HSBC 2009 Annual Report Download - page 259

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movements in interest rates on its net interest income
arises in two main areas, core deposit franchises and
Global Markets:
• core deposit franchises: these are exposed to
changes in the cost of deposits raised and
spreads on wholesale funds. The net interest
income benefit of core deposits increases as
interest rates rise and decreases as interest rates
fall. This risk is asymmetrical in a very low
interest rate environment, however, as there is
limited room to lower deposit pricing in the
event of interest rate reductions; and
• residual interest rate risk is managed within
Global Markets, under the Group’s policy of
transferring interest rate risk to Global Markets
to be managed within defined limits and with
flexibility as to the instruments used.
The main drivers of the year on year movements
in the sensitivity of the Group’s net interest income
to the changes in interest rates tabulated above were:
• decreases in interest rates, particularly in US
dollar, Hong Kong dollar and sterling which
have restricted the Group’s ability to pass on
to depositors further rate reductions, thereby
increasing exposures to further rate falls; and
• Global Markets’ decreased net trading asset
positions, particularly in euros and US dollars.
The funding of net trading assets is recorded in
‘Net interest income’ whereas the income from
such assets is recorded in ‘Net trading income’.
HSBC monitors the sensitivity of reported
reserves to interest rate movements on a monthly
basis by assessing the expected reduction in
valuation of available-for-sale portfolios and cash
flow hedges due to parallel movements of plus or
minus 100 basis points in all yield curves. The table
below describes the sensitivity of HSBC’s reported
reserves to these movements at the end of 2009 and
2008 and the maximum and minimum month-end
figures during these years:
Sensitivity of reported reserves to interest rate movements
(Unaudited)
US$m
Maximum
impact
US$m
Minimum
impact
US$m
At 31 December 2009
+ 100 basis point parallel move in all yield curves ......................................... (3,096) (3,438) (2,715)
As a percentage of total shareholders’ equity ................................................. (2.4%) (2.7%) (2.1%)
– 100 basis point parallel move in all yield curves ......................................... 3,108 3,380 2,477
As a percentage of total shareholders’ equity ................................................. 2.4% 2.6% 1.9%
At 31 December 2008
+ 100 basis point parallel move in all yield curves ......................................... (2,740) (2,740) (1,737)
As a percentage of total shareholders’ equity ................................................. (2.9%) (2.9%) (1.9%)
– 100 basis point parallel move in all yield curves ......................................... 2,477 2,609 1,944
As a percentage of total shareholders’ equity ................................................. 2.6% 2.8% 2.1%
The sensitivities are illustrative only and are
based on simplified scenarios. The table shows the
potential sensitivity of reserves to valuation
changes in available-for-sale portfolios and from
cash flow hedges following the pro forma
movements in interest rates. These particular
exposures form only a part of the Group’s overall
interest rate exposures. The accounting treatment
under IFRSs of the Group’s remaining interest rate
exposures, while economically largely offsetting
the exposures shown in the above table, does not
require revaluation movements to go to reserves.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent
net investments in subsidiaries, branches and
associates, the functional currencies of which are
currencies other than the US dollar. An entity’s
functional currency is the currency of the primary
economic environment in which the entity operates.
Exchange differences on structural exposures
are recognised in other comprehensive income. The
main functional currencies in which HSBC’s
operations transact business are the US dollar, the
Hong Kong dollar, pound sterling, the euro, the
Mexican peso, the Brazilian real and the Chinese
renminbi. HSBC Holdings’ functional currency is
the US dollar because the US dollar and currencies
linked to it are the most significant currencies
relevant to the operations of its subsidiaries, as well
as representing a significant proportion of its funds
generated from financing activities. HSBC uses the
US dollar as its presentation currency in its
consolidated financial statements because the US