The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2019 Contents Certain defined terms Page This document comprises the Annual Report and Accounts 2019 Certain defined terms 1 for The Hongkong and Shanghai Banking Corporation Limited (‘the Cautionary statement regarding forward-looking statements 1 Bank’) and its subsidiaries (together ‘the group’). References to Chinese translation 1 ‘HSBC’, ‘the Group’ or ‘the HSBC Group’ within this document mean HSBC Holdings plc together with its subsidiaries. Within this Financial Highlights 2 document the Hong Kong Special Administrative Region of the Report of the Directors 3 People’s Republic of China is referred to as ‘Hong Kong’. The Financial Review 8 abbreviations ‘HK$m’ and ‘HK$bn’ represent millions and billions Risk 12 (thousands of millions) of Hong Kong dollars respectively. Capital 51 Statement of Directors’ Responsibilities 54 Cautionary statement regarding forward- Independent Auditor’s Report 55 looking statements Consolidated Financial Statements This Annual Report and Accounts contains certain forward-looking Consolidated income statement 60 statements with respect to the financial condition, results of Consolidated statement of comprehensive income 61 operations and business of the group. Consolidated balance sheet 62 Consolidated statement of cash flows 63 Statements that are not historical facts, including statements Consolidated statement of changes in equity 64 about the Bank’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘anticipates’, ‘intends’, Notes on the Consolidated Financial ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably Statements possible’, variations of these words and similar expressions are 1 Basis of preparation and significant accounting policies 66 intended to identify forward-looking statements. These statements 2 Operating profit 76 are based on current plans, estimates and projections, and 3 Insurance business 78 therefore undue reliance should not be placed on them. Forward- 4 Employee compensation and benefits 79 looking statements speak only as of the date they are made, and it 5 Tax 83 should not be assumed that they have been revised or updated in 6 Dividends 84 the light of new information or future events. 7 Trading assets 85 Forward-looking statements involve inherent risks and 8 Derivatives 85 uncertainties. Readers are cautioned that a number of factors 9 Financial assets designated and otherwise mandatorily could cause actual results to differ, in some instances materially, 87 measured at fair value through profit or loss from those anticipated or implied in any forward-looking 10 Loans and advances to customers 87 statement. 11 Financial investments 88 12 Assets pledged, assets transferred and collateral received 89 13 Investments in subsidiaries 90 Chinese translation 14 Interests in associates and joint ventures 90 A Chinese translation of the Annual Report and Accounts is 15 Goodwill and intangible assets 93 available upon request from: Communications (Asia), Level 32, 16 Property, plant and equipment 95 HSBC Main Building, 1 Queen’s Road Central, Hong Kong. The 17 Prepayments, accrued income and other assets 96 report is also available, in English and Chinese, on the Bank’s 18 Customer accounts 96 website at www.hsbc.com.hk. 19 Trading liabilities 96 20 Financial liabilities designated at fair value 96 21 Debt securities in issue 97 22 Accruals and deferred income, other liabilities and provisions 97 23 Subordinated liabilities 98 24 Preference shares 98 25 Share capital 98 26 Other equity instruments 99 27 Maturity analysis of assets and liabilities 99 28 Analysis of cash flows payable under financial liabilities by remaining contractual maturities 102 29 Contingent liabilities, contractual commitments and guarantees 103 30 Other commitments 103 31 Offsetting of financial assets and financial liabilities 103 32 Segmental analysis 104 33 Related party transactions 106 34 Fair values of financial instruments carried at fair value 108 35 Fair values of financial instruments not carried at fair value 111 36 Structured entities 112 37 Bank balance sheet and statement of changes in equity 114 38 Legal proceedings and regulatory matters 116 39 Ultimate holding company 117 40 Events after the balance sheet date 117 41 Approval of financial statements 117 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2019 1 Financial Highlights | Report of the Directors Financial Highlights 2019 2018 HK$m HK$m For the year Net operating income before change in expected credit losses and other credit impairment charges 219,381 210,469 Profit before tax 136,433 134,583 Profit attributable to shareholders 105,722 103,013 At the year-end Total shareholders’ equity 814,678 752,758 Total equity 879,281 812,920 Total capital1 598,934 557,180 Customer accounts 5,432,424 5,207,666 Total assets 8,661,714 8,263,454 Ratios % % Return on average ordinary shareholders’ equity 13.9 14.8 Post-tax return on average total assets 1.3 1.4 Cost efficiency ratio 42.6 41.5 Net interest margin 2.02 2.06 Advances-to-deposits ratio 68.5 67.8 Capital ratios Common equity tier 1 capital 17.2 16.5 Tier 1 capital 18.8 17.8 Total capital 21.0 19.8 1 Capital is calculated in accordance with the Banking (Capital) Rules issued by the Hong Kong Monetary Authority (“HKMA”) under section 97C(1) of the Banking Ordinance. Established in Hong Kong and Shanghai in 1865, The Hongkong and Shanghai Banking Corporation Limited is the founding member of the HSBC Group – one of the world’s largest banking and financial services organisations. It is the largest bank incorporated in Hong Kong and one of Hong Kong’s three note-issuing banks. It is a wholly-owned subsidiary of HSBC Holdings plc, the holding company of the HSBC Group, which has an international network organised into five geographical regions: Europe, Asia, Middle East and North Africa, North America and Latin America. The Hongkong and Shanghai Banking Corporation Limited Incorporated in the Hong Kong SAR with limited liability Registered Office and Head Office: HSBC Main Building, 1 Queen’s Road Central, Hong Kong Telephone: (852) 2822 1111 Facsimile: (852) 2810 1112 Web: www.hsbc.com.hk. 2 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2019 Report of the Directors Graham John Bradley* He is non-executive Chairman and a Director of HSBC Bank Australia Principal Activities Limited. He is also Chairman and a non-executive Director of Graincorp Limited; Chairman and a Director of EnergyAustralia Holdings Limited, The group provides a comprehensive range of domestic and Infrastructure New South Wales and Virgin Australia International international banking and related financial services, principally in Holdings Limited. He holds a Bachelor of Arts and a Bachelor of Laws the Asia–Pacific region. (Hons I) from Sydney University and a Master of Laws from Harvard University. Asia Strategy Louisa Wai Wan Cheang HSBC’s Asian franchise remains integral to the Group’s focus on She is Vice-Chairman and Chief Executive of Hang Seng Bank Limited. growth and value creation for our stakeholders. Leveraging the She is also a Group General Manager of HSBC Holdings plc; an HSBC Group’s signature balance sheet strength, privileged access independent non-executive Director of Treasury Wine Estates Limited; and to high growth Asian markets, and unique history and positioning an International Advisor of China Union Pay. She holds a Bachelor of as the world’s Leading International Bank, we have made good Social Sciences from The University of Hong Kong. She is also an progress in executing our key strategic priorities in Asia. We Honorary Certified Financial Management Planner of The Hong Kong continue to fortify our leading position in the Greater Bay Area Institute of Bankers. (including in Hong Kong SAR and the Pearl River Delta), to invest Dr Christopher Wai Chee Cheng*, GBS, OBE in growing our business in Southeast Asia, and to enhance our He is Chairman of Wing Tai Properties Limited; an independent non- ability to serve more of the region’s growing wealth, insurance, executive Director of NWS Holdings Ltd.; and an independent non- and asset management needs. We continue to support clients and executive Director of Eagle Asset Management (CP) Limited. He holds a economies participating in the China-led Belt and Road Initiative, Bachelor of Business Administration from University of Notre Dame; a and we re-affirm our commitment as an industry leader in Master of Business Administration from Columbia University; a Doctorate sustainable finance to support the world’s ongoing transition to a in Social Sciences honoris causa from The University of Hong Kong and an Honorary Degree of Doctor of Business Administration from The Hong low-carbon economy. Kong Polytechnic University. Consolidated Financial Statements Dr Raymond Kuo Fung Ch'ien*, GBS, CBE The state of affairs of the Bank and the group, and the He is independent non-executive Chairman of Hang Seng Bank Limited. consolidated profit of the group, are shown on pages 60 to 117. He is also an independent non-executive Director of China Resources Power Holdings Company Limited, Swiss Re Limited and Swiss Re Asia Subordinated liabilities, Preference Shares and Pte. Ltd. He holds a Bachelor of Arts from Rockford College and a Master Share Capital of Arts and Doctor of Philosophy (Economics) from University of Pennsylvania. Details on subordinated liabilities issued by the group are set out in notes 23 and 33. Details on preference shares and share capital Yiu Kwan Choi* of the Bank are set out in notes 24, 25 and 26 on the Consolidated He is an independent non-executive Director of HSBC Bank (China) Financial Statements. Company Limited. He holds a higher certificate in Accountancy from The Hong Kong Polytechnic University and is a fellow member of The Hong Dividends Kong Institute of Bankers.