HSBC 2008 Annual Report Download - page 250

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Market risk > Sensitivity of NII / Structural FX exposures / HSBC Holdings
248
to lower deposit pricing in the event of interest
rate reductions.
• Residual interest rate risk is managed within
Global Markets, under the Group’s policy of
transferring interest rate risk to Global Markets
to be managed within defined limits and with
flexibility as to the instruments used.
The main drivers of the year on year movements
in the sensitivity of the Group’s net interest income
to the changes in interest rates tabulated above were:
• decreases in interest rates, particularly in US
dollar, Hong Kong dollar and Sterling which
have restricted the Group’s ability to pass on to
depositors further rate reductions thereby
increasing exposures to further rate falls; and
• Global Markets increased net trading asset
positions, particularly in euro. The funding of
net trading assets is generally sourced from
floating rate retail deposits and recorded in ‘Net
interest income’ whereas the income from such
assets is recorded in ‘Net trading income’.
Projecting the movement in net interest income
from prospective changes in interest rates is a
complex interaction of structural and managed
exposures.
HSBC monitors the sensitivity of reported
reserves to interest rate movements on a monthly
basis by assessing the expected reduction in
valuation of available-for-sale portfolios and cash
flow hedges due to parallel movements of plus or
minus 100 basis points in all yield curves. The table
below describes the sensitivity of HSBC’s reported
reserves to these movements at the end of 2008 and
2007 and the maximum and minimum month-end
figures during these years:
Sensitivity of reported reserves to interest rate movements
(Unaudited)
US$m
Maximum
impact
US$m
Minimum
impact
US$m
At 31 December 2008
+ 100 basis point parallel move in all yield curves ......................................... (2,740) (2,740) (1,737)
As a percentage of total shareholders’ equity ................................................. (2.9%) (2.9%) (1.9%)
– 100 basis point parallel move in all yield curves ......................................... 2,477 2,609 1,944
As a percentage of total shareholders’ equity ................................................. 2.6% 2.8% 2.1%
At 31 December 2007
+ 100 basis point parallel move in all yield curves ......................................... (1,737) (1,738) (1,519)
As a percentage of total shareholders’ equity ................................................. (1.4%) (1.4%) (1.2%)
– 100 basis point parallel move in all yield curves ......................................... 1,977 2,048 1,430
As a percentage of total shareholders’ equity ................................................. 1.5% 1.6% 1.1%
The sensitivities are illustrative only and are
based on simplified scenarios. The table shows the
potential sensitivity of reserves to valuation
changes in available-for-sale portfolios and from
cash flow hedges following the pro forma
movements in interest rates. These particular
exposures form only a part of the Group’s overall
interest rate exposures. The accounting treatment
under IFRSs of the Group’s remaining interest rate
exposures, while economically largely offsetting
the exposures shown in the above table, does not
require revaluation movements to go to reserves.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent net
investments in subsidiaries, branches or associates,
the functional currencies of which are currencies
other than the US dollar.
Exchange differences on structural exposures
are recorded in the consolidated statement of
recognised income and expense. The main
operating (or functional) currencies in which
HSBC’s business is transacted are the US dollar,
the Hong Kong dollar, pound sterling, the euro, the
Mexican peso, the Brazilian real and the Chinese
renminbi. As the US dollar and currencies linked to
it form the dominant currency bloc in which
HSBC’s operations transact business, HSBC
Holdings prepares its consolidated financial
statements in US dollars. HSBC’s consolidated
balance sheet is, therefore, affected by exchange
differences between the US dollar and all the non-
US dollar functional currencies of underlying
subsidiaries.
HSBC hedges structural foreign exchange
exposures only in limited circumstances. HSBC’s
structural foreign exchange exposures are managed