HSBC 2015 Annual Report Download - page 44

As a provider of banking and financial
services, managing risk is part of our core
day-to-day activities. Our success in doing
so is due to our clear risk appetite, which
is aligned to our strategy. We set out the
aggregate level and types of risk that we
are willing to accept in order to achieve
our medium- and long-term strategic
objectives in our risk appetite statement,
which is approved by the Board, covering:
– risks that we accept as part of doing
business, such as credit risk and
market risk;
– risks that we incur to generate income,
such as operational risk and capital and
liquidity risk, which are managed to
remain below an acceptable tolerance;
and
– risks that we have zero tolerance for,
such as reputational risk.
Our risk management framework
and its key components, and our exposure
to risks arising from the business activities
of the global businesses are shown on pages
101 and 109, respectively.
Risk overview
We actively manage risk to protect
and enable the business.
Managing risk
Risk management and stress testing
Key risk appetite metrics
Component Measure Risk appetite 2015
Returns Return on average ordinary shareholders’ equity
in excess of our estimated cost of equity of 9%
≥10% 7. 2%
Capital Common equity tier 1 ratio – CRD IV end point basis ≥10% 11.9%
Liquidity HSBC consolidated balance sheet advances-to-
deposits ratio
≤90% 72%
Loan
impairment
charges
RBWM loan impairment charges as % of advances1<0.65% 0.58%
Wholesale loan impairment charges as
% of advances
<0.45% 0.26%
1 Including the loans of the Brazilian operations held for sale.
2015 Bank of England Stress Test Results
Group Common Equity Tier 1 Ratio
31 December 2014 actual (end point) 11.1%
Minimum stressed ratio before management actions 7.0%
Minimum stressed ratio after management actions 7.7%
Bank of England minimum ratio 4.5%
31 December 2015 actual (end point) 11.9%
Stress testing is an integral component
of our risk management framework.
It is an important tool for us to assess
potential vulnerabilities in our businesses,
business model or portfolios. It allows us
to understand the sensitivities of the core
assumptions in our strategic and capital
plans, and improve decision-making
through balancing risk and return.
Internal stress test scenarios are closely
aligned to our assessment of top and
emerging risks. The potential impact from
these scenarios, were they to occur, may
prompt pre-emptory management actions
including a reduction in limits or direct
exposures, or closer monitoring of
exposures sensitive to stress.
We also participate in regulatory stress
test exercises in a number of jurisdictions.
The primary Group-wide exercise is
requested by the Bank of England. The
2015 scenario incorporated a synchronised
global downturn affecting Asia, Brazil and
the eurozone in particular, a reduction in
global risk appetite and market liquidity,
and a recession in the UK.
Our approach to stress testing and
the results of regulatory stress testing
programmes are discussed on pages 103
and 116, respectively.
The strategic actions designed to increase
our return on equity are described on
page 18.
To ensure that risks are managed in
a consistent way across the Group, we
employ a risk management framework
that is applicable to all levels of the
organisation and across all risk types.
It sets out governance and structures,
responsibilities and processes. Global
Risk, led by the Group Chief Risk
Officer, who is an executive Director,
is responsible for enterprise-wide risk
oversight and is independent from
the sales and trading functions of the
Group’s businesses. This independence
ensures the necessary balance in risk/
return decisions.
The results were published by the Bank
of England on 1 December 2015 and
are summarised below. Our CET1 ratio
remained well above the regulatory
minimum despite our significant
presence in the countries and regions
affected by the scenario, demonstrating
our resilience to a severe stress situation
in our core markets.
Strategic Report
HSBC HOLDINGS PLC
42