFRS 9 and IAS 39 applicable to hedge accounting. The hedge accounting relationships that are affected by Phase 1 and Phase 2 amendments are presented in the balance sheet as ‘Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income’, ‘Loans and advances to customers’, ‘Debt securities in issue’ and ‘Deposits by banks’. The notional value of the derivatives impacted by the Ibors reform, including those designated in hedge accounting relationships, is disclosed on page 31 in the section ‘Financial instruments impacted by the Ibor reform’. For further details of Ibor transition, see ‘Top and emerging risks’ on page 28. During 2022, the group transitioned all of its hedging instruments referencing sterling Libor, European Overnight Index Average rate (‘Eonia’) and Japanese yen Libor. The group also transitioned some of the hedging instruments referencing US dollar Libor. There is no significant judgement applied for these benchmarks to determine whether and when the transition uncertainty has been resolved. The most significant Ibor benchmark in which the group continues to have hedging instruments is US dollar Libor. The transition out of US dollar Libor hedging derivatives has been largely completed by the end of 2022. These transitions do not necessitate new approaches compared with any of the mechanisms used so far for transition and it will not be necessary to change the transition risk management strategy. For some of the Ibors included under the 'Other' header, in the table below, judgment has been needed to establish whether a transition is required, since there are Ibor benchmarks which are subject to computation methodology improvements and insertion of fallback provisions without full clarity being provided by their administrators on whether these Ibor benchmarks will be demised. The notional amounts of Interest Rate derivatives designated in hedge accounting relationships do not represent the extent of the risk exposure managed by the group but they are expected to be directly affected by market-wide Ibor reform and in scope of Phase 1 amendments and are shown in the table below. The cross-currency swaps designated in hedge accounting relationships and affected by Ibor reform are not significant and have not been presented below. HSBC Bank plc Annual Report and Accounts 2022 163 Hedging instrument impacted by Ibor Reform Hedging instrument Impacted by Ibor Reform NOT Impacted by Ibor Reform Notional Amount1 EUR2 GBP USD Other3 Total The group £m £m £m £m £m £m £m Fair Value Hedges 7,581 — 225 105 7,911 18,738 26,649 Cash Flow Hedges 7,359 — — — 7,359 22,136 29,495 At 31 Dec 2022 14,940 — 225 105 15,270 40,874 56,144 Fair Value Hedges 6,407 — 336 124 6,867 17,619 24,486 Cash Flow Hedges 5,877 — — — 5,877 9,190 15,067 At 31 Dec 2021 12,284 — 336 124 12,744 26,809 39,553 The bank Fair Value Hedges 5,184 — 4 104 5,292 13,099 18,391 Cash Flow Hedges — — — — — 15,017 15,017 At 31 Dec 2022 5,184 — 4 104 5,292 28,116 33,408 Fair Value Hedges 4,920 — 6 124 5,050 12,966 18,016 Cash Flow Hedges — — — — — 9,190 9,190 At 31 Dec 2021 4,920 — 6 124 5,050 22,156 27,206 1The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. 2 The notional contract amounts of euro interest rate derivatives impacted by Ibor reform mainly comprise hedges with a Euribor benchmark, which are Fair value hedges of £7,581m (31 Dec 2021: £6,407m) and Cash flow hedges £7,359m (31 Dec 2021: £5,877m). 3 Other benchmarks impacted by Ibor reform comprise derivatives that are expected to transition, but do not have a published cessation date. 15 Financial investments Carrying amount of financial investments The group The bank 2022 2021 2022 2021 £m £m £m £m Financial investments measured at fair value through other comprehensive income 29,356 41,290 12,261 23,205 – treasury and other eligible bills 1,447 2,229 693 1,441 – debt securities 27,710 38,924 11,514 21,711 – equity securities 109 103 54 53 – other instruments1 90 34 — — Debt instruments measured at amortised cost 3,248 10 6,378 3,337 – treasury and other eligible bills 1,030 2 976 — – debt securities2 2,218 8 5,402 3,337 At 31 Dec 32,604 41,300 18,639 26,542 1'Other instruments’ are comprised of loans and advances. 2The £4.2bn (2021: £3.3bn) of debt securities in the bank relates to Senior Non-Preferred debt issued by HSBC Continental Europe to comply with Single Resolution Board requirements on Minimum Required Eligible Liabilities. Equity instruments measured at fair value through other comprehensive income Instruments held at year end Fair value Dividends recognised Type of equity instruments £m £m Business facilitation 77 — Investments required by central institutions 31 — Others 1 — At 31 Dec 2022 109 — Business facilitation 76 — Investments required by central institutions 26 — Others 1 — At 31 Dec 2021 103 — Notes on the Financial Statements 164 HSBC Bank plc Annual Report and Accounts 2022 16 Assets pledged, collateral received and assets transferred Assets pledged1 Financial assets pledged as collateral The group The bank 2022 2021 2022 2021 £m £m £m £m Treasury bills and other eligible securities 1,649 990 877 990 Loans and advances to banks 3,300 — 3,300 — Loans and advances to customers 4,996 18,403 — — Debt securities 17,407 20,247 9,699 11,415 Equity securities 25,408 23,612 25,014 25,452 Cash collateral 45,034 29,963 32,255 22,961 Other 330 298 329 298 Assets pledged at 31 Dec 98,124 93,513 71,474 61,116 Financial assets pledged as collateral which the counterparty has the right to sell or repledge The group The bank 2022 2021 2022 2021 £m £m £m £m Trading assets 38,896 39,594 32,371 35,311 Financial investments 3,588 1,436 1,974 542 At 31 Dec 42,484 41,030 34,345 35,853 Assets pledged as collateral includes all assets categorised as encumbered in the disclosure on page 84 except for assets held for sale. The amount of assets pledged to secure liabilities may be greater than the book value of assets utilised as collateral. For example, in the case of securitisations and covered bonds, the amount of liabilities issued, plus mandatory over-collateralisation, is less than the book value of the pool of assets available for use as collateral. This is also the case where assets are placed with a custodian or a settlement agent that has a floating charge over all the assets placed to secure any liabilities under settlement accounts. These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and borrowing, repurchase agreements and derivative margining. The group places both cash and non-cash collateral in relation to derivative transactions. Collateral received1 The fair value of assets accepted as collateral, relating primarily to standard securities lending, reverse repurchase agreements and derivative margining, that the group is permitted to sell or repledge in the absence of default was £180,233m (2021: £202,794m) (the bank: 2022: £154,376m; 2021: £167,737m). The fair value of any such collateral sold or repledged was £136,777m (2021: £151,378m) (the bank: 2022: £113,917m; 2021: £120,436m). The group is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard securities lending, reverse repurchase agreements and derivative margining. Assets transferred1 The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending agreements, as well as swaps of equity and debt securities. For secured borrowings, the transferred asset collateral continues to be recognised in full and a related liability, reflecting the group’s obligation to repurchase the assets for a fixed price at a future date is also recognised on the balance sheet. Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral received is not recognised on the balance sheet. The group is unable to use, sell or pledge the transferred assets for the duration of these transactions, and remains exposed to interest rate risk and credit risk on these pledged assets. The counterparty’s recourse is not limited to the transferred assets. Transferred financial assets not qualifying for full derecognition and associated financial liabilities Carrying amount of: Transferred assets Associated liabilities The group £m £m At 31 Dec 2022 Repurchase agreements 13,349 13,371 Securities lending agreements 29,171 3,442 At 31 Dec 2021 Repurchase agreements 11,710 11,732 Securities lending agreements 29,321 2,129 1 Excludes assets classified as held for sale. HSBC Bank plc Annual Report and Accounts 2022 165 Transferred financial assets not qualifying for full derecognition and associated financial liabilities Carrying amount of: Transferred assets Associated liabilities The bank £m £m At 31 Dec 2022 Repurchase agreements 5,795 5,795 Securities lending agreements 28,550 3,467 At 31 Dec 2021 Repurchase agreements 4,489 4,488 Securities lending agreements 31,365 2,132 17 Interests in associates and joint ventures Principal associates of the group and the bank Business Growth Fund Group plc (‘BGF’) is a principal associate of the group. BGF is an independent company, established in 2011 to provide investment to growing small to medium-sized British businesses. BGF is backed by five of the UK’s main banking groups: Barclays, HSBC, Lloyds, RBS and Standard Chartered. At 31 Dec 2022, the group had a 24.62% interest in the equity capital of BGF. Share of (Loss)/profit in BGF is £(22)m (2021: £192m; 2020: £5m) and carrying amount of interest in BGF is £673m (2021: £702m; 2020: £471m). Interests in joint ventures A list of all associates is set out on page 189. 18 Investments in subsidiaries Main subsidiaries of HSBC Bank plc1 At 31 Dec 2022 Country of incorporation or registration HSBC Bank plc’s interest in equity capital Share class % HSBC Investment Bank Holdings Limited England and Wales 100.00 £1 Ordinary HSBC Life (UK) Limited England and Wales 100.00 £1 Ordinary HSBC Trinkaus & Burkhardt GmbH Germany 99.99 €1 Ordinary HSBC Continental Europe France 99.99 €5 Actions HSBC Bank Malta p.l.c Malta 70.03 €0.3 Ordinary 1Main subsidiaries are either held directly or indirectly via intermediate holding companies. All the above prepare their financial statements up to 31 December. Details of all group subsidiaries, as required under Section 409 of the Companies Act 2006, are set out in Note 36. The principal countries of operation are the same as the countries of incorporation. Impairment testing of investments in subsidiaries At each reporting period end, HSBC Bank plc reviews investments in subsidiaries for indicators of impairment. An impairment is recognised when the carrying amount exceeds the recoverable amount for that investment. The recoverable amount is the higher of the investment’s fair value less costs of disposal and its value in use, in accordance with the requirements of IAS 36. The value in use is calculated by discounting management’s cash flow projections for the investment. The cash flows represent the Free Cash Flows ('FCF') based on the subsidiary’s binding capital requirements. •The cash flow projections for each investment are based on the latest approved plans, which includes forecast capital available for distribution based on the capital requirements of the subsidiary taking into account minimum and core capital requirements. Our cash flow projections include known climate-related opportunities and costs associated with our sustainable offering. A long term growth rate is used to extrapolate the free cash flows in perpetuity. •The growth rate reflects inflation for the country within which the investment operates and is based on the long-term average growth rates. •The rate used to discount the cash flows is based on the cost of capital assigned to each investment, which is derived using a capital asset pricing model (‘CAPM’). CAPM depends on a number of inputs reflecting financial and economic variables, including the risk- free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market’s assessment of the economic variables and management’s judgement. The discount rates for each investment are refined to reflect the rates of inflation for the countries within which the investment operates. In addition, for the purposes of testing investments for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM, with cost of capital rates produced by external sources for businesses operating in similar markets. Notes on the Financial Statements 166 HSBC Bank plc Annual Report and Accounts 2022 During 2022, an additional investment of £3.4bn is made in HSBC Continental Europe. Further, an impairment reversal of £2bn was recognised in the fourth quarter as a result of the impairment test performed which relates to the investment in subsidiary i.e. HSBC Continental Europe. This was due to updates to inputs and assumptions in the model used to estimate value-in-use ('VIU') and increase in forecast free cash flows, resulting from acquisition of HSBC Bank Malta plc and HSBC Trinkaus & Burkhardt GmbH as well as interest rates rise in the Eurozone. No investments in subsidiaries were impaired or reversed in 2021. There is no impact on the group financial statement due to these transactions. Impairment test results Investments Carrying amount Value in use Discount rate Long-term growth rate Headroom HSBC Continental Europe £m £m % % £m At 31 Dec 2022 7,743 11,507 9.95 1.56 3,764 At 31 Dec 2021 4,331 4,429 8.34 1.53 98 Sensitivities of key assumptions in calculating VIU At 31 December 2022, the investment in HSBC Continental Europe was sensitive to reasonably possible changes in the key assumptions supporting the recoverable amount. In making an estimate of reasonably possible changes to assumptions, management considers the available evidence in respect of each input to the model. These include the external range of observable discount rates, historical performance against forecast, and risks attaching to the key assumptions underlying cash flow projections. The following table presents a summary of the key assumptions underlying the most sensitive inputs to the model for HSBC Continental Europe, the key risks attaching to each, and details of a reasonably possible change to assumptions where, in the opinion of management, there is a sufficient headroom to cover the changes which could not result in an impairment. Reasonably possible changes in key assumptions Input Key assumptions Associated risks Reasonably possible change Investment HSBC Continental Europe Free Cash Flows projections •Level of interest rates and yield curves. •Competitors’ positions within the market. •Level and change in unemployment rates. •Customer remediation and regulatory actions. •Achievement of strategic actions relating to revenue and costs. •FCF projections decrease by 10% . •Achievement of revenue and cost targets. Discount rate •Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business. •External evidence arises to suggest that the rate used is not appropriate to the business. •Discount rate increases by 1%. Sensitivity of VIU to reasonably possible changes in key assumptions and changes to current assumptions to reduce headroom to nil Increase/(decrease) Investments Carrying amount Value in use Discount rate Free Cash flows At 31 Dec 2022 £m £m bps % HSBC Continental Europe 7,743 11,507 614 (33.3) 19 Structured entities The group is mainly involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets, conduits and investment funds, established either by the group or a third party. Consolidated structured entities Total assets of the group’s consolidated structured entities, split by entity type Conduits Securitisations HSBC managed funds Other Total £m £m £m £m £m At 31 Dec 2022 3,479 192 3,981 463 8,115 At 31 Dec 2021 3,233 287 4,653 568 8,741 Conduits The group has established and manages two types of conduits: securities investment conduits (‘SICs’) and multi-seller conduits. Securities investment conduits The SICs purchase highly rated ABSs to facilitate tailored investment opportunities. At 31 Dec 2022, Solitaire, the group's principal SIC held £1.1bn of ABSs (2021: £1.2bn). It is currently funded entirely by commercial paper (‘CP’) issued to the group. At 31 Dec 2022, the group held £1.3bn of CP (2021: £1.3bn). Multi-seller conduits The group's multi-seller conduit was established to provide access to flexible market-based sources of finance for its clients. Currently, the group bears risk equal to transaction-specific facility offered to the multi-seller conduits, amounting to £4.7bn at 31 December 2022 (2021: £4.6bn). First loss protection is provided by the originator of the assets, and not by the group, through transaction-specific credit enhancements. A layer of secondary loss protection is provided by the group in the form of programme-wide enhancement facilities. HSBC Bank plc Annual Report and Accounts 2022 167 Securitisations The group uses structured entities to securitise customer loans and advances it originates in order to diversify the sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by the group to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. HSBC managed funds The group together with other HSBC entities has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than agent in its role as investment manager, the group controls these funds. Other The group has entered into a number of transactions in the normal course of business, which include asset and structured finance transactions where it has control of the structured entity. In addition, the group is deemed to control a number of third-party managed funds through its involvement as a principal in the funds. Unconsolidated structured entities The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by the group. The group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities. Nature and risks associated with the group’s interests in unconsolidated structured entities Securitisations HSBC managed funds Non-HSBC managed funds Other Total Total asset values of the entities (£m) 0 – 400 2 155 966 12 1,135 400 – 1,500 1 55 757 1 814 1,500 – 4,000 — 19 304 — 323 4,000 – 20,000 — 16 155 — 171 20,000+ — 3 14 — 17 Number of entities at 31 Dec 2022 3 248 2,196 13 2,460 £m £m £m £m £m Total assets in relation to the group's interests in the unconsolidated structured entities 220 4,671 4,425 925 10,241 – trading assets — 1 104 — 105 – financial assets designated and otherwise mandatorily measured at fair value — 4,665 3,869 — 8,534 – loans and advances to banks — — — — — – loans and advances to customers 220 — 452 497 1,169 – financial investments — 5 — — 5 – other assets — — — 428 428 Total liabilities in relation to the group’s interests in the unconsolidated structured entities — 4 — — 4 Other off-balance sheet commitments 34 — 571 24 629 The group's maximum exposure at 31 Dec 2022 254 4,667 4,996 949 10,866 Total asset values of the entities (£m) 0 – 400 2 157 1,194 14 1,367 400 – 1,500 — 81 774 — 855 1,500 – 4,000 — 16 354 — 370 4,000 – 20,000 — 12 149 — 161 20,000+ — 2 9 — 11 Number of entities at 31 Dec 2021 2 268 2,480 14 2,764 £m £m £m £m £m Total assets in relation to the group’s interests in the unconsolidated structured entities 193 4,414 5,225 631 10,463 – trading assets — 1 1,807 — 1,808 – financial assets designated at fair value — 4,409 3,273 — 7,682 – loans and advances to customers 193 — 49 631 873 – financial investments — 4 96 — 100 – other assets — — — — — Total liabilities in relation to group‘s interests in the unconsolidated structured entities — — 2 — 2 Other off-balance sheet commitments 20 4 916 38 978 The group's maximum exposure at 31 Dec 2021 213 4,418 6,139 669 11,439 Notes on the Financial Statements 168 HSBC Bank plc Annual Report and Accounts 2022 The maximum exposure to loss from the group’s interests in unconsolidated structured entities represents the maximum loss it could incur as a result of its involvement with these entities regardless of the probability of the loss being incurred. •For commitments, guarantees and written credit default swaps, the maximum exposure to loss is the notional amount of potential future losses. •For retained and purchased investments and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value of these interests at the balance sheet reporting date. The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to mitigate the group‘s exposure to loss. Securitisations The group has interests in unconsolidated securitisation vehicles through holding notes issued by these entities. In addition, the group has investments in ABSs issued by third-party structured entities. HSBC managed funds The group together with other HSBC entities establishes and manages money market funds and non-money market investment funds to provide customers with investment opportunities. The group, as fund manager, may be entitled to receive management and performance fees based on the assets under management. The group may also retain units in these funds. Non-HSBC managed funds The group purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs. Other The group has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to the interests disclosed above, the group enters into derivative contracts, reverse repos and stock borrowing transactions with structured entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management solutions. Group sponsored structured entities The amount of assets transferred to and income received from such sponsored entities during 2022 and 2021 was not significant. 20 Goodwill and intangible assets The group The bank 2022 2021 2022 2021 £m £m £m £m Goodwill — — 19 19 Present value of in-force long-term insurance business 1,076 811 — — Other intangible assets1 91 83 22 15 At 31 Dec 1,167 894 41 34 1Included within the group's other intangible assets is internally generated software with a net carrying value of £87m (2021: £77m). During 2022, capitalisation of internally generated software was £47m (2021: £46m), impairment was £21m (2021: £45m) and amortisation was £34m (2021: £15m). Present value of in-force long-term insurance business When calculating the present value of in-force long-term (‘PVIF’) insurance business, expected cash flows are projected after adjusting for a variety of assumptions made by each insurance operation to reflect local market conditions and management’s judgement of future trends and uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology) including valuing the cost of policyholder options and guarantees using stochastic techniques. Financial reporting Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. All changes to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved by the Financial Reporting Committee. Movements in PVIF 2022 2021 £m £m PVIF at 1 Jan 811 647 Change in PVIF of long-term insurance business 226 200 – value of new business written during the year 79 67 – expected return1 (53) (70) – assumption changes and experience variances2,3 (see below) 200 202 – other adjustments — 1 Exchange differences 39 (36) PVIF at 31 Dec 1,076 811 1‘Expected return’ represents the unwinding of the discount rate and reversal of expected cash flows for the period. 2Represents the effect of changes in assumptions on expected future profits and the difference between assumptions used in the previous PVIF calculation and actual experience observed during the year to the extent that this affects future profits. The gain of £200m in the year (2021: gain of £202m) was primarily driven by a reduction in the cost of financial guarantees in France as a result of rising interest rates during 2022. 32022 includes £52m impact recognised on the classification of France retail as discontinued operations. HSBC Bank plc Annual Report and Accounts 2022 169 Key assumptions used in the computation of PVIF for main life insurance operations Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF is sensitive to observed market movements and the impact of such changes is included in the sensitivities presented below. 2022 2021 UK France1 UK France1 % % % % Weighted average risk-free rate 3.71 2.80 0.95 0.69 Weighted average risk discount rate 3.71 4.44 0.95 1.55 Expense inflation 3.70 4.26 3.80 1.80 1For 2022, the calculation of France’s PVIF assumes a risk discount rate of 4.44% (2021: 1.55%) plus a risk margin of £83m (2021: £156m). Sensitivity to changes in economic assumptions The group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit allowances for risks not reflected in the best estimate cash flow modelling. Where the insurance operations provide options and guarantees to policyholders, the cost of these options and guarantees is accounted for as a deduction from the present value of in-force 'PVIF' asset, unless the cost of such guarantees is already allowed for as an explicit addition to liabilities under insurance contracts. See page 92 for further details of these guarantees and the impact of changes in economic assumptions on our insurance manufacturing subsidiaries. Sensitivity to changes in non-economic assumptions Policyholder liabilities and PVIF are determined by reference to non-economic assumptions including mortality and/or morbidity, lapse rates and expense rates. See page 93 for further details on the impact of changes in non-economic assumptions on our insurance manufacturing operations. 21 Prepayments, accrued income and other assets The group The bank 2022 2021 2022 2021 £m £m £m £m Cash collateral and margin receivables 44,932 29,947 32,255 22,961 Settlement accounts 6,926 4,960 5,441 4,604 Bullion 3,464 2,253 3,464 2,253 Prepayments and accrued income 1,769 1,365 994 531 Property, plant and equipment 761 846 9 10 Right-of-use assets 166 251 32 37 Reinsurers’ share of liabilities under insurance contracts (Note 4) 140 146 — — Employee benefit assets (Note 5) 73 54 12 43 Endorsements and acceptances 243 196 218 172 Other accounts 2,905 3,100 1,482 879 At 31 Dec 61,379 43,118 43,907 31,490 Prepayments, accrued income and other assets include £55,801m (2021: £39,064m) of financial assets, the majority of which are measured at amortised cost. 22 Trading liabilities The group The bank 2022 2021 2022 2021 £m £m £m £m Deposits by banks1 4,337 3,122 4,350 3,141 Customer accounts1 5,812 6,386 5,692 6,216 Other debt securities in issue 812 1,324 61 30 Other liabilities – net short positions in securities 30,304 35,601 15,662 21,774 At 31 Dec 41,265 46,433 25,765 31,161 1'Deposits by banks' and 'Customer accounts' include repos, stock lending and other amounts. Notes on the Financial Statements 170 HSBC Bank plc Annual Report and Accounts 2022 23 Financial liabilities designated at fair value The group The bank 2022 2021 2022 2021 £m £m £m £m Deposits by banks and customer accounts 4,864 4,302 4,864 4,245 Liabilities to customers under investment contracts 948 1,032 — — Debt securities in issue 20,666 26,049 13,742 14,399 Subordinated liabilities (Note 26) 809 2,225 809 2,225 At 31 Dec 27,287 33,608 19,415 20,869 The group The carrying amount of financial liabilities designated at fair value was £(3,431)m lower than the contractual amount at maturity (2021: £(1,568)m lower). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of £(292)m (2021: loss of £165m). The bank The carrying amount of financial liabilities designated at fair value was £(2,230)m lower than the contractual amount at maturity (2021: £(2,146)m lower). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of £(139)m (2021: loss of £72m). 24 Accruals, deferred income and other liabilities The group The bank 2022 2021 2022 2021 £m £m £m £m Cash collateral and margin payables 55,470 32,309 40,356 24,204 Settlement accounts 4,915 4,767 4,485 3,996 Accruals and deferred income 1,903 1,507 1,241 859 Amount due to investors in funds consolidated by the group 991 1,315 — — Lease liabilities 269 386 45 55 Employee benefit liabilities (Note 5) 121 196 56 74 Share-based payment liability to HSBC Holdings 98 129 72 102 Endorsements and acceptances 231 189 218 172 Other liabilities 2,947 2,658 1,509 708 At 31 Dec 66,945 43,456 47,982 30,170 For the group, accruals, deferred income and other liabilities include £66,356m (2021: £42,887m), and for the bank £47,683m (2021: £29,913m) of financial liabilities, the majority of which are measured at amortised cost. HSBC Bank plc Annual Report and Accounts 2022 171 25 Provisions Restructuring costs Legal proceedings and regulatory matters Customer remediation Other provisions Total The group £m £m £m £m £m Provisions (excluding contractual commitments) At 1 Jan 2022 164 175 21 99 459 Additions 117 61 4 63 245 Amounts utilised (124) (152) (6) (34) (316) Unused amounts reversed (35) (4) (6) (23) (68) Exchange and other movements 4 (3) — (2) (1) At 31 Dec 2022 126 77 13 103 319 Contractual commitments1 At 1 Jan 2022 103 Net change in expected credit loss provision and other movements 2 At 31 Dec 2022 105 Total Provisions At 31 Dec 2021 562 At 31 Dec 2022 424 Provisions (excluding contractual commitments) At 1 Jan 2021 309 237 25 103 674 Additions 91 32 11 86 220 Amounts utilised (170) (63) (10) (32) (275) Unused amounts reversed (63) (25) (6) (58) (152) Exchange and other movements (3) (6) 1 — (8) At 31 Dec 2021 164 175 21 99 459 Contractual commitments1 At 1 Jan 2021 187 Net change in expected credit loss provision and other movements (84) At 31 Dec 2021 103 Total Provisions At 31 Dec 2020 861 At 31 Dec 2021 562 1The contractual commitments include provision for off-balance sheet loan commitments and guarantees, for which expected credit losses are provided under IFRS 9. Further analysis of the movement in the expected credit loss is disclosed within the 'Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees' table on page 53. Restructuring costs Legal proceedings and regulatory matters Customer remediation Other provisions Total The bank £m £m £m £m £m Provisions (excluding contractual commitments) At 1 Jan 2022 12 155 13 27 207 Additions 36 51 1 32 120 Amounts utilised (14) (146) (3) (11) (174) Unused amounts reversed (17) (3) (3) (13) (36) Exchange and other movements — — — — — At 31 Dec 2022 17 57 8 35 117 Contractual commitments1 At 1 Jan 2022 43 Net change in expected credit loss provision and other movements 7 At 31 Dec 2022 50 Total Provisions At 31 Dec 2021 250 At 31 Dec 2022 167 Notes on the Financial Statements 172 HSBC Bank plc Annual Report and Accounts 2022 Restructuring costs Legal proceedings and regulatory matters Customer remediation Other provisions Total The bank £m £m £m £m £m Provisions (excluding contractual commitments) At 1 Jan 2021 39 198 17 52 306 Additions 54 23 7 30 114 Amounts utilised (54) (32) (8) (15) (109) Unused amounts reversed (26) (24) (4) (40) (94) Exchange and other movements (1) (10) 1 — (10) At 31 Dec 2021 12 155 13 27 207 Contractual commitments1 At 1 Jan 2021 107 Net change in expected credit loss provision and other movements (64) At 31 Dec 2021 43 Total Provisions At 31 Dec 2020 413 At 31 Dec 2021 250 1The contractual commitments provision includes off-balance sheet loan commitments and guarantees, for which expected credit losses are provided under IFRS 9. Further analysis of the movement in the expected credit loss is disclosed within the 'Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including loan commitments and financial guarantees' table on page 53. Restructuring costs These provisions comprise the estimated cost of restructuring, including redundancy costs where an obligation exists. Additions made during the year relate to formal restructuring plans made within the group. Legal proceedings and regulatory matters Further details of legal proceedings and regulatory matters are set out in Note 32. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim), or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulatory or law enforcement agencies in connection with alleged wrongdoing. 26 Subordinated liabilities Subordinated liabilities The group The bank 2022 2021 2022 2021 £m £m £m £m At amortised cost 14,528 12,488 14,252 12,218 – subordinated liabilities 13,828 11,788 14,252 12,218 – preferred securities 700 700 — — Designated at fair value (Note 23) 809 2,225 809 2,225 – subordinated liabilities 809 2,225 809 2,225 At 31 Dec 15,337 14,713 15,061 14,443 Subordinated liabilities rank behind senior obligations and consist of capital instruments and other instruments. Capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may reset or become floating rate based on relevant market rates. On subordinated liabilities other than floating rate notes, interest is payable at fixed rates of up to 7.65%. The balance sheet amounts disclosed below are presented on an IFRS basis and do not reflect the amount that the instruments contribute to regulatory capital due to the inclusion of issuance costs, regulatory amortisation and regulatory eligibility limits. HSBC Bank plc Annual Report and Accounts 2022 173 Subordinated liabilities of the group Carrying amount 2022 2021 £m £m Additional tier 1 instruments guaranteed by the bank £700m 5.844% Non-cumulative Step-up Perpetual Preferred Securities1,5,6 569 700 Tier 2 instruments $750m 3.43% Subordinated Loan 2022 — 558 £300m 6.5% Subordinated Notes 20233 134 300 £1,500m Floating Rate Subordinated Loan 2023 — 1,260 €1,500m Floating Rate Subordinated Loan 2032 1,326 — €1,500m Floating Rate Subordinated Loan 2024 1,329 1,260 $300m 7.65% Subordinated Notes 20252 141 222 $750m HSBC Bank plc 4.19% Subordinated Loan 2027 593 604 €300m Floating Rate Subordinated Loan 2027 — 252 £200m Floating Rate Subordinated Loan 2028 200 200 €300m Floating Rate Subordinated Loan 2028 266 252 €260m Floating Rate Subordinated Loan 2029 230 218 £350m 5.375% Callable Subordinated Step-up Notes 20303,4,6 60 398 $2,000m HSBC Bank plc 1.625% Subordinated Loan 2031 1,497 1,457 €2,000m HSBC Bank plc 0.375% Subordinated Loan 2031 1,583 1,658 €2,000m HSBC Bank plc 0.375% Subordinated Loan 2031 1,583 1,658 €1,250m HSBC Bank plc 0.25% Subordinated Loan 2031 990 1,036 £500m 5.375% Subordinated Notes 20333 152 665 £225m 6.25% Subordinated Notes 20413 47 224 £600m 4.75% Subordinated Notes 20463 191 595 $750m Undated Floating Rate Primary Capital Notes 624 554 $500m Undated Floating Rate Primary Capital Notes 415 369 $300m Undated Floating Rate Primary Capital Notes (Series 3) 249 222 $1,250m HSBC Bank plc floating Subordinated Loan 2028 1,035 — $1,100m HSBC Bank plc floating Subordinated Loan 2033 910 — €400m HSBC Bank plc floating Subordinated Loan 2028 362 — €400m HSBC Bank plc floating Subordinated Loan 2027 361 — €500m HSBC Bank plc floating Subordinated Loan 2028 443 — Other Tier 2 instruments each less than £100m 47 51 At 31 Dec 15,337 14,713 1The value of the security partially decreased as a result of a fair value hedge gain. The instrument was held at amortised cost in 2021. Also, the interest rate payable after November 2031 is the sum of the compounded daily Sonia rate plus 2.0366%. 2The bank tendered for this security in November 2022. The principal balance is $180m. The original notional value of the security is $300m. 3The bank tendered for these securities in November 2022. The principal balance is £135m, £61m, £157m, £70m and £237m respectively. The original notional values of these securities are £300m, £350m, £500m, £225m and £600m respectively. 4 The interest rate payable after November 2025 is the sum of the compounded daily Sonia rate plus 1.6193%. 5 See paragraph below, ‘Guaranteed by HSBC Bank plc’. 6 These securities are ineligible for inclusion in the capital base of the group. Guaranteed by HSBC Bank plc A capital security guaranteed by the bank was issued by a Jersey limited partnership. The proceeds of this was lent to the bank by the limited partnership in the form of a subordinated note. It qualified as additional tier 1 capital for the group (on a solo and consolidated basis) under CRR II until 31 December 2021 by virtue of the application of grandfathering provisions. Since 31 December 2021, this security has no longer qualified as regulatory capital for the group. This preferred security, together with the guarantee, is intended to provide investors with rights to income, capital distributions and distributions upon liquidation of the company that are equivalent to the rights that they would have had if they had purchased non- cumulative perpetual preference shares of the company. There are limitations on the payment of distributions if such payments are prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC’s capital adequacy requirements, or if the bank has insufficient distributable reserves (as defined). The bank has individually covenanted that, if prevented under certain circumstances from paying distributions on the preferred security in full, it will not pay dividends or other distributions in respect of its ordinary shares, or repurchase or redeem its ordinary shares, until the distribution on the preferred security has been paid in full. If the preferred security guaranteed by the bank is outstanding in November 2048, or if the total capital ratio of the group (on a solo or consolidated basis) falls below the regulatory minimum required, or if the Directors expect it to do so in the near term, provided that proceedings have not been commenced for the liquidation, dissolution or winding up of the bank, the holders’ interests in the preferred security guaranteed by the bank will be exchanged for interests in preference shares issued by the bank that have economic terms which are in all material respects equivalent to the preferred security and its guarantee. Tier 2 securities Tier 2 capital securities are either perpetual or dated subordinated securities on which there is an obligation to pay coupons. These capital securities are included within the group’s regulatory capital base as tier 2 capital under CRR II, either as fully eligible capital or by virtue of the application of grandfathering provisions. In accordance with CRR II, the capital contribution of all tier 2 securities is amortised for regulatory purposes in their final five years before maturity. Notes on the Financial Statements 174 HSBC Bank plc Annual Report and Accounts 2022 27 Maturity analysis of assets, liabilities and off-balance sheet commitments Contractual maturity of financial liabilities The balances in the table below do not agree directly with those in our consolidated balance sheet as the table incorporates, on an undiscounted basis, all cash flows relating to principal and future coupon payments (except for trading liabilities and derivatives not treated as hedging derivatives). Undiscounted cash flows payable in relation to hedging derivative liabilities are classified according to their contractual maturities. Trading liabilities and derivatives not treated as hedging derivatives are included in the ‘Due not more than 1 month’ time bucket and not by contractual maturity. In addition, loans and other credit-related commitments, and financial guarantees are generally not recognised on our balance sheet. The undiscounted cash flows potentially payable under loan and other credit-related commitments and financial guarantees are classified on the basis of the earliest date they can be called. Cash flows payable under financial liabilities by remaining contractual maturities Due not more than 1 month Due over 1 month but not more than 3 months Due between 3 and 12 months Due between 1 and 5 years Due after 5 years Total The group £m £m £m £m £m £m Deposits by banks 16,178 36 2,479 1,994 256 20,943 Customer accounts 197,400 11,821 6,441 127 285 216,074 Repurchase agreements – non-trading 30,572 1,793 203 427 — 32,995 Trading liabilities 41,265 — — — — 41,265 Financial liabilities designated at fair value 9,558 1,950 4,887 7,200 6,857 30,452 Derivatives 218,015 88 391 1,382 437 220,313 Debt securities in issue 832 3,047 2,352 812 851 7,894 Subordinated liabilities 9 137 427 3,300 14,713 18,586 Other financial liabilities1 65,305 272 824 180 1,080 67,661 579,134 19,144 18,004 15,422 24,479 656,183 Loan and other credit-related commitments 127,913 — — — — 127,913 Financial guarantees2 5,327 — — — — 5,327 At 31 Dec 2022 712,374 19,144 18,004 15,422 24,479 789,423 Deposits by banks 16,783 1,555 1,106 12,277 401 32,122 Customer accounts 196,609 5,599 2,770 199 101 205,278 Repurchase agreements – non-trading 24,273 1,924 1,061 7 — 27,265 Trading liabilities 46,433 — — — — 46,433 Financial liabilities designated at fair value 9,358 2,790 4,310 8,269 11,873 36,600 Derivatives 139,040 46 104 406 581 140,177 Debt securities in issue 2,755 2,952 2,145 1,328 335 9,515 Subordinated liabilities 14 62 123 3,969 10,734 14,902 Other financial liabilities1 40,292 423 442 234 1,417 42,808 475,557 15,351 12,061 26,689 25,442 555,100 Loan and other credit-related commitments 119,476 — — — — 119,476 Financial guarantees2 11,054 — — — — 11,054 At 31 Dec 2021 606,087 15,351 12,061 26,689 25,442 685,630 HSBC Bank plc Annual Report and Accounts 2022 175 Cash flows payable under financial liabilities by remaining contractual maturities (continued) Due not more than 1 month Due over 1 month but not more than 3 months Due between 3 and 12 months Due between 1 and 5 years Due after 5 years Total The bank £m £m £m £m £m £m Deposits by banks 13,327 6 214 53 — 13,600 Customer accounts 129,308 8,578 3,867 3 — 141,756 Repurchase agreements – non-trading 27,436 1,663 203 427 — 29,729 Trading liabilities 25,765 — — — — 25,765 Financial liabilities designated at fair value 9,446 646 4,303 3,820 3,967 22,182 Derivatives 192,521 88 365 1,372 434 194,780 Debt securities in issue — 2,878 1,525 83 314 4,800 Subordinated liabilities 9 137 417 3,283 14,874 18,720 Other financial liabilities 48,283 180 297 18 18 48,796 446,095 14,176 11,191 9,059 19,607 500,128 Loan and other credit-related commitments 36,474 — — — — 36,474 Financial guarantees2 1,363 — — — — 1,363 At 31 Dec 2022 483,932 14,176 11,191 9,059 19,607 537,965 Deposits by banks 18,053 4,781 1,516 1,453 — 25,803 Customer accounts 119,749 3,504 1,453 2 — 124,708 Repurchase agreements – non-trading 19,707 1,575 1,061 7 — 22,350 Trading liabilities 31,161 — — — — 31,161 Financial liabilities designated at fair value 9,241 1,597 3,723 2,360 7,055 23,976 Derivatives 127,352 46 104 379 574 128,455 Debt securities in issue 1,480 1,915 845 1,118 327 5,685 Subordinated liabilities 14 62 111 3,700 11,202 15,089 Other financial liabilities 29,248 320 148 28 22 29,766 356,005 13,800 8,961 9,047 19,180 406,993 Loan and other credit-related commitments 32,471 — — — — 32,471 Financial guarantees2 1,270 — — — — 1,270 At 31 Dec 2021 389,746 13,800 8,961 9,047 19,180 440,734 1Excludes financial liabilities of disposal groups. 2Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied. Maturity analysis of financial assets and financial liabilities The following table provides an analysis of financial assets and liabilities by residual contractual maturity at the balance sheet date. These balances are included in the maturity analysis as follows: •Financial assets and liabilities with no contractual maturity (such as equity securities) are included in the ‘Due after more than 1 year’ time bucket. Undated or perpetual instruments are classified based on the contractual notice period, which the counterparty of the instrument is entitled to give. Where there is no contractual notice period, undated or perpetual contracts are included in the ‘Due after more than 1 year’ time bucket. •Financial instruments included within assets and liabilities of disposal groups held for sale are classified on the basis of the contractual maturity of the underlying instruments and not on the basis of the disposal transaction. •Liabilities under investment contracts are classified in accordance with their contractual maturity. Undated investment contracts are included in the ‘Due after more than 1 year’ time bucket, however, such contracts are subject to surrender and transfer options by the policyholders. Notes on the Financial Statements 176 HSBC Bank plc Annual Report and Accounts 2022 Maturity analysis of financial assets and financial liabilities 2022 2021 Due within 1 year Due after more than 1 year Total Due within 1 year Due after more than 1 year Total The group £m £m £m £m £m £m Assets Financial assets designated or otherwise mandatorily measured at fair value 1,391 14,490 15,881 3,225 15,424 18,649 Loans and advances to banks 15,867 1,242 17,109 8,841 1,943 10,784 Loans and advances to customers 38,405 34,209 72,614 40,837 50,340 91,177 Reverse repurchase agreement – non-trading 52,324 1,625 53,949 53,079 1,369 54,448 Financial investments 7,201 25,403 32,604 6,748 34,552 41,300 Other financial assets 55,369 428 55,797 38,851 203 39,054 Assets held for sale 4,174 17,040 21,214 9 — 9 At 31 Dec 174,731 94,437 269,168 151,590 103,831 255,421 Liabilities Deposits by banks 18,674 2,162 20,836 19,439 12,749 32,188 Customer accounts 215,562 386 215,948 204,973 268 205,241 Repurchase agreements – non-trading 32,486 415 32,901 27,252 7 27,259 Financial liabilities designated at fair value 16,281 11,006 27,287 16,329 17,279 33,608 Debt securities in issue 6,149 1,119 7,268 7,840 1,588 9,428 Other financial liabilities 65,108 1,248 66,356 41,131 1,754 42,885 Subordinated liabilities 142 14,386 14,528 8 12,480 12,488 Liabilities of disposal groups held for sale 21,621 3,090 24,711 — — — At 31 Dec 376,023 33,812 409,835 316,972 46,125 363,097 The bank Assets Financial assets designated or otherwise mandatorily measured at fair value 1,287 331 1,618 2,796 419 3,215 Loans and advances to banks 13,338 1,148 14,486 5,267 1,511 6,778 Loans and advances to customers 25,814 11,178 36,992 23,609 10,327 33,936 Reverse repurchase agreement – non-trading 41,430 1,625 43,055 38,759 949 39,708 Financial investments 3,415 15,224 18,639 4,580 21,962 26,542 Other financial assets 39,605 2 39,607 28,812 — 28,812 At 31 Dec 124,889 29,508 154,397 103,823 35,168 138,991 Liabilities Deposits by banks 13,543 51 13,594 14,655 — 14,655 Customer accounts 141,712 2 141,714 124,704 2 124,706 Repurchase agreements – non-trading 29,223 415 29,638 22,337 7 22,344 Financial liabilities designated at fair value 14,290 5,125 19,415 14,425 6,444 20,869 Debt securities in issue 4,341 315 4,656 4,240 1,418 5,658 Other financial liabilities 47,651 32 47,683 29,868 44 29,912 Subordinated liabilities 133 14,119 14,252 — 12,218 12,218 At 31 Dec 250,893 20,059 270,952 210,229 20,133 230,362 28 Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously (‘the offset criteria’). In the following table, the ‘Amounts not set off in the balance sheet’ include transactions where: •the counterparty has an offsetting exposure with the group and a master netting or similar arrangement is in place with a right of set off only in the event of default, insolvency or bankruptcy, or the offset criteria are not otherwise satisfied; and •in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-cash collateral (debt securities and equities) has been received/pledged to cover net exposure in the event of a default or other predetermined events. The effect of over-collateralisation is excluded. ‘Amounts not subject to enforceable master netting agreements’ include contracts executed in jurisdictions where the rights of set off may not be upheld under the local bankruptcy laws, and transactions where a legal opinion evidencing enforceability of the right of offset may not have been sought, or may have been unable to obtain. For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and the relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right of offset remains appropriate. HSBC Bank plc Annual Report and Accounts 2022 177 Amounts subject to enforceable netting arrangements Amounts not subject to enforceable netting arrangements5 Total Amounts not set off in the balance sheet Gross amounts Amounts offset Net amounts in the balance sheet Financial instruments, including non- cash collateral6 Cash collateral Net amount £m £m £m £m £m £m £m £m Financial assets Derivatives (Note 14)1 303,911 (79,799) 224,112 (193,720) (29,998) 394 1,126 225,238 Reverse repos, stock borrowing and similar agreements classified as2: – trading assets 14,490 (196) 14,294 (14,293) — 1 63 14,357 – non-trading assets 103,839 (52,268) 51,571 (51,310) (260) 1 2,378 53,949 Loans and advances to customers3 17,979 (8,105) 9,874 (8,143) — 1,731 1 9,875 At 31 Dec 2022 440,219 (140,368) 299,851 (267,466) (30,258) 2,127 3,568 303,419 Derivatives (Note 14)1 160,801 (20,689) 140,112 (114,985) (24,277) 850 1,109 141,221 Reverse repos, stock borrowing and similar agreements classified as2: – trading assets 11,960 (156) 11,804 (11,804) — — 40 11,844 – non-trading assets 125,935 (72,788) 53,147 (53,044) (103) — 1,301 54,448 Loans and advances to customers3 14,741 (6,091) 8,650 (7,053) — 1,597 5 8,655 At 31 Dec 2021 313,437 (99,724) 213,713 (186,886) (24,380) 2,447 2,455 216,168 Financial liabilities Derivatives (Note 14)1 297,341 (79,799) 217,542 (197,201) (19,662) 679 1,325 218,867 Repos, stock lending and similar agreements classified as2: – trading liabilities 10,180 (196) 9,984 (9,983) — 1 2 9,986 – non-trading liabilities 85,168 (52,268) 32,900 (32,719) (182) (1) 1 32,901 Customer accounts4 24,082 (8,105) 15,977 (8,143) — 7,834 10 15,987 At 31 Dec 2022 416,771 (140,368) 276,403 (248,046) (19,844) 8,513 1,338 277,741 Derivatives (Note 14)1 159,169 (20,689) 138,480 (124,745) (13,273) 462 888 139,368 Repos, stock lending and similar agreements classified as2: – trading liabilities 9,444 (156) 9,288 (9,288) — — 13 9,301 – non-trading liabilities 100,031 (72,788) 27,243 (27,090) (153) — 16 27,259 Customer accounts4 21,846 (6,091) 15,755 (7,053) — 8,702 11 15,766 At 31 Dec 2021 290,490 (99,724) 190,766 (168,176) (13,426) 9,164 928 191,694 1At 31 Dec 2022, the amount of cash margin received that had been offset against the gross derivatives assets was £2,373m (2021: £2,590m). The amount of cash margin paid that had been offset against the gross derivatives liabilities was £7,279m (2021: £6,180m). 2For the amount of repos, reverse repos, stock lending, stock borrowing and similar agreements recognised on the balance sheet within 'Trading assets' and 'Trading liabilities', see the 'Funding sources and uses' table on page 83. 3At 31 Dec 2022, the total amount of 'Loans and advances to customers' recognised on the balance sheet was £72,614m (2021: £91,177m) of which £9,874m (2021: £8,650m) was subject to offsetting. 4At 31 Dec 2022, the total amount of 'Customer accounts' recognised on the balance sheet was £215,948m (2021: £205,241m) of which £15,977m (2021: £15,755m) was subject to offsetting. 5These exposures continue to be secured by financial collateral, but we may not have sought or been able to obtain a legal opinion evidencing enforceability of the right of offset. 6The disclosure has been enhanced this year to support consistency across Group entities. All financial instruments (whether recognised on our balance sheet or as non-cash collateral received or pledged) are presented within ‘financial instruments, including non-cash collateral‘ as balance sheet classification has no effect on the rights of set-off associated with financial instruments. Comparative data have been represented accordingly. 29 Called up share capital and other equity instruments Issued and fully paid HSBC Bank plc £1.00 ordinary shares 2022 2021 Number £m Number £m At 1 Jan 796,969,111 797 796,969,111 797 At 31 Dec 796,969,112 797 796,969,111 797 HSBC Bank plc share premium 2022 2021 £m £m At 31 Dec 420 — Notes on the Financial Statements 178 HSBC Bank plc Annual Report and Accounts 2022 Total called up share capital and share premium 2022 2021 £m £m At 31 Dec 1,217 797 HSBC Bank plc $0.01 non-cumulative third dollar preference shares 2022 2021 Number £000 Number £000 At 1 Jan and 31 Dec 35,000,000 172 35,000,000 172 The bank has no obligation to redeem the preference shares but may redeem them in part or in whole at any time, subject to prior notification to the Prudential Regulation Authority ('PRA'). Dividends on the preference shares in issue are paid annually at the sole and absolute discretion of the Board of Directors. The Board of Directors will not declare a dividend on the preference shares in issue if (i) payment of the dividend would cause a breach of the capital adequacy requirements of the bank (or its subsidiary undertakings) under applicable laws or regulations or (ii) the distributable profits of the bank are insufficient to enable the payment in full or in part (as applicable) of the dividends on the preference shares in issue. If either the solo or consolidated Common Equity Tier 1 Capital Ratio of the bank as of any date falls below 7.00% (a so-called 'right conversion event'), the rights attaching to the preference shares shall be altered irrevocably and permanently such that they have the same rights attaching to them as ordinary shares. Holders of the preference shares in issue will be able to attend any general meetings of shareholders of the bank and to vote on any resolution proposed to vary or abrogate any of the rights attaching to the preference shares or any resolution proposed to reduce the paid up capital of the preference shares. If the dividend payable on the preference shares in issue has not been paid in full for the most recent dividend period, if a rights conversion event has occured or if any resolution is proposed for the winding-up of the bank or the sale of its entire business then, in such circumstances, holders of preference shares will be entitled to vote on all matters put to general meetings. In the case of unpaid dividends, the holders of preference shares in issue will be entitled to attend and vote at any general meetings until such time as dividends on the preference shares for the most recent dividend period have been paid in full, or a sum set aside for such payment in full, in respect of one dividend period. All shares in issue are fully paid. Other equity instruments HSBC Bank plc additional tier 1 instruments 2022 2021 £m £m €1,900m Undated Subordinated Resettable Additional Tier 1 instrument issued 2015 (Callable December 2020 onwards) 1,388 1,388 €235m Undated Subordinated Resettable Additional Tier 1 instrument issued 2016 (Callable January 2022 onwards) 197 197 €300m Undated Subordinated Resettable Additional Tier 1 instrument 2018 (Callable March 2023 onwards) 263 263 £555m Undated Subordinated Resettable Additional Tier 1 instrument 2018 (Callable March 2023 onwards) 555 555 £500m Undated Subordinated Resettable Additional Tier 1 instrument 2019 (Callable November 2024 onwards) 500 500 €250m Undated Subordinated Resettable Additional Tier 1 instrument 2019 (Callable November 2024 onwards) 213 213 £431m Undated Subordinated Resettable Additional Tier 1 instrument 2019 (Callable December 2024 onwards) 431 431 €200m Undated Subordinated Resettable Additional Tier 1 instrument 2019 (Callable January 2025 onwards) 175 175 €250m Undated Subordinated Resettable Additional Tier 1 instruments issued 2022 (Callable March 2027 onwards) 208 — At 31 Dec 3,930 3,722 These instruments are held by HSBC Holdings plc. The bank has issued capital instruments that are included in the group’s capital base as fully CRR II compliant additional tier 1 capital. Interest on these instruments will be due and payable only at the sole discretion of the bank, and the bank has sole and absolute discretion at all times and for any reason to cancel (in whole or in part) any interest payment that would otherwise be payable on any date. There are limitations on the payment of principal, interest or other amounts if such payments are prohibited under UK banking regulations, or other requirements, if the bank has insufficient distributable items reserves or if the bank fails to satisfy the solvency condition as defined in the instruments terms. The instruments are undated and are repayable, at the option of the bank, in whole at the initial call date, or on any Interest Payment Date after the initial call date. In addition, the instruments are repayable at the option of the bank in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the Prudential Regulation Authority. These instruments rank pari passu with the bank’s most senior class or classes of issued preference shares and therefore ahead of ordinary shares. These instruments will be written down in whole, together with any accrued but unpaid interest if either the group’s solo or consolidated Common Equity Tier 1 Capital Ratio falls below 7.00%. HSBC Bank plc Annual Report and Accounts 2022 179 30 Contingent liabilities, contractual commitments, guarantees and contingent assets The group The bank 2022 2021 2022 2021 £m £m £m £m Guarantees and other contingent liabilities: – financial guarantees 5,327 11,054 1,363 1,270 – performance and other guarantees 17,136 15,833 6,886 7,334 – other contingent liabilities 353 367 342 364 At 31 Dec 22,816 27,254 8,591 8,968 Commitments:1 – documentary credits and short-term trade-related transactions 2,317 1,928 820 778 – forward asset purchases and forward deposits placed 33,684 30,005 3,317 1,138 – standby facilities, credit lines and other commitments to lend 91,912 87,543 32,337 30,555 At 31 Dec 127,913 119,476 36,474 32,471 1Includes £126,457m of commitments (2021: £115,695m), to which the impairment requirements in IFRS 9 are applied where the group has become party to an irrevocable commitment. The above table discloses the nominal principal amounts, which represent the maximum amounts at risk should the contracts be fully drawn upon and clients default. As a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements. UK branches of HSBC overseas entities In December 2017, HM Revenue & Customs (‘HMRC’) challenged the VAT status of certain UK branches of HSBC overseas entities. HMRC has also issued notices of assessment covering the period from 1 October 2013 to 31 December 2017 totalling £262m, with interest to be determined. No provision has been recognised in respect of these notices. In Q1 2019, HMRC reaffirmed its assessment that the UK branches are ineligible to be members of the UK VAT group and, consequently, HSBC paid HMRC the sum of £262m and filed appeals. In February 2022, the Upper Tribunal issued a judgement addressing several preliminary legal issues, which was partially in favour of HMRC and partially in favour of HSBC. The case will now return to the First-tier Tax tribunal for full trial and we await confirmation of the trial window. Since January 2018, HSBC’s returns have been prepared on the basis that the UK branches are not in the UK VAT group. In the event that HSBC’s appeals are successful, HSBC will seek a refund of this VAT, of which £174m is estimated to be attributable to HSBC Bank plc. Contingent liabilities arising from legal proceedings, regulatory and other matters against group companies are disclosed in Note 32. Financial Services Compensation Scheme The Financial Services Compensation Scheme (‘FSCS’) provides compensation, up to certain limits, to eligible customers of financial services firms that are unable, or likely to be unable, to pay claims against them. The FSCS may impose a further levy on the group to the extent the industry levies imposed to date are not sufficient to cover the compensation due to customers in any future possible collapse. The ultimate FSCS levy to the industry as a result of collapse cannot be estimated reliably. It is dependent on various uncertain factors including the potential recovery of assets by the FSCS, changes in the level of protected products (including deposits and investments) and the population of FSCS members at the time. In December 2022, the FCA announced that it expects to review various elements of the scheme to ensure consumers are appropriately and proportionately protected, with costs distributed across industry levy payers in a fair and sustainable way, with a view to deliver the majority of changes by the end of the 2023/24 financial year. Guarantees The group The bank 2022 2021 2022 2021 In favour of third parties By the group in favour of other HSBC Group entities In favour of third parties By the group in favour of other HSBC Group entities In favour of third parties By the bank in favour of other HSBC Group entities In favour of third parties By the bank in favour of other HSBC Group entities £m £m £m £m £m £m £m £m Financial guarantees1 4,158 1,169 10,635 419 1,105 258 824 446 Performance and other guarantees 15,475 1,661 14,433 1,400 5,516 1,370 6,119 1,215 Total 19,633 2,830 25,068 1,819 6,621 1,628 6,943 1,661 1Financial guarantees contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due, in accordance with the original or modified terms of a debt instrument. The amounts in the above table are nominal principal amounts. ‘Financial guarantees’ to which the impairment requirements in IFRS 9 are applied have been presented separately from other guarantees to align with credit risk disclosures. The group provides guarantees and similar undertakings on behalf of both third-party customers and other entities within HSBC Group. These guarantees are generally provided in the normal course of the group‘s banking businesses. Guarantees with terms of more than one year are subject to the group’s annual credit review process. Notes on the Financial Statements 180 HSBC Bank plc Annual Report and Accounts 2022 31 Finance lease receivables The group leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft), property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income. 2022 2021 Total future minimum payments Unearned finance income Present value Total future minimum payments Unearned finance income Present Value £m £m £m £m £m £m Lease receivables: No later than one year 211 (24) 187 409 (20) 389 One to two years 214 (26) 188 251 (19) 232 Two to three years 207 (21) 186 187 (17) 170 Three to four years 117 (16) 101 177 (13) 164 Four to five years 100 (13) 87 90 (9) 81 Later than one year and no later than five years 638 (76) 562 705 (58) 647 Later than five years 457 (50) 407 556 (33) 523 At 31 Dec 1,306 (150) 1,156 1,670 (111) 1,559 32 Legal proceedings and regulatory matters The group is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations. Apart from the matters described below, the group considers that none of these matters are material. The recognition of provisions is determined in accordance with the accounting policies set out in Note 1. While the outcomes of legal proceedings and regulatory matters are inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of these matters as at 31 December 2022 (see Note 25). Where an individual provision is material, the fact that a provision has been made is stated and quantified, except to the extent that doing so would be seriously prejudicial. Any provision recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities. Bernard L. Madoff Investment Securities LLC Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Bernard L. Madoff Investment Securities LLC ('Madoff Securities'). Based on information provided by Madoff Securities as at 30 November 2008, the purported aggregate value of these funds was $8.4bn, including fictitious profits reported by Madoff. Based on information available to HSBC, the funds’ actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time HSBC serviced the funds are estimated to have totalled approximately $4bn. Various HSBC companies have been named as defendants in lawsuits arising out of Madoff Securities’ fraud. US litigation: The Madoff Securities Trustee has brought lawsuits against various HSBC companies and others, seeking recovery of transfers from Madoff Securities to HSBC in an amount not specified, and these lawsuits remain pending in the US Bankruptcy Court for the Southern District of New York (the 'US Bankruptcy Court'). Certain Fairfield entities (together, ‘Fairfield’) (in liquidation since July 2009) have brought a lawsuit in the US against fund shareholders, including HSBC companies that acted as nominees for clients, seeking restitution of redemption payments. In August 2022, the US District Court for the Southern District of New York (the 'New York District Court') affirmed earlier decisions by the US Bankruptcy Court that dismissed the majority of the liquidators' claims (against most of the HSBC companies). In September 2022, the remaining defendants before the US Bankruptcy Court sought leave to appeal and the liquidators filed appeals to the US Court of Appeals for the Second Circuit, which are currently pending. Meanwhile, proceedings before the US Bankruptcy Court with respect to the remaining claims are ongoing. UK litigation: The Madoff Securities Trustee has filed a claim against various HSBC companies in the High Court of England and Wales, seeking recovery of transfers from Madoff Securities to HSBC. The claim has not yet been served and the amount claimed has not been specified. Cayman Islands litigation: In February 2013, Primeo Fund (‘Primeo’) (in liquidation since April 2009) brought an action against HSBC Securities Services Luxembourg (‘HSSL’) and Bank of Bermuda (Cayman) Limited (now known as HSBC Cayman Limited), alleging breach of contract and breach of fiduciary duty and claiming monetary damages. Following dismissal of Primeo's action by the lower and appellate courts in the Cayman Islands, in 2019, Primeo appealed to the UK Privy Council. During 2021, the UK Privy Council held two separate hearings in connection with Primeo's appeal. Judgment was given against HSBC in respect of the first hearing and judgment is pending in respect of the second hearing. Luxembourg litigation: In April 2009, Herald Fund SPC (‘Herald’) (in liquidation since July 2013) brought an action against HSSL before the Luxembourg District Court, seeking restitution of cash and securities that Herald purportedly lost because of Madoff Securities’ fraud, or money damages. The Luxembourg District Court dismissed Herald’s securities restitution claim, but reserved Herald’s cash restitution and money damages claims. Herald has appealed this judgment to the Luxembourg Court of Appeal, where the matter is pending. In late 2018, Herald brought additional claims against HSSL and HSBC Bank plc before the Luxembourg District Court, seeking further restitution and damages. In October 2009, Alpha Prime Fund Limited ('Alpha Prime') brought an action against HSSL before the Luxembourg District Court, seeking the restitution of securities, or the cash equivalent, or money damages. In December 2018, Alpha Prime brought additional claims seeking damages against various HSBC companies. These matters are currently pending before the Luxembourg District Court. In December 2014, Senator Fund SPC (‘Senator’) brought an action against HSSL before the Luxembourg District Court, seeking restitution of securities, or the cash equivalent, or money damages. In April 2015, Senator commenced a separate action against the Luxembourg branch of HSBC Bank plc asserting identical claims. HSBC Bank plc Annual Report and Accounts 2022 181 In December 2018, Senator brought additional claims against HSSL and HSBC Bank plc Luxembourg branch, seeking restitution of Senator’s securities or money damages. These matters are currently pending before the Luxembourg District Court. There are many factors that may affect the range of possible outcomes, and any resulting financial impact, of the various Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the proceedings have been brought. Based upon the information currently available, management’s estimate of the possible aggregate damages that might arise as a result of all claims in the various Madoff-related proceedings is around $600m, excluding costs and interest. Due to uncertainties and limitations of this estimate, any possible damages that might ultimately arise could differ significantly from this amount. Anti-money laundering and sanctions-related matters In December 2012, HSBC Holdings plc (’HSBC Holdings’) entered into a number of agreements, including an undertaking with the UK Financial Services Authority (replaced with a Direction issued by the UK Financial Conduct Authority ('FCA') in 2013 and again in 2020) as well as a cease-and-desist order with the US Federal Reserve Board ('FRB'), both of which contained certain forward-looking anti-money laundering (‘AML’) and sanctions-related obligations. For several years thereafter, HSBC retained a Skilled Person under section 166 of the Financial Services and Markets Act and an Independent Consultant under the FRB cease-and-desist order to produce periodic assessments of the Group’s AML and sanctions compliance programme. The Skilled Person completed its engagement in the second quarter of 2021, and the FCA determined that no further Skilled Person work is required. Separately, the Independent Consultant's engagement is now complete and, in August 2022, the FRB terminated its cease-and-desist order. Since November 2014, a number of lawsuits have been filed in federal courts in the US against various HSBC companies and others on behalf of plaintiffs who are, or are related to, victims of terrorist attacks in the Middle East. In each case, it is alleged that the defendants aided and abetted the unlawful conduct of various sanctioned parties in violation of the US Anti-Terrorism Act. Nine actions against HSBC Bank plc remain pending in federal courts and HSBC Bank plc's motions to dismiss have been granted in five of these cases. In September 2022 and January 2023, respectively, the appellate courts affirmed the dismissals of two of the cases, and the plaintiffs’ requests for review of these decisions by the full appellate courts have been denied. The dismissals in the other cases are subject to appeal. The four remaining actions are at an early stage. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of the pending matters, including the timing or any possible impact on HSBC, which could be significant. London interbank offered rates, European interbank offered rates and other benchmark interest rate investigations and litigation Euro interest rate derivatives: In December 2016, the European Commission (‘EC’) issued a decision finding that HSBC, among other banks, engaged in anti-competitive practices in connection with the pricing of euro interest rate derivatives, and the EC imposed a fine on HSBC based on a one-month infringement in 2007. The fine was annulled in 2019 and a lower fine was imposed in 2021. In January 2023, the European Court of Justice dismissed an appeal by HSBC and upheld the EC's findings on HSBC's liability. A separate appeal by HSBC concerning the amount of the fine remains pending before the General Court of the European Union. US dollar Libor: Beginning in 2011, HSBC and other panel banks have been named as defendants in a number of private lawsuits filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US federal and state laws, including antitrust and racketeering laws and the Commodity Exchange Act (‘US CEA’). The lawsuits include individual and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the New York District Court. HSBC has reached class settlements with five groups of plaintiffs, and the court has approved these settlements. HSBC has also resolved several of the individual actions, although a number of other US dollar Libor-related actions remain pending. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of the pending matters, including the timing or any possible impact on HSBC, which could be significant. Foreign exchange-related investigations and litigation In June 2020, the Competition Commission of South Africa, having initially referred a complaint for proceedings before the South African Competition Tribunal in February 2017, filed a revised complaint against 28 financial institutions, including HSBC Bank plc, for alleged anti-competitive behaviour in the South African foreign exchange market. In December 2021, a hearing on HSBC Bank plc's application to dismiss the revised complaint took place before the South African Competition Tribunal, where a decision remains pending. Beginning in 2013, various HSBC companies and other banks have been named as defendants in a number of putative class actions filed in, or transferred to, the New York District Court arising from allegations that the defendants conspired to manipulate foreign exchange rates. HSBC has reached class settlements with two groups of plaintiffs, including direct and indirect purchasers of foreign exchange products, and the court has granted final approval of these settlements. In 2018, complaints alleging foreign exchange-related misconduct were filed in the New York District Court and the High Court of England and Wales against HSBC and other defendants by certain plaintiffs that opted out of the direct purchaser class action settlement in the US. In December 2022, HSBC reached a settlement-in-principle with the plaintiffs to resolve these matters. The settlement remains subject to the negotiation of definitive documentation. Additionally, in January 2023, HSBC reached a settlement-in-principle with plaintiffs in Israel to resolve a class action lawsuit filed in the local courts alleging foreign exchange-related misconduct. The settlement remains subject to the negotiation of definitive documentation and court approval. Lawsuits alleging foreign exchange-related misconduct remain pending against HSBC and other banks in courts in Brazil. It is possible that additional civil actions will be initiated against HSBC in relation to its historical foreign exchange activities. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant. Precious metals fix-related litigation Gold: Beginning in December 2015, numerous putative class actions were filed in the Ontario and Quebec Superior Courts of Justice against various HSBC companies and other financial institutions. The plaintiffs allege that, among other things, from January 2004 to March 2014, the defendants conspired to manipulate the price of gold and gold derivatives in violation of the Canadian Competition Act and common law. These actions are ongoing. Silver: Beginning in July 2014, numerous putative class actions were filed in federal district courts in New York, naming HSBC and other members of The London Silver Market Fixing Limited as defendants. The complaints, which were consolidated in the New York District Court, allege that, from January 2007 to December 2013, the defendants conspired to manipulate the price of silver and silver derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. In February 2022, following the Notes on the Financial Statements 182 HSBC Bank plc Annual Report and Accounts 2022 conclusion of pre-class certification discovery, the defendants filed a motion seeking to dismiss the plaintiffs’ antitrust claims, which remains pending. In April 2016, two putative class actions were filed in the Ontario and Quebec Superior Courts of Justice against various HSBC companies and other financial institutions. The plaintiffs in both actions allege that, from January 1999 to August 2014, the defendants conspired to manipulate the price of silver and silver derivatives in violation of the Canadian Competition Act and common law. These actions are ongoing. Platinum and palladium: Between late 2014 and early 2015, numerous putative class actions were filed in the New York District Court, naming HSBC and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The complaints allege that, from January 2008 to November 2014, the defendants conspired to manipulate the price of platinum group metals and related financial products for their collective benefit in violation of US antitrust laws and the US CEA. In March 2020, the court granted the defendants' motion to dismiss the plaintiffs’ third amended complaint but granted the plaintiffs leave to re-plead certain claims. The plaintiffs have filed an appeal. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant. Other regulatory investigations, reviews and litigation HSBC Bank plc and/or certain of its affiliates are subject to a number of other investigations and reviews by various regulators and competition and law enforcement authorities, as well as litigation, in connection with various matters relating to the firm’s businesses and operations, including: •an investigation by the US Commodity Futures Trading Commission ('CFTC') concerning compliance with records preservation requirements relating to the use of unapproved electronic messaging platforms for business communications. HSBC Bank plc has reached a settlement-in-principle with the CFTC's Division of Enforcement to resolve this investigation. The settlement is subject to the negotiation of definitive documentation and final approval by the CFTC; •an investigation by the PRA in connection with depositor protection arrangements in the UK; •an investigation by the FCA in connection with collections and recoveries operations in the UK; •an investigation by the UK Competition and Markets Authority into potentially anti-competitive arrangements involving historical trading activities relating to certain UK-based fixed income products and related financial instruments; and •two group actions pending in the US courts and a claim issued in the High Court of England and Wales in connection with HSBC Bank plc’s role as a correspondent bank to Stanford International Bank Ltd from 2003 to 2009. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant. 33 Related party transactions The immediate and ultimate parent company of the group is HSBC Holdings plc, which is incorporated in England and Wales. Copies of the Group financial statements may be obtained from the below address. HSBC Holdings plc 8 Canada Square London E14 5HQ IAS 24 ‘Related party disclosures’ defines related parties as including the parent, fellow subsidiaries, associates, joint ventures, post- employment benefit plans for HSBC employees, Key Management Personnel (‘KMP’) of the group and its ultimate parent company, close family members of the KMP and entities which are controlled, jointly controlled or significantly influenced by the KMP or their close family members. Particulars of transactions between the group and the related parties are tabulated below. The disclosure of the year-end balance and the highest amounts outstanding during the year are considered to be the most meaningful information to represent the amount of the transactions and outstanding balances during the year. Key Management Personnel The KMP of the bank are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the bank. They include the Directors and certain senior executives of the bank, directors and certain members of the Group Executive Committee of HSBC Holdings plc, to the extent they have a role in directing the affairs of the bank. The emoluments of those KMP who are not Directors or senior executives of the bank are paid by other Group companies who make no recharge to the bank. Accordingly, no emoluments in respect of these KMP are included in the following disclosure. The tables below represent the compensation for KMP (directors and certain senior executives) of the bank in exchange for services rendered to the bank for the period they served during the year. Compensation of Key Management Personnel 2022 2021 2020 £000 £000 £000 Short-term employee benefits1,2 13,487 13,678 3,865 Post-employment benefits 69 46 19 Other long-term employee benefits 1,152 1,378 429 Share-based payments 4,234 4,331 586 Year ended 31 Dec 18,942 19,433 4,899 1Includes fees paid to non-executive Directors. 22022 includes payment of £600,000 (2021: £2,091,617) relating to compensation for loss of employment. HSBC Bank plc Annual Report and Accounts 2022 183 Advances and credits, guarantees and deposit balances during the year with Key Management Personnel 2022 2021 Balance at 31 Dec Highest amounts outstanding during year2 Balance at 31 Dec Highest amounts outstanding during year £m £m £m £m Key Management Personnel1 Advances and credits — — 0.03 0.08 Deposits 21 32 11 18 1Includes close family members and entities which are controlled or jointly controlled by KMP of the bank or their close family members. 2Exchange rate applied for non-GBP amounts is the average for the year. The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features. In addition to the requirements of IAS 24, particulars of advances (loans and quasi-loans), credits and guarantees entered into by the group with Directors of HSBC Bank plc are required to be disclosed pursuant to section 413 of the Companies Act 2006. Under the Companies Act, there is no requirement to disclose transactions with other KMP. During the course of 2022, there were no advances, credits and guarantees entered into by the group with Directors of HSBC Bank plc. Other related parties Transactions and balances during the year with KMP of the bank’s ultimate parent company During the course of 2022, there were no transactions and balances between KMP of the bank’s ultimate parent company, who were not considered KMP of the bank, in respect of advances and credits, guarantees and deposits. Transactions and balances during the year with associates and joint ventures During the course of 2022, there were no transactions and balances with associates and joint ventures, in respect of loans, deposits, guarantees and commitments. The group’s transactions and balances during the year with HSBC Holdings plc and subsidiaries of HSBC Holdings plc 2022 2021 Due to/from HSBC Holdings plc Due to/from subsidiaries of HSBC Holdings plc Due to/from HSBC Holdings plc Due to/from subsidiaries of HSBC Holdings plc Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec £m £m £m £m £m £m £m £m Assets Trading assets 62 17 7,074 848 108 19 4,702 1,360 Derivatives 7,196 5,714 39,341 27,473 2,002 787 25,566 21,862 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 6 5 28 25 7 6 29 27 Loans and advances to banks — — 6,237 5,585 — — 4,890 3,173 Loans and advances to customers 183 — 496 424 — — 490 329 Financial investments 154 136 — — 172 154 — — Reverse repurchase agreements – non-trading — — 6,150 4,341 — — 2,332 1,690 Prepayments,accrued income and other assets 1,263 21 11,591 8,389 1,540 1,262 9,853 4,784 Total related party assets at 31 Dec 8,864 5,893 70,917 47,085 3,829 2,228 47,862 33,225 Liabilities Trading liabilities 45 21 522 91 158 23 116 82 Financial liabilities designated at fair value 1,162 593 — — 1,181 1,162 1,201 — Deposits by banks — — 6,034 3,310 — — 6,659 2,261 Customer accounts 6,202 4,315 3,149 1,551 2,364 1,875 3,428 3,149 Derivatives 4,345 2,680 43,384 30,997 3,443 2,074 26,152 22,133 Subordinated liabilities 12,115 12,115 — — 9,485 9,251 10,421 — Repurchase agreements – non-trading — — 5,811 5,738 — — 6,162 1,841 Provisions, accruals, deferred income and other liabilities 3,357 3,161 10,816 4,864 189 179 8,057 3,826 Total related party liabilities at 31 Dec 27,226 22,885 69,716 46,551 16,820 14,564 62,196 33,292 Guarantees and commitments — — 4,762 3,383 — — 2,622 2,061 Notes on the Financial Statements 184 HSBC Bank plc Annual Report and Accounts 2022 The group’s transactions and balances during the year with HSBC Holdings plc and subsidiaries of HSBC Holdings plc (continued) Due to/from HSBC Holdings plc Due to/from subsidiaries of HSBC Holdings plc 2022 2021 2020 2022 2021 2020 £m £m £m £m £m £m Income statement Interest income 3 4 5 178 32 55 Interest expense1 307 50 (55) 162 58 256 Fee income 9 8 13 74 61 55 Fee expense — — — 382 357 389 Trading income — — — 53 2 2 Trading expense — — — 2 — 2 Other operating income 1 7 30 149 236 365 General and administrative expenses 65 143 126 2,387 2,110 2,077 12020 negative balance relates to net impact of fixed-for-floating-interest-rate swaps which the group has entered into to manage the movements in market interest rates on certain fixed rate financial liabilities. The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties. The bank's transactions and balances during the year with HSBC Bank plc subsidiaries, HSBC Holdings plc and subsidiaries of HSBC Holdings plc 2022 2021 Due to/from subsidiaries of HSBC Bank plc subsidiaries Due to/from HSBC Holdings plc Due to/from subsidiaries of HSBC Holdings plc Due to/from subsidiaries of HSBC Bank plc subsidiaries Due to/from HSBC Holdings plc Due to/from subsidiaries of HSBC Holdings plc Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec £m £m £m £m £m £m £m £m £m £m £m £m Assets Trading assets 264 172 62 17 7,074 845 603 264 108 19 4,695 1,360 Derivatives 17,187 11,332 7,196 5,714 37,475 26,170 15,309 9,025 2,002 787 22,953 19,755 Loans and advances to banks 3,484 2,940 — — 5,197 3,892 3,172 2,259 — — 3,561 2,100 Loans and advances to customers 4,517 4,515 183 — 285 247 6,446 3,850 — — 416 242 Financial investments 4,521 4,183 — — — — 3,337 3,337 — — — — Reverse repurchase agreements – non-trading 4,683 2,332 — — 5,920 3,947 2,313 2,313 — — 2,058 1,428 Prepayments, accrued income and other assets 4,868 2,905 1,262 21 10,096 6,818 5,921 1,685 1,537 1,261 9,327 4,557 Investments in subsidiary undertakings 10,646 10,646 — — — — 6,479 6,479 — — — — Total related party assets at 31 Dec 50,170 39,025 8,703 5,752 66,047 41,919 43,580 29,212 3,647 2,067 43,010 29,442 Liabilities Trading liabilities 113 32 44 21 508 91 112 49 158 21 116 82 Financial liabilities designated at fair value — — 1,162 593 — — — — 1,181 1,162 1,201 — Deposits by banks 3,385 960 — — 3,601 1,979 1,808 1,229 — — 3,245 965 Customer accounts 1,095 514 6,202 4,315 3,048 1,426 1,287 696 2,364 1,875 3,321 3,013 Derivatives 13,479 13,361 4,345 2,680 40,460 29,001 17,378 10,190 3,443 2,074 23,787 20,182 Subordinated liabilities 700 700 11,884 11,884 — — 700 700 9,262 9,033 10,187 — Repurchase agreements – non-trading 1,279 429 — — 5,328 5,030 988 431 — — 5,670 1,645 Provisions, accruals, deferred income and other liabilities 7,596 1,015 3,349 3,167 9,511 4,437 6,166 1,127 174 166 6,423 3,302 Total related party liabilities at 31 Dec 27,647 17,011 26,986 22,660 62,456 41,964 28,439 14,422 16,582 14,331 53,950 29,189 Guarantees and commitments 4,469 2,655 — — 2,690 1,380 5,338 2,676 — — 1,686 1,130 The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties. Post-employment benefit plans The HSBC Bank (UK) Pension Scheme (the ‘Scheme’) entered into swap transactions with the bank to manage the inflation and interest rate sensitivity of the liabilities. At 31 December 2022, the gross notional value of the swaps was £5,449m (2021: £5,490m), the swaps had a positive fair value of £424m to the bank (2021: positive fair value of £766m) and the bank had delivered collateral of £425m (2021: £775m) to the Scheme in respect of these swaps. All swaps were executed at prevailing market rates and within standard market bid/ offer spreads. HSBC Bank plc Annual Report and Accounts 2022 185 34 Assets held for sale and liabilities of disposal groups held for sale Held for sale at 31 December 2022 2021 £m £m Disposal groups 23,179 3 Unallocated impairment losses1 (1,978) — Non-current assets held for sale 13 6 Total assets 21,214 9 Liabilities of disposal groups 24,711 0 1This represents impairment losses in excess of the carrying value on the non-current assets, excluded from the measurement scope of IFRS 5. Disposal groups Planned sale of our retail banking operations in France On 25 November 2021, HSBC Continental Europe signed a framework agreement with Promontoria MMB SAS (‘My Money Group’) and its subsidiary Banque des Caraïbes SA, regarding the planned sale of HSBC Continental Europe’s retail banking operations in France. The sale, which is subject to regulatory approvals and the satisfaction of other relevant conditions, includes: HSBC Continental Europe’s French retail banking operations; the Crédit Commercial de France (‘CCF’) brand; and HSBC Continental Europe’s 100% ownership interest in HSBC SFH (France) and its 3% ownership interest in Crédit Logement. The framework agreement has a long-stop date of 31 May 2024, if the sale has not closed by that point the agreement will terminate, although that date can be extended by either party to 30 November 2024 in certain circumstances or with the agreement of both parties. We have agreed a detailed plan with My Money Group with the aim of completing the sale in the second half of 2023, subject to regulatory approvals, agreement and implementation of necessary financing structures and the completion of the operational transfer, including customer and data migrations. In this regard the framework agreement imposes certain obligations on the parties in planning for completion. Given the scale and complexity of the business being sold, there is risk of delay in the implementation of this plan. The disposal group was classified as held for sale for the purposes of IFRS 5 as at 30 September 2022, reflecting the prevailing judgements concerning likelihood of the framework agreement’s timetable being achieved. The assets and liabilities classified as held for sale were determined in accordance with the framework agreement, and are subject to change as the detailed transition plan is executed. This classification and consequential remeasurement resulted in an impairment loss of £1.7bn, which included related transaction costs. At 31 December 2022, we reassessed the likelihood of completion taking account of the most recent correspondence with My Money Group concerning the implementation of the plan and related developments. As a result of this reassessment, the likelihood of completion in 2023 is judged to be highly probable. As such, and in accordance with IFRS 5, the disposal group continues to be classified as held for sale. The disposal group will be remeasured at the lower of the carrying amount and fair value less costs to sell at each reporting period. Any remaining gains or losses not previously recognised, including from the recycling of foreign currency translation reserves and the reversal of any remaining deferred tax assets and liabilities, will be recognised on completion. Planned sale of our branch operations in Greece On 24 May 2022, HSBC Continental Europe signed a sale and purchase agreement for the sale of its branch operations in Greece to Pancreta Bank SA. Completion of the transaction is subject to regulatory approval, and is currently expected to occur in the first half of 2023. At 31 December 2022, the disposal group included £0.3bn of loans and advances to customers and £1.9bn of customer accounts, which met the criteria to be classified as held for sale. In the second quarter of 2022, we recognised a loss of £0.1bn upon reclassification as held for sale in accordance with IFRS 5. On completion accumulated foreign currency translation reserves will be recycled to the income statement. Planned sale of our business in Russia On 30 June 2022, following a strategic review of our business in Russia, HSBC Europe BV (a wholly-owned subsidiary of HSBC Bank plc) entered into an agreement for the planned sell of its wholly-owned subsidiary HSBC Bank (RR) (Limited Liability Company). Completion of the transaction is subject to regulatory and governmental approval, and is currently expected to occur in the first half of 2023. In 2022, a £0.2bn loss on the planned sale was recognised, upon reclassification as held for sale in accordance with IFRS5. On completion accumulated foreign currency translation reserves will be recycled to the income statement. Notes on the Financial Statements 186 HSBC Bank plc Annual Report and Accounts 2022 At 31 December 2022, the major classes of assets and associated liabilities of disposal groups held for sale, including allocated impairment losses, were as follows: France retail business Branch operations in Greece Business in Russia Total £m £m £m £m Assets of disposal groups held for sale Cash and balances at central banks 60 1,502 — 1,562 Financial assets designated and otherwise mandatorily measured at fair value through profit and loss 39 — — 39 Loans and advances to banks — 25 102 127 Loans and advances to customers 20,776 291 — 21,067 Reverse repurchase agreements — — 208 208 Financial investments — 66 22 88 Prepayments, accrued income and other assets 63 4 21 88 Total Assets at 31 Dec 2022 20,938 1,888 353 23,179 Liabilities of disposal groups held for sale Customer accounts 18,551 1,900 27 20,478 Financial liabilities designated at fair value 2,925 — — 2,925 Debt securities in issue 1,100 — — 1,100 Accruals, deferred income and other liabilities 138 52 18 208 Total Liabilities at 31 Dec 2022 22,714 1,952 45 24,711 Expected date of completion Second Half of 2023 First Half of 2023 First Half of 2023 Operating segment WPB All global businesses CMB, GBM France retail banking operations £m Net assets/(liabilities) classified as held for sale1 (1,712) Expected cash contribution 2 3,398 Disposal group post-cash contribution 3 1,686 1Excludes impairment loss allocated against the non-current assets that are in scope of IFRS 5 measurement of £64m. 2The contributions are reported within ‘Cash and balances at central banks’ on the group’s consolidated balance sheet. 3‘Disposal group post-cash contribution’ includes the net asset value of the transferring business of €1.6bn (£1.5bn) and £0.2bn of additional items to which a nil value is ascribed per the framework agreement. Under the financial terms of the planned transaction, HSBC Continental Europe will transfer the business with a net asset value of €1.6bn (£1.5bn), subject to adjustment (upwards or downwards) in certain circumstances, for a consideration of €1. Any required increase to the net asset value of the business to achieve the net asset value of €1.6bn (£1.5bn) will be satisfied by the inclusion of additional cash. The value of cash contribution will be determined by the net asset or liability position of the disposal group at the point of completion. Based upon the net liabilities of the disposal group at 31 December 2022, HSBC would be expected to include a cash contribution of £3.4bn as part of the planned transaction. 35 Events after the balance sheet date In its assessment of events after the balance sheet date, the group has considered and concluded that there are no events requiring adjustment or disclosures in the financial statements. 36 HSBC Bank plc’s subsidiaries, joint ventures and associates In accordance with section 409 of the Companies Act 2006 a list of HSBC Bank plc subsidiaries, joint ventures and associates, their registered office address and the effective percentage of equity owned at 31 December 2022 is disclosed below. Unless otherwise stated, the share capital comprises ordinary or common shares which are held by HSBC Bank plc or its subsidiaries. The ownership percentage is provided for each undertaking. The undertakings below are consolidated by HSBC Bank plc unless otherwise indicated. HSBC Bank plc's registered office address is: HSBC Bank plc 8 Canada Square London E14 5HQ HSBC Bank plc Annual Report and Accounts 2022 187 Subsidiaries The undertakings below are consolidated by the group. Subsidiaries % of share class held by immediate parent company (or by HSBC Bank plc where this varies) Footnotes Assetfinance December (H) Limited 100.00 9 Assetfinance December (P) Limited 100.00 2,9 Assetfinance December (R) Limited 100.00 9 Assetfinance June (A) Limited 100.00 9 Assetfinance Limited 100.00 9 Assetfinance March (B) Limited 100.00 10 Assetfinance March (F) Limited 100.00 9 Assetfinance September (F) Limited 100.00 9 Banco Nominees (Guernsey) Limited 100.00 11 Banco Nominees 2 (Guernsey) Limited 100.00 11 Beau Soleil Limited Partnership n/a 0,12 BentallGreenOak China Real Estate Investments, L.P. n/a 0,1,13 Canada Crescent Nominees (UK) Limited 100.00 2,9 CCF & Partners Asset Management Limited 100.00 (99.99) 9 CCF Holding (LIBAN) S.A.L. (In Liquidation) 74.99 16 Charterhouse Administrators (D.T.) Limited 100.00 (99.99) 9 Charterhouse Management Services Limited 100.00 (99.99) 9 Charterhouse Pensions Limited 100.00 2,9 COIF Nominees Limited n/a 0,2,9 Corsair IV Financial Services Capital Partners - B L.P n/a 0,1,18 Dem 9 100.00 (99.99) 3,19 Dempar 1 100.00 (99.99) 3,19 Eton Corporate Services Limited 100.00 11 Flandres Contentieux S.A. 100.00 (99.99) 19 Foncière Elysées 100.00 (99.99) 19 Griffin International Limited 100.00 9 HLF 100.00 (99.99) 19 HSBC (BGF) Investments Limited 100.00 2,9 HSBC Asset Finance (UK) Limited 100.00 2,9 HSBC Asset Finance M.O.G. Holdings (UK) Limited 100.00 2,9 HSBC Assurances Vie (France) 100.00 (99.99) 24 HSBC Bank (General Partner) Limited 100.00 2,25 HSBC Bank (RR) (Limited Liability Company) n/a 0,6,26 HSBC Bank Armenia cjsc 100.00 27 HSBC Bank Capital Funding (Sterling 1) LP n/a 0,25 HSBC Bank Capital Funding (Sterling 2) LP n/a 0,25 HSBC Bank Malta p.l.c. 70.03 28 HSBC City Funding Holdings 100.00 9 HSBC Client Holdings Nominee (UK) Limited 100.00 2,9 HSBC Client Nominee (Jersey) Limited 100.00 2,29 HSBC Continental Europe 99.99 19 HSBC Corporate Trustee Company (UK) Limited 100.00 2,9 HSBC Custody Services (Guernsey) Limited 100.00 11 HSBC Epargne Entreprise (France) 100.00 (99.99) 24 HSBC Equity (UK) Limited 100.00 2,9 HSBC Europe B.V. 100.00 9 HSBC Factoring (France) 100.00 (99.99) 19 HSBC Global Asset Management (Deutschland) GmbH 100.00 30 HSBC Global Asset Management (France) 100.00 (99.99) 24 HSBC Global Asset Management (Malta) Limited 100.00 (70.03) 31 HSBC Global Asset Management (Switzerland) AG 100.00 (99.99) 3,32 HSBC Global Custody Nominee (UK) Limited 100.00 2,9 HSBC Global Custody Proprietary Nominee (UK) Limited 100.00 1,2,9 HSBC Global Shared Services (India) Private Limited (In Liquidation) 99.99 1,33 HSBC Infrastructure Limited 100.00 9 HSBC Insurance Services Holdings Limited 100.00 2,9 Subsidiaries % of share class held by immediate parent company (or by HSBC Bank plc where this varies) Footnotes HSBC Investment Bank Holdings Limited 100.00 2,9 HSBC Issuer Services Common Depositary Nominee (UK) Limited 100.00 2,9 HSBC Issuer Services Depositary Nominee (UK) Limited 100.00 2,9 HSBC Life (UK) Limited 100.00 2,9 HSBC Life Assurance (Malta) Limited 100.00 (70.03) 31 HSBC LU Nominees Limited 100.00 2,9 HSBC Marking Name Nominee (UK) Limited 100.00 2,9 HSBC Middle East Leasing Partnership n/a 0,34 HSBC Operational Services GmbH 100.00 (99.99) 30 HSBC Overseas Nominee (UK) Limited 100.00 2,9 HSBC PB Corporate Services 1 Limited 100.00 35 HSBC Pension Trust (Ireland) DAC 100.00 2,36 HSBC PI Holdings (Mauritius) Limited 100.00 37 HSBC Preferential LP (UK) 100.00 2,9 HSBC Private Banking Nominee 3 (Jersey) Limited 100.00 35 HSBC Private Equity Investments (UK) Limited 100.00 9 HSBC Private Markets Management SARL n/a 0,38 HSBC Property Funds (Holding) Limited 100.00 9 HSBC Real Estate Leasing (France) 100.00 (99.99) 19 HSBC REIM (France) 100.00 (99.99) 24 HSBC Securities (South Africa) (Pty) Limited 100.00 2,39 HSBC Securities Services (Guernsey) Limited 100.00 11 HSBC Securities Services (Ireland) DAC 100.00 36 HSBC Securities Services (Luxembourg) S.A. 100.00 2,40 HSBC Securities Services Holdings (Ireland) 100.00 36 HSBC Service Company Germany GmbH 100.00 (99.99) 1,30 HSBC Services (France) 100.00 (99.99) 19 HSBC SFH (France) 100.00 (99.99) 3,24 HSBC SFT (C.I.) Limited 100.00 2,11 HSBC Specialist Investments Limited 100.00 9 HSBC Titan GmbH & Co. KG 100.00 (99.99) 1,41 HSBC Transaction Services GmbH 100.00 (99.99) 5,30 HSBC Trinkaus & Burkhardt (International) S.A. 100.00 (99.99) 42 HSBC Trinkaus & Burkhardt Gesellschaft fur Bankbeteiligungen mbH 100.00 (99.99) 30 HSBC Trinkaus & Burkhardt GmbH 100.00 (99.99) 5,30 HSBC Trinkaus Europa Immobilien-Fonds Nr. 5 GmbH 100.00 (99.99) 30 HSBC Trinkaus Family Office GmbH 100.00 (99.99) 5,30 HSBC Trinkaus Real Estate GmbH 100.00 (99.99) 5,30 HSBC Trustee (C.I.) Limited 100.00 2,35 HSBC Trustee (Guernsey) Limited 100.00 2,11 HSIL Investments Limited 100.00 9 INKA Internationale Kapitalanlagegesellschaft mbH 100.00 (99.99) 30 James Capel (Nominees) Limited 100.00 2,9 James Capel (Taiwan) Nominees Limited 100.00 2,9 Keyser Ullmann Limited 100.00 (99.99) 9 Midcorp Limited 100.00 2,9 Prudential Client HSBC GIS Nominee (UK) Limited 100.00 2,9 Republic Nominees Limited 100.00 2,11 RLUKREF Nominees (UK) One Limited 100.00 1,2,9 RLUKREF Nominees (UK) Two Limited 100.00 1,2,9 S.A.P.C. - Ufipro Recouvrement 99.99 19 Saf Baiyun 100.00 (99.99) 3,19 Saf Guangzhou 100.00 (99.99) 3,19 SCI HSBC Assurances Immo 100.00 (99.99) 24 SFM 100.00 (99.99) 19 SFSS Nominees (Pty) Limited 100.00 39 SNC Les Oliviers D'Antibes 60.00 (59.99) 4,24 SNCB/M6 - 2008 A 100.00 (99.99) 19 SNCB/M6-2007 A 100.00 (99.99) 3,19 Notes on the Financial Statements 188 HSBC Bank plc Annual Report and Accounts 2022 SNCB/M6-2007 B 100.00 (99.99) 3,19 Société Française et Suisse 100.00 (99.99) 19 Somers Dublin DAC 100.00 (99.99) 36 Sopingest 100.00 (99.99) 19 South Yorkshire Light Rail Limited 100.00 9 Swan National Limited 100.00 9 The Venture Catalysts Limited 100.00 2,9 Trinkaus Australien Immobilien Fonds Nr. 1 Brisbane GmbH & Co. KG 100.00 (99.99) 30 Trinkaus Australien Immobilien-Fonds Nr. 1 Treuhand-GmbH 100.00 (99.99) 5,30 Trinkaus Europa Immobilien-Fonds Nr.3 Objekt Utrecht Verwaltungs-GmbH 100.00 (99.99) 30 Trinkaus Immobilien-Fonds Geschaeftsfuehrungs-GmbH 100.00 (99.99) 5,30 Trinkaus Immobilien-Fonds Verwaltungs- GmbH 100.00 (99.99) 5,30 Trinkaus Private Equity Management GmbH 100.00 (99.99) 30 Trinkaus Private Equity Verwaltungs GmbH 100.00 (99.99) 5,30 Valeurs Mobilières Elysées 100.00 (99.99) 19 Joint ventures The undertakings below are joint ventures and equity accounted. Joint Ventures % of share class held by immediate parent company (or by HSBC Bank plc where this varies) Footnotes HCM Holdings Limited (In Liquidation) 50.99 23 The London Silver Market Fixing Limited n/a 0,1,2,48 Associates The undertakings below are associates and equity accounted. Associates % of share class held by immediate parent company (or by HSBC Bank plc where this varies) Footnotes BGF Group plc 24.62 14 Bud Financial Limited 5.36 1,15 Contour Pte Ltd 12.65 1,17 Divido Financial Services Limited 5.56 1,20 Episode Six Limited 7.02 1,21 Euro Secured Notes Issuer 16.67 22 LiquidityMatch LLC n/a 0,1,43 London Precious Metals Clearing Limited 30.00 1,2,44 Monese Ltd 5.39 1,45 Quantexa Ltd 10.10 46 Services Epargne Enterprise 14.18 47 Threadneedle Software Holdings Limited 6.56 1,49 Trade Information Network Limited 16.67 1,50 Trinkaus Europa Immobilien-Fonds Nr. 7 Frankfurt Mertonviertel KG n/a 0,30 Vizolution Limited 17.95 1,7 We Trade Innovation Designated Activity Company (In Liquidation) 9.88 1,8 Footnotes 0 Where an entity is governed by voting rights, HSBC consolidates when it holds — directly or indirectly — the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities, and whether power is held as an agent or principal. HSBC's consolidation policy is described in Note 1.2(a). 1 Management has determined that these undertakings are excluded from consolidation in the Group accounts as these entities do not meet the definition of subsidiaries in accordance with IFRSs. HSBC’s consolidation policy is described in Note 1.2(a). 2 Directly held by HSBC Bank plc Description of shares 3 Actions 4 Parts 5 GmbH Anteil 6 Russian Limited Liability Company Shares Registered offices 7 Office Block A, Bay Studios Business Park, Fabian Way, Swansea, Wales, United Kingdom, SA1 8QB 8 10 Earlsfort Terrace, Dublin, Ireland, D02 T380 9 8 Canada Square, London, United Kingdom, E14 5HQ 10 5 Donegal Square South, Northern Ireland, Belfast, United Kingdom, BT1 5JP 11 Arnold House, St Julians Avenue, St Peter Port, Guernsey, GY1 3NF 12 HSBC Main Building, 1 Queen's Road Central, Hong Kong 13 Oak House Hirzel Street, St Peter Port, Guernsey, GY1 2NP 14 13-15 York Buildings, London, United Kingdom, WC2N 6JU 15 Linen Court Floor 3, 10 East Road, London, United Kingdom, N1 6AD 16 Solidere - Rue Saad Zaghloul Immeuble - 170 Marfaa, P.O. Box 17 5476 Mar Michael, Beyrouth, Lebanon, 11042040 17 50 Raffles Place, #32-01 Singapore Land Tower, Singapore, 048623 18 c/o Walkers Corporate Services Limited Walker House, 87 Mary Street, George Town, Grand Cayman, Cayman Islands, KY1-9005 19 38 avenue Kléber, Paris, France, 75116 20 Office 7, 35-37 Ludgate Hill, London, United Kingdom, EC4M 7JN 21 9/F Amtel Bldg, 148 des Voeux Rd Central, Central, Hong Kong 22 3 avenue de l'Opera, Paris, France, 75001 23 c/o Teneo Financial Advisory Limited, 156 Great Charles Street, Queensway, Birmingham, West Midlands, United Kingdom, B3 3HN 24 Immeuble Cœur Défense, 110 esplanade du Général de Gaulle, Courbevoie, France, 92400 25 HSBC House Esplanade, St. Helier, Jersey, JE4 8UB 26 2 Paveletskaya Square Building 2, Moscow, Russian Federation, 115054 27 66 Teryan Street, Yerevan, Armenia, 0009 28 116 Archbishop Street, Valletta, Malta 29 HSBC House Esplanade, St. Helier, Jersey, JE1 1HS 30 Hansaallee 3, Düsseldorf, Germany, 40549 31 80 Mill Street, Qormi, Malta, QRM 3101 32 26 Gartenstrasse, Zurich, Switzerland, 8002 33 52/60, M G Road Fort, Mumbai, India, 400 001 34 Unit 401 Level 4, Gate District Precinct Building 2, Dubai International Financial Centre, Dubai, United Arab Emirates, 506553 35 HSBC House Esplanade, St. Helier, Jersey, JE1 1GT HSBC Bank plc Annual Report and Accounts 2022 189 Registered offices (continued) 36 1 Grand Canal Square, Grand Canal Harbour, Dublin 2, Ireland, D02 P820 37 6th Floor HSBC Centre 18, Cybercity, Ebene, Mauritius, 72201 38 5 rue Heienhaff, Senningerberg, Luxembourg, 1736 39 1 Mutual Place, 107 Rivonia Road, Sandton, Gauteng, South Africa, 2196 40 18 Boulevard de Kockelscheuer, Luxembourg, Luxembourg, L-1821 41 3 Hansaallee, Düsseldorf, Nordrhein-Westfalen, Germany, 40549 42 16 Boulevard d'Avranches, Luxembourg, Luxembourg, L-1160 43 100 Town Square Place, Suite 201 | Jersey City, NJ, United States Of America, 07310 44 7th Floor 62 Threadneedle Street, London, United Kingdom, EC2R 8HP 45 Eagle House, 163 City Road, London, United Kingdom, EC1V 1NR 46 Hill House, 1 Little New Street, London, United Kingdom, EC4A 3TR 47 32 rue du Champ de Tir, Nantes, France, 44300 48 c/o Hackwood Secretaries Limited, One Silk Street, London, United Kingdom, EC2Y 8HQ 49 2nd Floor Regis House, 45 King William Street, London, United Kingdom, EC4R 9AN 50 3 More London Riverside, London, United Kingdom, SE1 2AQ Notes on the Financial Statements 190 HSBC Bank plc Annual Report and Accounts 2022 HSBC Bank plc 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 020 7991 8888 www.hsbc.co.uk Registered number 00014259