HSBC 2008 Annual Report Download - page 43

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partly to ‘Loans and Advances’ and partly to
‘Financial investments’ following the changes to
International Accounting Standard 39 – ‘Financial
Instruments – Recognition and Measurement’
(‘IAS39’) issued in October 2008 by the IASB.
Excluding these effects, trading assets remained
broadly unchanged as rises in Europe and Asia,
where the Group increased its holdings of
government bonds, were offset by the run-off of the
mortgage-backed securities portfolio in the US and a
reduction in debt securities held for balance sheet
management purposes due to changes in liquidity
and risk preference.
An 18 per cent decline in financial assets
designated at fair value was driven by falling equity
markets, which reduced the value of assets held to
meet life insurance liabilities, particularly in Hong
Kong and France. To the extent that these liabilities
related to unit-linked and participating insurance
contracts, there was a corresponding decline in
liabilities under insurance contracts. The
underperformance of certain investment products
also led clients to withdraw funds.
Derivative assets rose significantly, led by an
increase in interest rate derivatives with further
growth in credit and foreign exchange derivatives.
The global falls in interest rates resulted in
significant gaps between the fixed and floating legs
of interest rate swaps, leading to substantial mark-to-
market increases in the value of interest rate swap
positions. Widening credit spreads and increasing
market volatility caused mark-to-market increases in
the value of credit derivatives held in the UK and the
US. Foreign exchange derivative asset growth was
driven by a combination of increased volumes and
mark-to-market rises in existing positions in the UK.
Under IFRS, only limited netting is allowed between
derivative assets and liabilities with the same
counterparty, and the balance sheet value is therefore
significantly higher than the credit exposure. For
information on maximum exposure to credit risk, see
pages 197 to 200.
A 29 per cent decline in loans and advances
to banks occurred mainly in Hong Kong and the UK
where Balance Sheet Management invested a greater
proportion of its assets in government and
government-guaranteed debt.
HSBC also reduced counterparty credit risk in
the UK by channelling an increasing proportion of
lending to banks through the London Clearing House
in the form of reverse repos. This is recorded within
customer loans even when the end counterparty is a
bank, which means the fall in loans and advances to
banks and the rise in loans and advances to
customers are magnified. The rise in loans and
advances to customers was also inflated by the
reclassification of US$15 billion of assets following
changes to IAS39 isused in October 2008.
Further increases in loans and advances to
customers were due to growth in mortgage lending
in Europe and Asia, as well as to a rise in overdraft
balances to customers whose exposures are managed
net but reported gross under IFRS. These rises were
offset by a reduction in customer lending in the US
due to the run-off of the mortgage services portfolio,
the sale of certain loan portfolios at HSBC USA,
tighter underwriting criteria which restricted
originations in the consumer lending and credit card
portfolios, and the cessation of most new
originations in the US vehicle finance portfolio.
Financial investments grew by 15 per cent as
Balance Sheet Management assets were increasingly
classified as available-for-sale financial investments
rather than trading assets. As noted above, there was
also a rise in financial investments in the UK as the
Group placed a greater proportion of surplus funds in
government issued or guaranteed debt. The growth
in the Group’s financial investments was partly
offset by a reduction in holdings of asset-backed
securities, including those held through special
purpose entities, which decreased due to a
combination of asset sales, amortisation and write-
downs. For details of the Group’s asset-backed
securities portfolios, see pages 145 to 158.
Liabilities
Deposits by banks rose by 14 per cent, driven, in
particular, by increases in France, due to a rise in
repo activity to finance increased trading activity,
and in Hong Kong, where banks responded to
HSBC’s reputation for strength and security and
deposited their surplus liquidity with the Group.
Customer account balances grew by 16 per cent,
driven by strong inflows from customers attracted by
HSBC’s relative financial strength as they withdrew
funds from more volatile investments.
Trading liabilities declined 9 per cent as a fall in
third-party funding requirements allowed a reduction
in liabilities in Hong Kong, and repo transactions
were reduced in Europe to manage liquidity and
counterparty credit risk.
A significant widening of credit spreads led to
further falls in the fair value of the Group’s own debt
which reduced financial liabilities designated at fair
value. This was compounded by a decline in
liabilities in the UK due to the underperformance of
certain investment products.