HSBC 2012 Annual Report Download - page 292

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Capital > Capital structure / Future developments
290
At 31 December 2012
RWAs
US$m
Capital
US$m
Estimated regulatory impact of management actions
Management actions completed in 2013:
Dilution of our shareholding in Industrial Bank and the subsequent change in accounting treatment .... (38,880) (2,150)
Completion of the second tranche of the sale of Ping An ......................................................................... 3,522 9,393
Estimated total after management actions completed in 2013 ....................................................................... 1,253,852 122,694
Estimated CET1 ratio after management actions completed in 2013 .................................................... 9.8%
Planned short-term management actions if rules are finalised in their current form:
Mitigation of immaterial holdings9 ............................................................................................................ 2,645 7,052
Estimated total after planned management actions ........................................................................................ 1,256,497 129,746
Estimated CET1 ratio after planned management actions ...................................................................... 10.3%
For the detailed basis of preparation, see
page 298 of the Appendix to Capital.
The table above presents a reconciliation of our
reported core tier 1 capital and RWAs position at
31 December 2012 to the pro-forma estimated
CET1 end point capital and estimated RWAs based
on our interpretation of the July 2011 draft CRD IV
regulation, supplemented by FSA guidance and, in
lieu of guidance, our expectation of how these draft
rules will be updated following EU negotiations.
CRD IV is not yet in law and its provisions are
subject to ongoing negotiation and amendment. As
such, the finalised rules could have a materially
different effect on CET1 and RWAs.
The CRD IV rule changes introduce a revised
definition of regulatory capital, primarily focused
on CET1 capital as the predominant form of going
concern capital, with a greater quantum to be held
by banks. There are increased capital deductions and
new regulatory adjustments affecting this higher tier
of capital. The new rules also introduce increased
RWA requirements, mainly for CCR.
The largest impact on our CET1 capital is the
deduction of unconsolidated significant investments
in banks, financial institutions and insurance entities
of US$9.0bn (shown as US$6.7bn and US$2.3bn in
the table above). This results from a reallocation of
current deductions to this higher tier of capital and
new rules for calculating the amounts to be
deducted.
Adding to the above, the regulatory treatment
applied to immaterial unconsolidated investments in
banks, financial institutions and insurance entities,
whereby a maturity restriction does not recognise the
netting of long and short positions when the short
position is less than one year residual maturity,
even though they are hedged from a market risk
perspective. This results in an estimated deduction
of US$6.0bn. The effect on capital is exacerbated
by its impact on the threshold for other deductions.
The rules are currently in draft and subject to
ongoing negotiation. If they were to be finalised in
their current form, the holdings of such positions
would generate a disproportionate capital cost and
potentially the relevant business could be curtailed,
closed or our hedging would be adjusted to negate
the impact.
Capital management initiatives and management
actions already adopted by the Group, in accordance
with our six filters strategic framework, have
contributed to mitigating the effect of the future
rules. In 2012, this included the continuing run-off
of capital intensive portfolios including the US
CML and the GB&M legacy credit portfolios and
the sale of the Card and Retail Services business.
Post year-end, we sold our remaining investment
in Ping An and reduced our percentage holding
in Industrial Bank following a private placement
by the company.
Although the effect of the future CRD IV rules
is shown above on an end point basis, the rules allow
for a transition period of six years to phase in the
new deductions and regulatory adjustments. On a
CRD IV first year transitional basis our CET1 ratio,
if applied to our year end 2012 position, would be
11.5% before management actions.
As a result of the capital resources floor, we
currently manage our capital position to meet an
internal target CET1 ratio on an end point basis for
year end 2013. We will continue to manage our
capital position to ensure that it exceeds current
regulatory requirements and is well placed to meet
expected future regulatory requirements. We will
review our capital target ratios on an ongoing basis,
reflecting any changes in the regulatory environment
as they develop.