HSBC 2008 Annual Report Download - page 248

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Market risk > Non-trading portfolios / DBS / Sensitivity of NII
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would have absorbed the first US$2.2 billion (2007:
US$2.3 billion) of any losses incurred by the
SICs prior to HSBC incurring any equity losses.
The notable increase in this sensitivity at
31 December 2008, compared with 31 December
2007, was again due to the effect of higher volatility
in credit spreads observed during 2008. The overall
credit spread positions within the available-for-sale
portfolios were lower on 31 December 2008
compared with 31 December 2007.
Equity securities classified as available
for sale
(Audited)
Market risk arises on equity securities held as
available for sale. The fair value of these securities
at 31 December 2008 was US$6.8 billion (2007:
US$12.6 billion) and included private equity
holdings of US$2.5 billion (2007: US$3.2 billion).
Investments in private equity are primarily made
through managed funds that are subject to limits
on the amount of investment. Potential new
commitments are subject to risk appraisal to ensure
that industry and geographical concentrations remain
within acceptable levels for the portfolio as a whole.
Regular reviews are performed to substantiate the
valuation of the investments within the portfolio.
Funds typically invested for short-term cash
management represented US$0.9 billion (2007:
US$3.1 billion). Investments held to facilitate
ongoing business, such as holdings in government-
sponsored enterprises and local stock exchanges,
represented US$1.0 billion (2007: US$1.7 billion).
Other strategic investments represented
US$2.4 billion (2007: US$4.6 billion). The fair value
of the constituents of equity securities classified as
available for sale can fluctuate considerably. A
10 per cent reduction in the value of the available-
for-sale equities at 31 December 2008 would have
reduced equity by US$0.7 billion (2007:
US$1.3 billion). For details of the impairment
incurred on available-for-sale equity securities see
‘Accounting policies’ on page 350.
US$1.0 billion of the reduction in the AFS
Equities relates to funds that were consolidated
within the Group’s balance sheet as at 31 December
2008.
Defined benefit pension schemes
(Audited)
Market risk also arises within HSBC’s defined
benefit pension schemes to the extent that the
obligations of the schemes are not fully matched by
assets with determinable cash flows. Pension scheme
obligations fluctuate with changes in long-term
interest rates, inflation, salary increases and the
longevity of scheme members. Pension scheme
assets will include equities and debt securities, the
cash flows of which change as equity prices and
interest rates vary. There are risks that market
movements in equity prices and interest rates could
result in asset valuations which, taken together with
regular ongoing contributions, are insufficient over
time to cover the level of projected obligations and
these, in turn, could increase with a rise in inflation
and members living longer. Management, together
with the trustees who act on behalf of the pension
scheme beneficiaries, assess these risks using reports
prepared by independent external actuaries and take
action and, where appropriate, adjust investment
strategies and contribution levels accordingly. For
example, in order to mitigate the risk of adverse
movements in investments, interest rates and
inflation, the Trustee of the HSBC Bank (UK)
Pension Scheme has continued to implement a
programme of initiatives proposed by HSBC,
including reducing the equity content of the
investment strategy, increasing the diversification of
the scheme’s assets, and entering into long-term
interest rate and inflation swaps.
The present value of HSBC’s defined benefit
pension plans’ obligations was US$24.0 billion at
31 December 2008, compared with US$32.4 billion
at 31 December 2007. Assets of the defined benefit
schemes at 31 December 2008 comprised equity
investments, 20 per cent (2007: 26 per cent); debt
securities, 68 per cent (2007: 62 per cent); and other
(including property), 12 per cent (2007: 12 per cent)
(see Note 8 on the Financial Statements).
Increased corporate bond yields in the UK in
2008 have resulted in an increase of 110 basis points
in the real discount rate (net of the increase in
expected inflation) used to value the accrued benefits
payable under the HSBC Bank (UK) Pension
Scheme, the Group’s largest plan. The resulting
decrease in the liabilities of the scheme has been
largely offset by a reduction in the fair values of the
plan assets of the scheme. As a consequence, the
deficit on the HSBC Bank (UK) Pension Scheme
has decreased to US$392 million from
US$808 million.
Sensitivity of net interest income
(Unaudited)
A principal part of HSBC’s management of market
risk in non-trading portfolios is to monitor the
sensitivity of projected net interest income under
varying interest rate scenarios (simulation
modelling). HSBC aims, through its management of
market risk in non-trading portfolios, to mitigate the