HSBC 2014 Annual Report Download - page 35

HSBC BANK PLC
Report of the Directors: Risk (continued)
33
These exercises, designed to assess the resilience of
banks to adverse market development and ensure that
they have robust, forward-looking capital planning
processes that account for their unique risks, include the
programmes of the PRA, the EBA, and the ECB.
In 2014, the Group took part in the first PRA concurrent
stress test exercise involving major UK banks. The
exercise was run on an enterprise-wide basis and
comprised the EBA base scenario and a stress scenario
that predominantly followed the EBA stress scenario
with an additional overlay of variables for the UK only.
This overlay reflected the vulnerabilities facing the UK
banking system, including significant declines in the
value of sterling, residential and commercial property
prices and bond and equity prices, along with a
downturn in economic activity and rising unemployment.
HSBC’s submission, which comprised the base and stress
case along with supporting mitigating actions, was made
to the PRA at the end of June 2014. The Group also
participated in the complementary programme of
regular data provision to the Bank of England under its
Firm Data Submission Framework.
The Bank of England (‘The Bank’) disclosed the results of
the 2014 Concurrent Stress Test on 16 December 2014.
The Bank’s results show that, under the hypothetical
stress scenario, the Group’s CET1 capital ratio would fall
to a low point of 8.7 per cent, well above the Bank of
England threshold CET1 capital ratio of 4.5 per cent.
These results demonstrate the Group’s continued capital
strength.
The results incorporate management actions that have
been accepted by the Bank of England for the purposes
of this exercise. Under adverse economic circumstances,
we would in practice consider a variety of management
actions depending on the particular prevailing
circumstances. The Group’s intention, as evidenced by
past actions, is to maintain a conservative and prudent
stance on capital management.
The EBA conducted a Europe-wide stress test in the first
half of 2014, run via the PRA for UK banks. The adverse
macro-economic scenario included country-specific
shocks to sovereign bond spreads, short-term interest
rates and residential property prices, together with a
decline in world trade, currency depreciation in Central
and Eastern Europe and slow-downs or contractions in
GDP growth around the world.
The EBA disclosed results of the stress test exercise on
26 October 2014, publishing detailed results for HSBC
Group using dedicated templates from the exercise. The
Group’s stressed CET1 capital ratio was projected to fall
to a low point of 8.7 per cent at end-2015, above the
EBA minimum threshold of 5.5 per cent. The Group’s
fully-loaded stressed CET1 ratio at end-2016 was
projected to be 9.3 per cent, which compared favourably
with other major European banks.
The ECB conducted its comprehensive assessment in the
first half of 2014, which comprised an Asset Quality
Review and the ECB’s stress testing process, the latter
using the EBA scenarios. HSBC France and HSBC Bank
Malta plc fell within scope and both passed the exercise,
the results of which were also published in October
2014. Under the stressed scenario, the CET1 ratio for
HBFR was projected to fall from 12.9 per cent in 2013 to
6.6 per cent by the end of 2016, remaining above
regulatory minimums. The fall reflected HBFR’s business
model, namely the group’s euro Rates business, and the
application of EBA methodology, specifically the
application of ECB credit loss benchmarks.
The number, granularity and timelines of these stress
tests give rise to a number of risks. Banks that do not
meet both the quantitative and qualitative requirements
of the stress test exercises may be required to hold
additional capital, may have restrictions placed on their
planned capital actions including the payment of
dividends or may have to implement other remedial
measures. The Group created a Stress Testing
Management Board in early 2014, chaired by the Group
Finance Director, to ensure appropriate senior
management oversight and governance of the stress test
programmes.
Depressed oil and gas prices
Oil and commodity prices have declined significantly
since the middle of 2014 as a result of increasing global
demand and supply imbalances and changes in market
sentiment. There is considerable uncertainty regarding
the future price levels during 2015 and beyond.
Prolonged depressed oil prices will affect countries,
industries and individual companies differently:
• Country level: net oil importers are likely to benefit
from reduced oil prices. In advanced economies,
this is likely to increase consumer disposable
income while in emerging market countries it is
more likely to benefit the governments’ fiscal
position. The impact on oil exporting countries will
depend on the importance of the oil receipts to
fiscal revenues, the extraction costs and the amount
of fiscal reserves that the countries are able to draw
upon.
• Industry level: the oil and gas industry and
supporting services will be affected, though this will
vary depending on the relevant sub-sector. Large
integrated producers are likely to remain resilient.
Within the pure producers sector, the higher cost
pure producers are likely to experience higher levels
of stress. Similarly, infrastructure and services
providers are likely to come under stress as
producers curtail capital expenditure. Industries
where oil and gas represent major costs, such as
haulage, transport and shipping, are likely to benefit
if prices remain depressed.
The oil and gas sector has been considered a higher risk
sector for some time and has been under enhanced
monitoring and controls with risk appetite and new
money lending under increased scrutiny.
HSBC has a diversified lending profile to the oil and gas
sector. Lending in GB&M is concentrated predominately
in upstream activities and with large investment-grade
global integrated producers. CMB mainly focuses on
lending to service companies and pure producers. The
exposures are diversified across a number of countries.
The overall portfolio of the group has drawn risk
exposures amounting to about £6.0 billion, with just over
20 per cent consisting of exposures to oil service