Annual Report and Accounts 2020 the HSBC Group HSBC Bank Malta P.L.C

HSBC Bank Malta p.l.c. Annual Report and Accounts 2020 The HSBC Group HSBC Bank Malta p.l.c. is a member of the HSBC Group, whose ultimate parent company is HSBC Holdings plc. Headquartered in London, HSBC Holdings plc is one of the largest banking and financial services organisations in the world. The HSBC Group’s international network is spread across 64 countries and territories in Europe, Asia, North America, Latin America, and the Middle East and North Africa. HSBC Bank Malta p.l.c. Registered in Malta: C3177 Registered Office and Head Office: 116 Archbishop Street Valletta VLT 1444 Malta Telephone: 356 2380 2380 www.hsbc.com.mt HSBC Holdings plc Registered Office and Group Head Office: 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 020 7991 8888 www.hsbc.com Contents Page Chairman’s Statement 2 Chief Executive Officer’s Review 7 Board of Directors and Company Secretary 15 Executive Committee and Head of Internal Audit 17 Report of the Directors 20 Directors’ Responsibilities Statement 30 Statement of compliance with the Code of Principles of Good Corporate Governance 31 Remuneration Report 39 Independent Auditor’s Report to the Shareholders of HSBC Bank Malta p.l.c. 45 Income Statements 53 Statements of Comprehensive Income 54 Statements of Financial Position 55 Statements of Changes in Equity 56 Statements of Cash Flows 58 Notes on the Financial Statements 59 Additional Regulatory Disclosures 146 Five-Year Comparison: Income Statements and Statements of Comprehensive Income 183 Five-Year Comparison: Statements of Financial Position 184 Five-Year Comparison: Statements of Cash Flows 185 Five-Year Comparison: Accounting Ratios 186 Branches and Offices 187 HSBC Bank Malta p.l.c. Annual Report and Accounts 2020 1 Chairman’s Statement Chairman’s Statement The conditions under which our bank has had to operate during most of 2020 were obviously dominated by the unforeseen global pandemic caused by the Covid-19 virus. This has had a seriously detrimental effect on all of the bank’s operations, as indeed it has had on the majority of businesses worldwide. Not surprisingly, the local economy has suffered too, with some sectors being particularly badly hit, but the various support measures put in place by the Government and the relevant institutions, including the banks, have thus far gone some way to soften the blow. Some encouraging signs emerged at the end of the year, thanks to the remarkable efforts of the international scientific community to develop vaccines in such a short period, but it is impossible to predict, with any certainty, a timeframe for any economic recovery. The negative interest rate environment has continued to prevail and there is little evidence to suggest that this will change soon. This continues to have an effect on the results of our bank, over and above the effect of the pandemic. The economic instability created by the pandemic has materially impacted the bank’s performance in 2020, as our CEO explains in his review that follows. The bank has been obliged to make increased provisions on its loan book, based on cautious and conservative economic forecasts and regulatory policy guidelines. In addition, the pandemic has resulted in a deterioration in the valuation of investments in our insurance business, with a negative impact on results. Nevertheless, I am pleased to note that, given our strong capital position, the bank is proposing the payment of a dividend to the extent that regulatory restrictions allow. In terms of the recovery of the local economy, the immediate priority must be the quickest possible roll-out of our national inoculation programme to enable our economic operators to plan for that recovery and beyond, and to focus on the long term sustainability of their businesses. It remains essential, for long term sustainability, that all our economic operators, as well as our institutions, manage effectively their risk exposure to financial crime. It is essential that the work that has been done to address shortcomings on which our bank has been expressing concern for some time, results in a successful outcome to the much awaited Moneyval report. Whilst national efforts, both at country and enterprise levels, to combat financial crime must continue unabated, it should not stop there. If we are to build a sustainable economic model for our country, apart from effective governance, we have to recognise and embrace other global priorities, at the forefront of which, is the environment. HSBC has made a very strong commitment globally to encourage and support sustainable finance initiatives. At HSBC, we continue to believe that the most important contribution we can make to the local economy is to continue to be a strong and safe bank. We aim to grow our business from the compliant platform of operations that we have built. We will continue to invest in a modern banking offering what we believe is most suited to our customers’ needs. We believe that the investment in our new branch at 80 Mill Street in Qormi will be the embodiment of this, as will our growing suite of digital solutions. We will continue to offer the unique support to the international trading activities of our customers enabled by our Global brand. In short, we will continue to pursue safe growth. Results Financial performance in 2020 was heavily impacted by the Covid-19 pandemic. The reported profit before tax for the year ended . 31 December 2020 was €10.4m. This represents a decrease of €20.3m or 66% compared with the prior year. The decrease in profits is mainly attributable to higher expected credit losses booked on our wholesale and retail portfolios as well as losses incurred by the insurance subsidiary. 2 HSBC Bank Malta p.l.c. Annual Report and Accounts 2020 End-of-Year Financial Results, 18 February 2020, Malta Chamber of Commerce, Enterprise and Industry Whilst there were no notable items in 2020, the adjusted profit before tax for 2019 excluded a restructuring provision and a brokerage provision release. The adjusted profit before tax decreased by €34.9m, or 77% versus 2019. More details on the financial results can be found in the CEO’s review. The bank’s capital ratios continued to improve with CET1 increasing from 16.4% to 18.0% and the total capital ratio improving from 19.0% to 20.7%. The bank continues to maintain a strong capital base and is fully compliant with the regulatory capital requirements. Profit attributable to shareholders amounted to €7.6m, resulting in earnings per share of 2.1 cents compared with 5.6 cents in 2019. Given our strong capital base and recognising the importance of dividends to our shareholders, the Board recommended a dividend of €2.7m. This proposal represents the maximum that can be distributed, in line with the recommendation of the European Central Bank. The final gross dividend will be 1.16 cents per share (0.75 cents per share net of tax). Our regulatory environment During the course of 2020, regulatory and supervisory authorities have maintained a sharp focus on prudential risk management, aiming to consolidate the banks’ capital and liquidity. This focus has become more pronounced in 2020 as a result of Covid-19 and its impact on the financial services industry. Notwithstanding these challenges, the bank has successfully managed its prudential risk in a market which has been significantly impacted by negative interest rates and enhanced cost pressures emanating from heightened compliance and risk management activities. During this time, the bank has effectively maintained its business model which is aligned to the principle of safe growth and strict but safer prudential risk buffers and high compliance standards. An increase in regulatory reporting demands was observed in 2020, also in view of additional Covid-19 reporting introduced by local and European regulators. The increased reporting requirements in line with regulators’ specifications has resulted in a material administrative burden on banks’ resources and systems, albeit it is acknowledged by the bank that the aggregation of accurate and timely data is the foundation for effective risk management and decision-making, which is key to sustainable growth. From a regulatory engagement perspective, continuous and transparent engagement with the bank’s principal regulators has continued on multiple risk themes and assessments and was further enhanced as a result of the onset of Covid-19. Engagement was mainly focused on ensuring that governance and prudential risk management structures, procedures, and internal controls are operating effectively, with an increased focus by the local regulators on the area of Financial Crime. This work continues to be pivotal to the regulators’ supervisory evaluation process. The Regulatory Change Programme of the bank has progressed on various new and enhanced investor and consumer protection regulations such as the Cross Border Payments Regulation II (‘CBPR II’), Payment Services Directive II (‘PSD II’), and the Shareholders Rights Directive II (‘SRD II’). These regulatory requirements are aimed at facilitating an expanded digital footprint and financial inclusion in banking products and services, while providing more comprehensive disclosures to customers and shareholders. Additionally, the Directive on Moratoria on Credit Facilities in Exceptional Circumstances (‘CBM Directive 18’) has been implemented by the Central Bank of Malta in response to Covid-19. This Directive aims to provide the regulatory framework for Malta’s credit and financial institutions to grant a moratorium on credit facilities to borrowers who have been materially impacted by the Covid-19 outbreak. HSBC Bank Malta p.l.c. Annual Report and Accounts 2020 3 Chairman’s Statement Interim Financial Results, 3 August, remote event During this year, the bank was closely engaged with regulators and industry bodies during the consultation/ongoing implementation processes of other regulatory changes, such as the changes to the FIAU Implementing Procedures, Interbank Offered Rates (‘IBORs’) transition, and UK Brexit preparations.

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