HSBC 2015 Annual Report Download - page 405

HSBC HOLDINGS PLC
403
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Bank of Communications Co., Limited
HSBC’s investment in BoCom was equity accounted with effect from August 2004. Its significant influence in BoCom was
established as a result of representation on the Board of Directors and, in accordance with the Technical Cooperation and
Exchange Programme, HSBC is assisting in the maintenance of financial and operating policies and a number of staff have been
seconded to assist in this process.
Impairment testing
At 31 December 2015, the fair value of HSBC’s investment in BoCom had been below the carrying amount for approximately
44 months, apart from a short period in 2013 and briefly during the first half of 2015. As a result, the Group performed an
impairment test on the carrying amount of the investment in BoCom. The test confirmed that there was no impairment at
31 December 2015.
At 31 December 2015 At 31 December 2014
VIU
Carrying
value
Fair
value VIU
Carrying
value
Fair
value
$bn $bn $bn $bn $bn $bn
Bank of Communications Co., Limited 17.0 15.3 9.9 15.7 14.6 13.1
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a value in use (‘VIU’)
calculation, with its carrying amount. The VIU calculation uses discounted cash flow projections based on management’s
estimates of earnings. Cash flows beyond the short- to medium-term are then extrapolated in perpetuity using a long-term
growth rate. An imputed capital maintenance charge (‘CMC’) is calculated to reflect the expected regulatory capital
requirements, and is calculated as a deduction from forecast cash flows. The principal inputs to the CMC calculation include
estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected regulatory capital requirements.
Management judgement is required in estimating the future cash flows of BoCom.
Key assumptions in VIU calculation
Long-term growth rate: the growth rate used was 5% (2014: 5%) for periods after 2018 and does not exceed forecast GDP
growth in mainland China.
Long-term asset growth rate: the growth rate used was 4% (2014: 4%) for periods after 2018 and this is the rate of growth
required for an assumed 5% long-term growth rate in profit.
Discount rate: the discount rate of 13% (2014: 13%) is derived from a range of values obtained by applying a Capital Asset
Pricing Model (‘CAPM’) calculation for BoCom, using market data. Management supplements this by comparing the rates
derived from the CAPM with discount rates available from external sources, and HSBC’s discount rate for evaluating
investments in mainland China. The discount rate used is within the range of 10.1% to 14.2% (2014: 11.4% to 14.2%) indicated
by the CAPM and external sources.
Loan impairment charge as a percentage of customer advances: the ratio used ranges from 0.71% to 0.78% (2014: 0.73% to
1%) in the short- to medium-term and is based on the forecasts disclosed by external analysts. It was assumed that the
long-term ratio will stabilise at a rate of 0.70% (2014: 0.65%) which is slightly higher than the historical rate of 0.65%.
Risk-weighted assets as a percentage of total assets: the ratio used was 67% for all forecast periods (2014: 70% to 72% in the
short- to medium-term and 70% in the long-term). This is consistent with the forecasts disclosed by external analysts.
Cost-income ratio: the ratio used was 41% (2014: ranged from 40.0% to 42.4%) in the short- to medium-term. The ratios were
consistent with the short- to medium-term range forecasts of 40.3% to 40.7% (2014: 37.2% to 44.5%) disclosed by external
analysts.
Sensitivity analyses were performed on each key assumption to ascertain the impact of reasonably possible changes in
assumptions. The following change to each key assumption used on its own in the VIU calculation would reduce the headroom
to nil.
Key assumption Changes to key assumption to reduce headroom to nil
• Long-term growth rate
• Long-term asset growth rate
• Discount rate
• Loan impairment charge as a percentage of customer advances
• Risk-weighted assets as a percentage of total assets
• Cost-income ratio
• Decrease by 62 basis points
• Increase by 62 basis points
• Increase by 82 basis points
• Increase by 13 basis points
• Increase by 5.4%
• Increase by 2.8%