HSBC 2015 Annual Report Download - page 245

HSBC HOLDINGS PLC
243
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Footnotes to Capital
1 From 1 January 2015 the CRD IV transitional CET1 and end point CET1 capital ratios became aligned for HSBC Holdings plc due to the recognition of
unrealised gains on investment property and available-for-sale securities.
2 This includes dividends on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity.
3 The basis of presentation for foreign currency translation differences has changed to reflect the total amount in CET1 capital. Previously this only
included foreign currency translation differences recognised in other comprehensive income. The comparative period, where applicable, has not been
updated to reflect the change.
4 In the first half of 2015, a portfolio of customers was transferred from CMB to RBWM in Latin America in order to better align the combined banking
needs of the customers with our established global businesses. Comparative data have been re-presented accordingly.
5 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
6 For the basis of preparation, see page 247.
7 CRD IV balances as at 31 December 2013 were estimated based on the Group’s interpretation of final CRD IV legislation and final rules issued by the
PRA, details of which can be found in the basis of preparation on page 324 of the Annual Report and Accounts 2013.
8 Includes externally verified profits for the year to 31 December 2015.
9 Mainly comprises unrealised gains/losses in available-for-sale debt securities related to SPEs.
10 Includes own credit spread on trading liabilities.
11 Mainly comprise investments in insurance entities.
Appendix to Capital
Capital management
(Audited)
Approach and policy
Our approach to capital management is driven by our strategic and organisational requirements, taking into account the
regulatory, economic and commercial environment in which we operate. Pre-tax return on risk-weighted assets (‘RoRWA’)
is an operational metric by which the global businesses are managed on a day-to-day basis. The metric is calibrated against
return on equity and our capital requirements to ensure we are best placed to achieve capital strength and business
profitability, combined with regulatory capital efficiency objectives. It is our objective to maintain a strong capital base to
support the risks inherent in our business and invest in accordance with our strategy, exceeding both consolidated and local
regulatory capital requirements at all times.
Our policy on capital management is underpinned by a capital management framework and our internal capital adequacy
assessment process, which enables us to manage our capital in a consistent manner. The framework, which is approved by
the Group Management Board (‘GMB’) annually, incorporates a number of different capital measures including market
capitalisation, shareholders’ equity, economic capital and regulatory capital. During 2015, we continued to manage Group
capital to meet a medium-term target for return on equity of more than 10%. This is modelled on a CET1 ratio on an end point
basis in the range of 12% to 13%.
Capital measures
• shareholders’ equity is the equity capital invested in HSBC by our shareholders, adjusted for certain reserves and goodwill previously
amortised or written-off;
• economic capital is the internally calculated capital requirement which we deem necessary to support the risks to which we are exposed;
and
• regulatory capital is the capital which we are required to hold in accordance with the rules established by the PRA for the consolidated
Group and by our local regulators for individual Group companies. This comprises common equity tier 1, additional tier 1 and tier 2
capital.
Our assessment of capital adequacy is aligned to our assessment of risks, including: credit, market, operational, interest rate
risk in the banking book, pensions, insurance, structural foreign exchange risk and residual risks.
Stress testing
In addition to our annual group internal stress test, the Group is subject to supervisory stress testing in many jurisdictions.
Supervisory requirements are increasing in frequency and in the granularity with which the results are required. These
exercises include the programmes of the PRA, the FRB, the EBA, the ECB and the HKMA, as well as stress tests undertaken
in other jurisdictions. We take into account the results of all such regulatory stress testing and our internal stress test when
assessing our internal capital requirements. The outcome of stress testing exercises carried out by the PRA, will also feed into
a PRA buffer under the Pillar 2 requirements, where required.
Risks to capital
Outside of the stress-testing framework, a list of top and emerging risks is regularly evaluated for their effect on our CET1
capital ratio. As a result, other risks may be identified which have the potential to affect our RWAs and/or capital position.
These risks are also included in the evaluation of risks to capital. The downside or upside scenarios are assessed against our
capital management objectives and mitigating actions are assigned as necessary. The responsibility for global capital allocation
principles and decisions rests with the GMB. Through our internal governance processes, we seek to maintain discipline over