HSBC 2015 Annual Report Download - page 112

Report of the Directors: Risk (continued)
Top and emerging risks
HSBC HOLDINGS PLC
110
Top and emerging risks
Our approach to identifying and monitoring top and
emerging risks is described on page 103. Our current
top and emerging risks are as follows:
Externally driven
• Economic outlook and capital flows
• Geopolitical risk
• Turning of the credit cycle
• Regulatory developments with adverse impact on
business model and profitability
• Regulatory focus on conduct of business and
financial crime
• Dispute risk
• Regulatory commitments and consent orders
• Cyber threat and unauthorised access to systems
Economic outlook and capital flows
Economic growth remained subdued in 2015, with a number
of headwinds adversely affecting both developed and
emerging market countries.
The slowdown of the mainland Chinese economy has
dampened global trade flows and caused volatility in
currency and global stock markets. Market concerns persist
as to the scale of the slowdown and the potential for further
depreciation of the renminbi and emerging market
currencies.
Oil and gas prices fell further during 2015 and early 2016 as a
result of continuing global supply and demand imbalances,
raising the risk that any recovery in oil prices over the
medium term will be even more gradual than currently
expected. Although oil importers benefit from low prices,
low oil prices increase fiscal and financing challenges for
exporters and accentuate deflationary risks.
Emerging market economies have been affected by falling
commodity prices, the economic slowdown in mainland
China and a vulnerability to monetary policy normalisation
in the US. This has led to steep depreciation in several key
emerging market currencies against the US dollar and
substantial capital outflows.
The economic recovery in the eurozone remains fragile,
driven by a combination of low oil prices, a weak euro,
slowing growth and loose monetary policy. Populist parties
are in the ascendancy in several EU countries, helped by the
subdued economic backdrop as well as other issues such
as migration. A referendum on the UK’s EU membership
is expected to occur within the lifetime of the current
Parliament, and may be held as early as mid-2016 (see
‘Geopolitical risk’ below). While the risk of Greece exiting
the EU has faded, the implementation of required structural
reforms could prove politically challenging.
Potential impact on HSBC
• We earn a significant proportion of our profits from
our operations in Asia. Our results could be adversely
affected by a prolonged or severe slowdown in regional
economic growth or contraction in global trade and
capital flows as a consequence.
• HSBC’s results could be impacted by a prolonged period
of low oil prices, particularly in conjunction with a low
inflation environment and/or low or negative interest
rates.
• The intensification of fragmentation risks in the EU could
have both political and economic consequences for
Europe.
Mitigating actions
• We closely monitor economic developments in key
markets and sectors with the aim of ensuring trends
are identified, the implications for specific customers,
customer segments or portfolios are assessed, and
appropriate mitigating action – which may include
revising key risk appetite metrics or limits – is taken
as circumstances evolve.
• We use internal stress testing and scenario analysis as
well as regulatory stress test programmes to evaluate
the impact of macroeconomic shocks on our businesses
and portfolios. Analyses undertaken on our oil and gas
portfolio and mainland China exposures are discussed
on page 117.
Geopolitical risk
Our operations and portfolios are exposed to risks arising
from political instability, civil unrest and military conflict in
many parts of the world.
In the Middle East, the intervention of Russia and the rise of
the terrorist group, Daesh, have added to an already complex
civil war in Syria and further destabilised Iraq. These are
conflicts which show few signs of resolution. Daesh has
proved capable of carrying out attacks in neighbouring
countries and further afield. The lifting of sanctions following
a deal between Iran and the five permanent members of the
UN Security Council on the country’s nuclear programme has
done little to calm regional tensions.
Violence in Ukraine has abated but the conflict in the east of
the country has not been resolved. Sanctions imposed by the
US and EU against the Russian government, institutions and
individuals have damaged the Russian economy.
European states are experiencing heightened political
tension, reflecting concerns over migration, fears of
terrorism and the possibility that the UK may vote to exit the
EU following a referendum. An exit could have a significant
impact on UK, European and global macroeconomic
conditions, as well as substantial political ramifications.
In Asia, territorial disputes between Japan and China and
other states have strained diplomatic relations and are
testing the resolve of the US to defend freedom of
navigation.
Potential impact on HSBC
• Our results are subject to the risk of loss from physical
conflicts or terrorist attacks, unfavourable political
developments, currency fluctuations, social instability
and changes in government policies in the jurisdictions
in which we operate.