HSBC 2009 Annual Report Download - page 261

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management of interest rate risk arising on certain
long-term debt capital issues do not qualify for
hedge accounting treatment. Changes in the market
values of these swaps are recognised directly in the
income statement. HSBC Holdings expects that
these swaps will be held to final maturity with the
accumulated changes in market value consequently
trending to zero.
Certain loans to subsidiaries of a capital nature
that are not denominated in the functional currency
of either the provider or the recipient are accounted
for as financial assets. Changes in the carrying
amount of these assets due to exchange differences
are taken directly to the income statement. These
loans, and the associated foreign exchange
exposures, are eliminated on a Group consolidated
basis.
The principal tools used in the management of
market risk are the projected sensitivity of HSBC
Holdings’ net interest income to future changes in
yield curves and interest rate gap re-pricing tables
for interest rate risk, and VAR for foreign exchange
rate risk.
Net interest income sensitivity
HSBC Holdings monitors net interest income
sensitivity over a 5-year time horizon reflecting the
longer-term perspective on interest rate risk
management appropriate to a financial services
holding company. The table below sets out the
effect on HSBC Holdings’ future net interest
income over a 5-year time horizon of an incremental
25 basis point parallel fall or rise in all yield curves
worldwide at the beginning of each quarter during
the 12 months from 1 January 2010.
Assuming no management action, a sequence
of such rises would increase HSBC Holdings’
planned net interest income for 2010 by
US$16 million (2009: decrease of US$60 million)
and decrease cumulative net interest income
by US$116 million over a 5-year period
from 1 January 2010 (2009: decrease of
US$554 million), while a sequence of such falls
would decrease planned net interest income for
2010 by US$17 million (2009: increase of
US$60 million) and increase cumulative net
interest income by US$115 million over a 5-year
period from 1 January 2010 (2009: increase of
US$554 million). These figures incorporate the
effect of any option features in the underlying
exposures.
Instead of assuming that all interest rates move
together, HSBC groups its interest rate exposures
into currency blocs whose interest rates are
considered likely to move together. The sensitivity
of projected net interest income, on this basis, is
described as follows:
Sensitivity of HSBC Holdings’ net interest income to interest rate movements
(Unaudited)
US dollar
bloc
Sterling
bloc
Euro
bloc Tota l
US$m US$m US$m US$m
Change in projected net interest income as at 31 December
2009 arising from a shift in yield curves of:
+ 25 basis points at the beginning of each quarter
0-1 year ................................................................................. (13) 18 11 16
2-3 years ............................................................................... (172) 75 19 (78)
4-5 years ............................................................................... (165) 105 6 (54)
– 25 basis points at the beginning of each quarter
0-1 year ................................................................................. 12 (18) (11) (17)
2-3 years ............................................................................... 172 (75) (19) 78
4-5 years ............................................................................... 165 (105) (6) 54
Change in projected net interest income as at 31 December 2008
arising from a shift in yield curves of:
+ 25 basis points at the beginning of each quarter
0-1 year ................................................................................. (81) 10 11 (60)
2-3 years ............................................................................... (351) 20 77 (254)
4-5 years ............................................................................... (358) 54 64 (240)
– 25 basis points at the beginning of each quarter
0-1 year ................................................................................. 81 (10) (11) 60
2-3 years ............................................................................... 351 (20) (77) 254
4-5 years ............................................................................... 358 (54) (64) 240