HSBC 2015 Annual Report Download - page 230

Report of the Directors: Capital (continued)
Capital overview / Movements by major drivers / RWAs
HSBC HOLDINGS PLC
228
Our objective in the management of Group capital is
to maintain appropriate levels of capital to support our
business strategy and meet our regulatory and stress
testing related requirements.
Capital highlights
• Our end point common equity tier 1 (‘CET1’) ratio of 11.9%
was up from 11.1% at the end of 2014.
• We continue to generate capital from profit and our progress
to achieve targeted RWA initiatives strengthened our CET1
ratio, creating capacity for growth.
• Our leverage ratio remained strong at 5.0%.
Capital overview
Capital ratios
At 31 December
2015 2014
% %
CRD IV end point
Common equity tier 1 ratio1 11.9 11.1
CRD IV transitional
Common equity tier 1 ratio1 11.9 10.9
Tier 1 ratio 13.9 12.5
Total capital ratio 17.2 15.6
Total regulatory capital and risk-weighted assets
At 31 December
2015 2014
$m $m
CRD IV end point
Common equity tier 1 capital1 130,863 135,953
CRD IV transitional
Common equity tier 1 capital1 130,863 133,200
Additional tier 1 capital 22,440 19,539
Tier 2 capital 36,530 37,991
Total regulatory capital 189,833 190,730
Risk-weighted assets 1,102,995 1,219,765
For footnote, see page 243.
We manage Group capital to ensure that we exceed current
regulatory requirements and that we respect the payment
priority of our capital providers. Throughout 2015, we
complied with the Prudential Regulation Authority’s (‘PRAs’)
regulatory capital adequacy requirements, including those
relating to stress testing. We are also well placed to meet
our expected future capital requirements.
We continue to manage Group capital to meet a medium-
term target for return on equity of more than 10% by 2017.
This is modelled on a CET1 ratio on an end point basis in
the range of 12% to 13%, which takes into account known
and quantifiable end-point CET1 requirements and includes
a regulatory and management buffer in the range of 1% to
2%, based on our estimate of the additional CET1 we will
need to hold to cover the new time-varying buffers and
other factors. The CET1 regulatory and management buffer
will be kept under review until the details of the regulatory
framework are finalised.
Capital and RWAs are calculated and presented according
to the Group’s interpretation of CRD IV legislation and the
PRA’s rules as set out in the PRA Rulebook.
Despite the rules published to date, there remains
continued uncertainty around the amount of capital that
UK banks will be required to hold. In December 2015, the
Financial Policy Committee (‘FPC’) published its view of the
capital framework as applicable to UK banks, which set out
expectations in relation to CET1 and tier 1 capital across the
industry. However, requirements applicable to individual
banks are subject to the PRA’s determination. While there is
emerging clarity around the interaction of the capital
buffers and the PRA’s Pillar 2 framework, uncertainty
remains around the broader capital framework, including
revisions to the RWA requirements, capital floors, and
global systemically important bank (‘G-SIB’) developments.
Furthermore, there remain a number of draft and
unpublished European Banking Authority (‘EBA’) technical
and implementation standards due in 2016.
A summary of our policies and practices regarding capital
management, measurement and allocation is provided in
the Appendix to Capital on page 243.
Movements by major drivers
Capital and RWA movements by major driver – CRD IV end
point basis
CET1
capital RWAs
$bn $bn
CRD IV end point basis at 1 January 2015 136.0 1,219.8
Capital generation from profit 3.4
– consolidated profits attributable to
shareholders of the parent company
(including regulatory adjustments) 11.3
–
dividends net of scrip2 (7.9)
RWA initiatives (123.8)
Business growth including associates 48.7
Foreign currency translation differences3 (7.9) (52.2)
Other movements (0.6) 10.5
CRD IV end point basis at 31 December
2015 130.9 1,103.0
For footnotes, see page 243.
Our CET1 capital was reduced by foreign currency
translation differences of $7.9bn. This was partly offset by
capital of $3.4bn generated from profits net of dividends
(including the fourth interim dividend after planned scrip).
Included in profits was a $1.4bn gain on the partial sale of
our shareholding in Industrial Bank. This included fair value
gains reclassified to the income statement that has already
been included in CET1 capital, resulting in no further
impact. An additional impact on CET1 capital from the
partial sale of our shareholding in Industrial Bank was
lower allowable non-controlling interest.
Substantial progress has been made in achieving the
Group’s 2017 RWA target. After foreign currency
translation differences, RWAs reduced by $65bn in 2015,
primarily driven by specific initiatives that saved $124bn of
RWAs. The saving was partially offset by business growth of
$49bn.