HSBC Bank Malta Plc

National Storage Mechanism | Additional information RNS Number : 9289D HSBC Bank plc 21 February 2024 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 2023 and of the group's profit 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 2023 (the 'Annual Report'), which comprise the: - consolidated balance sheet as at 31 December 2023; - consolidated income statement and consolidated statement of comprehensive income for the year then ended; - consolidated statement of changes in equity for the year then ended; - consolidated statement of cash flows for the year then ended; - HSBC Bank plc balance sheet as at 31 December 2023; - HSBC Bank plc statement of changes in equity for the year then ended; - HSBC Bank plc statement of cash flows for the year then ended; and - notes on the financial statements, comprising material accounting policies and other explanatory information. 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 22 to 86. 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') ('IFRS Accounting Standards'). In our opinion, the group and company financial statements have been properly prepared in accordance with IFRS Accounting Standards 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. Our audit approach Overview Audit scope - We performed audits of the complete financial information of two Components, namely the UK non-ring-fenced bank ('UK NRFB') 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 matter - Expected credit losses - Impairment of loans and advances to customers (group and company) Materiality - Overall group materiality: ��231 million (2022: ��230 million) based on 1% of Tier 1 capital. - Overall company materiality: ��129 million (2022: ��133 million) based on 1% of Tier 1 capital. - Performance materiality: ��174 million (2022: ��172 million) (group) and ��97 million (2022: ��99 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. 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), recognition of deferred tax assets (group) and impairment of investment in subsidiaries (company), which were key audit matters last year, are no longer included. The judgement in relation to held for sale accounting (group) has reduced following the completion of the disposal of the HBCE retail banking business on 1 January 2024. The judgement associated with the recognition of deferred tax assets has also reduced as the forecast cash flows of HBCE have improved and there is less uncertainty on the underlying assumptions. The risk of impairment of investment in subsidiaries (company) has reduced due to a significantly improved Value in Use assessment resulting in a lower risk of material misstatement. Expected credit losses - Impairment of loans and advances to customers (group and company) 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 2023 as a result of the uncertain macroeconomic and geopolitical environment, high levels of inflation and the 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. We held discussions with the Audit Committee covering governance and controls over ECL. We discussed a number of areas including: - the severity of forward looking economic 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. 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 forward looking economic scenarios and their probability weightings and (2) the assessment of ECL for Wholesale portfolios, including the assessment of ECL calculated on high value 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 elements from source systems to impairment models and management judgemental adjustments; - the calculation and approval of management's judgemental adjustments to modelled outcomes; - the identification of credit impairment triggers; and - the calculation and approval of significant individual impairments relating to high value wholesale credit impaired exposures. We involved our economic experts in assessing the significant assumptions made in determining the severity and probability weighting of forward looking economic scenarios, with particular focus on the downside and consensus central scenarios. These assessments considered the sensitivity of ECL to variations in the severity and probability weighting of macroeconomic variables for different economic scenarios. We involved our modelling specialists in assessing the appropriateness of the significant assumptions and methodologies used for models and independently reperformed 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. We tested a sample of Credit Risk Ratings ('CRRs') applied to wholesale exposures and for certain credit impaired wholesale exposures we tested calculations made in estimating expected cash flows and challenged assumptions used by management. Where necessary, we involved our valuation specialists to assist in testing the valuation of collateral for a sample of wholesale credit impaired exposures. 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; and - a sample of critical data elements used in the year end ECL calculation. We evaluated and tested the Credit Risk disclosures made in the financial statements. - Credit risk page 30 - 68 Audit Committee Report, page 90 Note 1.2(d) Financial instruments measured at amortised cost, page 122. Note 1.2(i) Impairment of amortised cost and FVOCI financial assets, page 123. 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 Bank plc 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, 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. HSBC Bank plc's progress on their group-wide ESG targets is not included within the scope of this audit. Scoping HSBC Bank plc operates as one integrated business with two main hubs in London and Paris. The London hub consists of the UK NRFB and the Paris hub comprises HBCE, its EU branches and its subsidiaries in Malta and Luxembourg. Through 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. The risks of material misstatement can be reduced to an acceptable level by testing the most financially significant entities within the group and those that drive particular significant risks identified as part of our risk assessment (collectively 'Components'). This ensures that sufficient coverage has been obtained for each financial statement line item ('FSLI'). We continually assessed risks and changed the scope of our audit where necessary. In establishing the overall approach to the group and company audit, we scoped using the balances relevant to each Component and 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 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. 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. In June 2023, we held a meeting in London with the partners and senior staff from the group audit team and the PwC teams who undertake audits of the financially significant Components. The meeting focused primarily on assessing our approach to auditing the group's businesses, changes at HSBC Bank plc and in our PwC teams, and how we continue to innovate and improve the quality of the audit. We also discussed our significant audit risks. We were in active dialogue throughout the year with the partners and teams responsible for the UK NFRB and HBCE audits, including consideration of how they planned and performed their work. Senior members of our team undertook at least one in-person site visit prior to the year end where a full scope audit was requested. 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, in-person site visits to inspect their working papers throughout the different phases of the audit and formal clearance meetings. This enabled us to effectively oversee and monitor the quality of the audit carried out by the Component auditors. The group audit engagement partner was also the partner on the audit of the UK NRFB significant Component. Certain balances were audited by the PwC HSBC Holdings plc Group engagement team where they related to Group level accounts. HSBC has entity level controls that have a pervasive influence across the Group, as well as other global and regional governance and controls over aspects of financial reporting, such as those operated by the Global Risk function for expected credit losses. A significant amount of IT and operational processes and controls relevant to financial reporting are undertaken in operations centres run by Digital Business Services ('DBS'). Whilst these operations centres are not separate Components, the IT and operational processes and controls are relevant to the financial information of HSBC Bank plc. Financial reporting processes and controls are also performed centrally in HSBC Bank plc's finance operations centres ('Finance Operations'), including the impairment assessment of investment in subsidiaries and intangible assets, the consolidation of HSBC Bank plc's results, the preparation of financial statements, and certain management oversight controls relevant to financial reporting. HSBC Holdings plc Group-wide processes or processes in DBS and Finance Operations are subject to specified audit procedures or an audit over specific FSLIs. These procedures primarily relate to testing of IT general controls, forward looking economic scenarios for ECL, operating expenses, intangible assets, valuation of financial instruments, intercompany eliminations, reconciliations, consolidation and payroll. For these areas, we either performed audit work ourselves, or directed and provided oversight of the audit work performed by other PwC teams. This audit work, together with analytical review procedures and assessing the outcome of local external audits, also mitigated the risk of material misstatement for balances in entities that were not financially significant components. 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: Overall materiality ��231 million (2022: ��230 million). ��129 million (2022: ��133 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 be the most 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 was less than our overall group materiality. The range of materiality allocated across Components was ��6 million to ��117 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% (2022: 75%) of overall materiality, amounting to ��174 million (2022: ��172 million) for the group financial statements and ��97 million (2022: ��99 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. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above ��12 million (group audit) (2022: ��11 million) and ��6 million (company audit) (2022: ��6 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; - Inspecting credit rating agency ratings and actions; and - 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 2023 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, 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. We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006 and relevant tax legislation. 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; - 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; - Assessment of matters reported on the group's whistleblowing programmes and the results of management's investigation of such matters; insofar as they related to the financial statements; - 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 and recognition of deferred tax assets; - Obtaining confirmations from third parties to confirm the existence of a sample of 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; and - 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. 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 nine years, covering the years ended 31 December 2015 to 31 December 2023. 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 2024 Financial statements Contents 106 Consolidated income statement 108 Consolidated statement of comprehensive income 109 Consolidated balance sheet 110 Consolidated statement of changes in equity 114 Consolidated statement of cash flows 115 HSBC Bank plc balance sheet 116 HSBC Bank plc statement of changes in equity 118 HSBC Bank plc statement of cash flows Consolidated income statement for the year ended 31 December 2023 20221 20211 Notes ��m ��m ��m Net interest income 2,151 1,904 1,754 - interest income2,3 17,782 6,535 3,149 - interest expense4 (15,631) (4,631) (1,395) Net fee income 2 1,229 1,295 1,413 - fee income 2,594 2,593 2,706 - fee expense (1,365) (1,298) (1,293) Net income from financial instruments held for trading or managed on a fair value basis 3 3,395 2,875 1,733 Net income/ (expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss 3 1,168 (1,370) 1,214 Changes in fair value of long-term debt and related derivatives 3 (63) 102 (8) Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss 3 284 143 493 Net (losses)/ gains from financial investments (84) (60) 60 Net insurance premium income 4 - - 1,906 Gains/ (losses) recognised on Assets held for sale5,6 296 (1,947) 67 Insurance finance (expense)/income (1,184) 1,106 - Insurance service result 124 121 - - Insurance revenue 379 361 - - Insurance service expense (255) (240) - Other operating income6 190 135 527 Total operating income 7,506 4,304 9,159 Net insurance claims, benefits paid and movement in liabilities to policyholders 4 - - (3,039) Net operating income before change in expected credit losses and other credit impairment charges7 7,506 4,304 6,120 Change in expected credit losses and other credit impairment charges (169) (222) 174 Net operating income 7,337 4,082 6,294 Total operating expenses (5,142) (5,251) (5,462) - employee compensation and benefits 5 (1,706) (1,698) (2,023) - general and administrative expenses (3,375) (3,425) (3,265) - depreciation and impairment of property, plant and equipment and right of use assets (45) (103) (110) - amortisation and impairment of intangible assets (16) (25) (64) Operating profit/ (loss) 2,195 (1,169) 832 Share of (loss)/profit in associates and joint ventures 17 (43) (30) 191 Profit/(loss) before tax 2,152 (1,199) 1,023 Tax (charge)/ credit 7 (427) 646 23 Profit/(loss) for the year 1,725 (553) 1,046 Profit/ (loss) attributable to the parent company 1,703 (563) 1,041 Profit attributable to non-controlling interests 22 10 5 * For Notes on the financial statements, see page 118. 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. 2 Interest income includes ��16,484m (2022: ��5,512m; 2021: ��1,986m) of interest recognised on financial assets measured at amortised cost; ��42m (2022: ��422m; 2021: ��659m) of negative interest recognised on financial liabilities and ��1,256m (2022: ��601m; 2021: ��504m) of interest recognised on financial assets measured at fair value through other comprehensive income. Include within this is ��117m (2022: ��59m; 2021: ��61m) interest recognised on impaired financial assets. 3 Interest 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. 4 Interest expense includes ��14,226m (2022: ��3,740m; 2021: ��616m) of interest on financial liabilities, excluding interest on financial liabilities held for trading or designated or otherwise mandatorily measured at fair value. 5 In relation to the sale of our retail banking operations in France, we recognised a ��1.7bn impairment loss in 3Q22 on initial classification of the business as held-for-sale. In 1Q23, we reversed the ��1.7bn impairment loss as the sale became less certain. On subsequent re-classification of the business as held-for-sale in 4Q23, we recognised a ��1.5bn impairment loss. 6 In 2022, a ��0.2bn impairment loss on the planned sale of our business in Russia was recognised upon classification as held for sale in accordance with IFRS 5. As at 31 December 2023, the outcome of the planned sale become less certain. This resulted in the reversal of ��0.2bn of the previously recognised loss, as the business was no longer classified as held for sale. However, owing to restrictions impacting the recoverability of assets in Russia, we recognised a charge of ��0.2bn in other operating income. 7 Net operating income before change in expected credit losses and other credit impairment charges is also referred to as 'revenue'. Consolidated statement of comprehensive income for the year ended 31 December 2023 20221 20211 ��m ��m ��m Profit/(loss) for the year 1,725 (553) 1,046 Other comprehensive income/(expense) Items that will be reclassified subsequently to profit or loss when specific conditions are met: Debt instruments at fair value through other comprehensive income 439 (1,886) (237) - fair value gains/(losses) 495 (2,631) (247) - fair value (gains)/losses transferred to the income statement on disposal 93 59 (63) - expected credit (recoveries)/losses recognised in the income statement (2) 6 (5) - income taxes (147) 680 78 Cash flow hedges 663 (943) (165) - fair value gains/(losses) 614 (1,418) (40) - fair value losses/(gains) reclassified to the income statement 301 127 (202) - income taxes (252) 348 77 Finance (expenses)/income from insurance contracts (298) 1,408 - - before income taxes (402) 1,898 - - income taxes 104 (490) - Exchange differences (302) 672 (603) Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit asset/liability (2) 38 44 - before income taxes (20) 56 61 - income taxes 18 (18) (17) Equity instruments designated at fair value through other comprehensive income (1) - 2 - fair value (losses)/gains (1) - 2 - income taxes - - - Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in own credit risk (132) 329 2 - fair value (losses)/gains (179) 462 3 - income taxes 47 (133) (1) Other comprehensive income/(expense) for the year, net of tax 367 (382) (957) Total comprehensive income/(expense) for the year 2,092 (935) 89 Attributable to: - shareholders of the parent company 2,070 (947) 93 - non-controlling interests 22 12 (4) 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. Consolidated balance sheet at 31 December At 31 Dec 31 Dec 1 Jan 2023 20221 2022 Notes ��m ��m ��m Assets Cash and balances at central banks 110,618 131,433 108,482 Items in the course of collection from other banks 2,114 2,285 346 Trading assets 10 100,696 79,878 83,706 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 13 19,068 15,881 18,649 Derivatives 14 174,116 225,238 141,221 Loans and advances to banks 14,371 17,109 10,784 Loans and advances to customers 75,491 72,614 91,177 Reverse repurchase agreements - non-trading 73,494 53,949 54,448 Financial investments 15 46,368 32,604 41,300 Assets held for sale2 35 20,368 21,214 9 Prepayments, accrued income and other assets 21 63,635 61,444 43,146 Current tax assets 485 595 1,135 Interests in associates and joint ventures 17 665 728 743 Goodwill and intangible assets 20 203 91 83 Deferred tax assets 7 1,278 1,583 798 Total assets 702,970 716,646 596,027 Liabilities and equity Liabilities Deposits by banks 22,943 20,836 32,188 Customer accounts 222,941 215,948 205,241 Repurchase agreements - non-trading 53,416 32,901 27,259 Items in the course of transmission to other banks 2,116 2,226 489 Trading liabilities 22 42,276 41,265 46,433 Financial liabilities designated at fair value 23 32,545 27,282 33,608 Derivatives 14 171,474 218,867 139,368 Debt securities in issue 13,443 7,268 9,428 Liabilities of disposal groups held for sale2 35 20,684 24,711 - Accruals, deferred income and other liabilities 24 60,444 67,020 43,515 Current tax liabilities 272 130 97 Insurance contract liabilities 4 20,595 20,004 22,201 Provisions 25 390 424 562 Deferred tax liabilities 7 6 3 5 Subordinated liabilities 26 14,920 14,528 12,488 Total liabilities 678,465 693,413 572,882 Equity Total shareholders' equity 24,359 23,102 23,014 - called up share capital 30 797 797 797 - share premium account 1,004 420 - - other equity instruments 30 3,930 3,930 3,722 - other reserves (6,096) (6,413) (5,662) - retained earnings 24,724 24,368 24,157 Non-controlling interests 146 131 131 Total equity 24,505 23,233 23,145 Total liabilities and equity 702,970 716,646 596,027 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. We have restated 2022 comparative data and the IFRS 17 transition impact on the balance sheet at 1 January 2022. 2 Includes businesses classified as held-for-sale as part of a broader restructuring of our European business. Refer to Note 35 'Assets held for sale and liabilities of disposal groups held for sale' on page 184. * For Notes on the financial statements, see page 118. The accompanying notes on pages 118 to 192, and the audited sections of the 'Report of the Directors' on pages 22 to 96 form an integral part of these financial statements. The financial statements were approved by the Board of Directors on 20 February 2024 and signed on its behalf by: Kavita Mahtani Director Consolidated statement of changes in equity for the year ended 31 December Other reserves Called up share capital & share premium Other equity instru- ments Retained earnings Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Group reorgan-isation reserve ('GRR')7 Insur-ance finance reserve1 Total share- holders' equity Non-control-ling interests Total equity ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2023 1,217 3,930 24,368 (278) (950) 1,613 (7,692) 894 23,102 131 23,233 Profit for the period - - 1,703 - - - - - 1,703 22 1,725 Other comprehensive income/(expense) (net of tax) - - (134) 422 661 (294) - (288) 367 - 367 - debt instruments at fair value through other comprehensive income - - - 437 - - - - 437 2 439 - equity instruments designated at fair value through other comprehensive income - - - (1) - - - - (1) - (1) - cash flow hedges - - - - 663 - - - 663 - 663 - remeasurement of defined benefit asset/liability - - (2) - - - - - (2) - (2) - changes in fair value of financial liabilities designated at fair value due to movement in own credit risk3 - - (132) - - - - - (132) - (132) - insurance finance (expense)/income recongnised in other comprehensive income - - - - - - - (298) (298) - (298) - exchange differences - - - (14) (2) (294) - 10 (300) (2) (302) Total comprehensive income/(expense) for the year - - 1,569 422 661 (294) - (288) 2,070 22 2,092 Capital securities issued during the period 584 - - - - - - - 584 - 584 Dividends paid to the parent company4 - - (961) - - - - - (961) (7) (968) Net impact of equity-settled share-based payments - - (18) - - - - - (18) - (18) Change in business combinations and other movements - - (234) (1,012) (41) 859 - 10 (418) - (418) At 31 Dec 2023 1,801 3,930 24,724 (868) (330) 2,178 (7,692) 616 24,359 146 24,505 Consolidated statement of changes in equity (continued) for the year ended 31 December Other reserves Called up share capital & share premium Other equity instru-ments Retained earnings Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Group reorgani-sation reserve ('GRR')7 Insur-ance finance reserve1 Total share- holders' equity Non- control-ling interests Total equity ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m As on 31 Dec 2021 797 3,722 24,735 1,081 (7) 948 (7,692) - 23,584 131 23,715 IFRS 17 Transition - - (578) 522 - - - (514) (570) - (570) At 1 Jan 2022 797 3,722 24,157 1,603 (7) 948 (7,692) (514) 23,014 131 23,145 Loss for the year - - (563) - - - - - (563) 10 (553) Other comprehensive (expense)/income (net of tax) - - 367 (1,881) (943) 665 - 1,408 (384) 2 (382) - debt instruments at fair value through other comprehensive income - - - (1,881) - - - - (1,881) (5) (1,886) - equity instruments designated at fair value through other comprehensive income - - - - - - - - - - - - cash flow hedges - - - - (943) - - - (943) - (943) - remeasurement of defined benefit asset/liability - - 38 - - - - - 38 - 38 - changes in fair value of financial liabilities designated at fair value due to movement in own credit risk3 - - 329 - - - - - 329 - 329 - insurance finance income/ (expense) recongnised in other comprehensive income - - - - - - - 1,408 1,408 - 1,408 - exchange differences - - - - - 665 - - 665 7 672 Total comprehensive (expense)/income for the year - - (196) (1,881) (943) 665 - 1,408 (947) 12 (935) Capital securities issued during the period 420 208 - - - - - - 628 - 628 Dividends paid to the parent company4 - - (1,052) - - - - - (1,052) (2) (1,054) Net impact of equity-settled share-based payments - - 5 - - - - - 5 - 5 Capital contribution5 - - 1,465 - - - - - 1,465 - 1,465 Change in business combinations and other movements - - (11) - - - - - (11) (10) (21) At 31 Dec 20222 1,217 3,930 24,368 (278) (950) 1,613 (7,692) 894 23,102 131 23,233 Consolidated statement of changes in equity (continued) for the year ended 31 December Other reserves Called up share capital & share premium Other equity instru-ments Retained earnings Financial assets at FVOCI reserve Cash flow hedging reserve Foreign exchange reserve Group reorgani-sation reserve ('GRR')7 Total share- holders' equity Non- control-ling interests Total equity ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m 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) - remeasurement of defined benefit asset/liability - - 44 - - - - 44 - 44 - changes in fair value of financial liabilities designated at fair value due to movement in own credit risk3 - - 2 - - - - 2 - 2 - 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 paid to the parent company4 - - (194) - - - - (194) (1) (195) Net impact of equity-settled share-based payments - - (10) - - - - (10) - (10) Change in business combinations and other movements6 - - 23 6 - - - 29 (47) (18) At 31 Dec 20212 797 3,722 24,735 1,081 (7) 948 (7,692) 23,584 131 23,715 1 The insurance finance reserve reflects the impact of the adoption of the other comprehensive income option for our insurance business in France. Underlying assets supporting these contracts are measured at fair value through other comprehensive income. Under this option, only the amount that matches income or expenses recognised in profit or loss on underlying items is included in finance income or expenses, resulting in the elimination of income statement accounting mismatches. The remaining amount of finance income or expenses for these insurance contracts is recognised in other comprehensive income ('OCI'). 2 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. 3 The 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 ��151m (2022: gain of ��292m and 2021: loss of ��165m). 4 The dividends to the parent company includes dividend on ordinary share capital ��750m (2022: ��850m and 2021: nil) and coupon payments on additional tier 1 instrument ��211m (2022: ��202m and 2021: ��194m). 5 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. 6 Additional shares were acquired in HSBC Trinkaus & Burkhardt GmbH and HSBC Bank Armenia CJSC, in 2021 increasing the group's interest to 100%. 7 The Group reorganisation reserve ('GRR') is an accounting reserve resulting from the ring-fencing implementation. Consolidated statement of cash flows for the year ended 31 December 2023 20221 20211 ��m ��m ��m Profit/(loss) before tax 2,152 (1,199) 1,023 Adjustments for non-cash items Depreciation, amortisation and impairment 61 128 174 Net loss/(gain) from investing activities2 (66) 2,002 (62) Share of loss/(profit) in associates and joint ventures 43 30 (191) Change in expected credit losses gross of recoveries and other credit impairment charges 161 253 (171) Provisions including pensions 132 192 104 Share-based payment expense 58 46 96 Other non-cash items included in loss/(profit) before tax (165) (16) (198) Elimination of exchange differences3 4,426 (6,761) 4,926 Changes in operating assets and liabilities (3,172) 37,515 9,602 - change in net trading securities and derivatives (15,528) (6,213) 8,157 - change in loans and advances to banks and customers 4,245 (2,717) 11,149 - change in reverse repurchase agreements - non-trading (13,531) 6,251 9,538 - change in financial assets designated and otherwise mandatorily measured at fair value (3,296) 2,729 (2,429) - change in other assets (5,707) (7,359) 10,924 - change in deposits by banks and customer accounts 7,548 19,835 7,940 - change in repurchase agreements - non-trading 20,516 5,641 (7,643) - change in debt securities in issue 6,175 (1,060) (7,943) - change in financial liabilities designated at fair value 4,042 (1,827) (7,191) - change in other liabilities (7,506) 21,393 (12,295) - dividend received from associates 15 7 - - contributions paid to defined benefit plans (5) (10) (24) - tax received/(paid) (140) 845 (581) Net cash from operating activities 3,630 32,190 15,303 - purchase of financial investments (26,586) (13,227) (18,890) - proceeds from the sale and maturity of financial investments 15,497 20,490 25,027 - net cash flows from the purchase and sale of property, plant and equipment (31) (20) 52 - net investment in intangible assets (125) (28) (45) - net cash outflow from investment in associates and acquisition of businesses and subsidiaries4 (1,161) (29) (85) - net cash flow on disposal of subsidiaries, businesses, associates and joint ventures5 (394) - - Net cash from investing activities (12,800) 7,186 6,059 - issue of ordinary share capital and other equity instruments 584 628 - - subordinated loan capital issued6 3,246 3,111 10,466 - subordinated loan capital repaid6 (2,693) (2,248) (10,902) - dividends to the parent company (961) (1,052) (194) - funds received from the parent company - 1,465 - - dividends paid to non-controlling interests (7) (2) (1) Net cash from financing activities 169 1,902 (631) Net increase in cash and cash equivalents (9,001) 41,278 20,731 Cash and cash equivalents at 1 Jan 189,907 140,923 125,304 Exchange difference in respect of cash and cash equivalents (3,869) 7,706 (5,112) Cash and cash equivalents at 31 Dec7 177,037 189,907 140,923 Cash and cash equivalents comprise of - cash and balances at central banks 110,618 131,433 108,482 - items in the course of collection from other banks 2,114 2,285 346 - loans and advances to banks of one month or less 12,970 13,801 7,516 - reverse repurchase agreement with banks of one month or less 28,704 23,182 17,430 - treasury bills, other bills and certificates of deposit less than three months 144 294 235 - cash collateral and net settlement accounts 16,325 19,213 7,403 - cash and cash equivalents held for sale8 8,278 1,925 - - less: items in the course of transmission to other banks (2,116) (2,226) (489) Cash and cash equivalents at 31 Dec6 177,037 189,907 140,923 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data for the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year 31 December 2021 is prepared on an IFRS 4 basis. 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 During 2023, HSBC Bank plc acquired HSBC Bank Bermuda Limited ('HBBM') from HSBC Overseas Holdings (UK) Limited ('HOHU') for ��990m and HSBC Continental Europe ('HBCE') acquired HSBC Private Bank (Luxembourg) SA ('PBLU') for ��170m. 5 2023 balances includes net cash outflow of ��(667)m on sale of the assets of our HBCE Greece branch. 6 Subordinated liabilities changes during the year are attributable to cash flows from issuance ��3,246m (2022: ��3,111m; 2021: ��10,466m) and repayment of ��(2,693)m (2022: ��(2,248)m; 2021: ��(10,902)m) of securities as presented in the Consolidated statement of cash flows. Non-cash changes during the year included foreign exchanges gains/(losses) ��(420)m (2022: ��711m; 2021: ��(512)m) and fair value gains/(losses) ��62m (2022: ��(427)m; 2021: ��(82)m). 7 At 31 December 2023, ��26,554m (2022: ��23,395m; 2021: ��9,410m) was not available for use by the group due to a range of restrictions including currency exchange and other restrictions. 8 Includes ��177m (2022: ��1,562m) of cash and balances at central banks; ��8,103m (2022: ��114m) of loans and advances to banks of one month or less, nil (2022: ��208m) of reverse repurchase agreements with banks of one month or less and remaining ��(2)m (2022: ��41m) relates to other cash and cash equivalents. Interest received was ��19,288m (2022: ��7,668m; 2021: ��4,285m), interest paid was ��17,267m (2022: ��5,284m; 2021: ��2,919m) and dividends received were ��522m (2022: ��431m; 2021: ��704m). HSBC Bank plc balance sheet at 31 December 2023 2022 Notes* ��m ��m Assets Cash and balances at central banks 61,128 78,441 Items in the course of collection from other banks 1,877 1,863 Trading assets 10 85,766 67,623 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 13 3,181 1,618 Derivatives 14 153,765 196,714 Loans and advances to banks 11,670 14,486 Loans and advances to customers 32,443 36,992 Reverse repurchase agreements - non-trading 56,973 43,055 Financial investments 15 28,391 18,639 Assets held for sale1 35 160 - Prepayments, accrued income and other assets 21 47,400 43,907 Current tax assets 39 394 Investments in subsidiary undertakings 18 11,627 10,646 Goodwill and intangible assets 20 88 41 Deferred tax assets 7 391 608 Total assets 494,899 515,027 Liabilities and equity Liabilities Deposits by banks 18,775 13,594 Customer accounts 133,373 141,714 Repurchase agreements - non-trading 48,842 29,638 Items in the course of transmission to other banks 1,837 1,758 Trading liabilities 22 24,932 25,765 Financial liabilities designated at fair value 23 23,446 19,415 Derivatives 14 152,799 193,336 Debt securities in issue 7,353 4,656 Accruals, deferred income and other liabilities 24 44,922 47,982 Current tax liabilities 77 21 Provisions 25 176 167 Deferred tax liabilities 7 1 - Subordinated liabilities 26 14,658 14,252 Total liabilities 471,191 492,298 Equity Called up share capital 30 797 797 Share premium account 1,004 420 Other equity instruments 30 3,930 3,930 Other reserves (5,522) (6,073) Retained earnings 23,499 23,655 Total equity 23,708 22,729 Total liabilities and equity 494,899 515,027 * For Notes on the financial statements, see page 118. 1 Includes planned transfer of hedge fund administration services. Profit after tax for the year was ��887m (2022: ��2,743m). The accompanying notes on pages 118 to 192, and the audited sections of the 'Report of the Directors' on pages 22 to 96 form an integral part of these financial statements. The financial statements were approved by the Board of Directors on 20 February 2024 and signed on its behalf by: Kavita Mahtani Director 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')4 Total shareholders' equity ��m ��m ��m ��m ��m ��m ��m ��m At 1 Jan 2023 1,217 3,930 23,655 (122) (796) 93 (5,248) 22,729 Profit for the year - - 887 - - - - 887 Other comprehensive income/(expense) (net of tax) - - (63) 65 516 (30) - 488 - debt instruments at fair value through other comprehensive income - - - 67 - - - 67 - equity instruments designated at fair value through other comprehensive income - - - - - - - - - cash flow hedges - - - - 516 - - 516 - changes in fair value of financial liabilities designated at fair value due to movement in own credit risk1 - - (80) - - - - (80) - remeasurement of defined benefit asset/liability - - 17 - - - - 17 - exchange differences - - - (2) - (30) - (32) Total comprehensive income/(expense) for the period - - 824 65 516 (30) - 1,375 Capital securities issued during the period 584 - - - - - - 584 Dividends to the parent company2 - - (961) - - - - (961) Net impact of equity-settled share-based payments - - (18) - - - - (18) Change in business combinations and other movements - - (1) (29) 4 25 - (1) At 31 Dec 2023 1,801 3,930 23,499 (86) (276) 88 (5,248) 23,708 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')5 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 1 The 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 ��42m (2022: gain of ��139m). 2 The dividends to the parent company includes dividend on ordinary share capital ��750m (2022: ��850m) and coupon payments on additional tier 1 instrument ��211m (2022: ��222m) & dividend on preference share capital nil (2022: nil). 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. 4 The Group reorganisation reserve ('GRR') is an accounting reserve resulting from the ring-fencing implementation. HSBC Bank plc statement of cash flows for the year ended 31 December 2023 2022 ��m ��m Profit before tax 1,063 2,548 Adjustments for non-cash items Depreciation, amortisation and impairment 4 17 Net (gain)/loss from investing activities1 80 (1,669) Change in expected credit losses gross of recoveries and other credit impairment charges 37 130 Provisions including pensions 110 91 Share-based payment expense 45 27 Other non-cash items included in loss/(profit) before tax (127) (21) Elimination of exchange differences2 2,650 (2,109) Changes in operating assets and liabilities (5,098) 18,609 - change in net trading securities and derivatives (16,033) (9,551) - change in loans and advances to banks and customers (1,405) (3,870) - change in reverse repurchase agreements - non-trading (8,040) 791 - change in financial assets designated and otherwise mandatorily measured at fair value (1,632) 1,597 - change in other assets3 (6,509) (10,912) - change in deposits by banks and customer accounts 5,989 15,947 - change in repurchase agreements - non-trading 19,204 7,294 - change in debt securities in issue 2,697 (1,002) - change in financial liabilities designated at fair value 3,946 (116) - change in other liabilities (3,554) 17,343 - contributions paid to defined benefit plans (5) (10) - tax received 244 1,098 Net cash from operating activities (1,236) 17,623 - purchase of financial investments (19,798) (8,535) - proceeds from the sale and maturity of financial investments 11,115 17,022 - net cash flows from the purchase and sale of property, plant and equipment (6) (2) - net investment in intangible assets (76) (176) - net cash outflow from investment in associates and acquisition of businesses and subsidiaries4 (990) - - net cash flow on disposal of subsidiaries, businesses, associates and joint ventures 268 - Net cash from investing activities (9,487) 8,309 - issue of ordinary share capital and other equity instruments 584 628 - subordinated loan capital issued5 3,246 3,111 - subordinated loan capital repaid5 (2,685) (2,240) - funds received from the parent company - 1,465 - dividends to the parent company (961) (1,052) Net cash from financing activities 184 1,912 Net increase in cash and cash equivalents (10,539) 27,844 Cash and cash equivalents at 1 Jan 115,310 83,814 Exchange difference in respect of cash and cash equivalents (2,354) 3,652 Cash and cash equivalents at 31 Dec 102,417 115,310 Cash and cash equivalents comprise of: - cash and balances at central banks 61,128 78,441 - items in the course of collection from other banks 1,877 1,863 - loans and advances to banks of one month or less 9,922 11,353 - reverse repurchase agreement with banks of one month or less 19,795 13,917 - treasury bills, other bills and certificates of deposit less than three months - 150 - cash collateral and net settlement accounts 11,532 11,344 - less: items in the course of transmission to other banks (1,837) (1,758) Cash and cash equivalents at 31 Dec 102,417 115,310 1 Included within 2022 is the impact of impairment reversal booked in Paris branch for investment in subsidiary. 2 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. 3 Includes additional investment in subsidiaries nil (2022: ��3,406m). 4 During 2023, HSBC Bank plc acquired HBBM from HOHU and invested ��990m. 5 Subordinated liabilities changes during the year are attributable to cash flows from issuance ��3,246m (2022: ��3,111m) and repayment of ��(2,685)m (2022: ��(2,240)m) of securities as presented in the HSBC Bank plc statement of cash flows. Non-cash changes during the year included foreign exchange gains/(losses) ��(415)m (2022: ��696m) and fair value gains/(losses) ��62m (2022: ��(427)m). Interest received was ��13,005m (2022: ��5,023m), interest paid was ��12,934m (2022: ��3,891m) and dividends received was ��629m (2022: ��936m). Notes on the Financial Statements Contents 119 1 Basis of preparation and material accounting policies 170 20 Goodwill and intangible assets 131 2 Net fee income 170 21 Prepayments, accrued income and other assets 132 3 Net income from financial instruments measured at fair value through profit or loss 171 22 Trading liabilities 171 23 Financial liabilities designated at fair value 132 4 Insurance business 172 24 Accruals, deferred income and other liabilities 139 5 Employee compensation and benefits 172 25 Provisions 144 6 Auditors' remuneration 173 26 Subordinated liabilities 144 7 Tax 176 27 Maturity analysis of assets, liabilities and off-balance sheet commitments 147 8 Dividends 147 9 Segmental analysis 179 28 Offsetting of financial assets and financial liabilities 149 10 Trading assets 180 29 Interest rate benchmark reform 149 11 Fair values of financial instruments carried at fair value 180 30 Called up share capital and other equity instruments 157 12 Fair values of financial instruments not carried at fair value 181 31 Contingent liabilities, contractual commitments, guarantees and contingent assets 159 13 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 182 32 Finance lease receivables 159 14 Derivatives 182 33 Legal proceedings and regulatory matters 164 15 Financial investments 185 34 Related party transactions 165 16 Assets pledged, collateral received and assets transferred 187 35 Assets held for sale and liabilities of disposal groups held for sale 166 17 Interests in associates and joint ventures 189 36 Effects of adoption of IFRS 17 166 18 Investments in subsidiaries 192 37 Events after the balance sheet date 168 19 Structured entities 193 38 HSBC Bank plc's subsidiaries, joint ventures and associates 1 Basis of preparation and material accounting policies 1.1 Basis of preparation (a) Compliance with International Financial Reporting Standards The consolidated financial statements of the group and the separate financial statements of the bank 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 as issued by the IASB ('IFRS Accounting Standards'), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRS Accounting standards adopted by the UK, IFRS Accounting Standards as adopted by the EU and IFRS Accounting Standards as issued by the IASB in terms of their application to the group for the periods presented. There were no unendorsed standards effective for the year ended 31 December 2023 affecting these consolidated and separate financial statements. Standards adopted during the year ended 31 December 2023 IFRS 17 'Insurance Contracts' On 1 January 2023, the group adopted the requirements of IFRS 17 'Insurance Contracts' retrospectively with comparatives restated from the transition date, 1 January 2022. At transition, the group's total equity reduced by ��570m. On adoption of IFRS 17, balances based on IFRS 4, including the present value of in-force long-term insurance business ('PVIF') asset in relation to the upfront recognition of future profits of in-force insurance contracts, were derecognised. Insurance contract liabilities have been remeasured under IFRS 17 based on groups of insurance contracts, which include the fulfilment cash flows comprising the best estimate of the present value of the future cash flows (for example premiums and payouts for claims, benefits and expenses), together with a risk adjustment for non-financial risk, as well as the contractual service margin ('CSM'). The CSM represents the unearned profits that will be released and systematically recognised in insurance revenue as services are provided over the expected coverage period. In addition, the group has made use of the option under the standard to re-designate certain eligible financial assets held to support insurance contract liabilities, which were predominantly measured at amortised cost, as financial assets measured at fair value through profit or loss, with comparatives restated from the transition date. The effects on adoption of IFRS 17 are set out in Note 36 with a description of the policy set out in Note 1.2(j). The key differences between IFRS 4 and IFRS 17 are summarised in the following table: Balance sheet - Insurance contract liabilities for non-linked life insurance contracts are calculated by local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, by reference to the value of the relevant underlying funds or indices. Grouping requirements follow local regulations. - An intangible asset for the PVIF is recognised, representing the upfront recognition of future profits associated with in-force insurance contracts. - Insurance contract liabilities are measured for groups of insurance contracts at current value, comprising the fulfilment cash flows and the CSM. - The fulfilment cash flows comprise the best estimate of the present value of the future cash flows, together with a risk adjustment for non-financial risk. - The CSM represents the unearned profit. Profit emergence / recognition - The value of new business is reported as revenue on Day 1 as an increase in PVIF. - The impact of the majority of assumption changes is recognised immediately in the income statement. - Variances between actual and expected cash flows are recognised in the period they arise. - The CSM is systematically recognised in revenue as services are provided over the expected coverage period of the group of contracts (i.e. no Day 1 profit). - Contracts are measured using the GMM or VFA model for insurance contracts with direct participation features upon meeting the eligibility criteria. Under the VFA model, the group's share of the investment experience and assumption changes are absorbed by the CSM and released over time to profit or loss. For contracts measured under GMM, the group's share of the investment volatility is recorded in profit or loss as it arises. - Losses from onerous contracts are recognised in the income statement immediately. Investment return assumptions (discount rate) - PVIF is calculated based on long-term investment return assumptions based on assets held. It therefore includes investment margins expected to be earned in future. - Under the market consistent approach, expected future investment spreads are not included in the investment return assumption. Instead, the discount rate includes an illiquidity premium that reflects the nature of the associated insurance contract liabilities. Expenses - Total expenses to acquire and maintain the contract over its lifetime are included in the PVIF calculation. - Expenses are recognised across operating expenses and fee expense as incurred and the allowances for those costs are released from the PVIF simultaneously. - Projected lifetime expenses that are directly attributable costs are included in the insurance contract liabilities and recognised in the insurance service result. - Non-attributable costs are reported in operating expenses. Transition In applying IFRS 17 for insurance contracts retrospectively, the full retrospective approach ('FRA') has been used unless it was impracticable. When the FRA is impracticable such as when there is a lack of sufficient and reliable data, an entity has an accounting policy choice to use either the modified retrospective approach ('MRA') or the fair value approach ('FVA'). The group has applied the MRA in France prior to 2019, and the FVA for the UK insurance business prior to 2019. The FVA has been applied for all other businesses prior to 2020 when the FRA is impracticable to apply. Under the FVA, the valuation of insurance liabilities on transition is based on the applicable requirements of IFRS 13 'Fair Value Measurement'. This requires consideration of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The CSM is calculated as the difference between what a market participant would demand for assuming the unexpired risk associated with insurance contracts, including required profit, and the fulfilment cash flows that are determined using IFRS 17 principles. In determining the fair value, the group considered the estimated profit margin that a market participant would demand in return for assuming the insurance liabilities with the consideration of the level of capital that a market participant would be required to hold, and the discount rate with an allowance for an illiquidity premium that takes into account the level of 'matching' between the group's assets and related liabilities. These assumptions were set taking into account the assumptions that a hypothetical market participant operating in each local jurisdiction would consider. Amendments to IAS 12 'International Tax Reform - Pillar Two Model Rules' On 23 May 2023, the IASB issued amendments to IAS 12 'International Tax Reform - Pillar Two Model Rules', which became effective immediately and were approved for adoption by all members of the UK Endorsement Board on 19 July 2023 and by the European Financial Reporting Advisory Group on 8 November 2023. On 20 June 2023, legislation was substantively enacted in the UK to introduce the OECD's Pillar Two global minimum tax rules and a UK qualified domestic minimum top-up tax, with effect from 1 January 2024. The group has applied the IAS 12 exemption from recognising and disclosing information on associated deferred tax assets and liabilities. There were no other new standards or amendments to standards that had an effect on these financial statements. (b) Future accounting developments Minor amendments to IFRS Accounting Standards The IASB has published a number of minor amendments to IFRS Accounting Standards that are effective from 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. (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 at 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 IFRS Accounting standards have been included in the audited sections of this Annual Report and Accounts 2023 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 22 to 86; - the 'Own funds' disclosure is included in the 'Report of the Directors: Capital Risk in 2023' on page 73; 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 estimates and judgements The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted, as the 'critical estimates and judgements' in 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 2023 management did not consider there to be a material impact on our critical judgements and estimates from the physical, transition and other climate-related risks in the short to medium term. In particular management has considered the known and observable potential impacts of climate-related risks of associated judgements and estimates in our value in use calculations. (f) 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 the macroeconomic environment following, rising inflation and disrupted supply chains as a result of the ongoing Russia-Ukraine and Israel-Hamas wars. They also considered other top and emerging risks, including climate change, as well as the related impacts on profitability, capital and liquidity. 1.2 Summary of material accounting policies (a) Consolidation and related policies Investments in subsidiaries Where an entity is governed by voting rights, the group consolidates when it holds - directly or indirectly - the necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of other factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as agent or principal. Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. 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 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: - 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. The group does not consider there to be a significant risk of a material adjustment to the carrying amount of investment in subsidiary in the next financial year but does consider this to be an area that is inherently judgemental. 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, by comparing the recoverable amount of the relevant investment to its carrying amount. 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 by applying the effective interest rate to the amortised cost (i.e. gross carrying amount of the asset less allowance for ECL). Non-interest income and expense The group generates fee income from services provided over time, such as account service and card fees, or when the group delivers a specific transaction at a point in time, such as broking services and import/export services. With the exception of certain fund management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be variable depending on the size of the customer portfolio and 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. 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, the corresponding transaction price is allocated to each performance obligation based on the estimated stand-alone selling prices. Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders approve the dividend for unlisted equity securities. Net income/(expense) from financial instruments measured at fair value through profit or loss includes the following: - 'Net income from financial instruments held for trading or managed on a fair value basis': This comprises net trading income, which includes all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading and other financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the effect of changes in the credit risk of liabilities managed on a fair value basis. It also includes all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss. - 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss': This includes all gains and losses from changes in the fair value, together with related interest income, 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 service result and insurance finance income/(expense) 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 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: - 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 amount of these financial assets at initial recognition includes any directly attributable transactions costs. The group may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the lending commitment is expected to be sold shortly after origination, the commitment to lend is recorded as a derivative. When the group intends to hold the loan, the loan commitment is included in the impairment calculations set out below. Non-trading reverse repurchase, repurchase and similar agreements When debt securities are sold subject to a commitment to repurchase them at a predetermined price ('repos'), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell ('reverse repos') are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid. Non-trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement. Contracts that are economically equivalent to reverse repo or repo agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repo or repo agreements. (e) Financial assets measured at fair value through other comprehensive income Financial assets managed within a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at 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 generally derecognised when they are either sold or redeemed. They are subsequently remeasured at fair value with changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) 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 or by a valuation model. 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 a hedged item for which the effective interest rate method is used is amortised to the income statement on a recalculated effective interest rate, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately. Cash flow hedge The effective portion of gains and losses on hedging instruments is recognised in 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 FVOCI, and certain loan commitments and financial guarantee contracts. At initial recognition, an allowance (or provision in the case of some loan commitments and financial guarantees) is recognised for ECL resulting from possible default events within the next 12 months, or less, where the remaining life is less than 12 months, ('12-month ECL'). In the event of a significant increase in credit risk, an allowance (or provision) is recognised for ECL resulting from all possible default events over the expected life of the financial instrument ('lifetime ECL'). Financial assets where 12-month ECL is recognised are considered to be 'stage 1'; financial assets which are considered to have experienced a significant increase in credit risk are in 'stage 2'; and financial assets for which there is objective evidence of impairment, and so are considered to be in default or otherwise credit impaired are in 'stage 3'. Purchased or originated credit-impaired financial assets ('POCI') are treated differently as set out below. Credit-impaired (stage 3) The group determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily whether contractual payments of either principal or interest are past due for more than 90 days, there are other indications that the borrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons relating to the borrower's financial condition, or the loan is otherwise considered to be in default. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due. Therefore, the definitions of credit impaired and default are aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit-impaired. Interest income is recognised by applying the effective interest rate to the amortised cost (i.e. gross carrying amount less allowance for ECL). Write-off Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier. Forbearance Loans are identified as forborne and classified as either performing or non-performing when the group modifies the contractual terms due to financial difficulty of the borrower. Non-performing forborne loans are stage 3 and classified as non-performing until they meet the cure criteria, as specified by applicable credit risk policy (for example, when the loan is no longer in default and no other indicators of default have been present for at least 12 months). Any amount written off as a result of any modification of contractual terms upon entering forbearance would not be reversed. The group applies the EBA Guidelines on the application of definition of default for our retail portfolios, which affects credit risk policies and our reporting in respect of the status of loans as credit impaired principally due to forbearance (or curing thereof). Further details are provided under 'Forborne loans and advances' on page 32. Performing forborne loans are initially stage 2 and remain classified as forborne until they meet applicable cure criteria (for example, they continue to not be in default and no other indicators of default are present for a period of at least 24 months). At this point, the loan is either stage 1 or stage 2 as determined by comparing the risk of a default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). A forborne loan is derecognised if the existing agreement is cancelled and a new agreement is made on substantially different terms, or if the terms of an existing agreement are modified such that the forborne loan is a substantially different financial instrument. Any new loans that arise following derecognition events in these circumstances would generally be classified as POCI and will continue to be disclosed as forborne. 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 restructuring is at market rates and no payment-related concession has been provided. Modifications of certain higher credit risk wholesale loans are assessed for derecognition having regard to changes in contractual terms that either individually or in combination are judged to result in a substantially different financial instrument. Mandatory and general offer loan modifications that are not borrower specific, for example market-wide customer relief programmes generally do not result in derecognition, but their stage allocation is determined considering all available and supportable information under our ECL impairment policy. Changes made to these financial instruments that are economically equivalent and required by interest rate benchmark reform do not result in the derecognition or a change in the carrying amount of the financial instrument, but instead require the effective interest rate to be updated to reflect the change of the interest rate benchmark. Significant increase in credit risk (stage 2) An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account reasonable and supportable information, including information about past events, current conditions and future economic conditions. The assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a significant increase in credit risk and these criteria will differ for different types of lending, particularly between retail and wholesale. However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due. In addition, wholesale loans that are individually assessed, which are typically corporate and commercial customers, and included on a watch or worry list, are included in stage 2. For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default ('PD'), which encompasses a wide range of information including the obligor's customer risk rating ('CRR'), 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: 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: 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 31. For Retail portfolios, default risk is assessed using a reporting date 12-month PD derived from internally developed statistical models, 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. We continue to refine the retail transfer criteria approach for certain portfolios, as additional data becomes available, in order to utilise a more relative approach for certain portfolios. These enhancements take advantage of the increase in origination related data in the assessment of significant increases in credit risk by comparing remaining lifetime PD to the comparable remaining term lifetime PD at origination based on portfolio-specific origination segments. Unimpaired and without significant increase in credit risk (stage 1) ECL resulting from default events that are possible within the next 12 months ('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 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 IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the following table: PD - Through the cycle (represents long-run average PD throughout a full economic cycle). - The definition of default includes a backstop of 90+ days past due. - Point in time (based on current conditions, adjusted to take into account estimates of future conditions that will impact PD). - Default backstop of 90+ days past due for all portfolios. EAD - Cannot be lower than current balance - Amortisation captured for term products LGD - Downturn LGD (consistent losses expected to be suffered during a severe but plausible economic downturn). - Regulatory floors may apply to mitigate risk of underestimating downturn LGD due to lack of historical data. - Discounted using cost of capital. - All collection costs included. - Expected LGD (based on estimate of loss given default including the expected impact of future economic conditions such as changes in value of collateral). - No floors. - Discounted using the original effective interest rate of the loan. - Only costs associated with obtaining/selling collateral included. Other - Discounted back from point of default to balance sheet date. While 12-month PDs are recalibrated from Basel models where possible, the lifetime PDs are determined by projecting the 12-month PD using a term structure. For the Wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer migrating through the CRR bands over its life. The ECL for Wholesale stage 3 is determined primarily on an individual basis using a discounted cash flow ('DCF') methodology. The expected future cash flows are based on estimates as of the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on its estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of the original effective interest rate. For significant cases, cash flows under up to four different scenarios are probability-weighted by reference to the status of the borrower, economic scenarios applied more generally by HSBC Group and judgement of in relation to the likelihood of the workout strategy succeeding or receivership being required. For less significant cases where an individual assessment is undertaken, the effect of different economic scenarios and work-out strategies results in an ECL calculation based on a most likely outcome which is adjusted to capture losses resulting from less likely but possible outcomes. For certain less significant cases, the bank may use an LGD-based modelled approach to ECL assessment, which factors in a range of economic scenarios. 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 credit 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 41. Critical 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: - 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 credit 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 41 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 17 'Insurance Contracts'. Aggregation of insurance contracts Individual insurance contracts that are managed together and subject to similar risks are identified as a portfolio. Contracts that are managed together usually belong to the same product group, and have similar characteristics such as being subject to a similar pricing framework or similar product management, and are issued by the same legal entity. If a contract is exposed to more than one risk, the dominant risk of the contract is used to assess whether the contract features similar risks. Each portfolio is further separated by the contract's expected profitability. The portfolios are split by their profitability into: (i) contracts that are onerous at initial recognition; (ii) contracts that at initial recognition have no significant possibility of becoming onerous subsequently; and (iii) the remaining contracts. These profitability groups are then divided by issue date, with most contracts the group issues after the transition date being grouped into calendar quarter cohorts. For multi-currency groups of contracts, the group considers its groups of contracts as being denominated in a single currency. The measurement of the insurance contract liability is based on groups of insurance contracts as established at initial recognition, and will include fulfilment cash flows as well as the CSM representing the unearned profit. The group has elected to update the estimates used in the measurement on a year-to-date basis. Fulfilment cash flows The fulfilment cash flows comprise the following: Best estimates of future cash flows These cash flows within the contract boundary of each contract in the group include amounts expected to be collected from premiums and payouts for claims, benefits and expenses, and are projected using a range of scenarios and assumptions in an unbiased way based on the group's demographic and operating experience along with external mortality data where the group's own experience data is not sufficiently large in size to be credible. Adjustment for the time value of money (i.e. discounting) and financial risks associated with the future cash flows The estimates of future cash flows are adjusted to reflect the time value of money and the financial risks to derive an expected present value. The group generally makes use of stochastic modelling techniques in the estimation for products with options and guarantees. A bottom-up approach is used to determine the discount rate to be applied to a given set of expected future cash flows. This is derived as the sum of the risk-free yield and an illiquidity premium. The risk-free yield is determined based on observable market data, where such markets are considered to be deep, liquid and transparent. When information is not available, management judgement is applied to determine the appropriate risk-free yield. Illiquidity premiums reflect the liquidity characteristics of the associated insurance contracts. Risk adjustment for non-financial risk The risk adjustment reflects the compensation required for bearing the uncertainty about the amount and timing of future cash flows that arises from non-financial risk. It is calculated as a 75th percentile level of stress over a one-year period. The level of the stress is determined with reference to external regulatory stresses and internal economic capital stresses. For the main insurance manufacturing entity in the group, the one-year 75th percentile level of stress corresponds to the 60th percentile (2022: 60th percentile) based on an ultimate view of risk over all future years. The group does not disaggregate changes in the risk adjustment between insurance service result (comprising insurance revenue and insurance service expense) and insurance finance income or expenses. All changes are included in insurance service result. Measurement models The variable fee approach ('VFA') measurement model is used for most of the contracts issued by the group, which is mandatory upon meeting the following eligibility criteria at inception: - the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items; - the group expects to pay to the policyholder a substantial share of the fair value returns on the underlying items. The group considers that a substantial share is a majority of returns; and - the group expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items. The group considers that a substantial proportion is a majority proportion of change on a present value probability-weighted average of all scenarios. For some contracts measured under VFA, the other comprehensive income ('OCI') option is used. The OCI option is applied where the underlying items held by the group are not accounted for at fair value through profit or loss. Under this option, only the amount that matches income or expenses recognised in profit or loss on underlying items is included in finance income or expenses for these insurance contracts, and hence results in the elimination of accounting mismatches. The remaining amount of finance income or expenses for these insurance contracts issued for the period is recognised in OCI. In addition, the risk mitigation option is used for a number of economic offsets against the instruments that meet specific requirements. The remaining contracts issued and the reinsurance contracts held are accounted for under the general measurement model ('GMM'). CSM and coverage units The CSM represents the unearned profit and results in no income or expense at initial recognition when the group of contracts is profitable. The CSM is adjusted at each subsequent reporting period for changes in fulfilment cash flows relating to future service (e.g. changes in non-economic assumptions, including mortality and morbidity rates). For initial recognition of onerous groups of contracts and when groups of contracts become onerous subsequently, losses are recognised in insurance service expense immediately. For groups of contracts measured using the VFA, changes in the group's share of the underlying items, and economic experience and economic assumption changes adjust the CSM, whereas these changes do not adjust the CSM under the GMM, but are recognised in profit or loss as they arise. However, under the risk mitigation option for VFA contracts, the changes in the fulfilment cash flows and the changes in the group's share in the fair value return on underlying items that the instruments mitigate are not adjusted in CSM but recognised in profit or loss. The risk mitigating instruments are primarily reinsurance contracts held. The CSM is systematically recognised in insurance revenue to reflect the insurance contract services provided, based on the coverage units of the group of contracts. Coverage units are determined by the quantity of benefits and the expected coverage period of the contracts. The group identifies the quantity of the benefits provided as follows: - Insurance coverage: This is based on the expected net policyholder insurance benefit at each period after allowance for decrements, where net policyholder insurance benefit refers to the amount of sum assured less the fund value or surrender value. - Investment services (including both investment-return service and investment-related service): This is based on a constant measure basis which reflects the provision of access for the policyholder to the facility. For contracts that provide both insurance coverage and investment services, coverage units are weighted according to the expected present value of the future cash outflows for each service. Insurance service result Insurance revenue reflects the consideration to which the group expects to be entitled in exchange for the provision of coverage and other insurance contract services (excluding any investment components). Insurance service expenses comprise the incurred claims and other incurred insurance service expenses (excluding any investment components), and losses on onerous groups of contracts and reversals of such losses. Insurance finance income and expenses Insurance finance income or expenses comprise the change in the carrying amount of the group of insurance contracts arising from the effects of the time value of money, financial risk and changes therein. For VFA contracts, changes in the fair value of underlying items (excluding additions and withdrawals) are recognised in insurance finance income or expenses. (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 estimates and judgements The recognition of deferred tax assets depends on judgements and 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. Critical 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: - 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 amount of its assets and liabilities, including non-financial assets that are directly attributable to it and non-financial assets that can be allocated to it on a reasonable and consistent basis. Non-financial assets that cannot be allocated to an individual CGU are tested for impairment at an appropriate grouping of CGUs. The recoverable amount of the CGU is the higher of the fair value less costs of disposal of the CGU, which is determined by independent and qualified valuers where relevant, and the value in use, which is calculated based on appropriate inputs. When the recoverable amount of a CGU is less than its carrying amount, an impairment loss is recognised in the income statement to the extent that the impairment can be allocated on a pro-rata basis to the non-financial assets by reducing their carrying amounts to the higher of their respective individual recoverable amount or nil. Impairment is not allocated to the financial assets in a CGU. Impairment losses recognised in prior periods for non-financial assets are reversed when there has been a change in the estimate used to determine the recoverable amount. The impairment loss is reversed to the extent that the carrying amount of the non-financial assets would not exceed the amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised in prior periods. (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 amount of the non-current assets in scope of IFRS 5 for measurement is recognised against the total assets of the disposal group. Critical estimates and judgements The classification as held for sale depends on certain 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 2023 20221 20211 ��m ��m ��m Net fee income by product Account services 339 302 271 Funds under management 408 420 465 Cards 59 56 44 Credit facilities 278 235 246 Broking income 327 354 368 Underwriting 239 171 286 Imports/exports 35 44 40 Remittances 114 101 84 Global custody 190 203 200 Corporate finance 45 124 132 Securities others - (including stock lending) 95 81 76 Trust income 55 49 43 Other 410 453 451 Fee income 2,594 2,593 2,706 Less: fee expense (1,365) (1,298) (1,293) Net fee income 1,229 1,295 1,413 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 2023 Fee income 1,275 847 131 427 556 (642) 2,594 Less: fee expense (1,496) (177) (102) (19) (207) 636 (1,365) Net fee income/ (expense) (221) 670 29 408 349 (6) 1,229 Year ended 31 Dec 20221 Fee income 1,301 817 69 425 580 (599) 2,593 Less: fee expense (1,439) (173) (55) (25) (199) 593 (1,298) Net fee income/ (expense) (138) 644 14 400 381 (6) 1,295 Year ended 31 Dec 20211 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/ (expense) 6 673 6 361 378 (11) 1,413 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. Net fee income includes ��842m 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) (2022: ��778m; 2021: ��935m), ��247m 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) (2022: ��229m; 2021: ��221m), ��654m of fees earned on trust and other fiduciary activities (2022: ��673m; 2021: ��709m), and ��83m of fees payable relating to trust and other fiduciary activities (2022: ��69m; 2021: ��61m). 3 Net income from financial instruments measured at fair value through profit or loss 2023 2022 2021 ��m ��m ��m Net income arising on: Net Trading activities 4,569 (2,840) 3 Other instruments managed on a fair value basis (1,174) 5,715 1,730 Net income from financial instruments held for trading or managed on a fair value basis 3,395 2,875 1,733 Financial assets held to meet liabilities under insurance and investment contracts 1,231 (1,429) 1,305 Liabilities to customers under investment contracts (63) 59 (91) Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss 1,168 (1,370) 1,214 Derivatives managed in conjunction with the group's issued debt securities 189 (736) (337) Other changes in fair value (252) 838 329 Changes in fair value of designated debt and related derivatives (63) 102 (8) Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss 284 143 493 Year ended 31 Dec 4,784 1,750 3,432 4 Insurance business The table below represents an analysis of the total insurance revenue and expenses recognised in the period: Insurance Service result Year ended 31 Dec 2023 Year ended 31 Dec 20221 Life direct participating and Investment DPF contracts2 Life other contracts3 Total Life direct participating and Investment DPF contracts2 Life other contracts3 Total ��m ��m ��m ��m ��m ��m Insurance revenue Amounts relating to changes in liabilities for remaining coverage 183 188 371 165 193 358 - Contractual service margin recognised for services provided 77 43 120 78 36 114 - Change in risk adjustment for non-financial risk for risk expired 6 6 12 5 7 12 - Expected incurred claims and other insurance service expenses 100 139 239 82 150 232 Recovery of insurance acquisition cash flows 2 6 8 1 2 3 Total insurance revenue 185 194 379 166 195 361 Insurance service expenses Incurred claims and other insurance service expenses (88) (120) (208) (88) (132) (220) Losses and reversal of losses on onerous contracts (8) (7) (15) (2) (6) (8) Amortisation of insurance acquisition cash flows (2) (6) (8) (1) (2) (3) Adjustments to liabilities for incurred claims - (24) (24) 1 (10) (9) Total insurance service expenses (98) (157) (255) (90) (150) (240) Total insurance service results 87 37 124 76 45 121 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 2 'Life direct participating and investment DPF contracts' are substantially measured under the variable fee approach measurement model. 3 'Life other contracts' are measured under the general measurement model. Net investment return Year ended 31 Dec 2023 Year ended 31 Dec 20221 Life direct participating and Investment DPF contracts Life other contracts Total Life direct participating and Investment DPF contracts Life other contracts Total ��m ��m ��m ��m ��m ��m Investment return Amounts recognised in profit or loss2 1,246 17 1,263 (1,086) (4) (1,090) Amounts recognised in OCI3 404 - 404 (1,899) - (1,899) Total investment return (memorandum) 1,650 17 1,667 (2,985) (4) (2,989) Net finance (expense)/income Changes in fair value of underlying items of direct participating contracts (1,585) - (1,585) 2,979 - 2,979 Interest accreted - 2 2 - 7 7 Effect of changes in interest rates and other financial assumptions - 1 1 - 19 19 Effect of measuring changes in estimates at current rates and adjusting the CSM at rates on initial recognition - (4) (4) - (1) (1) Total net finance (expenses)/income from insurance contracts (1,585) (1) (1,586) 2,979 25 3,004 Represented by: Amounts recognised in profit or loss (1,183) (1) (1,184) 1,081 25 1,106 Amounts recognised in OCI (402) - (402) 1,898 - 1,898 Total net investment results 65 16 81 (6) 21 15 Represented by: Amounts recognised in profit or loss 63 16 79 (5) 21 16 Amounts recognised in OCI 2 - 2 (1) - (1) 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 2 Total Bank 'Net income/(expense) from assets and liabilities of insurance business, including related derivatives, measured at fair value through profit or loss' gain of ��1,168m (2022: ��1,370m loss) includes returns on assets and liabilities supporting insurance policies of ��1,082m (2022: ��1,300m loss) and on shareholder assets of ��86m (2022: ��70m loss). Investment returns of ��1,263m (2022: ��1,090m loss) include gains of ��1,082m (2022: ��1,300m loss) on underlying assets supporting insurance liabilities reported in 'Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through profit or loss', ��187m gains (2022: ��210m gain) reported in 'Net interest income' and ��6m loss (2022: nil) reported in 'Other operating income'. 3 'Amounts recognised in OCI' for the year ended 31 December 2023 included fair value gains of ��407m (2022: ��1,902m losses) and impairment of ��3m (2022: ��3m impairment reversal). Reconciliation of amounts included in other comprehensive income for financial assets measured at fair value through other comprehensive income - Contracts measured under the modified retrospective approach 2023 2022 ��m ��m Balance at 1 Jan (808) 459 Net change in fair value 363 (1,665) Net amount reclassified to profit or loss (5) (1) Related income tax (93) 430 Foreign exchange and other 17 (31) Balance at 31 Dec (526) (808) Movements in carrying amounts of insurance contracts - Analysis by remaining coverage and incurred claims Year ended 31 Dec 2023 Life direct participating and Investment DPF contracts Life other contracts Liabilities for remaining coverage: Liabilities for remaining coverage: Excluding loss component Loss component Incurred claims Total Excluding loss component Loss component Incurred claims Total Total ��m ��m ��m ��m ��m ��m ��m ��m ��m Opening assets - - - - (49) - 6 (43) (43) Opening liabilities 19,712 5 2 19,719 146 10 129 285 20,004 Net opening balance at 1 Jan 2023 19,712 5 2 19,719 97 10 135 242 19,961 Changes in the statement of profit or loss and other comprehensive income Insurance revenue Contracts under the fair value approach (11) - - (11) (78) - - (78) (89) Contracts under the modified retrospective approach (119) - - (119) (17) - - (17) (136) Other contracts2 (55) - - (55) (99) - - (99) (154) Total insurance revenue (185) - - (185) (194) - - (194) (379) Insurance service expenses Incurred claims and other insurance service expenses - (1) 89 88 - (1) 121 120 208 Amortisation of insurance acquisition cash flows 2 - - 2 6 - - 6 8 Losses and reversal of losses on onerous contracts - 8 - 8 - 7 - 7 15 Adjustments to liabilities for incurred claims - - - - - - 24 24 24 Total insurance service expenses 2 7 89 98 6 6 145 157 255 Investment components (1,879) - 1,879 - (3) - 3 - - Insurance service result (2,062) 7 1,968 (87) (191) 6 148 (37) (124) Net finance (income)/expense from insurance contracts3 1,585 - - 1,585 - - 1 1 1,586 Effect of movements in exchange rates (371) - - (371) (1) - - (1) (372) Total changes in the statement of profit or loss and other comprehensive income (848) 7 1,968 1,127 (192) 6 149 (37) 1,090 Cash flows Premiums received 1,471 - - 1,471 218 - - 218 1,689 Claims and other insurance service expenses paid, including investment components (51) - (1,968) (2,019) - - (116) (116) (2,135) Insurance acquisition cash flows (15) - (15) (28) - (28) (43) Total cash flows 1,405 - (1,968) (563) 190 - (116) 74 (489) Other movements 5 1 - 6 3 - (17) (14) (8) Net closing balance at 31 Dec 2023 20,274 13 2 20,289 98 16 151 265 20,554 Closing assets - - - - (54) 4 9 (41) (41) Closing liabilities 20,274 13 2 20,289 152 12 142 306 20,595 Net closing balance at 31 Dec 2023 20,274 13 2 20,289 98 16 151 265 20,554 Movements in carrying amounts of insurance contracts - Analysis by remaining coverage and incurred claims (continued) Year ended 31 Dec 20221 Life direct participating and Investment DPF contracts Life other contracts Liabilities for: Liabilities for: Excluding loss component Loss component Incurred claims Total Excluding loss component Loss component Incurred claims Total Total ��m ��m ��m ��m ��m ��m ��m ��m ��m Opening assets - - - - (53) 1 5 (47) (47) Opening liabilities 21,916 4 2 21,922 170 4 105 279 22,201 Net opening balance at 1 Jan 2022 21,916 4 2 21,922 117 5 110 232 22,154 Changes in the statement of profit or loss and other comprehensive income Insurance revenue Contracts under the fair value approach (10) - - (10) (83) - - (83) (93) Contracts under the modified retrospective approach (120) - - (120) (20) - - (20) (140) Other contracts2 (36) - - (36) (92) - - (92) (128) Total insurance revenue (166) - - (166) (195) - - (195) (361) Insurance service expenses Incurred claims and other insurance service expenses - (1) 89 88 - - 132 132 220 Amortisation of insurance acquisition cash flows 1 - - 1 2 - - 2 3 Losses and reversal of losses on onerous contracts - 2 - 2 - 6 - 6 8 Adjustments to liabilities for incurred claims - - (1) (1) - - 10 10 9 Total insurance service expenses 1 1 88 90 2 6 142 150 240 Investment components (1,687) - 1,687 - (3) - 3 - - Insurance service result (1,852) 1 1,775 (76) (196) 6 145 (45) (121) Net finance income from insurance contracts3 (2,979) - - (2,979) (19) - (6) (25) (3,004) Effect of movements in exchange rates 946 - - 946 - - 3 3 949 Total changes in the statement of profit or loss and other comprehensive income (3,885) 1 1,775 (2,109) (215) 6 142 (67) (2,176) Cash flows Premiums received 1,721 - - 1,721 215 - - 215 1,936 Claims and other insurance service expenses paid, including investment components (41) - (1,775) (1,816) - - (124) (124) (1,940) Insurance acquisition cash flows (14) - - (14) (26) - - (26) (40) Total cash flows 1,666 - (1,775) (109) 189 - (124) 65 (44) Other movements 15 - - 15 6 (1) 7 12 27 Net closing balance at 31 Dec 2022 19,712 5 2 19,719 97 10 135 242 19,961 Closing assets - - - - (49) - 6 (43) (43) Closing liabilities 19,712 5 2 19,719 146 10 129 285 20,004 Net closing balance at 31 Dec 2022 19,712 5 2 19,719 97 10 135 242 19,961 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 2 'Other contracts' are those contracts measured by applying IFRS 17 from inception of the contracts. This includes contracts measured under the full retrospective approach at Transition and contracts incepted after Transition. 3 'Net finance (income)/expense from insurance contracts' expense of ��1,586m (2022: ��3,004m income) comprises expense of ��1,184m (2022: ��1,106m income) recognised in the statement of profit or loss and expense of ��402m (2022: ��1,898m income) recognised in the statement of other comprehensive income. Movements in carrying amounts of insurance contracts - Analysis by measurement component Year ended 31 Dec 2023 Life direct participating and investment discretionary participating contracts Life other contracts Contractual service margin Contractual service margin Estimates of present value of future cash flows and risk adjustment Contracts under the fair value approach Contracts under the modified retros- pective approach Other contracts2 Total Estimates of present value of future cash flows and risk adjustment Contracts under the fair value approach Contracts under the modified retros- pective approach Other contracts2 Total ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m Opening assets - - - - - (76) 6 - 27 (43) Opening liabilities 18,771 29 657 262 19,719 134 114 15 22 285 Net opening balance at 1 Jan 2023 18,771 29 657 262 19,719 58 120 15 49 242 Changes in the statement of profit or loss and other comprehensive income Changes that relate to current services Contractual service margin recognised for services provided - (3) (57) (17) (77) - (19) (5) (19) (43) Change in risk adjustment for non-financial risk expired (6) - - - (6) (6) - - - (6) Experience adjustments (12) - - - (12) (19) - - - (19) Changes that relate to future services Contracts initially recognised in the year (48) - - 48 - (24) - - 25 1 Changes in estimates that adjust contractual service margin 133 (16) (26) (91) - (1) 9 5 (13) - Changes in estimates that result in losses and reversal of losses on onerous contracts 8 - - - 8 6 - - - 6 Changes that relate to past services Adjustments to liabilities for incurred claims - - - - - 24 - - - 24 Insurance service result 75 (19) (83) (60) (87) (20) (10) - (7) (37) Net finance (income)/expense from insurance contracts3 1,585 - - - 1,585 (1) 1 - 1 1 Effect of movements in exchange rates (352) - (14) (5) (371) - (1) - - (1) Total changes in the statement of profit or loss and other comprehensive income 1,308 (19) (97) (65) 1,127 (21) (10) - (6) (37) Cash flows Premiums received 1,471 - - - 1,471 218 - - - 218 Claims, other insurance service expenses paid (including investment components) and other cash flows (2,019) - - - (2,019) (116) - - - (116) Insurance acquisition cash flows (15) - - - (15) (28) - - - (28) Total cash flows (563) - - - (563) 74 - - - 74 Other movements 1 - 1 4 6 (21) - - 7 (14) Net closing balance at 31 Dec 2023 19,517 10 561 201 20,289 90 110 15 50 265 Closing assets - - - - - (63) 4 - 18 (41) Closing liabilities 19,517 10 561 201 20,289 153 106 15 32 306 Net closing balance at 31 Dec 2023 19,517 10 561 201 20,289 90 110 15 50 265 Movements in carrying amounts of insurance contracts - Analysis by measurement component (continued) Year ended 31 Dec 2022 Life direct participating and investment discretionary participating contracts Life other contracts Contractual service margin Contractual service margin Estimates of present value of future cash flows and risk adjustment Contracts under the fair value approach Contracts under the modified retros- pective approach Other contracts2 Total Estimates of present value of future cash flows and risk adjustment Contracts under the fair value approach Contracts under the modified retros- pective approach Other contracts2 Total ��m ��m ��m ��m ��m ��m ��m ��m ��m ��m Opening assets - - - - - (79) 17 - 15 (47) Opening liabilities 21,172 34 520 196 21,922 139 94 19 27 279 Net opening balance at 1 Jan 2022 21,172 34 520 196 21,922 60 111 19 42 232 Changes in the statement of profit or loss and other comprehensive income Changes that relate to current services Contractual service margin recognised for services provided - (3) (57) (18) (78) - (21) (5) (10) (36) Change in risk adjustment for non-financial risk expired (5) - - - (5) (7) - - - (7) Experience adjustments 6 - - - 6 (20) - - - (20) Changes that relate to future services Contracts initially recognised in the year (54) - - 54 - (23) - - 25 2 Changes in estimates that adjust contractual service margin (178) 1 161 16 - (8) 11 - (3) - Changes in estimates that result in losses and reversal of losses on onerous contracts 2 - - - 2 6 - - - 6 Changes that relate to past services Adjustments to liabilities for incurred claims (1) - - - (1) 10 - - - 10 Insurance service result (230) (2) 104 52 (76) (42) (10) (5) 12 (45) Net finance income from insurance contracts3 (2,979) - - - (2,979) (26) 1 - - (25) Effect of movements in exchange rates 901 1 33 11 946 (2) 3 1 1 3 Total changes in the statement of profit or loss and other comprehensive income (2,308) (1) 137 63 (2,109) (70) (6) (4) 13 (67) Cash flows Premiums received 1,721 - - - 1,721 215 - - - 215 Claims, other insurance service expenses paid (including investment components) and other cash flows (1,816) - - - (1,816) (124) - - - (124) Insurance acquisition cash flows (14) - - - (14) (26) - - - (26) Total cash flows (109) - - - (109) 65 - - - 65 Other movements 16 (4) - 3 15 3 15 - (6) 12 Net closing balance at 31 Dec 2022 18,771 29 657 262 19,719 58 120 15 49 242 Closing assets - - - - - (76) 6 - 27 (43) Closing liabilities 18,771 29 657 262 19,719 134 114 15 22 285 Net closing balance at 31 Dec 2022 18,771 29 657 262 19,719 58 120 15 49 242 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 2 'Other contracts' are those contracts measured by applying IFRS 17 from inception of the contracts. These include contracts measured under the full retrospective approach at Transition and contracts incepted after Transition. 3 'Net finance (income)/expense from insurance contracts' expense of ��1,586m (2022: ��3,004m income) comprises expense of ��1,184m (2022: ��1,106m income) recognised in the statement of profit or loss and expense of ��402m (2022: ��1,898m income) recognised in the statement of other comprehensive income. Effect of contracts initially recognised in the year Year ended 31 Dec 2023 Year ended 31 Dec 20221 Profitable contracts issued Onerous contracts issued Total Profitable contracts issued Onerous contracts issued Total ��m ��m ��m ��m ��m ��m Life direct participating and investment DPF contracts Estimates of present value of cash outflows 1,169 15 1,184 1,377 12 1,389 - Insurance acquisition cash flows 10 - 10 - - - - Claims and other insurance service expenses payable 1,159 15 1,174 1,377 12 1,389 Estimates of present value of cash inflows (1,222) (15) (1,237) (1,437) (12) (1,449) Risk adjustment for non-financial risk 5 - 5 4 - 4 Contractual service margin 48 - 48 56 - 56 Losses recognised on initial recognition - - - - - - Life other contracts Estimates of present value of cash outflows 129 9 138 150 22 172 - Insurance acquisition cash flows 1 - 1 - - - - Claims and other insurance service expenses payable 128 9 137 150 22 172 Estimates of present value of cash inflows (161) (8) (169) (183) (20) (203) Risk adjustment for non-financial risk 7 - 7 7 1 8 Contractual service margin 25 - 25 25 - 25 Losses recognised on initial recognition - (1) (1) - (2) (2) 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. Present value of expected future cash flows of insurance contract liabilities and contractual service margin Less than 1 year 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years 10-20 years Over 20 years Total ��m ��m ��m ��m ��m ��m ��m ��m ��m Insurance liability future cash flows Life direct participating and investment DPF contracts 614 660 648 612 555 1,809 (15) 14,536 19,419 Life other contracts 33 - (4) (5) (4) 13 28 59 120 Insurance liability future cash flows at 31 Dec 2023 647 660 644 607 551 1,822 13 14,595 19,539 Remaining contractual service margin Life direct participating and investment DPF contracts 66 62 59 55 51 204 208 67 772 Life other contracts 28 24 19 16 14 42 29 3 175 Remaining contractual service margin at 31 Dec 2023 94 86 78 71 65 246 237 70 947 Insurance liability future cash flows Life direct participating and investment DPF contracts 196 327 343 336 316 1,004 7 16,148 18,677 Life other contracts 46 (7) (8) (8) (7) (9) 33 59 99 Insurance liability future cash flows at 31 Dec 20221 242 320 335 328 309 995 40 16,207 18,776 Remaining contractual service margin Life direct participating and investment DPF contracts 78 74 70 66 61 248 261 90 948 Life other contracts 28 23 19 16 14 44 31 8 183 Remaining contractual service margin at 31 Dec 20221 106 97 89 82 75 292 292 98 1,131 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. Discount rates The discount rates applied to expected future cash flows are determined through a bottom-up approach as set out in Note 1.2(j) 'Summary of material accounting policies - Insurance contracts' on page 127. The blended average of discount rates used within our most material manufacturing entities are as follows: HSBC Life (UK) Ltd HSBC Assurances Vie (France) �� At 31 Dec 2023 10 year discount rate (%) 3.28 2.96 20 year discount rate (%) 3.43 2.97 At 31 Dec 2022 10 year discount rate (%) 3.71 3.66 20 year discount rate (%) 3.54 3.33 5 Employee compensation and benefits 2023 2022 2021 ��m ��m ��m Wages and salaries 1,344 1,365 1,609 Social security costs 294 278 341 Post-employment benefits1 68 55 73 Year ended 31 Dec 1,706 1,698 2,023 1 Includes ��52m (2022: ��42m; 2021: ��37m) in employer contributions to the defined contribution pension plans. Average number of persons employed by the group during the year by global business1 2023 2022 2021 MSS 3,954 3,722 4,322 GB 2,125 2,155 2,458 GBM Other 27 81 140 CMB 2,536 2,748 3,023 WPB 6,119 6,484 6,709 Corporate Centre 48 215 171 Year ended 31 Dec 14,809 15,405 16,823 1 Average 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 ��58m were equity settled (2022: ��45m; 2021: ��96m), as follows: 2023 2022 2021 ��m ��m ��m Restricted share awards 58 45 96 Savings-related and other share award option plans 1 1 1 Year ended 31 Dec 59 46 97 HSBC share awards 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 2023 2022 Number Number (000s) (000s) Restricted share awards outstanding at 1 Jan 20,454 21,828 Additions during the year1 10,998 11,651 Released in the year1 (11,864) (12,279) Forfeited in the year (383) (746) Restricted share awards outstanding at 31 Dec 19,205 20,454 Weighted average fair value of awards granted (��) 4.74 4.96 1 Includes a number of share option plans transferred from or to other subsidiaries of HSBC Holdings plc. HSBC share option plans 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% (2022: 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 2023 5,782 2.91 Granted during the year2 1,348 4.57 Exercised during the year (2,428) 2.72 Expired during the year (38) 4.73 Forfeited during the year (325) 2.94 Outstanding at 31 Dec 2023 4,339 3.51 Weighted average remaining contractual life (years) 2.37 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 1 Weighted average exercise price. 2 Includes a number of share option plans transferred from or to other subsidiaries of HSBC Holdings plc. Post-employment benefit plans We operate a number of pension plans throughout Europe for our employees. Some are defined benefit plans, of which HSBC Germany 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 Germany Pension Plan (HSBC Trinkaus & Burkhardt Pension Plan) HSBC Germany Pension 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, lumpsum 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 Verm��genstreuh��nder e.V. and HSBC Trinkaus Mitarbeitertreuh��nder e.V. assume the role of trustee. Active members of the trustee are 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. The latest measurement of the defined benefit obligation of the plan at 31 December 2023 was carried out by Hans-Peter Kieselmann (Fellow of the German Association of Actuaries ('DAV')) and Helga Bader, at Willis Towers Watson GmbH, using the projected unit credit method. The next measurement will have an effective date of 31 December 2024. 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 459 (479) (20) Defined benefit healthcare plans - (46) (46) At 31 Dec 2023 459 (525) (66) Total employee benefit liabilities (within 'Accruals, deferred income and other liabilities') (117) Total employee benefit assets (within 'Prepayments, accrued income and other assets') 51 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 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 Germany Pension Plan2 Other plans HSBC Germany Pension Plan2 Other plans HSBC Germany Pension Plan2 Other plans ��m ��m ��m ��m ��m ��m At 1 Jan 2023 405 129 (357) (174) 48 (45) Service cost - - (7) (5) (7) (5) - current service cost - - (8) (6) (8) (6) - past service gains - - 1 1 1 1 Net interest income/(cost) on the net defined benefit asset/(liability) 11 6 (9) (9) 2 (3) Remeasurement effects recognised in other comprehensive income 6 (6) (29) 1 (23) (5) - return on plan assets (excluding interest income) 6 (6) - - 6 (6) - actuarial losses financial assumptions - - (29) (8) (29) (8) - actuarial gains demographic assumptions - - - 2 - 2 - actuarial gains experience assumptions - - - 7 - 7 - other changes - - - - - - Exchange differences (8) - 7 1 (1) 1 Benefits paid - (7) 12 15 12 8 Other movements1,3 (77) - 79 (4) 2 (4) At 31 Dec 2023 337 122 (304) (175) 33 (53) Net asset/(liability) under defined benefit pension plans (continued) Fair value of plan assets Present value of defined benefit obligations Net defined benefit asset/(liability) HSBC Germany Pension Plan2 Other plans HSBC Germany Pension Plan2 Other plans HSBC Germany 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 gains - - 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 financial assumptions - - 94 106 94 106 - actuarial losses demographic assumptions - - - (2) - (2) - actuarial 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) 1 Other movements include contributions by the group, contributions by employees, administrative costs and tax paid by plan. 2 The HSBC Germany 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. 3 Other movements for HSBC Germany Pension Plan include reclassification of Lebensarbeitszeitkonto (LAZK) plan to long term employee benefits. HSBC Germany does not expect to make contributions to the HSBC Germany Pension Plan during 2024. Benefits expected to be paid from the plans 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 2024 2025 2026 2027 2028 2029-2033 ��m ��m ��m ��m ��m ��m HSBC Germany Pension Plan1 12 12 11 12 12 69 1 The duration of the defined benefit obligation is 14.2 years for the HSBC Germany Pension Plan under the disclosure assumptions adopted (2022: 13.7 years). Fair value of plan assets by asset classes 31 Dec 2023 31 Dec 2022 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 Germany Pension Plan Fair value of plan assets 337 312 25 - 405 352 53 - - equities 3 3 - - 8 8 - - - bonds fixed income 196 196 - - 173 173 - - - bonds index linked 6 6 - - 26 26 - - - bonds other - - - - - - - - - property 3 - 3 - - - - - - pooled investment vehicle - - - - - - - - - other 129 107 22 - 198 145 53 - 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 Germany Pension Plan At 31 Dec 2023 3.17 2.25 2.25 2.25 At 31 Dec 2022 3.71 2.25 2.25 2.25 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 Germany Pension Plan At 31 Dec 2023 RT 2018G11 25.4 28.3 29.1 31.3 At 31 Dec 2022 RT 2018G11 25.2 28.2 28.9 31.2 1 Heubeck 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. The effect of changes in key assumptions HSBC Germany Pension Plan Obligation Financial impact of increase Financial impact of decrease 2023 2022 2021 2023 2022 2021 ��m ��m ��m ��m ��m ��m Discount rate - increase/decrease of 0.25% (9) (7) (13) 9 8 13 Inflation rate - increase/decrease of 0.25% 7 7 11 (6) (5) (9) Pension payments and deferred pensions - increase/decrease of 0.25% 6 5 9 (6) (5) (8) Pay - increase/decrease of 0.25% 1 1 2 (1) (1) (2) Change in mortality - increase of 1 Year 9 10 16 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 with the prior period. 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: 2023 2022 2021 ��000 ��000 ��000 Fees1 1,427 1,410 1,525 Salaries and other emoluments2 2,792 2,294 3,569 Annual incentives3 1,163 979 694 Long-term incentives4 1,193 779 511 Year ended 31 Dec 6,575 5,462 6,299 1 Fees paid to non-executive Directors. 2 Salaries and other emoluments include Fixed Pay Allowances. 3 Discretionary 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 ��581,561 (2022: ��489,285) in cash and ��581,561 (2022: ��489,285) in Restricted Shares, which is the upfront portion of the annual incentive granted in respect of performance year 2023. 4 The amount shown is comprised of ��493,868 (2022: ��380,893) in deferred cash, ��699,552 (2022: ��398,162) 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 2023. 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. 5 In addition to the amounts set out above, a payment was also made to a Director relating to compensation for loss of employment. As the payment related to a longer period of employment with the Group (and not specifically to the Directorship) it is not included in the tables. However, the amount paid that related (on a time apportioned basis) to the period of Directorship is ��169,358. 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 (2022: None). In addition, there were payments during 2023 under unfunded retirement benefit agreements to former Directors of ��410,403 (2022: ��394,334). The provision at 31 December 2023 in respect of unfunded pension obligations to former Directors amounted to ��3,811,422 (2022: ��4,286,951). Of these aggregate figures, the following amounts are attributable to the highest paid Director: 2023 2022 2021 ��000 ��000 ��000 Salaries and other emoluments 1,641 1,641 1,399 Annual incentives1 1,074 859 558 Long-term incentives2 990 677 390 Year ended 31 Dec 3,705 3,177 2,347 1 Awards made to the highest paid Director are delivered in the form of cash and HSBC Holdings plc shares. The amount shown comprises ��537,040 (2022: ��429,285) in cash and ��537,040 (2022: ��429,285) in Restricted Shares. 2 The amount shown comprises ��408,439 (2022: ��330,687) in deferred cash, ��581,165 (2022: ��345,818) 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 2023. 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 (2022: ��0). 6 Auditors' remuneration 2023 2022 2021 ��m ��m ��m Audit fees payable to PwC 13.1 11.3 10.4 Other audit fees payable 0.6 0.7 0.4 Year ended 31 Dec 13.7 12.0 10.8 Fees payable by the group to PwC 2023 2022 2021 ��m ��m ��m Fees for HSBC Bank plc's statutory audit1,5 5.3 5.5 4.8 Fees for other services provided to the group 17.5 15.6 14.3 - audit of the group's subsidiaries2 7.8 5.8 5.6 - audit-related assurance services3 5.2 5.3 5.7 - other assurance services4 4.5 4.5 3.0 Year ended 31 Dec 22.8 21.1 19.1 1 Fees 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'. 2 Including fees payable to PwC for the statutory audit of the bank's subsidiaries. 3 Including services for assurance and other services that relate to statutory and regulatory filings, including interim reviews. 4 Including 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. 5 2023 Audit fees payable to PwC includes prior year adjustments after finalisation of the 2022 financial statements. In addition to the above, the estimated fees paid to PwC by third parties associated with HSBC Bank plc amount to ��0.6m. In these cases, HSBC Bank plc was connected with the contracting party and may therefore have been involved in appointing PwC. These fees arose from services such as reviewing the financial position of corporate concerns that borrow from HSBC Bank plc. 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 2023 20221 20211 ��m ��m ��m Current tax 386 (283) (187) - for this year 359 (243) (245) - adjustments in respect of prior years 27 (40) 58 Deferred tax 41 (363) 164 - origination and reversal of temporary differences 25 (529) 248 - effect of changes in tax rates - 33 (56) - adjustments in respect of prior years 16 133 (28) Year ended 31 Dec2 427 (646) (23) 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. 2 In addition to amounts recorded in the income statement, a tax charge of ��334m (2022: credit of ��393m; 2021 credit of ��135m) was recorded directly to equity. The group's profits are taxed at different rates depending on the country in which they arise. The key applicable corporate tax rates in 2023 included the UK and France. The UK tax rate applying to HSBC Bank plc and its banking subsidiaries in 2023 was a blended rate of 27.75% (2022: 27.00%), comprising 23.50% corporation tax plus 4.25% surcharge on UK banking profits, following an increase in the main rate of UK corporation tax from 19% to 25% and a reduction in the UK banking surcharge rate from 8% to 3% from 1 April 2023. The applicable tax rate in France was 26% (2022: 26%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate. On 20 June 2023, legislation was substantively enacted in the UK, the jurisdiction of the entity's ultimate parent entity, HSBC Holdings plc, to introduce the 'Pillar Two' global minimum tax model rules of the OECD's Inclusive Framework on Base Erosion and Profit Shifting (BEPS), as well as a qualified domestic minimum tax, with effect from 1 January 2024. Under these rules, a top-up tax liability arises where the effective tax rate of the HSBC Holdings plc operations in a jurisdiction, calculated based on principles set out in the OECD's Pillar Two model rules, is below 15%. Based on the group's forecasts, top-up tax liabilities are expected to arise in four jurisdictions, in particular Jersey, due to low statutory tax rates. During 2023, the government of Bermuda announced the introduction of a corporation tax system to apply to Bermudian entities of large multinational groups, with a statutory rate of 15%, with effect from 1 January 2025. This is expected to apply to the HSBC Group's operations in Bermuda. 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: 2023 20221 20211 ��m % ��m % ��m % Profit/(loss) before tax 2,152 (1,199) 1,023 Tax expense Taxation at UK corporation tax rate 506 23.5 (228) 19.0 194 19.0 Impact of taxing overseas profits at different rates (20) (0.9) (75) 6.3 7 0.7 UK banking surcharge 5 0.2 (47) 3.9 (2) (0.2) Items increasing the tax charge in 2023: - UK and European bank levies 78 3.6 50 (4.2) 72 7.0 - adjustments in respect of prior periods 58 2.7 93 (7.8) 30 2.9 - provisions for fines and penalties 23 1.1 3 (0.3) (2) (0.2) - local taxes and overseas withholding taxes 19 0.9 4 (0.3) (4) (0.4) - effect of losses (profits) in associates and joint ventures 5 0.2 5 (0.4) (43) (4.2) - other 25 1.2 (5) 0.4 (32) 3.0 - impact of changes in tax rates - - 33 (2.8) (56) (5.5) - impact of temporary differences between French tax and IFRS - - - - 324 31.7 Items reducing the tax charge in 2023: - movements in unrecognised deferred tax (81) (3.8) (268) 22.4 (47) (4.6) - non-taxable gain on transfer of Guernsey branch (74) (3.4) - - - - - deductions for AT1 coupon payments (60) (2.8) (55) 4.6 (53) (5.2) - impact of held for sale adjustments (25) (1.2) 47 (3.9) - - - non-taxable income and gains (21) (1.0) (93) 7.8 (92) (9.0) - movements in provisions for uncertain tax positions (11) (0.5) (110) 9.2 5 0.5 - tax impact of sale of French retail banking business - - - - (324) (31.7) Year ended 31 Dec 427 19.8 (646) 53.9 (23) (2.2) 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. The effective tax rate for the year was 19.8% (2022: 53.9%; 2021: (2.2)%). The 2023 effective tax rate of 19.8% reflects the mix of profits and losses in different jurisdictions and is decreased by the release of provisions for uncertain tax positions, recognition of a deferred tax asset for prior period excess expenses in HSBC Life (UK) and the non-taxable gain arising on the transfer of the Guernsey branch to PBRS and increased by non-deductible UK and European bank levy expenses and charges in respect of prior periods. The effective tax rate for 2022 of 53.9% represented a tax credit on a loss before tax and was increased by non-recurring items, including recognition of previously unrecognised deferred tax assets in France and a tax credit of ��110m from the release of provisions for uncertain tax positions and reduced by charges in respect of prior periods and non-deductible UK and European bank levy expenses. In 2021, the signing of a framework agreement for the 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. Movement of deferred tax assets and liabilities Cash flow hedges Loan impairment provisions Property, plant and equipment FVOCI investments Relief for tax losses3 Other2 Total ��m ��m ��m ��m ��m ��m ��m Assets 391 60 227 474 628 151 1,931 Liabilities - - - (351) - - (351) At 1 Jan 2023 391 60 227 123 628 151 1,580 Income statement - (4) (36) 44 (17) (28) (41) Other comprehensive income (252) - - (43) - 65 (230) Foreign exchange and other adjustments (1) 3 - 8 (10) (37) (37) At 31 Dec 2023 138 59 191 132 601 151 1,272 Assets4 138 59 191 329 601 204 1,522 Liabilities4 - - - (197) - (53) (250) Assets 40 60 206 40 382 65 793 Liabilities - - - - - - - At 1 Jan 20221 40 60 206 40 382 65 793 Income statement - (2) 22 (124) 221 246 363 Other comprehensive income 348 - - 190 - (151) 387 Foreign exchange and other adjustments 3 2 (1) 17 25 (9) 37 At 31 Dec 20221 391 60 227 123 628 151 1,580 Assets4 391 60 227 474 628 151 1,931 Liabilities4 - - - (351) - - (351) 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. 2 Other deferred tax assets and liabilities relate to share-based payments, expense provisions and other temporary differences. 3 The deferred tax asset recognised in respect of tax losses mainly relates to France (��566m) and US State tax losses of the New York branch of HSBC Bank plc (��28m), both of which are supported by future profit forecasts. 4 After netting off balances within countries, the balances as disclosed in the financial statements are as follows: deferred tax assets ��1,278m (2022: ��1,583m); and deferred tax liabilities ��6m (2022: ��3m). 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 ��1,272m (2022: ��1,580m) included a net UK deferred tax asset of ��441m (2022: ��597m) and a net deferred asset of ��693m (2022: ��797m) in France, of which ��566m (2022: ��588m) related to tax losses which are expected to be substantially recovered within 12 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. 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 14 231 75 - 28 260 608 Lliabilities2 - - - - - - - At 1 Jan 2023 14 231 75 - 28 260 608 Income statement (15) (40) - - - 38 (17) Other comprehensive income 10 - (32) - - (179) (201) Foreign exchange and other adjustments - - - - - - - At 31 Dec 2023 9 191 43 - 28 119 390 Assets3 9 191 43 - 28 120 391 Liabilities3 - - - - - (1) (1) Assets 17 207 - 191 69 48 532 Liabilities - - (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 - - - - - - - 1 Other deferred tax assets and liabilities relate to fair value of own debt, loan impairment allowances, share-based payments and cash flow hedges. 2 The 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. 3 After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets ��391m (2022: ��608m) and deferred tax liabilities ��1m (2022: 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 ��673m (2022: ��1,017m). These amounts include unused tax losses, tax credits and temporary differences of ��668m (2022: ��912m) arising in the New York branch of HSBC Bank plc. The unrecognised losses 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 ��668m (2022: ��912m). These amounts include unused tax losses, tax credits and temporary differences arising in the New York branch of HSBC Bank plc of ��668m (2022: ��912m). The unrecognised losses expire after 10 years or do not expire. Deferred tax is not recognised in respect of the group's investments in subsidiaries and branches where HSBC Bank plc is able to control the timing of remittance or other realisation and where remittance or realisation is not probable in the foreseeable future. The aggregate temporary differences relating to unrecognised deferred tax liabilities arising on investments in subsidiaries and branches is ��3.7bn (2022: ��3.3bn) and the corresponding unrecognised deferred tax liability was ��27m (2022: ��26m). 8 Dividends Dividends to the parent company 2023 2022 2021 �� per share ��m �� per share ��m �� per share ��m Dividends paid on ordinary shares Current year: - first special dividend1 0.941 750 1.067 850 - - - second special dividend - - - - - - Total 0.941 750 1.067 850 - - Dividends on preference shares classified as equity Dividend on HSBC Bank plc non-cumulative third dollar preference shares 0.001 - 0.001 - 0.001 - Total 0.001 - 0.001 - 0.001 - Total coupons on capital securities classified as equity - 211 - 202 - 194 Dividends to parent - 961 - 1,052 - 194 1 Special dividend declared/paid on CET1 capital in 2023. Total coupons on capital securities classified as equity 2023 2022 2021 First call date ��m ��m ��m Undated Subordinated additional Tier 1 instruments Undated Subordinated Resettable Additional Tier 1 instrument 2015 Dec 2020 85 87 84 Undated Subordinated Resettable Additional Tier 1 instrument 2016 Jan 2022 12 11 12 Undated Subordinated Resettable Additional Tier 1 instrument 2018 Mar 2023 28 28 10 Undated Subordinated Resettable Additional Tier 1 instrument 2018 Mar 2023 10 10 28 Undated Subordinated Resettable Additional Tier 1 instrument 2019 Nov 2024 24 24 24 Undated Subordinated Resettable Additional Tier 1 instrument 2019 Nov 2024 15 8 7 Undated Subordinated Resettable Additional Tier 1 instrument 2019 Dec 2024 19 20 20 Undated Subordinated Resettable Additional Tier 1 instrument 2019 Jan 2025 9 8 9 Undated Subordinated Resettable Additional Tier 1 instrument 2022 Mar 2027 9 6 - Total 211 202 194 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. 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 global functions to the extent that they can be meaningfully attributed to global businesses. 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. Measurement of segmental assets, liabilities, income and expenses is in accordance with the group's accounting policies. Shared costs are included in segments on the basis of actual recharges. The intra-group elimination items for the global businesses are presented in Corporate Centre. 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 7. By operating segment: Profit/(loss) before tax 2023 MSS GB GBM Other CMB WPB Corporate Centre Total ��m ��m ��m ��m ��m ��m ��m Net operating income before change in ECL and other credit impairment charges1 1,996 2,092 13 1,746 1,339 320 7,506 - of which: net interest income/(expense) 212 1,430 (13) 1,331 946 (1,755) 2,151 Change in ECL and other credit impairment charges (9) (91) 3 (83) 12 (1) (169) Net operating income/(expense) 1,987 2,001 16 1,663 1,351 319 7,337 Total operating expenses (2,131) (1,013) (282) (663) (894) (159) (5,142) Operating profit/(loss) (144) 988 (266) 1,000 457 160 2,195 Share of loss in associates and joint ventures - - - - - (43) (43) Profit/(loss) before tax (144) 988 (266) 1,000 457 117 2,152 % % % % % % Cost efficiency ratio 106.8 48.4 n/a 38.0 66.8 68.5 20222 Net operating income/(expense) before change in ECL and other credit impairment charges1 2,446 1,571 (108) 1,433 (432) (606) 4,304 - of which: net interest income/(expense) (54) 903 (16) 925 710 (564) 1,904 Change in ECL and other credit impairment charges (1) (153) (1) (54) (7) (6) (222) Net operating income/(expense) 2,445 1,418 (109) 1,379 (439) (612) 4,082 Total operating expenses (1,936) (932) (406) (663) (834) (480) (5,251) Operating profit/(loss) 509 486 (515) 716 (1,273) (1,092) (1,169) Share of loss in associates and joint ventures - - (2) - - (28) (30) Profit/(loss) before tax 509 486 (517) 716 (1,273) (1,120) (1,199) % % % % % % Cost efficiency ratio 79.1 59.3 n/a 46.3 n/a 122.0 20212 Net operating income before change in ECL other credit impairment charges1 2,042 1,367 311 1,096 1,277 27 6,120 - of which: net interest income/(expense) (232) 568 224 649 567 (22) 1,754 Change in ECL and other credit impairment charges 1 140 5 7 23 (2) 174 Net operating income/(expense) 2,043 1,507 316 1,103 1,300 25 6,294 Total operating expenses (2,055) (918) (597) (611) (981) (300) (5,462) Operating profit/(loss) (12) 589 (281) 492 319 (275) 832 Share of profit in associates and joint ventures - - - - - 191 191 Profit/(loss) before tax (12) 589 (281) 492 319 (84) 1,023 % % % % % % Cost efficiency ratio 100.6 67.2 192.0 55.7 76.8 89.2 1 Net 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 ��62m (2022: ��108m; 2021: ��127m). 2 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. 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: 2023 20221 2021 ��m ��m ��m External net operating income by country 7,506 4,304 6,120 - United Kingdom 3,609 3,068 2,937 - France 1,819 (70) 1,677 - Germany 836 732 887 - Other countries 1,242 574 619 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data of the financial year ended 31 December 2022 have been restated accordingly. Comparative data for the year ended 31 December 2021 is prepared on an IFRS 4 basis. Balance sheet by business MSS GB GBM Other CMB WPB Corporate Centre Total ��m ��m ��m ��m ��m ��m ��m 31 Dec 2023 Loans and advances to customers 2,718 34,723 67 24,226 13,666 91 75,491 Customer accounts 41,102 85,303 9,434 58,620 28,337 145 222,941 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 10 Trading assets The group The bank 2023 2022 2023 2022 ��m ��m ��m ��m Treasury and other eligible bills 4,808 3,712 4,353 3,061 Debt securities 27,724 21,873 16,071 13,960 Equity securities 50,020 38,330 47,498 35,407 Trading securities 82,552 63,915 67,922 52,428 Loans and advances to banks1 5,094 3,987 5,060 3,872 Loans and advances to customers1 13,050 11,976 12,784 11,323 At 31 Dec 100,696 79,878 85,766 67,623 1 Loans 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; - 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 2023 20221 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 72,164 26,482 2,050 100,696 52,493 24,647 2,738 79,878 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 7,008 9,178 2,882 19,068 6,183 6,380 3,318 15,881 Derivatives 428 171,865 1,823 174,116 2,296 221,205 1,737 225,238 Financial investments 25,857 10,743 907 37,507 19,007 8,902 1,447 29,356 Liabilities Trading liabilities 29,791 12,233 252 42,276 26,258 14,592 415 41,265 Financial liabilities designated at fair value 992 27,595 3,958 32,545 933 23,888 2,461 27,282 Derivatives 994 168,145 2,335 171,474 1,744 214,645 2,478 218,867 The bank Recurring fair value measurements at 31 Dec Assets Trading assets 58,152 25,772 1,842 85,766 41,524 23,940 2,159 67,623 Financial assets designated and otherwise mandatorily measured at fair value through profit or loss 206 2,910 65 3,181 252 1,094 272 1,618 Derivatives 152 151,661 1,952 153,765 2,037 192,778 1,899 196,714 Financial investments 15,074 1,233 55 16,362 11,214 976 71 12,261 Liabilities Trading liabilities 13,177 11,503 252 24,932 11,771 13,591 403 25,765 Financial liabilities designated at fair value - 20,811 2,635 23,446 - 17,565 1,850 19,415 Derivatives 601 149,850 2,348 152,799 1,691 189,908 1,737 193,336 1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated accordingly. 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 2023 Transfers from Level 1 to Level 2 26 252 - - 4 - - Transfers from Level 2 to Level 1 121 408 - - 41 - - 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 - - - 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. 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 2023 2022 MSS Corporate Centre MSS Corporate Centre ��m ��m ��m ��m Type of adjustment Risk-related 327 32 359 33 - bid-offer 155 - 188 - - uncertainty 42 2 50 - - credit valuation adjustment 61 27 98 29 - debt valuation adjustment (20) - (64) - - funding fair value adjustment 89 3 87 4 - other - - - - Model-related 41 - 31 - - model limitation 41 - 31 - - other - - - - Inception profit (Day 1 P&L reserves) 54 - 64 - At 31 Dec 422 32 454 33 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 HSBC 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. 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 66 1 2,656 - 2,723 8 1 - 9 Asset-backed securities 160 97 6 - 263 - - - - Structured notes - - - - - - 3,490 - 3,490 Derivatives - - - 1,823 1,823 - - 2,335 2,335 Other portfolios 681 1,952 220 - 2,853 244 467 - 711 At 31 Dec 2023 907 2,050 2,882 1,823 7,662 252 3,958 2,335 6,545 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 The bank Private equity including strategic investments 55 - 65 - 120 8 - - 8 Asset-backed securities - 97 - - 97 - - - - Structured notes - - - - - - 2,635 - 2,635 Derivatives - - - 1,952 1,952 - - 2,343 2,343 Other portfolios - 1,745 - - 1,745 244 - 5 249 At 31 Dec 2023 55 1,842 65 1,952 3,914 252 2,635 2,348 5,235 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 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. 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 2023 1,447 2,738 3,318 1,737 415 2,461 2,478 Total gains or losses) on assets and total gains or losses on liabilities recognised in profit or loss (1) 189 8 851 (268) 60 1,008 - net income from financial instruments held for trading or managed on a fair value basis - 189 - 851 (268) - 1,008 - changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss - - 8 - - 60 - - gains less losses from financial investments at fair value through other comprehensive income (1) - - - - - - Total total gains or losses recognised in other comprehensive income ('OCI')1 (1) (28) (92) (2) - (8) (5) - financial investments: fair value total gains or losses 29 - - - - - - - exchange differences (30) (28) (92) (2) - (8) (5) Purchases 51 1,004 305 - 233 - - New issuances - 1 - - 2 3,005 - Sales (213) (1,675) (484) - (253) (2) - Settlements (38) (79) (72) (1,009) 138 (1,169) (1,295) Transfers out (451) (561) (120) (233) (30) (660) (339) Transfers in 113 461 19 479 15 271 488 At 31 Dec 2023 907 2,050 2,882 1,823 252 3,958 2,335 Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2023 - - (75) 520 - (217) (823) - trading income/(expense) excluding net interest income - - - 520 - - (823) - net income/(expense) from other financial instruments designated at fair value - - (75) - - (217) - 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 from other financial instruments designated at fair value - - 49 - - 30 - 1 Included 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. 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 2023 71 2,159 272 1,899 403 1,850 1,737 Total gains/(losses) on assets and total (gains)/losses on liabilities recognised in profit or loss - 192 22 1,025 (271) 13 1,222 - net income from financial instruments held for trading or managed on a fair value basis - 192 - 1,025 (271) - 1,222 - changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss - - 22 - - 13 - - gains less losses from financial investments at fair value through other comprehensive income - - - - - - - Total gains/(losses) recognised in other comprehensive income ('OCI')1 - (18) (7) - - - - - financial investments: fair value gains/(losses) - - - - - - - - exchange differences - (18) (7) - - - - Purchases - 930 - - 233 - - New issuances - - - - - 2,548 - Sales - (1,280) (154) - (252) - - Settlements (1) (72) (69) (1,192) 154 (1,580) (746) Transfers out (15) (490) - (287) (30) (449) (400) Transfers in - 421 1 507 15 253 535 At 31 Dec 2023 55 1,842 65 1,952 252 2,635 2,348 Unrealised gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 Dec 2023 - - (1) 511 - (180) (818) - trading income/(expense) excluding net interest income - - - 511 - - (818) - net income/(expense) from other financial instruments designated at fair value - - (1) - - (180) - 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 from other financial instruments designated at fair value - - - - - 19 - 1 Included 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. Effect of changes in significant unobservable assumptions to reasonably possible alternatives Sensitivity of Level 3 fair values to reasonably possible alternative assumptions 2023 2022 Reflected in profit or loss Reflected in OCI Reflected in profit or loss Reflected in OCI Favourable changes Un- favourable changes Favourable changes Un- favourable changes Favourable changes Un- favourable changes Favourable changes Un- favourable changes The group ��m ��m ��m ��m ��m ��m ��m ��m Derivatives, trading assets and trading liabilities1 478 (225) - - 201 (261) - - Designated and otherwise mandatorily measured at fair value through profit or loss 193 (194) - - 236 (235) - - Financial investments 10 (9) 23 (25) 9 (9) 27 (19) Year ended 31 Dec 681 (428) 23 (25) 446 (505) 27 (19) The bank Derivatives, trading assets and trading liabilities1 478 (225) - - 193 (253) - - Designated and otherwise mandatorily measured at fair value through profit or loss 11 (11) - - 45 (45) - - Financial investments 1 - 6 (6) 0 - 14 (6) Year ended 31 Dec 490 (236) 6 (6) 238 (298) 14 (6) 1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these instruments are risk managed. 1 Sensitivity of Level 3 fair values to reasonably possible alternative assumptions by instrument type 2023 2022 Reflected in profit or loss Reflected in OCI Reflected in profit or loss Reflected in OCI Favourable changes Un-favourable changes Favourable changes Un-favourable changes Favourable changes Un-favourable changes Favourable changes Un-favourable changes ��m ��m ��m ��m ��m ��m ��m ��m Private equity including strategic investments 182 (184) 6 (6) 225 (389) 8 (7) Asset-backed securities 28 (16) 2 (2) 28 (17) 12 (5) Structured notes 5 (5) - - 5 (5) - - Derivatives 237 (182) - - 44 (44) - - Other portfolios 229 (41) 15 (17) 144 (50) 7 (7) Total 681 (428) 23 (25) 446 (505) 27 (19) The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and historical data. When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually. Key unobservable inputs to Level 3 financial instruments Quantitative information about significant unobservable inputs in Level 3 valuations Fair value 2023 2022 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 2,723 9 See below See below N/A N/A N/A N/A Asset-backed securities 263 - - CLO/CDO1 34 - Market proxy Bid quotes - 94 - 92 - Other ABSs 229 - Market proxy Bid quotes 220 - 99 Structured notes - 3,490 - equity-linked notes - 3,050 Model - Option model Equity Volatility 6% 154% 6% 99% Equity Correlation 35% 100% 32% 99% - fund-linked notes - - Model - Option model Fund Volatility - FX-linked notes - 11 Model - Option model FX Volatility 1% 18% 3% 20% - other - 429 Derivatives 1,823 2,335 Interest rate derivatives: 621 616 - securitisation swaps 114 106 Model - Discounted cash flow Constant Prepayment Rate 5% 10% 5% 10% - long-dated swaptions 44 54 Model - Option model IR Volatility 11% 34% 9% 33% - other 463 456 FX derivatives: 299 358 - FX options 250 311 Model - Option model FX Volatility 3% 31% 3% 46% - other 49 47 Equity derivatives: 658 1,044 - long-dated single stock options 305 400 Model - Option model Equity Volatility 7% 87% 7% 153% - other2 353 644 Credit derivatives: 245 317 - other 245 317 Other portfolios 2,853 711 - repurchase agreements 553 243 Model - Discounted cash flow IR Curve 3% 8% 1% 9% - other3 2,300 468 At 31 Dec 7,662 6,545 1 Collateralised loan obligation/collateralised debt obligation. 2 Other Equity Derivatives consists mainly of Swaps and OTC Options. 3 Other 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. 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 2023 Assets Loans and advances to banks 14,371 - 14,371 - 14,371 Loans and advances to customers 75,491 - - 74,904 74,904 Reverse repurchase agreements - non-trading 73,494 - 73,494 - 73,494 Financial investments - at amortised cost 8,861 7,173 1,660 4 8,837 Liabilities Deposits by banks 22,943 - 22,950 - 22,950 Customer accounts 222,941 - 223,067 - 223,067 Repurchase agreements - non-trading 53,416 - 53,416 - 53,416 Debt securities in issue 13,443 - 13,320 138 13,458 Subordinated liabilities 14,920 - 15,219 - 15,219 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 - 32,901 Debt securities in issue 7,268 - 7,124 132 7,256 Subordinated liabilities 14,528 - 14,434 - 14,434 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 2023 Assets Loans and advances to banks 8,103 - 8,103 - 8,103 Loans and advances to customers 13,345 - - 12,902 12,902 Reverse repurchase agreements - non-trading - - - - - Liabilities Deposits by banks - - - - - Customer accounts 17,587 - 17,587 - 17,587 Debt securities in issue 1,080 - 1,066 - 1,066 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 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 2023 Assets Loans and advances to banks 11,670 - 11,688 - 11,688 Loans and advances to customers 32,443 - - 32,359 32,359 Reverse repurchase agreements - non-trading 56,973 - 56,973 - 56,973 Financial investments - at amortised cost 12,029 5,738 6,328 - 12,066 Liabilities Deposits by banks 18,775 - 18,796 - 18,796 Customer accounts 133,373 - 133,373 - 133,373 Repurchase agreements - non-trading 48,842 - 48,842 - 48,842 Debt securities in issue 7,353 - 7,372 - 7,372 Subordinated liabilities 14,658 - 15,015 - 15,015 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 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 amount. 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. Repurchase and reverse repurchase agreements - non-trading Fair values of repurchase and reverse repurchase agreements that are held on a non-trading basis provide approximate carrying amounts. This is due to the fact that balances are generally short dated. This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com. RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy. END ACSUASKRSAUUURR

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