HSBC : Pillar 3 Disclosures at 31 March 2021

HSBC Holdings plc

Pillar 3 Disclosures at 31 March 2021

Pillar 3 Disclosures at 31 March 2021

Contents

	Page
Introduction	2
Highlights	2
Regulatory framework for disclosures	2
Pillar 3 disclosures	2
Key metrics	3
Capital	4
Approach and policy	4
Risk-weighted assets	5
Minimum requirement for own funds and eligible liabilities	7
Cautionary statement regarding forward-looking statements	8
Abbreviations	10
Contacts	11

Unless the context requires otherwise, 'HSBC Holdings' means HSBC Holdings plc and 'HSBC', the 'Group', 'we', 'us' and 'our' refer to HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. When used in the terms 'shareholders' equity' and 'total shareholders' equity', 'shareholders' means holders of HSBC Holdings ordinary shares and those preference shares and capital securities issued by HSBC Holdings classified as equity. The abbreviations '$m' and '$bn' represent millions and billions (thousands of millions) of US dollars respectively.

This document should be read in conjunction with the Earnings Release 1Q21, which has been published on our website www.hsbc.com/investors.

• HSBC Holdings plc Pillar 3 1Q21

Introduction

Highlights

Common equity tier 1: $134.5bn and 15.9%1

133.4	136.1	134.5
15.6%	15.9%	15.9%

Sep 20Dec 20Mar 21

CET1 ($bn) ____ CET1%

• Capital figures and ratios are reported on a CRR II transitional basis for capital instruments.

Risk-weighted assets by risk type at 31 March 2021 ($bn)

846.8

93.7

24.7

41.4

		687.0
	Credit risk		Counterparty credit risk
	Market risk		Operational risk

Regulatory framework for disclosures

We are supervised on a consolidated basis in the UK by the Prudential Regulation Authority ('PRA'), which receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, which set and monitor their local capital adequacy requirements. In most jurisdictions, non-banking financial subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.

At a consolidated Group level, capital is calculated for prudential regulatory reporting purposes using the Basel III framework of the Basel Committee on Banking Supervision ('Basel'), as implemented by the European Union ('EU') in the revisions to the Capital Requirements Regulation, as implemented ('CRR II'), and in the PRA Rulebook for the UK banking industry. The regulators of Group banking entities outside the EU are at varying stages of implementing the Basel III framework, so the Group may have been subject to local regulations that were on the basis of the Basel I, II or III frameworks.

The Basel framework is structured around three 'pillars', with the Pillar 1 minimum capital requirements and Pillar 2 supervisory review process complemented by Pillar 3 market discipline. The aim of Pillar 3 is to produce disclosures that allow market participants to assess the scope of application by banks of the Basel framework and the rules in their jurisdiction, their capital condition, risk exposures and risk management processes, and hence their capital adequacy.

Following the end of the transition period following the UK's withdrawal from the EU, any reference to EU regulations and directives, including European Banking Authority ('EBA') technical standards, should be read as a reference to the UK's version of such regulation and/or directive, onshored into UK law under the European Union (Withdrawal) Act 2018, as amended. EU regulations and directives (including EBA technical standards) will continue to be relevant for HSBC's EU subsidiaries.

Pillar 3 disclosures

Our Pillar 3 Disclosures at 31 March 2021 comprises both quantitative and qualitative information required under Pillar 3. These disclosures are made in accordance with the requirements of CRD IV and associated European guidance. They are supplemented by specific additional requirements of the PRA and discretionary disclosures on our part.

Our Pillar 3 disclosures are governed by the Group's disclosure policy framework as approved by the Group Audit Committee.

To give insight into movements during the year, we provide comparative figures, commentary of variances and flow tables for capital requirements. In all tables where the term 'capital requirements' is used, this represents the minimum total capital charge set at 8% of risk-weighted assets ('RWAs') by article 92 of the Capital Requirements Regulation. Table name references and row numbering in tables identify those prescribed in the relevant EBA guidelines where applicable and where there is a value.

Where disclosures have been enhanced, or are new, we do not generally restate or provide comparatives. Wherever specific rows and columns in the tables prescribed by the EBA or Basel are not applicable or immaterial to our activities, we omit them and follow the same approach for comparative disclosures.

Pillar 3 requirements may be met by inclusion in other disclosure media. Where we adopt this approach, references are provided to the relevant pages of the Earnings Release 1Q21 or to other locations.

We continue to engage in the work of the UK authorities and industry associations to improve the transparency and comparability of UK banks' Pillar 3 disclosures.

Regulatory reporting developments

We highlight on page 171 of the Annual Report and Accounts 2020 certain risks to capital and liquidity, including the UK's implementation of amendments to the Capital Requirements Regulation, the Basel III Reforms, and the regulatory impact from the UK's withdrawal from the EU, as well as other regulatory statements. These risks continue to be relevant at 31 March 2021.

The methodology used in the Group consolidated LCR in relation to the treatment of part of the Group's high-quality liquid assets is currently under review. Upon implementation of this revised approach it is anticipated that the Group's consolidated LCR will reduce, although remain within appetite.

There is also a continued focus on the quality of regulatory reporting by the PRA and other regulators globally. We continue to strengthen our processes and controls, including commissioning independent external reviews of various aspects of regulatory reporting. As a result, there may be impacts on some of our regulatory ratios such as the CET1 and LCR. We continue to keep the PRA and other relevant regulators informed of adverse findings from external reviews and our progress in strengthening the control environment.

HSBC Holdings plc Pillar 3 1Q21

2

Pillar 3 Disclosures at 31 March 2021

Key metrics

Key metrics (KM1/IFRS9-FL)1

					At
			31 Mar	31 Dec	30 Sep	30 Jun	31 Mar
Ref*		Footnotes	2021	2020	2020	2020	2020
	Available capital ($bn)
1	Common equity tier 1 ('CET1') capital	^	134.5	136.1	133.4	128.4	125.2
2	CET1 capital as if IFRS 9 transitional arrangements had not been applied		133.6	134.9	132.2	127.4	124.5
3	Tier 1 capital	^	160.2	160.2	157.4	152.5	149.2
4	Tier 1 capital as if IFRS 9 transitional arrangements had not been applied		159.3	159.0	156.2	151.4	148.5
5	Total capital	^	183.1	184.4	181.8	177.2	174.0
6	Total capital as if IFRS 9 transitional arrangements had not been applied		182.2	183.2	180.7	176.1	173.3
	Risk-weighted assets ('RWAs') ($bn)
7	Total RWAs		846.8	857.5	857.0	854.6	857.1
8	Total RWAs as if IFRS 9 transitional arrangements had not been applied		846.1	856.6	856.6	854.1	856.7
	Capital ratios (%)
9	CET1	^	15.9	15.9	15.6	15.0	14.6
10	CET1 as if IFRS 9 transitional arrangements had not been applied		15.8	15.7	15.4	14.9	14.5
11	Tier 1	^	18.9	18.7	18.4	17.8	17.4
12	Tier 1 as if IFRS 9 transitional arrangements had not been applied		18.8	18.6	18.2	17.7	17.3
13	Total capital	^	21.6	21.5	21.2	20.7	20.3
14	Total capital as if IFRS 9 transitional arrangements had not been applied		21.5	21.4	21.1	20.6	20.2
	Additional CET1 buffer requirements as a percentage of RWAs (%)
	Capital conservation buffer requirement		2.50	2.50	2.50	2.50	2.50
	Countercyclical buffer requirement		0.21	0.21	0.22	0.20	0.22
	Bank G-SIB and/or D-SIB additional requirements		2.00	2.00	2.00	2.00	2.00
	Total bank CET1 specific buffer requirements		4.71	4.71	4.72	4.70	4.72
	Total capital requirement (%)	2
	Total capital requirement		11.0	11.0	11.1	11.1	11.0
	CET1 available after meeting the bank's minimum capital requirements		9.7	9.7	9.3	8.8	8.4
	Leverage ratio	3
15	Total leverage ratio exposure measure ($bn)	^	2,930.2	2,897.1	2,857.4	2,801.4	2,782.7
16	Leverage ratio (%)	^	5.4	5.5	5.4	5.3	5.3
17	Leverage ratio as if IFRS 9 transitional arrangements had not been applied (%)		5.4	5.4	5.4	5.3	5.2
	Liquidity coverage ratio ('LCR')	4
	Total high-quality liquid assets ($bn)		695.1	677.9	654.2	654.4	617.2
	Total net cash outflow ($bn)		487.0	487.3	446.3	442.9	395.0
	LCR ratio (%)		142.7	139.1	146.6	147.8	156.3

• The references in this table and other tables within this section identify the lines prescribed in the relevant EBA template where applicable and where there is a value.

^ Figures have been prepared on an IFRS 9 transitional basis.

• Where applicable, our reporting throughout this document also reflects government relief schemes intended to mitigate the impact of the Covid-19 outbreak.

• Total capital requirement is defined as the sum of Pillar 1 and Pillar 2A capital requirements set by the UK PRA. The minimum requirements represent the total capital requirement to be met by CET1.

3 Leverage ratio is calculated using the CRR II end point basis for capital.

• The EU's regulatory transitional arrangements for IFRS 9 in article 473a of the Capital Requirements Regulation do not apply to liquidity coverage measures. LCR is calculated as at the end of each period rather than using average values. For further details, refer to page 176 of the Annual Report and Accounts 2020.

We have adopted the regulatory transitional arrangements in CRR II for IFRS 9, including paragraph four of article 473a. These transitional arrangements permit banks to add back to their capital base a proportion of the impact that IFRS 9 has upon their loan loss allowances during the first five years of use. The impact is defined as:

• the increase in loan loss allowances on day one of IFRS 9 adoption; and
• any subsequent increase in expected credit losses ('ECL') in the non-credit-impaired book thereafter.

Any add-back must be tax affected and accompanied by a recalculation of exposure and RWAs. The impact is calculated

separately for portfolios using the standardised ('STD') and internal ratings-based ('IRB') approaches. For IRB portfolios, there is no add-back to capital unless loan loss allowances exceed regulatory 12-month expected losses.

The EU's CRR 'Quick Fix' relief package enacted in June 2020 increased from 70% to 100% the relief that banks may take for loan loss allowances recognised since 1 January 2020 on the non-credit-impaired book.

In the current period, the add-back to the capital base amounted to $1.2bn under the STD approach with a tax impact of $0.3bn.

• HSBC Holdings plc Pillar 3 1Q21

Capital

Approach and policy

A list of the main features of our capital instruments in accordance with Annex III of Commission Implementing Regulation 1423/2013 is also published on our website with reference to our balance sheet on 31 December 2020. This is in addition to the full terms and conditions of our securities, also available on our website.

Our approach to capital management is driven by our strategic and organisational requirements, taking into account the regulatory, economic and commercial environment. We aim to maintain a strong capital base to support the risks inherent in our business and invest in accordance with our strategy, meeting both consolidated and local regulatory capital requirements at all times.

For further details of our approach to capital risk management, see page 169 of the Annual Report and Accounts 2020.

Own funds disclosure

		At
		31 Mar		31 Dec
		2021		2020
Ref		$m		$m
6	Common equity tier 1 capital before regulatory adjustments	164,393		165,479
28	Total regulatory adjustments to common equity tier 1	(29,912)		(29,429)
29	Common equity tier 1 capital	134,481		136,050
36	Additional tier 1 capital before regulatory adjustments	25,775		24,183
43	Total regulatory adjustments to additional tier 1 capital	(60)		(60)
44	Additional tier 1 capital	25,715		24,123
45	Tier 1 capital	160,196		160,173
51	Tier 2 capital before regulatory adjustments	24,366		25,722
57	Total regulatory adjustments to tier 2 capital	(1,445)		(1,472)
58	Tier 2 capital	22,921		24,250
59	Total capital	183,117		184,423

At 31 March 2021, our our common equity tier 1 ('CET1') ratio of 15.9% was unchanged from 31 December 2020, reflecting a decrease in RWAs, offset by a fall in CET1 capital during the quarter by $1.6bn. The fall in CET1 was mainly as a result of:

• a $1.2bn decrease in fair value through other comprehensive income reserves due to increasing yields;
• a fall of $1.1bn due to foreign currency translation differences;
• an increase of $1.0bn in deductions for significant investments in financial sector entities and intangible assets;
• a $0.7bn decrease in the IFRS 9 transitional add-back and a $0.3bn higher deduction for excess expected loss; and

• a $0.8bn foreseeable dividend deduction, which is a quarter of the 2020 dividend. This will be adjusted during the rest of 2021 based on various factors, including regulatory guidance.

This decrease in CET1 capital was partly offset by capital generation of $3.5bn through profits net of dividends paid on other equity instruments.

In 2020, a higher prudential valuation adjustment ('PVA') diversification benefit was temporarily allowed by the regulators. This ended on 1 January 2021, with the benefit reverting to 50%. The subsequent impact was partly offset by other underlying changes to PVA.

HSBC Holdings plc Pillar 3 1Q21

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